# Integer Holdings Corp: Form 10-Q for the period ended Sep 30, 2022

- Company: [Integer Holdings Corp](/companies/itgr.md) (CIK 1114483)
- Form: 10-Q
- Filed: 2022-10-27
- Accepted by EDGAR: Oct 27, 2022, 16:02 ET
- Period: 2022-09-30
- Accession: 0001114483-22-000029
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1114483/000111448322000029/itgr-20220930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1114483/000111448322000029/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-07-02 to 2022-09-30 | $342.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-01-01 to 2022-09-30 | $1.00bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-07-02 to 2022-09-30 | $256.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-01-01 to 2022-09-30 | $742.6m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-07-02 to 2022-09-30 | $86.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-01-01 to 2022-09-30 | $261.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-07-02 to 2022-09-30 | $38.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-01-01 to 2022-09-30 | $119.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-07-02 to 2022-09-30 | $29.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-01-01 to 2022-09-30 | $84.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-07-02 to 2022-09-30 | $10.7m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-01-01 to 2022-09-30 | $24.4m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-07-02 to 2022-09-30 | $938.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-01-01 to 2022-09-30 | $7.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-07-02 to 2022-09-30 | $16.1m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-01-01 to 2022-09-30 | $48.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-07-02 to 2022-09-30 | $0.48 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-01-01 to 2022-09-30 | $1.45 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-07-02 to 2022-09-30 | $0.48 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-01-01 to 2022-09-30 | $1.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-07-02 to 2022-09-30 | 33,336,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-01-01 to 2022-09-30 | 33,329,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-01-01 to 2022-09-30 | $64.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-01-01 to 2022-09-30 | $43.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2022-09-30 | $20.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-09-30 | $556.6m | us-gaap:AssetsCurrent |
| Total assets | at 2022-09-30 | $2.74bn | us-gaap:Assets |
| Current liabilities | at 2022-09-30 | $198.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-09-30 | $1.38bn | us-gaap:Liabilities |
| Long-term debt | at 2022-09-30 | $923.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-09-30 | $15.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-09-30 | $1.36bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,418 characters.

*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

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- 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.

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### 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.

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### 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).

| Medical Sales: | Three Months Ended September 30, 2022 | October 1, 2021 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| 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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### MANAGEMENT'S DISCUSSION AND ANALYSIS

| Medical Sales: | Nine Months Ended September 30, 2022 | October 1, 2021 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| 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 September 30, 2022 | October 1, 2021 | Nine Months Ended 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 September 30, 2022 | October 1, 2021 | Nine Months Ended 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 Amount Rate | October 1, 2021 Amount Rate |  | Change 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

*(in thousands)*

| Cash provided by (used in): | Nine Months Ended September 30, 2022 | October 1, 2021 |
| --- | ---: | ---: |
| 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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## Market risk

As filed, 542 characters.

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.

## Controls and procedures

As filed, 1,422 characters.

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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## Risk factors

As filed, 5,074 characters.

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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Filed Oct 27, 2022.
Source: SEC EDGAR, the filing index for accession 0001114483-22-000029. Last ingested by Listed: Oct 29, 2026, 08:06 ET. No prices; not investment advice.