0001114483-18-000014.txt : 20180504 0001114483-18-000014.hdr.sgml : 20180504 20180504132546 ACCESSION NUMBER: 0001114483-18-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 91 CONFORMED PERIOD OF REPORT: 20180330 FILED AS OF DATE: 20180504 DATE AS OF CHANGE: 20180504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Integer Holdings Corp CENTRAL INDEX KEY: 0001114483 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 161531026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1230 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16137 FILM NUMBER: 18807075 BUSINESS ADDRESS: STREET 1: 2595 DALLAS PARKWAY, SUITE 310 CITY: FRISCO STATE: TX ZIP: 75034 BUSINESS PHONE: (214) 618-5243 MAIL ADDRESS: STREET 1: 2595 DALLAS PARKWAY, SUITE 310 CITY: FRISCO STATE: TX ZIP: 75034 FORMER COMPANY: FORMER CONFORMED NAME: GREATBATCH, INC. DATE OF NAME CHANGE: 20050531 FORMER COMPANY: FORMER CONFORMED NAME: WILSON GREATBATCH TECHNOLOGIES INC DATE OF NAME CHANGE: 20000511 10-Q 1 form10-q2018x03x30.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________ 
FORM 10-Q
_____________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2018
Commission File Number 1-16137
 _____________________________________ 
INTEGER HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
 _____________________________________ 
Delaware
 
16-1531026
(State of
Incorporation)
 
(I.R.S. Employer
Identification No.)
2595 Dallas Parkway
Suite 310
Frisco, Texas 75034
(Address of principal executive offices)
(214) 618-5243
(Registrant’s telephone number, including area code)
 
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
 
 
 
 
 
Emerging growth company
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of May 1, 2018 was: 32,013,674 shares.




INTEGER HOLDINGS CORPORATION
Form 10-Q
For the Quarterly Period Ended March 30, 2018
TABLE OF CONTENTS


- 2 -



PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in thousands except share and per share data)
March 30,
2018
 
December 29,
2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
29,488

 
$
44,096

Accounts receivable, net of allowance for doubtful accounts of $0.7 million and $0.8 million, respectively
242,218

 
242,456

Inventories
239,490

 
227,534

Refundable income taxes
494

 
37

Prepaid expenses and other current assets
17,071

 
17,786

Total current assets
528,761

 
531,909

Property, plant and equipment, net
367,664

 
370,375

Goodwill
995,200

 
990,238

Other intangible assets, net
914,398

 
920,393

Deferred income taxes
4,388

 
4,152

Other assets
36,647

 
31,278

Total assets
$
2,847,058

 
$
2,848,345

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
32,813

 
$
30,469

Accounts payable
104,372

 
83,517

Income taxes payable
12,549

 
13,477

Accrued expenses
74,992

 
81,540

Total current liabilities
224,726

 
209,003

Long-term debt
1,528,944

 
1,578,696

Deferred income taxes
150,578

 
145,364

Other long-term liabilities
22,421

 
21,901

Total liabilities
1,926,669

 
1,954,964

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,138,402 and 31,977,953 shares issued, respectively; 32,011,286 and 31,871,427 shares outstanding, respectively
32

 
32

Additional paid-in capital
673,106

 
669,756

Treasury stock, at cost, 127,116 and 106,526 shares, respectively
(5,964
)
 
(4,654
)
Retained earnings
184,186

 
176,068

Accumulated other comprehensive income
69,029

 
52,179

Total stockholders’ equity
920,389

 
893,381

Total liabilities and stockholders’ equity
$
2,847,058

 
$
2,848,345

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 3 -



INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (Unaudited)
 
Three Months Ended
(in thousands except per share data)
March 30,
2018
 
March 31,
2017
Sales
$
381,745

 
$
345,413

Cost of sales
285,975

 
254,187

Gross profit
95,770

 
91,226

Operating expenses:
 
 
 
Selling, general and administrative expenses
41,238

 
39,499

Research, development and engineering costs
14,538

 
13,411

Other operating expenses
5,277

 
11,771

Total operating expenses
61,053

 
64,681

Operating income
34,717

 
26,545

Interest expense
26,445

 
28,893

(Gain) loss on cost and equity method investments, net
(4,970
)
 
398

Other loss, net
1,033

 
1,449

Income (loss) before income taxes
12,209

 
(4,195
)
Provision for income taxes
4,091

 
144

Net income (loss)
$
8,118

 
$
(4,339
)
Earnings (loss) per share:
 
 
 
Basic
$
0.25

 
$
(0.14
)
Diluted
$
0.25

 
$
(0.14
)
Weighted average shares outstanding:
 
 
 
Basic
31,902

 
31,016

Diluted
32,423

 
31,016

 
 
 
 
Comprehensive Income
 
 
 
Net income (loss)
$
8,118

 
$
(4,339
)
Other comprehensive income:
 
 
 
Foreign currency translation gain
13,441

 
6,536

Net change in cash flow hedges, net of tax
3,409

 
1,750

Other comprehensive income
16,850

 
8,286

Comprehensive income
$
24,968

 
$
3,947

The accompanying notes are an integral part of these condensed consolidated financial statements.


- 4 -



INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended
(in thousands)
March 30,
2018
 
March 31,
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
8,118

 
$
(4,339
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
26,334

 
24,606

Debt related amortization included in interest expense
2,871

 
3,437

Stock-based compensation
3,222

 
4,669

Non-cash (gain) loss on cost and equity method investments
(4,970
)
 
398

Other non-cash losses
123

 
1,101

Deferred income taxes
3,181

 
(1,753
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
1,008

 
(8,700
)
Inventories
(11,442
)
 
(5,956
)
Prepaid expenses and other current assets
2,810

 
1,853

Accounts payable
22,466

 
13,146

Accrued expenses
(6,031
)
 
4,401

Income taxes
(1,568
)
 
5,762

Net cash provided by operating activities
46,122

 
38,625

Cash flows from investing activities:
 
 
 
Acquisition of property, plant and equipment
(10,959
)
 
(12,787
)
Proceeds from sale of property, plant and equipment
898

 
459

Purchase of cost and equity method investments

 
(260
)
Net cash used in investing activities
(10,061
)
 
(12,588
)
Cash flows from financing activities:
 
 
 
Principal payments of long-term debt
(50,032
)
 
(79,151
)
Proceeds from issuance of long-term debt

 
50,000

Proceeds from the exercise of stock options
1,006

 
7,449

Payment of debt issuance costs

 
(1,789
)
Withholding tax paid related to stock-based compensation
(2,188
)
 

Net cash used in financing activities
(51,214
)
 
(23,491
)
Effect of foreign currency exchange rates on cash and cash equivalents
545

 
219

Net increase (decrease) in cash and cash equivalents
(14,608
)
 
2,765

Cash and cash equivalents, beginning of period
44,096

 
52,116

Cash and cash equivalents, end of period
$
29,488

 
$
54,881

Supplemental disclosure of cash flow information:
 
 
 
Noncash investing and financing activities:
 
 
 
Property, plant and equipment purchases included in accounts payable
$
2,007

 
$
3,243

The accompanying notes are an integral part of these condensed consolidated financial statements.


- 5 -



INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
 
Common Stock
 
Additional
Paid-In
Capital
 
Treasury Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
(in thousands)
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
December 29, 2017
31,978

 
$
32

 
$
669,756

 
(107
)
 
$
(4,654
)
 
$
176,068

 
$
52,179

 
$
893,381

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Net income

 

 

 

 

 
8,118

 

 
8,118

Other comprehensive income, net

 

 

 

 

 

 
16,850

 
16,850

Share-based compensation plans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Stock-based compensation

 

 
3,222

 

 

 

 

 
3,222

Net shares issued
160

 

 
128

 
(20
)
 
(1,310
)
 

 

 
(1,182
)
March 30, 2018
32,138

 
$
32

 
$
673,106

 
(127
)
 
$
(5,964
)
 
$
184,186

 
$
69,029

 
$
920,389

The accompanying notes are an integral part of these condensed consolidated financial statements.


- 6 -



INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1.)     BASIS OF PRESENTATION
Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly traded corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is one of the largest medical device outsource manufacturers in the world serving the cardiac, neuromodulation, orthopedics, vascular, advanced surgical and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition, it develops batteries for high-end niche applications in the energy, military, and environmental markets. The Company’s reportable segments are: (1) Medical and (2) Non-Medical. The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. Intercompany transactions and balances have been fully eliminated in consolidation.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2017.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The first quarter of 2018 and 2017 each contained 13 weeks and ended on March 30, and March 31, respectively. The Company’s 2018 and 2017 fiscal years will end or ended on December 28, 2018 and December 29, 2017, respectively.
(2.)     INVENTORIES
Inventories are comprised of the following (in thousands):
 
March 30,
2018
 
December 29,
2017
Raw materials
$
96,405

 
$
97,615

Work-in-process
104,612

 
92,650

Finished goods
38,473

 
37,269

Total
$
239,490

 
$
227,534


- 7 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(3.)     GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the quarter ended March 30, 2018 were as follows (in thousands):
 
Medical
 
Non- Medical
 
Total
December 29, 2017
$
973,238

 
$
17,000

 
$
990,238

Foreign currency translation
4,962

 

 
4,962

March 30, 2018
$
978,200

 
$
17,000

 
$
995,200

Intangible Assets
Intangible assets at March 30, 2018 and December 29, 2017 were as follows (in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Net
Carrying
Amount
March 30, 2018
 
 
 
 
 
 

Definite-lived:
 
 
 
 
 
 
 
Purchased technology and patents
$
256,719

 
$
(121,802
)
 
$
3,432

 
$
138,349

Customer lists
759,987

 
(95,149
)
 
20,872

 
685,710

Other
4,534

 
(7,809
)
 
3,326

 
51

Total
$
1,021,240

 
$
(224,760
)
 
$
27,630

 
$
824,110

Indefinite-lived:
 
 
 
 
 
 
 
Trademarks and tradenames


 
 
 
 
 
$
90,288

 
 
 
 
 
 
 
 
December 29, 2017
 
 
 
 
 
 

Definite-lived:
 
 
 
 
 
 
 
Purchased technology and patents
$
256,719

 
$
(117,695
)
 
$
2,483

 
$
141,507

Customer lists
759,987

 
(87,555
)
 
16,103

 
688,535

Other
4,534

 
(7,797
)
 
3,326

 
63

Total
$
1,021,240

 
$
(213,047
)
 
$
21,912

 
$
830,105

Indefinite-lived:
 
 
 
 
 
 
 
Trademarks and tradenames


 
 
 
 
 
$
90,288

Aggregate intangible asset amortization expense is comprised of the following (in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Cost of sales
$
4,068

 
$
4,084

Selling, general and administrative expenses
7,606

 
6,758

Research, development and engineering costs
39

 
136

Total intangible asset amortization expense
$
11,713

 
$
10,978

Estimated future intangible asset amortization expense based on the carrying value as of March 30, 2018 is as follows (in thousands):
 
2018
 
2019
 
2020
 
2021
 
2022
 
After 2022
Amortization Expense
$
33,872

 
$
45,724

 
$
46,349

 
$
45,470

 
$
43,430

 
$
609,265


- 8 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(4.)     DEBT
Long-term debt is comprised of the following (in thousands):
 
March 30,
2018
 
December 29,
2017
Senior secured term loan A
$
328,125

 
$
335,157

Senior secured term loan B
830,286

 
873,286

9.125% senior notes due 2023
360,000

 
360,000

Revolving line of credit
74,000

 
74,000

Unamortized discount on term loan B and debt issuance costs
(30,654
)
 
(33,278
)
Total debt
1,561,757

 
1,609,165

Current portion of long-term debt
(32,813
)
 
(30,469
)
Total long-term debt
$
1,528,944

 
$
1,578,696

Senior Secured Credit Facilities
The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), (ii) a $375 million term loan A facility (the “TLA Facility”), and (iii) a $1,025 million term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB facility was issued at a 1% discount.
Revolving Credit Facility
The Revolving Credit Facility matures on October 27, 2020. The Revolving Credit Facility also includes a $15 million sublimit for swingline loans and a $25 million sublimit for standby letters of credit. The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.175% and 0.25%, depending on the Company’s Total Net Leverage Ratio (as defined in the Senior Secured Credit Facilities agreement). Interest rates on the Revolving Credit Facility, as well as the TLA Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s Total Net Leverage Ratio, or (ii) the applicable LIBOR rate plus the applicable margin, which will range between 1.75% and 3.25%, based on the Company’s Total Net Leverage Ratio.
As of March 30, 2018, the Company had $74 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $116.8 million after giving effect to $9.2 million of outstanding standby letters of credit. As of March 30, 2018, the weighted average interest rate on all outstanding borrowings under the Revolving Credit Facility was 5.10%.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00. The outstanding amount of the Revolving Credit Facility approximated its fair value as of March 30, 2018 based upon the debt being variable rate and short-term in nature.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 2.25% or (ii) the applicable LIBOR rate plus 3.25%, with LIBOR subject to a 1.00% floor. As of March 30, 2018, the interest rates on the TLA Facility and TLB Facility were 5.13% and 4.99%, respectively. Additionally, if the Company receives both (a) a public corporate family credit rating from Moody’s Investors Services, Inc. of “B2” (stable outlook) or higher and (b) a public corporate credit rating from Standard & Poor’s Financial Services LLC of “B” (stable outlook) or higher, the interest rate margins for the TLB Facility will step down by an additional 25 basis points.
Subject to certain conditions, one or more incremental term loan facilities may be added to the Term Loan Facilities so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.
As of March 30, 2018, the estimated fair value of the TLB Facility was approximately $839 million, based on quoted market prices for the debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. The par amount of the TLA Facility approximated its fair value as of March 30, 2018 based upon the debt being variable rate in nature.

- 9 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(4.)     DEBT (Continued)
Covenants
The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 6.0:1.00, subject to periodic step downs beginning in the third quarter of 2018 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 2.75:1.00 subject to a step up beginning in the first quarter of 2019. As of March 30, 2018, the Company was in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants.
The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of March 30, 2018, the Company was in compliance with all negative covenants under the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become immediately due and payable.
9.125% Senior Notes due 2023
On October 27, 2015, the Company completed a private offering of $360 million aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”). All of the Senior Notes are outstanding as of March 30, 2018.
As of March 30, 2018, the estimated fair value of the Senior Notes was approximately $390 million, based on quoted market prices of these Senior Notes, recent sales prices for the Senior Notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
The indenture for the Senior Notes contain certain restrictive covenants and provides for customary events of default, subject in certain cases to customary cure periods, as a result of which the Senior Notes and any unpaid interest would become due and payable. As of March 30, 2018, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.
Contractual maturities under the Senior Secured Credit Facilities and Senior Notes for the remainder of 2018 and the next four years and thereafter, excluding any discounts or premiums, as of March 30, 2018 are as follows (in thousands):
 
 
2018
 
2019
 
2020
 
2021
 
2022
 
After 2022
Future minimum principal payments
 
$
23,437

 
$
37,500

 
$
111,500

 
$
229,688

 
$
830,286

 
$
360,000

Debt Issuance Costs and Discounts
The change in deferred debt issuance costs related to the Revolving Credit Facility is as follows (in thousands):
December 29, 2017
$
2,808

Amortization during the period
(247
)
March 30, 2018
$
2,561


- 10 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(4.)     DEBT (Continued)
The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows (in thousands):
 
Debt Issuance Costs
 
Unamortized Discount on TLB Facility
 
Total
December 29, 2017
$
26,889

 
$
6,389

 
$
33,278

Write-off of debt issuance costs and unamortized discount(1)
(745
)
 
(312
)
 
(1,057
)
Amortization during the period
(1,279
)
 
(288
)
 
(1,567
)
March 30, 2018
$
24,865

 
$
5,789

 
$
30,654

(1) 
The Company prepaid portions of its TLB Facility during 2018 and 2017. The Company recognized losses from extinguishment of debt during the quarters ended March 30, 2018 and March 31, 2017 of $1.1 million and $1.6 million, respectively, which is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income. The loss from extinguishment of debt represents the portion of the unamortized discount and debt issuance costs related to the portion of the TLB Facility that was prepaid.
Interest Rate Swap
During 2016, the Company entered into a three-year $200 million interest rate swap to hedge against potential changes in cash flows on the outstanding variable rate debt, which is indexed to the one-month LIBOR rate. The variable rate received on the interest rate swap and the variable rate paid on the outstanding debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same date. The swap is being accounted for as a cash flow hedge.
Information regarding the Company’s outstanding interest rate swap designated as a cash flow hedge as of March 30, 2018 is as follows (dollars in thousands):
Notional Amount
 
Start Date
 
End Date
 
Pay Fixed Rate
 
Receive Current Floating Rate
 
Fair Value
 
Balance Sheet Location
$
200,000

 
Jun-17
 
Jun-20
 
1.1325
%
 
1.8750
%
 
$
5,544

 
Other Long-Term Assets
The estimated fair value of the interest rate swap agreement represents the amount the Company would receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swap during the quarters ended March 30, 2018 and March 31, 2017 was considered ineffective. The amounts recorded to Interest Expense during the quarters ended March 30, 2018 and March 31, 2017 related to the Company’s interest rate swap were a reduction of $0.2 million and $0.1 million, respectively. The estimated Accumulated Other Comprehensive Income related to the Company’s interest rate swaps that is expected to be reclassified into earnings within the next twelve months is a $2.0 million gain.
(5.)     BENEFIT PLANS
The Company is required to provide its employees located in Switzerland, Mexico, France, and Germany certain statutorily mandated defined benefits. Components of net defined benefit cost for these plans were comprised of the following (in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Service cost
$
127

 
$
110

Interest cost
46

 
38

Amortization of net loss
16

 
17

Expected return on plan assets
(4
)
 
(4
)
Net defined benefit cost
$
185

 
$
161


- 11 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(6.)     STOCK-BASED COMPENSATION
The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders and are administered by the Board of Directors, or the Compensation and Organization Committee of the Board. The stock-based compensation plans provide for the granting of stock options, shares of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.
The components and classification of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Stock options
$
331

 
$
710

RSAs and RSUs (time-based)
2,078

 
2,204

Performance-based RSUs (“PSUs”)
813

 
1,755

Total stock-based compensation expense
$
3,222

 
$
4,669

 
 
 
 
Cost of sales
$
220

 
$
142

Selling, general and administrative expenses
2,965

 
2,159

Research, development and engineering costs
33

 
105

Other operating expenses
4

 
2,263

Total stock-based compensation expense
$
3,222

 
$
4,669

During the first quarter of 2017, the Company recorded $2.2 million of accelerated stock-based compensation expense in connection with the transition of its former Chief Executive Officer per the terms of his contract, which was classified as Other Operating Expenses.
The weighted average fair value and assumptions used to value options granted are as follows:
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Weighted average fair value
$
14.89

 
$
9.14

Risk-free interest rate
2.21
%
 
1.63
%
Expected volatility
39
%
 
38
%
Expected life (in years)
4.0

 
3.7

Expected dividend yield
%
 
%
The following table summarizes the Company’s stock option activity:
 
Number of
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(In Years)
 
Aggregate
Intrinsic
Value
(In Millions)
Outstanding at December 29, 2017
931,353

 
$
30.89

 
 
 
 
Granted
28,447

 
45.13

 
 
 
 
Exercised
(27,322
)
 
36.81

 
 
 
 
Forfeited or expired
(818
)
 
48.43

 
 
 
 
Outstanding at March 30, 2018
931,660

 
$
31.14

 
5.7
 
$
23.7

Exercisable at March 30, 2018
777,521

 
$
30.03

 
5.0
 
$
20.6


- 12 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(6.)     STOCK-BASED COMPENSATION (Continued)
During the three months ended March 30, 2018, the Company awarded grants of 0.3 million RSUs to certain members of management, of which 0.2 million are performance-based RSUs (“PSUs”) and the remainder are time-based RSUs that vest over three years. Of the PSUs, 0.1 million of the shares subject to each grant will be earned based upon achievement of specific Company performance metrics over a three-year performance period ending January 1, 2021, and 0.1 million of the shares subject to each grant will be earned based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over a three-year performance period ending January 1, 2021. The number of PSUs earned based on the achievement of the Company performance metrics and TSR performance requirements, if any, will vest based on the recipient’s continuous service to the Company over a period of generally one to three years from the grant date. The time-based RSUs generally vest ratably over a three-year period.
The grant-date fair value of the TSR portion of the PSUs granted during the three months ended March 30, 2018 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.92 years, (ii) risk free interest rate of 2.28%, (iii) expected dividend yield of 0.0% and (iv) expected stock price volatility over the expected term of the TSR award of 40%. The grant-date fair value of all other restricted stock awards is equal to the closing market price of Integer common stock on the date of grant.
The following table summarizes RSA and RSU activity:
 
Time-Vested
Activity
 
Weighted Average Fair Value
Nonvested at December 29, 2017
163,431

 
$
35.96

Granted
147,878

 
49.30

Vested
(11,999
)
 
49.78

Forfeited
(4,453
)
 
43.62

Nonvested at March 30, 2018
294,857

 
$
41.97

The following table summarizes PSU activity:
 
Performance-
Vested
Activity
 
Weighted
Average
Fair Value
Nonvested at December 29, 2017
469,889

 
$
32.37

Granted
159,669

 
45.37

Vested
(127,191
)
 
34.29

Forfeited
(129,311
)
 
33.36

Nonvested at March 30, 2018
373,056

 
$
36.93

(7.)     OTHER OPERATING EXPENSES
Other Operating Expenses is comprised of the following (in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Strategic reorganization and alignment
$
3,492

 
$

Manufacturing alignment to support growth
513

 

Consolidation and optimization initiatives
605

 
2,395

Acquisition and integration expenses

 
4,820

Asset dispositions, severance and other
667

 
4,556

Total other operating expenses
$
5,277

 
$
11,771


- 13 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(7.)     OTHER OPERATING EXPENSES (Continued)
Strategic Reorganization and Alignment
During the fourth quarter of 2017, the Company began to take steps to better align its resources in order to enhance the profitability of its portfolio of products. This includes improving its business processes and redirecting investments away from projects where the market does not justify the investment, as well as aligning resources with market conditions and the Company’s future strategic direction. The Company estimates that it will incur aggregate pre-tax charges in connection with the strategic reorganization and alignment plan of between approximately $10 million to $12 million, of which an estimated $8 million to $12 million are expected to result in cash outlays. During the three months ended March 30, 2018, the Company incurred charges relating to this initiative which primarily included severance and personnel related costs for terminated employees and fees for professional services. These expenses were primarily recorded within the Medical Segment. As of March 30, 2018, total expense incurred for this initiative since inception was $9.4 million. These actions are expected to be substantially completed by the end of the second quarter of 2018.
Manufacturing Alignment to Support Growth
In 2017, the Company initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth.  The plan involves the relocation of certain manufacturing operations and expansion of certain of the Company's facilities. The Company estimates that it will incur aggregate pre-tax restructuring related charges in connection with the realignment plan of between approximately $9 million to $11 million, the majority of which are expected to be cash expenditures, and capital expenditures of between approximately $4 million to $6 million. Costs related to the Company’s manufacturing alignment to support growth initiative were primarily recorded within the Medical Segment. As of March 30, 2018, total expense incurred for this initiative since inception was $0.9 million. These actions are expected to be substantially completed by the end of 2019.
Consolidation and Optimization Initiatives
In 2014, the Company initiated plans to transfer certain manufacturing functions performed at its facility in Beaverton, OR to a new facility in Tijuana, Mexico. Additionally, during 2016, the Company announced it would be closing its facility in Clarence, NY after transferring the machined component product lines manufactured in that facility to other Integer locations in the U.S. Costs related to the Company’s consolidation and optimization initiatives were primarily recorded within the Medical Segment. The Company does not expect to incur any material additional costs associated with these activities as they were substantially completed as of March 30, 2018.
The following table summarizes the change in accrued liabilities related to the initiatives described above (in thousands):
 
Severance and Retention
 
Other
 
Total
December 29, 2017
$
1,308

 
$

 
$
1,308

Restructuring charges
3,274

 
1,336

 
4,610

Cash payments
(3,136
)
 
(897
)
 
(4,033
)
March 30, 2018
$
1,446

 
$
439

 
$
1,885

Acquisition and Integration Expenses
The Company did not incur any additional costs associated with these activities during the three months ended March 30, 2018. During the three months ended March 31, 2017, the Company incurred $4.8 million in acquisition and integration costs related to the acquisition of Lake Region Medical, consisting primarily of integration costs. Integration costs primarily include professional, consulting, severance, retention, relocation, and travel costs. The $0.4 million of acquisition and integration costs accrued as of December 29, 2017 were paid during the three months ended March 30, 2018. These projects were completed as of December 29, 2017.
Asset Dispositions, Severance and Other
During the first quarter of 2018 and 2017, the Company recorded losses in connection with various asset disposals and/or write-downs. The 2017 amount also includes approximately $4.7 million in expense related to the Company’s leadership transitions, which were recorded within the corporate unallocated segment.

- 14 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(8.)     INCOME TAXES
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
Under GAAP, the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. As such, the Company recognized an estimate of the impact of the Tax Reform Act in the year ended December 29, 2017. The Company had an estimated $147.5 million of undistributed foreign earnings and profit subject to the deemed mandatory repatriation as of December 29, 2017 and recognized a provisional $14.7 million in 2017 for the one-time transition tax. The Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with the repatriation tax. In addition, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 29, 2017 and recognized a $56.5 million tax benefit in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 29, 2017. For further discussion of the impact of the Tax Reform Act for the year ended December 29, 2017 reference is made to Note 12 of the Company’s consolidated financial statements as of and for the year ended December 29, 2017 included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 29, 2017.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the tax impact of the revaluation of deferred tax assets and liabilities and the provisional tax impact related to deemed repatriated earnings and included these amounts in its consolidated financial statements for the year ended December 29, 2017. The ultimate impact may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. This accounting is expected to be complete by the date that the Company’s 2017 U.S. corporate income tax return is filed in 2018. During the three month period ended March 30, 2018, there were no changes made to the provisional amount recorded in 2017.
In addition to the reduction of the U.S. federal corporate tax rate and the one-time transition tax discussed above, the Tax Reform Act also established new tax laws that affect 2018, including, but not limited to: (i) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (ii) a new U.S. Income inclusion on certain earnings of foreign subsidiaries (Global Intangible Low-Taxed Income (“GILTI”)); (iii) the repeal of the domestic production activity deductions; (iv) limitations on the deductibility of certain executive compensation; (v) an elimination of the deduction for certain deemed “base erosion payments” made to foreign affiliates (Base Erosion and Anti-Abuse Tax (“BEAT”)); and (vi) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

- 15 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(8.)     INCOME TAXES (Continued)
The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018. Because of the complexity of the new GILTI tax rules and the ongoing regulatory interpretation of the GILTI provisions, the Company is continuing its evaluation of this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company's current structure and estimated future results of global operations, but also its intent and ability to modify its structure. While the Company has included an estimate of GILTI in its estimated effective tax rate for 2018, it has not finalized its analysis and is not yet able to determine which method to elect. Adjustments related to the amount of GILTI Tax recorded in its condensed consolidated financial statements may be required based on the outcome of this election.
The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax.
The Company does not expect to be materially impacted by the BEAT or FDII provisions and has not included any impact of the provisions in its estimated effective tax rate for 2018, however, it is still in the process of analyzing the effect of these provisions of the Tax Reform Act.
The Company’s worldwide effective tax rate for the first quarter of 2018 was 33.5% on $12.2 million of income before the provision for income taxes compared to (3.4)% on $4.2 million of losses before the provision for income taxes for the same period in 2017. The 2018 estimated annual effective tax rate includes the estimated impact of all Tax Reform Act provisions.
The Company’s effective tax rate for 2018 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of the GILTI tax. The Company’s earnings outside the United States are generally taxed at blended rates that are marginally lower than the U.S. federal rate. The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. There is a statutory deduction of 50% of the GILTI inclusion, however the deduction is subject to limitations based on U.S. taxable income. The Company currently has net operating losses to offset forecasted U.S. taxable income and as such, is temporarily subject to the deduction limitation which correspondingly imposes an incremental impact on U.S. income tax. The foreign jurisdictions in which the Company operates and where its foreign earnings are primarily derived, include Switzerland, Mexico, Germany, Uruguay, Malaysia and Ireland.
The Company’s effective tax rate for 2017 differs from the U.S. federal statutory tax rate of 35% due principally to the Company’s earnings outside the U.S. which are generally taxed at rates lower than the U.S. federal rate. In addition, the Company had positive income before taxes in its foreign jurisdictions but losses before taxes in U.S. jurisdictions.
As of March 30, 2018, the balance of unrecognized tax benefits is approximately $12.7 million. It is reasonably possible that a reduction of up to $1.1 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately $12.3 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
(9.)     COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future.


- 16 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(9.)     COMMITMENTS AND CONTINGENCIES
In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. On January 26, 2016, a jury in the U.S. District Court for the District of Delaware returned a verdict finding that AVX infringed two Integer patents and awarded Integer $37.5 million in damages. Following a second trial in August 2017, a jury found that AVX infringed an additional Integer patent. On March 30, 2018, the U.S. District Court for the District of Delaware vacated the original damage award and ordered a retrial on damages, which is scheduled for January 2019. The Company has recorded no gains in connection with this litigation as no cash has been received.
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company does not expect future product warranty claims will have a material effect on its condensed consolidated results of operations, financial position, or cash flows. However, there can be no assurance that any future customer complaints or negative regulatory actions regarding the Company’s products, which the Company currently believes to be immaterial, does not become material in the future. The change in product warranty liability was comprised of the following (in thousands):
December 29, 2017
$
4,745

Additions to warranty reserve
256

Warranty claims settled
(69
)
March 30, 2018
$
4,932

Foreign Currency Contracts
The Company periodically enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate fluctuations in its international operations. The Company has designated these foreign currency forward contracts as cash flow hedges. Accordingly, the effective portions of the unrealized gains and losses on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are reclassified to earnings in the same periods during which the hedged transactions affect earnings. The estimated Accumulated Other Comprehensive Income related to the Company’s foreign currency contracts that is expected to be reclassified into earnings within the next twelve months is a $2.2 million loss.
The impact to the Company’s results of operations from its forward contract hedges is as follows (in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Increase in sales
$
139

 
$
24

Increase (decrease) in cost of sales
(436
)
 
1,062

Ineffective portion of change in fair value

 

Information regarding outstanding foreign currency contracts designated as cash flow hedges as of March 30, 2018 is as follows (dollars in thousands):
Aggregate
Notional
Amount
 
Start
Date
 
End
Date
 
$/Foreign Currency
 
Fair
Value
 
Balance Sheet Location
$
2,313

 
Jan 2018
 
Jun 2018
 
0.0514

Peso
 
$
142

 
Prepaid expenses and other current assets
22,798

 
Jan 2018
 
Dec 2018
 
0.0507

Peso
 
1,403

 
Prepaid expenses and other current assets
21,900

 
Jan 2018
 
Dec 2018
 
1.2089

Euro
 
644

 
Prepaid expenses and other current assets

- 17 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(10.)     EARNINGS (LOSS) PER SHARE (“EPS”)
The following table illustrates the calculation of basic and diluted EPS (in thousands, except per share amounts):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Numerator for basic and diluted EPS:
 
 
 
Net income (loss)
$
8,118

 
$
(4,339
)
Denominator for basic EPS:
 
 
 
Weighted average shares outstanding
31,902

 
31,016

Effect of dilutive securities:
 
 
 
Stock options, restricted stock and RSUs
521

 

Denominator for diluted EPS
32,423

 
31,016

Basic EPS
$
0.25

 
$
(0.14
)
Diluted EPS
$
0.25

 
$
(0.14
)
The diluted weighted average share calculations do not include the following securities, which are not dilutive to the EPS calculations or the performance criteria have not been met (in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Time-vested stock options, restricted stock and RSUs
150

 
1,700

Performance-vested restricted stock and PSUs
182

 
593

(11.)     ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income is comprised of the following (in thousands):
 
Defined
Benefit
Plan
Liability
 
Cash
Flow
Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Pre-Tax
Amount
 
Tax
 
Net-of-Tax
Amount
December 29, 2017
$
(1,422
)
 
$
3,418

 
$
50,200

 
$
52,196

 
$
(17
)
 
$
52,179

Unrealized gain on cash flow hedges

 
5,124

 

 
5,124

 
(1,076
)
 
4,048

Realized gain on foreign currency hedges

 
(575
)
 

 
(575
)
 
121

 
(454
)
Realized gain on interest rate swap hedges

 
(234
)
 

 
(234
)
 
49

 
(185
)
Foreign currency translation gain

 

 
13,441

 
13,441

 

 
13,441

March 30, 2018
$
(1,422
)
 
$
7,733

 
$
63,641

 
$
69,952

 
$
(923
)
 
$
69,029

December 30, 2016
$
(1,475
)
 
$
1,420

 
$
(15,660
)
 
$
(15,715
)
 
$
(285
)
 
$
(16,000
)
Unrealized gain on cash flow hedges

 
1,712

 

 
1,712

 
(599
)
 
1,113

Realized loss on foreign currency hedges

 
1,086

 

 
1,086

 
(380
)
 
706

Realized gain on interest rate swap hedges

 
(106
)
 

 
(106
)
 
37

 
(69
)
Foreign currency translation gain

 

 
6,536

 
6,536

 

 
6,536

March 31, 2017
$
(1,475
)
 
$
4,112

 
$
(9,124
)
 
$
(6,487
)
 
$
(1,227
)
 
$
(7,714
)
The realized loss (gain) relating to the Company’s foreign currency hedges were reclassified from Accumulated Other Comprehensive Income and included in Cost of Sales or Sales as the transactions they are hedging occur. The realized gain relating to the Company’s interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income and included in Interest Expense as interest on the corresponding debt being hedged is accrued.

- 18 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(12.)     FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis. The Company also holds cost method and equity method investments which are measured at fair value on a nonrecurring basis.
Foreign Currency Contracts
The fair value of foreign currency contracts were determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs included foreign exchange rate and credit spread curves. In addition, the Company received fair value estimates from the foreign currency contract counterparties to verify the reasonableness of the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair value hierarchy. Refer to Note 9 “Commitments and Contingencies” for further discussion regarding the fair value of the Company’s foreign currency contracts.
Interest Rate Swaps
The fair value of the Company’s interest rate swap contracts outstanding were determined through the use of a cash flow model that utilizes observable market data inputs. These observable market data inputs include LIBOR, swap rates, and credit spread curves. In addition, the Company received a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. Refer to Note 4 “Debt” for further discussion regarding the fair value of the Company’s interest rate swap.
The following table provides information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands):
 
 
Fair Value
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
March 30, 2018
 
 
 
 
 
 
 
 
Assets: Foreign currency contracts (Note 9)
 
$
2,189

 
$

 
$
2,189

 
$

Assets: Interest rate swap (Note 4)
 
5,544

 

 
5,544

 

 
 
 
 
 
 
 
 
 
December 29, 2017
 
 
 
 
 
 
 
 
Assets: Interest rate swaps
 
$
4,279

 
$

 
$
4,279

 
$

Liabilities: Foreign currency contracts
 
861

 

 
861

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. Refer to Note 4 “Debt” for further discussion regarding the fair value of the Company’s Senior Secured Credit Facilities and Senior Notes. A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:
Cost and Equity Method Investments
The Company holds investments in equity and other securities that are accounted for as either cost method or equity method investments, which are classified as Other Assets on the Condensed Consolidated Balance Sheets. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost method investments are not adjusted if there are no identified events or changes in circumstances that may have a material effect on the fair value of the investments. The aggregate recorded amount of cost and equity method investments at March 30, 2018 and December 29, 2017 was $25.8 million and $20.8 million, respectively.


- 19 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(12.)     FAIR VALUE MEASUREMENTS (Continued)
As of March 30, 2018 and December 29, 2017, the recorded amount of the Company’s equity method investment was $18.8 million and $13.8 million, respectively. The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change. As of March 30, 2018, the Company owned 6.6% of this fund. During the three months ended March 30, 2018 and March 31, 2017, the Company recognized a net gain of $5.0 million and a net loss of $0.4 million, respectively, on its equity method investment.
The Company’s recorded amount of cost method investments was $7.0 million at March 30, 2018 and December 29, 2017.
The Company did not recognize any impairment charges related to cost method investments during the three months ended March 30, 2018 and March 31, 2017. The fair value of these investments is primarily determined by reference to recent sales data of similar shares to independent parties in an inactive market and categorized in Level 2 of the fair value hierarchy.
(13.)     SEGMENT INFORMATION
The Company organizes its business into two reportable segments: (1) Medical and (2) Non-Medical. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker (“CODM”), to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting. There were no sales between segments during the three months ended March 30, 2018 and March 31, 2017.
The following table presents sales by product line (in thousands).
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Segment sales by product line:
 
 
 
Medical
 
 
 
Cardio & Vascular
$
138,348

 
$
125,108

Cardiac & Neuromodulation
108,910

 
103,813

Advanced Surgical, Orthopedics & Portable Medical
121,775

 
105,146

Total Medical
369,033

 
334,067

Non-Medical
12,712

 
11,346

Total sales
$
381,745

 
$
345,413

The following table presents income from operations for the Company’s reportable segments (in thousands).
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Segment income from operations:
 
 
 
Medical
$
52,127

 
$
50,360

Non-Medical
3,198

 
1,562

Total segment income from operations
55,325

 
51,922

Unallocated operating expenses
(20,608
)
 
(25,377
)
Operating income
34,717

 
26,545

Unallocated expenses, net
(22,508
)
 
(30,740
)
Income (loss) before income taxes
$
12,209

 
$
(4,195
)

- 20 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(14.)
REVENUE FROM CONTRACTS WITH CUSTOMERS
The majority of the Company’s revenues consist of sales of various medical devices and products to large, multinational OEMs and their affiliated subsidiaries. The Company considers the customer’s purchase order, which in some cases is governed by a long-term agreement, and the Company’s corresponding sales order acknowledgment as the contract with the customer. The Company has elected to adopt the practical expedient provided in ASC 340-40-25-4 and recognize the incremental costs of obtaining a contract, which are primarily sales commissions, as expense when incurred because the amortization period is less than one year.
Performance Obligations
The Company considers each shipment of an individual product included on a purchase order to be a separate performance obligation, as each shipment is separately identifiable and the customer can benefit from each individual product separately from the other products included on the purchase order. Accordingly, a contract can have one or more performance obligations to manufacture products. Standard payment terms range from 30 to 90 days and can include a discount for early payment.
The Company does not offer its customers a right of return. Rather, the Company warrants that each unit received by the customer will meet the agreed upon technical and quality specifications and requirements. Only when the delivered units do not meet these requirements can the customer return the non-compliant units as a corrective action under the warranty. The remedy offered to the customer is repair of the returned units or replacement if repair is not viable. Accordingly, the Company records a warranty reserve and any warranty activities are not considered to be a separate performance obligation. Historically, warranty reserves have not been material.
Transaction Price
Generally, the transaction price of the Company’s contracts consists of a unit price for each individual product included in the contract, which can be fixed or variable based on the number of units ordered. In some instances, the transaction price also includes a rebate for meeting certain volume-based targets over a specified period of time. The transaction price of a contract is determined based on the unit price and the number of units ordered, reduced by the rebate expected to be earned on those units. Rebates are estimated based on the expected achievement of the volume-based target using the most likely amount method and updated quarterly. Any adjustments to these estimates are recognized under the cumulative catch-up method, such that impact of the adjustment is recognized in the period in which it is identified.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. As the majority of products sold to customers are manufactured to meet the specific requirements and technical specifications of that customer, the products are considered unique to that customer and the unit price stated in the contract is considered the standalone selling price.
The Company has elected to adopt the practical expedient provided in ASC 606-10-50-14 and not disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations and an expectation of when those amounts are expected to be recognized as revenue because the majority of contracts have an original expected duration of one year or less.
Revenue Recognition
The Company recognizes revenue at the point in time when a performance obligation is satisfied and the customer has obtained control of the products. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product. The customer obtains control of the products when title and risk of ownership transfers to them, which is primarily based upon shipping terms. Accordingly, the majority of the Company’s revenues are recognized at the point of shipment. In instances where title and risk of ownership do not transfer to the customer until the products have reached the customer’s location, revenue is recognized at that point in time. Revenue is recognized net of sales tax, value-added taxes and other taxes.
Contract Modifications
Contract modifications, which can include a change in either or both scope and price, most often occur related to contracts that are governed by a long-term arrangement. Contract modifications typically relate to the same products already governed by the long-term arrangement, and therefore, are accounted for as part of the existing contract. If a contract modification is for additional products, it is accounted for as a separate contract.
 

- 21 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(14.)
REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
Disaggregated Revenue
In general, the Company's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment's results of operations. For a summary by disaggregated product line sales for each segment, refer to Note 13, “Segment Information.” Additionally, the tables below disaggregate the Company’s revenues based upon significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues, and ship to country, which is defined as any country where 10% or more of a segment’s total revenues are shipped to. The Company believes that these categories best depict how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors.
The following table presents revenues by customer for the three months ended March 30, 2018.
Customer
 
 
Medical
 
Non-Medical
Customer A
 
 
17
%
 
%
Customer B
 
 
16
%
 
%
Customer C
 
 
15
%
 
%
Customer D
 
 
%
 
19
%
Customer E
 
 
%
 
11
%
All other customers
 
 
52
%
 
70
%
The following table presents revenues by ship to country for the three months ended March 30, 2018.
Ship to Location
 
 
Medical
 
Non-Medical
United States
 
 
55
%
 
69
%
Puerto Rico
 
 
10
%
 
%
Canada
 
 
%
 
11
%
All other Countries
 
 
35
%
 
20
%
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and less frequently, unearned revenue. Accounts receivable are recorded when the right to consideration becomes unconditional. Unearned revenue is recorded when customers pay or are billed in advance of the Company’s satisfaction of performance obligations. Contract liabilities were $4.4 million and $3.6 million as of March 30, 2018 and December 29, 2017, respectively, and are classified as Accrued Expenses on the Condensed Consolidated Balance Sheets. During the three months ended March 30, 2018, we recognized $0.7 million of revenue that was included in the contract liability balance as of December 29, 2017. The Company does not have any contract assets.

- 22 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(15.)
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the Financial Accounting Standards Board ("FASB"):
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.
 
The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users.
 
December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted.
 
The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.
 
The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
 
December 29, 2018. Early adoption is permitted.
 
The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
 
The new guidance clarifies the presentation and classification of the components of net periodic benefit costs in the consolidated statement of operations.
 
December 30, 2017.

 
The Company adopted the new guidance effective December 30, 2017, the beginning of its 2018 fiscal year, using the retrospective transition method, as part of the FASB's simplification initiative. See Adoption of ASU 2017-07 section below for additional information.
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory.
 
The new guidance requires the income tax consequences of an intra-entity transfer of assets other than inventory to be recognized when the transfer occurs rather than deferring until an outside sale has occurred.
 
December 30, 2017.

 
The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments.
 
The new guidance clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows.
 
December 30, 2017.

 
The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company.
In February 2016, the FASB issued ASU 2016-02, Leases.
 
The new guidance supersedes the lease guidance under ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.
 
December 29, 2018. Early adoption is permitted.
 
The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for real estate operating leases. The Company anticipates recognition of additional assets and corresponding liabilities related to leases upon adoption, but has not yet quantified these at this time. The Company plans to adopt the standard effective December 29, 2018.

- 23 -

INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(15.)     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
 
The new guidance updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
 
December 30, 2017.

 
The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09.
 
The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance provides alternative methods of adoption. Subsequent guidance issued after May 2014 did not change the core principle of ASU 2014-09.
 
December 30, 2017.

 
The Company adopted the new guidance effective December 30, 2017, using the modified retrospective transition method applied to those contracts which were not completed as of December 30, 2017.  Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting.  The adoption of this ASU did not have a material impact on the consolidated financial statements and therefore no cumulative adjustment was recorded to equity. The Company has updated its internal controls for changes and expanded disclosures have been made in the Notes to the Financial Statements as a result of adopting the standard. (See Note 14, “Revenue from Contracts with Customers”).
Adoption of ASU 2017-07
On December 30, 2017, we retrospectively adopted the new accounting guidance on presentation of net periodic pension costs (ASU 2017-07). That guidance requires that we disaggregate the service cost component of net benefit costs and report those costs in the same line item or items in the Condensed Consolidated Statements of Operations and Comprehensive Income as other compensation costs arising from services rendered by the pertinent employees during the period. The other non-service components of net benefit costs are required to be presented separately from the service cost component.
Following the adoption of this guidance, we continue to record the service cost component of net benefit costs in Cost of Sales and Selling, General and Administrative expenses. The interest cost component of net benefit costs is now recorded in Interest Expense and the remaining components of net benefit costs, amortization of net losses and expected return on plan assets, are now recorded in Other Loss, Net.
(16.)     SUBSEQUENT EVENT
On May 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines within its Medical segment to MedPlast, LLC for $600 million in cash (the “Transaction”).  The Company expects to close the Transaction in the third quarter of 2018, subject to regulatory clearance and other customary closing conditions. The net proceeds from the sale are expected to be used to accelerate debt payments to reduce leverage.

- 24 -



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q should be read in conjunction with the disclosures included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2017. In addition, please read this section in conjunction with our Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contained herein.
Forward-Looking Statements
Some of the statements contained in this report and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations, and these statements are subject to known and unknown risks, uncertainties and assumptions. Forward-looking statements include statements relating to:
future sales, expenses, and profitability;
future development and expected growth of our business and industry;
our ability to execute our business model and our business strategy;
our ability to identify trends within our industries and to offer products and services that meet the changing needs of those markets;
our ability to remain in compliance with the financial covenants contained in the agreement governing our Senior Secured Credit Facilities; and
projected capital expenditures.
You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or “variations” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those stated or implied by these forward-looking statements. In evaluating these statements and our prospects, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this report.
Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors include the following: our high level of indebtedness, our inability to pay principal and interest on this high level of outstanding indebtedness or to remain in compliance with financial and other covenants under our Senior Secured Credit Facilities, and the risk that this high level of indebtedness limits our ability to invest in our business and overall financial flexibility; our dependence upon a limited number of customers; customer ordering patterns; product obsolescence; our inability to market current or future products; pricing pressure from customers; our ability to timely and successfully implement cost savings and consolidation initiatives; our reliance on third party suppliers for raw materials, products and subcomponents; fluctuating operating results; our inability to maintain high quality standards for our products; challenges to our intellectual property rights; product liability claims; product field actions or recalls; our inability to successfully consummate and integrate acquisitions and to realize synergies and to operate these acquired businesses in accordance with expectations; our unsuccessful expansion into new markets; our failure to develop new products; the timing, progress and ultimate success of pending regulatory actions and approvals; our inability to obtain licenses to key technology; regulatory changes, including health care reform, or consolidation in the healthcare industry; global economic factors, including currency exchange rates and interest rates; the resolution of various legal actions brought against the Company; enactment related and ongoing impacts related to the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”), including the Global Intangible Low-Taxed Income (“GILTI”) tax; and other risks and uncertainties that arise from time to time and are described in Item 1A “Risk Factors” of our Annual Report on Form 10-K and in other periodic filings with the Securities and Exchange Commission. Except as required by applicable law, the Company assumes no obligation to update forward-looking statements in this report whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise.

- 25 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

Our Business
Integer Holdings Corporation is one of the largest medical device outsource (“MDO”) manufacturers in the world serving the cardiac, 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 principle product lines. The Medical segment includes the Advanced Surgical, Orthopedics & Portable Medical, Cardio & Vascular and Cardiac & Neuromodulation product lines and the Non-Medical segment is comprised of the Electrochem product line.
Strategic Overview
During 2017, we undertook a thorough strategic review of our customers, competitors and markets. As a result of this review, during the fourth quarter of 2017, we began to take steps to better align our resources in order to invest to grow, protect, preserve and to enhance the profitability of our portfolio of products. These steps include focusing our investment in research and development and manufacturing, improving our business processes and redirecting investments away from projects where the market does not justify the investment. The execution of this strategy will be our primary focus going forward.
We believe Integer is well-positioned within the medical technology and MDO manufacturing market and that there is a robust pipeline of opportunities to pursue. We have expanded our medical device capabilities and are excited about opportunities to partner with customers to drive innovation. We believe we have the scale and global presence, supported by world-class manufacturing and quality capabilities, to capture these opportunities. We are confident in our abilities as one of the largest MDO manufacturers, with a long history of successfully integrating companies, driving down costs and growing revenues over the long-term. Ultimately, our strategic vision is to drive shareholder value by enhancing the lives of patients worldwide by being our customers’ partner of choice for innovative technologies and services.
2018 Outlook(a) 
(dollars in millions, except per share amounts)
 
GAAP
 
Non-GAAP(b)(c)
 
As Reported
 
Growth
 
Adjusted
 
Growth
Sales
$1,510 to $1,550
 
3% to 6%
 
$1,510 to $1,550
 
3% to 6%
Net Income
$50 to $60
 
(25%) to (10%)
 
$103 to $113
 
14% to 25%
EBITDA
N/A
 
N/A
 
$310 to $320
 
9% to 12%
Earnings per Diluted Share
$1.55 to $1.85
 
(26%) to (11%)
 
$3.20 to $3.50
 
14% to 25%
(a)
Our 2018 Outlook does not reflect the potential impact of the planned divestiture of the Advanced Surgical and Orthopedics product lines that was announced on May 3, 2018. Refer to Note 16 “Subsequent Event” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the divestiture.
(b)
Except as described below, further reconciliations by line item to the closest corresponding GAAP financial measure for Adjusted Net Income, Adjusted Earnings per Diluted Share and Adjusted EBITDA, included in our “2018 Outlook” above, are not available without unreasonable efforts on a forward-looking basis due to the high variability, complexity and visibility of the charges excluded from this non-GAAP financial measure.
(c)
Adjusted Net Income and EPS for 2018 is expected to consist of GAAP Net Income and EPS, excluding items such as intangible amortization, IP-related litigation costs, consolidation and realignment costs, asset disposition and write-down charges, and loss on extinguishment of debt totaling approximately $63 million. The after-tax impact of these items is estimated to be approximately $50 million, or approximately $1.54 per diluted share. Additionally, Adjusted Net Income and EPS is expected to exclude the estimated impact relating to our disallowed deduction of the GILTI tax, as mandated by the Tax Reform Act. This disallowed deduction of the GILTI tax (approximately 50% of the total GILTI tax) is due to the Company making use of its U.S. net operating losses (“NOLs”), and will be eliminated once the Company’s U.S. NOLs are fully utilized, which is expected to be in approximately three to five years. This adjustment makes our Adjusted Diluted EPS more comparable with other global companies that are not subject to this disallowed GILTI tax deduction and more comparable to the Company’s results following the full utilization of its U.S. NOLs.
Adjusted EBITDA is expected to consist of Adjusted Net Income, excluding items such as depreciation, interest, stock-based compensation and taxes totaling approximately $207 million.

- 26 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

Financial Overview
Net income for the first quarter of 2018 was $8.1 million, or $0.25 per diluted share, compared to a net loss of $4.3 million, or $0.14 per diluted share for the first quarter of 2017. This variance is primarily the result of the following:
Sales increased $36.3 million or 11%. Foreign currency exchange rates increased sales by approximately $6 million. Organic sales for the first quarter of 2018 increased 9%, primarily driven by sales growth in our Medical segment through strong demand for Integer-owned products in the Cardio & Vascular product line, as well as strong demand for Neuromodulation products and strength in the Advanced Surgical, Orthopedics & Portable Medical product line;
Gross profit for the first quarter of 2018 increased $4.5 million, primarily due to the increase in sales discussed above, partially offset by price concessions given to our larger OEM customers and higher incentive compensation based upon current quarter results;
Operating expenses for the first quarter of 2018 were lower by $3.6 million, due to a decrease in other operating expenses ($6.5 million) attributable to the completion of spending on integration activities and various efficiencies and synergies gained as a result of our integration and consolidation initiatives partially offset by higher incentive compensation ($2.3 million);
Interest expense for the first quarter of 2018 declined $2.4 million, primarily attributable to lower outstanding debt balances due to the repayment of debt over the last year;
Net gains on cost and equity method investments, which are unpredictable in nature, increased first quarter income by $5.4 million as a result of a net gain of $5.0 million in the first quarter of 2018 compared to a net loss of $0.4 million during the first quarter of 2017; and
Other loss, net for the first quarter of 2018 was lower by $0.4 million (lower net loss), which includes a $0.1 million decrease in foreign currency exchange rate losses (favorable impact).
Income tax provision increased primarily due to an increase in pre-tax income, resulting from the factors discussed above and the estimated impact of the GILTI tax.
Use of Non-GAAP Financial Information
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Additionally, we consistently report and discuss in our earnings releases and investor presentations adjusted pre-tax income, adjusted net income, adjusted earnings per diluted share, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted EBITDA and organic sales growth rates. Adjusted pre-tax income, adjusted net income and adjusted earnings per diluted share consist of GAAP amounts adjusted for the following to the extent occurring during the period: (i) acquisition and integration related charges and expenses, (ii) amortization of intangible assets including inventory step-up amortization, (iii) facility consolidation, optimization, manufacturing transfer and system integration charges, (iv) asset write-down and disposition charges, (v) charges in connection with corporate realignments or a reduction in force, (vi) certain litigation expenses, charges and gains, (vii) unusual or infrequently occurring items, (viii) gain/loss on cost and equity method investments, (ix) extinguishment of debt charges, (x) the income tax (benefit) related to these adjustments (not for adjusted pre-tax income) and (xi) certain tax items that are outside the normal provision for the period (not for adjusted pre-tax income). Adjusted earnings per diluted share are calculated by dividing adjusted net income by diluted weighted average shares outstanding. Adjusted EBITDA consists of GAAP net income (loss) plus (i) the same adjustments as listed above except for items (x) and (xi), (ii) GAAP stock-based compensation, interest expense, and depreciation, (iii) GAAP provision (benefit) for income taxes and (iv) cash gains received from cost and equity method investments during the period. To calculate organic sales growth rates, which exclude the impact of changes in foreign currency exchange rates, as well as the impact of any acquisitions or divestitures of product lines on sales growth rates, we convert current period sales from local currency to U.S. dollars using the previous periods foreign currency exchange rates and exclude the amount of sales acquired/divested during the period from the current/previous period amounts, respectively. We believe that the presentation of adjusted net income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA, and organic sales growth rates provides important supplemental information to management and investors seeking to understand the financial and business trends relating to our financial condition and results of operations.

- 27 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

A reconciliation of GAAP net income (loss) and diluted earnings (loss) per share (“EPS”) to adjusted amounts is as follows (in thousands, except per share amounts):
 
Three Months Ended
 
March 30, 2018
 
March 31, 2017
 
Pre-Tax
 
Net Income
 
Per
Diluted
Share
 
Pre-Tax
 
Net Income (Loss)
 
Per
Diluted
Share
As reported (GAAP)
$
12,209

 
$
8,118

 
$
0.25

 
$
(4,195
)
 
$
(4,339
)
 
$
(0.14
)
Adjustments:
 
 
 

 
 

 
 
 
 

 
 

Amortization of intangibles(a)
11,713

 
9,304

 
0.29

 
10,978

 
7,746

 
0.24

IP related litigation (SG&A)(a)(b)
321

 
254

 
0.01

 
377

 
245

 
0.01

Strategic reorganization and alignment (OOE)(a)(c)
3,492

 
2,779

 
0.09

 

 

 

Manufacturing alignment to support growth (OOE)(a)(d)
513

 
369

 
0.01

 

 

 

Consolidation and optimization expenses (OOE)(a)(e)
605

 
473

 
0.01

 
2,395

 
1,899

 
0.06

Acquisition and integration expenses (OOE)(a)(f)

 

 

 
4,820

 
3,133

 
0.10

Asset dispositions, severance and other (OOE)(a)(g)
667

 
489

 
0.02

 
4,556

 
2,957

 
0.09

(Gain) loss on cost and equity method investments, net(a)
(4,970
)
 
(3,926
)
 
(0.12
)
 
398

 
259

 
0.01

Loss on extinguishment of debt(a)(h)
1,057

 
835

 
0.03

 
1,559

 
1,013

 
0.03

Tax adjustments(i)

 
1,021

 
0.03

 

 

 

Adjusted (Non-GAAP)
$
25,607

 
$
19,716

 
$
0.61

 
$
20,888

 
$
12,913

 
$
0.41

 
 
 
 
 
 
 
 
 
 
 
 
Diluted weighted average shares for adjusted EPS(j)


 
32,423

 
 

 


 
31,685

 
 

(a)
The difference between pre-tax and net income (loss) amounts is the estimated tax impact related to the respective adjustment. Net income amounts are computed using a 21% U.S. tax rate (35% U.S. tax rate for 2017 periods), and the statutory tax rates in Mexico, Germany, France, Netherlands, Uruguay, Ireland and Switzerland, as adjusted for the existence of NOLs. Amortization of intangibles and OOE expense have also been adjusted to reflect the estimated impact relating to our disallowed deduction of the GILTI tax, as described in note (i) below. Expenses that are not deductible for tax purposes (i.e. permanent tax differences) are added back at 100%.
(b)
In 2013, we filed suit against AVX Corporation alleging they were infringing our intellectual property. Given the complexity and significant costs incurred pursuing this litigation, we are excluding these litigation expenses from adjusted amounts. This matter proceeded to trial during the first quarter of 2016 and again in the third quarter of 2017 that resulted in a jury awarding damages in the amount of $37.5 million.  In March 2018, the court vacated that damage award and ordered a new trial on damages, which is scheduled for January 2019. To date, no gains have been recognized in connection with this litigation.
(c)
As a result of the strategic review of our customers, competitors and markets we undertook during the fourth quarter of 2017, we began to take steps to better align our resources in order to invest to grow, protect, preserve and to enhance the profitability of our portfolio of products. This will include focusing our investment in RD&E and manufacturing, improving our business processes and redirecting investments away from projects where the market does not justify the investment. As a result, during the first quarter of 2018 we incurred charges related to this strategy, which primarily consisted of severance and fees for professional services.
(d)
In 2017, we initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth.  The plan involves the relocation of certain manufacturing operations and expansion of certain of our facilities.
(e)
During 2018 and 2017, we incurred costs primarily related to the closure of our Clarence, NY facility and the transfer of our Beaverton, OR portable medical and Plymouth, MN vascular manufacturing operations to Tijuana, Mexico.
(f)
Reflects acquisition and integration costs related to the acquisition of Lake Region Medical, which occurred in October 2015.
(g)
Amounts for 2017 primarily include expenses related to our CEO and CFO transitions.
(h)
Represents debt extinguishment charges in connection with pre-payments made on our Term B Loan Facility, which are included in interest expense.

- 28 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

(i)
Tax adjustments primarily includes the estimated impact relating to our disallowed deduction of the GILTI tax, as mandated by the Tax Reform Act. This disallowed deduction of the GILTI tax (approximately 50% of the total GILTI tax) is due to the Company making use of its U.S. NOLs, and will be eliminated once the Company’s U.S. NOLs are fully utilized, which is expected to be in approximately three to five years. This adjustment makes our Adjusted Diluted EPS more comparable with other global companies that are not subject to this disallowed GILTI tax deduction and more comparable to the Company’s results following the full utilization of its U.S. NOLs.
(j)
The diluted weighted average shares for adjusted EPS for the three month period ended March 31, 2017 includes 669,000 of potentially dilutive shares not included in the computation of diluted weighted average common shares for GAAP diluted EPS purposes because their effect would have been anti-dilutive in that period.
Adjusted diluted EPS, which excludes the impact of amortization of intangible assets, losses on extinguishment of debt and various other operating expenses, among others, was $0.61 per share for the first quarter of 2018, compared to $0.41 per share for the first quarter of 2017. These results reflect the benefit of our increased sales, lower interest expense, and the completion of spending on integration activities, partially offset by higher incentive compensation.
A reconciliation of GAAP net income (loss) to EBITDA and adjusted EBITDA is as follows (dollars in thousands):
 
Three Months Ended
 
March 30,
2018
 
March 31,
2017
Net income (loss) (GAAP)
$
8,118

 
$
(4,339
)
 
 
 
 
Interest expense
26,445

 
28,893

Provision for income taxes
4,091

 
144

Depreciation
14,621

 
13,628

Amortization
11,713

 
10,978

EBITDA
64,988

 
49,304

 
 
 
 
IP related litigation
321

 
377

Stock-based compensation (excluding OOE)
3,218

 
2,406

Strategic reorganization and alignment
3,492

 

Manufacturing alignment to support growth
513

 

Consolidation and optimization expenses
605

 
2,395

Acquisition and integration expenses

 
4,820

Asset dispositions, severance and other
667

 
4,556

Non-cash (gain) loss on cost and equity method investments
(4,970
)
 
398

Adjusted EBITDA (Non-GAAP)
$
68,834

 
$
64,256

Our CEO’s View
We delivered another quarter of strong year-over-year sales growth, driven by strength in our Advanced Surgical, Orthopedics & Portable Medical, Cardio & Vascular, and Electrochem product lines as well as a return to growth in our Cardiac & Neuromodulation product line. Cash flow generation remains strong and enabled further accelerated debt pay down in the quarter. We have increased our 2018 guidance to reflect our strong first quarter results and our confidence in continued year over year revenue growth throughout the remainder of the year.
We are pleased with our sustained quarterly growth demonstrating our progress towards transitioning our business back to a long-term growth trajectory. As we look forward, we believe we have significant opportunities to further expand and grow our business. We have a unique breadth of capabilities to serve our customers across the entire product continuum and across multiple product categories. Whether a customer needs an engineered component or a complete device that we’ve developed, or anything in between, we can deliver. Our innovative design and manufacturing capabilities, our global footprint and scalability, our high-quality, and our customer focus enable us to deliver more for our customers.

- 29 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

Cost Savings and Consolidation Efforts
In 2018 and 2017, we recorded charges in Other Operating Expenses related to various cost savings and consolidation initiatives. These initiatives were undertaken to improve our operational efficiencies and profitability, the most significant of which are as follows (dollars in millions):
Initiative
 
Expected Expense
 
Expected Capital Expenditures
 
Expected Annual Cost Savings(a)
 
Expected Completion Date
Strategic reorganization and alignment
 
$10 - $12
 
-
 
$8 - $12
 
2018
Manufacturing alignment to support growth
 
$9 - $11
 
$4 - $6
 
$2 - $3
 
2019
Consolidation and optimization expenses
 
$18 - $22
 
$5 - $6
 
$12 - $13
 
2018
(a) Represents the annual benefit to our operating income expected to be realized from these initiatives through cost savings and/or increased capacity. These benefits will be phased in over time as the various initiatives are completed, some of which are already included in our current period results.
We continually evaluate our operating structure in order to maximize efficiencies and drive margin expansion. Future charges are expected to be incurred as we seek to create an optimized manufacturing footprint, leveraging our increased scale and product capabilities while also supporting the needs of our customers. Our efforts will include:
potential manufacturing consolidations;
continuous improvement;
productivity initiatives;
direct material and indirect expense savings opportunities; and
the establishment of centers of excellence.
Refer to Note 7 “Other Operating Expenses” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the timing, cash flow impact, and amount of future expenditures for our cost savings and consolidation initiatives.

- 30 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

Our Financial Results
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. For 52-week years, each quarter contains 13 weeks. The first quarter of 2018 and 2017 ended on March 30, and March 31, respectively, and each contained 13 weeks.
The following tables present selected financial information derived from our Condensed Consolidated Financial Statements, contained in Item 1 of this report, for the periods presented (dollars in thousands, except per share):
 
Three Months Ended
 
 
 
 
 
March 30,
 
March 31,
 
Change
 
2018
 
2017
 
$
 
%
Medical Sales:
 
 
 
 
 
 
 
Cardio & Vascular
$
138,348

 
$
125,108

 
$
13,240

 
10.6
 %
Cardiac & Neuromodulation
108,910

 
103,813

 
5,097

 
4.9
 %
Advanced Surgical, Orthopedics & Portable Medical
121,775

 
105,146

 
16,629

 
15.8
 %
Total Medical Sales
369,033

 
334,067

 
34,966

 
10.5
 %
Non-Medical
12,712

 
11,346

 
1,366

 
12.0
 %
Total Sales
381,745

 
345,413

 
36,332

 
10.5
 %
Cost of sales
285,975

 
254,187

 
31,788

 
12.5
 %
Gross profit
95,770

 
91,226

 
4,544

 
5.0
 %
Gross profit as a % of sales
25.1
%
 
26.4
 %
 
 
 
 
SG&A
41,238

 
39,499

 
1,739

 
4.4
 %
SG&A as a % of sales
10.8
%
 
11.4
 %
 
 
 
 
RD&E
14,538

 
13,411

 
1,127

 
8.4
 %
RD&E as a % of sales
3.8
%
 
3.9
 %
 
 
 
 
Other operating expenses
5,277

 
11,771

 
(6,494
)
 
(55.2
)%
Operating income
34,717

 
26,545

 
8,172

 
30.8
 %
Operating margin
9.1
%
 
7.7
 %
 
 
 
 
Interest expense
26,445

 
28,893

 
(2,448
)
 
(8.5
)%
(Gain) loss on cost and equity method investments, net
(4,970
)
 
398

 
(5,368
)
 
NM 
Other loss, net
1,033

 
1,449

 
(416
)
 
(28.7
)%
Income (loss) before income taxes
12,209

 
(4,195
)
 
16,404

 
NM 
Provision for income taxes
4,091

 
144

 
3,947

 
NM 
Effective tax rate
33.5
%
 
(3.4
)%
 
 
 
 
Net income (loss)
$
8,118

 
$
(4,339
)
 
$
12,457

 
NM 
Net income as a % of sales
2.1
%
 
(1.3
)%
 
 
 
 
Diluted earnings per share
$
0.25

 
$
(0.14
)
 
$
0.39

 
NM 
 
 
 
 
 
 
 
 
NM Calculated amount not meaningful

- 31 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

Product Line Sales Highlights
For the first quarter of 2018, Cardio & Vascular sales increased $13.2 million, or 11% versus the comparable 2017 period. These increases were primarily driven by continued strong demand for Integer-owned products from new and existing customers and increased demand for contract manufactured products. During the first quarter of 2018, price concessions to our larger OEM customers reduced Cardio & Vascular sales by approximately $1.6 million, in comparison to the same period of 2017. Foreign currency exchange rate fluctuations increased first quarter 2018 sales by approximately $1.5 million in comparison to the 2017 period primarily due to U.S. dollar fluctuations relative to the Euro.
For the first quarter of 2018, Cardiac & Neuromodulation sales increased $5.1 million, or 5% versus the comparable 2017 period. The increase in Cardiac & Neuromodulation sales was driven by strong Neuromodulation demand and the resolution of a supply constraint in the prior year. Price concessions to our larger OEM customers reduced first quarter 2018 Cardiac & Neuromodulation sales by approximately $2.5 million, in comparison to the same period of 2017. Foreign currency exchange rate fluctuations did not have a material impact on Cardiac & Neuromodulation sales during the first quarter of 2018 in comparison to the same period of 2017.
Advanced Surgical, Orthopedics & Portable Medical first quarter 2018 sales increased $16.6 million, or 16%, versus the comparable 2017 period. This increase was driven by volume strength with existing customers, new product ramps, and expected tailwind from customer inventory management. For the first quarter of 2018, price concessions to our larger OEM customers reduced Advanced Surgical, Orthopedics & Portable Medical sales by approximately $0.8 million, in comparison to the same period of 2017. Foreign currency exchange rate fluctuations increased first quarter 2018 sales by approximately $4.5 million in comparison to the 2017 period primarily due to U.S. dollar fluctuations relative to the Euro.
For the first quarter of 2018, Non-Medical sales increased $1.4 million, or 12%, versus the comparable 2017 period. This increase was driven by new business wins in a stable energy market. Foreign currency exchange rates and price fluctuations did not have a material impact on Non-Medical sales during the first quarter of 2018 in comparison to the same period of 2017.
Gross Profit
Changes to gross profit as a percentage of sales (“Gross Margin”) from the prior year were due to the following:
 
Change From Prior Year
 
Three
Months
Price(a)
(1.3
)%
Mix(b)
(0.4
)
Incentive compensation(c)
(0.5
)
Production efficiencies and volume(d)
0.9

Total percentage point change to gross profit as a percentage of sales
(1.3
)%
 
(a)
Our Gross Margin for the first quarter of 2018 has been negatively impacted by price concessions given to our larger OEM customers in return for long-term volume commitments.
(b)
Our Gross Margin for the first quarter of 2018 has been negatively impacted by a higher mix of sales of lower margin products.
(c)
Amounts represent the impact to our Gross Margin attributable to our cash and stock incentive programs, including performance-based compensation, which is accrued based upon actual results achieved.
(d)
Represents various increases and decreases to our Gross Margin. Overall, our Gross Margin for the first quarter of 2018 has been positively impacted by production efficiencies and synergies gained as a result of our integration and consolidation initiatives as well as higher volume in comparison to the respective 2017 period.

- 32 -

INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS

SG&A Expenses
Changes to SG&A expenses from the prior year were due to the following (in thousands):
 
Change From Prior Year
 
Three
Months
Legal expenses(a)
$
(710
)
Intangible asset amortization(b)