# Integer Holdings Corp (ITGR) FY 2022 MD&A Verbatim Item 7 Management's Discussion and Analysis from Integer Holdings Corp's 10-K for fiscal year 2022. SEC filing source: https://www.sec.gov/Archives/edgar/data/1114483/000111448323000003/gb-20221231.htm Accession: 0001114483-23-000003 Filing date: 2023-02-21 Report date: 2022-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/ITGR/ All MD&A years: /company/ITGR/mda/ Previous year: /company/ITGR/mda/fy2021/ (FY 2021) Next year: /company/ITGR/mda/fy2023/ (FY 2023) ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Item 1A of this report. Unless otherwise stated, all results and comparisons below represent results from continuing operations. Our Business •Our business •Impact of global events •Business acquisitions •Product line sales realignment •Discontinued operations •Financial overview Our Financial Results •Fiscal 2022 compared with fiscal 2021 •Liquidity and capital resources •Cash and other commitments •Impact of recently issued accounting standards Critical Accounting Estimates •Inventories •Acquisition method of accounting •Valuation of goodwill and intangible assets Our Business Integer Holdings Corporation is one of the largest MDO manufacturers in the world serving the cardiac rhythm management, neuromodulation, orthopedics, vascular and advanced surgical 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 principle 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 18, “Segment and Geographic Information,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. Impact of Global Events Global economic challenges, including the impact of the war in Ukraine, the COVID-19 pandemic, severe and sustained inflation, a rising interest rate environment, fluctuations in global currencies, and supply chain disruptions 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, restrictions on associates’ ability to travel or work, and delays in shipments to and from certain countries. We monitor economic conditions closely. In response to reductions in revenue, we can take actions to align our cost structure with changes in demand and manage our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions and other developments. - 29 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS 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. On December 1, 2021, we acquired 100% of the equity interests of Oscor Inc., Oscor Caribe, LLC and Oscor Europe GmbH (collectively “Oscor”), privately-held companies with operations in Florida, the Dominican Republic and Germany that design, develop, manufacture and market a comprehensive portfolio of highly specialized medical devices, venous access systems and diagnostic catheters and implantable devices. Refer to Note 2, “Business Acquisitions,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about the acquisition of Aran and Oscor. Product Line Sales Realignment We have communicated to certain customers our intent to exit certain markets we serve in the Advanced Surgical, Orthopedics & Portable Medical product line. We are working closely with these customers to support the transition of these products to other suppliers. Due to quality and regulatory requirements, we expect it will take three to four years to complete this transition and see the corresponding decline in sales. In order to align with the planned exit of those markets and better align with our end markets and product line strategies, product line sales within the Medical segment have been recast to reflect the reclassification of certain products from the historical product lines to the product lines associated with those revenues that will be utilized for future revenue reporting. We believe the revised presentation will provide improved reporting and better transparency into the operational results of our business and markets. Prior period amounts have been reclassified to conform to the new product line sales reporting presentation. For the years ended December 31, 2021 and 2020, Cardio & Vascular sales of $32.9 million and $31.7 million, respectively, and Advanced Surgical, Orthopedics & Portable Medical sales of $22.8 million and $20.5 million, respectively, were reclassified to the Cardiac Rhythm Management & Neuromodulation product line. Discontinued Operations In July 2018, we completed the sale of the AS&O Product Line within our Medical segment. For all periods presented, financial results reported as discontinued operations relate to the divested AS&O Product Line. All results and information presented exclude the AS&O Product Line unless otherwise noted. During 2022, we recognized income from discontinued operations of $1.0 million or $0.03 per diluted share. During 2021, we recognized income from discontinued operations of $3.8 million or $0.11 per diluted share. There was no income from discontinued operations during 2020. Refer to Note 20, “Discontinued Operations,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information. - 30 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Financial Overview Fiscal 2022 Compared with Fiscal 2021 Income from continuing operations for 2022 was $65.4 million or $1.96 per diluted share compared to $93.0 million or $2.80 per diluted share for 2021. These variances are primarily the result of the following: •Sales for 2022 increased 13% to $1.376 billion primarily from the Oscor acquisition and continued product demand recovery from the impacts of the COVID-19 pandemic. •Gross profit for 2022 increased $22.0 million or 7%, primarily from higher sales volume, partially offset by increased cost of sales resulting from labor and supply constraints. •Operating expenses for 2022 increased by $36.4 million compared to 2021, due to higher labor costs and restructuring and other charges. •Interest expense for 2022 increased by $7.0 million, due to higher interest rates and average debt outstanding. •We recognized net losses on equity investments of $7.6 million and $3.1 million during 2022 and 2021, respectively. Gains and losses on equity investments are generally unpredictable in nature. •Other (income) loss, net for 2022 and 2021 was income of $0.9 million and $0.1 million, respectively, primarily due to fluctuations in foreign currency gains and losses in the respective periods. •We recorded provisions for income taxes of $10.6 million and $8.0 million for 2022 and 2021, respectively. The changes in income tax were primarily due to relative changes in pre-tax income and the impact of discrete tax items. Fiscal 2021 Compared with Fiscal 2020 Income from continuing operations for 2021 was $93.0 million or $2.80 per diluted share compared to $77.3 million or $2.33 per diluted share for 2020. These variances are primarily the result of the following: •Sales for 2021 increased 14% to $1.221 billion as we began to see our sales return to pre-pandemic levels as the demand for many of our products continued to recover from the impacts of the COVID-19 pandemic. •Gross profit for 2021 increased $51.3 million or 18%, primarily from higher sales volume and production efficiencies. •Operating expenses for 2021 increased by $36.2 million compared to 2020, primarily due to increases of $32.4 million in SG&A expenses and $3.5 million in RD&E expenses. Included in SG&A expenses for 2020 is a net gain of $28.2 million recognized in connection with a patent litigation judgment. Refer to Note 13, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information on the patent litigation judgment. •Interest expense for 2021 decreased by $6.6 million primarily due to lower interest rates and lower average outstanding debt balances. •We recognized a net loss on equity investments of $3.1 million in 2021, compared to a net gain on equity investments of $5.3 million during 2020. Gains and losses on equity investments are generally unpredictable in nature. •Other (income) loss, net for 2021 was income of $0.1 million compared to a loss of $1.5 million during 2020, primarily due to fluctuations in foreign currency gains and losses in the respective periods. •We recorded provisions for income taxes of $8.0 million and $8.9 million for 2021 and 2020, respectively. The changes in income tax were primarily due to relative changes in pre-tax income and the impact of discrete tax items. - 31 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Our Financial Results The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 8 of this report, for the periods presented (dollars in thousands, except per share amounts): [[GREPCENT_TABLE]] [["","","","Change","","Change"],["","","","","","","","2022 vs. 2021","","2021 vs. 2020"],["","2022","","2021","","2020","","$","","%","","$","","%"],["Medical Sales:"],["Cardio & Vascular","$","699,469","","","$","593,117","","","$","538,240","","","$","106,352","","","18","%","","$","54,877","","","10","%"],["Cardiac Rhythm Management & Neuromodulation","532,580","","","502,288","","","398,409","","","30,292","","","6","%","","103,879","","","26","%"],["Advanced Surgical, Orthopedics & Portable Medical","97,502","","","87,221","","","101,329","","","10,281","","","12","%","","(14,108)","","","(14)","%"],["Total Medical Sales","1,329,551","","","1,182,626","","","1,037,978","","","146,925","","","12","%","","144,648","","","14","%"],["Non-Medical","46,545","","","38,453","","","35,464","","","8,092","","","21","%","","2,989","","","8","%"],["Total sales","1,376,096","","","1,221,079","","","1,073,442","","","155,017","","","13","%","","147,637","","","14","%"],["Cost of sales","1,017,090","","","884,109","","","787,735","","","132,981","","","15","%","","96,374","","","12","%"],["Gross profit","359,006","","","336,970","","","285,707","","","22,036","","","7","%","","51,263","","","18","%"],["Gross profit as a % of sales","26.1","%","","27.6","%","","26.6","%"],["Operating expenses:"],["Selling, general and administrative","160,578","","","141,418","","","109,006","","","19,160","","","14","%","","32,412","","","30","%"],["Research, development and engineering","60,918","","","51,985","","","48,468","","","8,933","","","17","%","","3,517","","","7","%"],["Restructuring and other charges","16,183","","","7,856","","","7,621","","","8,327","","","106","%","","235","","","3","%"],["Total operating expenses","237,679","","","201,259","","","165,095","","","36,420","","","18","%","","36,164","","","22","%"],["Operating income","121,327","","","135,711","","","120,612","","","(14,384)","","","(11)","%","","15,099","","","13","%"],["Interest expense","38,632","","","31,628","","","38,220","","","7,004","","","22","%","","(6,592)","","","(17)","%"],["(Gain) loss on equity investments, net","7,636","","","3,143","","","(5,337)","","","4,493","","","143","%","","8,480","","","(159)","%"],["Other (income) loss, net","(899)","","","(123)","","","1,522","","","(776)","","","NM","","(1,645)","","","NM"],["Income from continuing operations before income taxes","75,958","","","101,063","","","86,207","","","(25,105)","","","(25)","%","","14,856","","","17","%"],["Provision for income taxes","10,608","","","8,043","","","8,949","","","2,565","","","32","%","","(906)","","","(10)","%"],["Effective tax rate","14.0","%","","8.0","%","","10.4","%"],["Income from continuing operations","$","65,350","","","$","93,020","","","$","77,258","","","$","(27,670)","","","(30)","%","","$","15,762","","","20","%"],["Diluted earnings per share from continuing operations","$","1.96","","","$","2.80","","","$","2.33","","","$","(0.84)","","","(30)","%","","$","0.47","","","20","%"]] [[/GREPCENT_TABLE]] NM - Calculated change not meaningful. - 32 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Fiscal 2022 Compared with Fiscal 2021 The following discussion is a comparison between results for the years ended December 31, 2022 and 2021. For a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which was filed with the SEC on February 22, 2022. Sales Sales by product line for 2022 and 2021 were as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","","","Change"],["","2022","","2021","","$","","%"],["Medical Sales:"],["Cardio & Vascular","$","699,469","","","$","593,117","","","$","106,352","","","17.9","%"],["Cardiac Rhythm Management & Neuromodulation","532,580","","","502,288","","","30,292","","","6.0","%"],["Advanced Surgical, Orthopedics & Portable Medical","97,502","","","87,221","","","10,281","","","11.8","%"],["Total Medical Sales","1,329,551","","","1,182,626","","","146,925","","","12.4","%"],["Non-Medical","46,545","","","38,453","","","8,092","","","21.0","%"],["Total sales","$","1,376,096","","","$","1,221,079","","","$","155,017","","","12.7","%"]] [[/GREPCENT_TABLE]] Total 2022 sales increased 13% to $1.376 billion in comparison to 2021. The most significant drivers of this decrease were as follows: Cardio & Vascular (“C&V”) sales for 2022 increased $106.4 million or 18% in comparison to 2021. C&V sales for 2022 reflect strong customer demand, as well as sales from the Oscor and Aran acquisitions. Foreign currency exchange rate fluctuations lowered C&V sales for 2022 by $6.3 million. C&V sales for 2022 include Aran (since the date of acquisition) and Oscor sales totaling $52.1 million. C&V sales for 2021 include Oscor sales since the date of acquisition of $2.9 million. Cardiac Rhythm Management & Neuromodulation (“CRM&N”) sales for 2022 increased $30.3 million or 6% in comparison to 2021. CRM&N sales for 2022 were driven by the Oscor acquisition, with mid-single digit growth in both cardiac rhythm management and neuromodulation. Foreign currency exchange rate fluctuations lowered CRM&N sales for 2022 by $0.1 million. CRM&N sales for 2022 include Oscor sales totaling $41.7 million. CRM&N sales for 2021 include Oscor sales since the date of acquisition of $1.8 million. Advanced Surgical, Orthopedics & Portable Medical (“AS&O”) sales for 2022 increased by $10.3 million in comparison to 2021, primarily due to higher demand to support the start of the multi-year Portable Medical exit announced earlier this year. Foreign currency exchange rate fluctuations lowered AS&O sales for 2022 by $0.1 million. Non-Medical sales for 2022 increased $8.1 million or 21% in comparison to 2021. The sales increase reflects energy market growth and strong demand in military and environmental markets. Foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during 2022 in comparison to 2021. Gross Profit [[GREPCENT_TABLE]] [["","2022","","2021"],["Gross profit (in thousands)","$","359,006","","","$","336,970"],["Gross margin","26.1","%","","27.6","%"]] [[/GREPCENT_TABLE]] Gross margin for 2022 decreased 150 basis points compared to 2021, primarily driven by incremental labor and supply chain costs related to increased wages, freight and manufacturing inefficiencies from supply chain disruptions. - 33 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS SG&A Expenses SG&A expenses comprise the following for 2022 and 2021 (in thousands): [[GREPCENT_TABLE]] [["","2022","","2021","","Change"],["Compensation and benefits(a)","$","85,876","","","$","77,208","","","$","8,668"],["Amortization expense(b)","33,136","","","28,507","","","4,629"],["Professional fees(c)","14,003","","","13,040","","","963"],["Contract services(d)","10,165","","","8,218","","","1,947"],["Travel and entertainment(e)","1,690","","","505","","","1,185"],["All other SG&A(f)","15,708","","","13,940","","","1,768"],["Total SG&A expense","$","160,578","","","$","141,418","","","$","19,160"]] [[/GREPCENT_TABLE]] __________ (a)Compensation and benefits increased primarily due to an increase in headcount from the acquisitions of Aran and Oscor. (b)Amortization expense increased due to amortization of intangible assets from the Aran and Oscor acquisitions. (c)Professional fees increased primarily due to inclusion of the operations of Aran and Oscor for all or part of 2022. (d)Contract services expense increased primarily due to higher software costs from information technology enhancements. (e)The increases in travel and entertainment expense was due to a modest return to travel as travel restrictions originally implemented in response to the COVID-19 pandemic ease. (f)The net increase in all other SG&A for 2022 compared to 2021 is primarily attributable to higher rent and insurance from the Aran and Oscor acquisitions. RD&E RD&E expenses for 2022 and 2021 were $60.9 million and $52.0 million, respectively. The increase in RD&E expenses for 2022 compared to 2021 was primarily due to investments made to support long-term revenue growth, the timing of program milestone achievements for customer funded programs, and incremental expense due to the Aran and Oscor Acquisitions. RD&E expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations. - 34 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Restructuring and Other Charges We continuously evaluate our business and identify opportunities to realign resources to better serve our customers and markets, improve operational efficiency and capabilities, and lower operating costs. To realize the benefits associated with these opportunities, we undertake restructuring-type activities to transform our business. We incur costs associated with these activities, which primarily include exit and disposal costs and other costs directly related to the restructuring initiative. Restructuring charges include exit and disposal costs from these activities and restructuring-related charges are costs directly related to the restructuring initiatives. In addition, from time to time, we incur costs associated with acquiring and integrating businesses, and certain other general expenses, including asset impairments. Restructuring and other charges comprise the following for 2022 and 2021 (in thousands): [[GREPCENT_TABLE]] [["","2022","","2021","","Change"],["Restructuring charges(a)","4,920","","","4,804","","","116"],["Acquisition and integration costs(b)","10,075","","","2,544","","","7,531"],["Other general expenses(c)","1,188","","","508","","","680"],["Total restructuring and other charges","$","16,183","","","$","7,856","","","$","8,327"]] [[/GREPCENT_TABLE]] __________ (a)Restructuring charges for 2022 and 2021 primarily consist of termination benefits associated with our operational excellence and strategic reorganization and alignment initiatives. (b)Amounts for 2022 primarily include expenses related to the Aran and Oscor acquisitions. Amounts for 2021 primarily include expenses related to the Oscor acquisition. The 2022 and 2021 amounts also include $3.1 million and $0.1 million, respectively, of net expense related to adjustments to increase the fair value of acquisition-related contingent consideration liabilities. See Note 17, “Financial Instruments and Fair Value Measurements,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information related to the fair value measurement of the contingent consideration. (c)Amounts include expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to reduce future costs and improve efficiencies. Refer to Note 11, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding these initiatives. - 35 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Interest Expense Information relating to our interest expense for 2022 and 2021 is as follows (dollars in thousands): [[GREPCENT_TABLE]] [["","2022","","2021","","Change"],["","Amount","","Rate","","Amount","","Rate","","Amount","","Rate (bp)"],["Contractual interest expense","$","35,282","","","3.80","%","","$","21,042","","","2.99","%","","$","14,240","","","81"],["Loss on interest rate swap","918","","","0.10","","","3,406","","","0.48","","","(2,488)","","","(38)"],["Amortization of deferred debt issuance costs and original issue discount","1,922","","","0.23","","","3,251","","","0.50","","","(1,329)","","","(27)"],["Loss from extinguishment of debt","114","","","0.01","","","3,774","","","0.54","","","(3,660)","","","(53)"],["Interest expense on borrowings","38,236","","","4.14","%","","31,473","","","4.51","%","","6,763","","","(37)"],["Other interest expense","396","","","","","155","","","","","241"],["Total interest expense","$","38,632","","","","","$","31,628","","","","","$","7,004"]] [[/GREPCENT_TABLE]] Interest expense relates primarily to borrowings made under our Senior Secured Credit Facilities, which consist of a five-year $400 million revolving credit facility (the “Revolving Credit Facility”), a five-year “term A” loan (the “TLA Facility”), and a seven-year “term B” loan (the “TLB Facility”). During 2022, contractual interest expense increased due to higher average debt outstanding combined with increasing applicable interest rates. The higher average debt balance outstanding is the result of borrowings to fund the Oscor and Aran acquisitions, while interest rates have continued to climb due to increases in LIBOR which were partially offset by beneficial changes in our Senior Secured Credit Facilities agreement. During the third and fourth quarters of 2021 we entered into and subsequently amended a new Senior Secured Credit Facilities agreement, which among other changes, lowered the interest rate spreads on our Revolving Credit Facility and TLA Facility by 75 basis points and the LIBOR floor on our TLB facility by 50 basis points. Other components of interest expense on borrowings include gains and losses on interest rate swaps and non-cash amortization and write-off (losses from extinguishment of debt) of deferred debt issuance costs and original issue discount. Interest rate swap includes realized (gains) losses on our interest rate swap contract which fluctuate depending on the spread between the rate swap contract fixed rate and TLA Facility floating rate. Compared to the same periods in 2021, amortization of deferred debt issuance costs and original issue discount decreased as a result of the extended maturity under the new Senior Secured Credit Facilities. The losses from extinguishment of debt during 2022 and 2021 were related to prepayments of portions of the Term Loan B facility. 2021 also included a write-off of $3.3 million of deferred issuance costs and unamortized discount in connection with the refinancing of our credit facilities in September 2021. See Note 8, “Debt,” of the Notes to the Consolidated Financial Statements contained in Item 8 of this report for additional information pertaining to our debt. As of December 31, 2022 and 2021, approximately 11% and 18%, respectively, of our principal amount of debt outstanding has been effectively converted to fixed-rate borrowings through the use of an interest rate swap.  We enter into interest rate swap agreements to reduce our exposure to fluctuations in the LIBOR rate. See Note 17, “Financial Instruments and Fair Value Measurements,” of the Notes to the Consolidated Financial Statements contained in Item 8 of this report for additional information pertaining to our interest rate swap agreement. (Gain) Loss on Equity Investments, Net During 2022 and 2021, we recognized net losses of $7.6 million and $3.1 million, respectively, on our equity investments. Gains and losses on equity investments are generally unpredictable in nature. During 2021, we recognized impairment charges of $0.1 million related to investments in our non-marketable equity securities. The residual losses for 2022 and 2021 relate to our share of equity method investee gains/losses, including unrealized appreciation and depreciation of the underlying interests of the investee. As of December 31, 2022 and December 31, 2021, the carrying value of our equity investments was $13.9 million and $21.8 million, respectively. See Note 17, “Financial Instruments and Fair Value Measurements,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for further details regarding these investments. - 36 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Other (Income) Loss, Net Other (income) loss, net during 2022 and 2021 was income of $0.9 million and $0.1 million, respectively. Other (income) 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 foreign currency exchange rates on transactions denominated in foreign currencies included in Other (income) loss, net for 2022 and 2021 were net gains of $1.1 million and $0.1 million, respectively. We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. However, fluctuations in foreign currency exchange rates could have a significant impact, positive or negative, on our financial results in the future. Provision for Income Taxes During 2022 and 2021, our provision for income taxes was $10.6 million on worldwide pre-tax income of $76.0 million (effective tax rate of 14.0%) and $8.0 million on worldwide pre-tax income of $101.1 million (effective tax rate of 8.0%), respectively. The stand-alone U.S. component of the effective tax rate for 2022 reflected a $4.9 million provision on $14.4 million of pre-tax book income (effective tax rate of 34.2%) versus a $2.0 million provision on $48.3 million of pre-tax book income (effective tax rate of 4.0%) for 2021. The stand-alone International component of the effective tax rate for 2022 reflected a $5.6 million provision on $61.5 million of pre-tax book income (effective tax rate of 9.2%) versus a $6.0 million provision on $52.8 million of pre-tax book income (effective tax rate of 11.4%) for 2021. The provision for income taxes for 2022 differs from the U.S. statutory rate due to the following (dollars in thousands): [[GREPCENT_TABLE]] [["","U.S.","","International","","Combined"],["","$","","%","","$","","%","","$","","%"],["Income before provision for income taxes","$","14,446","","","","","$","61,512","","","","","$","75,958"],["Provision at statutory rate","$","3,034","","","21.0","%","","$","12,917","","","21.0","%","","$","15,951","","","21.0","%"],["Federal tax credits (including R&D)","(9,399)","","","(65.2)","","","\u2014","","","\u2014","","","(9,399)","","","(12.4)"],["Foreign rate differential","1,459","","","10.1","","","(9,152)","","","(14.9)","","","(7,693)","","","(10.1)"],["Stock-based compensation","2,009","","","13.9","","","\u2014","","","\u2014","","","2,009","","","2.6"],["Uncertain tax positions","2,469","","","17.1","","","\u2014","","","\u2014","","","2,469","","","3.3"],["State taxes, net of federal benefit","978","","","6.8","","","\u2014","","","\u2014","","","978","","","1.3"],["U.S. tax on foreign earnings, net of \u00a7250 deduction","5,225","","","36.2","","","\u2014","","","\u2014","","","5,225","","","6.9"],["Valuation allowance","(888)","","","(6.1)","","","694","","","1.1","","","(194)","","","(0.3)"],["Other","61","","","0.4","","","1,201","","","2.0","","","1,262","","","1.7"],["Provision for income taxes","$","4,948","","","34.2","%","","$","5,660","","","9.2","%","","$","10,608","","","14.0","%"]] [[/GREPCENT_TABLE]] - 37 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS The provision for income taxes for 2021 differs from the U.S. statutory rate due to the following (dollars in thousands): [[GREPCENT_TABLE]] [["","U.S.","","International","","Combined"],["","$","","%","","$","","%","","$","","%"],["Income before provision for income taxes","$","48,293","","","","","$","52,770","","","","","$","101,063"],["Provision at statutory rate","$","10,141","","","21.0","%","","$","11,082","","","21.0","%","","$","21,223","","","21.0","%"],["Federal tax credits (including R&D)","(11,929)","","","(24.8)","","","\u2014","","","\u2014","","","(11,929)","","","(11.8)"],["Foreign rate differential","1,366","","","2.8","","","(6,531)","","","(12.4)","","","(5,165)","","","(5.1)"],["Stock-based compensation","(1,084)","","","(2.2)","","","\u2014","","","\u2014","","","(1,084)","","","(1.1)"],["Uncertain tax positions","18","","","\u2014","","","\u2014","","","\u2014","","","18","","","\u2014"],["State taxes, net of federal benefit","1,183","","","2.4","","","\u2014","","","\u2014","","","1,183","","","1.2"],["U.S. tax on foreign earnings, net of \u00a7250 deduction","1,913","","","4.0","","","\u2014","","","\u2014","","","1,913","","","1.9"],["Valuation allowance","\u2014","","","\u2014","","","524","","","1.0","","","524","","","0.5"],["Other","398","","","0.8","","","962","","","1.8","","","1,360","","","1.4"],["Provision for income taxes","$","2,006","","","4.0","%","","$","6,037","","","11.4","%","","$","8,043","","","8.0","%"]] [[/GREPCENT_TABLE]] Our effective tax rate of 14.0% for 2022 is higher than our effective tax rate of 8.0% for 2021, primarily due to the unfavorable impact of stock-based compensation in 2022 and the non-recurring favorable impact in 2021 of a release of Uncertain Tax Positions relating to the tax years 2017 and 2018 as the Internal Revenue Service (“IRS”) effectively concluded its examination of those years during 2021. Our effective tax rate for 2022 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, and the impact of earnings realized in foreign jurisdictions with statutory rates that are different than the U.S. federal statutory rate. These benefits are partially offset by 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. 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 currently have a tax holiday in Malaysia through April 2023, provided certain conditions continue to be met. In addition, we acquired manufacturing operations in the Dominican Republic as part of the 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. In addition, we continue to explore tax planning opportunities that may have a material impact on our effective tax rate. It is reasonably possible that a reduction of approximately $1.8 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of December 31, 2022, approximately $7.7 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized. - 38 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Liquidity and Capital Resources [[GREPCENT_TABLE]] [["(dollars in thousands)","December 31, 2022","","December 31, 2021"],["Cash and cash equivalents","$","24,272","","","$","17,885"],["Working capital","$","334,546","","","$","293,353"],["Current ratio","2.50","","","2.84"]] [[/GREPCENT_TABLE]] Cash and cash equivalents at December 31, 2022 increased by $6.4 million from December 31, 2021, primarily as a result of cash generated by operating activities, partially offset by purchases of property, plant and equipment and debt principal payments. In addition, the acquisition of Aran resulted in a net cash disbursement of $129.3 million, which was funded by proceeds from borrowing under our Revolving Credit Facility. Working capital increased by $41.2 million from December 31, 2021, primarily from positive working capital fluctuations associated with accounts receivable and inventory aggregating to $95.1 million, which were partially offset by increases in accounts payable and accrued expenses and other current liabilities. During 2022, accounts receivable increased mainly from an increase in sales volume and inventory increased to support higher product demand, sales volume and material stock levels to protect availability of critical components. Accounts payable increased mainly from higher sequential inventory purchases and the timing of supplier payments, while accrued expenses and other current liabilities increased mainly from accrued contingent consideration associated with the acquisition of Aran. At December 31, 2022, $20.4 million of our cash and cash equivalents were held by foreign subsidiaries. We intend to limit our distributions from foreign subsidiaries to previously taxed income or current period earnings. If distributions are made utilizing current period earnings, we will record foreign withholding taxes in the period of the distribution. Summary of Cash Flow The following cash flow summary information includes cash flows related to discontinued operations (in thousands): [[GREPCENT_TABLE]] [["","2022","","2021"],["Cash provided by (used in):"],["Operating activities","$","116,381","","","$","156,666"],["Investing activities","(200,421)","","","(270,998)"],["Financing activities","92,476","","","81,986"],["Effect of foreign currency exchange rates on cash and cash equivalents","(2,049)","","","1,025"],["Net change in cash and cash equivalents","$","6,387","","","$","(31,321)"]] [[/GREPCENT_TABLE]] Operating Activities - During 2022, we generated cash from operations of $116.4 million, compared to $156.7 million in 2021. The decrease of $40.3 million was the result of decreases of $12.2 million in net income adjusted for non-cash items such as depreciation and amortization and $28.1 million in cash flow provided by changes in operating assets and liabilities. The decrease in net income adjusted for non-cash items such as depreciation and amortization is from higher compensation and benefit costs, restructuring charges, acquisition and integration expenses, and interest expense partially offset by higher sales volume. The decrease associated with changes in operating assets and liabilities is primarily related to higher sales volume and inventory growth in the current period partially offset by increases from the prior period payment of Coronavirus Aid, Relief, and Economic Security Act deferred social security taxes and timing of income tax payments. Investing Activities – The $70.6 million decrease in net cash used in investing activities was primarily attributable to a decrease in net cash paid for business acquisitions $91.3 million and increased purchases of property, plant, and equipment of $21.3 million. Financing Activities – Net cash provided by financing activities during 2022 was $92.5 million compared to $82.0 million in 2021. Financing activities during 2022 and 2021 each included net borrowings of $95.8 million. The net cash inflow for 2022 included $166.0 million in borrowings on our Revolving Credit Facility primarily to fund the Aran acquisition. The net cash inflow for 2021 included $220.0 million in borrowings to fund the Oscor acquisition. We paid $8.1 million of debt issuance costs in connection with the refinancing of our Senior Secured Credit Facilities in 2021. - 39 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Capital Structure - As of December 31, 2022, our capital structure consists of $925.3 million of debt, net of deferred debt issuance costs and unamortized discounts, outstanding under our Senior Secured Credit Facilities and 33 million shares of common stock outstanding. We have access to $256.2 million of borrowing capacity under our Revolving Credit Facility, available for normal course of business and letters of credit. We are also authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of December 31, 2022, our contractual debt service obligations for 2023, consisting of principal and interest on our outstanding debt, are estimated to be approximately $78 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. Refer to Note 21, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Item 8 of this report for information regarding the January 30, 2023 and February 15, 2023 amendments to the 2021 Credit Agreement, the January 31, 2023 Capped Call Transactions and the February 3, 2023 Convertible Notes offering. Credit Facilities - Our 2021 Credit Agreement permits borrowings and other extensions of credit in an initial aggregate principal amount of up to $1 billion (as may be increased from time to time in accordance with the terms). The 2021 Credit Agreement governs our Senior Secured Credit Facilities, which consist of a five-year $400 million Revolving Credit Facility, which had available borrowing capacity of $256.2 million as of December 31, 2022, a five-year TLA Facility with outstanding principal balance of $455 million, and a seven-year TLB Facility with outstanding principal balance of $336 million. The Revolving Credit and TLA Facilities mature on September 2, 2026. The TLB Facility matures on September 2, 2028. Our off-balance sheet commitments related to our outstanding letters of credit as of December 31, 2022 were $3.5 million. The 2021 Credit Agreement contains customary terms and conditions, including representations and warranties and affirmative and negative covenants, as well as financial covenants for the benefit of the lenders under the Revolving Credit Facility and the TLA Facility, which require that we maintain (i) a total net leverage ratio not to exceed 5.50:1.00 (stepping down to 5.00:1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following qualified acquisitions, but not to exceed 5.50:1.00) and (ii) an interest coverage ratio of at least 2.50:1.00. As of December 31, 2022, we were in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants. As of December 31, 2022, our total net leverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.9 to 1.0. For the twelve month period ended December 31, 2022, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 8.7 to 1.0. Failure to comply with these financial covenants would result in an event of default as defined under the Revolving Credit Facility and TLA Facility unless waived by the lenders. An event of default may result in the acceleration of our indebtedness. As a result, management believes that compliance with these covenants is material to us. Refer to Note 8, “Debt,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for further description of our outstanding debt. Refer to Note 21, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Item 8 of this report for information regarding the January 30, 2023 and February 15, 2023 amendments to the 2021 Credit Agreement, the January 31, 2023 Capped Call Transactions and the February 3, 2023 Convertible Notes offering. - 40 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS Cash and Other Commitments We have material cash requirements to pay third parties under various contractual obligations discussed below. Presented below is a summary of contractual obligations and other minimum commitments as of December 31, 2022. Refer to Note 13, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding self-insurance liabilities, which are not reflected in the table below. [[GREPCENT_TABLE]] [["","Payments due by period"],["","Total","","Less than 1 year","","1-3 years","","3-5 years","","More than 5 years"],["Principal amount of debt outstanding(a)","$","931,238","","","$","18,188","","","$","68,687","","","$","526,238","","","$","318,125"],["Interest on debt(a)","258,296","","","59,794","","","114,631","","","67,492","","","16,379"],["Operating lease obligations(b)","85,773","","","13,033","","","24,112","","","19,602","","","29,026"],["Finance lease obligations(b)","10,801","","","1,402","","","2,710","","","1,537","","","5,152"]] [[/GREPCENT_TABLE]] __________ (a)Interest payments in the table above reflect the contractual interest payments on our outstanding debt based upon the balance outstanding and applicable interest rates at December 31, 2022, and exclude the impact of the debt issuance cost and discount amortization and the impact of interest rate swap agreements. Refer to Note 8, “Debt,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding long-term debt. Refer to Note 21, “Subsequent Events,” of the Notes to Consolidated Financial Statements in Item 8 of this report for information regarding the January 30, 2023 and February 15, 2023 amendments to the 2021 Credit Agreement, the January 31, 2023 Capped Call Transactions and the February 3, 2023 Convertible Notes offering. (b)Refer to Note 14, “Leases,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about our operating and finance lease obligations. Capital expenditures, which are net of proceeds from the sale of property, plant and equipment, for 2022 totaled $74.1 million, compared to $53.0 million and $46.8 million in 2021 and 2020, respectively. Capital expenditures in 2022 related primarily to upgrades of manufacturing facilities and information technology. We expect 2023 capital expenditures to approximate $100 million to $120 million, with a significant portion related to additional upgrades of manufacturing facilities and information technology, as well as for manufacturing equipment to support productivity initiatives. We have recorded liabilities for unrecognized tax benefits that, because of their nature, have a high degree of uncertainty regarding the timing of future cash payment and other events that extinguish these liabilities. Refer to Note 12, “Income Taxes,” of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information about these unrecognized tax benefits. Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents and availability under our Revolving Credit Facility are sufficient to meet our working capital, debt service and capital expenditure requirements for at least the next twelve months. However, such cash flows are dependent upon our future operating performance which, in turn, is subject to prevailing economic conditions, the effects of the COVID-19 pandemic, and to financial, business and other factors, including the conditions of our markets, some of which are beyond our control. If our future financing needs increase, we may need to arrange additional debt or equity financing. We continually evaluate and consider various financing alternatives to enhance or supplement our existing financial resources, including our Senior Secured Credit Facilities. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all. Impact of Recently Issued Accounting Standards In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations. - 41 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING ESTIMATES Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements. We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions have had or are reasonably likely to have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. Inventories Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality. Historically, our inventory adjustment has been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our net income. Acquisition Method of Accounting We account for business combinations using the acquisition method of accounting. We recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the date of acquisition. Any excess purchase price over the fair value of net assets acquired is recorded to goodwill. Determining the fair value of these items requires management’s judgment and more often than not the utilization of independent valuation specialists. The judgments made in the determination of the estimated fair values assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. For more information on our acquisitions and application of the acquisition method, see Note 2, “Business Acquisitions,”of the Notes to Consolidated Financial Statements contained in Item 8 of this report. Valuation of Goodwill and Intangible Assets We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our intangible and other long-lived assets. Goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis on the last day of our fiscal year and whenever events or business conditions change that could indicate that the asset is impaired. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable. Evaluation of goodwill for impairment We test each reporting unit’s goodwill for impairment on the last day of our fiscal year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. In conducting this annual impairment testing, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value. If not, no further goodwill impairment testing is required. If it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit. - 42 - Table of Contents MANAGEMENT’S DISCUSSION AND ANALYSIS We performed a qualitative assessment of our Medical reporting unit as of December 31, 2022. As part of this analysis, we evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall financial performance of the reporting unit. The assessment indicated that it was more likely than not that the fair value of the Medical reporting unit exceeded its carrying value.  We elected to bypass the qualitative assessment and performed a quantitative analysis for our Non-Medical reporting unit. Resulting from the quantitative analysis, the fair value exceeded the carrying value of the Non-Medical reporting unit by approximately 148%. We do not believe that any of our reporting units are at risk for impairment. However, changes to the factors considered above could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We may be unaware of one or more significant factors that, if we had been aware of, would cause our conclusion to change, which could result in a goodwill impairment charge in a future period. Evaluation of indefinite-lived intangible assets for impairment Our indefinite-lived intangible assets include the Greatbatch Medical and Lake Region Medical tradenames. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets on the last day of our fiscal year, unless events occur that trigger the need for an interim impairment review. We have the option to first assess qualitative factors in determining whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value. Fair value is estimated using the relief-from-royalty method. Significant assumptions inherent in this methodology include estimates of royalty rates and discount rates. The discount rate applied is based on the risk inherent in the respective intangible assets and royalty rates are based on the rates at which comparable tradenames are being licensed in the marketplace. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets. We performed a quantitative assessment to test our indefinite-lived intangible assets for impairment as of December 31, 2022. For the Greatbatch Medical tradename, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value) was in excess of its carrying value of $20 million by approximately 294% as of December 31, 2022. The Lake Region Medical tradename had an excess of the estimated fair value over carrying value of approximately 77% and a carrying value of $70 million at December 31, 2022. We do not believe that our indefinite-lived intangible assets are at risk for impairment. However, a significant increase in the discount rate, decrease in the terminal growth rate, increase in tax rates, decrease in the royalty rate or substantial reductions in our end-markets and volume assumptions could have a negative impact on the estimated fair values of either of our tradenames and require us to recognize impairments of these indefinite-lived intangible assets in a future period. Evaluation of long-lived assets for impairment When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) or definite-lived intangible asset(s) including, but not limited to, PP&E and right-of-use lease assets, exceeds the related undiscounted future cash flows. In cases where the carrying value exceeds the undiscounted future cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life. Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment. Events could occur that would materially affect our estimates and assumptions. Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives. - 43 - Table of Contents