Integer Holdings Corp: Form 10-Q for the period ended Sep 27, 2024

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, 2023. In addition, please read this section in conjunction with our Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contained herein.

Cautionary Note Regarding Forward-Looking Statements

Some statements contained in this report 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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. 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, but are not limited to, statements relating to:

• future development and expected growth of our business and industry;
• our ability to execute our business model and our business strategy;
• having available sufficient cash and borrowing capacity to meet working capital, debt service and capital expenditure requirements for the next twelve months;
• our ability to refinance amounts that may become due upon a request for conversion of the 2028 Convertible Notes;
• the timing for the consummation of the sale of the Electrochem business; and
• projected contractual debt service obligations.

You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “forecast,” “outlook,” “assume,” “potential” or “continue” or variations or the negative counterparts of these terms or other comparable terminology. These statements are only predictions and are not guarantees of future performance, and investors should not place undue reliance on forward-looking statements as predictive of future results. 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 report.

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 our dependence upon a limited number of customers; pricing pressures and contractual pricing restraints we face from customers; our reliance on third-party suppliers for raw materials, key products and subcomponents; interruptions in our manufacturing operations; our ability to attract, train and retain a sufficient number of qualified associates to maintain and grow our business; the potential for harm to our reputation and competitive advantage caused by quality problems related to our products; our dependence upon our information technology systems and our ability to prevent cyber-attacks and other failures; global climate change and the emphasis on Environmental, Social and Governance matters by various stakeholders; our dependence upon our senior management team and key technical personnel; our energy market revenues’ dependence on conditions in the historically volatile oil and natural gas industries; and consolidation in the healthcare industry resulting in greater competition;
• 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 and indebtedness risks, such as our ability to accurately forecast future performance based on operating results that often fluctuate; our significant amount of outstanding indebtedness and our ability to remain in compliance with financial and other covenants under the credit agreement governing our Senior Secured Credit Facilities; economic and credit market uncertainties that could interrupt our access to capital markets, borrowings or financial transactions; the conditional conversion feature of the 2028 Convertible Notes adversely impacting our liquidity, the conversion of our 2028 Convertible Notes, if it were to occur, diluting ownership interests of existing holders of our common stock; the counterparty risk associated with our capped call transaction; the counter 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;
• 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 to comply with customer-driven policies and third-party standards or certification requirements; our ability to obtain and/or retain necessary licenses from third parties for new technologies; our ability and the cost to comply with environmental regulations; legal and regulatory risks from our international operations; the fact that the healthcare industry is highly regulated and subject to various regulatory changes; and our business being indirectly subject to healthcare industry cost containment measures that could result in reduced sales of our products; and
• other risks and uncertainties that arise from time to time.

Except as may be required by applicable law, we disclaim any 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 contract development and manufacturing organizations in the world, serving the cardiac rhythm management, neuromodulation, and cardio and vascular markets. As a strategic partner of choice to medical device companies and OEMs, we are committed to enhancing the lives of patients worldwide by providing innovative, high-quality products and solutions.

The third quarter and first nine months of 2024 ended on September 27, 2024 and consisted of 91 days and 271 days, respectively. The third quarter and first nine months of 2023 ended on September 29, 2023 and consisted of 91 days and 272 days, respectively.

Divestiture and Discontinued Operations

On September 27, 2024, we entered into a stock purchase agreement with Ultralife Corporation (“Ultralife”), pursuant to which we agreed to sell 100% of the issued and outstanding shares of common stock of Electrochem Solutions, Inc. (“Electrochem”) for $50 million in cash, subject to customary working capital adjustments. The consummation of the sale is expected to occur by the end of October 2024.

The Electrochem business represented substantially all of the assets and operations in our previously reported Non-Medical reporting segment The pending divestiture of Electrochem represents a strategic shift in our business. Consequently, the Electrochem business has been reclassified as a discontinued operation. For all periods presented, the assets and liabilities that will be transferred in the Electrochem divestiture (the “disposal group”) are presented as held for sale in our Condensed Consolidated Balance Sheets (unaudited), and operating results related to the Electrochem business are reflected as discontinued operations in our Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited).

Prior period amounts have been reclassified to conform to the continuing operations reporting presentation. All results and information presented exclude the Electrochem business unless otherwise noted specifically as discontinued operations.

Refer to Note 3, “Discontinued Operations” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for more information regarding the presentation of the disposal group in our financial statements.

The divestiture of Electrochem also represents a sale of the Non-Medical segment as the Electrochem business constituted substantially all of the assets and liabilities and operations reported in the Non-Medical segment. Under the new organizational and reporting structure, the Company has one reportable segment. Consequently, segment reporting previously disclosed is no longer applicable.

Impact of Global Events

Global economic challenges, including the impact of military conflicts, severe and sustained inflation, 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 January 5, 2024, we acquired 100% of the outstanding capital stock of Pulse Technologies, Inc. (“Pulse”), a technology, engineering and contract manufacturing company focused on complex micro machining of medical device components for high growth structural heart, heart pump, electrophysiology, leadless pacing, and neuromodulation markets. Pulse also provides proprietary advanced technologies, including hierarchical surface restructuring (HSRTM), scratch-free surface finishes, and titanium nitride coatings. Consistent with our tuck-in acquisition strategy, the acquisition of Pulse further increases our end-to-end development capabilities and manufacturing footprint in targeted growth markets and provides customers with expanded capabilities, capacity and resources to accelerate the time to market for customer products.

Effective as of October 1, 2023, we acquired substantially all of the assets and assumed certain liabilities of InNeuroCo, Inc. (“InNeuroCo”), 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 acquisition strategy, the acquisition of InNeuroCo further increases our ability to provide enhanced solutions to our customers in the neurovascular catheter space.

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.

Financial Overview

Income from continuing operations for the third quarter and first nine months of 2024 was $36.3 million, or $1.01 per diluted share, and $88.1 million, or $2.49 per diluted share, respectively, compared to $28.2 million, or $0.83 per diluted share, and $62.3 million, or $1.85 per diluted share for the third quarter and first nine months of 2023, respectively. These variances are primarily the result of the following:

• Sales for the third quarter and first nine months of 2024 increased $34.6 million and $115.9 million, respectively, when compared to the same periods in 2023, driven by strong demand, new product ramps, growth from emerging customers with PMA (premarket approval) products and contributions from our recent acquisitions.
• Gross profit for the third quarter and first nine months of 2024 increased $11.6 million and $41.9 million, respectively, primarily from higher sales volume leverage, efficiencies gained from the continued improvement in the supply chain and contributions from our recent acquisitions.
• Operating expenses for the third quarter and first nine months of 2024 increased $2.3 million and $10.5 million, respectively, when compared to the same periods in 2023, due to higher SG&A and Restructuring and other charges, partially offset by lower RD&E costs.
• Interest expense for the third quarter and first nine months of 2024 increased $3.1 million and $3.9 million, respectively, compared to the same periods in 2023, primarily due to higher average debt outstanding, partially offset by a decrease in losses from extinguishment of debt.
• During the third quarter and first nine months of 2024, we recognized gains on equity investments of $0.9 million and $2.0 million, respectively, compared to losses of $3.5 million for the third quarter and first nine months of 2023. Gains and losses on equity investments are generally unpredictable in nature.
• Other loss, net for the third quarter and first nine months of 2024 were net losses of $0.9 million and $1.8 million, respectively, compared to net losses of $0.6 million and $1.7 million, respectively, for the third quarter and first nine months of 2023, 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 2024 of $7.1 million and $20.2 million, respectively, compared with provisions for income taxes of $5.1 million and $13.1 million, respectively, for the third quarter and first nine months of 2023. The changes in income tax expense were primarily due to relative changes in pre-tax income and the impact of discrete tax items.

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).

NM - Calculated change not meaningful.

MANAGEMENT'S DISCUSSION AND ANALYSIS

NM - Calculated change not meaningful.

Product Line Sales

For the third quarter and first nine months of 2024, Cardio & Vascular (“C&V”) sales increased $27.0 million, or 13%, and $80.6 million, or 13%, respectively, versus the comparable 2023 periods. The increase in C&V sales was driven by new product ramps in electrophysiology and structural heart, and the InNeuroCo and Pulse acquisitions. C&V sales for the third quarter and first nine months of 2024 included $13.5 million and $40.3 million, respectively, of sales from the recent Pulse and InNeuroCo acquisitions. Foreign currency exchange rate fluctuations did not have a material impact on C&V sales during the third quarter and first nine months of 2024 in comparison to 2023.

For the third quarter and first nine months of 2024, Cardiac Rhythm Management & Neuromodulation (“CRM&N”) sales increased $5.0 million, or 3%, and $30.4 million, or 7%, respectively, versus the comparable 2023 periods, driven by strong growth in emerging neuromodulation customers with PMA (premarket approval) products, and the Pulse acquisition. Foreign currency exchange rate fluctuations did not have a material impact on CRM&N sales during the third quarter and first nine months of 2024 in comparison to 2023.

Advanced Surgical, Orthopedic & Portable Medical (“AS&O”) sales for the third quarter and first nine months of 2024 increased $2.6 million, or 12%, and $4.9 million, or 6%, respectively, versus the comparable 2023 periods, primarily driven by fulfillment timing of last-time-buy orders related to the planned multi-year Portable Medical exit announced in 2022. Foreign currency exchange rate fluctuations did not have a material impact on AS&O sales during the third quarter and first nine months of 2024 in comparison to the 2023 periods.

Gross Profit

Gross margin for the third quarter and first nine months of 2024 increased 50 basis points and 90 basis points, respectively, compared to the comparable 2023 periods, primarily driven by higher sales volume leverage and efficiencies realized through our manufacturing excellence initiatives.

SG&A Expenses

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

(a) Compensation and benefits increased primarily due to annual merit increases and an increase in headcount related to the recent Pulse and InNeuroCo acquisitions.

(b) The changes in depreciation and amortization expense for the three and nine month periods were due to the mix and timing of depreciation and amortization of certain property, plant and equipment and intangible assets.

(c) Professional fees increased primarily due to higher legal expense related to general corporate matters.

(d) Contract services expense increased primarily due to higher software costs from information technology enhancements.

(e) The increase in bank fees and charges during the first nine months of 2024 was driven by increased accounts receivable factoring and supplier financing fees primarily due to the launch of accounts receivable factoring arrangements during 2023.

RD&E

RD&E expense for the third quarter and first nine months of 2024 was $11.9 million and $42.8 million, respectively, compared to $14.1 million and $48.9 million, respectively, for the third quarter and first nine months of 2023. The decreases in RD&E expense during the third quarter and first nine months of 2024 compared to the same periods in 2023 were primarily due to lower labor costs and the timing of program milestone achievements for customer funded programs. 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.

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. 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):

(a) Restructuring charges for the first nine months of 2024 and 2023 primarily consist of costs associated with our strategic reorganization and alignment and manufacturing alignment to support growth initiatives.

(b) Amounts for the first nine months of 2024 primarily include acquisition expenses related to the InNeuroCo and Pulse acquisitions. Amounts for the first nine months of 2023 primarily included integration expenses related to the Aran and Oscor acquisitions, partially offset by a benefit of $0.5 million to adjust the fair value of acquisition-related contingent consideration liabilities.

(c) Amounts include gains and losses in connection with the disposal of property, plant and equipment. In addition, during the second quarter of 2024 we recorded $1.2 million of loss recoveries relating to property damage which occurred in the fourth quarter of 2023 at one of our manufacturing facilities.

Refer to Note 9, “Restructuring and Other Charges” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these initiatives.

Interest Expense

Information relating to our interest expense is as follows (dollars in thousands):

During 2024, contractual interest expense has increased due to higher average debt balance outstanding. The higher average debt balance outstanding is primarily the result of borrowings on our Revolving Credit Facility to fund the Pulse and InNeuroCo acquisitions.

Other components of interest expense on borrowings include gains on an interest rate swap contract and non-cash amortization and write-off (losses from extinguishment of debt) of deferred debt issuance costs and original issue discount. Gain on interest rate swap includes realized gains on an interest rate swap contract which matured as of June 30, 2023. Amortization of deferred debt issuance costs and original issue discount increased during 2024 compared to the same periods in 2023 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 TLA Facility and full repayment of our seven-year “term B” loan (the “TLB Facility”) in connection with issuance of the 2028 Convertible Notes.

As of September 27, 2024 and December 31, 2023, approximately 46% and 51%, respectively, of our principal amount of debt are fixed rate borrowings.

See Note 7, “Debt,” of the Notes to the Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our debt.

(Gain) Loss on Equity Investments

(Gain) loss on equity investments for each period were as follows (in thousands):

Equity method investment (gain) loss for both periods in 2024 and 2023 relates to our share of equity method investee (gains) losses including unrealized appreciation/depreciation of the underlying interests of the investee. As of September 27, 2024 and December 31, 2023, the carrying value of our equity method investment was $10.1 million and $7.8 million, respectively.

During the third quarters of 2024 and 2023, we determined that, based upon available information, certain of our investments in non-marketable equity securities were impaired and determined the fair value to be zero. As a result, during the third quarters of 2024 and 2023 we recorded impairment charges of $0.3 million and $3.3 million, respectively. As of September 27, 2024 and December 31, 2023, the carrying value of our non-marketable equity securities was $0.2 million and $0.4 million, respectively.

See Note 14, “Financial Instruments and Fair Value Measurements” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for further details regarding these investments.

Other Loss, Net

Other loss, net for the third quarter and first nine months of 2024 were net losses of $0.9 million and $1.8 million, respectively, compared to net losses of $0.6 million and $1.7 million for the third quarter and first nine months of 2023, respectively. Other loss, net primarily includes gains/losses from the impact of exchange rates on transactions denominated in foreign currencies. Our foreign currency transaction gains/losses are based primarily on fluctuations of the U.S. dollar relative to the Euro, Mexican peso, Uruguayan peso, Malaysian ringgits or Dominican peso.

The impact of exchange rates on transactions denominated in foreign currencies included in Other loss, net for the third quarter and first nine months of 2024 were net losses of $0.8 million and $1.7 million, respectively, compared to losses of $0.5 million and $1.7 million for the third quarter and first nine months of 2023, 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.

Provision for Income Taxes

We recognized income tax expense of $7.1 million for the third quarter of 2024 on $43.4 million of income before taxes (effective tax rate of 16.4%), compared to an income tax expense of $5.1 million on $33.3 million of income before taxes (effective tax rate of 15.3%) for the same period of 2023. The income tax expense for the first nine months of 2024 was $20.2 million on $108.3 million of income before taxes (effective tax rate of 18.7%), compared to income tax expense of $13.1 million on income before taxes of $75.4 million (effective tax rate of 17.3%) for the same period of 2023. Income tax expense for the third quarter and first nine months of 2024 included discrete benefits of $1.6 million and $1.9 million, respectively. For the third quarter and first nine months of 2023, we recorded discrete tax expense of $0.8 million and $0.4 million, respectively.

Our effective tax rate for 2024 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 previously operated under a tax holiday in Malaysia. We met the conditions of the Malaysian tax holiday and the holiday expired in accordance with its original terms on April 30, 2023. Our manufacturing operations in the Dominican Republic operate under a free trade zone agreement through March 2034.

On December 15, 2022, the European Union (EU) Member States formally adopted the EU’s Pillar Two Directive, which generally provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Co-operation and Development (OECD) Pillar Two Framework. The effective dates are January 1, 2024 and January 1, 2025, for different aspects of the directive. A significant number of other countries are expected to also implement similar legislation with varying effective dates in the future. We continue to evaluate the potential impact on future periods of the Pillar Two Framework, pending legislative adoption by additional individual countries. Our 2024 provision for income taxes includes the impact of the Pillar Two 15% Global Minimum Tax, with an enactment date of January 1, 2024.

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. In addition, we continue to explore planning opportunities that may have a material impact on our effective tax rate.

Income (loss) from discontinued operations

For the third quarter and first nine months of 2024, we recognized losses from discontinued operations, net of income taxes, of $0.8 million and $0.9 million, respectively, compared to a loss of $0.9 million for the third quarter of 2023 and income of $2.0 million for the first nine months of 2023. Discontinued operations consists of the results of operations of the Electrochem business, the sale of which is expected to be completed by the end of October 2024.

Liquidity and Capital Resources

Sources of Liquidity

(dollars in thousands)

(a) Excludes current assets and liabilities held for sale at September 27, 2024 and December 31, 2023.

Cash and cash equivalents at September 27, 2024 increased by $11.9 million from December 31, 2023, primarily as a result of cash generated by operating activities and net borrowings on our Revolving Credit Facility, mostly offset by purchases of property, plant and equipment and cash paid to acquire Pulse.

Working capital from continuing operations increased by $75.2 million from December 31, 2023, or $63.3 million excluding the increase in cash and cash equivalents. The increase in working capital, exclusive of cash and cash equivalents, primarily relates to positive fluctuations in accounts receivable, inventory and contract assets. Inventory increased from higher sales volume and product demand which also contributed to the increase in contract assets and accounts receivable.

At September 27, 2024, $21.9 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 27, 2024, our capital structure consisted of $1.079 billion of debt, net of deferred debt issuance costs and unamortized discounts and 34 million shares of common stock outstanding. As of September 27, 2024, we had access to $580.5 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 27, 2024, our contractual debt service obligations for the next twelve months, consisting of principal and interest on our outstanding debt, are estimated to be approximately $54 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 2028 Convertible Notes

As of September 27, 2024, we had Senior Secured Credit Facilities that consist of an $800 million Revolving Credit Facility, with an outstanding principal balance of $216 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 similar credit facilities.

During the first quarter of 2023, we issued $500 million aggregate principal amount of 2028 Convertible Notes, which 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 Convertible 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 Convertible 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 Convertible Notes.

As of September 27, 2024, the conditions allowing holders of the 2028 Convertible Notes to convert had been met and, therefore, the 2028 Convertible Notes became eligible for conversion at the option of the holders beginning on July 1, 2024 and ending at the close of business on September 30, 2024. Subsequent to September 27, 2024, the sale price for conversion was satisfied as of September 30, 2024 and as a result, the Convertible Notes will continue to be eligible for optional conversion during the fourth quarter of 2024. Any determination regarding the convertibility of the 2028 Convertible Notes during future periods will be made in accordance with the terms of the indenture governing the 2028 Convertible Notes. If a conversion request occurs, we have the intent and ability to refinance the amounts that may become due with respect to the 2028 Convertible Notes using the available borrowing capacity under the Revolving Credit Facility. As such, these obligations with respect to the 2028 Convertible Notes continue to be classified as a long-term liability on the Condensed Consolidated Balance Sheet at September 27, 2024.

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 27, 2024, we were in compliance with these financial covenants. As of September 27, 2024, our Total Net Leverage Ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.6:1.0. For the twelve month period ended September 27, 2024, our interest coverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 7.8:1.0.

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 7, “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.

Factoring Arrangements

We utilize accounts receivable factoring arrangements with financial institutions to accelerate the timing of cash receipts and enhance our cash position. These arrangements, in all cases, do not contain recourse provisions, which would obligate us in the event of our customers’ failure to pay. During the first nine months of 2024, we sold, without recourse, $162.6 million of accounts receivable. We did not utilize receivable factoring arrangements prior to the second quarter of 2023. See Note 1, “Basis of Presentation” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for further information regarding our factoring arrangements.

Summary of Cash Flow

The following cash flow summary information includes cash flows related to discontinued operations.

(in thousands)

Operating Activities – During the first nine months of 2024, we generated cash from operations of $142.0 million, compared to $124.6 million for the first nine months of 2023. The increase of $17.3 million was the result of a $29.4 million increase in net income adjusted for non-cash items such as depreciation and amortization, partially offset by a $12.1 million decrease in cash flow provided by changes in operating assets and liabilities.

The increase in net income adjusted for non-cash items such as depreciation and amortization was primarily from higher sales volume and margin partially offset by higher acquisition costs due to the Pulse acquisition. The decrease associated with changes in operating assets and liabilities is primarily related to unfavorable cash flow impacts from accrued expenses. Accrued expenses included higher levels of profit sharing and bonus payments in the first nine months of 2024.

Investing Activities – The $142.2 million increase in net cash used in investing activities was primarily attributable to cash paid for an acquisition and increased purchases of property, plant and equipment. Investing activities for the first nine months of 2024 included net cash paid of $138.5 million for the Pulse acquisition.

Financing Activities – Net cash provided by financing activities for the first nine months of 2024 was $95.6 million compared to $35.5 million used in financing activities for the first nine months of 2023. Cash provided by financing activities for the first nine months of 2024 was primarily due to net borrowings on our Revolving Credit Facility of $117.0 million, primarily to fund the Pulse acquisition. The cash used in financing activities for the first nine months of 2023 was primarily related to the issuance of our 2028 Convertible Notes of $486.3 million, which was partially offset by $335.6 million in full repayment of our TLB Facility, $55.3 million in repayments on our TLA Facility, $59.4 million of net payments on our Revolving Credit Facility and $35.0 million of capped call purchases related to the issuance of our 2028 Convertible Notes.

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, 2023.

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, 2023.

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.

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 27, 2024. 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 27, 2024, 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.

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, 2023.