# Integer Holdings Corp (ITGR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Integer Holdings Corp's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1114483/000111448324000034/gb-20231231.htm
Accession: 0001114483-24-000034
Filing date: 2024-02-20
Report date: 2023-12-31
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/fy2022/ (FY 2022)
Next year: /company/ITGR/mda/fy2024/ (FY 2024)

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, “Financial Statements and Supplementary Data” 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 Item 1A, “Risk Factors” 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

•Portable medical exit

•Discontinued operations

•Financial overview

Our Financial Results

•Fiscal 2023 compared with fiscal 2022

•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, indefinite-lived intangible assets and long-lived 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 principal product lines. The Medical segment includes the Cardio & Vascular, Cardiac Rhythm Management & Neuromodulation and Advanced Surgical, Orthopedics & Portable Medical product lines and the Non-Medical segment comprises the Electrochem product line. For more information on our segments, please refer to Note 18, “Segment and Geographic Information,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report.

Impact of Global Events

Global economic challenges, including the impact of the military conflicts between Russia and Ukraine and between Israel and Hamas, severe and sustained inflation, a rising interest rate environment, fluctuations in global currencies, and supply chain disruptions may continue to cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market and product line, but specific impacts to our business include increased borrowing costs, labor shortages, disruptions in the supply chain, delayed or reduced customer orders and sales, and delays in shipments to and from certain countries. We monitor economic conditions closely. In response to 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Business Acquisitions

Subsequent to the end of the 2023, on January 5, 2024, we acquired 100% of the equity interests of Pulse Technologies, Inc. (“Pulse”). Prior to the acquisition, Pulse was a privately-held 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. Based in Pennsylvania, 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 products’ time to market. Given the January 5, 2024 closing date of the acquisition, Pulse results are not included in this MD&A and the disclosures included herein. Refer to Note 21, “Subsequent Events,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for additional information about the acquisition of Pulse.

Effective as of October 1, 2023, we acquired substantially all of the assets and assumed certain liabilities of InNeuroCo, Inc.(“InNeuroCo”). InNeuroCo is a recognized leader in neurovascular catheter innovation with strong development and manufacturing capabilities. InNeuroCo’s expertise and highly differentiated neurovascular catheter innovation complements our existing capabilities and market focus. Consistent with our strategy, the addition of InNeuroCo further increases our ability to provide enhanced solutions to our customers in the neurovascular catheter space.

On April 6, 2022, we acquired 100% of the outstanding 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 acquisition of Aran further increases our ability to offer complete solutions for complex delivery and therapeutic devices in high growth cardiovascular markets such as structural heart, neurovascular, peripheral vascular, and endovascular as well as general surgery.

Refer to Note 2, “Business Acquisitions,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for additional information about the acquisition of InNeuroCo and Aran.

Portable Medical Exit

During the fourth quarter of 2021, we initiated plans to exit our portable medical market to enhance profitability and reallocate manufacturing capacity to support growth. Since that time, we have been working closely with impacted customers to support the transition of these products to other suppliers. Due to quality and regulatory requirements, we expected it would take three to four years to complete this transition. Our AS&O product line sales, which includes Portable Medical sales, increased 12% and 9% in 2022 and 2023, respectively, when compared to the previous year, driven by increases in Portable Medical sales. We attribute the increase in Portable Medical sales to the higher demand created when we announced the exit of that market. We currently expect Portable Medical sales to begin to wind down with the final sales and market exit occurring in 2025.

Discontinued Operations

During 2018, we sold a portion of our Advanced Surgical, Orthopedics & Portable Medical product line. As a result, for all periods presented, financial results of the divested product line are classified as discontinued operations. All results and information presented exclude discontinued operations unless otherwise noted.

There was no activity from discontinued operations during 2023. 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.

Refer to Note 20, “Discontinued Operations,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Financial Overview

Fiscal 2023 Compared with Fiscal 2022

Income from continuing operations for 2023 was $90.7 million or $2.69 per diluted share compared to $65.4 million or $1.96 per diluted share for 2022. These variances are primarily the result of the following:

•Sales for 2023 increased 16% to $1.597 billion, driven by our Medical product lines with strong demand, new product ramps, growth from emerging customers with PMA (premarket approval) products and supply chain improvements.

•Gross profit for 2023 increased $59.3 million or 17%, primarily from higher sales volume leverage and efficiencies gained from the continued improvement in the supply chain.

•Operating expenses for 2023 increased by $13.3 million compared to 2022, primarily due to higher labor costs and amortization expense, partially offset by lower restructuring and other charges.

•Interest expense for 2023 increased by $14.7 million, due to higher interest rates, higher average debt outstanding and higher losses from extinguishment of debt.

•We recognized net losses on equity investments of $5.7 million and $7.6 million during 2023 and 2022, respectively. Gains and losses on equity investments are generally unpredictable in nature.

•Other (income) loss, net for 2023 were losses of $1.0 million compared to income of $0.9 million for 2022, primarily due to fluctuations in foreign currency gains and losses in the respective periods.

•We recorded provisions for income taxes of $16.6 million and $10.6 million for 2023 and 2022, respectively. The changes in income tax were primarily due to relative changes in pre-tax income and the impact of discrete tax items.

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.

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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, “Financial Statements and Supplementary Data” of this report, for the periods presented (dollars in thousands, except per share amounts):

[[GREPCENT_TABLE]]
[["","","","Change","","Change"],["","","","","","","","2023 vs. 2022","","2022 vs. 2021"],["","2023","","2022","","2021","","$","","%","","$","","%"],["Medical Sales:"],["Cardio & Vascular","$","836,342","","","$","699,469","","","$","593,117","","","$","136,873","","","20","%","","$","106,352","","","18","%"],["Cardiac Rhythm Management & Neuromodulation","610,577","","","532,580","","","502,288","","","77,997","","","15","%","","30,292","","","6","%"],["Advanced Surgical, Orthopedics & Portable Medical","106,421","","","97,502","","","87,221","","","8,919","","","9","%","","10,281","","","12","%"],["Total Medical Sales","1,553,340","","","1,329,551","","","1,182,626","","","223,789","","","17","%","","146,925","","","12","%"],["Non-Medical","43,333","","","46,545","","","38,453","","","(3,212)","","","(7)","%","","8,092","","","21","%"],["Total sales","1,596,673","","","1,376,096","","","1,221,079","","","220,577","","","16","%","","155,017","","","13","%"],["Cost of sales","1,178,384","","","1,017,090","","","884,109","","","161,294","","","16","%","","132,981","","","15","%"],["Gross profit","418,289","","","359,006","","","336,970","","","59,283","","","17","%","","22,036","","","7","%"],["Gross profit as a % of sales","26.2","%","","26.1","%","","27.6","%"],["Operating expenses:"],["Selling, general and administrative","175,619","","","160,578","","","141,418","","","15,041","","","9","%","","19,160","","","14","%"],["Research, development and engineering","63,771","","","60,918","","","51,985","","","2,853","","","5","%","","8,933","","","17","%"],["Restructuring and other charges","11,569","","","16,183","","","7,856","","","(4,614)","","","(29)","%","","8,327","","","106","%"],["Total operating expenses","250,959","","","237,679","","","201,259","","","13,280","","","6","%","","36,420","","","18","%"],["Operating income","167,330","","","121,327","","","135,711","","","46,003","","","38","%","","(14,384)","","","(11)","%"],["Interest expense","53,370","","","38,632","","","31,628","","","14,738","","","38","%","","7,004","","","22","%"],["Loss on equity investments, net","5,691","","","7,636","","","3,143","","","(1,945)","","","(25)","%","","4,493","","","143","%"],["Other (income) loss, net","975","","","(899)","","","(123)","","","1,874","","","NM","","(776)","","","NM"],["Income from continuing operations before income taxes","107,294","","","75,958","","","101,063","","","31,336","","","41","%","","(25,105)","","","(25)","%"],["Provision for income taxes","16,644","","","10,608","","","8,043","","","6,036","","","57","%","","2,565","","","32","%"],["Effective tax rate","15.5","%","","14.0","%","","8.0","%"],["Income from continuing operations","$","90,650","","","$","65,350","","","$","93,020","","","$","25,300","","","39","%","","$","(27,670)","","","(30)","%"],["Diluted earnings per share from continuing operations","$","2.69","","","$","1.96","","","$","2.80","","","$","0.73","","","37","%","","$","(0.84)","","","(30)","%"]]
[[/GREPCENT_TABLE]]

NM - Calculated change not meaningful.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Fiscal 2023 Compared with Fiscal 2022

The following discussion is a comparison between results for the years ended December 31, 2023 and 2022. For a discussion of our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, 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, 2022, which was filed with the SEC on February 21, 2023.

Sales

Sales by product line for 2023 and 2022 were as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","","","Change"],["","2023","","2022","","$","","%"],["Medical Sales:"],["Cardio & Vascular","$","836,342","","","$","699,469","","","$","136,873","","","19.6","%"],["Cardiac Rhythm Management & Neuromodulation","610,577","","","532,580","","","77,997","","","14.6","%"],["Advanced Surgical, Orthopedics & Portable Medical","106,421","","","97,502","","","8,919","","","9.1","%"],["Total Medical Sales","1,553,340","","","1,329,551","","","223,789","","","16.8","%"],["Non-Medical","43,333","","","46,545","","","(3,212)","","","(6.9)","%"],["Total sales","$","1,596,673","","","$","1,376,096","","","$","220,577","","","16.0","%"]]
[[/GREPCENT_TABLE]]

Total 2023 sales increased 16% to $1.597 billion in comparison to 2022. The most significant drivers of this increase were as follows:

Cardio & Vascular (“C&V”) sales for 2023 increased $136.9 million or 20% in comparison to 2022. The increase in C&V sales for 2023 was driven by strong demand, acquisition performance and supply chain improvements, with double-digit growth across all C&V markets. Foreign currency exchange rate fluctuations increased C&V sales for 2023 by $1.2 million.

Cardiac Rhythm Management & Neuromodulation (“CRM&N”) sales for 2023 increased $78.0 million or 15% in comparison to 2022. CRM&N sales for 2023 were driven by double-digit CRM growth from strong customer demand, double-digit Neuromodulation growth from emerging customers, and supply chain improvements. Foreign currency exchange rate fluctuations did not have a material impact on CRM&N sales for 2023.

Advanced Surgical, Orthopedics & Portable Medical (“AS&O”) sales for 2023 increased by $8.9 million in comparison to 2022, driven by high double-digit growth in Portable Medical related to demand to support the multi-year Portable Medical exit. Foreign currency exchange rate fluctuations did not have a material impact on AS&O sales for 2023.

Non-Medical sales for 2023 decreased $3.2 million or 7% in comparison to 2022, as sales returned to a normalized run-rate in the second half of 2023 following previously higher sales from the supply chain recovery. Foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales for 2023.

Gross Profit

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Gross profit (in thousands)","$","418,289","","","$","359,006"],["Gross margin","26.2","%","","26.1","%"]]
[[/GREPCENT_TABLE]]

Gross profit as a percent of sales (“Gross margin”) for 2023 increased 10 basis points compared to 2022. The improved year over year gross margin was primarily due to higher sales volume leverage and efficiencies gained from the continued improvement in the supply chain.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

SG&A Expenses

SG&A expenses comprise the following for 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022","","Change"],["Compensation and benefits(a)","$","91,573","","","$","85,876","","","$","5,697"],["Depreciation and amortization expense(b)","41,515","","","37,662","","","3,853"],["Professional fees(c)","15,639","","","14,003","","","1,636"],["Contract services(d)","11,779","","","10,165","","","1,614"],["Bank fees and charges(e)","2,907","","","1,019","","","1,888"],["All other SG&A","12,206","","","11,853","","","353"],["Total SG&A expense","$","175,619","","","$","160,578","","","$","15,041"]]
[[/GREPCENT_TABLE]]

__________

(a)Compensation and benefits increased primarily due to annual merit increases and higher incentive compensation, partially offset by lower headcount.

(b)Depreciation and amortization expense increased due to amortization of intangible assets from the Aran and Oscor customer list intangible assets.

(c)Professional fees increased primarily due to increased costs associated with third-party information technology services.

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

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

RD&E

RD&E expenses for 2023 and 2022 were $63.8 million and $60.9 million, respectively. The increase in RD&E expenses for 2023 compared to 2022 was primarily due to higher labor costs attributed to annual merit increases and higher incentive compensation. RD&E expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations.

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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. 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 2023 and 2022 (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022","","Change"],["Restructuring charges(a)","6,015","","","4,920","","","1,095"],["Acquisition and integration costs(b)","3,444","","","10,075","","","(6,631)"],["Other general expenses(c)","2,110","","","1,188","","","922"],["Total restructuring and other charges","$","11,569","","","$","16,183","","","$","(4,614)"]]
[[/GREPCENT_TABLE]]

__________

(a)Restructuring charges for 2023 and 2022 primarily consist of costs associated with our strategic reorganization and alignment and manufacturing alignment to support growth initiatives. Included in restructuring charges for 2023 are $3.6 million in costs related to the relocation and closure of our R&D facility in Israel.

(b)Amount for 2023 primarily includes acquisition expenses related to the InNeuroCo and Pulse (complete in January 2024) acquisitions, and integration expenses related to the Aran and Oscor acquisitions. Amount for 2022 primarily includes expenses related to the Aran and Oscor acquisitions. The 2023 and 2022 amounts also include a benefit of $0.7 million and expense of $3.1 million, respectively, related to adjustments to 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, “Financial Statements and Supplementary Data” of this report for additional information related to the fair value measurement of the contingent consideration.

(c)Amounts include gains and losses in connection with the disposal of property, plant and equipment. In addition, the 2023 amount includes $2.0 million of property loss and related expenses resulting from a fire which occurred in the fourth quarter of 2023 at one of our manufacturing facilities.

Refer to Note 11, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for additional information regarding these initiatives.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Interest Expense

Information relating to our interest expense for 2023 and 2022 is as follows (dollars in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022","","Change"],["","Amount","","Rate","","Amount","","Rate","","Amount","","Rate (bp)"],["Contractual interest expense","$","46,177","","","4.62","%","","$","35,282","","","3.80","%","","$","10,895","","","82"],["(Gain) loss on interest rate swap","(1,262)","","","(0.12)","","","918","","","0.10","","","(2,180)","","","(22)"],["Amortization of deferred debt issuance costs and original issue discount","3,536","","","0.42","","","1,922","","","0.23","","","1,614","","","19"],["Loss from extinguishment of debt","4,518","","","0.46","","","114","","","0.01","","","4,404","","","45"],["Interest expense on borrowings","52,969","","","5.38","%","","38,236","","","4.14","%","","14,733","","","124"],["Other interest expense","401","","","","","396","","","","","5"],["Total interest expense","$","53,370","","","","","$","38,632","","","","","$","14,738"]]
[[/GREPCENT_TABLE]]

Interest expense relates primarily to borrowings made under our Senior Secured Credit Facilities, which consist of a five-year $500 million revolving credit facility (the “Revolving Credit Facility”) and a five-year “term A” loan (the “TLA Facility”), and $500 million aggregate principal amount of the 2028 Convertible Notes.

During 2023, contractual interest expense has increased due to higher average debt outstanding combined with increasing applicable interest rates. The higher average debt balance outstanding is the result of incremental borrowings related to the strategic change to replace some of our variable rate debt to fixed rate through issuance of the 2028 Convertible Notes. Interest rates have continued to climb due to increases in overall market rates, partially offset by a 25 basis point decrease in the interest rate margin on our Senior Secured Credit Facilities. The decrease in the interest rate margin was effective during the second quarter of 2023 based on our secured net leverage ratio (as defined in our Senior Secured Credit Facilities).

Other components of interest expense on borrowings include gains and losses on interest rate swaps and non-cash amortization and write-off (losses from extinguishment of debt) of deferred debt issuance costs and original issue discount. Interest rate swap includes realized (gains) losses on our interest rate swap contract, which fluctuate depending on the spread between the rate swap contract fixed rate and senior secured credit facility floating rate. Our outstanding interest rate swap matured as of June 30, 2023. Amortization of deferred debt issuance costs and original issue discount increased during 2023 compared to 2022 as a result of higher unamortized balances related to new debt. The losses from extinguishment of debt during 2023 were related to prepayments of portions of the TLA Facility and full repayment of our Term Loan B facility in connection with issuance of the 2028 Notes.

See Note 8, “Debt,” of the Notes to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for additional information pertaining to our debt.

As of December 31, 2023 and 2022, approximately 51% and 11%, respectively, of our principal amount of debt are fixed rate borrowings or have been converted to fixed-rate borrowings with an interest rate swap. During February 2023, we strategically replaced about half of our variable rate debt with fixed rate debt through the issuance of the 2028 Convertible Notes at a fixed rate of 2.125% and paying down our highest rate variable debt, the Term Loan B facility, and a portion of our Revolving Credit Facility. These transactions are expected to mitigate increased borrowing costs and result in a more balanced mix of fixed and floating rates to help protect against interest rate exposure. We may enter into interest rate swap agreements in the future in order to reduce our exposure to fluctuations in floating rates.

Loss on Equity Investments, Net

During 2023 and 2022, we recognized net losses of $5.7 million and $7.6 million, respectively, on our equity investments. Gains and losses on equity investments are generally unpredictable in nature. During 2023, we recognized impairment charges of $5.2 million related to investments in our non-marketable equity securities. The residual losses for 2023 and 2022 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, 2023 and December 31, 2022, the carrying value of our equity investments was $8.2 million and $13.9 million, respectively. See Note 17, “Financial Instruments and Fair Value Measurements,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for further details regarding these investments.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Other (Income) Loss, Net

Other (income) loss, net for 2023 were losses of $1.0 million compared to income of $0.9 million in 2022. 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 or Dominican peso.

The impact of foreign currency exchange rates on transactions denominated in foreign currencies included in Other (income) loss, net for 2023 were net losses of $1.0 million and net gains of $1.1 million for 2022. 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 2023 and 2022, our provision for income taxes was $16.6 million on worldwide pre-tax income of $107.3 million (effective tax rate of 15.5%) and $10.6 million on worldwide pre-tax income of $76.0 million (effective tax rate of 14.0%), respectively. The stand-alone U.S. component of the effective tax rate for 2023 reflected a $5.8 million provision on $31.0 million of pre-tax book income (effective tax rate of 18.8%) versus a $4.9 million provision on $14.4 million of pre-tax book income (effective tax rate of 34.2%) for 2022. The stand-alone International component of the effective tax rate for 2023 reflected a $10.8 million provision on $76.3 million of pre-tax book income (effective tax rate of 14.2%) versus a $5.7 million provision on $61.5 million of pre-tax book income (effective tax rate of 9.2%) for 2022.

The provision for income taxes for 2023 differs from the U.S. statutory rate due to the following (dollars in thousands):

[[GREPCENT_TABLE]]
[["","U.S.","","International","","Combined"],["","$","","%","","$","","%","","$","","%"],["Income before provision for income taxes","$","31,001","","","","","$","76,293","","","","","$","107,294"],["Provision at statutory rate","$","6,510","","","21.0","%","","$","16,021","","","21.0","%","","$","22,531","","","21.0","%"],["Federal tax credits (including R&D)","(11,113)","","","(35.8)","","","\u2014","","","\u2014","","","(11,113)","","","(10.4)"],["Foreign rate differential","1,921","","","6.2","","","(7,434)","","","(9.7)","","","(5,513)","","","(5.1)"],["Stock-based compensation","1,862","","","6.0","","","\u2014","","","\u2014","","","1,862","","","1.7"],["Uncertain tax positions","(1,170)","","","(3.8)","","","\u2014","","","\u2014","","","(1,170)","","","(1.1)"],["State taxes, net of federal benefit","1,185","","","3.8","","","\u2014","","","\u2014","","","1,185","","","1.1"],["U.S. tax on foreign earnings, net of \u00a7250 deduction","6,090","","","19.7","","","\u2014","","","\u2014","","","6,090","","","5.7"],["Valuation allowance","411","","","1.3","","","1,326","","","1.7","","","1,737","","","1.6"],["Other","120","","","0.4","","","915","","","1.2","","","1,035","","","1.0"],["Provision for income taxes","$","5,816","","","18.8","%","","$","10,828","","","14.2","%","","$","16,644","","","15.5","%"]]
[[/GREPCENT_TABLE]]

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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]]

Our effective tax rate of 15.5% for 2023 is higher than our effective tax rate of 14.0% for 2022, primarily due to the expiration of the Malaysia Tax Holiday described below, the increase in pre-tax book income and related statutory rate differential, and the impact of non-recurring discrete tax benefits recorded in 2022 for provision to return adjustments for the 2021 tax return filed in 2022, partially offset by favorable discrete tax benefits in 2023 from the release of uncertain tax benefits related to the expiration of the statute of the 2019 tax year.

Our effective tax rate for 2023 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of Federal Tax Credits (including R&D credits and Foreign tax credits), stock-based compensation windfalls, 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 have previously operated in Malaysia under a tax holiday. 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.

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 $0.6 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, 2023, approximately $6.4 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized.

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 are continuing to evaluate the potential impact on future periods of the Pillar Two Framework, pending legislative adoption by additional individual countries.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Liquidity and Capital Resources

[[GREPCENT_TABLE]]
[["(dollars in thousands)","December 31, 2023","","December 31, 2022"],["Cash and cash equivalents","$","23,674","","","$","24,272"],["Working capital","$","396,699","","","$","334,546"],["Current ratio","2.80","","","2.50"]]
[[/GREPCENT_TABLE]]

Cash and cash equivalents at December 31, 2023 decreased by $0.6 million from December 31, 2022, primarily as a result of cash generated by operating activities, which includes the benefit of accelerated customer collections from new factoring arrangements, partially offset by purchases of property, plant and equipment, certain assets of InNeuroCo, and net payments on long-term debt and contingent consideration.

Working capital increased by $62.2 million from December 31, 2022, or $62.8 million excluding the decrease in cash and cash equivalents. The increase in working capital, exclusive of cash and cash equivalents, primarily relates to higher sales volume and product demand which contributed to positive fluctuations in inventory, accounts receivable and contract asset balances. In addition, accelerated payments under our Senior Secured Credit Facilities further improved our working capital but was partially offset by a negative fluctuation in accrued expense from higher levels of accrued profit sharing and bonuses.

At December 31, 2023, $19.6 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 December 31, 2023, our capital structure consists of $959.9 million of debt, net of debt discounts and deferred issuance costs, outstanding under our Senior Secured Credit Facilities and the 2028 Convertible Notes, and 33 million shares of common stock outstanding. As of December 31, 2023, we have access to $397.5 million of borrowing capacity under our Revolving Credit Facility. We are authorized to issue up to 100 million shares of common stock, of which approximately 33 million shares were issued and outstanding at December 31, 2023, and 100 million shares of preferred stock, none of which were outstanding at December 31, 2023. As of December 31, 2023, our contractual debt service obligations for 2024, consisting of interest on our outstanding debt and commitment fees on the unused portion of the Revolving Credit Facility are estimated to be approximately $44 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.

Our off-balance sheet commitments related to our outstanding letters of credit as of December 31, 2023 were $3.5 million.

Credit Facilities and 2028 Convertible Notes

As of December 31, 2023, we had Senior Secured Credit Facilities that consist of a $500 million Revolving Credit Facility, with an outstanding principal balance of $99 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 notes. The 2028 Convertible Notes mature on February 15, 2028 and bear interest at a fixed rate of 2.125% per annum. The total net proceeds from the issuance of the 2028 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 Term Loan B 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.

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 December 31, 2023, we were in compliance with these financial covenants. As of December 31, 2023, our Total Net Leverage Ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.6:1.0. For the year ended December 31, 2023, our interest coverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 9.2:1.0.

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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

See Note 8 “Debt” of the Notes to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for a further information of our outstanding debt.

Factoring Arrangements

We may 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 2023, we sold, without recourse, $144.4 million of accounts receivable. We did not utilize receivable factoring arrangements prior to 2023. See Note 1 “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for a further information regarding the factoring arrangements.

Summary of Cash Flow

The following cash flow summary information includes cash flows related to discontinued operations (in thousands):

[[GREPCENT_TABLE]]
[["","2023","","2022"],["Cash provided by (used in):"],["Operating activities","$","180,213","","","$","116,381"],["Investing activities","(163,367)","","","(200,421)"],["Financing activities","(18,014)","","","92,476"],["Effect of foreign currency exchange rates on cash and cash equivalents","570","","","(2,049)"],["Net change in cash and cash equivalents","$","(598)","","","$","6,387"]]
[[/GREPCENT_TABLE]]

Operating Activities - During 2023, we generated cash from operations of $180.2 million, compared to $116.4 million in 2022. The increase of $63.8 million was the result of a $23.5 million increase in cash flow provided by changes in operating assets and liabilities and a $40.3 million increase in net income adjusted for non-cash items such as depreciation and amortization.

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

Investing Activities – The $37.1 million decrease in net cash used in investing activities was primarily attributable to a decrease in net cash paid for acquisitions, partially offset by increased purchases of property, plant and equipment. Investing activities for 2023 included net cash paid of $43.6 million for the InNeuroCo acquisition. For 2022, investing activities included $126.6 million for the Aran acquisition and settlement of working capital and other closing adjustments in connection with the Oscor acquisition. Purchases of property, plant and equipment were $119.9 million in 2023, compared to $74.7 million in 2022, as we continue to upgrade our manufacturing facilities and information technology systems, and invest in manufacturing equipment to support our productivity initiatives.

Financing Activities – Net cash used in financing activities during 2023 was $18.0 million compared to net cash provided by financing activities of $92.5 million in 2022. The cash used in financing activities during 2023 was primarily related to the $335.6 million full repayment of our Term Loan B facility, $80.3 million in repayments of our TLA Facility, $41.7 million of net payments on our Revolving Credit Facility, $35.0 million of capped call purchases related to the issuance of our 2028 Convertible Notes, and $7.7 million paid to settle certain contingent consideration liabilities related to the Aran and Inomec acquisitions, which was partially offset by the issuance of our 2028 Convertible Notes of $486.3 million. The net cash inflow for 2022 included $166.0 million in borrowings on our Revolving Credit Facility, primarily to fund the Aran acquisition.

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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, 2023. Refer to Note 13, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” 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)","$","974,000","","","$","\u2014","","","$","37,500","","","$","936,500","","","$","\u2014"],["Interest on debt(a)","176,397","","","44,123","","","86,811","","","45,463","","","\u2014"],["Operating lease obligations(b)","104,883","","","12,744","","","25,219","","","24,237","","","42,683"],["Finance lease obligations(b)","14,364","","","2,411","","","4,460","","","2,977","","","4,516"]]
[[/GREPCENT_TABLE]]

__________

(a)Interest payments in the table above reflect the contractual interest payments on our outstanding debt and commitment fees on the unused portion of the Revolving Credit Facility based upon the balance outstanding and applicable interest rates at December 31, 2023, and exclude the impact of the debt discount and deferred issuance costs. Refer to Note 8, “Debt,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this report for additional information regarding long-term debt.

(b)Refer to Note 14, “Leases,” of the Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” 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 2023 totaled $119.8 million, compared to $74.1 million and $53.0 million in 2022 and 2021, respectively. Capital expenditures in 2023 related primarily to upgrades of manufacturing facilities and information technology systems. We expect 2024 capital expenditures to approximate $90 million to $110 million, with a significant portion related to additional upgrades of manufacturing facilities and information technology systems, 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, “Financial Statements and Supplementary Data” 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 borrowings under our Revolving Credit Facility are sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. However, such cash flows are dependent upon our future operating performance which, in turn, is subject to prevailing economic conditions, 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. 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, “Financial Statements and Supplementary Data” of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

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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, “Financial Statements and Supplementary Data” 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, “Financial Statements and Supplementary Data” of this report.

Valuation of Goodwill, Indefinite-Lived Intangible Assets and Long-Lived 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.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

We performed a qualitative assessment of our Medical reporting unit as of December 31, 2023. 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 11%. 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, 2023. 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 327% as of December 31, 2023. The Lake Region Medical tradename had an excess of the estimated fair value over carrying value of approximately 75% and a carrying value of $70 million at December 31, 2023. 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.

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