INTEGER HOLDINGS CORPORATION This Quarterly Report on Form 10-Q should be read in conjunction with the disclosures included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . In addition, please read this section in conjunction with our Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contained herein. Forward-Looking Statements Some of the statements contained in this Form 10-Q and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have based these forward-looking statements on our current expectations, and these statements are subject to known and unknown risks, uncertainties and assumptions. Forward-looking statements include statements relating to: •recovery from the COVID-19 global pandemic; •future development and expected growth of our business and industry, including expansion of our manufacturing capacity; •our ability to execute our business model and our business strategy, including completion and integration of current or future acquisition targets; •having available sufficient cash and borrowing capacity to meet working capital, debt service and capital expenditure requirements for the next twelve months; and •projected capital spending. You can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "projects" or "continue" or variations or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those stated or implied by these forward-looking statements. In evaluating these statements and our prospects, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this Form 10-Q. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors and other risks and uncertainties that arise from time to time are described in Item 1A "Risk Factors" of our Annual Report on Form 10-K and in other periodic filings with theSEC and include the following: •operational risks, such as the duration, scope and impact of the COVID-19 pandemic, including the evolving health, economic, social and governmental environments and the effect of the pandemic on our associates, suppliers and customers as well as the global economy; our dependence upon a limited number of customers; pricing pressures that we face from customers; our reliance on third party suppliers for raw materials, key products and subcomponents; the potential for harm to our reputation caused by quality problems related to our products; the dependence of our energy market-related revenues on the conditions in the oil and natural gas industry; interruptions in our manufacturing operations; our dependence upon our information technology systems and our ability to prevent cyber-attacks and other failures; our dependence upon our senior management team and technical personnel; and global climate change and the emphasis on ESG matters by various stakeholders; •strategic risks, such as the intense competition we face and our ability to successfully market our products; our ability to respond to changes in technology; our ability to develop new products and expand into new geographic and product markets; and our ability to successfully identify, make and integrate acquisitions to expand and develop our business in accordance with expectations; •financial risks, such as our significant amount of outstanding indebtedness and our ability to remain in compliance with financial and other covenants under our senior secured credit facilities; economic and credit market uncertainties that could interrupt our access to capital markets, borrowings or financial transactions; financial and market risks related to our international operations and sales; our complex international tax profile; and our ability to realize the full value of our intangible assets; and •legal and compliance risks, such as regulatory issues resulting from product complaints, recalls or regulatory audits; the potential of becoming subject to product liability or intellectual property claims; our ability to protect our intellectual property and proprietary rights; our ability and the cost to comply with environmental regulations; our ability to comply with customer-driven policies and third party standards or certification requirements; our ability to obtain necessary licenses for new technologies; legal and regulatory risks from our international operations; and the fact that the healthcare industry is highly regulated and subject to various regulatory changes; and
•other risks and uncertainties that arise from time to time.
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INTEGER HOLDINGS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS
Except as required by applicable law, the Company assumes no obligation to update forward-looking statements in this Form 10-Q whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise.
In this Form 10-Q, references to "Integer," "we," "us," "our" and the "Company"
mean
Our Business
Integer Holdings Corporation is one of the largest medical device outsource ("MDO") manufacturers in the world serving the cardiac, neuromodulation, vascular, orthopedics, advanced surgical and portable medical markets. We also develop batteries for high-end niche applications in the non-medical energy, military, and environmental markets. Our vision is to enhance the lives of patients worldwide by being our customers' partner of choice for innovative technologies and services. We organize our business into two reportable segments, Medical and Non-Medical, and derive our revenues from four principal product lines. The Medical segment includes the Cardio & Vascular, Cardiac & Neuromodulation and Advanced Surgical, Orthopedics & Portable Medical product lines and the Non-Medical segment comprises the Electrochem product line. For more information on our segments, please refer to Note 14 "Segment Information" of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report.
The first quarter of 2022 ended on
Impact of Global Events
Beginning in earlyMarch 2020 , the global spread of the novel coronavirus ("COVID-19") created significant uncertainty and worldwide economic disruption. Specific impacts to our business include labor shortages, disruptions in the supply chain, delayed or reduced customer orders and sales, restrictions on associates' ability to travel or work, and delays in shipments to and from certain countries. We are uncertain of the future impact of the ongoing COVID-19 pandemic or recovery of prior deterioration in economic conditions to our sales channels, supply chain, manufacturing, and distribution. As pandemic-related events continue to evolve, additional impacts may arise that we are not aware of currently. Additionally, the current conflict betweenRussia andUkraine and the related sanctions and other penalties imposed by countries across the globe againstRussia are creating substantial uncertainty in the global economy. While we do not have operations inRussia orUkraine and do not have significant direct exposure to customers and vendors in those countries, we are unable to predict the impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows.
Business Acquisitions
OnDecember 1, 2021 , we acquired 100% of the outstanding equity interests ofOscor Inc. ,Oscor Caribe, LLC andOscor Europe GmbH (collectively "Oscor"), privately-held companies with operations inFlorida , theDominican Republic andGermany that design, develop, manufacture and market a comprehensive portfolio of highly specialized medical devices, venous access systems and diagnostic catheters and implantable devices. Refer to Note 2 "Business Acquisitions" of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about this acquisition. Subsequent to the end of the first quarter, onApril 6, 2022 , we acquired Connemara Biomedical Holdings Teoranta, including its operating subsidiaries Aran Biomedical and Proxy Biomedical (collectively "Aran"). A recognized leader in proprietary medical textiles, high precision biomaterial coverings and coatings as well as advanced metal and polymer braiding, Aran delivers development and manufacturing solutions for implantable medical devices. Consistent with our strategy, the combination with Aran further increases our ability to offer complete solutions for complex delivery and therapeutic devices in high growth cardiovascular markets such as structural heart, neurovascular, peripheral vascular, and endovascular as well as general surgery. Given theApril 6, 2022 effective date of the Aran Acquisition, Aran results are not included in this MD&A and the disclosures included herein. - 27 -
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Sales Realignment
We have communicated to certain customers our intent to exit certain markets we serve in the Advanced Surgical, Orthopedics & Portable Medical product line. We are working closely with these customers to support the transition of these products to other suppliers. Due to quality and regulatory requirements, we expect it will take three to four years to complete this transition and see the corresponding decline in sales. In order to align with the planned exit of those markets and better align with our end markets and product line strategies, product line sales within the Medical segment have been recast to reflect the reclassification of certain products from the historical product lines to the product lines associated with those revenues that will be utilized for future revenue reporting. We believe the revised presentation will provide improved reporting and better transparency into the operational results of our business and markets. Prior period amounts have been reclassified to conform to the new product line sales reporting presentation. For the three months endedApril 2, 2021 , Cardio & Vascular sales of$8.0 million and Advanced Surgical, Orthopedics & Portable Medical sales of$5.3 million were reclassified to the Cardiac Rhythm Management & Neuromodulation product line.
Financial Overview
Net income for the first quarter of 2022 was
•Sales for the first quarter of 2022 increased$20.4 million when compared to the same period in 2021. During the first quarter of 2022 we continued to see the demand for many of our products recover from the impacts of the COVID-19 pandemic.
•Gross profit for the first quarter of 2022 decreased
•Operating expenses for the first quarter of 2022 increased$9.1 million when compared to the same period in 2021, primarily due to higher labor costs and restructuring and other charges.
•Interest expense for the first quarter of 2022 decreased
•During the first quarter of 2022, we recognized a loss on equity investments of$2.4 million , compared to a loss of$1.3 million for the first quarter of 2021. Gains and losses on equity investments are generally unpredictable in nature.
•Other (income) loss, net for the first quarter of 2022 was a loss of
•We recorded provisions for income taxes for the first quarter of 2022 of$2.6 million , compared with provisions for income taxes of$3.5 million for the first quarter of 2021. The change in income tax expense was primarily due to relative changes in pre-tax income and the impact of discrete tax items. - 28 -
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Financial Results
The following table presents selected financial information derived from our
Condensed Consolidated Financial Statements, contained in Item 1 of this report,
for the periods presented (dollars in thousands, except per share).
Three Months Ended
April 1, April 2, Change
2022 2021 $ %
Medical Sales:
Cardio & Vascular 159,037 $ 141,206 $ 17,831 12.6 %
Cardiac Rhythm Management & Neuromodulation 123,324 121,703 1,621 1.3 %
Advanced Surgical, Orthopedics & Portable Medical 19,666 20,056 (390) (1.9) %
Total Medical Sales 302,027 282,965 19,062 6.7 %
Non-Medical 8,885 7,502 1,383 18.4 %
Total sales 310,912 290,467 20,445 7.0 %
Cost of sales 229,437 205,981 23,456 11.4 %
Gross profit 81,475 84,486 (3,011) (3.6) %Gross profit as a % of sales ("Gross margin") 26.2 %
29.1 %
Operating expenses:
Selling, general and administrative ("SG&A") 39,560 35,502 4,058 11.4 %
SG&A as a % of sales 12.7 % 12.2 %
Research, development and engineering ("RD&E") 16,083 13,461 2,622 19.5 %
RD&E as a % of sales 5.2 % 4.6 %
Restructuring and other charges 3,335 915 2,420 NM
Total operating expenses 58,978 49,878 9,100 18.2 %
Operating income 22,497 34,608 (12,111) (35.0) %
Operating income as a % of sales 7.2 % 11.9 %
Interest expense 5,968 8,532 (2,564) (30.1) %
Loss on equity investments 2,404 1,335 1,069 80.1 %
Other (income) loss, net 177 (237) 414 NM
Income before taxes 13,948 24,978 (11,030) (44.2) %
Provision for income taxes 2,581 3,458 (877) (25.4) %
Effective tax rate 18.5 % 13.8 %
Net income $ 11,367 $ 21,520 $ (10,153) (47.2) %
Net income as a % of sales 3.7 % 7.4 %
Diluted earnings per share $ 0.34 $ 0.65 $ (0.31) (47.7) %
__________NM Calculated amount not meaningful
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Sales
For the first quarter of 2022, Cardio & Vascular ("C&V") sales increased $17.8
million , or 13%, versus the comparable 2021 period. The increase in C&V sales
for the first quarter of 2022 was driven by strong demand in the neurovascular
market and structural heart product development revenue, despite higher labor
absenteeism in January 2022 and supply chain constraints. During the first
quarter of 2022, price changes increased C&V sales by $1.0 million in comparison
to the 2021 period. Foreign currency exchange rate fluctuations decreased C&V
sales for the first quarter of 2022 by $1.0 million in comparison to the 2021
period, primarily due to U.S. dollar fluctuations relative to the Euro.
For the first quarter of 2022, Cardiac Rhythm Management & Neuromodulation
("CRM&N") sales increased
In addition to Portable Medical sales, Advanced Surgical, Orthopedic & Portable
Medical ("AS&O") includes sales to the acquirer of our divested Advanced
Surgical, Orthopedic product line. For the first quarter of 2022, AS&O sales
decreased $0.4 million , or 2% versus the comparable 2021 period, driven by a
reduction in demand for COVID-related ventilator and patient monitoring
components. Price changes and foreign currency exchange rate fluctuations did
not have a material impact on AS&O sales during the first quarter of 2022 in
comparison to the 2021 period.
For the first quarter of 2022, Non-Medical sales increased $1.4 million , or 18%,
versus the comparable 2021 period, despite negative impacts from supply chain
constraints as the energy market continues to recover. Price reductions and
foreign currency exchange rate fluctuations did not have a material impact on
Non-Medical sales during the first quarter of 2022 in comparison to the 2021
period.
Gross Profit
Three Months Ended
April 1, April 2,
2022 2021
Gross profit 81,475 84,486
Gross margin 26.2 % 29.1 %
Gross margin for the first quarter of 2022 decreased 290 basis points compared
to the prior year period, primarily driven by the direct labor headwinds caused
by the global supply chain challenges, labor markets and high January 2022
absenteeism caused by COVID-19. The increased spend in direct labor was caused
by higher-than-normal overtime, inefficiencies from delayed material, as well as
high training costs and the incremental salaries for new associates we are
hiring to support growth through the rest of 2022.
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SG&A Expenses
Changes to SG&A expenses from the prior year were due to the following (in thousands):
Change From Prior Year Three Months
Compensation and benefits(a) $ 1,899
Amortization expense(b) 777
Contract services(c) 422
All other SG&A(d) 960
Net increase in SG&A expenses $ 4,058
__________
(a)Compensation and benefits increased during the first quarter of 2022 compared to the prior year period primarily due to an increase in headcount from the Oscor Acquisition.
(b)Amortization expense increased during the first quarter of 2022 compared to the prior year period due to amortization of intangible assets from theOscor Acquisition. (c)Contract services expense increased during the first quarter of 2022 compared to the prior year period primarily due to higher software costs from information technology enhancements. (d)The net increase in all other SG&A for the first quarter of 2022 compared to the same period of 2021 is primarily attributable to higher professional fees and travel expenses. RD&E RD&E expense for the first quarter of 2022 was$16.1 million , compared to$13.5 million for the first quarter of 2021. The increase in RD&E expense during the first quarter of 2022 compared to the first quarter of 2021 was primarily due to investments made to support long-term revenue growth, the timing of program milestone achievements for customer funded programs, and incremental expense due to the Oscor Acquisition. RD&E expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. - 31 -
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Restructuring and Other Charges
We continuously evaluate our business and identify opportunities to realign resources to better serve our customers and markets, improve operational efficiency and capabilities, and lower operating costs. To realize the benefits associated with these opportunities, we undertake restructuring-type activities to transform out business. We incur costs associated with these activities, which primarily include exit and disposal costs and other costs directly related to the restructuring initiative. Restructuring charges include exit and disposal costs from these activities and restructuring-related charges are costs directly related to the restructuring initiatives. In addition, from time to time, the Company incurs costs associated with acquiring and integrating businesses, and certain other general expenses, including asset impairments.
Restructuring and other charges comprise the following (in thousands):
Three Months Ended
April 1, April 2,
2022 2021
Restructuring charges(a) $ 1,103 $ 654
Acquisition and integration costs(b) 1,936 84
Other general expenses(c) 296
177
Total restructuring and other charges$ 3,335
__________
(a)Restructuring charges for the first quarter of 2022 primarily consist of termination benefits associated with our operational excellence projects.
(b)Amounts include expenses related to the purchase of certain assets and liabilities from business acquisitions. Acquisition and integration costs for the first quarter of 2022 include costs associated with the acquisition ofOscor and due diligence cost associated with the acquisition of Aran.
(c)Amounts include expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to reduce future costs and improve efficiencies.
Refer to Note 8 "Restructuring and Other Charges" of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these initiatives.
Interest Expense
Information relating to our interest expense is as follows (dollars in
thousands):
Three Months Ended
April 1, April 2,
2022 2021 Change
Contractual interest expense $ 4,647 $ 6,105 $ (1,458)
Loss on interest rate swap 768 1,034 (266)
Amortization of deferred debt issuance costs and
original issue discount 481 1,026 (545)
Losses from extinguishment of debt - 346 (346)
Other interest expense 72 21 51
Total interest expense $ 5,968 $ 8,532 $ (2,564)
Interest expense for the first quarter of 2022 decreased $2.6 million compared
to the same period in 2021, primarily due to lower contractual interest rate
expense and debt-related charges.
The decrease in contractual interest expense was due to lower interest rates,
partially offset by higher outstanding debt balances. The lower interest rates
were the result of beneficial changes in our Senior Secured Credit Facilities
agreement. During the third and fourth quarters of 2021 we entered into and
subsequently amended a new Senior Secured Credit Facilities agreement, which
among other changes, lowered the spreads on our Revolving Credit Facility and
TLA Facility by 75 basis points and the LIBOR floor on our TLB facility by 50
basis points. The higher outstanding debt balance is the result of borrowings to
fund the Oscor acquisition.
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INTEGER HOLDINGS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Debt related charges included in interest expense include the amortization and write-off (losses from extinguishment of debt) of deferred debt issuance costs and original issue discount. Amortization of deferred debt issuance costs and original issue discount decreased as a result of the the extended maturity under the new Senior Secured Credit Facilities. We had no losses from extinguishment of debt during 2022. The losses from extinguishment of debt during the first quarter of 2021 were related to prepayments of portions of the Term Loan B facility under the previous credit agreement.
See Note 6 "Debt" of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our debt.
As ofApril 1, 2022 andDecember 31, 2021 , approximately 18% of our principal amount of debt has been converted to fixed-rate borrowings with interest rate swaps. We enter into interest rate swap agreements in order to reduce our exposure to fluctuations in the LIBOR rate. See Note 13 "Financial Instruments and Fair Value Measurements" of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our interest rate swap agreements.
Loss on Equity Investments
During the first quarter of 2022, we recognized a loss on equity investments of$2.4 million , compared to a loss of$1.3 million during the first quarter of 2021. Gains and losses on equity investments are generally unpredictable in nature. The amounts for both 2022 and 2021 relate to our share of equity method investee losses including unrealized depreciation of the underlying interests of the investee. As ofApril 1, 2022 andDecember 31, 2021 , the carrying value of our equity investments was$19.4 million and$21.8 million , respectively. See Note 13 "Financial Instruments and Fair Value Measurements" of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for further details regarding these investments.
Other (Income) Loss, Net
Other (income) loss, net for the first quarter of 2022 were losses of$0.2 million , compared income of$0.2 million for the first quarter of 2021. Other (income) loss, net primarily includes gains/losses from the impact of exchange rates on transactions denominated in foreign currencies. Our foreign currency transaction gains/losses are based primarily on fluctuations of theU.S. dollar relative to the Euro, Mexican peso, Uruguayan peso, Malaysian ringgits, Dominican peso, or Israeli shekel. The impact of exchange rates on transactions denominated in foreign currencies included in Other (income) loss, net for the first quarter of 2022 were net losses of$0.1 million , compared to net gains of$0.1 million for the first quarter of 2021. We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. However, fluctuations in exchange rates could have a significant impact, positive or negative, on our financial results in the future. - 33 -
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Income Taxes
We recognized income tax expense of$2.6 million for the first quarter of 2022 on$13.9 million of income before taxes (effective tax rate of 18.5%), compared to an income tax expense of$3.5 million on$25.0 million of income before taxes (effective tax rate of 13.8%) for the same period of 2021. Income tax expense for the first quarter of 2022 included$0.5 million of discrete tax expense. There is a potential for volatility in our effective tax rate due to several factors including changes in the mix of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations. We continue to closely monitor developments related to proposed changes in tax laws and tax rates, including current proposals forU.S. Tax Reform and a proposed 15% Minimum Global Tax Rate recently announced by theOrganization for Economic Cooperation and Development . We currently have various tax planning initiatives in place and continuously evaluate planning strategies aimed at reducing our effective tax rate over the long term. This includes strategies to realize deferred tax assets that would otherwise expire unutilized. Our effective tax rates for 2022 differ from theU.S. federal statutory tax rate of 21% due principally to the net impact of the Company's earnings outside theU.S. , which are generally taxed at rates that differ from theU.S federal rate, the GILTI tax, the FDII deduction, the availability of tax credits, and the recognition of discrete tax items. The discrete tax amounts relate predominately to excess tax benefits recognized upon vesting of RSUs and/or tax shortfalls recorded for the forfeiture of certain PRSUs. Our earnings outside theU.S. are generally taxed at blended rates that are marginally lower than theU.S. federal rate. The GILTI provisions require us to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary's tangible assets in ourU.S. income tax return. The foreign jurisdictions in which we operate and where our foreign earnings are primarily derived, includeSwitzerland ,Mexico ,Uruguay ,Malaysia andIreland . We currently have a tax holiday inMalaysia throughApril 2023 provided certain conditions continue to be met. In addition, we acquired manufacturing operations in theDominican Republic as part of the Oscor Acquisition, and are operating under a free trade zone agreement in theDominican Republic throughMarch 2034 . With the exception of the expiration of these tax holidays, we are not currently aware of any material trends in these jurisdictions that are likely to impact our current or future tax expense, our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower effective tax rates and higher than anticipated in countries where we have higher effective tax rates, or by changes in tax laws or regulations. We regularly assess any significant exposure associated with increases in tax rates in international jurisdictions and adjustments are made as events occur that warrant adjustment to our tax provisions.
Liquidity and Capital Resources
April 1, December 31,
(dollars in thousands) 2022 2021
Cash and cash equivalents $ 25,668 $ 17,885
Working capital $ 321,708 $ 293,353
Current ratio 2.86 2.84
Cash and cash equivalents at
Working capital increased by$28.4 million fromDecember 31, 2021 , primarily from positive working capital fluctuations associated with cash and cash equivalents, accounts receivable, and inventory aggregating to$41.1 million , which were partially offset by an increase in accounts payable of$13.2 million . During the first quarter of 2022, cash and cash equivalents increased mainly from cash generated from operating activities, accounts receivable increased mainly from the timing of sales in the quarter, and inventory increased on higher purchase levels to support sales order volume. Accounts payable increased mainly from higher sequential inventory purchases and the timing of supplier payments. AtApril 1, 2022 ,$14.3 million of our cash and cash equivalents were held by foreign subsidiaries. We intend to limit our distributions from foreign subsidiaries to previously taxed income or current period earnings. If distributions are made utilizing current period earnings, we will record foreign withholding taxes in the period of the distribution. - 34 -
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