Greatbatch, Inc. (now Integer Holdings Corp.) — Form 10-Q Summary
Reporting period: Quarter and six months ended July 4, 2014, compared with periods ended June 28, 2013. The filing identifies the registrant as Greatbatch, Inc.; the request identifies Integer Holdings Corp. The interim financial statements are unaudited and cover 13-week and 26-week periods.
Business Context
The company operated through two reportable segments: Greatbatch Medical, which designs and manufactures medical devices and components, and QiG, which develops complete medical device systems and related technologies. Greatbatch Medical represented nearly all revenue. Three customers accounted for 46% of quarterly sales and 47% of year-to-date sales.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Sales | $172.1 million | $171.3 million | $346.4 million | $319.6 million |
| Gross profit | $58.5 million | $57.3 million | $116.1 million | $106.1 million |
| Gross margin | 34.0% | 33.4% | 33.5% | 33.2% |
| Operating income | $19.5 million | $17.1 million | $42.1 million | $31.5 million |
| Operating margin | 11.4% | 10.0% | 12.1% | 9.8% |
| Net income | $12.3 million | $9.8 million | $27.3 million | $15.4 million |
| Diluted EPS | $0.48 | $0.39 | $1.06 | $0.62 |
Adjusted operating income was $23.8 million, or 13.8% of sales, in the quarter and $46.1 million, or 13.3% of sales, for the six months. Adjusted diluted EPS was $0.60 and $1.14, respectively. These non-GAAP measures exclude selected consolidation, acquisition, asset disposition, unusual and other items.
- Cash flow: Operating cash flow was $26.5 million for the first six months, compared with cash used of $8.6 million in the prior-year period. Capital expenditures were $12.0 million, and net cash used in investing activities was $9.8 million.
- Liquidity: Cash and cash equivalents were $51.2 million at July 4, 2014, including $11.7 million held by foreign subsidiaries and considered permanently reinvested. Working capital was $232.6 million and the current ratio was 3.96.
- Debt: Long-term debt was $192.5 million, down from $197.5 million at January 3, 2014. The company had $300 million of revolving borrowing capacity available. The weighted average borrowing rate before the interest-rate swap was 1.57%.
- Covenants: The company was in compliance with all credit-facility covenants. Adjusted EBITDA to interest expense was 28.5-to-1 versus a minimum of 3.0-to-1; total leverage was 1.4-to-1 versus a maximum of 4.5-to-1.
Material Changes Versus the Prior Comparable Period
- Quarterly sales were essentially flat, while six-month sales increased 8%, reflecting strong orthopaedic and vascular growth and favorable currency effects.
- Quarterly operating income increased 14%; six-month operating income increased 34%. Higher gross profit, production efficiencies, lower performance-based compensation and lower interest expense were significant contributors.
- Orthopaedic sales increased 17% in the quarter and 20% year to date; vascular sales increased 25% and 24%, respectively.
- Cardiac and neuromodulation sales declined 4% in the quarter because of shipment timing and the beginning end-of-life impact for two legacy products, but increased 9% year to date.
- Portable Medical sales declined 24% in the quarter and 12% year to date as the company discontinued or reduced lower-margin products.
- Interest expense declined 26% in the quarter and 74% year to date, primarily because 2013 convertible subordinated debt discount amortization did not recur and debt balances and rates were lower.
- Net other operating expenses decreased year to date to $4.0 million from $7.1 million, although quarterly expenses increased to $4.3 million because of new capacity and capability initiatives.
- Cash generation improved substantially, despite increases in accounts receivable and inventory and reductions in accrued expenses.
Guidance, Outlook, Risks and Unusual Items
- 2014 guidance: Sales of $685 million to $705 million; GAAP operating margin of 11.0% to 11.5%; adjusted operating margin of 13.0% to 13.3%; GAAP diluted EPS of $1.94 to $1.99; and adjusted diluted EPS of $2.25 to $2.35.
- Management expects continued double-digit growth in orthopaedic and vascular products, offset in part by slower cardiac and portable medical markets. The company continues to target approximately 5% annual revenue growth and substantially greater earnings growth.
- The company announced facility and organizational realignment initiatives, including transfers of manufacturing functions to Tijuana, Mexico, a Minneapolis-area R&D hub and a Frisco commercial operations hub. Expected capital investment was $18 million to $20 million and expected restructuring charges were $22 million to $27 million; $2.2 million of restructuring charges had been incurred by July 4.
- Management expects these new initiatives to generate up to $17 million of annualized savings beginning in 2016. Additional consolidation and optimization charges may occur.
- Algovita, the spinal cord stimulation system, received European CE Mark approval in June 2014. Management expected to be positioned for U.S. FDA premarket approval in early 2015.
- A voluntary field corrective action affected Standard Offset Cup Impactors manufactured and distributed from 2004 through 2013 because of sterilization instructions. Two potentially related complaints had been received, with no adverse events reported. Further complaints or regulatory action could affect results.
- A Texas product-liability case was scheduled for trial in the second half of 2014. The company had not recorded a reserve because a loss was not considered probable or reasonably estimable; customer indemnification and insurance may reduce exposure.
- On August 12, 2014, after the reporting date, the company acquired CCC in Uruguay for $18.0 million plus a working-capital adjustment, funded with cash. The filing does not provide the acquisition-date allocation or expected financial contribution.
- Other risks include customer concentration, pricing pressure, product obsolescence, reliance on suppliers, intellectual-property disputes, recalls, regulatory approval, foreign currency and interest-rate exposure, and execution of facility transfers and acquisitions.
Investor Verification Checklist
- Confirm the registrant-name transition from Greatbatch, Inc. to Integer Holdings Corp. and the applicable historical reporting conventions.
- Reconcile GAAP results to adjusted operating income and adjusted EPS, particularly the treatment of restructuring, capacity-transfer, tax-credit and investment items.
- Track portable medical declines, legacy cardiac product end-of-life effects, and the sustainability of orthopaedic and vascular growth.
- Monitor execution, remaining cash costs and savings realization from the facility and organizational realignments.
- Evaluate liquidity after the post-period $18.0 million CCC acquisition and planned 2014 capital expenditures of $25 million to $35 million.
- Follow Algovita’s FDA approval process and any consequences from the Standard Offset Cup Impactor corrective action.
- Assess customer concentration and the effect of pricing concessions, foreign exchange and floating-rate debt on future margins and cash flow.