Integer Holdings Corporation

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Integer Holdings Corporation is a medical device manufacturing company focused on designing, developing, and manufacturing innovative, high-quality medical components, subassemblies and finished devices, also serving other high-growth sectors outside of medical.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Integer Holdings Corporation (ITGR) operates within the medical device manufacturing sector, a field characterized by stringent regulations, high barriers to entry, and a strong reliance on proprietary technology and material science. This gives certain companies a moat due to these factors.

Business Explanation

Integer Holdings Corporation (ITGR) operates within the medical devices industry. It produces medical components, assemblies, and devices for the treatment of a multitude of diseases and conditions.

The company’s business segments can be broken down into:

  • Cardio & Vascular: Designs and manufactures components and devices used in therapies to treat cardiovascular diseases, like arrhythmia management, heart failure, structural heart, and peripheral intervention.
  • Cardiac Rhythm Management & Neuromodulation (CRM): Focuses on devices for implantable pacemakers, cardioverter defibrillators, and neurostimulation.
  • Advanced Surgical, Orthopedics, & Portable Medical: Offers a diverse portfolio of products including orthopedic tools, surgical devices and equipment, and drug delivery devices.
  • Non-Medical: Includes batteries and other components for various industrial applications.

While primarily focused on medical applications, ITGR also has operations in markets outside of medical, which may reduce the dependence on medical equipment.

  • Technological Innovation: The medical device industry is being transformed by innovations in digital health, robotics, and 3D printing, requiring companies to stay competitive by investing in advanced manufacturing and novel technologies.
  • Regulatory Scrutiny: Medical devices are subject to stringent regulatory approval processes that make market entry difficult and expensive.
  • Aging Population: Increasing life expectancy coupled with an aging population and increased occurrence of chronic illnesses leads to greater demand for medical treatments, creating a growing market for medical devices.
  • Globalization: The medical device industry is becoming increasingly global, with companies expanding their manufacturing and sales to emerging markets, which are often subject to unstable markets.
  • Focus on Value: Payers, especially in the US, are increasingly shifting from traditional fee-for-service models to value-based models, thereby pressuring medical device companies to enhance product efficacy and reduce costs.

Competitive Landscape

ITGR operates in a fragmented industry and faces competition on several fronts. On the products side, they face direct competition from other large medical device manufacturers and from various smaller vendors, all of which have innovative products that threaten Integer’s revenue stream.

The company competes based on:

  • Innovation: Developing innovative products, improving existing products, or expanding in a new market is extremely important.
  • Quality and reliability: Producing high-quality devices and components that are reliable is highly crucial for this industry.
  • Price: Many companies provide alternative options at lower price points.
  • Compliance: Strict compliance with different regulatory standards is a necessity to avoid penalties or lawsuits.
  • Scale: Size and scale to gain favorable market advantages and economics of scale.

What Makes the Company Different?

While not unique, Integer Holdings Corporation is set apart by:

  • Proprietary Technology & Customization: They focus on designing, developing and manufacturing innovative products that are specifically tailored for the needs of their clients in many cases, rather than mass-produced products.
  • Vertical Integration: They operate a vertically integrated manufacturing process.
  • Advanced Materials & Manufacturing: They use advanced and high-quality materials in their production and maintain high quality control.
  • Specialization: The focus on a range of specialized products enables them to have stronger expertise and build specific infrastructure.

Moat Analysis: 3/5

Integer’s moat is moderate. It stems from a combination of factors, but none of them is a strong moat by themselves. Here’s a breakdown:

  1. Intangible Assets: They don’t have a very strong brand name like some pharmaceutical companies, but due to the nature of the manufacturing process, having a strong long-term relationship with its clients creates somewhat of an economic moat. Their proprietary technology and process adds to the moat. These types of relationships will create switching costs, although they are limited.
  2. Switching Costs: Customers in regulated industries like medical devices incur substantial switching costs, as these devices and components must be vetted by the necessary regulatory bodies. This, plus close relationships and reliance between Integer and its clients, will lead to a greater stickiness.
  3. Cost Advantages: The specialized nature of production limits the cost advantages, as they can’t achieve a strong advantage in cost.
  4. Scale Advantages: Integer has a somewhat large size compared to their competitors, giving them a larger reach and the ability to maintain a wider distribution system. But at an industry level, this benefit is likely to be low due to the fragmentation.

Why the Moat is not 4 or 5/5: While the company has some advantages, none of these attributes is strong enough to fully offset competitors from entering the market and grabbing some of the profits. In the end, this may be a winner take all market, and Integer may not be the ultimate winner if competitors are more innovative or have better technologies.

Risks to the Moat

  • Disruptive Innovation: Advances in technology could make its existing products and manufacturing methods obsolete, leading to loss of revenue and decreased valuation.
  • Increased Competition: Increased competition from lower-cost manufacturers or new market entrants could cause revenue to decline and put downward pressure on prices.
  • Regulation & Legal Issues: More stringent rules will increase the cost of operations and potentially prohibit existing products. There is always the risk of litigation, which could potentially impact the financials of the business.
  • Consolidation: The medical device sector is subject to mergers and acquisitions which may create bigger competitors and more competition, making it harder for Integer to gain a foothold.
  • Supply chain disruptions: The company’s complex manufacturing process with components made globally can be easily interrupted due to economic reasons.

Business Resilience

  • Diversified Customer Base: Integer sells its products to multiple industries, and in different geographies, reducing the risk that a single company, industry, or market will affect the entire business.
  • Product and Process Innovation: They have invested significant capital in developing and maintaining production technology and to research new products and solutions, increasing adaptability.
  • High Quality Standards: This makes their products more desirable to its customers and provides a foundation to continue to serve customers as preferences changes.

Financials

  • Revenue: For the fiscal year 2022, Integer reported $1.4 billion in net sales. They reported $1.25 billion in net sales for the fiscal year 2021 and $1.16 billion in 2020. The business has shown steady growth over the last years.
  • Gross Profit and Margin: The company’s gross margins have ranged from 35-40% which is pretty standard for a manufacturing company. However, the company’s gross margins have been declining each year since 2020.
  • Operating Expenses: Operating expenses have mostly been driven by SG&A, and R&D expenses, which have also increased over the last years.
  • Net Income and EPS: Net income is fluctuating as the expenses vary from year to year. Net income was $48.8 million, $43.1 million and -$32.3 million for years 2022, 2021 and 2020. That translates to diluted EPS of $1.46, 1.25, and -1.21 for the same period. These results are significantly driven by non recurring items such as restructuring expenses and impairments.
  • Cash Flow: The company’s total cash flow from operations is around $200 to $300 million in the last three years, which is significantly above capex. This is a very good signal for a capital-intensive business.

Debt & Liquidity: The company’s debt is concerning. Total debt of $1.2 billion with 1.4x leverage and a current ratio of 1.1 shows that the company may have difficulty in the case of prolonged poor performance.

  • Goodwill: They are carrying around $700M in goodwill. This isn’t necessarily bad, but it’s important to look at that in a valuation context.
  • Overall: The numbers are not the best right now, however, with some financial maneuvering they can be improved. With the right management the company may be very valuable.

Understandability: 2/5

The business is somewhat complex, due to the high regulation and technical nature of its medical devices manufacturing business. Analyzing the financials also requires a deep understanding of accounting standards, especially for long-term investments, intangibles, and taxes. The diversified business areas also make the business more complex.

Balance Sheet Health: 3/5

While the company’s total assets and equity are high, the excessive debt and low debt-coverage, and declining cash position puts the balance sheet in a somewhat unstable position.