Integer Holdings Corp 10-Q for FY2022 Q3
Integer Holdings Corp (ITGR)
10-Q
2022-10-27
For: 2022-09-30
View Original
Added on
April 07, 2026
About this 10-Q
Integer Holdings Corp filed this 10-Q on October 27, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $342.68M
- up 12.1% from $305.57M a year earlier
- Net income
- $16.06M
- down 27.2% from net income of $22.07M a year earlier
- Diluted EPS
- $0.48
- down 27.3% from $0.66 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________
FORM 10-Q
_____________________________________________________________
(Mark One) | ||||||||
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||||||
For the quarterly period ended September 30, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ____ to ____
Commission File Number 1-16137
_____________________________________________________________
(Exact name of Registrant as specified in its charter)
_____________________________________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
(214 ) 618-5243
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |||||||||||||||||||
| Smaller reporting company | Emerging growth company | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of October 21, 2022 was: 33,130,993 shares.
INTEGER HOLDINGS CORPORATION
Form 10-Q
For the Quarterly Period Ended September 30, 2022
TABLE OF CONTENTS
| Page | |||||||||||
| ITEM 1. | |||||||||||
| ITEM 2. | |||||||||||
| ITEM 3. | |||||||||||
| ITEM 4. | |||||||||||
| ITEM 1. | |||||||||||
| ITEM 1A. | |||||||||||
| ITEM 6. | |||||||||||
- 2 -
PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| (in thousands except share and per share data) | September 30, 2022 | December 31, 2021 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of provision for credit losses of $ | |||||||||||
| Inventories | |||||||||||
| Refundable income taxes | |||||||||||
| Contract assets | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease assets | |||||||||||
| Other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Income taxes payable | |||||||||||
| Operating lease liabilities | |||||||||||
| Accrued expenses and other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt | |||||||||||
| Deferred income taxes | |||||||||||
| Operating lease liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 10) | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 3 -
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in thousands except per share data) | September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | |||||||||||||||||||
| Sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research, development and engineering | |||||||||||||||||||||||
| Restructuring and other charges | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | |||||||||||||||||||||||
| (Gain) loss on equity investments | ( | ||||||||||||||||||||||
| Other (gain) loss, net | ( | ( | |||||||||||||||||||||
| Income before taxes | |||||||||||||||||||||||
| Provision for income taxes | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Comprehensive Income (Loss) | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation loss | ( | ( | ( | ( | |||||||||||||||||||
| Change in fair value of cash flow hedges, net of tax | |||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income (loss), net of tax | $ | ( | $ | $ | ( | $ | |||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| Nine Months Ended | |||||||||||
| (in thousands) | September 30, 2022 | October 1, 2021 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Debt related charges included in interest expense | |||||||||||
| Inventory step-up amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Non-cash lease expense | |||||||||||
| Non-cash loss on equity investments | |||||||||||
| Other non-cash losses | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Changes in operating assets and liabilities, net of acquisition: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Contract assets | ( | ( | |||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | ( | ( | |||||||||
| Income taxes | ( | ( | |||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of property, plant and equipment | ( | ( | |||||||||
| Proceeds from sale of property, plant and equipment | |||||||||||
| Acquisitions, net | ( | ||||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Principal payments of term loans | ( | ( | |||||||||
| Proceeds from issuance of term loans | |||||||||||
| Proceeds from revolving credit facility | |||||||||||
| Payments of revolving credit facility | ( | ( | |||||||||
| Proceeds from the exercise of stock options | |||||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Tax withholdings related to net share settlements of restricted stock unit awards | ( | ( | |||||||||
| Contingent consideration payments | ( | ( | |||||||||
| Principal payments on finance leases | ( | ( | |||||||||
| Net cash provided by (used in) financing activities | ( | ||||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | |||||||||||
| Net increase (decrease) in cash and cash equivalents | ( | ||||||||||
| Cash and cash equivalents, beginning of period | |||||||||||
| Cash and cash equivalents, end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| (in thousands) | September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | |||||||||||||||||||
| Total stockholders’ equity, beginning balance | $ | $ | $ | $ | |||||||||||||||||||
| Common stock and additional paid-in capital | |||||||||||||||||||||||
| Balance, beginning of period | |||||||||||||||||||||||
| Stock awards exercised or vested | ( | ( | ( | ||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||
| Balance, end of period | |||||||||||||||||||||||
| Retained earnings | |||||||||||||||||||||||
| Balance, beginning of period | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Balance, end of period | |||||||||||||||||||||||
| Accumulated other comprehensive income (loss) | |||||||||||||||||||||||
| Balance, beginning of period | ( | ||||||||||||||||||||||
| Other comprehensive loss | ( | ( | ( | ( | |||||||||||||||||||
| Balance, end of period | ( | ( | |||||||||||||||||||||
| Total stockholders’ equity, ending balance | $ | $ | $ | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 6 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1.) BASIS OF PRESENTATION
Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly-traded corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is a medical device outsource manufacturer serving the cardiac, neuromodulation, vascular, orthopedics, advanced surgical and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition, it develops batteries for high-end niche applications in the energy, military, and environmental markets.
The accompanying condensed consolidated financial statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The third quarter and first nine months of 2022 ended on September 30 and consisted of 91 days and 273 days, respectively. The third quarter and first nine months of 2021 ended on October 1 and consisted of 91 days and 274 days, respectively.
Risks and Uncertainties
Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, severe and sustained inflation, a rising interest rate environment, fluctuations in global currencies, and supply chain disruptions could cause economic uncertainty and volatility. The impact of these issues on the Company’s operations will vary by geographic market and product line, but specific impacts to our business include increased borrowing costs, 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. The Company monitors economic conditions closely. In response to reductions in revenue, the Company can take actions to align its cost structure with changes in demand and manage its working capital. However, there can be no assurance as to the effectiveness of these efforts to mitigate any impact of the current and future adverse economic conditions and other developments.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). The Company evaluated all recent accounting pronouncements issued, including those that are currently effective, and determined that the adoption of these pronouncements would not have a material effect on the financial position, results of operations or cash flows of the Company. There have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, that are of significance, or potential significance, to the Company.
- 7 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.) BUSINESS ACQUISITIONS
2022 Acquisition
On April 6, 2022, the Company acquired 100 % of the equity interests of 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 the Company’s strategy, the combination with Aran further increases Integer’s 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. The Company funded the purchase price with borrowings under its Revolving Credit Facility. Aran is included in the Company’s Medical segment. The total consideration transferred was $141.3 million, which includes an initial cash payment of $133.9 million ($129.3 million net of cash acquired) and $7.4 million in estimated fair value of contingent consideration. The contingent consideration represents the estimated fair value of the Company’s obligation, under the purchase agreement, to make additional payments of up to €10 million ($10.9 million at the exchange rate as of April 6, 2022) based on Aran’s achievement of 2022 revenue growth milestones. The contingent consideration will be paid after completion of the earn-out period ending December 31, 2022, in accordance with the terms of the share purchase agreement. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.
The Company has preliminarily estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition. The determination of estimated fair value required management to make significant estimates and assumptions based on information that was available at the time the consolidated financial statements were prepared. The amounts reported are considered preliminary as the Company is completing the valuations that are required to allocate the purchase price in areas such as property and equipment, intangible assets, liabilities and goodwill. As a result, the allocation of the preliminary purchase price may change in the future, which could be material.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed (in thousands):
| Fair value of net assets acquired | |||||||||||
| Current assets | $ | ||||||||||
| Property, plant and equipment | |||||||||||
| Goodwill | |||||||||||
| Definite-lived intangible assets | |||||||||||
| Operating lease assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Current liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ||||||||||
| Other noncurrent liabilities | ( | ||||||||||
| Fair value of net assets acquired | $ | ||||||||||
The goodwill resulting from the transaction is primarily attributable to future customer relationships and the assembled workforce of the acquired business. The goodwill acquired in connection with the Aran acquisition was allocated to the Medical segment and is not deductible for tax purposes.
The breakout of definite-lived intangible assets acquired was as follows (dollars in thousands):
| Definite-lived Intangible Assets | Fair Value Assigned | Weighted Average Amortization Period (Years) | Weighted Average Discount Rate | |||||||||||||||||||||||
| Customer lists | $ | |||||||||||||||||||||||||
| Technology | ||||||||||||||||||||||||||
| Tradenames | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||
- 8 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.) BUSINESS ACQUISITIONS (Continued)
To determine the acquisition date estimated fair value of intangible assets acquired, the Company applied the income approach, specifically the multi-period excess earnings method for customer lists and the relief-from-royalty method for technology and tradenames. The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted-average cost of capital used to discount future cash flows, and a customer attrition rate for customer relationships and royalty rates for technology and tradenames. For additional information, see the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for the methods and assumptions used to estimate the fair value of each class of net assets acquired.
For segment reporting purposes, the results of operations from Aran have been included in the Company’s Medical segment since the acquisition date. Sales and earnings related to the operations of Aran for the three and nine months ended September 30, 2022 were not material.
2021 Acquisition
On December 1, 2021, the Company acquired 100 % of the equity interests of Oscor Inc., Oscor Caribe, LLC and Oscor Europe GmbH (collectively “Oscor”), privately-held companies with operations in Florida, the Dominican Republic and Germany that design, develop, manufacture and market a comprehensive portfolio of highly specialized medical devices, venous access systems and diagnostic catheters and implantable devices. Serving the Company’s current markets, Oscor broadens the Company’s product portfolio, expands its research and development capabilities, and adds low-cost manufacturing capacity. The preliminary purchase price of Oscor is $215.2 million, including working capital and other closing adjustments of $5.2 million, which were settled in the second quarter of 2022. The Company used proceeds from its Senior Secured Credit Facilities to fund the acquisition. Oscor is included in the Company’s Medical segment. The goodwill is primarily associated with future customer relationships and an acquired assembled work force.
The Company preliminarily estimated fair values for the assets purchased, liabilities assumed and purchase consideration as of the date of the acquisition. The determination of estimated fair value requires management to make significant estimates and assumptions based on information that is available at the time the consolidated financial statements are prepared. The Company recorded the preliminary purchase price allocation in the fourth quarter of 2021. During the first nine months of 2022, the Company recorded measurement period adjustments, inclusive of working capital and other closing adjustments, resulting in increases to goodwill and current liabilities of $0.4 million and $2.3 million, respectively, and decreases to current assets (excluding inventory) and inventory of $2.5 million and $0.8 million, respectively. The preliminary purchase price allocation remains subject to measurement period adjustments. As a result, the allocation of the preliminary purchase price may change in the future.
The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed (in thousands):
| Fair value of net assets acquired | |||||||||||
| Current assets (excluding inventory) | $ | ||||||||||
| Inventory | |||||||||||
| Property, plant and equipment | |||||||||||
| Goodwill | |||||||||||
| Intangible assets | |||||||||||
| Operating lease assets | |||||||||||
| Other noncurrent assets | |||||||||||
| Current liabilities | ( | ||||||||||
| Operating lease liabilities | ( | ||||||||||
| Fair value of net assets acquired | $ | ||||||||||
- 9 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.) BUSINESS ACQUISITIONS (Continued)
Pro Forma (unaudited) disclosures
The following table presents (in thousands) unaudited pro forma financial information as if Aran and Oscor had been included in the Company’s financial results as of the beginning of fiscal year 2021 and 2020, respectively, through the date of acquisition. The pro forma results include the historical results of operations of the Company, Aran and Oscor, as well as adjustments for additional amortization of the assets acquired, additional interest expense related to the financing of the transactions and other transactional adjustments. The pro forma results do not include efficiencies, cost reductions or synergies expected to result from the acquisition. These pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future.
Nine Months Ended September 30, 2022 | Three Months Ended October 1, 2021 | Nine Months Ended October 1, 2021 | |||||||||||||||||||||
| Sales | $ | $ | $ | ||||||||||||||||||||
| Net income | |||||||||||||||||||||||
Acquisition costs
During the three and nine months ended September 30, 2022, direct costs of these acquisitions of $0.1 million and $2.9 million, respectively, were expensed as incurred and included in Restructuring and other charges in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
(3.) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the Condensed Consolidated Statements of Cash Flows (in thousands):
| Nine Months Ended | |||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||
| Noncash investing and financing activities: | |||||||||||
| Property, plant and equipment purchases included in accounts payable | $ | $ | |||||||||
| Debt issuance costs incurred but not yet paid | |||||||||||
| Supplemental lease disclosures: | |||||||||||
| Assets acquired under operating leases | |||||||||||
(4.) INVENTORIES
Inventories comprise the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total | $ | $ | |||||||||
- 10 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(5.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2022 were as follows (in thousands):
| Medical | Non- Medical | Total | |||||||||||||||
| December 31, 2021 | $ | $ | $ | ||||||||||||||
| Acquisition (Note 2) | |||||||||||||||||
| Acquisition-related adjustments (Note 2) | |||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||
| September 30, 2022 | $ | $ | $ | ||||||||||||||
Intangible Assets
The Company reclassified purchased tradenames with a net carrying value of $16.2 Intangible assets comprise the following (in thousands):
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| Definite-lived: | |||||||||||||||||||||||
| Purchased technology and patents | $ | $ | ( | $ | |||||||||||||||||||
| Customer lists | ( | ||||||||||||||||||||||
| Amortizing tradenames and other | ( | ||||||||||||||||||||||
| Total amortizing intangible assets | $ | $ | ( | $ | |||||||||||||||||||
| Indefinite-lived: | |||||||||||||||||||||||
| Trademarks and tradenames | $ | ||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Definite-lived: | |||||||||||||||||||||||
| Purchased technology and patents | $ | $ | ( | $ | |||||||||||||||||||
| Customer lists | ( | ||||||||||||||||||||||
| Amortizing tradenames and other | ( | ||||||||||||||||||||||
| Total amortizing intangible assets | $ | $ | ( | $ | |||||||||||||||||||
| Indefinite-lived: | |||||||||||||||||||||||
| Trademarks and tradenames | $ | ||||||||||||||||||||||
Aggregate intangible asset amortization expense comprises the following (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Total intangible asset amortization expense | $ | $ | $ | $ | |||||||||||||||||||
- 11 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(5.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Continued)
Estimated future intangible asset amortization expense based on the carrying value as of September 30, 2022 is as follows (in thousands):
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | After 2026 | ||||||||||||||||||||||||||||||
| Amortization Expense | $ | ||||||||||||||||||||||||||||||||||
(6.) DEBT
The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”), which consist of a five-year $400 million revolving credit facility (the “Revolving Credit Facility”), a five-year “term A” loan (the “TLA Facility”) and a seven-year “term B” loan (the “TLB Facility” and, together with the TLA Facility, the “Term Loan Facilities”). The TLB Facility was issued at a 0.50 % discount.
Long-term debt related to the Senior Secured Credit Facilities as of September 30, 2022 and December 31, 2021, respectively, comprises the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Senior secured term loan A | $ | $ | |||||||||
| Senior secured term loan B | |||||||||||
| Senior secured revolving credit facility | |||||||||||
| Unamortized discount on term loan B and deferred debt issuance costs | ( | ( | |||||||||
| Total debt | |||||||||||
| Current portion of long-term debt | ( | ( | |||||||||
| Total long-term debt | $ | $ | |||||||||
Revolving Credit Facility
The Revolving Credit Facility matures on September 2, 2026 and includes a $40 million sublimit for swingline loans and standby letters of credit. As of September 30, 2022, the Company had available borrowing capacity on the Revolving Credit Facility of $254.2 million after giving effect to $140.3 million of outstanding borrowings and $5.5 million of outstanding standby letters of credit.
Interest rates on the Revolving Credit Facility are at the Company’s option, either at: (i) the applicable LIBOR (or an applicable benchmark replacement) plus the applicable margin, which will range between 1.25 % and 2.25 %, based on the Company’s Total Net Leverage Ratio (as defined in the Senior Secured Credit Facilities agreement), or (ii) the Base Rate (as defined below) plus the applicable margin, which will range between 0.25 % and 1.25 %, based on the Company’s Total Net Leverage Ratio. The Base Rate is defined, for any day, as the per annum rate equal to the highest of (i) the prime rate (as defined in the Senior Secured Credit Facilities agreement), (ii) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 0.50 %, and (iii) one-month LIBOR plus 1.00 %. As of September 30, 2022, the interest rate on outstanding borrowings under the Revolving Credit Facility was 4.87 %.
The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.15 % and 0.25 %, depending on the Company’s Total Net Leverage Ratio. As of September 30, 2022, the commitment fee on the unused portion of the Revolving Credit Facility was 0.20 %.
Term Loan Facilities
The TLA Facility and TLB Facility mature on September 2, 2026 and September 2, 2028, respectively, and require quarterly installments. The quarterly principal installments under the TLA Facility increase over the term of the loan. The interest rate terms for the TLA Facility are the same as those outlined above for the Revolving Credit Facility. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the applicable LIBOR rate plus 2.50 %, with LIBOR subject to a 0.50 % floor, or (ii) the Base Rate plus 1.50 %. As of September 30, 2022, the interest rates on the TLA Facility and TLB Facility were 4.87 % and 5.62 %, respectively.
- 12 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6.) DEBT (Continued)
Covenants
The Senior Secured Credit Facilities agreement contains customary terms and conditions, including representations and warranties and affirmative and negative covenants, as well as financial covenants for the benefit of the lenders under the Revolving Credit Facility and the TLA Facility, which require that (i) the Company maintain a Total Net Leverage Ratio not to exceed 5.50 :1.00 (stepping down to 5.00 :1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following qualified acquisitions, but shall not exceed 5.50 :1.00) and (ii) the Company maintain an interest coverage ratio of at least 2.50 :1.00. The TLB Facility does not contain any financial maintenance covenants. As of September 30, 2022, the Company was in compliance with these financial covenants.
Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2022 and through maturity, excluding any discounts or premiums, as of September 30, 2022 are as follows (in thousands):
| Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | After 2026 | |||||||||||||||||||||||||||||||||
| Future minimum principal payments | $ | |||||||||||||||||||||||||||||||||||||
(7.) STOCK-BASED COMPENSATION
The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders and are administered by the Board of Directors (the “Board”) or the Compensation and Organization Committee of the Board. The stock-based compensation plans provide for the granting of stock options, restricted stock awards, time-based restricted stock units (“RSUs”), performance-based RSUs (“PRSUs”), stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.
Stock-based Compensation Expense
The components and classification of stock-based compensation expense were as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| RSUs and PRSUs | $ | $ | $ | $ | |||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | $ | $ | $ | $ | |||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research, development and engineering | |||||||||||||||||||||||
| Restructuring and other charges | |||||||||||||||||||||||
| Total stock-based compensation expense | $ | $ | $ | $ | |||||||||||||||||||
Stock Options
The following table summarizes the Company’s stock option activity for the nine month period ended September 30, 2022:
| Number of Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value (In Millions) | ||||||||||||||||||||
| Outstanding at December 31, 2021 | $ | ||||||||||||||||||||||
| No activity | — | — | |||||||||||||||||||||
| Outstanding and exercisable at September 30, 2022 | $ | $ | |||||||||||||||||||||
- 13 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(7.) STOCK-BASED COMPENSATION (Continued)
Restricted Stock Units
During the nine months ended September 30, 2022, the Company awarded grants of either RSUs or a mix of RSUs and PRSUs to members of its Board of Directors and certain members of management. Most RSUs granted during the nine months ended September 30, 2022 vest over a period of three years from the grant date, subject to the recipient’s continuous service to the Company. RSUs are issued to members of the Board as a portion of their annual retainer and vest quarterly over a one-year vesting term. The grant-date fair value of all RSUs is equal to the closing market price of Integer common stock on the date of grant.
The following table summarizes RSU activity for the nine month period ended September 30, 2022:
| Time-Vested Activity | Weighted Average Grant Date Fair Value | ||||||||||
| Nonvested at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | ( | ||||||||||
| Nonvested at September 30, 2022 | $ | ||||||||||
For the Company’s PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of market-based performance conditions. The market-based performance conditions are based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over three year performance periods, or contingent upon achieving specified stock price milestones over a five year performance period.
The following table summarizes PRSU activity for the nine month period ended September 30, 2022:
| Performance- Vested Activity | Weighted Average Grant Date Fair Value | ||||||||||
| Nonvested at December 31, 2021 | $ | ||||||||||
| Granted | |||||||||||
| Forfeited | ( | ||||||||||
| Nonvested at September 30, 2022 | $ | ||||||||||
The Company uses a Monte Carlo simulation model to determine the grant-date fair value of awards with market-based performance conditions. The grant-date fair value of all other PRSUs is equal to the closing market price of Integer common stock on the date of grant.
The weighted average fair value and assumptions used to value the PRSU awards granted with market-based performance conditions are as follows:
| Nine Months Ended | |||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||
| Weighted average fair value | $ | $ | |||||||||
| Risk-free interest rate | % | % | |||||||||
| Expected volatility | % | % | |||||||||
| Expected life (in years) | |||||||||||
| Expected dividend yield | % | % | |||||||||
The valuation of the market-based PRSUs granted during 2022 and 2021 also reflects a weighted average illiquidity discount of 9.25 % and 8.19 %, respectively, related to the six-month
- 14 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.) RESTRUCTURING AND OTHER CHARGES
The Company continuously evaluates the business and identifies opportunities to realign its resources to better serve its customers and markets, improve operational efficiency and capabilities, and lower its operating costs or improve profitability. To realize the benefits associated with these opportunities, the Company undertakes restructuring-type activities to transform its business. The Company incurs costs associated with these activities, which primarily include exit and disposal costs and other costs directly related to the restructuring initiative. The Company records exit and disposal costs (“restructuring charges”) as incurred in accordance with ASC 420, Exit or Disposal Cost Obligations, and are classified within Restructuring and other charges, while other costs directly related to the restructuring initiatives (“restructuring-related charges”) are classified within Cost of sales, Selling, general and administrative, and Research, development and engineering expenses in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
In addition, from time to time, the Company incurs costs associated with acquiring and integrating businesses, and certain other general expenses, including asset impairments. The Company classifies costs associated with these items within Restructuring and other charges in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Restructuring and other charges comprise the following (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Restructuring charges | $ | $ | $ | $ | |||||||||||||||||||
Acquisition and integration costs | |||||||||||||||||||||||
| Other general expenses | |||||||||||||||||||||||
Total restructuring and other charges | $ | $ | $ | $ | |||||||||||||||||||
Restructuring programs
The following table comprises restructuring and restructuring-related charges by income statement classification for the three and nine month periods ended September 30, 2022 (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| September 30, 2022 | September 30, 2022 | |||||||||||||||||||||||||
| Restructuring charges: | ||||||||||||||||||||||||||
Restructuring and other charges | $ | $ | ||||||||||||||||||||||||
Restructuring-related expenses(a): | ||||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||||||||
| Research, development and engineering | ||||||||||||||||||||||||||
Total restructuring and restructuring-related charges | $ | $ | ||||||||||||||||||||||||
__________
(a) Restructuring-related expenses primarily include retention bonuses and consulting expenses. Restructuring related expenses for the three and nine months ended October 1, 2021 were not material.
Operational excellence initiatives
The Company’s operational excellence (“OE”) initiatives mainly consist of costs associated with executing on its sales force, manufacturing, business process and performance excellence operational strategic imperatives. These projects focus on changing the Company’s organizational structure to match product line growth strategies and customer needs, transitioning its manufacturing process into a competitive advantage and standardizing and optimizing its business processes.
2022 OE Initiatives - Costs related to the Company’s 2022 OE initiatives are primarily recorded within the Medical segment or unallocated operating expenses and mainly include termination benefits. The Company estimates that it will incur aggregate pre-tax charges in connection with the 2022 OE initiatives of between approximately $3 million to $5 million, the majority of which are expected to be cash expenditures. As of September 30, 2022, total restructuring and restructuring-related charges incurred since inception were $1.6 million. These actions are expected to be substantially complete by the end of 2025.
- 15 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.) RESTRUCTURING AND OTHER CHARGES (Continued)
2021 OE Initiatives - Costs related to the Company’s 2021 OE initiatives are primarily recorded within the Medical segment or unallocated operating expenses and mainly include termination benefits. The Company estimates that it will incur aggregate pre-tax charges in connection with the 2021 OE initiatives of between approximately $4 million to $5 million, the majority of which are expected to be cash expenditures. As of September 30, 2022, total restructuring and restructuring-related charges incurred since inception were $4.9 million. These actions are expected to be substantially complete by the end of 2022.
Strategic reorganization and alignment
The Company’s strategic reorganization and alignment (“SRA”) initiatives primarily include those that align resources with market conditions and the Company’s strategic direction in order to enhance the profitability of its portfolio of products.
Cost Reduction Initiatives - During the third quarter of 2022, the Company recorded $1.1 million in restructuring charges related to cost reduction actions taken in response to higher manufacturing and direct labor costs. These charges consisted of employee termination benefits. The Company expects to incur aggregate pre-tax cash charges of up to $2.0 million through completion in the second quarter of 2023.
2021 SRA Initiatives - During the fourth quarter of 2021, the Company initiated plans to exit certain markets served in our Medical segment to enhance profitability and reallocate manufacturing capacity needed to support our overall growth plans. The Company estimates that it will incur a range of pre-tax charges in connection with the 2021 SRA initiatives of approximately $5 million and $8 million, the majority of which are expected to be cash expenditures. Costs related to the Company’s 2021 SRA Initiatives are primarily recorded within the Medical segment and mainly include termination benefits. As of September 30, 2022, total restructuring and restructuring-related charges incurred since inception were $2.8 million. These actions are expected to be completed by the end of 2025.
The following table summarizes the activity for restructuring reserves (in thousands):
| Operational excellence initiatives | Strategic reorganization and alignment | Total | |||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | ||||||||||||||||||||
| Charges incurred, net of reversals | |||||||||||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||||||||
| September 30, 2022 | $ | $ | $ | ||||||||||||||||||||
Acquisition and integration
Acquisition and integration costs primarily consist of professional fees and other costs related to business acquisitions. During the nine months ended September 30, 2022, acquisition and integration costs included $5.9 million of expenses primarily related to the acquisitions of Oscor and Aran.
Other general expenses
- 16 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(9.) INCOME TAXES
The Company’s effective tax rate for the third quarter of 2022 was 5.5 % on $17.0 million of income before taxes compared to 4.8 % on $23.2 million of income before taxes for the same period in 2021. The Company’s effective tax rate for the nine months ended September 30, 2022 was 12.8 % on $55.4 million of income before taxes compared to 7.5 % on $78.9 million of income before taxes for the same period of 2021. The difference between the Company’s effective tax rates and the U.S. federal statutory income tax rate of 21% for the third quarter and first nine months of 2022 and 2021 is due principally to the net impact of the Company’s earnings outside the U.S., which are generally taxed at rates that differ from the U.S federal rate, the Global Intangible Low-Taxed Income (“GILTI”) tax, the Foreign Derived Intangible Income (“FDII”) deduction, the availability of tax credits, and the recognition of certain discrete tax items.
The Company recorded a discrete tax benefit of $0.7 million and $0.2 million for the third quarter and first nine months of 2022, compared to discrete tax benefits of $1.6 million and $6.1 million, respectively, for the third quarter and first nine months of 2021. The discrete tax benefit for third quarter and the first nine months of 2022 is predominately related to favorable return to provision adjustments attributable to the 2021 tax year. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs during those periods and/or tax shortfalls recorded for the forfeiture of certain PRSUs. Approximately $3.5 million of the discrete tax benefits recognized for the first nine months of 2021 relate to the reversal of unrecognized tax benefits resulting from the effective settlement of tax audits during the second quarter of 2021. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs or exercise of stock options during those quarters and favorable return to provision adjustments related to the 2020 tax year.
Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements. As of September 30, 2022, the Company had unrecognized tax benefits of approximately $6.6 million, of which approximately $6.5 million would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized. As of September 30, 2022, the Company believes the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to its consolidated financial statements.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. The CARES Act provided for deferred payment of the employer portion of social security taxes through the end of 2020. As of September 30, 2022 and December 31, 2021, the Company had a remaining deferred amount of $4.8
- 17 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(10.) COMMITMENTS AND CONTINGENCIES
Contingent Consideration Arrangements
The Company records contingent consideration liabilities related to the earn-out provisions for certain acquisitions. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information.
Litigation
The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future.
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The product warranty liability is presented within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The change in product warranty liability comprised the following (in thousands):
| December 31, 2021 | $ | ||||
| Additions to warranty reserve, net of reversals | ( | ||||
| Adjustments to pre-existing warranties | ( | ||||
| September 30, 2022 | $ | ||||
(11.) EARNINGS PER SHARE (“EPS”)
The following table sets forth a reconciliation of the information used in computing basic and diluted EPS (in thousands, except per share amounts):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Numerator for basic and diluted EPS: | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Denominator for basic and diluted EPS: | |||||||||||||||||||||||
| Weighted average shares outstanding - Basic | |||||||||||||||||||||||
| Dilutive effect of share-based awards | |||||||||||||||||||||||
| Weighted average shares outstanding - Diluted | |||||||||||||||||||||||
| Basic EPS | $ | $ | $ | $ | |||||||||||||||||||
| Diluted EPS | $ | $ | $ | $ | |||||||||||||||||||
The diluted weighted average share calculations do not include the following securities, which are not dilutive to the EPS calculations or the performance criteria have not been met (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| PRSUs | |||||||||||||||||||||||
- 18 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(12.) STOCKHOLDERS’ EQUITY
Common Stock
The following is a summary of the number of shares of common stock issued, treasury stock and common stock outstanding for the nine month periods ended September 30, 2022 and October 1, 2021:
| Nine Months Ended | |||||||||||
| September 30, 2022 | October 1, 2021 | ||||||||||
| Shares outstanding at beginning of period | |||||||||||
| Stock options exercised | |||||||||||
| Vesting of RSUs, net of shares withheld to cover taxes | |||||||||||
| Shares outstanding at end of period | |||||||||||
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) comprises the following (in thousands):
| Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | ||||||||||||||||||||||||||||||
| July 1, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Realized loss on foreign currency hedges | — | — | ( | ||||||||||||||||||||||||||||||||
| Realized gain on interest rate swap hedge | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||
| September 30, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| December 31, 2021 | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Unrealized gain on cash flow hedges | — | — | ( | ||||||||||||||||||||||||||||||||
| Realized gain on foreign currency hedges | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Realized loss on interest rate swap hedge | — | — | ( | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||
| September 30, 2022 | $ | ( | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||
| July 2, 2021 | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Realized gain on foreign currency hedges | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Realized loss on interest rate swap hedge | — | — | ( | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||
| October 1, 2021 | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
| December 31, 2020 | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Unrealized loss on cash flow hedges | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Realized gain on foreign currency hedges | — | ( | — | ( | ( | ||||||||||||||||||||||||||||||
| Realized loss on interest rate swap hedge | — | — | ( | ||||||||||||||||||||||||||||||||
| Foreign currency translation loss | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||
| October 1, 2021 | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
- 19 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments and contingent consideration. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates, and uses derivatives to manage these exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. All derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets.
The following tables provide information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands):
| Fair Value | Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||
| Assets: Interest rate swap | $ | $ | $ | $ | |||||||||||||||||||
| Assets: Foreign currency hedging contracts | |||||||||||||||||||||||
| Liabilities: Foreign currency hedging contracts | |||||||||||||||||||||||
| Liabilities: Contingent consideration | |||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Assets: Foreign currency hedging contracts | $ | $ | $ | $ | |||||||||||||||||||
| Liabilities: Interest rate swap | |||||||||||||||||||||||
| Liabilities: Contingent consideration | |||||||||||||||||||||||
Derivatives Designated as Hedging Instruments
Interest Rate Swaps
The Company periodically enters into interest rate swap agreements in order to reduce the cash flow risk caused by interest rate changes on its outstanding floating rate borrowings. Under these swap agreements, the Company pays a fixed rate of interest and receives a floating rate equal to one-month LIBOR. The variable rate received from the swap agreements and the variable rate paid on the outstanding debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same date. The Company has designated these swap agreements as cash flow hedges based on concluding the hedged forecasted transaction is probable of occurring within the period the cash flow hedge is anticipated to affect earnings.
Information regarding the Company’s outstanding interest rate swap as of September 30, 2022 is as follows (dollars in thousands):
| Notional Amount | Start Date | End Date | Pay Fixed Rate | Receive Current Floating Rate | Fair Value | Balance Sheet Location | ||||||||||||||||||||||||||||||||||||||
| $ | Jun 2020 | Jun 2023 | % | % | $ | Prepaid expenses and other current assets | ||||||||||||||||||||||||||||||||||||||
Information regarding the Company’s outstanding interest rate swap as of December 31, 2021 is as follows (dollars in thousands):
| Notional Amount | Start Date | End Date | Pay Fixed Rate | Receive Current Floating Rate | Fair Value | Balance Sheet Location | ||||||||||||||||||||||||||||||||||||||
| $ | Jun 2020 | Jun 2023 | % | % | $ | ( | Other long-term liabilities | |||||||||||||||||||||||||||||||||||||
- 20 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
Foreign Currency Contracts
The Company periodically enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate fluctuations in its international operations. The Company has designated these foreign currency forward contracts as cash flow hedges.
Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of September 30, 2022 is as follows (dollars in thousands):
| Notional Amount | End Date | $/Foreign Currency | Fair Value | Balance Sheet Location | ||||||||||||||||||||||||||||
| $ | Dec 2022 | MXN Peso | $ | Prepaid expenses and other current assets | ||||||||||||||||||||||||||||
| Dec 2022 | Euro | ( | Accrued expenses and other current liabilities | |||||||||||||||||||||||||||||
| Dec 2022 | UYU Peso | Prepaid expenses and other current assets | ||||||||||||||||||||||||||||||
| Dec 2022 | Euro | ( | Accrued expenses and other current liabilities | |||||||||||||||||||||||||||||
| Dec 2022 | Euro | ( | Accrued expenses and other current liabilities | |||||||||||||||||||||||||||||
Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of December 31, 2021 is as follows (dollars in thousands):
| Notional Amount | End Date | $/Foreign Currency | Fair Value | Balance Sheet Location | ||||||||||||||||||||||||||||
| $ | Dec 2022 | MXN Peso | $ | Prepaid expenses and other current assets | ||||||||||||||||||||||||||||
| Dec 2022 | Euro | Prepaid expenses and other current assets | ||||||||||||||||||||||||||||||
| Dec 2022 | UYU Peso | Prepaid expenses and other current assets | ||||||||||||||||||||||||||||||
The following tables present the effect of cash flow hedge derivative instruments on other comprehensive loss (“OCI”), AOCI and the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and October 1, 2021 (in thousands):
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | |||||||||||||||||||||||
| Sales | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Interest expense | ( | |||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | Total | Amount of Gain (Loss) on Cash Flow Hedge Activity | |||||||||||||||||||||||
| Sales | $ | $ | ( | $ | $ | ( | ||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Interest expense | ( | ( | ||||||||||||||||||||||||
- 21 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
| Unrealized Gain (Loss) Recognized in OCI | Realized Gain (Loss) Reclassified from AOCI | |||||||||||||||||||||||||||||||
| Three Months Ended | Location in Statements of Operations and Comprehensive Income (Loss) | Three Months Ended | ||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||||||
| Interest rate swap | $ | $ | Interest expense | $ | $ | ( | ||||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | Sales | ( | ( | |||||||||||||||||||||||||||
| Foreign exchange contracts | ( | Cost of sales | ||||||||||||||||||||||||||||||
| Foreign exchange contracts | ( | Operating expenses | ||||||||||||||||||||||||||||||
| Nine Months Ended | Location in Statements of Operations and Comprehensive Income (Loss) | Nine Months Ended | ||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||||||
| Interest rate swap | $ | $ | Interest expense | $ | ( | $ | ( | |||||||||||||||||||||||||
| Foreign exchange contracts | ( | ( | Sales | ( | ( | |||||||||||||||||||||||||||
| Foreign exchange contracts | ( | Cost of sales | ||||||||||||||||||||||||||||||
| Foreign exchange contracts | Operating expenses | |||||||||||||||||||||||||||||||
The Company expects to reclassify net gains totaling $1.2 million related to its cash flow hedges from AOCI into earnings during the next twelve months.
Derivatives Not Designated as Hedging Instruments
The Company also has foreign currency exposure on balances, primarily intercompany, that are denominated in a foreign currency and are adjusted to current values using period-end exchange rates. To minimize foreign currency exposure, the Company enters into foreign currency contracts with a one month maturity. At September 30, 2022, the Company had two contracts outstanding, with a total notional amount of $16.4 million and a fair value of approximately $(0.1 ) million. At December 31, 2021, the Company had one contract outstanding, with a notional amount of $15.0 million and a fair value of $(0.1 ) million. The Company recorded a net gain on foreign currency contracts not designated as hedging instruments of $0.9 million and $1.6 million, respectively, for the three and nine months ended September 30, 2022, which is included in Other (gain) loss, net in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in Other loss, net. The Company did not have foreign currency contracts not designated as hedging instruments outstanding during the nine months ended October 1, 2021.
Contingent Consideration
The following table presents the changes in the estimated fair values of the Company’s liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2022 and October 1, 2021 (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Fair value measurement at beginning of period | $ | $ | $ | $ | |||||||||||||||||||
Amount recorded for current year acquisitions | |||||||||||||||||||||||
| Fair value measurement adjustment | ( | ( | |||||||||||||||||||||
Payments | ( | ( | |||||||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||||||||
| Fair value measurement at end of period | $ | $ | $ | $ | |||||||||||||||||||
- 22 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
On April 6, 2022, the Company acquired Aran. See Note 2 “Business Acquisitions” for additional information about the Aran acquisition and related contingent consideration. On February 19, 2020, the Company acquired certain assets and liabilities of InoMec Ltd. (“InoMec”), a privately-held company based in Israel that specializes in the research, development and manufacturing of medical devices, including minimally invasive tools, delivery systems, tubing and catheters, surgery tools, drug-device combination, laser combined devices, and tooling and production. On October 7, 2019, the Company acquired certain assets and liabilities of US BioDesign, LLC (“USB”), a privately-held developer and manufacturer of complex braided biomedical structures for disposable and implantable medical devices. The contingent consideration at September 30, 2022 is the estimated fair value of the Company’s obligations, under the asset purchase agreements for Aran, InoMec and USB, to make additional payments if certain revenue goals are met.
During 2022, the Company made payments associated with the USB acquisition, resulting from achievement of revenue-based goals for the period from January 1, 2021 to December 31, 2021. During 2021, the Company made payments associated with the InoMec and USB acquisitions, resulting from achievement of revenue-based goals for the period from March 1, 2020 to February 28, 2021 for InoMec and January 1, 2020 to December 31, 2020 for USB.
As of September 30, 2022 and December 31, 2021, the current portion of contingent consideration liabilities included in Accrued expenses and other current liabilities was $7.6 million and $0.7 million, respectively, and the non-current portion included in Other long-term liabilities on the Condensed Consolidated Balance Sheets was $0.7 million and $1.5 million, respectively.
The following table provides quantitative information associated with the fair value measurement of the Company’s liabilities for contingent consideration:
| September 30, 2022 | ||||||||||||||||||||||||||||||||
| Contingency Type | Maximum Payout (undiscounted) | Fair Value | Valuation Technique | Unobservable Inputs | Weighted Average or Range | |||||||||||||||||||||||||||
| Revenue-based payments: | ||||||||||||||||||||||||||||||||
| InoMec and USB | $ | $ | Monte Carlo | Revenue volatility | % | |||||||||||||||||||||||||||
| Discount rate | % | |||||||||||||||||||||||||||||||
| Projected year(s) of payment | 2022-2024 | |||||||||||||||||||||||||||||||
| Aran | $ | $ | Probability-weighted expected returns method | Probability of occurrence | ||||||||||||||||||||||||||||
| Discount rate | % | |||||||||||||||||||||||||||||||
| Projected year(s) of payment | 2023 | |||||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Contingency Type | Maximum Payout (undiscounted) | Fair Value | Valuation Technique | Unobservable Inputs | Weighted Average or Range | |||||||||||||||||||||||||||
| Revenue-based payments: | ||||||||||||||||||||||||||||||||
| InoMec and USB | $ | $ | Monte Carlo | Revenue volatility | % | |||||||||||||||||||||||||||
| Discount rate | % | |||||||||||||||||||||||||||||||
| Projected year(s) of payment | 2022-2024 | |||||||||||||||||||||||||||||||
- 23 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items.
Borrowings under the Company’s Revolving Credit Facility, TLA Facility and TLB Facility accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. The carrying amount of this floating rate debt approximates fair value based upon the respective interest rates adjusting with market rate adjustments.
Equity Investments
The Company holds long-term, strategic investments in companies to promote business and strategic objectives. These investments are included in Other long-term assets on the Condensed Consolidated Balance Sheets.
Equity investments comprise the following (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Equity method investment | $ | $ | |||||||||||||||||||||
| Non-marketable equity securities | |||||||||||||||||||||||
Total equity investments | $ | $ | |||||||||||||||||||||
The components of (Gain) loss on equity investments for each period were as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Equity method investment (gain) loss | $ | $ | ( | $ | $ | ||||||||||||||||||
The Company’s equity method investment is in a venture capital fund focused on investing in life sciences companies. As of September 30, 2022, the Company owned 7.1 % of this fund.
- 24 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(14.) SEGMENT INFORMATION
The Company organizes its business into two reportable segments: (1) Medical and (2) Non-Medical. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting. For purposes of segment reporting, intercompany sales between segments are not material.
The Company has communicated to certain customers that it is exiting certain markets it serves in the Advanced Surgical, Orthopedics & Portable Medical product line. In order to align with the planned exit of those markets and better align to its end markets and product line strategies, the Company recast its product line sales within the Medical segment 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. The Company believes the revised presentation will provide improved reporting and better transparency into the operational results of its business and markets. The Company has reclassified the prior year information in the table below to conform to the current year presentation. For the three and nine months ended October 1, 2021, Cardio & Vascular sales of $8.6 million and $24.5 million, respectively, and Advanced Surgical, Orthopedics & Portable Medical sales of $6.3 million and $17.6 million, respectively, were reclassified to the Cardiac Rhythm Management & Neuromodulation product line.
The following table presents sales by product line (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Segment sales by product line: | |||||||||||||||||||||||
| Medical | |||||||||||||||||||||||
| Cardio & Vascular | $ | $ | $ | $ | |||||||||||||||||||
Cardiac Rhythm Management & Neuromodulation | |||||||||||||||||||||||
| Advanced Surgical, Orthopedics & Portable Medical | |||||||||||||||||||||||
| Total Medical | |||||||||||||||||||||||
| Non-Medical | |||||||||||||||||||||||
| Total sales | $ | $ | $ | $ | |||||||||||||||||||
The following table presents income for the Company’s reportable segments (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Segment income: | |||||||||||||||||||||||
| Medical | $ | $ | $ | $ | |||||||||||||||||||
| Non-Medical | |||||||||||||||||||||||
| Total segment income | |||||||||||||||||||||||
Unallocated operating expenses | ( | ( | ( | ( | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Unallocated expenses, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before taxes | $ | $ | $ | $ | |||||||||||||||||||
- 25 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(15.) REVENUE FROM CONTRACTS WITH CUSTOMERS
Disaggregated Revenue
In general, the Company’s business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment’s results of operations. For a summary by disaggregated product line sales for each segment, refer to Note 14, “Segment Information.”
Revenue recognized from products and services transferred to customers over time represented 28 % and 30 %, respectively, for the three and nine months ended September 30, 2022, compared to 33 % and 34 %, respectively, for the three and nine months ended October 1, 2021. Substantially all of the revenue recognized from products and services transferred to customers over time during the periods presented was within the Medical segment.
The following tables present revenues by significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues.
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Customer | Medical | Non-Medical | Medical | Non-Medical | ||||||||||||||||||||||
| Customer A | * | * | ||||||||||||||||||||||||
| Customer B | * | * | ||||||||||||||||||||||||
| Customer C | * | * | ||||||||||||||||||||||||
| Customer D | * | * | ||||||||||||||||||||||||
| Customer E | * | * | * | |||||||||||||||||||||||
| All other customers | ||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Customer | Medical | Non-Medical | Medical | Non-Medical | ||||||||||||||||||||||
| Customer A | * | * | ||||||||||||||||||||||||
| Customer B | * | * | ||||||||||||||||||||||||
| Customer C | * | * | ||||||||||||||||||||||||
| Customer D | * | * | ||||||||||||||||||||||||
| All other customers | ||||||||||||||||||||||||||
__________
* Less than 10% of segment’s total revenues for the period.
- 26 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(15.) REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
The following tables present revenues by significant ship to location, which is defined as any country where 10% or more of a segment’s total revenues are shipped.
| Three Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Ship to Location | Medical | Non-Medical | Medical | Non-Medical | ||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||
| All other countries | ||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | |||||||||||||||||||||||||
| Ship to Location | Medical | Non-Medical | Medical | Non-Medical | ||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||
| All other countries | ||||||||||||||||||||||||||
__________
* Less than 10% of segment’s total revenues for the period.
Contract Balances
The opening and closing balances of the Company’s contract assets and contract liabilities are as follows (in thousands):
| September 30, 2022 | December 31, 2021 | ||||||||||
| Contract assets | $ | $ | |||||||||
| Contract liabilities | |||||||||||
During the three and nine months ended September 30, 2022, the Company recognized $0.5 million and $2.2 million, respectively, of revenue that was included in the contract liability balance as of December 31, 2021. During the three and nine months ended October 1, 2021, the Company recognized $0.3 million and $1.4 million, respectively, of revenue that was included in the contract liability balance as of December 31, 2020.
- 27 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 ended December 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 sales, expenses, and profitability; customer demand; supplier performance (including delivery delays); costs (including wages, staffing levels and freight); 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 “outlook,” “projected,” “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 our other periodic filings with the SEC 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
- 28 -
•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.
Except as may be 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 Integer Holdings Corporation and its subsidiaries, unless the context indicates otherwise.
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 third quarter and first nine months of 2022 ended on September 30 and consisted of 91 days and 273 days, respectively. The third quarter and first nine months of 2021 ended on October 1 and consisted of 91 days and 274 days, respectively.
Impact of Global Events
Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, severe and sustained inflation, a rising interest rate environment, fluctuations in global currencies, and supply chain disruptions could cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market and product line, but specific impacts to our business include increased borrowing costs, 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 monitor economic conditions closely. In response to reductions in revenue, we can take actions to align our cost structure with changes in demand and manage our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions and other developments.
Business Acquisitions
On December 1, 2021, we acquired 100% of the equity interests of Oscor Inc., Oscor Caribe, LLC and Oscor Europe GmbH (collectively “Oscor”), privately-held companies with operations in Florida, the Dominican Republic and Germany that design, develop, manufacture and market a comprehensive portfolio of highly specialized medical devices, venous access systems and diagnostic catheters and implantable devices.
On April 6, 2022, we acquired 100% of the equity interests of 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.
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.
- 29 -
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 nine months ended October 1, 2021, Cardio & Vascular sales of $8.6 million and $24.5 million, respectively, and Advanced Surgical, Orthopedics & Portable Medical sales of $6.3 million and $17.6 million, respectively, were reclassified to the Cardiac Rhythm Management & Neuromodulation product line.
Financial Overview
Net income for the third quarter and first nine months of 2022 was $16.1 million, or $0.48 per diluted share, and $48.3 million, or $1.45 per diluted share, respectively, compared to $22.1 million, or $0.66 per diluted share, and $73.0 million, or $2.20 per diluted share for the third quarter and first nine months of 2021, respectively. These variances are primarily the result of the following:
•Sales for the third quarter and first nine months of 2022 increased $37.1 million and $95.6 million, respectively, when compared to the same periods in 2021 primarily from the Oscor Acquisition and continued product demand recovery from the impacts of the COVID-19 pandemic.
•Gross profit for the third quarter and first nine months of 2022 increased $4.8 million and $6.0 million, respectively, primarily from higher sales volume, partially offset by increased cost of sales resulting from labor and supply constraints.
•Operating expenses for the third quarter and first nine months of 2022 increased $8.7 million and $28.6 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 third quarter of 2022 increased $0.6 million compared to the same period in 2021, primarily due to higher average debt outstanding. Interest expense for the first nine months of 2022 decreased $1.7 million compared to the same period in 2021, primarily due to lower losses on interest rate swaps and losses from extinguishment of debt, partially offset by higher average debt outstanding.
•During the third quarter and first nine months of 2022, we recognized losses on equity investments of $2.9 million and $5.6 million, respectively, compared to a gain of $0.2 million and a net loss of $1.9 million, respectively, for the third quarter and first nine months of 2021. Gains and losses on equity investments are generally unpredictable in nature.
•Other (gain) loss, net for the third quarter and first nine months of 2022 were gains of $1.3 million and $0.9 million, respectively, compared to losses of approximately $0.1 million for the third quarter and first nine months of 2021, primarily due to fluctuations in foreign currency gains and losses in the respective periods.
•We recorded provisions for income taxes for the third quarter and first nine months of 2022 of $0.9 million and $7.1 million, respectively, compared with provisions for income taxes of $1.1 million and $5.9 million, respectively, for the third quarter and first nine 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 -
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 | |||||||||||||||||||||||
| September 30, | October 1, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Medical Sales: | |||||||||||||||||||||||
| Cardio & Vascular | 174,131 | $ | 152,276 | $ | 21,855 | 14.4 | % | ||||||||||||||||
Cardiac Rhythm Management & Neuromodulation | 130,631 | 121,425 | 9,206 | 7.6 | % | ||||||||||||||||||
| Advanced Surgical, Orthopedics & Portable Medical | 26,150 | 22,420 | 3,730 | 16.6 | % | ||||||||||||||||||
| Total Medical Sales | 330,912 | 296,121 | 34,791 | 11.7 | % | ||||||||||||||||||
| Non-Medical | 11,768 | 9,453 | 2,315 | 24.5 | % | ||||||||||||||||||
| Total sales | 342,680 | 305,574 | 37,106 | 12.1 | % | ||||||||||||||||||
| Cost of sales | 255,962 | 223,702 | 32,260 | 14.4 | % | ||||||||||||||||||
| Gross profit | 86,718 | 81,872 | 4,846 | 5.9 | % | ||||||||||||||||||
| Gross profit as a % of sales (“Gross margin”) | 25.3 | % | 26.8 | % | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling, general and administrative (“SG&A”) | 38,195 | 34,269 | 3,926 | 11.5 | % | ||||||||||||||||||
| SG&A as a % of sales | 11.1 | % | 11.2 | % | |||||||||||||||||||
| Research, development and engineering (“RD&E”) | 16,123 | 12,050 | 4,073 | 33.8 | % | ||||||||||||||||||
| RD&E as a % of sales | 4.7 | % | 3.9 | % | |||||||||||||||||||
| Restructuring and other charges | 3,142 | 2,463 | 679 | 27.6 | % | ||||||||||||||||||
| Total operating expenses | 57,460 | 48,782 | 8,678 | 17.8 | % | ||||||||||||||||||
| Operating income | 29,258 | 33,090 | (3,832) | (11.6) | % | ||||||||||||||||||
| Operating income as a % of sales | 8.5 | % | 10.8 | % | |||||||||||||||||||
| Interest expense | 10,676 | 10,053 | 623 | 6.2 | % | ||||||||||||||||||
| (Gain) loss on equity investments | 2,887 | (152) | 3,039 | NM | |||||||||||||||||||
| Other (gain) loss, net | (1,300) | 10 | (1,310) | NM | |||||||||||||||||||
| Income before taxes | 16,995 | 23,179 | (6,184) | (26.7) | % | ||||||||||||||||||
| Provision for income taxes | 938 | 1,113 | (175) | (15.7) | % | ||||||||||||||||||
| Effective tax rate | 5.5 | % | 4.8 | % | |||||||||||||||||||
| Net income | $ | 16,057 | $ | 22,066 | $ | (6,009) | (27.2) | % | |||||||||||||||
| Net income as a % of sales | 4.7 | % | 7.2 | % | |||||||||||||||||||
| Diluted earnings per share | $ | 0.48 | $ | 0.66 | $ | (0.18) | (27.3) | % | |||||||||||||||
__________
NM Calculated amount not meaningful
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| Nine Months Ended | |||||||||||||||||||||||
| September 30, | October 1, | Change | |||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| Medical Sales: | |||||||||||||||||||||||
| Cardio & Vascular | $ | 513,772 | $ | 438,165 | $ | 75,607 | 17.3 | % | |||||||||||||||
Cardiac Rhythm Management & Neuromodulation | 389,900 | 376,788 | 13,112 | 3.5 | % | ||||||||||||||||||
| Advanced Surgical, Orthopedics & Portable Medical | 69,101 | 65,759 | 3,342 | 5.1 | % | ||||||||||||||||||
| Total Medical Sales | 972,773 | 880,712 | 92,061 | 10.5 | % | ||||||||||||||||||
| Non-Medical | 30,900 | 27,352 | 3,548 | 13.0 | % | ||||||||||||||||||
| Total Sales | 1,003,673 | 908,064 | 95,609 | 10.5 | % | ||||||||||||||||||
| Cost of sales | 742,583 | 652,960 | 89,623 | 13.7 | % | ||||||||||||||||||
| Gross profit | 261,090 | 255,104 | 5,986 | 2.3 | % | ||||||||||||||||||
| Gross margin | 26.0 | % | 28.1 | % | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| SG&A | 119,541 | 105,150 | 14,391 | 13.7 | % | ||||||||||||||||||
| SG&A as a % of sales | 11.9 | % | 11.6 | % | |||||||||||||||||||
| RD&E | 47,077 | 39,249 | 7,828 | 19.9 | % | ||||||||||||||||||
| RD&E, Net as a % of sales | 4.7 | % | 4.3 | % | |||||||||||||||||||
| Restructuring and other charges | 10,010 | 3,657 | 6,353 | 173.7 | % | ||||||||||||||||||
| Total operating expenses | 176,628 | 148,056 | 28,572 | 19.3 | % | ||||||||||||||||||
| Operating income | 84,462 | 107,048 | (22,586) | (21.1) | % | ||||||||||||||||||
| Operating margin | 8.4 | % | 11.8 | % | |||||||||||||||||||
| Interest expense | 24,417 | 26,117 | (1,700) | (6.5) | % | ||||||||||||||||||
| Loss on equity investments | 5,611 | 1,867 | 3,744 | 200.5 | % | ||||||||||||||||||
| Other (gain) loss, net | (932) | 129 | (1,061) | NM | |||||||||||||||||||
| Income before taxes | 55,366 | 78,935 | (23,569) | (29.9) | % | ||||||||||||||||||
| Provision for income taxes | 7,106 | 5,916 | 1,190 | 20.1 | % | ||||||||||||||||||
| Effective tax rate | 12.8 | % | 7.5 | % | |||||||||||||||||||
| Net income | $ | 48,260 | $ | 73,019 | $ | (24,759) | (33.9) | % | |||||||||||||||
| Net income as a % of sales | 4.8 | % | 8.0 | % | |||||||||||||||||||
| Diluted earnings per share | $ | 1.45 | $ | 2.20 | $ | (0.75) | (34.1) | % | |||||||||||||||
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Product Line Sales
For the third quarter and first nine months of 2022, Cardio & Vascular (“C&V”) sales increased $21.9 million, or 14%, and $75.6 million, or 17%, respectively, versus the comparable 2021 periods. The increase in C&V sales for the third quarter and first nine months of 2022 was driven by strong demand in the neurovascular, electrophysiology and structural heart markets, as well as sales from the Oscor and Aran acquisitions, despite supplier delays. During the third quarter and first nine months of 2022, price changes increased C&V sales by $0.4 million and $0.8 million, respectively, in comparison to the 2021 periods. Foreign currency exchange rate fluctuations decreased C&V sales for the third quarter and first nine months of 2022 by $2.0 million and $4.6 million, respectively, in comparison to the 2021 periods, primarily due to U.S. dollar fluctuations relative to the Euro.
For the third quarter and first nine months of 2022, Cardiac & Neuromodulation (“CRM&N”) sales increased $9.2 million, or 8%, and $13.1 million, or 3%, respectively, versus the comparable 2021 periods. CRM&N sales for the third quarter and first nine months of 2022 increased as growth from the recent Oscor acquisition was partially offset by labor and supply chain constraints. During the third quarter and first nine months of 2022, price changes lowered CRM&N sales by $0.7 million and $2.5 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 third quarter and first nine months of 2022 in comparison to 2021.
Advanced Surgical, Orthopedic & Portable Medical (“AS&O”) sales for the third quarter and first nine months of 2022 increased $3.7 million, or 17%, and $3.3 million or 5%, respectively, versus the comparable 2021 periods, primarily due to higher demand to support the start of the multi-year Portable Medical exit announced earlier this year and low-double digit growth in Advanced Surgical and Orthopedics. During the third quarter and first nine months of 2022, price changes increased AS&O sales by $0.8 million and $1.2 million, respectively, in comparison to the 2021 periods. Foreign currency exchange rate fluctuations did not have a material impact on AS&O sales during the third quarter and first nine months of 2022 in comparison to the 2021 periods.
For the third quarter and first nine months of 2022, Non-Medical sales increased $2.3 million, or 24%, and $3.5 million, or 13%, respectively, versus the comparable 2021 periods, driven by strong demand across all market segments, with growth softened by battery supplier constraints. Price reductions and foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during the third quarter and first nine months of 2022 in comparison to the 2021 periods.
Gross Profit
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
| Gross profit (in thousands) | $ | 86,718 | $ | 81,872 | 261,090 | 255,104 | |||||||||||||||||
| Gross margin | 25.3 | % | 26.8 | % | 26.0 | % | 28.1 | % | |||||||||||||||
Gross margin for the third quarter and first nine months of 2022 decreased 150 basis points and 210 basis points, respectively, compared to the comparable 2021 periods, primarily driven by incremental labor and supply chain costs related to increased wages, freight and manufacturing inefficiencies from supply chain disruptions.
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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 | Nine Months | |||||||||||||
Compensation and benefits(a) | $ | 1,371 | $ | 6,656 | ||||||||||
Amortization expense(b) | 1,231 | 3,344 | ||||||||||||
Travel and entertainment(c) | 227 | 1,111 | ||||||||||||
Contract services(d) | 670 | 1,402 | ||||||||||||
All other SG&A(e) | 427 | 1,878 | ||||||||||||
| Net increase in SG&A expenses | $ | 3,926 | $ | 14,391 | ||||||||||
__________
(a)Compensation and benefits increased during the third quarter and first nine months of 2022 compared to the prior year periods primarily due to an increase in headcount from the Aran and Oscor Acquisitions.
(b)Amortization expense increased during the third quarter and first nine months of 2022 compared to the prior year periods due to amortization of intangible assets from the Aran 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 third quarter and first nine 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 third quarter and first nine months of 2022 compared to the same periods of 2021 is primarily attributable to higher professional fees and higher rent and insurance from the Aran and Oscor acquisitions.
RD&E
RD&E expense for the third quarter and first nine months of 2022 was $16.1 million and $47.1 million, respectively, compared to $12.1 million and $39.2 million, respectively, for the third quarter and first nine months of 2021. The increases in RD&E expense during the third quarter and first nine 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 the Aran and Oscor 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.
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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 | Nine Months Ended | ||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | September 30, 2022 | October 1, 2021 | ||||||||||||||||||||
Restructuring charges(a) | $ | 1,919 | $ | 1,727 | $ | 3,017 | $ | 2,572 | |||||||||||||||
Acquisition and integration costs(b) | 597 | 182 | 5,866 | 292 | |||||||||||||||||||
Other general expenses(c) | 626 | 554 | 1,127 | 793 | |||||||||||||||||||
Total restructuring and other charges | $ | 3,142 | $ | 2,463 | $ | 10,010 | $ | 3,657 | |||||||||||||||
__________
(a)Restructuring charges for the first nine months of 2022 primarily consist of termination benefits associated with our operational excellence and 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 third quarter and first nine months of 2022 include costs associated with the acquisition of Aran and Oscor.
(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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Interest Expense
Information relating to our interest expense is as follows (dollars in thousands):
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | Change | |||||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate (bp) | ||||||||||||||||||||||||||||||
| Contractual interest expense | $ | 10,102 | 4.24 | % | $ | 5,087 | 3.01 | % | $ | 5,015 | 123 | ||||||||||||||||||||||||
| (Gain) loss on interest rate swap | (4) | — | 792 | 0.47 | (796) | (47) | |||||||||||||||||||||||||||||
| Amortization of deferred debt issuance costs and original issue discount | 482 | 0.23 | 795 | 0.50 | (313) | (27) | |||||||||||||||||||||||||||||
Losses from extinguishment of debt | — | — | 3,346 | 2.00 | (3,346) | (200) | |||||||||||||||||||||||||||||
| Interest expense on borrowings | 10,580 | 4.47 | % | 10,020 | 5.98 | % | 560 | (151) | |||||||||||||||||||||||||||
| Other interest expense | 96 | 33 | 63 | ||||||||||||||||||||||||||||||||
| Total interest expense | $ | 10,676 | $ | 10,053 | $ | 623 | |||||||||||||||||||||||||||||
| Nine Months Ended | |||||||||||||||||||||||||||||||||||
| September 30, 2022 | October 1, 2021 | Change | |||||||||||||||||||||||||||||||||
| Amount | Rate | Amount | Rate | Amount | Rate (bp) | ||||||||||||||||||||||||||||||
| Contractual interest expense | $ | 21,428 | 3.09 | % | $ | 16,838 | 3.20 | % | $ | 4,590 | (11) | ||||||||||||||||||||||||
| Loss on interest rate swap | 1,289 | 0.19 | 2,613 | 0.50 | (1,324) | (31) | |||||||||||||||||||||||||||||
| Amortization of deferred debt issuance costs and original issue discount | 1,445 | 0.23 | 2,813 | 0.56 | (1,368) | (33) | |||||||||||||||||||||||||||||
Losses from extinguishment of debt | — | — | 3,774 | 0.73 | (3,774) | (73) | |||||||||||||||||||||||||||||
| Interest expense on borrowings | 24,162 | 3.51 | % | 26,038 | 4.99 | % | c | (1,876) | (148) | ||||||||||||||||||||||||||
| Other interest expense | 255 | 79 | 176 | ||||||||||||||||||||||||||||||||
| Total interest expense | $ | 24,417 | $ | 26,117 | $ | (1,700) | |||||||||||||||||||||||||||||
During 2022, contractual interest expense has increased due to higher average debt outstanding combined with increasing applicable interest rates. The higher average debt balance outstanding is the result of borrowings to fund the Oscor and Aran acquisitions, while interest rates have continued to climb due to increases in LIBOR which have been partially offset by 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 gains and 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 nine 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 of September 30, 2022 and December 31, 2021, approximately 11% and 18%, respectively, of our principal amount of debt has been converted to fixed-rate borrowings with an interest rate swap. 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.
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(Gain) Loss on Equity Investments
During the third quarter and first nine months of 2022, we recognized losses on equity investments of $2.9 million and $5.6 million, respectively. During the third quarter and first nine months of 2021, we recognized a gain of $0.2 million and a net loss of $1.9 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 of September 30, 2022 and December 31, 2021, the carrying value of our equity investments was $16.2 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 (Gain) Loss, Net
Other (gain) loss, net for the third quarter and first nine months of 2022 were gains of $1.3 million and $0.9 million, respectively, compared to losses of approximately $0.1 million for the third quarter and first nine months of 2021. Other (gain) 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 the U.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 (gain) loss, net for the third quarter and first nine months of 2022 were gains of $1.6 million and $1.1 million, respectively, compared to net losses of approximately $0.1 million for the third quarter and first nine months 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.
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Provision for Income Taxes
We recognized income tax expense of $0.9 million for the third quarter of 2022 on $17.0 million of income before taxes (effective tax rate of 5.5%), compared to an income tax expense of $1.1 million on $23.2 million of income before taxes (effective tax rate of 4.8%) for the same period of 2021. The income tax expense for the first nine months of 2022 was $7.1 million on $55.4 million of income before taxes (effective tax rate of 12.8%), compared to income tax expense of $5.9 million on income before taxes of $78.9 million (effective tax rate of 7.5%) for the same period of 2021.
Income tax expense for the third quarter and first nine months of 2022 included $0.7 million and $0.2 million, respectively, of discrete tax benefits. The discrete tax benefit for third quarter and the first nine months of 2022 is predominately related to favorable return to provision adjustments attributable to the 2021 tax year. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs during those periods and/or tax shortfalls recorded for the forfeiture of certain PRSUs. Income tax expense for the third quarter and first nine months of 2021 included $1.6 million and $6.1 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. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs or exercise of stock options during those quarters and favorable return to provision adjustments related to the 2020 tax year.
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 for U.S. Tax Reform and a proposed 15% Minimum Global Tax Rate proposed by the Organization 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 the U.S. federal statutory tax rate of 21% due principally to the net impact of the Company’s earnings outside the U.S., which are generally taxed at rates that differ from the U.S federal rate, the GILTI tax, the FDII deduction, the availability of tax credits, and the recognition of discrete tax items.
Our earnings outside the U.S. are generally taxed at blended rates that are marginally lower than the U.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 our U.S. income tax return. The foreign jurisdictions in which we operate and where our foreign earnings are primarily derived, include Switzerland, Mexico, Uruguay, Malaysia and Ireland.
We currently have a tax holiday in Malaysia through April 2023 provided certain conditions continue to be met. In addition, we acquired manufacturing operations in the Dominican Republic as part of the Oscor Acquisition, and are operating under a free trade zone agreement in the Dominican Republic through March 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
| (dollars in thousands) | September 30, 2022 | December 31, 2021 | |||||||||||||||
| Cash and cash equivalents | $ | 20,187 | $ | 17,885 | |||||||||||||
| Working capital | $ | 357,855 | $ | 293,353 | |||||||||||||
| Current ratio | 2.80 | 2.84 | |||||||||||||||
Cash and cash equivalents at September 30, 2022 increased by $2.3 million from December 31, 2021, primarily as a result of cash generated by operating activities, partially offset by purchases of property, plant and equipment and debt principal payments. 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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Working capital increased by $64.5 million from December 31, 2021, primarily from positive working capital fluctuations associated with accounts receivable and inventory aggregating to $88.4 million, which were partially offset by increases in accounts payable. During the first nine 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.
At September 30, 2022, $17.8 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.
Summary of Cash Flow
| Nine Months Ended | |||||||||||||||||
| (in thousands) | September 30, 2022 | October 1, 2021 | |||||||||||||||
| Cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 64,779 | $ | 117,410 | |||||||||||||
| Investing activities | (169,098) | (29,630) | |||||||||||||||
| Financing activities | 106,412 | (112,067) | |||||||||||||||
| Effect of foreign currency exchange rates on cash and cash equivalents | 209 | 553 | |||||||||||||||
| Net change in cash and cash equivalents | $ | 2,302 | $ | (23,734) | |||||||||||||
Operating Activities – During the first nine months of 2022, we generated cash from operations of $64.8 million, compared to $117.4 million for the first nine months of 2021. The decrease of $52.6 million was the result of decreases of $9.3 million in net income adjusted for non-cash items such as depreciation and amortization and $43.3 million in cash flow provided by changes in operating assets and liabilities.
The decrease in net income adjusted for non-cash items such as depreciation and amortization is from higher compensation and benefit costs, restructuring charges and acquisition and integration expenses, partially offset by higher sales volume and lower interest expense. The decrease associated with changes in operating assets and liabilities is primarily related to higher inventory growth in the current period partially offset by related growth in accounts payable.
Investing Activities – The $139.5 million increase in net cash used in investing activities was primarily attributable to an increase in net cash paid during the second quarter of 2022 for the Aran acquisition and settlement of working capital and other closing adjustments with Oscor of $126.6 million and increased purchases of property, plant and equipment of $43.1 million in the first nine months of 2022, compared to $29.7 million in the same period last year.
Financing Activities – Net cash provided by financing activities for the first nine months of 2022, was $106.4 million compared to $112.1 million used in financing activities for the first nine months of 2021. Financing activities during the first nine months of 2022 included net borrowings of $109.6 million, compared to debt payments of $102.4 million for the comparable 2021 period. The net cash inflow for 2022 included $160.0 million in borrowings on the revolving line of credit primarily to fund the Aran acquisition.
Capital Structure – As of September 30, 2022, our capital structure consisted of $939 million of debt, net of deferred debt issuance costs and unamortized discounts, outstanding under our Senior Secured Credit Facilities and 33 million shares of common stock outstanding. As of September 30, 2022, we had access to $254.2 million of borrowing capacity under our Revolving Credit Facility, available for normal course of business and letters of credit, and are authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of September 30, 2022, our contractual debt service obligations for the remainder of 2022, consisting of principal and interest on our outstanding debt, were estimated to be $16.1 million. Actual principal and interest payments may be higher if, for instance, the applicable interest rates on our Senior Secured Credit Facilities increase, we borrow additional amounts on our Revolving Credit Facility, or we pay principal amounts in excess of the required minimums reflected in the contractual debt service obligations above.
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Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents and borrowings under our Revolving Credit Facility are sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. If our future financing needs increase, we may need to arrange additional debt or equity financing. We continually evaluate and consider various financing alternatives to enhance or supplement our existing financial resources, including our Senior Secured Credit Facilities. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all.
Credit Facilities - As of September 30, 2022, we had Senior Secured Credit Facilities that consist of (i) a $400 million revolving credit facility (the “Revolving Credit Facility”), which had available borrowing capacity of $254.2 million, (ii) a term loan A facility (the “TLA Facility”) with outstanding principal balance of $458 million, and (iii) a term loan B facility (the “TLB Facility”) with outstanding principal balance of $347 million. The Revolving Credit Facility and TLA Facility mature on September 2, 2026. The TLB Facility matures on September 2, 2028. The Senior Secured Credit Facilities include a mandatory prepayment provision customary for credit facilities of its nature.
The Revolving Credit Facility and TLA Facility contain covenants requiring that we maintain (i) a total net leverage ratio not to exceed 5.50:1.00 (stepping down to 5.00:1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following certain qualified acquisitions) and (ii) an interest coverage ratio of at least 2.50:1.00. As of September 30, 2022, we were in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants. As of September 30, 2022, our total net leverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 3.1 to 1.0. For the twelve month period ended September 30, 2022, our interest coverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 11.0 to 1.0.
Failure to comply with these financial covenants would result in an event of default as defined under the Revolving Credit Facility and TLA Facility unless waived by the lenders. An event of default may result in the acceleration of our indebtedness. As a result, management believes that compliance with these covenants is material to us.
See Note 6 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for a further information on the Company’s outstanding debt.
Off-Balance Sheet Arrangements
We do not currently have off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our Condensed Consolidated Financial Statements.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the FASB, SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 1 “Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.
There have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q. Furthermore, a discussion of market risk exposures is included in Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
There have been no material changes in reported market risk since the inclusion of this discussion in the Company’s Annual Report on Form 10-K referenced above.
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of Disclosure Controls and Procedures
Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the Securities and Exchange Commission as of September 30, 2022. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their evaluation, as of September 30, 2022, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.
b. Changes in Internal Control Over Financial Reporting
During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II—OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
There were no new material legal proceedings that are required to be reported in the quarter ended September 30, 2022, and no material developments during the quarter in the Company’s legal proceedings as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 1A.RISK FACTORS
There have been no material changes to the Company’s risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, or any of our subsequently filed reports, except for the risk factors described below.
We rely on third party suppliers for raw materials, key products and subcomponents. Unavailability of, or increased prices for, these materials, products or subcomponents could adversely affect our results of operations.
Our business depends on a continuous supply of raw materials. The principal raw materials used in our business include platinum, stainless steel, gold, titanium, nitinol, lithium, palladium, iridium, tantalum, nickel cobalt, ruthenium, gallium trichloride, vanadium oxide, CFx and plastics. The supply and price of raw materials may be susceptible to fluctuations due to transportation issues, government regulations, price controls, foreign civil unrest, tariffs, worldwide economic conditions or other unforeseen circumstances, including the continuing impact of the global pandemic and the military conflict between Russia and Ukraine. Increasing global demand for raw materials has caused prices of certain materials to increase. Significant increases in the cost of raw materials that cannot be recovered through increases in the prices of our products could adversely affect our results of operations. There can be no assurance that the marketplace will support higher prices or that price increases and productivity gains, procurement deflation projects or savings will fully offset any raw material cost increases in the future. In addition, there are a limited number of worldwide suppliers of several raw materials needed to manufacture our products. For reasons of quality, cost effectiveness or availability, we obtain some raw materials from a single supplier. Although we work closely with our suppliers to seek to ensure continuity of supply, we may not be able to continue to procure raw materials critical to our business at all or to procure them at acceptable price levels. A disruption in deliveries from our suppliers, price increases or decreased availability of raw materials could have an adverse effect on our ability to meet our commitments to our customers and increase our operating costs.
We rely on third party manufacturers to supply many of the products and subcomponents that are incorporated into our products and components. These third party manufacturers have their own complex supply chains and related risks, whether due to the continuing impact of the global pandemic, the military conflict between Russia and Ukraine, or other causes. They are subject to raw material price and availability risks similar to those described above. Manufacturing problems may occur with these and other outside sources, as a supplier may fail to develop or manufacture products and subcomponents for us on a timely basis, or may supply us with products and subcomponents that do not meet our quality, quantity and cost requirements. Third party suppliers are also subject to shipping risks, including container shortages, blocked shipping lanes, and port backlogs. If any of these problems occur, we may be unable to obtain substitute sources for these products and subcomponents on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our own products and components profitably or on time. In addition, to the extent the processes our suppliers use to manufacture products and subcomponents are proprietary, we may be unable to obtain comparable products and subcomponents from alternative suppliers. In the third quarter of 2022, supplier performance issues reduced our revenue by approximately $15 million. We also incurred approximately $4 million in increased manufacturing costs, including labor and other inefficiencies related to supplier subcomponent delays.
Our business is also subject to risks associated with U.S. and foreign legislation, regulations and trade agreements relating to the materials we import, including the tariffs on steel that the U.S. has imposed and other quotas, duties, tariffs or taxes or restrictions on imports, which could adversely affect our operations and our ability to import materials used in our products at current or increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased or other restrictions on our imports will be imposed in the future or adversely modified, or what effect such actions would have on our costs of operations. Future quotas, duties or tariffs may adversely affect our business, financial condition, results of operations or cash flows. Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either of which could adversely affect our business, financial condition, results of operations or cash flows.
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ITEM 6.EXHIBITS
| Exhibit Number | Description | |||||||
| 31.1* | ||||||||
| 31.2* | ||||||||
| 32.1** | ||||||||
| 101.INS* | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |||||||
| 101.SCH* | XBRL Extension Schema Document | |||||||
| 101.CAL* | XBRL Extension Calculation Linkbase Document | |||||||
| 101.LAB* | XBRL Extension Label Linkbase Document | |||||||
| 101.PRE* | XBRL Extension Presentation Linkbase Document | |||||||
| 101.DEF* | XBRL Extension Definition Linkbase Document | |||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101). | |||||||
| * | Filed herewith. | ||||
| ** | Furnished herewith. | ||||
| # | Indicates exhibits that are management contracts or compensation plans or arrangements. | ||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: | October 27, 2022 | INTEGER HOLDINGS CORPORATION | |||||||||||||||
| By: | /s/ Joseph W. Dziedzic | ||||||||||||||||
| Joseph W. Dziedzic | |||||||||||||||||
| President and Chief Executive Officer | |||||||||||||||||
| (Principal Executive Officer) | |||||||||||||||||
| By: | /s/ Jason K. Garland | ||||||||||||||||
| Jason K. Garland | |||||||||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||||||||
| (Principal Financial Officer) | |||||||||||||||||
| By: | /s/ Tom P. Thomas | ||||||||||||||||
| Tom P. Thomas | |||||||||||||||||
| Vice President, Corporate Controller | |||||||||||||||||
| (Principal Accounting Officer) | |||||||||||||||||
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Exhibit 31.1
CERTIFICATION
I, Joseph W. Dziedzic, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2022 of Integer Holdings Corporation; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |||||||
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. | |||||||
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditor and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): | ||||
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |||||||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||||||
| Dated: | October 27, 2022 | /s/ Joseph W. Dziedzic | |||||||||
| Joseph W. Dziedzic | |||||||||||
| President and Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
Exhibit 31.2
CERTIFICATION
I, Jason K. Garland, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2022 of Integer Holdings Corporation; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and | |||||||
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. | |||||||
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditor and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): | ||||
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |||||||
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||||||
| Dated: | October 27, 2022 | /s/ Jason K. Garland | |||||||||
| Jason K. Garland | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
Exhibit 32.1
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Integer Holdings Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | October 27, 2022 | /s/ Joseph W. Dziedzic | |||||||||
| Joseph W. Dziedzic | |||||||||||
| President and Chief Executive Officer | |||||||||||
| (Principal Executive Officer) | |||||||||||
| Dated: | October 27, 2022 | /s/ Jason K. Garland | |||||||||
| Jason K. Garland | |||||||||||
| Executive Vice President and Chief Financial Officer | |||||||||||
| (Principal Financial Officer) | |||||||||||
This certification is being furnished solely to accompany this Form 10-Q pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liability of that section, and is not to be deemed incorporated by reference into any filing of the Company except to the extent the Company specifically incorporates it by reference therein.