Business Context and Reporting Period
Integer Holdings Corporation is a medical device outsource manufacturer serving cardiac, neuromodulation, vascular, orthopedic, advanced surgical and portable medical markets, with a smaller Non-Medical segment serving energy, military and environmental applications. The unaudited Form 10-Q covers the quarter and six months ended July 2, 2021; comparable periods ended July 3, 2020.
Financial Results and Key Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Sales | $312.0 million | $240.1 million | $602.5 million | $568.5 million |
| Gross profit | $88.7 million | $57.9 million | $173.2 million | $154.6 million |
| Gross margin | 28.4% | 24.1% | 28.8% | 27.2% |
| Operating income | $39.4 million | $9.2 million | $74.0 million | $53.3 million |
| Operating margin | 12.6% | 3.8% | 12.3% | 9.4% |
| Net income | $29.4 million | $0.4 million | $51.0 million | $31.5 million |
| Diluted EPS | $0.89 | $0.01 | $1.53 | $0.95 |
| Operating cash flow | Not separately provided | Not separately provided | $68.8 million | $78.0 million |
Q2 sales increased 29.9%, while six-month sales increased 6.0%. Medical represented approximately 97% of six-month sales and increased 6.4%; Non-Medical sales decreased 5.3%. Q2 growth was led by Cardiac & Neuromodulation, up 67.1%, and Cardio & Vascular, up 18.2%. Six-month Cardiac & Neuromodulation sales rose 27.1%, while Cardio & Vascular declined 2.1% and Advanced Surgical, Orthopedics & Portable Medical declined 11.6%.
Gross-margin expansion reflected higher volume leverage and favorable product mix, partly offset by customer price reductions. Operating expenses were $49.4 million in Q2 and $99.3 million for the six months. Q2 and six-month effective tax rates were 4.4% and 8.6%, respectively, including $3.8 million and $4.4 million of discrete tax benefits, principally from the settlement of tax audits.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $30.6 million at July 2, 2021, down from $49.2 million at December 31, 2020.
- Working capital was $270.1 million and the current ratio was 2.65.
- Operating cash flow was $68.8 million; capital expenditures were $18.4 million.
- Net cash used in financing was $69.2 million, including $64.8 million of debt principal payments, of which $46.0 million was accelerated repayment of Term Loan B.
- Total debt was $668.7 million, comprising approximately $210.9 million of Term Loan A and $462.3 million of Term Loan B, net of discounts and issuance costs.
- The $200 million revolving facility had no borrowings and $194.3 million of available capacity after letters of credit.
- The credit facilities mature October 27, 2022. Management expected to refinance them before October 27, 2021.
- The company was in compliance with its financial covenants. Reported total net leverage was approximately 2.7x and adjusted EBITDA to interest expense was approximately 8.2x.
Material Changes Versus the Prior Comparable Period
- Demand continued to recover from COVID-19-related disruption, particularly in Cardiac & Neuromodulation and Cardio & Vascular markets.
- Operating income increased 328% in Q2 and 38.9% for the six months, driven primarily by sales growth, volume leverage and margin expansion.
- Interest expense declined 18.8% in Q2 and 18.2% for the six months because of lower debt balances, although 2021 included $0.4 million of debt-extinguishment losses for the six-month period.
- Other operating expenses declined to $0.3 million in Q2 and $1.2 million for the six months, from $2.0 million and $5.0 million, respectively, in the prior-year periods.
- Operating cash flow declined $9.2 million year over year, primarily because prior-year working-capital changes benefited from collecting receivables during a period of declining sales.
- Stock-based compensation increased to $9.0 million for the six months from $3.2 million, primarily due to higher restricted stock unit expense.
Outlook, Commentary, Risks and Unusual Items
Management stated that it was well positioned in the medical technology and medical device outsourcing markets, with a pipeline of opportunities and ongoing initiatives focused on sales, innovation, manufacturing, business processes, leadership and performance excellence. No formal revenue or earnings guidance is provided in the filing.
Management expected operating cash flow, cash on hand and available revolver capacity to satisfy working-capital, debt-service and capital-expenditure requirements for the next twelve months. Refinancing the senior secured facilities was a significant near-term financing objective.
- COVID-19 may continue to cause labor shortages, supply-chain disruption, delayed customer orders, shipment delays and manufacturing interruptions.
- The company relies on a limited number of large OEM customers and faces customer pricing pressure; three Medical customers represented 51% of Medical sales in Q2.
- Key risks include supplier dependence, product quality or recall issues, regulatory and product-liability exposure, cybersecurity, international currency and tax risks, competition, acquisition integration, and substantial indebtedness.
- The company estimated $1 million to $2 million of aggregate pre-tax charges for its 2021 realignment plan; $0.6 million had been incurred through July 2, 2021, with completion expected by year-end.
- Contingent consideration liabilities totaled $2.3 million, with a maximum undiscounted payout of $6.8 million. The company also expected to reclassify approximately $2.8 million of net cash-flow-hedge losses from accumulated other comprehensive income into earnings over the next twelve months.
- No new material legal proceedings or material changes to previously disclosed risk factors were reported.
Investor Verification Priorities
- Verify the timing, terms and cost of the planned refinancing before the credit facilities’ maturity and covenant step-downs.
- Assess whether post-pandemic demand recovery is sustainable, particularly in Cardiac & Neuromodulation and Cardio & Vascular.
- Monitor customer concentration, OEM pricing concessions and supply-chain and labor constraints.
- Separate recurring operating performance from discrete tax benefits, debt-extinguishment charges, equity-investment losses and restructuring costs.
- Reconcile cash generation with accelerated debt repayment, capital expenditures and the company’s stated liquidity needs.