# Integer Holdings Corp: Form 10-Q for the period ended Sep 29, 2023

- Company: [Integer Holdings Corp](/companies/itgr.md) (CIK 1114483)
- Form: 10-Q
- Filed: 2023-10-26
- Accepted by EDGAR: Oct 26, 2023, 16:03 ET
- Period: 2023-09-29
- Accession: 0001114483-23-000031
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1114483/000111448323000031/itgr-20230929.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1114483/000111448323000031/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-29.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-29 | $404.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-29 | $1.18bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-29 | $299.1m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-29 | $875.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-29 | $105.6m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-29 | $308.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-29 | $42.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-29 | $129.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-29 | $48.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-29 | $123.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-29 | $12.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-29 | $40.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-29 | $4.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-29 | $13.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-29 | $27.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-29 | $64.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-29 | $0.81 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-29 | $1.91 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-29 | $0.82 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-29 | $1.93 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-29 | 33,774,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-29 | 33,679,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-29 | $124.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-29 | $82.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-09-29 | $32.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-29 | $609.3m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-29 | $2.84bn | us-gaap:Assets |
| Current liabilities | at 2023-09-29 | $203.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-29 | $1.38bn | us-gaap:Liabilities |
| Long-term debt | at 2023-09-29 | $941.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-09-29 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-09-29 | $1.46bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 47,174 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, 2022. 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:

- 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 global supply chain issues and the military conflicts between Russia and Ukraine and between Israel and Hamas, including the evolving economic, social and governmental environments and their effect on our 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, including trade regulation; 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 2023 ended on September 29 and consisted of 91 days and 272 days, respectively. The third quarter and first nine months of 2022 ended on September 30 and consisted of 91 days and 273 days, respectively.

### Impact of Global Events

Global economic challenges, including the impact of the military conflicts between Russia and Ukraine and between Israel and Hamas, severe and sustained inflation, a rising interest rate environment, fluctuations in global currencies, and supply chain disruptions may continue to 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, and delays in shipments to and from certain countries. We monitor economic conditions closely. In response to potential 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 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 this acquisition.

Subsequent to the end of the third quarter, on October 1, 2023, we acquired certain assets of InNeuroCo, Inc. (“ InNeuroCo”). InNeuroCo is a recognized leader in neurovascular catheter innovation with strong development and manufacturing capabilities. InNeuroCo’s expertise and highly differentiated neurovascular catheter innovation complements our existing capabilities and market focus. Consistent with our strategy, the addition of InNeuroCo further increases our ability to provide enhanced solutions to our customers in the neurovascular catheter space. As the InNeuroCo acquisition occurred subsequent to the end of the third quarter, the assets acquired and results of operations are not included below in management's discussion and analysis.

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See Note 16 “Subsequent Event” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information related to the acquisition of InNeuroCo, Inc.

### Financial Overview

Net income for the third quarter and first nine months of 2023 was $27.3 million, or $0.81 per diluted share, and $64.3 million, or $1.91 per diluted share, respectively, compared to $16.1 million, or $0.48 per diluted share, and $48.3 million, or $1.45 per diluted share for the third quarter and first nine months of 2022, respectively. These variances are primarily the result of the following:

- Sales for the third quarter and first nine months of 2023 increased $62.0 million and $179.8 million, respectively, when compared to the same periods in 2022, driven by our Medical product lines with strong demand, new product ramps, growth from emerging customers with PMA (premarket approval) products and supply chain improvements.
- Gross profit for the third quarter and first nine months of 2023 increased $18.8 million and $46.9 million, respectively, primarily from higher sales volume leverage and efficiency improvements from an improving supply chain environment.
- Operating expenses for the third quarter of 2023 were flat compared to the third quarter last year and increased $7.6 million when comparing the first nine months of 2023 to the same period in 2022, primarily due to higher labor costs, amortization expense and bank fees, partially offset by lower restructuring and other charges.
- Interest expense for the third quarter and first nine months of 2023 increased $1.3 million and $16.3 million, respectively, compared to the same periods in 2022, due to higher interest rates, higher average debt outstanding and higher losses from extinguishment of debt.
- During the third quarter and first nine months of 2023, we recognized a loss on equity investments of $3.5 million, compared to losses of $2.9 million and $5.6 million, respectively, for the third quarter and first nine months of 2022. Gains and losses on equity investments are generally unpredictable in nature.
- Other (gain) loss, net for the third quarter and first nine months of 2023 were losses of $0.6 million and $1.7 million, respectively, compared to gains of $1.3 million and $0.9 million, respectively, for the third quarter and first nine months of 2022, 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 2023 of $4.8 million and $13.7 million, respectively, compared with provisions for income taxes of $0.9 million and $7.1 million, respectively, for the third quarter and first nine months of 2022. 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 29, 2023 | September 30, 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cardio & Vascular | $214,003 | $174,131 | $39,872 | 22.9% |
| Cardiac Rhythm Management & Neuromodulation | 159,221 | 130,631 | 28,590 | 21.9% |
| Advanced Surgical, Orthopedics & Portable Medical | 22,678 | 26,150 | (3,472) | (13.3)% |
| Total Medical Sales | 395,902 | 330,912 | 64,990 | 19.6% |
| **Non-Medical** | 8,791 | 11,768 | (2,977) | (25.3)% |
| Total sales | 404,693 | 342,680 | 62,013 | 18.1% |
| Cost of sales | 299,137 | 255,962 | 43,175 | 16.9% |
| Gross profit | 105,556 | 86,718 | 18,838 | 21.7% |
| Gross profit as a % of sales | 26.1% | 25.3% |  |  |
| Operating expenses: |  |  |  |  |
| Selling, general and administrative (“SG&A”) | 42,102 | 38,195 | 3,907 | 10.2% |
| SG&A as a % of sales | 10.4% | 11.1% |  |  |
| Research, development and engineering (“RD&E”) | 14,539 | 16,123 | (1,584) | (9.8)% |
| RD&E as a % of sales | 3.6% | 4.7% |  |  |
| Restructuring and other charges | 840 | 3,142 | (2,302) | (73.3)% |
| Total operating expenses | 57,481 | 57,460 | 21 | —% |
| Operating income | 48,075 | 29,258 | 18,817 | 64.3% |
| Operating expense as a % of sales | 14.2% | 16.8% |  |  |
| Operating income as a % of sales | 11.9% | 8.5% |  |  |
| Interest expense | 11,967 | 10,676 | 1,291 | 12.1% |
| Loss on equity investments | 3,451 | 2,887 | 564 | 19.5% |
| Other (gain) loss, net | 580 | (1,300) | 1,880 | (144.6)% |
| Income before taxes | 32,077 | 16,995 | 15,082 | 88.7% |
| Provision for income taxes | 4,820 | 938 | 3,882 | 413.9% |
| Effective tax rate | 15.0% | 5.5% |  |  |
| Net income | $27,257 | $16,057 | $11,200 | 69.8% |
| Net income as a % of sales | 6.7% | 4.7% |  |  |
| Diluted earnings per share | $0.81 | $0.48 | $0.33 | 68.8% |

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### MANAGEMENT'S DISCUSSION AND ANALYSIS

| Medical Sales: | Nine Months Ended September 29, 2023 | September 30, 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cardio & Vascular | $613,700 | $513,772 | $99,928 | 19.4% |
| Cardiac Rhythm Management & Neuromodulation | 457,771 | 389,900 | 67,871 | 17.4% |
| Advanced Surgical, Orthopedics & Portable Medical | 77,808 | 69,101 | 8,707 | 12.6% |
| Total Medical Sales | 1,149,279 | 972,773 | 176,506 | 18.1% |
| **Non-Medical** | 34,243 | 30,900 | 3,343 | 10.8% |
| Total Sales | 1,183,522 | 1,003,673 | 179,849 | 17.9% |
| Cost of sales | 875,489 | 742,583 | 132,906 | 17.9% |
| Gross profit | 308,033 | 261,090 | 46,943 | 18.0% |
| Gross profit as a % of sales | 26.0% | 26.0% |  |  |
| Operating expenses: |  |  |  |  |
| SG&A | 129,815 | 119,541 | 10,274 | 8.6% |
| SG&A as a % of sales | 11.0% | 11.9% |  |  |
| RD&E | 50,514 | 47,077 | 3,437 | 7.3% |
| RD&E as a % of sales | 4.3% | 4.7% |  |  |
| Restructuring and other charges | 3,887 | 10,010 | (6,123) | (61.2)% |
| Total operating expenses | 184,216 | 176,628 | 7,588 | 4.3% |
| Operating income | 123,817 | 84,462 | 39,355 | 46.6% |
| Operating expense as a % of sales | 15.6% | 17.6% |  |  |
| Operating income as a % of sales | 10.5% | 8.4% |  |  |
| Interest expense | 40,680 | 24,417 | 16,263 | 66.6% |
| Loss on equity investments | 3,472 | 5,611 | (2,139) | (38.1)% |
| Other (gain) loss, net | 1,699 | (932) | 2,631 | (282.3)% |
| Income before taxes | 77,966 | 55,366 | 22,600 | 40.8% |
| Provision for income taxes | 13,673 | 7,106 | 6,567 | 92.4% |
| Effective tax rate | 17.5% | 12.8% |  |  |
| Net income | $64,293 | $48,260 | $16,033 | 33.2% |
| Net income as a % of sales | 5.4% | 4.8% |  |  |
| Diluted earnings per share | $1.91 | $1.45 | $0.46 | 31.7% |

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### Product Line Sales

For the third quarter and first nine months of 2023, Cardio & Vascular (“C&V”) sales increased $39.9 million, or 23%, and $99.9 million, or 19%, respectively, versus the comparable 2022 periods. The increase in C&V sales for the third quarter and first nine months of 2023 was driven by continued strong demand across all markets, growth in key products such as guidewires, new product ramps in electrophysiology and structural heart, and supply chain improvements. Foreign currency exchange rate fluctuations increased C&V sales for the third quarter and first nine months of 2023 by $1.1 million and $0.8 million, in comparison to the 2022 periods, primarily due to U.S. dollar fluctuations relative to the Euro.

For the third quarter and first nine months of 2023, Cardiac Rhythm Management & Neuromodulation (“CRM&N”) sales increased $28.6 million, or 22%, and $67.9 million, or 17%, respectively, versus the comparable 2022 periods, with double-digit growth in both CRM and Neuromodulation, driven by strong demand, including double-digit growth from emerging customers with PMA products, and supply chain improvements. Foreign currency exchange rate fluctuations did not have a material impact on CRM&N sales during the third quarter and first nine months of 2023 in comparison to 2022.

Advanced Surgical, Orthopedic & Portable Medical (“AS&O”) sales for the third quarter and first nine months of 2023 decreased $3.5 million, or 13%, and increased $8.7 million or 13%, respectively, versus the comparable 2022 periods, driven by execution of the planned multi-year Portable Medical exit announced in 2022 and a decline in Advanced Surgical and Orthopedics. Foreign currency exchange rate fluctuations did not have a material impact on AS&O sales during the third quarter and first nine months of 2023 in comparison to the 2022 periods.

For the third quarter and first nine months of 2023, Non-Medical sales decreased $3.0 million, or 25%, and increased $3.3 million, or 11%, respectively, versus the comparable 2022 periods. The third quarter of 2023 sales reflect a return to the normal run-rate after higher sales in previous quarters from the supply chain recovery. Foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during the third quarter and first nine months of 2023 in comparison to the 2022 periods.

### Gross Profit

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Nine Months Ended September 29, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit (in thousands) | $105,556 | $86,718 | 308,033 | 261,090 |
| Gross margin | 26.1% | 25.3% | 26.0% | 26.0% |

Gross profit as a percent of sales (“Gross margin”) for the third quarter of 2023 increased 80 basis points compared to the third quarter last year and was flat when comparing the first nine months of 2023 to the comparable 2022 period. The improved quarter over quarter gross margin was primarily due to higher sales volume leverage and efficiency improvements from an improving supply chain environment.

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### SG&A Expenses

Changes to SG&A expenses from the prior year were due to the following (in thousands):

|  | Three Months Ended September 29, 2023 | September 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Compensation and benefits(a) | $21,178 | $19,766 | $1,412 |
| Amortization expense(b) | 9,275 | 8,299 | 976 |
| Professional fees(c) | 3,746 | 3,385 | 361 |
| Contract services(d) | 2,923 | 2,686 | 237 |
| Bank fees and charges(e) | 976 | 249 | 727 |
| All other SG&A | 4,004 | 3,810 | 194 |
| Net increase in SG&A expenses | $42,102 | $38,195 | $3,907 |

|  | Nine Months Ended September 29, 2023 | September 30, 2022 | Change |
| --- | ---: | ---: | ---: |
| Compensation and benefits(a) | $67,825 | $64,936 | $2,889 |
| Amortization expense(b) | 27,680 | 24,699 | 2,981 |
| Professional fees(c) | 11,075 | 9,652 | 1,423 |
| Contract services(d) | 8,607 | 7,285 | 1,322 |
| Bank fees and charges(e) | 2,167 | 652 | 1,515 |
| All other SG&A | 12,461 | 12,317 | 144 |
| Net increase in SG&A expenses | $129,815 | $119,541 | $10,274 |

(a) Compensation and benefits expense increased during the third quarter and first nine months of 2023. The increases were primarily due to annual merit increases and higher incentive compensation, partially offset by lower headcount.

(b) Amortization expense increased during the third quarter and first nine months of 2023 compared to the same periods of 2022 primarily due to increased amortization relating to our Aran and Oscor customer list intangible assets.

(c) Professional fees increased during the third quarter and first nine months of 2023 primarily due to increased costs associated with third-party information technology services.

(d) Contract services expense increased during the third quarter and first nine months of 2023 compared to the same periods of 2022 primarily due to higher software costs from information technology enhancements.

(e) The increase in bank fees and charges during the third quarter and first nine months of 2023 was driven by increased factoring and supplier financing fees primarily due to the launch of accounts receivable factoring arrangements during the first nine months of of 2023.

### RD&E

RD&E expense for the third quarter and first nine months of 2023 was $14.5 million and $50.5 million, respectively, compared to $16.1 million and $47.1 million, respectively, for the third quarter and first nine months of 2022. The decrease in RD&E expense during the third quarter of 2023 compared to the same period in 2022, was primarily due to the timing of RD&E associates supporting product development contracts with customers. The increase in RD&E expense during first nine months of 2023 compared to the same period in 2022, was primarily due to higher labor costs attributed to annual merit increases and higher incentive compensation. 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. In addition, from time to time, we incur 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 29, 2023 | September 30, 2022 | Nine Months Ended September 29, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Restructuring charges(a) | $35 | $1,919 | $2,035 | $3,017 |
| Acquisition and integration costs(b) | 777 | 597 | 1,715 | 5,866 |
| Other general expenses(c) | 28 | 626 | 137 | 1,127 |
| Total restructuring and other charges | $840 | $3,142 | $3,887 | $10,010 |

(a) Restructuring charges for the first nine months of 2023 and 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 first nine months of 2023 and 2022 include a benefit of $0.5 million and $0.3 million, respectively, to adjust the fair value of acquisition-related contingent consideration liabilities. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration. Amounts for 2022 primarily include expenses related to the Aran and Oscor acquisitions.

(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 29, 2023 Amount Rate | September 30, 2022 Amount Rate | Change Amount Rate (bp) |
| --- | ---: | ---: | ---: |
| Contractual interest expense | $10,939 4.42% | $10,102 4.24% | $837 18 |
| Gain on interest rate swap | — — | (4) — | 4 — |
| Amortization of deferred debt issuance costs and original issue discount | 921 0.45 | 482 0.23 | 439 22 |
| Losses from extinguishment of debt | 87 0.04 | — — | 87 4 |
| Interest expense on borrowings | 11,947 4.91% | 10,580 4.47% | 1,367 44 |
| Other interest expense | 20 | 96 | (76) |
| Total interest expense | $11,967 | $10,676 | $1,291 |
|  | **Nine Months Ended** |  |  |
|  | **September 29, 2023** | **September 30, 2022** | **Change** |
|  | **Amount** **Rate** | **Amount** **Rate** | **Amount** **Rate (bp)** |
| Contractual interest expense | $34,560 4.60% | $21,428 3.09% | $13,132 151 |
| (Gain) loss on interest rate swap | (1,262) (0.16) | 1,289 0.19 | (2,551) (35) |
| Amortization of deferred debt issuance costs and original issue discount | 2,608 0.41 | 1,445 0.23 | 1,163 18 |
| Losses from extinguishment of debt | 4,518 0.62 | — — | 4,518 62 |
| Interest expense on borrowings | 40,424 5.47% | 24,162 3.51% | 16,262 196 |
| Other interest expense | 256 | 255 | 1 |
| Total interest expense | $40,680 | $24,417 | $16,263 |

During 2023, 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 incremental borrowings related to the strategic change to replace some of our variable rate debt to fixed rate through issuance of the 2028 Notes. Interest rates have continued to climb due to increases in overall market rates, partially offset by a 25 basis point decrease in the interest rate margin on our Senior Secured Credit Facilities. The decrease in the interest rate margin was effective during the second quarter of 2023 based on our Secured Net Leverage Ratio.

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. Our outstanding interest rate swap matured as of June 30, 2023. Amortization of deferred debt issuance costs and original issue discount increased during 2023 compared to the same periods in 2022 as a result of higher unamortized balances related to new debt. The losses from extinguishment of debt during the first nine months of 2023 were related to prepayments of portions of the Term Loan A facility and full repayment of our Term Loan B facility in connection with issuance of the convertible notes. We had no losses from extinguishment of debt during the first nine months of 2022.

As of September 29, 2023 and December 31, 2022, approximately 52% and 11%, respectively, of our principal amount of debt are fixed rate borrowings or have been converted to fixed-rate borrowings with an interest rate swap. During February 2023, we strategically replaced about half of our variable rate debt with fixed rate debt through the issuance of the 2028 Notes at a fixed rate of 2.125% and paying down our highest rate variable debt, the Term Loan B facility, and a portion of our Revolving Credit Facility. These transactions are expected to mitigate increased borrowing costs and result in a more balanced mix of fixed and floating rates to help protect against interest rate exposure. We may enter into interest rate swap agreements in order to reduce our exposure to fluctuations in floating rates.

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See Note 6 “Debt” and 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 debt and interest rate swap agreement.

### Loss on Equity Investments

During the third quarter and first nine months of 2023, we recognized a loss on equity investments of $3.5 million. During the third quarter and first nine months of 2022, we recognized losses of $2.9 million and $5.6 million, respectively. During the third quarter of 2023, we recognized an impairment charge of $3.3 million related to an investment in one of our non-marketable equity securities. The residual amounts for 2023 and 2022 relate to our share of equity method investee losses including unrealized appreciation/depreciation of the underlying interests of the investee. As of September 29, 2023 and December 31, 2022, the carrying value of our equity investments was $10.4 million and $13.9 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 2023 were losses of $0.6 million and $1.7 million, respectively, compared to gains of $1.3 million and $0.9 million, respectively, for the third quarter and first nine months of 2022. 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 2023 were net losses of $0.5 million and $1.7 million, respectively, compared to gains of $1.6 million and $1.1 million for the third quarter and first nine months of 2022, respectively. We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. However, fluctuations in exchange rates could have a significant impact, positive or negative, on our financial results in the future.

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### Provision for Income Taxes

We recognized income tax expense of $4.8 million for the third quarter of 2023 on $32.1 million of income before taxes (effective tax rate of 15.0%), compared to an income tax expense of $0.9 million on $17.0 million of income before taxes (effective tax rate of 5.5%) for the same period of 2022. The income tax expense for the first nine months of 2023 was $13.7 million on $78.0 million of income before taxes (effective tax rate of 17.5%), compared to income tax expense of $7.1 million on income before taxes of $55.4 million (effective tax rate of 12.8%) for the same period of 2022. Income tax expense for the third quarter and first nine months of 2023 included discrete tax benefits of $0.8 million and $0.4 million, respectively. The discrete tax benefits for the third quarter and first nine months of 2023 are predominately related to favorable return to provision adjustments attributable to the 2022 U.S. tax return. The remainder of the discrete tax amounts relate predominately to excess tax benefits recognized upon vesting of RSUs during those periods partially offset by tax expense from shortfalls recorded for the forfeiture of certain PRSUs, as well as unfavorable return to provision adjustments attributable to certain foreign tax returns for the 2022 tax year. 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 the third quarter and the first nine months of 2022 predominately relates to favorable return to provision adjustments attributable to the 2021 tax year.

Our effective tax rate for 2023 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of Federal Tax Credits (including R&D credits and Foreign tax credits), stock-based compensation windfalls or shortfalls, and the impact of U.S taxes on foreign earnings, including the GILTI provision which requires us to include foreign subsidiary earnings in excess of a deemed return on a foreign subsidiary’s tangible assets in our U.S. income tax return. The U.S. tax on foreign earnings is reflected net of a statutory deduction of 50% of the GILTI inclusion (subject to limitations based on U.S. taxable income, if any) and net of FDII that provides a 37.5% deduction to domestic companies for certain foreign sales and services income. In addition, our rate is impacted by earnings realized in foreign jurisdictions with statutory rates that are different than the U.S. federal statutory rate. The primary foreign jurisdictions in which we operate and the statutory tax rate for each respective jurisdiction include Switzerland (22%), Mexico (30%), Uruguay (25%), Ireland (12.5%) and Malaysia (24%). We had been operating under a tax holiday in Malaysia, however this expired in April 2023. We acquired manufacturing operations in the Dominican Republic as part of the acquisition of Oscor, and are operating under a free trade zone agreement in the Dominican Republic through March 2034.

There is a potential for volatility of our effective tax rate due to several factors, including changes in the mix of pre-tax income and the jurisdictions to which it relates, business acquisitions, settlements with taxing authorities, changes in tax rates, and foreign currency exchange rate fluctuations. We continue to closely monitor developments related to proposed changes in tax laws and tax rates. We are currently assessing the potential impact of The Pillar II Model Rules and the corresponding 15% Global Minimum Tax in anticipation of the January 1, 2024 effective date for jurisdictions that have already enacted laws complying with the Pillar II framework. In addition, we continue to explore planning opportunities that may have a material impact on our effective tax rate.

### Liquidity and Capital Resources

### Sources of Liquidity

*(dollars in thousands)*

|  | September 29, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $32,142 | $24,272 |
| Working capital | $406,243 | $334,546 |
| Current ratio | 3.00 | 2.50 |

Cash and cash equivalents at September 29, 2023 increased by $7.9 million from December 31, 2022, primarily as a result of cash generated by operating activities, which includes the benefit of accelerated customer collections from new factoring arrangements, partially offset by purchases of property, plant and equipment and net payments on long-term debt and contingent consideration.

Working capital increased by $71.7 million from December 31, 2022, or $63.8 million excluding the increase in cash and cash equivalents. The increase in working capital, exclusive of cash and cash equivalents, primarily relates to positive working capital fluctuations in inventory, contract assets and current portion of long-term debt. Inventory increased to support higher product demand and sales volume and current portion of long-term debt decreased from accelerated payments under our Senior Secured Credit Facility.

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At September 29, 2023, $26.8 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.

As of September 29, 2023, our capital structure consisted of $941.4 million of debt, net of deferred debt issuance costs and unamortized discounts and 33 million shares of common stock outstanding. As of September 29, 2023, we had access to $415.3 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 29, 2023, our contractual debt service obligations for the remainder of 2023, consisting of interest on our outstanding debt, are estimated to be approximately $8 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.

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. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all.

### Credit Facilities and Convertible Notes

As of September 29, 2023, we had Senior Secured Credit Facilities that consist of a $500 million Revolving Credit Facility, with an outstanding principal balance of $81 million, and a TLA Facility with an outstanding principal balance of $375 million. The Revolving Credit Facility and TLA Facility mature on February 15, 2028. The Senior Secured Credit Facilities include a mandatory prepayment provision customary for credit facilities of its nature.

During the first quarter of 2023, we issued $500 million aggregate principal amount of notes. The 2028 Notes mature on February 15, 2028 and bear interest at a fixed rate of 2.125% per annum. The total net proceeds from the issuance of the 2028 Notes, after deducting initial purchasers' discounts and commissions and debt issuance costs, were approximately $485 million. We used the net proceeds from the issuance of the 2028 Notes to settle in full principal and interest due of $336.1 million under the TLB Facility, pay down principal and interest due of $113.9 million under the Revolving Credit Facility, to pay related fees and expenses, and to pay the cost of the capped calls related to the issuance of our 2028 Notes.

The Revolving Credit Facility and TLA Facility contain covenants requiring that we maintain (i) a Total Net Leverage Ratio not to exceed 5.00:1.00, 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 29, 2023, we were in compliance with these financial covenants. As of September 29, 2023, our Total Net Leverage Ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.7:1.0. For the twelve month period ended September 29, 2023, our interest coverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 7.7:1.0.

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.

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### Summary of Cash Flow

*(in thousands)*

| Cash provided by (used in): | Nine Months Ended September 29, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Operating activities | $124,626 | $64,779 |
| Investing activities | (82,785) | (169,098) |
| Financing activities | (35,537) | 106,412 |
| Effect of foreign currency exchange rates on cash and cash equivalents | 1,566 | 209 |
| Net change in cash and cash equivalents | $7,870 | $2,302 |

***Operating Activities –*** During the first nine months of 2023, we generated cash from operations of $124.6 million, compared to $64.8 million for the first nine months of 2022. The increase of $59.8 million was the result of a $39.2 million increase in cash flow provided by changes in operating assets and liabilities and a $20.6 million increase in net income adjusted for non-cash items such as depreciation and amortization.

The increase in net income adjusted for non-cash items such as depreciation and amortization is primarily from higher sales volume partially offset by higher interest expense. The increase associated with changes in operating assets and liabilities is primarily related to less accounts receivable, inventory and accounts payable growth. Accounts receivable benefited from new factoring arrangements entered into during the first nine months of 2023 that accelerated accounts receivable collections. Factoring activity on accounts receivable provided an increase of approximately $30 million in cash generated from operating activities during the first nine months of 2023. Inventory growth was high in the first nine months of 2022 from investments to support growth and protect against supply chain risk, while accounts payable yielded less benefit to cash flow in the first nine months of 2023 from the timing of supplier payments and lower inventory growth.

***Investing Activities –*** The $86.3 million decrease in net cash used in investing activities was primarily attributable to lower cash paid for acquisitions, partially offset by increased purchases of property, plant and equipment of $82.9 million in the first nine months of 2023, compared to $43.1 million in the same period last year. Investing activities for the second quarter of 2022 included net cash paid of $126.6 million for the Aran acquisition and settlement of working capital and other closing adjustments with Oscor.

***Financing Activities –*** Net cash used in financing activities for the first nine months of 2023, was $35.5 million compared to net cash provided by financing activities of $106.4 million for the first nine months of 2022. The cash used in financing activities for the first nine months of 2023 was primarily related to the $335.6 million full repayment of our term loan B facility, $80.3 million in repayments of our term loan A facility, $59.4 million of net payments on our Revolving Credit Facility, $35.0 million of capped call purchases related to the issuance of our 2028 Notes, and $7.7 million paid to settle certain contingent consideration liabilities related to the Aran and Inomec acquisitions, which was partially offset by the issuance of our 2028 Notes of $486.3 million. The net cash inflow for 2022 included $160.0 million in borrowings on the revolving line of credit primarily to fund the Aran acquisition.

### 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.

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### 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, 2022.

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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, 2022.

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 29, 2023. 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 29, 2023, 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, 171 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, 2022.

Filed Oct 26, 2023.
Source: SEC EDGAR, the filing index for accession 0001114483-23-000031. Last ingested by Listed: Nov 11, 2026, 00:08 ET. No prices; not investment advice.