Greatbatch, Inc. Form 10-Q Summary
Filing-period note: The supplied filing identifies the registrant as Greatbatch, Inc., not Integer Holdings Corp. It covers the 13-week quarter and 39-week year-to-date period ended September 28, 2012, with comparisons to September 30, 2011. Greatbatch operated through Implantable Medical and Electrochem Solutions.
Business Context and Reporting Period
- Implantable Medical designs and manufactures medical devices and components for cardiac rhythm management, neuromodulation, vascular access and orthopaedic markets.
- Electrochem provides customized battery and power solutions, primarily for portable medical and energy applications.
- Micro Power Electronics was acquired in December 2011 and NeuroNexus Technologies was acquired in February 2012. The acquisitions contributed approximately $21.6 million of third-quarter revenue and $64.5 million of nine-month revenue.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Sales | $161.3 million | $131.7 million | $487.0 million | $427.1 million |
| Gross profit | $51.0 million | $41.9 million | $149.8 million | $135.7 million |
| Gross margin | 31.6% | 31.8% | 30.8% | 31.8% |
| Operating income | $2.1 million | $12.9 million | $24.4 million | $49.2 million |
| Operating margin | 1.3% | 9.8% | 5.0% | 11.5% |
| Net income (loss) | $(7.6) million | $7.0 million | $0.8 million | $27.5 million |
| Diluted EPS | $(0.32) | $0.30 | $0.03 | $1.16 |
| Adjusted diluted EPS | $0.46 | $0.41 | $1.25 | $1.29 |
| Cash flow from operations | Not separately provided | Not separately provided | $39.5 million | $58.5 million |
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $10.8 million at September 28, 2012, down from $36.5 million at December 30, 2011.
- Working capital was $169.4 million and the current ratio was 2.83, broadly consistent with year-end 2011.
- Long-term debt was $230.2 million, comprising $41.0 million drawn on the revolving credit facility and $197.8 million of convertible subordinated notes, net of unamortized discount.
- The convertible notes bear contractual interest of 2.25% and mature June 15, 2013. Management intended to repay them using the credit facility and operating cash flow, with repayment expected in February 2013.
- The revolving facility had $359 million of available borrowing capacity. The company was in compliance with its covenants, including a 3.0-to-1.0 minimum adjusted EBITDA-to-interest ratio and a 4.0-to-1.0 maximum leverage ratio. Reported ratios were 17.5-to-1.0 and 2.36-to-1.0, respectively.
- Cash used in investing activities was $52.4 million, including $33.6 million of capital expenditures and $17.2 million for acquisitions. Cash used in financing activities was $13.0 million, including $24.0 million of debt repayments and $10.0 million of new borrowings.
Material Changes Versus the Prior Comparable Period
- Sales increased 22% in the quarter and 14% year to date, primarily from acquisitions, CRM/neuromodulation growth, vascular access growth and strong portable medical sales.
- Electrochem sales increased 118% in the quarter and 107% year to date, largely reflecting Micro Power. Implantable Medical sales increased 7% in the quarter but declined 1% year to date.
- Orthopaedic sales declined 13% in the quarter and 16% year to date, reflecting foreign exchange, price concessions, fewer product launches and operational issues at Swiss facilities.
- Operating income and net income declined substantially because of $15.3 million of third-quarter and $24.0 million of year-to-date other operating charges, principally facility optimization, ERP implementation and integration costs.
- Adjusted operating income increased to $18.7 million in the quarter from $14.7 million, but declined modestly year to date to $52.8 million from $51.9 million. Adjusted operating margin was 11.6% in the quarter and 10.8% year to date.
- The nine-month effective tax rate increased to 93.0% from 31.0%, primarily because of approximately $5.0 million of Swiss tax charges, loss of a Swiss tax holiday and a valuation allowance on Swiss deferred tax assets.
- Operating cash flow decreased $19.0 million year to date, primarily because of lower earnings, higher performance-based compensation payments and increased accounts receivable.
Guidance, Outlook, Risks and Unusual Items
- Management maintained full-year sales growth guidance of 13% to 17% and expected revenue to remain within the original range.
- Adjusted diluted EPS and adjusted operating margin were expected at the low end of the annual guidance range.
- Expected 2012 adjustments to operating income were increased to $40 million to $45 million from the prior estimate of $20 million to $30 million, while management stated that the total cost to complete consolidation initiatives remained unchanged.
- Medical device revenue guidance was reduced to $8 million to $10 million from $10 million to $15 million because of slower product acceptance.
- Management expected Swiss orthopaedic consolidation to improve operating results beginning in early 2013. The company estimated that discontinuing certain non-core products could reduce 2013 orthopaedic revenue by approximately $10 million to $15 million.
- Orthopaedic initiatives were expected to require $25 million to $35 million of capital investment and $30 million to $36 million of expense, with approximately $21 million and $15.4 million incurred, respectively. Combined initiatives were expected to generate approximately $10 million to $15 million of annual cost savings.
- Management projected a 2012 GAAP effective tax rate of 90% to 95%, compared with an adjusted rate closer to the 35% U.S. statutory rate.
- A three-year, $150 million interest-rate swap was entered into in October 2012 and was expected to become effective in February 2013 in connection with anticipated refinancing of the convertible notes.
- Key risks included customer concentration, short visibility into CRM ordering patterns, dependence on limited suppliers, foreign-exchange exposure, regulatory and reimbursement changes, product liability, intellectual-property risk, acquisition integration and execution of facility consolidations.
- Four customers represented 50% of nine-month sales, increasing concentration risk. A supply-chain fire affecting a supplier of cyclododecatriene was not expected to materially affect results because of safety stock and mitigation efforts.
- Management preliminarily estimated that the U.S. medical-device tax beginning in 2013 could reduce operating income by up to $2 million.
Most Important Facts for Investors to Verify
- Confirm that the intended issuer is Greatbatch, Inc.; the supplied filing does not identify Integer Holdings Corp.
- Assess whether Swiss orthopaedic consolidation delivers the expected margin improvement and $10 million to $15 million of annual savings.
- Verify the company’s ability to repay or refinance the $197.8 million convertible notes due June 2013 without impairing liquidity.
- Track orthopaedic revenue declines, planned product discontinuations and the potential $10 million to $15 million 2013 revenue reduction.
- Evaluate the sustainability of Micro Power-driven portable medical growth and the degree to which revenue growth depends on acquisitions.
- Reconcile GAAP results with adjusted results and monitor recurring versus nonrecurring consolidation, integration, ERP and tax charges.
- Monitor customer concentration, CRM ordering volatility, supplier interruptions, foreign-exchange effects and the impact of the medical-device tax.