0001114483-19-000018.txt : 20190801 0001114483-19-000018.hdr.sgml : 20190801 20190801162750 ACCESSION NUMBER: 0001114483-19-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 98 CONFORMED PERIOD OF REPORT: 20190628 FILED AS OF DATE: 20190801 DATE AS OF CHANGE: 20190801 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: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16137 FILM NUMBER: 19993079 BUSINESS ADDRESS: STREET 1: 5830 GRANITE PARKWAY., SUITE 1150 CITY: PLANO STATE: TX ZIP: 75024 BUSINESS PHONE: (214) 618-5243 MAIL ADDRESS: STREET 1: 5830 GRANITE PARKWAY., SUITE 1150 CITY: PLANO STATE: TX ZIP: 75024 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-q2019x06x28.htm 10-Q Document
false--01-03Q2201900011144830.00256000006000000.0010.001100000000100000000326244943281662200.03250.02250.01750.00750.091250700000000P91DP91D151327176008<div style="font-family:Times New Roman;font-size:10pt;"><div style="line-height:120%;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;font-weight:bold;">IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS</font></div><div style="line-height:120%;text-align:left;font-size:10pt;"><font style="font-family:inherit;font-size:10pt;">The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the Financial Accounting Standards Board ("FASB") which are not yet effective for the Company</font><font style="font-family:inherit;font-size:10pt;font-style:italic;">.</font></div><div style="line-height:120%;text-align:left;padding-left:48px;text-indent:-48px;font-size:10pt;"><div style="padding-left:0px;text-indent:0px;line-height:normal;padding-top:10px;"><table cellpadding="0" cellspacing="0" 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _____________________________________________________________ 
FORM 10-Q
 _____________________________________________________________ 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-16137
 _____________________________________________________________ 
coverpagelogoa04.gif
INTEGER HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
 _____________________________________________________________ 
Delaware
 
16-1531026
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
5830 Granite Parkway,
Suite 1150
Plano,
Texas
 
75024
(Address of principal executive offices)
 
(Zip Code)
(214) 618-5243
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.001 par value per share
 
ITGR
 
New York Stock Exchange
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      No  
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes       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.
Large accelerated filer
  
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  
The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of July 26, 2019 was: 32,646,373 shares.




INTEGER HOLDINGS CORPORATION
Form 10-Q
For the Quarterly Period Ended June 28, 2019
TABLE OF CONTENTS
 
 
Page
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 6.
 
 
 


- 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)
June 28,
2019
 
December 28,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,922

 
$
25,569

Accounts receivable, net of allowance for doubtful accounts of $0.6 million, respectively
217,732

 
185,501

Inventories
187,154

 
190,076

Prepaid expenses and other current assets
24,978

 
15,104

Total current assets
445,786

 
416,250

Property, plant and equipment, net
229,209

 
231,269

Goodwill
831,368

 
832,338

Other intangible assets, net
791,472

 
812,338

Deferred income taxes
4,099

 
3,937

Operating lease assets
44,793

 

Other long-term assets
26,926

 
30,549

Total assets
$
2,373,653

 
$
2,326,681

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
37,500

 
$
37,500

Accounts payable
73,120

 
57,187

Income taxes payable
12,034

 
9,393

Accrued expenses and other current liabilities
61,288

 
60,490

Total current liabilities
183,942

 
164,570

Long-term debt
825,438

 
888,007

Deferred income taxes
201,350

 
203,910

Operating lease liabilities
39,788

 

Other long-term liabilities
11,440

 
9,701

Total liabilities
1,261,958

 
1,266,188

Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,816,622 and 32,624,494 shares issued, respectively; 32,640,614 and 32,473,167 shares outstanding, respectively
33

 
33

Additional paid-in capital
697,648

 
691,083

Treasury stock, at cost, 176,008 and 151,327 shares, respectively
(10,565
)
 
(8,125
)
Retained earnings
398,648

 
344,498

Accumulated other comprehensive income
25,931

 
33,004

Total stockholders’ equity
1,111,695

 
1,060,493

Total liabilities and stockholders’ equity
$
2,373,653

 
$
2,326,681

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

- 3 -



INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
Three Months Ended
 
Six Months Ended
(in thousands except per share data)
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Sales
$
314,194

 
$
314,464

 
$
628,870

 
$
606,890

Cost of sales
217,210

 
215,699

 
443,276

 
424,593

Gross profit
96,984

 
98,765

 
185,594

 
182,297

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
33,143

 
36,780

 
68,099

 
73,209

Research, development and engineering costs
11,396

 
12,935

 
22,991

 
26,211

Other operating expenses
3,108

 
4,692

 
5,998

 
8,476

Total operating expenses
47,647

 
54,407

 
97,088

 
107,896

Operating income
49,337

 
44,358

 
88,506

 
74,401

Interest expense
13,612

 
15,234

 
27,442

 
30,829

(Gain) loss on equity investments, net
1,611

 
(284
)
 
1,652

 
(5,254
)
Other income, net
(718
)
 
(2,387
)
 
(552
)
 
(1,427
)
Income from continuing operations before taxes
34,832

 
31,795

 
59,964

 
50,253

Provision for income taxes
6,610

 
8,739

 
10,376

 
14,113

Income from continuing operations
$
28,222

 
$
23,056

 
$
49,588

 
$
36,140

 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
Income (loss) from discontinued operations before taxes
4,930

 
(1,374
)
 
5,316

 
(7,623
)
Provision for income taxes
95

 
1,660

 
178

 
377

Income (loss) from discontinued operations
$
4,835

 
$
(3,034
)
 
$
5,138

 
$
(8,000
)
 
 
 
 
 
 
 
 
Net income
$
33,057

 
$
20,022

 
$
54,726

 
$
28,140

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.87

 
$
0.72

 
$
1.52

 
$
1.13

Income (loss) from discontinued operations
0.15

 
(0.09
)
 
0.16

 
(0.25
)
Basic earnings per share
1.01

 
0.62

 
1.68

 
0.88

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.85

 
$
0.70

 
$
1.50

 
$
1.11

Income (loss) from discontinued operations
0.15

 
(0.09
)
 
0.16

 
(0.25
)
Diluted earnings per share
1.00

 
0.61

 
1.66

 
0.86

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
32,621

 
32,038

 
32,579

 
31,970

Diluted
33,009

 
32,720

 
32,995

 
32,572

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

- 4 -


INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
 
Three Months Ended
 
Six Months Ended
(in thousands)
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Comprehensive Income (Loss)
 
 
 
 
 
 
 
Net income
$
33,057

 
$
20,022

 
$
54,726

 
$
28,140

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
4,510

 
(25,885
)
 
(2,328
)
 
(12,444
)
Change in fair value of cash flow hedges, net of tax
(4,043
)
 
(2,086
)
 
(4,745
)
 
1,323

Other comprehensive income (loss)
467

 
(27,971
)
 
(7,073
)
 
(11,121
)
Comprehensive income (loss)
$
33,524

 
$
(7,949
)
 
$
47,653

 
$
17,019

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

- 5 -



INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
(in thousands)
June 28,
2019
 
June 29,
2018
Cash flows from operating activities:
 
 
 
Net income
$
54,726

 
$
28,140

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,535

 
48,591

Debt related charges included in interest expense
3,676

 
5,083

Stock-based compensation
5,433

 
6,107

Non-cash (gain) loss on equity investments
1,652

 
(763
)
Other non-cash gains
(311
)
 
(2,307
)
Deferred income taxes
(1,126
)
 
8,894

Gain on sale of discontinued operations
(4,974
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(30,545
)
 
(11,306
)
Inventories
2,846

 
(20,948
)
Prepaid expenses and other assets
(12,942
)
 
3,306

Accounts payable
16,289

 
8,898

Accrued expenses and other liabilities
(8,593
)
 
(3,929
)
Income taxes payable
2,884

 
(2,547
)
Net cash provided by operating activities
67,550

 
67,219

Cash flows from investing activities:
 
 
 
Acquisition of property, plant and equipment
(15,506
)
 
(19,224
)
Proceeds from sale of property, plant and equipment
5

 
960

Purchase of equity investments
(327
)
 
(831
)
Proceeds from sale of discontinued operations
4,734

 

Net cash used in investing activities
(11,094
)
 
(19,095
)
Cash flows from financing activities:
 
 
 
Principal payments of long-term debt
(80,750
)
 
(75,062
)
Proceeds from issuance of long-term debt
15,000

 

Proceeds from the exercise of stock options
1,600

 
3,625

Payment of debt issuance and redemption costs

 
(688
)
Tax withholdings related to net share settlements of restricted stock unit awards
(2,123
)
 
(2,206
)
Other financing activities

 
(192
)
Net cash used in financing activities
(66,273
)
 
(74,523
)
Effect of foreign currency exchange rates on cash and cash equivalents
170

 
2,363

Net decrease in cash and cash equivalents
(9,647
)
 
(24,036
)
Cash and cash equivalents, beginning of period
25,569

 
44,096

Cash and cash equivalents, end of period
$
15,922

 
$
20,060

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

- 6 -



INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
 
Three Months Ended
 
Six Months Ended
(in thousands)
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Total equity, beginning balance
$
1,075,972

 
$
920,389

 
$
1,060,493

 
$
893,381

 
 
 
 
 
 
 
 
Common stock and additional paid-in capital
 
 
 
 
 
 
 
Balance, beginning of period
694,943

 
673,138

 
691,116

 
669,788

Stock awards exercised or vested
18

 
2,165

 
1,132

 
2,293

Stock-based compensation
2,720

 
2,885

 
5,433

 
6,107

Balance, end of period
697,681

 
678,188

 
697,681

 
678,188

Treasury stock
 
 
 
 
 
 
 
Balance, beginning of period
(10,026
)
 
(5,964
)
 
(8,125
)
 
(4,654
)
Treasury shares purchased
(782
)
 
(21
)
 
(2,905
)
 
(2,209
)
Treasury shares reissued
243

 
265

 
465

 
1,143

Balance, end of period
(10,565
)
 
(5,720
)
 
(10,565
)
 
(5,720
)
Retained earnings
 
 
 
 
 
 
 
Balance, beginning of period
365,591

 
184,186

 
344,498

 
176,068

Adoption of ASC 842 (Note 1)

 

 
(576
)
 

Net income
33,057

 
20,022

 
54,726

 
28,140

Balance, end of period
398,648

 
204,208

 
398,648

 
204,208

Accumulated other comprehensive income
 
 
 
 
 
 
 
Balance, beginning of period
25,464

 
69,029

 
33,004

 
52,179

Other comprehensive income (loss)
467

 
(27,971
)
 
(7,073
)
 
(11,121
)
Balance, end of period
25,931

 
41,058

 
25,931

 
41,058

Total equity, ending balance
$
1,111,695

 
$
917,734

 
$
1,111,695

 
$
917,734

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


- 7 -



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, vascular, orthopedics, 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.
On May 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical segment to Viant (formerly MedPlast, LLC), and on July 2, 2018 completed the sale.  The results of operations of the AS&O Product Line are reported as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the discontinued operations due to Integer’s centralized treasury and cash management processes, and, accordingly, cash flow amounts for discontinued operations are disclosed in Note 2 “Discontinued Operations and Divestiture.” All results and information in the condensed consolidated financial statements are presented as continuing operations and exclude the AS&O Product Line unless otherwise noted specifically as discontinued operations. Refer to Note 2 “Discontinued Operations and Divestiture” for additional information.
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 28, 2018.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The second quarter of 2019 and 2018 each contained 13 weeks and ended on June 28 and June 29, respectively. The Company’s 2019 fiscal year will end on January 3, 2020 and will be a fifty-three week period. Fiscal year 2018 ended on December 28, 2018 and was a fifty-two week period.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board ("FASB"). ASUs not yet adopted that are not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated result of operations, financial position and cash flows. With the exception of the accounting pronouncements adopted as discussed below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2018, that are of significance, or potential significance, to the Company.

- 8 -


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


(1.)     BASIS OF PRESENTATION (Continued)
Recently Adopted Accounting Guidance
Adoption of ASC Topic 842
Effective December 29, 2018, the Company adopted ASC 842, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company elected to transition to ASC 842 using the option to not restate comparative periods and apply the standard as of the date of initial application. In addition, certain practical expedients were elected which permit the Company to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, and to not reassess initial direct costs for any existing leases. The Company also elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets and the practical expedient related to land easements, allowing the Company to carry-forward its accounting treatment for land easements on existing agreements. The Company did not elect the practical expedient pertaining to the use of hindsight. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less and no purchase option the Company is reasonably certain to exercise off the balance sheet for all classes of underlying assets.
As a result of the adoption of ASC 842, the Company recognized operating lease right-of-use assets of $40.9 million and lease liabilities of $43.4 million on December 29, 2018. The difference between the lease assets and lease liabilities primarily represents the existing prepaid rent assets, deferred rent liabilities, and tenant improvement allowances, along with a cumulative-effect adjustment to beginning retained earnings. The adoption of ASC 842 did not have a material impact on the Company’s Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for the periods presented.
Refer to Note 11 “Leases” for additional information on the Company’s leases.
Adoption of ASU 2017-12 and ASU 2018-16
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements. The new guidance removes the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument, including any ineffectiveness, in the same income statement line item in which the earnings effect of the hedged item is reported.
ASU 2017-12 continues to allow an entity to exclude the time value of options and forward points from the assessment of hedge effectiveness. For excluded components in cash flow hedges, the base recognition model under this ASU is an amortization approach. An entity still may elect to record changes in the fair value of the excluded component currently in earnings; however, such an election will need to be applied consistently to similar hedges. The Company has elected to continue to record changes in the fair value of the excluded components of its derivative instruments currently in earnings given their highly effective nature.
Finally, this ASU continues to require an initial prospective quantitative hedge effectiveness assessment and documentation at hedge inception. However, if certain criteria are met, entities can elect to subsequently perform prospective and retrospective effectiveness assessments qualitatively, unless facts and circumstances change, and the hedge effectiveness assessment generally does not need to be completed until the first quarterly hedge effectiveness assessment date (i.e., up to three months).
The Company adopted ASU 2017-12 on December 29, 2018, the first day of the Company’s 2019 fiscal year, which did not materially affect the Company’s results of operations. The Company adopted the guidance on the modified retrospective basis and did not recognize a cumulative effect adjustment upon adoption as the Company had not recognized ineffectiveness on any of the hedging instruments existing as of the date of adoption. Refer to Note 14 “Financial Instruments and Fair Value Measurements” for additional information and disclosures of the Company’s derivatives and hedging activities.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in ASU 2018-16 permit the use of the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in this update were effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance prospectively as of December 29, 2018, concurrent with the adoption of ASU 2017-12, to be applied on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. Adoption of this guidance had no impact on the Condensed Consolidated Financial Statements.

- 9 -


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


(2.)     DISCONTINUED OPERATIONS AND DIVESTITURE
On May 3, 2018, the Company entered into a definitive agreement to sell its AS&O Product Line to Viant, and on July 2, 2018, completed the sale, collecting cash proceeds of approximately $581 million, which is net of transaction costs and adjustments set forth in the definitive agreement. In connection with the sale, the parties executed a transition services agreement whereby the Company would provide certain corporate services (including accounting, payroll, and information technology services) to Viant for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations. Viant paid Integer for these services as specified in the transition services agreement, which ended during the second quarter of 2019. For the performance of services during the three and six months ended June 28, 2019, the Company recognized $1.2 million and $2.9 million, respectively, of income under the transition services agreement. For the six months ended June 28, 2019, $0.1 million is recorded as a reduction of Cost of sales and for the three and six months ended June 28, 2019, $1.2 million and $2.8 million, respectively, is recorded as a reduction of Selling, general and administrative expenses. In addition, the parties executed long-term supply agreements under which the Company and Viant have agreed to supply the other with certain products at prices specified in the agreements for a term of three years.
In connection with the closing of the transaction but prior to a net working capital adjustment, the Company recognized a pre-tax gain on sale of discontinued operations of $195.0 million during the year ended December 28, 2018. During the quarter ended June 28, 2019, the Company received $4.8 million due to a net working capital adjustment agreed to with Viant. This was recognized as gain on sale from discontinued operations, during the quarter ended June 28, 2019.
The operating results of the AS&O Product Line have been classified as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The discontinued operations of the AS&O Product Line are reported in the Medical segment. Income (loss) from discontinued operations net of taxes, were as follows (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Sales
$

 
$
88,701

 
$

 
$
178,020

Cost of sales

 
71,276

 

 
148,357

Gross profit

 
17,425

 

 
29,663

Selling, general and administrative expenses

 
4,096

 

 
8,905

Research, development and engineering costs

 
1,090

 

 
2,352

Other operating expenses

 
2,497

 

 
3,990

Interest expense

 
11,007

 

 
21,857

Gain on sale of discontinued operations
(4,974
)
 

 
(4,974
)
 

Other (income) loss, net
44

 
109

 
(342
)
 
182

Income (loss) from discontinued operations
  before taxes
4,930

 
(1,374
)
 
5,316

 
(7,623
)
Provision for income taxes
95

 
1,660

 
178

 
377

Income (loss) from discontinued operations
$
4,835

 
$
(3,034
)
 
$
5,138

 
$
(8,000
)

Cash flow information from discontinued operations was as follows (in thousands):
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
Cash used in operating activities
$
(58
)
 
$
(5,465
)
Cash provided by (used in) investing activities
4,734

 
(3,596
)
 
 
 


Depreciation and amortization
$

 
$
7,450

Capital expenditures

 
3,610



- 10 -


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


(3.)
SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the Condensed Consolidated Statements of Cash Flows, including information related to discontinued operations:
 
Six Months Ended
(in thousands)
June 28,
2019
 
June 29,
2018
Noncash investing and financing activities:
 
 
 
Property, plant and equipment purchases included in accounts payable
$
2,297

 
$
3,002


Refer to Note 2 “Discontinued Operations and Divestiture” for additional supplemental cash flow information pertaining to discontinued operations and Note 11 “Leases” for additional supplemental cash flow information pertaining to leases.
(4.)     INVENTORIES
Inventories are comprised of the following (in thousands):
 
June 28,
2019
 
December 28,
2018
Raw materials
$
81,155

 
$
80,213

Work-in-process
73,999

 
75,711

Finished goods
32,000

 
34,152

Total
$
187,154

 
$
190,076



- 11 -


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


(5.)     GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the six months ended June 28, 2019 were as follows (in thousands):
 
Medical
 
Non- Medical
 
Total
December 28, 2018
$
815,338

 
$
17,000

 
$
832,338

Foreign currency translation
(970
)
 

 
(970
)
June 28, 2019
$
814,368

 
$
17,000

 
$
831,368


Intangible Assets
Intangible assets at June 28, 2019 and December 28, 2018 were as follows (in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
June 28, 2019
 
 
 
 

Definite-lived:
 
 
 
 
 
Purchased technology and patents
$
241,473

 
$
(131,882
)
 
$
109,591

Customer lists
709,344

 
(117,759
)
 
591,585

Other
3,503

 
(3,495
)
 
8

Total
$
954,320

 
$
(253,136
)
 
$
701,184

Indefinite-lived:
 
 
 
 
 
Trademarks and tradenames


 
 
 
$
90,288

 
 
 
 
 
 
December 28, 2018
 
 
 
 

Definite-lived:
 
 
 
 
 
Purchased technology and patents
$
241,726

 
$
(125,540
)
 
$
116,186

Customer lists
710,406

 
(104,556
)
 
605,850

Other
3,503

 
(3,489
)
 
14

Total
$
955,635

 
$
(233,585
)
 
$
722,050

Indefinite-lived:
 
 
 
 
 
Trademarks and tradenames


 
 
 
$
90,288


Aggregate intangible asset amortization expense is comprised of the following (in thousands):
 
Three Months Ended
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Cost of sales
$
3,195

 
$
3,673

 
$
6,457

 
$
7,389

Selling, general and administrative expenses
6,636

 
6,808

 
13,228

 
13,706

Research, development and engineering costs

 
38

 

 
77

Discontinued operations

 
350

 

 
1,410

Total intangible asset amortization expense
$
9,831

 
$
10,869

 
$
19,685

 
$
22,582


Estimated future intangible asset amortization expense based on the carrying value as of June 28, 2019 is as follows (in thousands):
 
2019
 
2020
 
2021
 
2022
 
2023
 
After 2023
Amortization Expense
$
20,427

 
40,449

 
39,597

 
38,564

 
36,721

 
525,426



- 12 -


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


(6.)     DEBT
Long-term debt is comprised of the following (in thousands):
 
June 28,
2019
 
December 28,
2018
Senior secured term loan A
$
285,937

 
$
304,687

Senior secured term loan B
580,286

 
632,286

Revolving line of credit
10,000

 
5,000

Unamortized discount on term loan B and debt issuance costs
(13,285
)
 
(16,466
)
Total debt
862,938

 
925,507

Current portion of long-term debt
(37,500
)
 
(37,500
)
Total long-term debt
$
825,438

 
$
888,007


The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a revolving credit facility (the “Revolving Credit Facility”) with $200 million borrowing capacity as described below, (ii) a $286 million term loan A facility (the “TLA Facility”), and (iii) a $580 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 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 June 28, 2019, the Company had $10 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $183.2 million after giving effect to $6.8 million of outstanding standby letters of credit. As of June 28, 2019, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 4.91%.
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 2.00% or (ii) the applicable LIBOR rate plus 3.00%, with LIBOR subject to a 1.00% floor. As of June 28, 2019, the interest rates on the TLA Facility and TLB Facility were 4.91% and 5.42%, respectively.
Covenants
The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 5.00:1.00, subject to periodic step downs beginning in the third quarter of 2019 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 3.00:1.00. The TLB Facility does not contain any financial maintenance covenants. As of June 28, 2019, the Company was in compliance with these financial covenants.
Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2019 and the next three years (through maturity), excluding any discounts or premiums, as of June 28, 2019 are as follows (in thousands):
 
 
2019
 
2020
 
2021
 
2022
Future minimum principal payments
 
$
18,750

 
47,500

 
229,687

 
580,286


The Company prepaid portions of its TLB Facility during 2019 and 2018. The Company recognized losses from extinguishment of debt during the three and six months ended June 28, 2019 of $0.6 million and $1.0 million, respectively, and $0.4 million and $1.5 million, during the three and six months ended June 29, 2018, respectively. 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 and is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations.

- 13 -


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


(7.)     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, 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
 
Six Months Ended
 
June 28,
2019
 
June 29,
2018
 
June 28,
2019
 
June 29,
2018
Stock options
$
102

 
$
197

 
$
203

 
$
511

RSAs and RSUs (time-based)
1,545

 
1,207

 
3,465

 
3,169

Performance-based RSUs (“PRSUs”)
1,073

 
796

 
1,765

 
1,503

Stock-based compensation expense - continuing operations
2,720

 
2,200

 
5,433

 
5,183

Discontinued operations

 
685

 

 
924

Total stock-based compensation expense
$
2,720

 
$
2,885

 
$
5,433

 
$
6,107

 
 
 
 
 
 
 
 
Cost of sales
$
281

 
$
200

 
$
598

 
$
376

Selling, general and administrative expenses
2,334

 
1,968

 
4,664

 
4,747

Research, development and engineering costs
58

 
31

 
124

 
55

Other operating expenses
47

 
1

 
47

 
5

Discontinued operations

 
685

 

 
924

Total stock-based compensation expense
$
2,720

 
$
2,885

 
$
5,433

 
$
6,107


There were no stock options granted during the six months ended June 28, 2019. The weighted average fair value and assumptions used to value options granted during the six months ended June 29, 2018 are as follows:
Weighted average fair value
 
$
14.89

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

Expected dividend yield
 
%

The following table summarizes the Company’s stock option activity: