Filing Overview
Issuer and period: The supplied Form 10-K is for Greatbatch, Inc., not Integer Holdings Corp. It covers the 52-week fiscal year ended December 28, 2012, with comparisons to December 30, 2011 and December 31, 2010. The filing is annual rather than a standalone fourth-quarter filing, although fourth-quarter data are disclosed.
Greatbatch operated through two segments: Implantable Medical, serving cardiac, neuromodulation, vascular and orthopaedic markets, and Electrochem, providing customized primary and rechargeable battery solutions. The company acquired NeuroNexus in February 2012 and included a full year of Micro Power Electronics results after its December 2011 acquisition.
Financial Highlights
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Sales | $646.2 million | $568.8 million | +14% |
| Gross profit | $201.6 million | $180.4 million | +12% |
| Gross margin | 31.2% | 31.7% | Down 0.5 points |
| Operating income | $25.8 million | $61.7 million | Down 58% |
| Operating margin | 4.0% | 10.8% | Down 6.8 points |
| Net income (loss) | $(4.8) million | $33.1 million | Down $37.9 million |
| Diluted EPS | $(0.20) | $1.40 | Down $1.60 |
| Adjusted operating income | $73.9 million | $67.6 million | +9% |
| Adjusted diluted EPS | $1.77 | $1.68 | +5% |
| Cash flow from operations | $64.8 million | $89.9 million | Down $25.1 million |
Reported profitability was substantially reduced by $42.3 million of other operating expenses, principally orthopaedic facility optimization, medical-device facility optimization, ERP implementation and integration costs. The company also incurred $33.9 million of medical-device initiative investments, including $5.2 million of design-verification testing.
Fourth-quarter 2012 sales were $159.2 million versus $141.7 million in the prior-year quarter. Fourth-quarter net loss was $5.6 million, compared with net income of $5.6 million in fourth-quarter 2011, primarily reflecting Swiss orthopaedic consolidation charges.
Segment and Operating Changes
- Implantable Medical: Sales declined 1% to $483.2 million. Cardiac and neuromodulation sales increased 2% to $309.1 million, vascular sales increased 15% to $52.0 million, and orthopaedic sales declined 13% to $122.1 million.
- Electrochem: Sales increased 104% to $163.0 million, principally because Micro Power contributed approximately $82.4 million. Organic Electrochem sales were approximately consistent with the prior year.
- Customer concentration: Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical accounted for 52% of 2012 sales, versus 59% in 2011.
- Backlog: Firm backlog declined to approximately $160 million at year-end from $191 million at December 30, 2011.
- Research and development: Net RD&E increased 15% to $52.5 million, or 8.1% of sales. Total spending associated with medical-device initiatives increased to $33.9 million from $27.3 million.
- Margins: Gross margin was pressured by Micro Power’s lower-margin mix, excess capacity, Swiss production inefficiencies and customer price concessions. Productivity and volume gains partly offset these effects.
Cash, Debt and Liquidity
| Balance-sheet metric | December 28, 2012 | December 30, 2011 |
|---|---|---|
| Cash and equivalents | $20.3 million | $36.5 million |
| Working capital | $176.4 million | $170.9 million |
| Current ratio | 2.92 | 2.82 |
| Long-term debt | $225.4 million | $236.0 million |
| Total assets | $889.9 million | $881.3 million |
Capital expenditures were $41.1 million, acquisitions used $17.2 million, and net debt repayment was $22.0 million. The company had $367 million of available revolving-credit capacity at year-end and was in compliance with its debt covenants. The revolving facility required an adjusted EBITDA-to-interest ratio of at least 3.0x and a total leverage ratio no greater than 4.0x; reported covenant ratios were 17.3x and 2.2x, respectively.
The $197.8 million of convertible subordinated notes were redeemed on February 20, 2013 using revolving-credit availability. As of February 27, 2013, available revolving capacity was reported at $174 million. The filing states that operating cash flow and the credit facility were expected to provide adequate liquidity.
Guidance, Outlook and Unusual Items
- For 2013, management forecast total sales of $660 million to $680 million, representing reported growth of 2% to 5% and consolidated organic growth of 5% to 8%.
- 2013 adjusted operating margin guidance was 12.0% to 12.5%, and adjusted diluted EPS guidance was $1.90 to $2.00.
- Management expected 2013 non-recurring, unusual or infrequently occurring items of approximately $11.5 million to $14.0 million, including $4.8 million to $5.8 million of residual design-verification testing costs for the Algostim neuromodulation project.
- Management expected other operating expenses to decline substantially to approximately $6.7 million to $8.2 million in 2013, compared with $42.3 million in 2012.
- The company expected capital spending of approximately $20 million to $30 million in 2013, with approximately half discretionary.
- Management expected to submit the Algostim spinal-cord-stimulation device to regulators in the second half of 2013. A field action involving a bi-directional guiding sheath was expected to delay related revenue until the second half of 2013.
- The medical-device tax expected to apply beginning in 2013 was preliminarily estimated to reduce gross profit by $1.5 million to $2.5 million.
- The company sold certain non-core Swiss orthopaedic product lines in early 2013; management expected the disposition to reduce 2013 orthopaedic revenue by approximately $15 million compared with 2012, despite estimated organic growth of the remaining orthopaedic business.
Principal Risks and Contingencies
- Dependence on a small number of large OEM customers, generally without minimum purchase commitments, creates material customer, pricing and ordering-pattern risk.
- Healthcare regulation, reimbursement pressure, the medical-device tax, product approvals, recalls and field actions could affect demand, costs and timing of product launches.
- Critical raw materials, including lithium, tantalum, precious metals and specialty chemicals, are sourced from limited suppliers and may experience price or availability volatility.
- Goodwill and other intangible assets totaled $457.2 million, or 51% of total assets; impairment or lower-than-expected performance could materially affect earnings.
- International operations expose the company to foreign-currency, labor, regulatory, tax and geopolitical risks. Foreign-currency movements reduced 2012 sales by approximately $6 million versus 2011.
- A Texas personal injury and wrongful-death action naming Electrochem was filed in December 2012. The filing states that the loss amount could not be reasonably estimated; defense costs were the customer’s responsibility and product-liability insurance was available.
- Total contractual obligations were $338.0 million, including $270.5 million of debt obligations, $19.0 million of operating leases and $24.7 million of purchase obligations.
- Management reported effective internal control over financial reporting, but excluded NeuroNexus from its 2012 assessment. NeuroNexus represented approximately 3% of net assets, 2% of total assets and 0.4% of revenue.
Investor Verification Checklist
- Confirm the issuer identity: the supplied filing is Greatbatch, Inc., while the request identifies Integer Holdings Corp.
- Reconcile GAAP results with adjusted operating income and adjusted EPS, particularly the $42.3 million of 2012 restructuring and optimization charges.
- Verify the post-year-end redemption of the convertible notes and the resulting debt balance, interest expense and revolving-credit availability.
- Assess whether the forecasted $10 million to $15 million of annual cost savings and the 2013 margin recovery were achieved.
- Track customer concentration, backlog, orthopaedic disposition effects and pricing pressure from major OEM customers.
- Review regulatory progress, commercialization and spending for Algostim and the impact of the medical-device tax.
- Review subsequent disclosures regarding the Texas litigation, product field action, Swiss restructuring and any goodwill or intangible-asset impairment.