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INTRICON CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Business Overview Headquartered in Arden Hills, Minnesota, IntriCon Corporation (together with its subsidiaries referred to as the "Company", "IntriCon," "we", "us" or "our") is an international company engaged in designing, developing, engineering and manufacturing body-worn devices. In addition to its operations in Minnesota, the Company has facilities in California, Singapore, Indonesia and Germany. Information contained in this section of this Quarterly Report on Form 10-Q and expressed in U.S. dollars is presented in thousands (000s), except for per share data and as otherwise noted. 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 its remaining security and certain microphone and receiver businesses effective January 27, 2014; 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. For all periods presented, the Company classified its former security, certain microphone and receiver businesses as discontinued operations. Unless otherwise indicated, the following description of our business refers only to continuing operations. Market Overview IntriCon 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. Revenue from the medical bio-telemetry and value hearing health markets is reported on the respective medical and hearing health lines in the discussion of our results of operation in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 16 "Revenue by Market" to the Company's consolidated condensed financial statements included herein. Medical Bio-Telemetry In the medical bio-telemetry market, the Company is focused on sales of bio-telemetry devices for life-critical diagnostic monitoring. Using our nanoDSP and BodyNet™ technology platforms, the Company manufactures microelectronics, micro-mechanical assemblies, high-precision injection-molded plastic components and complete bio-telemetry devices for emerging and leading medical device manufacturers. The medical industry is faced with pressures to reduce the cost of healthcare. Driven by core technologies, such as the IntriCon Physiolink™ that wirelessly connects patients and care givers in non-traditional ways, IntriCon helps shift the point of care from expensive traditional settings, such as hospitals, to less expensive non-traditional settings like the home. 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. Increasingly, the medical industry is looking for wireless, low-power capabilities in their devices. We have a strategic partnership with Advanced Medical Electronics Corp. (AME) that allows us to develop new bio-telemetry devices that better connect patients and care givers, providing critical information and feedback. Through the further development of our ULP BodyNet family, we believe the bio-telemetry markets offer significant opportunity. 17-------------------------------------------------------------------------------- Table of Contents IntriCon currently has a strong presence in both the diabetes and cardiac diagnostic monitoring bio-telemetry markets. For diabetes, IntriCon has partnered with Medtronic to manufacture their wireless continuous glucose monitors and sensors that measure glucose levels and deliver real-time blood glucose trend information. Along with the wireless glucose monitor, IntriCon also manufactures a variety of related accessories. During the 2013 third quarter, Medtronic received Food and Drug Administration (FDA) approval for their MiniMed 530G insulin pump. Further, we believe there are opportunities to expand our diabetes product offering with Medtronic as well as move into new markets outside of the diabetes market. In the cardiac diagnostic monitoring market, we provide solutions for ambulatory cardiac monitoring. Our first two product platforms, Sirona and Centauri, received FDA 510(k) approval in late 2011. The Sirona platform, which incorporates the PhysioLink technology, is essentially two products in one design: it can be used as an event recorder, a holter monitor or both. This platform is very small, rechargeable, and water spray proof. The Company has contracts in place with lead customers for the Sirona platform and anticipates expanding that customer base during the second half of 2014. IntriCon has a suite of medical coils and micro coils that it offers to various original equipment manufacturing (OEM) customers. These products are currently being used in pacemaker programming and interventional catheter positioning applications. As part of the global restructuring initiative, the Company is increasing its investment of resources and capital to help expand our customer base and market share. Lastly, IntriCon manufactures bubble sensors and flow restrictors that monitor and control the flow of fluid in an intravenous infusion system as well as a family of safety needle products for an OEM customer that utilizes IntriCon's insert and straight molding capabilities. These products are assembled using full automation, including built-in quality checks within the production lines. IntriCon is targeting 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. To do so, IntriCon is focusing more capital and resources in sales and marketing to expand its reach to other large medical device and health care companies. Value Hearing Health Market The Company believes the value hearing health (VHH) market offers significant growth opportunities. In the United States alone, there are approximately 36 million hearing impaired individuals. This population is expected to grow significantly over the next ten years as the 65-year-old-plus age demographic is one of the fastest growing segments in the U.S., Europe and Japan. The current market penetration into the U.S. hearing impaired population is approximately 20%. We believe the U.S. market penetration is low primarily due to the high costs to purchase a hearing device, consolidation at the retail level and inconveniences in the distribution channel. This has created the opportunity for alternative care models, such as the value hearing aid (VHA) channel and personal sound amplifier (PSAP) channel. To capitalize on these opportunities, IntriCon has increased its sales and marketing expertise and hired an industry veteran to help spearhead the Company's efforts in the VHH market. The Company is aggressively pursuing larger customers who can benefit from our value proposition and are continuing to make significant investments to target emerging larger value hearing health opportunities. We anticipate securing at least one of these opportunities in the next six months. In the VHA channel, the Company entered into a manufacturing agreement with hi HealthInnovations, a UnitedHealth Group company, to become their supplier of hearing aids. At the beginning of 2012, hi HealthInnovations launched a suite of high-tech, lower-cost hearing devices for their Medicare and Part D participants and later in the year announced they were increasing this offering to the over 26 million people enrolled in their employer-sponsored and individual health benefit plans. The insurance model has been successfully demonstrated internationally, where several countries providing a full insurance program are serving 40% to 70% of the hearing impaired population. Further, research in the U.S. has shown a fully insured model will encourage an individual to seek treatment at an earlier stage of hearing loss, greatly increasing the market size and penetration. 18 -------------------------------------------------------------------------------- Table of Contents In personal sound amplifier products, the FDA has created a PSAP category, which include ear worn devices that provide cost effective sound amplification. These devices are not hearing aids and make no claims of compensating for hearing loss. They can be purchased "off-the-shelf" and are not fit or prescribed to meet a specific individual's needs. Rather, these devices amplify sound and tend to be used in noisy or challenging environments. They have a significantly lower retail price to the consumer than traditional hearing aids. Additionally, the Company sees great opportunity to market its situational listening devices (SLD's). Much like the PSAP devices, these devices are intended to help people hear in noisy environments like restaurants and automobiles, and listen to television, music, and direct broadcast by wireless connection. Such devices are intended to be supplements to conventional hearing aids, which do not handle those situations well. The SLD's will be based on our PhysioLink technology, which was demonstrated at the 2013 annual convention of the American Academy of Audiology. The product line consists of an earpiece, TV transmitter, companion microphone, iPod/iPhone transmitter, and USB transmitter. We also believe there are niches in the conventional hearing health channel that will embrace our VHH proposition, as high costs of conventional devices constrain their growth potential. Additionally, we believe there is a large international market, most notably in the so-called BRIC countries (Brazil, Russia, India and China), for this type of product offering. We believe IntriCon is very well positioned to serve these VHH market channels. 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 Audion Amplifiers, APT™ and Lumen™ devices will drive market share gains into all channels of the emerging VHH market. Professional Audio Communications IntriCon entered the high-quality audio communication device market in 2001, and now has a line of miniature, professional audio headset products used by customers focusing on emergency response needs. The line includes several communication devices that are extremely portable and perform well in noisy or hazardous environments. These products are well suited for applications in the fire, law enforcement, safety, aviation and military markets. In addition, the Company has a line of miniature ear- and head-worn devices used by performers and support staff in the music and stage performance markets. We believe performance in difficult listening environments and wireless operations will continue to improve as these products increasingly include our proprietary nanoDSP, wireless nanoLink and PhysioLink technologies. Core Technologies Overview Our core technologies expertise is focused on three main markets: medical bio-telemetry, value hearing health and professional audio communications. Over the past several years, the Company has increased investments in the continued development of four critical core technologies: Ultra-Low-Power (ULP) Digital Signal Processing (DSP), Ultra-Low-Power Wireless, Microminiaturization, and Miniature Transducers. These four core technologies serve as the foundation of current and future product platform development, designed to meet the rising demand for smaller, portable more advanced devices. The continued advancements in this area have allowed the Company to further enhance the mobility and effectiveness of miniature body-worn devices. Ultra-Low-Power Digital Signal Processing DSP converts real-world analog signals into a digital format. Through our nanoDSP™ technology, IntriCon offers an extensive range of ULP DSP amplifiers for hearing, medical and professional audio applications. Our proprietary nanoDSP incorporates advanced ultra-miniature hardware with sophisticated signal processing algorithms to produce devices that are smaller and more effective. The Company further expanded its DSP portfolio including improvements to its Reliant CLEAR™ feedback canceller, offering increased added stable gain and faster reaction time. Additionally, newly developed DSP technologies are utilized in our recently unveiled Audion4™, our new four-channel hearing aid amplifier. The Audion4 is a feature-rich amplifier designed to fit a wide array of applications. In addition to multiple compression channels, the amplifier has a complete set of proven adaptive features which greatly improve the user experience. Ultra-Low-Power Wireless Wireless connectivity is fast becoming a required technology, and wireless capabilities are especially critical in new body-worn devices. IntriCon's BodyNet™ ULP technology, including the nanoLink™ and PhysioLink™ wireless systems, offers solutions for transmitting the body's activities to caregivers, and wireless audio links for professional communications and surveillance products. Potential BodyNet applications include electrocardiogram (ECG) diagnostics and monitoring, diabetes monitoring, sleep apnea studies and audio streaming for hearing devices. 19-------------------------------------------------------------------------------- Table of Contents IntriCon is in the final stages of commercializing its PhysioLink wireless technology, which will be incorporated into product platforms serving the medical, hearing health and professional audio communication markets. This system is based on 2.4GHz proprietary digital radio protocol in the industrial-scientific-medical (ISM) frequency band and enables audio and data streaming to ear-worn and body-worn applications over distances of up to five meters. Microminiaturization IntriCon excels at miniaturizing body-worn devices. We began honing our microminiaturization skills over 30 years ago, supplying components to the hearing health industry. Our core miniaturization technology allows us to make devices for our markets that are one cubic inch and smaller. We also are specialists in devices that run on very low power, as evidenced by our ULP wireless and DSP. Less power means a smaller battery, which enables us to reduce size even further, and develop devices that fit into the palm of one's hand. Miniature Transducers IntriCon's advanced transducer technology has been pushing the limits of size and performance for over a decade. Included in our transducer line are our miniature medical coils and micro coils used in pacemaker programming and interventional catheter positioning applications. We believe with the increase of greater interventional care that our coil technology harbors significant value. Forward-Looking and Cautionary Statements Certain statements included in this Quarterly Report on Form 10-Q or documents the Company files with the Securities and Exchange Commission, which are not historical facts, or that include forward-looking terminology such as "may", "will", "believe", "anticipate", "expect", "should", "optimistic" "continue", "estimate", "intend", "plan", "would", "could", "guidance", "potential", "opportunity", "project", "forecast", "confident", "projections", "schedule", "designed", "future", "discussion", "if" or the negative thereof or other variations thereof, are forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933, and the regulations thereunder), which are intended to be covered by the safe harbors created thereby. These statements may include, but are not limited to statements in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to the Company's Condensed Consolidated Financial Statements" such as net operating loss carryforwards, the ability to meet cash requirements for operating needs, the ability to meet liquidity needs, assumptions used to calculate future level of funding of employee benefit plans, the adequacy of insurance coverage and the impact of new accounting pronouncements and litigation. Forward-looking statements also include, without limitation, statements as to the Company's expected future results of operations and growth, the Company's ability to meet working capital requirements, the Company's business strategy, the expected increases in operating efficiencies, anticipated trends in the Company's markets, estimates of goodwill impairments and amortization expense of other intangible assets, estimates of future royalty payments from the Global Coils sale, the effects of changes in accounting pronouncements, the effects of litigation and the amount of insurance coverage, expected costs and savings from the restructuring, and statements as to trends or the Company's or management's beliefs, expectations and opinions. Forward-looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements. In addition to the factors discussed in this Quarterly Report on Form 10-Q, certain risks, uncertainties and other factors can cause actual results and developments to be materially different from those expressed or implied by such forward-looking statements, including, without limitation, the following: † our ability to successfully implement the Company's business and growth strategy; † risks arising in connection with the insolvency of our former subsidiary, Selas SAS, and potential liabilities and actions arising in connection therewith; † the volume and timing of orders received by the Company, particularly from Medtronic and hi HealthInnovations; † changes in estimated future cash flows; † our ability to collect on our accounts receivable; † foreign currency movements in markets the Company services; † changes in the global economy and financial markets; † the effects of federal government budget cutting and the sequestration; 20 -------------------------------------------------------------------------------- Table of Contents † weakening demand for the Company's products due to general economic conditions; † changes in the mix of products sold; † our ability to meet demand; † changes in customer requirements; † timing and extent of research and development expenses; † FDA approval, timely release and acceptance of the Company's products; † competitive pricing pressures; † pending and potential future litigation; † cost and availability of electronic components and commodities for the Company's products; † our ability to create and market products in a timely manner and develop products that are inexpensive to manufacture; † our ability to comply with covenants in our debt agreements or to obtain waivers if we do not comply; † our ability to repay debt when it comes due; † ability to obtain extensions of or existing credit facility or a new credit facility; † the loss of one or more of our major customers; † our ability to identify, complete and integrate acquisitions; † effects of legislation; † effects of foreign operations; † our ability to develop new products such as Centauri, Overtus, Scenic and APT; † our ability to recruit and retain engineering and technical personnel; † the costs and risks associated with research and development investments; † the recent recessions in Europe and the debt crisis in certain countries in the European Union; † our ability and the ability of our customers to protect intellectual property; and † loss of members of our senior management team. For a description of these and other risks, see Part I, "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013, and other risks described elsewhere in this Quarterly Report on Form 10-Q, or in other filings the Company makes from time to time with the Securities and Exchange Commission. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. Critical Accounting Policies The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Certain accounting estimates and assumptions are particularly sensitive because their significance to the consolidated condensed financial statements and the possibility that future events affecting them may differ markedly. The accounting policies of the Company with significant estimates and assumptions include the Company's revenue recognition, accounts receivable reserves, inventory valuation, goodwill, long-lived assets, deferred taxes policies and employee benefit obligations. These and other significant accounting policies are described in and incorporated by reference from "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 1 to the financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Results of Operations Sales, net Our net sales are comprised of three main markets: medical, hearing health, and professional audio communications. Below is a summary of our sales by main markets for the three and six months ended June 30, 2014 and 2013: Change Three Months Ended June 30 2014 2013 Dollars Percent Medical $ 9,230 $ 4,890 $ 4,340 88.8 % Hearing Health 5,617 4,989 628 12.6 % Professional Audio Communications 2,660 1,600 1,060 66.3 % Consolidated Net Sales $ 17,507 $ 11,479 $ 6,028 52.5 % Six Months Ended June 30 Medical $ 18,713 $ 12,014 $ 6,699 55.8 % Hearing Health 11,476 10,227 1,249 12.2 % Professional Audio Communications 4,628 3,364 1,264 37.6 % Consolidated Net Sales $ 34,817 $ 25,605 $ 9,212 36.0 % 21 -------------------------------------------------------------------------------- Table of Contents For the three and six months ended June 30, 2014, we experienced increases of 88.8% and 55.8% in net sales in the medical market compared to the same periods in 2013. In September 2013, Medtronic obtained the FDA approval for the 530G insulin pump system which is the primary reason sales have increased significantly from the prior period. While IntriCon expects medical sales growth to remain strong overall in 2014 year over year, the Company does not anticipate a sequential increase from the second quarter. Management believes that the industry-wide trend to shift 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 three and six months ended June 30, 2014 increased 12.6% and 12.2% compared to the same periods in 2013. The increases for the three and six months ended June 30, 2014 were chiefly due to strong device sales, including those into the personal sound amplifier products (PSAP) channel, slightly offset by lower conventional channel sales. 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 hired an industry 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. Net sales to the professional audio device sector increased 66.3% and 37.6% for the three and six months ended June 30, 2014 compared to the same periods in 2013. During the second quarter, IntriCon began delivery on a significant new contract with the Singapore government to provide technically advanced headsets worn in military applications. This contract will run through the end of 2014. 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. IntriCon will continue to leverage its core technology in professional audio to support existing customers, as well as pursue related hearing health and medical product opportunities. Gross profit Gross profit, both in dollars and as a percent of sales, for the three and six months ended June 30, 2014 and 2013, was as follows: 2014 2013 Change Percent Percent Three Months Ended June 30 Dollars of Sales Dollars of Sales Dollars Percent Gross Profit $ 4,772 27.3 % $ 1,862 16.2 % $ 2,910 156.3 % Six Months Ended June 30 Gross Profit $ 9,545 27.4 % $ 5,631 22.0 % $ 3,914 69.5 % The 2014 gross profit increase over the comparable prior year period was primarily due to higher overall sales volumes and cost reductions from global restructuring initiatives, partially offset by a less favorable sales mix. 22-------------------------------------------------------------------------------- Table of Contents Sales and Marketing, General and Administrative and Research and Development Expenses Sales and marketing, general and administrative and research and development expenses for the three and six months ended June 30, 2014 and 2013 were as follows: 2014 2013 Change Percent PercentThree Months Ended June 30 Dollars of Sales Dollars of Sales Dollars Percent Sales and Marketing $ 891 5.1 % $ 731 6.4 % $ 160 21.9 % General and Administrative 1,616 9.2 % 1,367 11.9 % 249 18.2 % Research and Development 1,148 6.6 % 1,249 10.9 % (101 ) -8.1 % Six Months Ended June 30 Sales and Marketing $ 1,898 5.5 % $ 1,623 6.3 % $ 275 16.9 % General and Administrative 3,240 9.3 % 2,927 11.4 % 313 10.7 % Research and Development 2,316 6.7 % 2,478 9.7 % (162 ) -6.5 % Sales and marketing expenses increased due to the addition of experienced professionals and greater commission expenses based on the significant revenue growth. General and administrative expenses are greater than the prior year period primarily due to increased support costs. Research and development decreased over the prior year three month period primarily due to cost reduction from the restructuring initiatives. Restructuring charges 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. The plan was approved by the Company's Board of Directors on June 12, 2013. 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 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 its remaining security, microphone and receiver operations; added experienced professionals in value hearing health; and focused more resources in medical biotelemetry. During the three and six months ended June 30, 2014, the Company incurred restructuring charges of $0 and $83 and during the three and six months ended June 30, 2013, the Company incurred restructuring charges of $199 and $199. These charges are primarily related to employee termination benefits, from the restructuring of its continuing operations. In the future, the Company does not expect to incur any additional cash charges related to this restructuring. Interest expense Net interest expense for the three and six months ended June 30, 2014 was $125 and $263 compared to $154 and $307 for the comparable three and six month periods in 2013. The decrease in interest expense was primarily due to lower average debt balances as compared to the prior year. Equity in loss of partnerships The equity in loss of partnerships for the three and six months ended June 30, 2014 was $73 and $108 compared to $77 and $135 for the same periods in 2013, due to changes in carrying amounts described below. The Company recorded a decrease of $49 and $84 in the carrying amount of its HIMPP investment, reflecting amortization of the patents, other intangibles and the Company's portion of the partnership's operating results for the three and six months ended June 30, 2014 compared to a decrease of $77 and $135 in the same respective periods in 2013. Also, in the second quarter of 2014 the Company paid $24 in operating expenses for HIMPP. 23-------------------------------------------------------------------------------- Table of Contents Other income (expense) Other income (expense) for the three and six months ended June 30, 2014 was $(49) and $46 compared to other income (expense) of ($7) and $83 for the same periods in 2013. The change in other income primarily related to foreign government grants and tax refunds. Income tax expense Income tax expense for the three and six months ended June 30, 2014 was $57 and $83 compared to $48 and $38 for the same periods in 2013. The expense for the three and six months ended June 30, 2014 was primarily due to taxable income generated by foreign operations. Loss from discontinued operations Loss from discontinued operations, net of income taxes, for the three and six months ended June 30, 2014 was $0 and $270 compared to $1,473 and $1,921 for the same periods in 2013. Included in the net loss for the three and six months ended June 30, 2013 were $983 in impairment charges primarily related to long-lived assets and goodwill. Liquidity and Capital Resources As of June 30, 2014, we had $161 of cash on hand. Sources of our cash for the three months ended June 30, 2014 have been from our operating activities, as described below. The Company's cash flows from operating, investing and financing activities, as reflected in the statement of cash flows, are summarized as follows: Six Months Ended June 30, 2014 June 30, 2013 Cash provided by (used in): Operating activities $ 1,293 $ 580 Investing activities (139 ) (214 ) Financing activities (1,217 ) (481 ) Effect of exchange rate changes on cash 7 (2 ) Decrease in cash $ (56 ) $ (117 ) The most significant items that contributed to the $1,293 of cash provided by operating activities was the net income of $1,330 and increase in accounts payable and accrued expenses partially offset by an increase in accounts receivable and inventory. Net cash used in investing activities of $139 consisted of $668 of purchases of property, plant and equipment partially offset by proceeds of $500 from the sale of the Company's discontinued securities, certain microphone and receiver business. Net cash used in financing activities of $1,217 was comprised primarily of repayments of borrowings under our credit facilities and an increase in restricted cash partially offset by proceeds from long-term borrowings. The Company had the following bank arrangements: June 30, 2014 December 31, 2013 Total borrowing capacity under existing facilities $ 11,959 $ 11,051 Facility borrowings: Domestic revolving credit facility 3,350 4,450 Domestic term loan 2,250 2,750 Foreign overdraft and letter of credit facility 1,626 1,281 Total borrowings and commitments 7,226 8,481 Remaining availability under existing facilities $ 4,733 $ 2,570 24 -------------------------------------------------------------------------------- Table of Contents 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 letters of credit. Under the revolving credit facility, the availability of funds depends on a borrowing base composed of stated percentages of the Company's eligible trade receivables and eligible inventory, and eligible equipment less a reserve; and † a term loan in the original amount of $4,000. In February 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. The amendment, among other things: † extended the term loan and revolving loan maturity date to February 28, 2018, keeping the existing term loan amortization schedule in place; † increased the eligible accounts receivable borrowing percentage from eighty percent to eight-five percent for all eligible accounts other than two specific customers which will be ninety percent. Under the revolving credit facility as amended, the availability of funds depends on a borrowing base composed of stated percentages of the Company's eligible trade receivables and inventory, less a reserve; † amended the applicable base rate margin, applicable LIBOR rate margin, applicable LOC fee and applicable non-use fee based on the then applicable leverage ratio; † amended the funded debt to EBITDA and fixed charge coverage covenants; † revised the definition of net income; † approved the application of net proceeds from the IntriCon Tibbetts asset sale against amounts outstanding under the revolving credit facility; and † waived certain financial covenant defaults as of December 31, 2013. Loans under the credit facility are secured by a security interest in substantially all of the assets of the Company and its domestic subsidiaries including a pledge of the stock of its domestic subsidiaries. Loans under the credit facility bear interest at varying rates based on the Company's leverage ratio of funded debt / EBITDA, at the option of the Company, at: † the London InterBank Offered Rate ("LIBOR") plus 2.75% - 4.00%, or † the base rate, which is the higher of (a) the rate publicly announced from time to time by the lender as its "prime rate" and (b) the Federal Funds Rate plus 0.5%, plus 0.00% - 1.25% ; in each case, depending on the Company's leverage ratio. Interest is payable monthly in arrears, except that interest on LIBOR based loans is payable at the end of the one, two or three month interest periods applicable to LIBOR based loans. IntriCon is also required to pay a non-use fee equal to 0.25% per year of the unused portion of the revolving line of credit facility, payable quarterly in arrears. Weighted average interest on the revolving credit facility was 5.06% for the six months ended June 30, 2014 and 4.65% for the year ended December 31, 2013. The outstanding balance of the revolving credit facility was $3,350 and $4,450 at June 30, 2014 and December 31, 2013, respectively. The total availability on the revolving credit facility was approximately $3,704 and $1,682 at June 30, 2014 and December 31, 2013, respectively. 25-------------------------------------------------------------------------------- Table of Contents The outstanding principal balance of the term loan, as amended, is payable in quarterly installments of $250. Any remaining principal and accrued interest is payable on February 28, 2018. IntriCon is also required to use 100% of the net cash proceeds of certain asset sales (excluding inventory and certain other dispositions), sale of capital securities or issuance of debt to pay down the term loan. The Company was in compliance with the financialcovenants under the credit facility as of June 30, 2014. Foreign Credit Facility In addition to its domestic credit facilities, the Company's wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd. that provides for a $2,655 line of credit as of June 30, 2014 based on applicable exchange rates. The international credit agreement was modified in August 2010 and again in August 2011 to allow for an additional total of $736 in borrowing under the existing base to fund the Singapore facility relocation, Batam facility construction and various other capital needs with varying due dates from 2013 to 2015. Borrowings bear interest at a rate of .75% to 2.5% over the lender's prevailing prime lending rate. Weighted average interest on the international credit facilities was 4.08% and 3.95% for the six months ended June 30, 2014 and the year ended December 31, 2013. The outstanding balance was $1,626 and $1,281 at June 30, 2014 and December 31, 2013, respectively. The total remaining availability on the international senior secured credit agreement was approximately $1,029 and $888 at June 30, 2014 and December 31, 2013, respectively. We believe that funds expected to be generated from operations, the available borrowing capacity through our revolving credit loan facilities and the control of capital spending will be sufficient to meet our anticipated cash requirements for operating needs and for repayment of maturing debt for at least the next 12 months. If, however, we do not generate sufficient cash from operations, or if we incur additional unanticipated liabilities, we may be required to seek additional financing or sell equity or debt on terms which may not be as favorable as we could have otherwise obtained. No assurance can be given that any refinancing, additional borrowing or sale of equity or debt will be possible when needed or that we will be able to negotiate acceptable terms. In addition, our access to capital is affected by prevailing conditions in the financial and equity capital markets, as well as our own financial condition. Furthermore, if we fail to meet our financial and other covenants under our loan agreements, absent waiver, we will be in default of the loan agreements and our lenders could take action that would adversely affect our business. There can be no assurance that our lenders will provide a waiver of any default in our loan covenants. While management believes that we will be able to meet our liquidity needs for at least the next 12 months, no assurance can be given that we will be able to do so. |