Integer Holdings Corporation — Form 10-Q Summary
Business Context and Reporting Period
Integer Holdings is a medical device outsource manufacturer serving cardiac, neuromodulation, vascular, orthopedic, advanced surgical and portable medical markets. Its Non-Medical segment develops batteries for niche energy, military and environmental applications. The filing covers the quarter and nine months ended October 1, 2021, compared with periods ended October 2, 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Sales | $305.6 million | $235.9 million | $908.1 million | $804.5 million |
| Gross profit | $81.9 million | $57.9 million | $255.1 million | $212.5 million |
| Gross margin | 26.8% | 24.6% | 28.1% | 26.4% |
| Operating income | $33.1 million | $39.8 million | $107.0 million | $93.0 million |
| Operating margin | 10.8% | 16.9% | 11.8% | 11.6% |
| Net income | $22.1 million | $30.3 million | $73.0 million | $61.8 million |
| Diluted EPS | $0.66 | $0.92 | $2.20 | $1.87 |
| Operating cash flow | Not separately provided | Not separately provided | $117.4 million | $110.2 million |
At October 1, 2021, cash and cash equivalents were $25.5 million, working capital was $286.2 million and the current ratio was 2.83. Total debt, net of discounts and issuance costs, was $630.7 million, compared with $731.3 million at December 31, 2020. The Company had $357.0 million of available revolving-credit capacity after outstanding borrowings and letters of credit.
Nine-month capital expenditures were $29.7 million. Investing cash outflows were $29.6 million and financing cash outflows were $112.1 million, primarily reflecting debt payments. Cash declined by $23.7 million during the nine months to $25.5 million.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 29.5% and nine-month sales increased 12.9%, primarily reflecting recovery in medical-device demand following COVID-19-related disruption.
- Medical sales increased 30.1% in Q3 and 13.3% for the nine months. Cardiac & Neuromodulation increased 46.1% in Q3 and 32.6% for the nine months; Cardio & Vascular increased 29.1% and 6.9%, respectively.
- Advanced Surgical, Orthopedics & Portable Medical sales declined 4.8% in Q3 and 9.4% for the nine months, partly because of lower portable medical component sales.
- Gross margin expanded 2.2 percentage points in Q3 and 1.7 points for the nine months, driven by higher volume, production efficiencies and product mix, partly offset by customer price reductions.
- Q3 operating income declined 16.8% and net income declined 27.3%. The comparison was materially affected by a $28.2 million net patent-litigation gain recorded in Q3 2020.
- Nine-month operating income increased 15.1% and net income increased 18.1%, despite the absence of the prior-year patent-litigation gain.
- Interest expense increased 7.3% in Q3 because of higher debt-extinguishment charges, but declined 9.9% for the nine months due primarily to lower debt balances.
- The Company refinanced its credit facilities on September 2, 2021. The new facilities include a $400 million revolver, a $250 million term loan A and a $350 million term loan B.
Guidance, Outlook, Commentary and Risks
The filing does not provide explicit quantitative full-year revenue or earnings guidance. Management expects operating cash flows, available cash and revolver capacity to be sufficient for working capital, debt service and capital expenditures over the next twelve months.
Management described continued recovery in product demand and emphasized sales-force, innovation, manufacturing, business-process, leadership and performance-excellence initiatives. The Company expects 2021 operational-excellence initiatives to generate approximately $3 million to $4 million of pretax charges, with most expenditures expected to be cash costs; $2.3 million had been incurred through October 1, 2021, and the actions were expected to be substantially complete by year-end.
COVID-19 remains a significant uncertainty, including potential labor shortages, supply-chain disruptions, delayed customer orders, shipment delays and manufacturing interruptions. Other principal risks include customer concentration, pricing pressure, reliance on suppliers, product quality and regulatory matters, cybersecurity, international operations and currency exposure, acquisition execution, intellectual-property and product-liability claims, intangible-asset impairment, and substantial indebtedness.
The Company was in compliance with its credit-facility covenants at October 1, 2021. Its reported total net leverage ratio was approximately 2.1:1 and interest coverage was approximately 10.7:1, compared with covenant limits of 5.50:1 and a minimum of 2.50:1, respectively. The TLB facility has no financial maintenance covenants.
On October 27, 2021, after the reporting date, the Company agreed to acquire Oscor for $220 million in cash, funded with debt. Closing was expected in the fourth quarter of 2021, subject to customary conditions. The acquisition is intended to expand cardiac-product capabilities, research and development and low-cost manufacturing capacity.
Unusual Items and Contingencies
- The prior-year comparison includes a $28.2 million net gain from patent litigation received in October 2020.
- Q3 and nine-month 2021 interest expense included $3.3 million and $3.8 million, respectively, of debt-extinguishment losses associated with refinancing and term-loan prepayments.
- Effective tax rates were 4.8% in Q3 and 7.5% for the nine months, supported by discrete tax benefits of $1.6 million and $6.1 million, respectively.
- The Company had $2.3 million of contingent consideration liabilities at October 1, 2021, against a maximum undiscounted payout of $6.8 million.
- The Company expects to reclassify approximately $3.4 million of net cash-flow-hedge losses from accumulated other comprehensive income into earnings over the following twelve months.
- Management did not expect pending litigation to have a material effect on consolidated results, financial position or cash flows, although litigation outcomes remain uncertain.
Most Important Facts for Investors to Verify
- Whether medical-device demand recovery continues amid labor, supply-chain and COVID-19-related constraints.
- Whether gross-margin gains from volume and production efficiencies offset pricing pressure and cost inflation.
- The funding, closing, leverage impact and integration performance of the planned $220 million Oscor acquisition.
- Compliance with the new credit agreement’s leverage and interest-coverage covenants after additional acquisition-related debt.
- The sustainability of reported earnings excluding the prior-year patent gain, discrete tax benefits and debt-refinancing charges.
- Customer concentration, particularly the three largest Medical customers, which represented 48% of Medical sales in Q3 2021 and 51% for the nine months.