Business Context and Reporting Period
The supplied filing is Greatbatch, Inc.’s Form 10-K, not Integer Holdings Corp.’s filing. It covers the 52-week fiscal year ended December 30, 2011, with quarterly information for the fourth quarter of 2011. Greatbatch operated through Greatbatch Medical, which serves cardiac rhythm management, neuromodulation, vascular access and orthopaedic markets, and Electrochem Solutions, which provides customized battery and wireless sensing solutions.
Greatbatch acquired Micro Power Electronics on December 15, 2011, expanding its engineered battery-pack, charger and power-supply capabilities. The acquisition contributed approximately $2.5 million of fourth-quarter revenue.
Financial Performance and Position
| Metric | FY 2011 | FY 2010 | Change |
|---|---|---|---|
| Sales | $568.8 million | $533.4 million | Up 7% |
| Gross profit | $180.4 million | $173.6 million | Up 4% |
| Gross margin | 31.7% | 32.5% | Down 0.8 points |
| Operating income | $61.7 million | $69.0 million | Down 11% |
| Operating margin | 10.8% | 12.9% | Down 2.1 points |
| Net income | $33.1 million | $33.1 million | Essentially flat |
| Diluted EPS | $1.40 | $1.40 | Flat |
| Operating cash flow | $89.9 million | $76.9 million | Up $13.0 million |
Fourth-quarter 2011 sales were $141.7 million, gross profit was $44.7 million, net income was $5.6 million and diluted EPS was $0.24. Fourth-quarter 2010 included a $9.5 million gain from the settlement of Electrochem litigation, making the year-over-year net income comparison unusually unfavorable.
- Greatbatch Medical sales increased 6% to $489.1 million: CRM/Neuromodulation was flat, Vascular Access rose 19% to $45.1 million, and Orthopaedic sales rose 18% to $140.3 million.
- Electrochem sales increased 9% to $79.8 million; excluding Micro Power, organic growth was approximately 6%.
- Adjusted operating income was $67.6 million, with an adjusted operating margin of 11.9%, compared with $64.9 million and 12.2% in 2010.
- Adjusted net income was $39.7 million and adjusted diluted EPS was $1.68, compared with $35.7 million and $1.51 in 2010.
- Cash and equivalents were $36.5 million, working capital was $170.9 million and the current ratio was 2.82.
- Long-term debt was $235.9 million, consisting principally of $197.8 million of convertible subordinated notes and $55.0 million drawn on the revolving credit facility, net of unamortized discount.
- The company had $345 million of available borrowing capacity and reported covenant ratios of 18.3 times adjusted EBITDA to interest expense and 2.06 times total leverage.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by Vascular Access, Orthopaedics, Electrochem and favorable foreign currency effects; CRM/Neuromodulation revenue remained approximately unchanged.
- Gross margin declined because of product mix, customer price concessions and higher performance-based compensation, partially offset by capacity utilization and productivity improvements.
- Operating income declined despite higher sales because SG&A increased 12% to $72.5 million, including higher performance compensation and medical-device-related professional costs.
- Net research, development and engineering costs were $45.5 million, or 8.0% of sales, and total medical-device investment increased to $29 million from $22 million.
- Operating cash flow improved, but investing cash use increased to $80.4 million because of the $66.5 million cash payment for Micro Power and higher capital expenditures.
- Debt repayments of $40 million were more than offset by $45 million borrowed to fund the Micro Power acquisition.
- Medical-device sales developed under the Greatbatch name reached approximately $5 million in 2011, the company’s first such revenue.
Guidance, Outlook, Risks and Unusual Items
Management projected 2012 sales of approximately $645 million to $665 million, representing 13% to 17% growth, adjusted operating margin of 11.5% to 12.5%, and adjusted diluted EPS of $1.75 to $1.85. The outlook assumed lower CRM/Neuromodulation revenue in the first half of 2012, recovery in the second half, continued medical-device investment and a less favorable product mix.
Expected 2012 capital spending was $30 million to $40 million. Management expected approximately $15 million to $20 million of other operating expenses, primarily for consolidation and cost-saving initiatives, and anticipated $4 million to $7 million of annual savings from these programs.
- Customer concentration remained significant: four customers represented 59% of 2011 sales, and supply agreements generally did not guarantee minimum purchases.
- Key risks included CRM market weakness, pricing pressure, customer vertical integration or dual sourcing, dependence on limited raw-material suppliers, product liability and regulatory risks, healthcare reform, foreign exchange exposure and dependence on oil and gas markets for portions of Electrochem.
- Intangible assets totaled $459.2 million, or 52% of total assets, including $338.7 million of goodwill; impairment could materially affect future earnings.
- Orthopaedic and medical-device infrastructure initiatives required substantial future capital and expense commitments.
- The company disclosed ordinary-course litigation but did not expect any individual matter to be material; the prior Electrochem litigation had been settled in 2010 for $25 million.
- Micro Power was excluded from management’s 2011 internal-control assessment because of the timing of the acquisition. Management and Deloitte concluded that controls were effective for the assessed operations.
Investor Verification Checklist
- Verify the issuer identity: the supplied document is Greatbatch, Inc., whereas the request identifies Integer Holdings Corp.
- Confirm whether the intended period is the full fiscal year ended December 30, 2011 or fourth-quarter 2011 results.
- Reconcile GAAP results with adjusted operating income, adjusted net income and adjusted EPS, including the $5.1 million neuromodulation design-verification expense and other exclusions.
- Assess the maturity and refinancing requirements for the $197.8 million convertible notes due in 2013.
- Evaluate the sustainability of growth outside CRM/Neuromodulation and the effect of customer concentration and pricing concessions.
- Review the preliminary purchase-price allocation and integration performance of Micro Power.
- Monitor execution, spending and expected savings from Orthopaedic, medical-device infrastructure and ERP initiatives.