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Integer (ITGR) - 2022 Q4 - Annual Report
ITGRInteger (ITGR)2023-02-21 12:54
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Sales Performance - Total 2022 sales increased 13% to 1.376 billion, driven by strong customer demand and acquisitions[189] - Cardio & Vascular sales for 2022 increased 106.4 million or 18%, including 52.1 million from Aran and Oscor acquisitions[189] - Cardiac Rhythm Management & Neuromodulation sales for 2022 increased 30.3 million or 6%, with 41.7 million from Oscor[190] - Advanced Surgical, Orthopedics & Portable Medical sales for 2022 increased 10.3 million, primarily due to higher demand for Portable Medical exit[191] - Non-Medical sales for 2022 increased 8.1millionor218.1 million or 21%, reflecting growth in energy, military, and environmental markets[192] - Sales for 2022 were 1.38 billion, up from 1.22billionin2021,withgrossprofitrisingto1.22 billion in 2021, with gross profit rising to 359.0 million from 337.0million[286]AcquisitionsandIntegration−Thecompanyacquired100337.0 million[286] Acquisitions and Integration - The company acquired 100% of Aran Biomedical and Proxy Biomedical on April 6, 2022, enhancing its capabilities in medical textiles and biomaterials[177] - The company acquired 100% of Oscor Inc. and its subsidiaries on December 1, 2021, expanding its portfolio of specialized medical devices[178] - On April 6, 2022, the company acquired 100% of the equity interests of Connemara Biomedical Holdings Teoranta, including its operating subsidiaries Aran Biomedical and Proxy Biomedical[14] - On December 1, 2021, the company acquired 100% of the outstanding equity interests of Oscor Inc., Oscor Caribe, LLC, and Oscor Europe GmbH[15] - The company acquired Connemara Biomedical Holdings Teoranta on April 6, 2022, which constitutes 5% of total assets, 9% of net assets, and 1% of sales as of December 31, 2022[261] - The company completed the acquisition of Connemara Biomedical Holdings Teoranta for 141.3 million, including a customer lists intangible asset valued at 53.4million[280]−TheCompanyacquired10053.4 million[280] - The Company acquired 100% of Connemara Biomedical Holdings Teoranta (including Aran Biomedical and Proxy Biomedical) for 141.3 million, enhancing its capabilities in high-growth cardiovascular markets[372] - The total consideration for the Aran acquisition includes an initial cash payment of 133.9million(133.9 million (129.3 million net of cash acquired) and 7.4millioninestimatedfairvalueofcontingentconsideration[373]−ThepreliminaryfairvalueofnetassetsacquiredintheAranacquisitionis7.4 million in estimated fair value of contingent consideration[373] - The preliminary fair value of net assets acquired in the Aran acquisition is 141.3 million, including 68.5millioningoodwilland68.5 million in goodwill and 71.5 million in definite-lived intangible assets[375] Financial Performance - Gross profit for 2022 increased 22.0millionor722.0 million or 7%, driven by higher sales volume but offset by increased labor and supply costs[186] - Operating expenses for 2022 increased by 36.4 million, primarily due to higher labor costs and restructuring charges[186] - Income from continuing operations for 2022 decreased to 65.4millionor65.4 million or 1.96 per diluted share, down from 93.0millionor93.0 million or 2.80 per diluted share in 2021[184] - Gross profit for 2022 was 359.0million,adecreaseof150basispointsingrossmarginto26.1359.0 million, a decrease of 150 basis points in gross margin to 26.1% compared to 27.6% in 2021, primarily due to increased labor and supply chain costs[193] - Total SG&A expenses for 2022 increased to 160.6 million from 141.4 million in 2021, driven by higher compensation and benefits, amortization, and professional fees due to the Aran and Oscor acquisitions[194] - RD&E expenses for 2022 increased to 60.9 million from 52.0millionin2021,primarilyduetoinvestmentsinlong−termrevenuegrowthandtheAranandOscoracquisitions[195]−Restructuringandotherchargesfor2022totaled52.0 million in 2021, primarily due to investments in long-term revenue growth and the Aran and Oscor acquisitions[195] - Restructuring and other charges for 2022 totaled 16.2 million, up from 7.9millionin2021,primarilyduetoacquisitionandintegrationcostsrelatedtotheAranandOscoracquisitions[198]−Contractualinterestexpensefor2022increasedto7.9 million in 2021, primarily due to acquisition and integration costs related to the Aran and Oscor acquisitions[198] - Contractual interest expense for 2022 increased to 35.3 million from 21.0millionin2021,drivenbyhigheraveragedebtoutstandingandrisinginterestrates[201]−Totalinterestexpensefor2022was21.0 million in 2021, driven by higher average debt outstanding and rising interest rates[201] - Total interest expense for 2022 was 38.6 million, up from 31.6millionin2021,primarilyduetohigherdebtlevelsandinterestrates[200]−Thecompanyincurred31.6 million in 2021, primarily due to higher debt levels and interest rates[200] - The company incurred 10.1 million in acquisition and integration costs in 2022, compared to 2.5millionin2021,primarilyrelatedtotheAranandOscoracquisitions[198]−Compensationandbenefitsexpensesincreasedto2.5 million in 2021, primarily related to the Aran and Oscor acquisitions[198] - Compensation and benefits expenses increased to 85.9 million in 2022 from 77.2millionin2021,primarilyduetoincreasedheadcountfromtheAranandOscoracquisitions[194]−Professionalfeesincreasedto77.2 million in 2021, primarily due to increased headcount from the Aran and Oscor acquisitions[194] - Professional fees increased to 14.0 million in 2022 from 13.0millionin2021,primarilyduetotheinclusionofAranandOscoroperations[194]−Travelandentertainmentexpensesincreasedto13.0 million in 2021, primarily due to the inclusion of Aran and Oscor operations[194] - Travel and entertainment expenses increased to 1.7 million in 2022 from 0.5millionin2021,reflectingamodestreturntotravelasCOVID−19restrictionseased[194]−Netincomefor2022was0.5 million in 2021, reflecting a modest return to travel as COVID-19 restrictions eased[194] - Net income for 2022 was 66.4 million, down from 96.8millionin2021,withdilutedearningspershareat96.8 million in 2021, with diluted earnings per share at 1.99 compared to 2.91in2021[286]−Operatingincomefor2022was2.91 in 2021[286] - Operating income for 2022 was 121.3 million, down from 135.7millionin2021,primarilyduetohigheroperatingexpenses[286]−Thecompany′sretainedearningsgrewto135.7 million in 2021, primarily due to higher operating expenses[286] - The company's retained earnings grew to 680.7 million in 2022 from 614.3 million in 2021, reflecting continued profitability[284] Product Lines and Market Segments - The company's Cardio & Vascular product line produces components, subassemblies, and finished devices used in interventional cardiology, structural heart, heart failure, peripheral vascular, neurovascular, interventional oncology, electrophysiology, vascular access, infusion therapy, hemodialysis, urology, and gastroenterology procedures[19] - The company's Cardiac Rhythm Management & Neuromodulation product line offers design, development, and manufacturing capabilities for components, sub-assemblies, assemblies, and finished medical device systems[28] - The company's Neuromodulation market includes implantable spinal cord stimulators, sacral nerve stimulators, deep brain stimulators, and other IMDs to treat psychiatric disorders, sleep disorders, and hearing loss[31] - The Advanced Surgical, Orthopedics & Portable Medical (AS&O) product line specializes in Li-ion battery packs and chargers for medical devices, including ventilators, portable defibrillators, and X-Ray machines[33] - The company's Non-Medical segment provides customized battery solutions for extreme environments, including downhole drilling tools, military devices, and oceanographic buoys[37] Research and Development - The company's Medical segment is actively pursuing product development projects in structural heart delivery systems, electrophysiology catheters, and neurovascular therapies[55] - The company is developing next-generation medium-rate and high-rate batteries with extended performance, including higher power pulsing capabilities and increased operating temperature range[55] Operational and Strategic Risks - The company faces supply chain risks due to reliance on a limited number of suppliers for critical raw materials, with safety stocks and long-term contracts in place to mitigate disruptions[61][63][64] - Precious metal prices, such as platinum, are subject to market fluctuations, but the company uses pass-through pricing and firm agreements to minimize exposure[62] - The COVID-19 pandemic has negatively impacted the company's operating results and may continue to do so in the future, with uncertain duration and scope[100] - The company faces operational risks, including supply chain pressures, dependence on a limited number of customers, and reliance on third-party suppliers[98] - Strategic risks include intense competition, the need to respond to technological changes, and challenges in developing new products and expanding into new markets[98] - Financial risks include significant outstanding indebtedness and the need to comply with financial covenants under the Senior Secured Credit Facilities[98] - Legal and compliance risks include regulatory issues, product liability claims, and the need to protect intellectual property[98] Workforce and Human Capital - The company employs approximately 10,000 associates globally, with 48% of the workforce being women and 42% of the U.S. workforce being people of color as of December 31, 2022[77][85] - The company's workforce is distributed globally, with 43% in the U.S., 26% in Mexico, 17% in Ireland, and smaller percentages in other countries[80] - The company has implemented a "Talent Cycle" framework to develop leadership and ensure consistent execution of human capital strategies[78] - The company maintains a commitment to diversity and inclusion, with 100% of associates completing annual anti-harassment and non-discrimination training[82] Regulatory and Compliance - The company maintains ISO 13485 and ISO 9001 certifications across its facilities, ensuring compliance with international quality standards for medical devices and components[59][60] - The company's medical devices are subject to FDA regulations, including 510(k) pre-market notification or pre-market approval (PMA) processes for U.S. market authorization[68] - The company is transitioning to comply with the European Medical Device Regulation (EU-MDR), which became effective in May 2021 and requires full compliance by May 2024[70] - The company is subject to SEC and EU conflict mineral regulations, requiring due diligence on the sourcing of materials like tin, tantalum, tungsten, and gold[74] Financial Reporting and Controls - The company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[261] - The company's management is responsible for maintaining effective internal control over financial reporting, as assessed by an independent registered public accounting firm[266] - The company's audit of internal control over financial reporting was conducted in accordance with PCAOB standards, providing a reasonable basis for the opinion[267] Inventory and Asset Management - Inventories increased to 208.8 million in 2022 from 155.7millionin2021,withpotentialwrite−downsforexcess,obsolete,orexpiredinventorybasedondemandforecasts[276][284]−Totalassetsincreasedto155.7 million in 2021, with potential write-downs for excess, obsolete, or expired inventory based on demand forecasts[276][284] - Total assets increased to 2.79 billion in 2022 from 2.58billionin2021,withgoodwillrisingto2.58 billion in 2021, with goodwill rising to 982.2 million from 924.7million[284]−Thecompany′stotalliabilitiesroseto924.7 million[284] - The company's total liabilities rose to 1.38 billion in 2022 from 1.23billionin2021,drivenbyanincreaseinlong−termdebtto1.23 billion in 2021, driven by an increase in long-term debt to 907.1 million from 812.9million[284]RevenueRecognitionandAccountingPolicies−Revenueisrecognizedwhencontrolofproductsistransferredtocustomers,primarilybasedonshippingterms,andisrecognizednetofsalestaxandothertaxes[343]−Environmentalliabilitiesarerecordedwhenassessmentsaremade,remedialeffortsareprobable,andtheamountcanbereasonablyestimated[351]−Restructuringchargesarerecordedasincurredandincludeexitanddisposalcosts,aswellasothercostsdirectlyrelatedtorestructuringinitiatives[352]−BasicEPSiscalculatedbydividingNetincomebytheweightedaveragenumberofsharesoutstandingduringtheperiod,whileDilutedEPSadjustsforpotentialcommonsharesifdilutive[368]−TheCompanytranslatesforeignsubsidiaries′assetsandliabilitiesatperiod−endexchangeratesandincome/expensesataverageexchangerates,withtheneteffectrecordedinAOCI[366]ValuationandImpairment−ThecompanyusesaMonteCarlovaluationmodeltodeterminetheinitialfairvalueofcontingentconsiderationliabilities,whichinvolvessimulatingfuturerevenuesduringtheearn−outperiodusingmanagement′sbestestimates[320]−Contingentconsiderationliabilitiesareremeasuredtofairvalueeachreportingperiodusingassumptionssuchasestimatedrevenues,discountrates,revenuevolatility,andprojectedpaymentdates[321]−Goodwillistestedforimpairmentannually,andthecompanymayperformaqualitativeorquantitativeassessmentbasedonfactorslikemacroeconomicconditions,markettrends,andfinancialperformance[322]−Definite−livedintangibleassets,suchaspurchasedtechnologyandpatents,areamortizedover5−20years,whilecustomerlistsareamortizedover7−20years[326]−Thecompanyreviewsdefinite−livedintangibleassetsforimpairmentwhenindicatorsexist,andwritesdownthecarryingvaluetofairvalueifitexceedsundiscountedfuturecashflows[327]−Equityinvestmentsaremeasuredusingfairvalue,withgainsorlossesrecordedthrough(Gain)lossonequityinvestments,net[330]−Thecompanyusesaqualitativemodeltotestnon−marketableequitysecuritiesforimpairment,similartothemodelusedforgoodwillandlong−livedassets[333]MarketandCustomerConcentration−Threemajormedicalcustomers(AbbottLaboratories,BostonScientific,andMedtronic)collectivelyaccountedfor46812.9 million[284] Revenue Recognition and Accounting Policies - Revenue is recognized when control of products is transferred to customers, primarily based on shipping terms, and is recognized net of sales tax and other taxes[343] - Environmental liabilities are recorded when assessments are made, remedial efforts are probable, and the amount can be reasonably estimated[351] - Restructuring charges are recorded as incurred and include exit and disposal costs, as well as other costs directly related to restructuring initiatives[352] - Basic EPS is calculated by dividing Net income by the weighted average number of shares outstanding during the period, while Diluted EPS adjusts for potential common shares if dilutive[368] - The Company translates foreign subsidiaries' assets and liabilities at period-end exchange rates and income/expenses at average exchange rates, with the net effect recorded in AOCI[366] Valuation and Impairment - The company uses a Monte Carlo valuation model to determine the initial fair value of contingent consideration liabilities, which involves simulating future revenues during the earn-out period using management's best estimates[320] - Contingent consideration liabilities are remeasured to fair value each reporting period using assumptions such as estimated revenues, discount rates, revenue volatility, and projected payment dates[321] - Goodwill is tested for impairment annually, and the company may perform a qualitative or quantitative assessment based on factors like macroeconomic conditions, market trends, and financial performance[322] - Definite-lived intangible assets, such as purchased technology and patents, are amortized over 5-20 years, while customer lists are amortized over 7-20 years[326] - The company reviews definite-lived intangible assets for impairment when indicators exist, and writes down the carrying value to fair value if it exceeds undiscounted future cash flows[327] - Equity investments are measured using fair value, with gains or losses recorded through (Gain) loss on equity investments, net[330] - The company uses a qualitative model to test non-marketable equity securities for impairment, similar to the model used for goodwill and long-lived assets[333] Market and Customer Concentration - Three major medical customers (Abbott Laboratories, Boston Scientific, and Medtronic) collectively accounted for 46% of the company's total sales in 2022[41] - The company's backlog orders as of December 31, 2022, were approximately 886 million, with the majority expected to be shipped within one year[46] Intellectual Property and Manufacturing - The company owns 672 U.S. and foreign patents and has licensing rights to an additional 398 patents as of December 31, 2022[56] - The company's manufacturing capabilities span across the U.S., Mexico, Uruguay, Ireland, Malaysia, the Dominican Republic, and Israel[58] - The company has implemented a standardized enterprise-wide manufacturing structure, known as the Integer Production System, to enhance operational performance[54] Growth Strategy - The company's growth strategy includes strategic "bolt-on" acquisitions to expand its product portfolio and support customer growth[50] Market Risks - The company is exposed to market risks primarily due to changes in foreign currency exchange rates and interest rates, which could impact earnings and cash flows[251]