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; our ability to attract, train and retain a sufficient number of qualified associates; 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 Rhythm Management & 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 second quarter and first six months of 2022 ended onJuly 1 and consisted of 91 days and 182 days, respectively. The second quarter and first six months of 2021 ended onJuly 2 and consisted of 91 days and 183 days, respectively.
Impact of Global Events
Significant uncertainty remains as to the potential impact of the COVID-19 pandemic on the Company's operations, and on the global economy. 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 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. OnApril 6, 2022 , we acquired 100% of the equity interests of Connemara Biomedical Holdings Teoranta, including its operating subsidiariesAran 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 withAran 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.
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 these acquisitions.
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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 and six months endedJuly 2, 2021 , Cardio & Vascular sales of$7.9 million and$15.9 million , respectively, and Advanced Surgical, Orthopedics & Portable Medical sales of$6.0 million and$11.3 million , respectively, were reclassified to the Cardiac Rhythm Management & Neuromodulation product line.
Financial Overview
Net income for the second quarter and first six months of 2022 was$20.8 million , or$0.62 per diluted share, and$32.2 million , or$0.97 per diluted share, respectively, compared to$29.4 million , or$0.89 per diluted share, and$51.0 million , or$1.53 per diluted share for the second quarter and first six months of 2021, respectively. These variances are primarily the result of the following: •Sales for the second quarter and first six months of 2022 increased$38.1 million and$58.5 million , respectively, when compared to the same periods in 2021. During 2022, we have continued to see the demand for many of our products recover from the impacts of the COVID-19 pandemic.
•Gross profit for the second quarter and first six months of 2022 increased
•Operating expenses for the second quarter and first six months of 2022 increased$10.8 million and$19.9 million , respectively, when compared to the same periods in 2021, primarily due to higher labor costs and restructuring and other charges. •Interest expense for the second quarter of 2022 increased$0.2 million compared to the same period in 2021, primarily due to higher average debt outstanding. Interest expense for the first six months of 2022 decreased$2.3 million compared to the same period in 2021, primarily due to lower interest rates during the applicable periods, partially offset by higher average debt outstanding. •During the second quarter and first six months of 2022, we recognized losses on equity investments of$0.3 million and$2.7 million , respectively, compared to losses of$0.7 million and$2.0 million , respectively, for the second quarter and first six months of 2021. Gains and losses on equity investments are generally unpredictable in nature.
•Other loss, net for the second quarter and first six months of 2022 was
•We recorded provisions for income taxes for the second quarter and first six months of 2022 of$3.6 million and$6.2 million , respectively, compared with provisions for income taxes of$1.3 million and$4.8 million , respectively, for the second quarter and first six months 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. - 30 -
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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
July 1, July 2, Change
2022 2021 $ %
Medical Sales:
Cardio & Vascular 180,604 $ 144,683 $ 35,921 24.8 %
Cardiac Rhythm Management & Neuromodulation 135,945 133,660 2,285 1.7 %
Advanced Surgical, Orthopedics & Portable Medical 23,285 23,283 2 - %
Total Medical Sales 339,834 301,626 38,208 12.7 %
Non-Medical 10,247 10,397 (150) (1.4) %
Total sales 350,081 312,023 38,058 12.2 %
Cost of sales 257,184 223,277 33,907 15.2 %
Gross profit 92,897 88,746 4,151 4.7 %Gross profit as a % of sales ("Gross margin") 26.5 %
28.4 %
Operating expenses:
Selling, general and administrative ("SG&A") 41,786 35,379 6,407 18.1 %
SG&A as a % of sales 11.9 % 11.3 %
Research, development and engineering ("RD&E") 14,871 13,738 1,133 8.2 %
RD&E as a % of sales 4.2 % 4.4 %
Restructuring and other charges 3,533 279 3,254 NM
Total operating expenses 60,190 49,396 10,794 21.9 %
Operating income 32,707 39,350 (6,643) (16.9) %
Operating income as a % of sales 9.3 % 12.6 %
Interest expense 7,773 7,532 241 3.2 %
Loss on equity investments 320 684 (364) (53.2) %
Other loss, net 191 356 (165) (46.3) %
Income before taxes 24,423 30,778 (6,355) (20.6) %
Provision for income taxes 3,587 1,345 2,242 166.7 %
Effective tax rate 14.7 % 4.4 %
Net income $ 20,836 $ 29,433 $ (8,597) (29.2) %
Net income as a % of sales 6.0 % 9.4 %
Diluted earnings per share $ 0.62 $ 0.89 $ (0.27) (30.3) %
__________NM Calculated amount not meaningful
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Six Months Ended
July 1, July 2, Change
2022 2021 $ %
Medical Sales:
Cardio & Vascular $ 339,641 $ 285,889 $ 53,752 18.8 %
Cardiac Rhythm Management & Neuromodulation 259,269 255,363 3,906 1.5 %
Advanced Surgical, Orthopedics & Portable
Medical 42,951 43,339 (388) (0.9) %
Total Medical Sales 641,861 584,591 57,270 9.8 %
Non-Medical 19,132 17,899 1,233 6.9 %
Total Sales 660,993 602,490 58,503 9.7 %
Cost of sales 486,621 429,258 57,363 13.4 %
Gross profit 174,372 173,232 1,140 0.7 %
Gross margin 26.4 % 28.8 %
Operating expenses:
SG&A 81,346 70,881 10,465 14.8 %
SG&A as a % of sales 12.3 % 11.8 %
RD&E 30,954 27,199 3,755 13.8 %
RD&E, Net as a % of sales 4.7 % 4.5 %
Restructuring and other charges 6,868 1,194 5,674 NM
Total operating expenses 119,168 99,274 19,894 20.0 %
Operating income 55,204 73,958 (18,754) (25.4) %
Operating margin 8.4 % 12.3 %
Interest expense 13,741 16,064 (2,323) (14.5) %
Loss on equity investments 2,724 2,019 705 34.9 %
Other loss, net 368 119 249 NM
Income before taxes 38,371 55,756 (17,385) (31.2) %
Provision for income taxes 6,168 4,803 1,365 28.4 %
Effective tax rate 16.1 % 8.6 %
Net income $ 32,203 $ 50,953 $ (18,750) (36.8) %
Net income as a % of sales 4.9 % 8.5 %
Diluted earnings per share $ 0.97 $ 1.53 $ (0.56) (36.6) %
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Sales
For the second quarter and first six months of 2022, Cardio & Vascular ("C&V")
sales increased $35.9 million , or 25%, and $53.8 million , or 19%, respectively,
versus the comparable 2021 periods. The increase in C&V sales for the second
quarter and first six months of 2022 was driven by strong demand in the
neurovascular, electrophysiology, and structural heart markets, as well as the
Oscor and Aran acquisitions. During the second quarter and first six months of
2022, price changes decreased C&V sales by $0.6 million and increased sales by
$0.4 million , respectively, in comparison to the 2021 periods. Foreign currency
exchange rate fluctuations increased C&V sales for the second quarter and first
six months of 2022 by $1.6 million and $2.6 million , respectively, in comparison
to the 2021 periods, primarily due to U.S. dollar fluctuations relative to the
Euro.
For the second quarter and first six months of 2022, Cardiac & Neuromodulation
("CRM&N") sales increased $2.3 million , or 2%, and $3.9 million or 2%,
respectively, versus the comparable 2021 periods. CRM&N sales for the second
quarter and first six months of 2022 increased as growth from the recent Oscor
acquisition was partially offset by labor and supply chain constraints. During
the second quarter and first six months of 2022, price reductions lowered CRM&N
sales by $1.0 million and $1.8 million , respectively, in comparison to the 2021
periods. Foreign currency exchange rate fluctuations did not have a material
impact on CRM&N sales during the second quarter and first six months of 2022 in
comparison to 2021.
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 second quarter and first six months
of 2022, AS&O sales were flat and decreased $0.4 million or 1%, respectively,
versus the comparable 2021 periods, driven by a reduction in demand for
COVID-related ventilator and patient monitoring components. During the second
quarter and first six months of 2022, price changes increased AS&O sales by $0.3
million in comparison to the 2021 periods. Foreign currency exchange rate
fluctuations did not have a material impact on AS&O sales during the second
quarter and first six months of 2022 in comparison to the 2021 periods.
For the second quarter and first six months of 2022, Non-Medical sales decreased
$0.2 million , or 1%, and increased $1.2 million or 7%, respectively, versus the
comparable 2021 periods. The increase in sales earlier this year attributable to
a continued recovery of the energy market was slowed during the second quarter
as our ability to fulfill strong customer demand was constrained by supplier
shortages. Price reductions and foreign currency exchange rate fluctuations did
not have a material impact on Non-Medical sales during the second quarter and
first six months of 2022 in comparison to the 2021 periods.
Gross Profit
Three Months Ended Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Gross profit (in thousands) $ 92,897 $ 88,746 174,372 173,232
Gross margin 26.5 % 28.4 % 26.4 % 28.8 %
Gross margin for the second quarter and first six months of 2022 decreased 190
basis points and 240 basis points, respectively, compared to the comparable 2021
periods, primarily driven by incremental labor and supply chain costs related to
overtime, training, and manufacturing inefficiencies from supply chain
disruptions.
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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 Six Months
Compensation and benefits(a) $ 3,386 $ 5,285
Amortization expense(b) 1,268 2,112
Travel and entertainment(c) 591 884
Contract services(d) 309 732
All other SG&A(e) 853 1,452
Net increase in SG&A expenses $ 6,407 $ 10,465 __________
(a)Compensation and benefits increased during the second quarter and first six months of 2022 compared to the prior year periods primarily due to an increase in headcount from theAran and Oscor Acquisitions. (b)Amortization expense increased during the second quarter and first six months of 2022 compared to the prior year periods due to amortization of intangible assets from theAran and Oscor Acquisitions.
(c)The increases in travel and entertainment expense was due to a modest return to travel as travel restrictions originally implemented in response to the COVID-19 pandemic ease.
(d)Contract services expense increased during the second quarter and first six months of 2022 compared to the prior year periods primarily due to higher software costs from information technology enhancements.
(e)The net increase in all other SG&A for the second quarter and first six months of 2022 compared to the same periods of 2021 is primarily attributable to higher professional fees.
RD&E RD&E expense for the second quarter and first six months of 2022 was$14.9 million and$31.0 million , respectively, compared to$13.7 million and$27.2 million , respectively, for the second quarter and first six months of 2021. The increases in RD&E expense during the second quarter and first six months of 2022 compared to the same periods in 2021, were 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 theAran andOscor Acquisitions. 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. - 34 -
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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 our 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 Six Months Ended
July 1, July 2, July 1, July 2,
2022 2021 2022 2021
Restructuring charges(a) $ (5) $ 191 $ 1,098 $ 845
Acquisition and integration costs(b) 3,333 26 5,269 110
Other general expenses(c) 205 62 501 239
Total restructuring and other charges $ 3,533 $ 279 __________
(a)Restructuring charges for the first six months of 2022 primarily consist of termination benefits associated with our operational excellence projects, partially offset by reversals in the second quarter of previously accrued termination benefits within our strategic reorganization and alignment initiatives.
(b)Amounts include expenses related to the purchase of certain assets and liabilities from business acquisitions. Acquisition and integration costs for the second quarter and first six months of 2022 include costs associated with the acquisition ofAran andOscor .
(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.
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest Expense
Information relating to our interest expense is as follows (dollars in
thousands):
Three Months Ended
July 1, 2022 July 2, 2021 Change
Amount Rate Amount Rate Amount Rate (bp)
Contractual interest expense $ 6,679 2.73 % $ 5,646 3.26 % $ 1,033 (53)
Loss on interest rate swap 526 0.21 787 0.46 (261) (25)
Amortization of deferred debt
issuance costs and original issue
discount 482 0.22 992 0.60 (510) (38)
Losses from extinguishment of debt - - 82 0.05 (82) (5)
Interest expense on borrowings 7,687 3.16 % 7,507 4.37 % 180 (121)
Other interest expense 86 25 61
Total interest expense $ 7,773 $ 7,532 $ 241
Six Months Ended
July 1, 2022 July 2, 2021 Change
Amount Rate Amount Rate Amount Rate (bp)
Contractual interest expense $ 11,326 2.49 % $ 11,751 3.29 % $ (425) (80)
Loss on interest rate swap 1,293 0.29 1,821 0.51 (528) (22)
Amortization of deferred debt
issuance costs and original issue
discount 963 0.23 2,018 0.60 (1,055) (37)
Losses from extinguishment of debt - - 428 0.12 (428) (12)
Interest expense on borrowings 13,582 3.01 % - 16,018 4.52 % (2,436) (151)
Other interest expense 159 46 113
Total interest expense $ 13,741 $ 16,064 $ (2,323)
During 2022, increases in contractual interest expense due to higher average
debt outstanding have been completely or partially offset by lower applicable
interest rates. The higher average debt balance outstanding is the result of
borrowings to fund the Oscor and Aran acquisitions, while 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 interest rate 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.
Other components of interest expense on borrowings include losses on interest
rate swaps and non-cash amortization and write-off (losses from extinguishment
of debt) of deferred debt issuance costs and original issue discount. Interest
rate swap includes realized (gains) losses on our interest rate swap contract
which fluctuate depending on the spread between the rate swap contract fixed
rate and senior secured credit facility floating rate. Compared to the same
periods in 2021, amortization of deferred debt issuance costs and original issue
discount decreased as a result of 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 six months 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 ofJuly 1, 2022 andDecember 31, 2021 , approximately 16% and 18%, respectively, 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. - 36 -
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Loss on Equity Investments
During the second quarter and first six months of 2022, we recognized losses on equity investments of$0.3 million and$2.7 million , respectively. During the second quarter and first six months of 2021, we recognized losses of$0.7 million and$2.0 million , respectively. 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 ofJuly 1, 2022 andDecember 31, 2021 , the carrying value of our equity investments was$19.1 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 Loss, Net
Other loss, net for the second quarter and first six months of 2022 was$0.2 million and$0.4 million , respectively, compared to$0.4 million and$0.1 million for the second quarter and first six months of 2021, respectively. Other 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 loss, net for the second quarter and first six months of 2022 were losses of$0.4 million and$0.5 million , respectively, compared to losses of$0.4 million and$0.1 million for the second quarter and first six months of 2021, respectively. 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. - 37 -
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INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Income Taxes
We recognized income tax expense of$3.6 million for the second quarter of 2022 on$24.4 million of income before taxes (effective tax rate of 14.7%), compared to an income tax expense of$1.3 million on$30.8 million of income before taxes (effective tax rate of 4.4%) for the same period of 2021. The income tax expense for the first six months of 2022 was$6.2 million on$38.4 million of income before taxes (effective tax rate of 16.1%), compared to income tax expense of$4.8 million on income before taxes of$55.8 million (effective tax rate of 8.6%) for the same period of 2021. We did not record discrete tax expense for the second quarter of 2022. Income tax expense for the first six months of 2022 included$0.5 million of discrete tax expense. Income tax expense for the second quarter and first six months of 2021 included$3.8 million and$4.4 million , respectively, of discrete tax benefits consisting principally of$3.5 million of tax benefits related to the reversal of unrecognized tax benefits resulting from effective settlement of tax audits during the second quarter of 2021. 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 proposed 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 however, 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
July 1, December 31,
(dollars in thousands) 2022 2021
Cash and cash equivalents $ 15,593 $ 17,885
Working capital $ 335,287 $ 293,353
Current ratio 2.70 2.84
Cash and cash equivalents at July 1, 2022 decreased by $2.3 million from
December 31, 2021 , primarily due to purchases of property, plant and equipment
and debt principal payments offsetting cash generated from operating activities.
In addition, the acquisition of Aran resulted in a net cash disbursement of
$129.3 million , which was funded by proceeds from borrowing under our Senior
Secured Revolving Credit Facility.
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Table of Contents
INTEGER HOLDINGS CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS Working capital increased by$41.9 million fromDecember 31, 2021 , primarily from positive working capital fluctuations associated with accounts receivable and inventory aggregating to$78.4 million , which were partially offset by increases in accounts payable and accrued expenses and other current liabilities of$26.2 million and$11.4 million , respectively. During the first six months of 2022, accounts receivable increased mainly from an increase in sales volume and inventory increased to support higher product demand, sales volume and material stock levels to protect availability of critical components. Accounts payable increased mainly from higher sequential inventory purchases and the timing of supplier payments. Accrued expenses and other current liabilities increased mainly from the contingent consideration for theAran acquisition. AtJuly 1, 2022 ,$14.4 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.
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