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IIN > SEC Filings for IIN > Form 10-K on 12-Mar-2014All Recent SEC Filings

Show all filings for INTRICON CORP

Form 10-K for INTRICON CORP


12-Mar-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Company Overview

IntriCon Corporation, (the "Company" or "IntriCon", "we", "us" or "our") is an international firm engaged in the designing, developing, engineering and manufacturing of body-worn devices. The Company serves the body-worn device market by designing, developing, engineering and manufacturing micro-miniature products, microelectronics, micro-mechanical assemblies and complete assemblies, primarily for bio-telemetry devices, hearing instruments and professional audio communication devices.

As discussed below, the Company has one operating segment - its body-worn device segment. Our expertise in this segment is focused on three main markets:
medical, hearing health and professional audio communications. Within these chosen markets, we combine ultra-miniature mechanical and electronics capabilities with proprietary technology - including ultra low power (ULP) wireless and digital signal processing (DSP) capabilities - that enhances the performance of body-worn devices.

Business Highlights

On June 13, 2013 the Company announced a global strategic restructuring plan designed to accelerate the Company's future growth by focusing resources on the highest potential growth areas and reduce costs by approximately $3.0 million annually. As part of this plan, the Company reduced investment in certain non-core professional audio communications product lines; transferred specific product lines from Singapore to the Company's lower-cost manufacturing facility in Batam, Indonesia; reduced its global administrative and support workforce; transferred the medical coil operations from the Company's Maine facility to Minnesota to better leverage existing manufacturing capacity, sold, effective January 27, 2014, its remaining security and certain microphone and receiver businesses; added experienced professionals in value hearing health; and focused more resources in medical biotelemetry. The sale of security, certain microphone and receivers businesses, which closed on January 27, 2014, marked the final milestone in the global strategic restructuring plan. The results of the Company have been revised to reflect discontinued operations.

During the 2013 third quarter, the Company's customer, Medtronic, received Food and Drug Administration (FDA) approval for their MiniMed 530G insulin pump. Medical market sales strengthened in the 2013 fourth quarter as Medtronic ramped for its launch of the MiniMed 530G.

On February 14, 2014, the Company and its domestic subsidiaries entered into a Sixth Amendment to the Loan and Security Agreement and Waiver with The PrivateBank and Trust Company (refer to Note 7).

Forward-Looking Statements

The following discussion and analysis of our financial condition and results of operations should be read together with our 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 Annual Report on Form 10-K. See also Item 1. "Business-Forward-Looking Statements" for more information.


Table of Contents

Results of Operations: 2013 Compared with 2012

Consolidated Net Sales

Our net sales are comprised of three main markets: medical, hearing health, and professional audio - collectively our body-worn device segment. Below is a recap of our sales by main markets for the years ended December 31, 2013 and 2012:

                                                                Change
                                      2013       2012     Dollars    Percent
Medical                             $ 25,978   $ 24,463   $  1,515        6.2 %
Hearing Health                        19,739     23,806     (4,067 )    -17.1 %
Professional Audio Communications      7,244     11,686     (4,442 )    -38.0 %
Consolidated Net Sales              $ 52,961   $ 59,955   $ (6,994 )    -11.7 %

In 2013, we experienced a 6.2 percent increase in medical sales primarily driven by higher sales to Medtronic and other key medical customers. In September 2013, Medtronic obtained FDA approval for the 530G insulin pump system. As such, medical market sales strengthened in the 2013 fourth quarter as Medtronic ramped for its launch of the MiniMed 530G. With the approval, IntriCon expects medical sales to remain strong in 2014 as Medtronic continues to meet marketplace demand. Management believes an industry wide shift in the point of care from expensive traditional settings, such as hospitals, to less expensive non-traditional settings like the home, will result in growth of the medical bio-telemetry industry. IntriCon currently serves this market by offering medical manufacturers the capabilities to design, develop and manufacture medical devices that are easier to use, are more miniature, use less power, and are lighter. IntriCon has a strong presence in both the diabetes market, with its Medtronic partnership, and cardiac diagnostic monitoring bio-telemetry market. The Company believes there are growth opportunities in these markets as well other emerging biotelemetry and home care markets, such as sleep apnea, that could benefit from its capabilities to develop devices that are more technologically advanced, smaller and lightweight.

Net sales in our hearing health business for the year ended December 31, 2013 decreased 17.1 percent over the same period in 2012 primarily due to the reduced purchases by hi HealthInnovations and the continued softness in the conventional channel consistent with industry trends. As of mid-2012, we satisfied hi HealthInnovations' initial product ramp-up needs and have received smaller orders since. hi HealthInnovations continues to make progress building the infrastructure to provide high-quality, affordable hearing health care to a broad range of customers. The Company remains optimistic about the progress made and the long term prospects of this market-changing program. Market dynamics, such as low penetration rates, an aging population, and the need for reduced cost and convenience, have resulted in the emergence of alternative care models, such the insurance channel and PSAP channel. IntriCon believes it is very well positioned to serve these value hearing health market channels. IntriCon has contracted with an experienced hearing health veteran to help spearhead the Company's efforts in the value hearing aid (VHA) market. The Company will be aggressively pursuing larger customers who can benefit from our value proposition. Over the past several years, the Company has invested heavily in core technologies, product platforms and its global manufacturing capabilities geared to provide high-tech, lower-cost hearing devices. Our DSP devices provide better clarity and an improved ability to filter out background noise at attractive pricing points. We believe product platform introductions such as the APT™ and Lumen™ devices will drive market share gains into all channels of the emerging value hearing health market.

Net sales to the professional audio device sector decreased 38.0 percent in 2013 compared to the same period in 2012. The decline was primarily due to the end of a Singapore government contract that was completed in 2012, the strategic decision to rationalize select non-core professional audio communications product lines, and the U.S. government sequestration and disruption associated with the federal government shutdown. Over the next few quarters, IntriCon anticipates additional revenue from contracts with the Singapore government. Additionally, we believe our extensive portfolio of communication devices that are portable, smaller and perform well in noisy or hazardous environments will provide future long-term growth in this market.

Gross Profit

Gross profit, both in dollars and as a percent of sales, for 2013 and 2012, were
as follows:


                       2013                    2012                  Change
                           Percent                 Percent
               Dollars     of Sales    Dollars     of Sales    Dollars    Percent

Gross Profit   $ 12,169         23.0 % $ 15,299         25.5 % $ (3,130 )    -20.5 %


Table of Contents

The 2013 gross profit decrease over the comparable prior year periods was primarily due to lower overall sales volumes partially offset by cost reductions from the global restructuring. Several of the activities associated with the Company's global strategic restructuring plan are focused on a reduction in overhead costs and increased product contribution margins, including:
aggressively transferring specific product lines from Singapore to the Company's lower-cost manufacturing facility in Batam, Indonesia; reducing global administrative and support workforce; and transferring the medical coil business from the Company's Maine facility to Minnesota to better leverage existing manufacturing capacity. Gross margins rose towards the latter parts of 2013 and are expected to continue to improve and be strong into 2014.

Sales and Marketing, General and Administrative and Research and Development
Expenses

Sales and marketing, general and administrative and research and development
expenses for the years ended December 31, 2013 and 2012 were:


                                      2013                      2012                    Change
                                           Percent                   Percent
                              Dollars      of Sales      Dollars    of Sales      Dollars     Percent

Sales and Marketing          $   3,308           6.2 %  $   3,324         5.5 %  $     (16 )      -0.5 %
General and Administrative       5,789          10.9 %      5,426         9.1 %        363         6.7 %
Research and Development         4,181           7.9 %      4,481         7.5 %       (300 )      -6.7 %

Sales and marketing decreased slightly over the prior year due to reduced sales and related selling commissions. During the third quarter of 2013, the Company contracted with an experienced hearing health veteran to lead the Value Hearing Health strategic initiative. Management expects to focus more capital and resources in sales and marketing in the upcoming years to expand its reach in the medical bio-telemetry and value hearing health markets. General and administrative expenses increased over the prior year period primarily driven by increased stock based compensation and increased administrative bank fees compared to 2012. Research and development decreased over the prior year primarily due to research and development tax credit refunds filed of $567 and the global restructure plan, partially offset by higher outside service costs.

Restructuring charges

During 2013, the Company incurred charges of $229, primarily related to employee termination severance costs, from the restructuring of its continuing operations. On June 13, 2013, the Company announced a global strategic restructuring plan designed to accelerate the Company's future growth by focusing resources on the highest potential growth areas and reduce costs by approximately $3.0 million annually. In the future, the Company expects to incur approximately $50 to $100 in additional cash charges related to employee termination and moving costs.

Interest Expense

Interest expense for 2013 was $600, a decrease of $155 from $755 in 2012. The decrease in interest expense was primarily due to lower average debt balances compared to the prior year.

Equity in Loss of Partnerships

The equity in loss of partnerships for 2013 was $262 compared to $116 in 2012.

The Company recorded a $204 decrease in the carrying amount of its investment in the Hearing Instrument Manufacturers Patent Partnership ("HIMPP") for 2013, reflecting amortization of the patents and other intangibles and the Company's portion of the partnership's operating results for the year ended December 31, 2013, compared to a $166 decrease in the carrying amount of the investment in 2012 for the amortization of the patents and other intangibles and the Company's portion of the partnership's operating results for the year ended December 31, 2012. Also, in 2013 the Company paid $58 in operating expenses for HIMPP compared to $50 in 2012.

Prior to the sale of the Global Coils joint venture interest in 2012, the Company recorded a $50 increase in the carrying amount of IntriCon's investment in this joint venture, reflecting the Company's portion of the joint venture's operating results for year ended December 31, 2012, respectively.


Table of Contents

Gain on Sale of Investment in Partnership

In August 2012, the Company sold its 50% interest in its Global Coils joint venture, to its joint venture partner Audemars SA. The Global Coils joint venture is in the business of marketing, designing, manufacturing, and selling audio coils to the hearing health industry. Audemars paid $426 in cash at closing and will make future payments, both one time and recurring, as specified in the purchase agreement. Audemars also transferred certain hearing health inventory to IntriCon. The Company recorded a gain on the sale of $822 in the gain on sale of investment in partnership line of the accompanying statement of operations.

The net gain was computed as follows:

                           Cash proceeds         $  426
                           Receivables              721
                           Inventory                186
                           Net assets disposed     (486 )
                           Transaction costs        (25 )
                           Gain on sale          $  822


No portion of this gain was recognized in 2013.

Other Income (Expense), net

In 2013, other income (expense), net was $127 compared to $ (96) in 2012 primarily related to the gain (loss) on foreign currency exchange.

Income Tax Expense

Income taxes were as follows:


                                      2013          2012
Income tax expense                  $    (217 )  $     (164 )
Percentage of income tax expense
of income from continuing
operations before income taxes
and discontinued operations             -10.5 %        -8.5 %

The expense in 2013 and 2012 was primarily due to foreign taxes on German and Singapore operations. The Company is in a net operating loss position ("NOL") for US federal and state income tax purposes and, consequently, minimal income tax expense from the current period domestic operations was recognized. Our deferred tax asset related to the NOL carry forwards has been offset by a full valuation allowance. We estimate we have approximately $22,997 of NOL carry forwards available to offset future federal income taxes that begin to expire in 2022.

Loss from Discontinued Operations

Loss from discontinued operations, net of income taxes, for the year ended December 31, 2013 was $3,872 compared to a loss of $1,050 for the year ended December 31, 2012. The increase in the loss was driven by decreased sales to the U.S. government due to the sequestration and disruption associated with the federal government shutdown. Also, included in the net loss for the year ended December 31, 2013 was $1,700 in impairment charges.

Results of Operations: 2012 Compared with 2011

Consolidated Net Sales

Below is a recap of our sales by main markets for the years ended December 31, 2012 and 2011:

                                                                 Change
Year Ended December 31                2012       2011     Dollars     Percent
Medical                             $ 24,463   $ 22,923   $  1,540         6.7 %
Hearing Health                        23,806     21,032      2,774        13.2 %
Professional Audio Communications     11,686      8,140      3,546        43.6 %
Consolidated Net Sales              $ 59,955   $ 52,095   $  7,860        15.1 %


Table of Contents

In 2012, we experienced a 6.7% increase in medical sales primarily driven by higher sales to Medtronic and other key medical customers.

Net sales in our hearing health business for the year ended December 31, 2012 increased 13.2% over the same period in 2012 driven by sales to hi HealthInnovations and sales into the nontraditional VHH hearing health market. These gains were partially offset by temporary declines in legacy products.

Net sales to the professional audio device sector increased 43.6% in 2012 compared to the same period in 2011. The significant increase over the prior year was due the fulfillment of a large headset contract with the Singapore government, providing technically advanced headsets to be worn in difficult listening environments.

Gross Profit

Gross profit, both in dollars and as a percent of sales, for 2012 and 2011, were
as follows:


                                 2012                    2011                   Change
                                     Percent                 Percent
Year Ended December 31   Dollars     of Sales    Dollars     of Sales    Dollars     Percent

Gross Profit $ 15,299 25.5 % $ 12,650 24.3 % $ 2,649 20.9 %

In 2012, gross profit increased primarily due to greater sales across our three core markets, partially offset by infrastructure costs in Asia and an unfavorable product mix in our professional audio communications market. The Company further expanded its low-cost manufacturing capabilities during the year. The continued ramp-up of the Company's Indonesian facility provides low-cost manufacturing options to drive ongoing margin improvement and the ability to pursue additional high-volume manufacturing opportunities. In addition, the Company increased the medical manufacturing infrastructure at its Singapore facility to support the transfer of certain medical business.

Sales and Marketing, General and Administrative and Research and Development
Expenses

Sales and marketing, general and administrative and research and development
expenses for the years ended December 31, 2012 and 2011 were:


                                     2012                   2011                  Change
                                         Percent                Percent
Year Ended December 31       Dollars    of Sales    Dollars    of Sales     Dollars     Percent

Sales and Marketing          $  3,324         5.5 % $  3,185         6.1 % $     139         4.4 %
General and Administrative      5,426         9.1 %    5,038         9.7 %       388         7.7 %
Research and Development        4,481         7.5 %    4,486         8.6 %        (5 )      -0.1 %

Sales and marketing increased over the prior year due to increased sales and related selling commissions and a headcount addition in late 2012. General and administrative expenses increased over the prior year period primarily driven by increased stock based compensation as compared to 2011. Research and development stayed relatively flat year-over-year.

Interest Expense

Interest expense for 2012 was $755, an increase of $146 from $609 in 2011. The increase in interest expense was primarily due to higher average debt balances and higher interest rates as compared to the prior year.

Equity in Income (Loss) of Partnerships

The equity in income (loss) of partnerships for 2012 was $ (116) compared to $174 in 2011.

The Company recorded a $166 decrease in the carrying amount of its investment in the Hearing Instrument Manufacturers Patent Partnership ("HIMPP") for 2012, reflecting amortization of the patents and other intangibles and the Company's portion of the partnership's operating results for the year ended December 31, 2012, compared to a $34 decrease in the carrying amount of the investment in 2011 for the amortization of the patents and other intangibles and the Company's portion of the partnership's operating results for the year ended December 31, 2011.


Table of Contents

Prior to the sale of the Global Coils joint venture interest in 2012, the Company recorded a $50 and $208 increase in the carrying amount of IntriCon's investment in this joint venture, reflecting the Company's portion of the joint venture's operating results for year ended December 31, 2012 and 2011, respectively.

Gain on Sale of Investment in Partnership

In August 2012, the Company sold its 50% interest in its Global Coils joint venture, to its joint venture partner Audemars SA. The Global Coils joint venture is in the business of marketing, designing, manufacturing, and selling audio coils to the hearing health industry. Audemars paid $426 in cash at closing and will make future payments, both one time and recurring, as specified in the purchase agreement. Audemars also transferred certain hearing health inventory to IntriCon. The Company recorded a gain on the sale of $822 in the gain on sale of investment in partnership line of the accompanying statement of operations.

The net gain was computed as follows:

                           Cash proceeds         $  426
                           Receivables              721
                           Inventory                186
                           Net assets disposed     (486 )
                           Transaction costs        (25 )
                           Gain on sale          $  822

Other Income (Expense), net

In 2012, other income (expense), net was $(96) compared to $52 in 2011, primarily related to the gain (loss) on foreign currency exchange.

Income Tax (Expense) Benefit

Income taxes were as follows:


                                                  2012        2011
Income tax (expense) benefit                    $   (164 )  $    160
Percentage of income tax (expense) benefit
of income from continuing operations before
income taxes and discontinued operations           -8.53 %    -36.20 %

The (expense) benefit in 2012 and 2011 was primarily due to foreign taxes on German and Singapore operations. The Company is in a net operating loss position ("NOL") for US federal and state income tax purposes and, consequently, minimal income tax expense from the current period domestic operations was recognized. Our deferred tax asset related to the NOL carry forwards has been offset by a full valuation allowance.

Loss from Discontinued Operations

Loss from discontinued operations, net of income taxes, for the year ended December 31, 2012 was $1,050 compared to $1,143 for the year ended December 31, 2011. The losses were comparable year-over-year.

Liquidity and Capital Resources

Our primary sources of cash have been cash flows from operations, bank borrowings, and other financing transactions. For the last three years, cash has been used for repayments of bank borrowings, purchases of equipment, establishment of an additional Asian manufacturing facility and working capital to support research and development, including product offerings under our hi HealthInnovations agreement.

As of December 31, 2013, we had approximately $217 of cash on hand. Sources and uses of our cash for the year ended December 31, 2013 have been from our operations, as described below.


Table of Contents

Consolidated net working capital decreased to $5,978 at December 31, 2013 from $8,893 at December 31, 2012. Our cash flows from operating, investing and financing activities, as reflected in the statement of cash flows for the years ended December 31, are summarized as follows:

                                            December 31,     December 31,     December 31,
                                                2013             2012             2011
Cash provided by (used in):
Operating activities                        $       2,674    $       2,006    $          (3 )
Investing activities                                 (930 )         (1,109 )         (2,582 )
Financing activities                               (1,763 )           (799 )          2,420
Effect of exchange rate changes on cash                11                8                3
Increase (decrease) in cash                 $          (8 )  $         106    $        (162 )

Operating Activities. The most significant items that contributed to the $2,674 of cash provided by continuing operations were increases in accounts payable and decreases in inventory, receivables, and other assets. Days sales in inventory decreased from 78 at December 31, 2012 to 76 at December 31, 2013. Days payables outstanding increased from 39 days at December 31, 2012 to 50 days at December 31, 2013. Day sales outstanding decreased from 38 days at December 31, 2012 to 33 days at December 31, 2013.

Investing Activities. Net cash used by investing activities consisted of purchases of property, plant and equipment of $930 primarily related to the infrastructure investment at our Asian facilities.

Financing Activities. Net cash used by financing activities of $1,763 was comprised primarily of repayments of borrowings under our credit facilities, partially offset by proceeds of new borrowings.

Cash generated from operations may be affected by a number of factors. See "Forward Looking Statements" and "Item 1A Risk Factors" contained in this Form 10-K for a discussion of some of the factors that can negatively impact the amount of cash we generate from our operations.

We had the following bank arrangements at December 31:

                                                        December 31,     December 31,
                                                            2013             2012

Total borrowing capacity under existing facilities      $      11,051    $      13,233

Facility Borrowings:
Domestic revolving credit facility                              4,450            4,360
Domestic term loan                                              2,750            3,750
Foreign overdraft and letter of credit facility                 1,281            1,795
Total borrowings and commitments                                8,481            9,905

Remaining availability under existing facilities        $       2,570    $       3,328

Domestic Credit Facilities

The Company and its domestic subsidiaries are parties to a credit facility with The PrivateBank and Trust Company. The credit facility, as amended, provides for:

† an $8,000 revolving credit facility, with a $200 sub facility for . . .

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