Integer Holdings Corporation — FY2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. The filing is an annual Form 10-K, not a standalone fourth-quarter report. Integer is a medical device outsource manufacturer serving cardiac, neuromodulation, vascular, surgical, orthopedic and portable medical markets, with a smaller Non-Medical battery business serving energy, military and environmental applications.
Financial Performance and Position
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Sales | $1.221 billion | $1.073 billion | +14% |
| Gross profit | $337.0 million | $285.7 million | +18% |
| Gross margin | 27.6% | 26.6% | +1.0 percentage point |
| Operating income | $135.7 million | $120.6 million | +13% |
| Operating margin | 11.1% | 11.2% | Down 0.1 point |
| Income from continuing operations | $93.0 million | $77.3 million | +20% |
| Net income | $96.8 million | $77.3 million | +25% |
| Diluted EPS from continuing operations | $2.80 | $2.33 | +20% |
| Operating cash flow | $156.7 million | $181.3 million | Down $24.7 million |
- Revenue mix: Medical sales increased 14% to $1.183 billion. Cardio & Vascular sales rose 10% to $626.0 million, while Cardiac & Neuromodulation increased 29% to $446.6 million. Advanced Surgical, Orthopedics & Portable Medical declined 10% to $110.0 million. Non-Medical sales increased 8% to $38.5 million.
- Margin drivers: Gross margin benefited from higher volume, production efficiencies and mix, partly offset by customer price reductions. SG&A increased 30%, partly reflecting the absence of the $28.2 million net patent litigation gain recorded in 2020. RD&E increased 7% to $52.0 million.
- Taxes and other items: The effective tax rate declined to 8.0% from 10.4%, primarily due to increased R&D and foreign tax credits, FDII benefits and the release of certain uncertain tax positions. Equity investments produced a $3.1 million loss versus a $5.3 million gain in 2020.
- Liquidity: Cash and equivalents were $17.9 million versus $49.2 million at year-end 2020. Working capital increased to $293.4 million and the current ratio was 2.84.
- Cash deployment: Operating cash flow was $156.7 million; capital expenditures were $53.5 million; and net cash paid for acquisitions was $218.0 million, primarily for Oscor. Net cash provided by financing activities was $82.0 million.
- Debt: Principal debt outstanding was $835.5 million, or $828.1 million net of issuance costs and discounts. The company had $375.0 million of available revolving capacity after borrowings and letters of credit. Net leverage was approximately 2.7x and adjusted EBITDA-to-interest coverage was approximately 12.5x; the company reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Results recovered from COVID-19-related demand and operating disruptions in 2020, with stronger medical procedure volumes and customer demand in 2021. Supply-chain constraints and labor shortages continued.
- Integer acquired Oscor on December 1, 2021, for a cash purchase price of $220.4 million. Oscor contributed $4.7 million of 2021 sales, including $2.9 million to Cardio & Vascular and $1.8 million to Cardiac & Neuromodulation; earnings contribution was not material.
- The acquisition added $77.9 million of goodwill and $105.3 million of intangible assets on a preliminary basis. The purchase-price allocation remained provisional at year-end.
- The company refinanced its credit facilities in September 2021 and added $220 million of term A debt in connection with the Oscor acquisition.
- Discontinued operations generated $3.8 million of income in 2021, primarily from the release of pre-divestiture tax liabilities related to the previously sold Advanced Surgical and Orthopedic product lines.
- Firm backlog was approximately $461 million at December 31, 2021, with most orders expected to ship within one year.
Outlook, Commentary, Risks and Unusual Items
- Management expects 2022 capital expenditures of approximately $65 million to $75 million, focused on manufacturing facilities, information technology, equipment and productivity initiatives. Management stated that projected operating cash flow, cash and revolver availability should satisfy working capital, debt service and capital expenditure needs for at least the next twelve months, subject to operating performance and market conditions.
- Integer continues to pursue organic growth, manufacturing and process improvements, expanded research and development, and strategic bolt-on acquisitions. The company expects 2021 operational-excellence actions to be substantially complete by the end of 2022 and market-exit and resource-alignment actions by the end of 2025.
- Principal risks include the continuing effects of COVID-19, customer concentration, pricing pressure, supply interruptions and raw-material inflation, manufacturing concentration, labor availability, cybersecurity, regulatory compliance, product recalls and liability, intellectual-property claims, foreign currency exposure, energy-market volatility and acquisition integration.
- Three medical customers accounted for approximately 47% of 2021 sales and 44% of year-end accounts receivable. The company has limited visibility into customers’ future purchasing and many agreements do not require minimum purchase volumes.
- Goodwill and other intangible assets totaled approximately $1.7 billion, or 67% of total assets. No impairment was identified in the 2021 testing, but adverse changes in customer demand, margins, discount rates or market conditions could produce future impairment charges.
- The company had $685 million of unhedged variable-rate debt at year-end; a hypothetical 100-basis-point increase in LIBOR would have increased annual interest expense by approximately $5 million. Approximately 18% of principal debt was effectively fixed through interest-rate swaps.
- Deloitte & Touche issued unqualified opinions on the financial statements and internal control over financial reporting. Management excluded Oscor from its internal-control assessment because it was acquired on December 1, 2021; Oscor represented 9% of total assets, 16% of net assets and less than 1% of sales and net income at year-end.
Most Important Facts for Investors to Verify
- Whether the post-pandemic recovery and $461 million backlog convert into sustained organic revenue growth, particularly in Cardiac & Neuromodulation and Cardio & Vascular.
- The pace and economics of Oscor integration, including final purchase-price allocation, customer retention, synergies and incremental amortization.
- Whether gross-margin gains from volume and manufacturing efficiency offset customer price reductions, labor costs and raw-material inflation.
- Debt reduction, interest-rate sensitivity, covenant headroom and the availability of the revolving facility as capital spending and acquisition activity continue.
- The impact of customer concentration, OEM inventory management, insourcing and supplier diversification on future orders.
- Potential changes in goodwill and intangible-asset valuations, product warranty exposure, environmental obligations and regulatory or litigation contingencies.
- The sustainability of the unusually low 8.0% effective tax rate, including the availability of tax credits, foreign tax benefits and other discrete items.