Table of Contents
Interest expense
Net interest expense for the three and nine months ended September 30,
2010 was $158 and $500, respectively, compared to $378 and $621 for the same
periods in 2009. The reduction in interest is primarily due to the August 2009
debt financing with PrivateBank and Trust Company which created higher expense
in 2009. Additional 2009 interest charges included $84 of deferred financing
costs, $121 to terminate and settle the Bank of America interest rate swap and
$62 in changes and interest incurred to repurchase equipment under our Bank of
America capital lease facility. These changes were partially offset by higher
2010 interest rates in effect, as discussed below in Liquidity and Capital
Resources.
Equity in income (loss) of partnerships
The equity in income (loss) of partnerships for the three and nine
months ended September 30, 2010 was $54 and $42, respectively, compared to
($19) and ($220) for the same periods in 2009, due to changes in carrying
amounts described below.
The Company recorded a $37 and $154 decrease in the carrying amount of
the HIMPP investment, reflecting amortization of the patents, other intangibles
and the Companys portion of the partnerships operating results for the three
and nine months ended September 30, 2010, respectively, compared to decreases
of $37 and $165 in the same respective periods in 2009.
The Company recorded a $91 and $196 increase in the carrying amount of
IntriCon Tibbetts Corporations investment in joint venture, reflecting the
Companys portion of the joint ventures operating results for the three and
nine months ended September 30, 2010, respectively. For the three and nine
months ended September 30, 2009, the Company recorded an increase of $18 and a
decrease of $105, respectively.
Other income (loss), net
Other income (loss), net for the three and nine months ended September
30, 2010, was ($57) and $29, compared to other income, net of ($243) and ($161)
for the same periods in 2009. The change in other income (loss), net primarily
related to changes in foreign currency exchange rates.
Income taxes
Income tax expense for the three and nine months ended September 30,
2010, was $31 and $106, respectively, compared to expense of $8 and benefit of
$30 and for the same periods in 2009. The expense and (benefit) for the three
and nine months ended September 30, 2010 and 2009 were primarily due to foreign
operating income (loss) and state taxes.
Liquidity and Capital Resources
As of September 30, 2010, we had $792 of cash on hand. Sources of our
cash for the nine months ended September 30, 2010 have been from our
operations, as described below.
The Companys cash flows from operating, investing and financing
activities, as reflected in the statement of cash flows, are summarized as
follows:
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Nine months Ended
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September 30,
2010
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September 30,
2009
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Cash
provided by (used in):
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Operating activities
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$
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1,302
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$
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1,410
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Investing activities
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(444
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)
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(2,001
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)
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Financing activities
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(447
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)
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1,621
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|
Effect of exchange rate changes on cash
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(4
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)
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3
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Increase in
cash and cash equivalents
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$
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407
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$
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1,033
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|
The most significant items that contributed to the $1,302 of cash
provided by operating activities was the change in net income adjusted for
significant non-cash depreciation and increases in accrued expenses and
accounts payable related to timing. These increases were partially offset by
increases in days sales outstanding from 42 days at December 31, 2009 to 49
days as of September 30, 2010.
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Table of Contents
Net cash provided by investing activities consisted of purchases of
property, plant and equipment of $1,219 partially offset by net proceeds from
the sale of the electronics business of $775.
Net cash used by financing activities of $447 was comprised primarily
of net payments of debt of $562.
The Company had the following bank arrangements:
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September 30,
2010
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December 31,
2009
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Total
borrowing capacity under existing facilities
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|
$
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10,903
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$
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12,376
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Facility
Borrowings:
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Domestic revolving credit facility
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4,440
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4,450
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Domestic term loan
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2,731
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3,250
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Foreign overdraft and letter of credit
facility
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1,005
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678
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|
Total
borrowings and commitments
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|
|
8,176
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|
8,378
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|
Remaining
availability under existing facilities
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|
$
|
2,727
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$
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3,998
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To finance a portion of the Datrix acquisition and replace the
Companys existing credit facilities with Bank of America, including capital
leases, the Company and its domestic subsidiaries entered into a three year
credit facility with The PrivateBank and Trust Company on August 13, 2009.
The credit facility provides for:
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▪
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an $8,000 revolving credit
facility, with a $200 subfacility for letters of credit. Under the revolving
credit facility, the availability of funds depends on a borrowing base
composed of stated percentages of the Companys eligible trade receivables
and eligible inventory, and eligible equipment less a reserve; and
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▪
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a $3,500 term loan.
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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 predefined levels of
Funded Debt / EBITDA, at the option of the Company, at:
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▪
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the London InterBank Offered
Rate (LIBOR) plus 3.00% - 4.00%, or
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▪
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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 0.25% -
1.25%.
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Weighted average interest on the new domestic asset-based revolving
credit facility was 4.36% for the nine months ended September 30, 2010 and
4.07% for the year ended December 31, 2009. The outstanding balance of the
revolving credit facility was $4,440 and $4,450 at September 30, 2010 and
December 31, 2009, respectively. The total remaining availability on the
revolving credit facility was approximately $1,755 and $2,821 at September
30, 2010 and December 31, 2009, respectively. The credit facility expires on
August 13, 2012 and all outstanding borrowings will become due and payable.
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The outstanding principal balance of the term loan is payable in
quarterly installments of varying amounts ranging from $169 to $188. Any
remaining principal and accrued interest is payable on August 13, 2012.
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.
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In March 2010, the Company entered into an amendment with The
PrivateBank to waive certain covenant violations at December 31, 2009 and
January 31, 2010 and reset certain covenant thresholds defined in the
original agreement. The Company was in compliance with all applicable covenants
under the credit facility, as amended, as of September 30, 2010.
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24
Table of Contents
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Upon termination of the Bank of America credit facility, the Company
was required to settle the outstanding obligations of $121 for the liability
related to its interest rate swap agreement with Bank of America and
recognize the corresponding charge of $121 in interest expense in the three
month period ended September 30, 2009, which was previously included in
accumulated other comprehensive loss. In addition, the Company expensed the
remaining deferred financing costs of $86 related to the Bank of America
facility, which was also included in interest expense in the three month
period ended September 30, 2009.
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The prior credit facility provided for:
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▪
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a $10,000 revolving credit
facility, with a $200 subfacility for letters of credit. Under the revolving
credit facility, the availability of funds depends on a borrowing base
composed of stated percentages of our eligible trade receivables and eligible
inventory, less a reserve.
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▪
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a $4,500 term loan, which was
used to fund the Companys May, 2007 acquisition of Tibbetts Industries, Inc.
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Loans under the credit facility were secured by a security interest
in substantially all of the assets of the borrowers including a pledge of the
stock of the subsidiaries. All of the borrowers were jointly and severally
liable for all borrowings under the credit facility.
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In June 2008, the Company completed a sale-leaseback of machinery and
equipment with Bank of America. The transaction generated proceeds of $1,098,
of which $1,013 was used to pay down the domestic term loan. The facility was
repaid on August 13, 2009 with proceeds borrowed under the new PrivateBank
facility.
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In addition to its domestic credit facilities, the Companys
wholly-owned subsidiary, IntriCon, PTE LTD., entered into an international
senior secured credit agreement with Oversea-Chinese Banking Corporation Ltd.
that provides for a $1,977 line of credit. Borrowings bear interest at a rate
of .75% to 2.5% over the lenders prevailing prime lending rate. Weighted
average interest on the international credit facilities was 4.14% for the
nine months ended September 30, 2010 and 5.31% for the year ended December
31, 2009. The outstanding balance was $1,005 and $678 at September 30, 2010
and December 31, 2009, respectively. The total remaining availability on the
international senior secured credit agreement was approximately $972 and
$1,177 at September 30, 2010 and December 31, 2009, respectively.
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The Company began relocation of its Singapore operation in the third
quarter of 2010, as required by the Singapore government, which is
redeveloping the land where the Singapore operation was located. This
includes construction of a new clean room to house future transfers of Class
2 and Class 3 medical devices, helping to meet the rising pressures from
medical customers to reduce costs. In connection with the relocation, the
Company entered into a lease agreement for the new facility. The new lease
agreement includes a five year term which commenced October 2010 with monthly
rental payments ranging from approximately $25 to $35 over the term of the
lease. Further, the Oversea-Chinese Banking Corporation Ltd. credit agreement
was modified in August 2010 to allow an additional $370 in borrowing under
the existing borrowing base to fund the Singapore facility relocation. The
borrowings will be repaid over a three year period.
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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 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.
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.
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25
Table of Contents
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Recent Accounting Pronouncements
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In January 2010, the FASB issued ASU No. 2010-06, Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair
Value Measurements, which amends ASC 820, Fair Value Measurements, by
requiring additional disclosures for transfers in and out of levels 1 and 2
and activity in level 3 fair value measurements. Additionally, the amendment
clarifies existing disclosure requirements surrounding the level of
disaggregation and valuation techniques and inputs. This guidance became
effective for us January 1, 2010 and did not have a material impact on our
consolidated financial statements.
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Critical Accounting Policies
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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.
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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 Companys 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 Managements Discussion and Analysis of Financial Condition
and Results of Operations, and Note 1 to the financial statements contained
in the Companys Annual Report on Form 10-K for the year ended December 31,
2009.
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26
Table of Contents
I
TEM 3.
Quantitative
and Qualitative Disclosures About Market Risk
For
information regarding the Companys exposure to certain market risks, see Item
7A, Quantitative and Qualitative Disclosures About Market Risk, in the
Companys Annual Report on Form 10-K for the year ended December 31, 2009.
There have been no material changes in the Companys market risk exposures
which have occurred since December 31, 2009.
I
TEM 4.
Controls
and Procedures
The Companys
management, with the participation of its chief executive officer and chief
financial officer, conducted an evaluation of the effectiveness of the
Companys disclosure controls and procedures, as defined in Exchange Act Rule
13a-15(e), as of September 30, 2010 (the Disclosure Controls Evaluation). Based
on the Disclosure Controls Evaluation, the Companys chief executive officer
and chief financial officer concluded that the Companys disclosure controls
and procedures were effective to provide a reasonable level of assurance that:
(i) information required to be disclosed by the Company in the reports the
Company files or submits under the Securities Exchange Act of 1934, as amended
(Exchange Act) is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions rules and
forms and (ii) information required to be disclosed in the reports the Company
files or submits under Exchange Act is accumulated and communicated to
management, including the principal executive officer and principal financial
officer, to allow timely decisions regarding required disclosure, all in
accordance with Exchange Act Rule 13a-15(e).
There were no
changes in the Companys internal control over financial reporting, as defined
in Exchange Act Rule 13a-15(f), during the quarter ended September 30, 2010,
that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. Because
of the inherent limitations in a cost-effective control system, misstatements
due to error or fraud may occur and not be detected.
27
Table of Contents
P
ART II - OTHER
INFORMATION
I
TEM 1.
Legal
Proceedings
The
information contained in note 14 to the Consolidated Condensed Financial
Statements in Part I of this quarterly report is incorporated by reference
herein.
I
TEM 1A.
Risk
Factors
In addition to
the other information set forth in this report, you should carefully consider
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report
on Form 10-K for the year ended December 31, 2009, which could materially
affect the Companys business, financial condition or future results. The risk
factors in the Companys Annual Report on Form 10-K have not materially
changed. The risks described in our Annual Report on Form 10-K are not the only
risks facing the Company. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial also may materially
adversely affect our business, financial condition and/or operating results.
I
TEM 2.
Unregistered
Sales of Equity Securities and Use of Proceeds
None.
I
TEM 3.
Defaults
upon Senior Securities
None.
I
TEM 4.
(Removed
and Reserved)
I
TEM 5.
Other
Information
None.
28
Table of Contents
I
TEM 6.
Exhibits
(a)
Exhibits
|
|
|
|
31.1
|
Certification
of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
|
|
31.2
|
Certification
of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
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|
|
32.1
|
Certification
of principal executive officer pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
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|
|
32.2
|
Certification
of principal financial officer to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
29
Table of Contents
S
IGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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|
|
|
INTRICON CORPORATION
|
|
(Registrant)
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|
|
|
Date:
November 10, 2010
|
By:
|
/s/ Mark S.
Gorder
|
|
|
Mark S.
Gorder
|
|
|
President
and Chief Executive Officer
|
|
|
(principal
executive officer)
|
|
|
|
Date:
November 10, 2010
|
|
|
|
By:
|
/s/ Scott
Longval
|
|
|
Scott
Longval
|
|
|
Chief
Financial Officer and Treasurer
|
|
|
(principal
financial officer)
|
30
Table of Contents
E
XHIBIT INDEX
|
|
31.1
|
Certification
of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32.1
|
Certification
of principal executive officer pursuant to U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
of principal financial officer to U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
31
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