Integer Holdings Corp annual report, FY2023

Integer Holdings Corporation — FY2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K; it does not provide a separate fourth-quarter income statement or cash-flow presentation. Integer is a medical device outsource manufacturer serving cardiac rhythm management, neuromodulation, cardiovascular, surgical, orthopedic and portable medical markets, with a smaller Non-Medical battery business.

Business Context

Reportable segments are Medical and Non-Medical. Medical generated $1.553 billion, or approximately 97% of 2023 sales; Non-Medical generated $43.3 million.
Medical customers Abbott, Boston Scientific and Medtronic collectively represented approximately 45% of total sales.
Integer acquired substantially all assets of InNeuroCo effective October 1, 2023, for $44.5 million of estimated consideration, including contingent consideration. InNeuroCo contributed $5.2 million of sales in 2023.
Firm backlog at December 31, 2023 was approximately $917 million, with most orders expected to ship within one year.

Financial Performance and Liquidity

Metric	FY2023	FY2022	Change
Sales	$1.597 billion	$1.376 billion	Up 16%
Gross profit	$418.3 million	$359.0 million	Up 17%
Gross margin	26.2%	26.1%	Up 10 basis points
Operating income	$167.3 million	$121.3 million	Up 38%
Income from continuing operations	$90.7 million	$65.4 million	Up 39%
Diluted EPS from continuing operations	$2.69	$1.96	Up 37%
Net cash from operating activities	$180.2 million	$116.4 million	Up $63.8 million
Capital expenditures	$119.9 million	$74.7 million	Up $45.2 million

Cardio & Vascular sales increased 20% to $836.3 million, driven by demand, acquisition performance and supply-chain improvements.
Cardiac Rhythm Management & Neuromodulation sales increased 15% to $610.6 million, supported by customer demand, emerging neuromodulation customers and improved supply availability.
Advanced Surgical, Orthopedics & Portable Medical sales increased 9% to $106.4 million, primarily due to elevated Portable Medical demand during the planned market exit.
Non-Medical sales declined 7% to $43.3 million as prior supply-chain recovery benefits normalized.
Operating expenses increased 6% to $251.0 million. Restructuring and other charges declined to $11.6 million from $16.2 million, but included $2.0 million of fire-related property loss and expenses.
Interest expense increased 38% to $53.4 million because of higher interest rates, higher average debt and $4.5 million of debt-extinguishment losses.
The effective tax rate increased to 15.5% from 14.0%, partly reflecting expiration of the Malaysian tax holiday in April 2023.
Cash and equivalents were $23.7 million at year-end, compared with $24.3 million in 2022. Working capital increased to $396.7 million, and the current ratio improved to 2.80 from 2.50.
Operating cash flow benefited from approximately $30 million of accelerated collections through new factoring arrangements. Integer sold $144.4 million of receivables without recourse during 2023.

Debt and Capital Structure

Principal debt outstanding was $974.0 million; net carrying value was $959.9 million. Debt consisted of $99.0 million of revolving borrowings, a $375.0 million Term Loan A and $500.0 million of 2.125% convertible notes due February 2028.
The company had approximately $397.5 million of available revolving-credit capacity after outstanding borrowings and letters of credit.
2023 financing activities included issuance of the convertible notes, repayment of the Term Loan B, repayments on the Term Loan A and revolving facility, and $35.0 million of capped-call purchases.
Approximately 51% of principal debt was fixed-rate or converted to fixed-rate exposure at year-end, compared with 11% in 2022.
2024 contractual debt-service obligations, including interest and unused-revolver commitment fees, were estimated at approximately $44 million.
The company was in compliance with its debt covenants at year-end, with a reported total net leverage ratio of approximately 2.6:1.0 versus a maximum generally of 5.0:1.0, and an interest-coverage ratio of approximately 9.2:1.0 versus a minimum of 2.5:1.0.

Material Changes Versus FY2022

Revenue growth accelerated from 13% in 2022 to 16% in 2023, while operating income and continuing-operations earnings recovered materially from their 2022 declines.
Medical sales growth was broad-based, led by Cardio & Vascular and CRM & Neuromodulation; Non-Medical sales declined.
Gross margin improved modestly despite inflation and labor-cost pressures, reflecting volume leverage and supply-chain efficiencies.
Operating cash generation improved substantially, partly due to receivables factoring and reduced working-capital drag.
Debt composition changed significantly following the convertible-note issuance and repayment of higher-rate variable debt. Total principal debt increased from approximately $931.2 million to $974.0 million.
Capital spending increased to support manufacturing facilities, information technology and productivity initiatives.
Foreign-currency translation shifted from a $25.6 million loss in 2022 to a $14.4 million gain in 2023, increasing comprehensive income.

Guidance, Outlook, Risks and Unusual Items

Management expects 2024 capital expenditures of approximately $90 million to $110 million.
Management expects Portable Medical sales to wind down, with final sales and market exit occurring in 2025.
On January 5, 2024, Integer acquired Pulse Technologies for $138.2 million in cash, subject to adjustments, with up to $20.0 million of contingent consideration. The acquisition was funded with revolving-credit borrowings and will be reported in Medical.
Restructuring and product-development realignment programs remain in progress. Certain initiatives are expected to continue through 2025 or 2026, including the consolidation of research and development operations in Israel and Ireland.
Material risks include customer concentration, customer pricing pressure and insourcing, dependence on constrained suppliers and raw materials, manufacturing interruptions, product quality or recall exposure, cybersecurity, regulatory compliance, foreign exchange, inflation, variable interest rates and acquisition integration.
Goodwill and other intangible assets totaled approximately $1.8 billion, or 61% of total assets. The Non-Medical reporting unit’s estimated fair value exceeded carrying value by approximately 11%, leaving sensitivity to adverse changes in forecasts, market conditions or discount rates.
The company reported no material pending litigation expected to affect results, but disclosed potential environmental remediation and related claims concerning a former New Jersey facility. Approximately $0.1 million was accrued at year-end.
Management and Deloitte & Touche reported effective internal control over financial reporting, although controls related to the InNeuroCo acquisition were excluded from the 2023 assessment.

Investor Verification Checklist

Verify the sustainability of 2023 Medical demand, backlog conversion and the contribution from new products and acquisitions.
Assess customer concentration and any changes in purchasing, inventory, pricing, dual-sourcing or insourcing plans at the three largest customers.
Reconcile operating cash flow excluding the approximately $30 million benefit from receivables factoring and monitor working-capital requirements.
Review the effect of the Pulse acquisition and related incremental debt on leverage, interest expense and covenant headroom.
Monitor floating-rate debt exposure, refinancing or conversion risks related to the 2028 Convertible Notes, and potential equity dilution.
Evaluate whether the Portable Medical exit, restructuring programs and manufacturing realignment produce the expected margin and capacity benefits.
Test goodwill, intangible-asset and inventory valuations against changing demand, customer forecasts and discount rates.
Review the impact of the Malaysian tax-holiday expiration, Pillar Two implementation and other changes in the global tax profile.