0001114483-21-000031.txt : 20211028 0001114483-21-000031.hdr.sgml : 20211028 20211028160429 ACCESSION NUMBER: 0001114483-21-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 92 CONFORMED PERIOD OF REPORT: 20211001 FILED AS OF DATE: 20211028 DATE AS OF CHANGE: 20211028 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: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16137 FILM NUMBER: 211358215 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 itgr-20211001.htm 10-Q itgr-20211001
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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 October 1, 2021
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
 _____________________________________________________________ 
itgr-20211001_g1.jpg
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 1150Plano,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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareITGRNew 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 filerNon-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 October 22, 2021 was: 33,018,867 shares.



INTEGER HOLDINGS CORPORATION
Form 10-Q
For the Quarterly Period Ended October 1, 2021
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)October 1,
2021
December 31,
2020
ASSETS
Current assets:
Cash and cash equivalents$25,472 $49,206 
Accounts receivable, net of provision for credit losses of $0.1 million and $0.2 million, respectively
177,488 156,207 
Inventories149,235 149,323 
Refundable income taxes12,580 2,087 
Contract assets59,440 40,218 
Prepaid expenses and other current assets18,352 15,896 
Total current assets442,567 412,937 
Property, plant and equipment, net250,450 253,964 
Goodwill849,686 859,442 
Other intangible assets, net716,060 757,224 
Deferred income taxes4,364 4,398 
Operating lease assets46,871 45,153 
Other long-term assets38,132 38,739 
Total assets$2,348,130 $2,371,857 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt$20,250 $37,500 
Accounts payable68,418 51,570 
Income taxes payable36 1,847 
Operating lease liabilities7,926 8,431 
Accrued expenses and other current liabilities59,780 56,843 
Total current liabilities156,410 156,191 
Long-term debt610,405 693,758 
Deferred income taxes180,597 182,304 
Operating lease liabilities41,382 37,861 
Other long-term liabilities27,083 30,688 
Total liabilities1,015,877 1,100,802 
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 33,016,984 and 32,908,178 shares issued and outstanding, respectively
33 33 
Additional paid-in capital710,513 700,814 
Retained earnings590,535 517,516 
Accumulated other comprehensive income31,172 52,692 
Total stockholders’ equity1,332,253 1,271,055 
Total liabilities and stockholders’ equity$2,348,130 $2,371,857 
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 EndedNine Months Ended
(in thousands except per share data)October 1,
2021
October 2,
2020
October 1,
2021
October 2,
2020
Sales$305,574 $235,942 $908,064 $804,483 
Cost of sales223,702 178,009 652,960 591,985 
Gross profit81,872 57,933 255,104 212,498 
Operating expenses:
Selling, general and administrative (Note 10)34,269 3,609 105,150 73,969 
Research, development and engineering12,050 11,892 39,249 37,879 
Other operating expenses2,463 2,674 3,657 7,631 
Total operating expenses48,782 18,175 148,056 119,479 
Operating income33,090 39,758 107,048 93,019 
Interest expense10,053 9,368 26,117 29,002 
(Gain) loss on equity investments(152)(2,234)1,867 (3,954)
Other (income) loss, net10 1,224 129 (233)
Income before taxes 23,179 31,400 78,935 68,204 
Provision for income taxes1,113 1,058 5,916 6,373 
Net income$22,066 $30,342 $73,019 $61,831 
Earnings per share:
Basic$0.67 $0.92 $2.21 $1.88 
Diluted$0.66 $0.92 $2.20 $1.87 
Weighted average shares outstanding:
Basic33,008 32,859 32,982 32,833 
Diluted33,309 33,076 33,250 33,107 
Comprehensive Income
Net income$22,066 $30,342 $73,019 $61,831 
Other comprehensive income (loss):
Foreign currency translation gain (loss)(7,836)16,387 (21,716)17,303 
Change in fair value of cash flow hedges, net of tax57 1,355 196 (5,070)
Other comprehensive income (loss), net of tax(7,779)17,742 (21,520)12,233 
Comprehensive income, net of tax$14,287 $48,084 $51,499 $74,064 
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 4 -


INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended
(in thousands)October 1,
2021
October 2,
2020
Cash flows from operating activities:
Net income$73,019 $61,831 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization60,479 59,005 
Debt related charges included in interest expense6,526 3,145 
Stock-based compensation12,235 6,229 
Non-cash (gains) charges related to customer bankruptcy(23)562 
Non-cash lease expense5,918 5,824 
Non-cash (gain) loss on equity investments1,867 (3,954)
Contingent consideration fair value adjustment (500)
Other non-cash losses893 316 
Deferred income taxes(242)42 
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable(21,638)42,096 
Inventories(838)10,272 
Prepaid expenses and other assets(599)(32,736)
Contract assets(19,528)(14,614)
Accounts payable16,044 (5,152)
Accrued expenses and other liabilities(4,292)(13,780)
Income taxes(12,411)(8,347)
Net cash provided by operating activities117,410 110,239 
Cash flows from investing activities:
Acquisition of property, plant and equipment(29,711)(35,182)
Purchase of intangible asset (4,607)
Proceeds from sale of property, plant and equipment81 76 
Acquisitions, net (5,219)
Net cash used in investing activities(29,630)(44,932)
Cash flows from financing activities:
Principal payments of term loans(737,973)(28,125)
Proceeds from issuance of term loans598,250  
Proceeds from revolving credit facility82,300 185,000 
Payments of revolving credit facility(45,000)(135,000)
Proceeds from the exercise of stock options594 3,123 
Payment of debt issuance costs(5,436)(431)
Tax withholdings related to net share settlements of restricted stock unit awards(3,130)(2,869)
Contingent consideration payments(1,621) 
Principal payments on finance leases(51) 
Net cash (used in) provided by financing activities(112,067)21,698 
Effect of foreign currency exchange rates on cash and cash equivalents553 (597)
Net increase (decrease) in cash and cash equivalents(23,734)86,408 
Cash and cash equivalents, beginning of period49,206 13,535 
Cash and cash equivalents, end of period$25,472 $99,943 
The accompanying notes are an integral part of these condensed consolidated financial statements.
- 5 -


INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
 Three Months EndedNine Months Ended
(in thousands)October 1,
2021
October 2,
2020
October 1,
2021
October 2,
2020
Total stockholders’ equity, beginning balance$1,314,572 $1,181,401 $1,271,055 $1,152,488 
Common stock and additional paid-in capital
Balance, beginning of period707,152 695,684 700,847 701,051 
Stock awards exercised or vested112 16 (2,536)(8,593)
Stock-based compensation3,282 2,987 12,235 6,229 
Balance, end of period710,546 698,687 710,546 698,687 
Treasury stock
Balance, beginning of period (509) (8,809)
Treasury shares reissued 509  8,809 
Balance, end of period    
Retained earnings
Balance, beginning of period568,469 471,747 517,516 440,258 
Net income22,066 30,342 73,019 61,831 
Balance, end of period590,535 502,089 590,535 502,089 
Accumulated other comprehensive income
Balance, beginning of period38,951 14,479 52,692 19,988 
Other comprehensive income (loss)(7,779)17,742 (21,520)12,233 
Balance, end of period31,172 32,221 31,172 32,221 
Total stockholders’ equity, ending balance$1,332,253 $1,232,997 $1,332,253 $1,232,997 
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, 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.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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 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 31, 2020.
The third quarter and first nine months of 2021 ended on October 1 and consisted of 91 days and 274 days, respectively. The third quarter and first nine months of 2020 ended on October 2 and consisted of 91 days and 276 days, respectively.
Risks and Uncertainties
Beginning in early March 2020, the global spread of the novel coronavirus (“COVID-19”) created significant uncertainty and worldwide economic disruption. Specific impacts to the Company’s business include labor shortages, disruptions in the supply chain, delayed or reduced customer orders and sales, restrictions on associates’ ability to travel or work, and delays in shipments to and from certain countries. The extent to which COVID-19 will continue to impact the Company’s operations depends on future developments, which remain highly uncertain and difficult to predict, including, among others, the duration of the outbreak, the effectiveness and utilization of vaccines for COVID-19 and its variants, new information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities to contain the pandemic or treat its impact. As pandemic-related events continue to evolve, additional impacts may arise that the Company is not aware of currently. Any prolonged material disruption of the Company’s labor force, suppliers, manufacturing, or customers could materially impact its consolidated financial position, results of operations or cash flows.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). The Company evaluated all recent accounting pronouncements issued, including those that are currently effective, and determined that the adoption of these pronouncements would not have a material effect on the financial position, results of operations or cash flows of the Company. 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 year ended December 31, 2020, that are of significance, or potential significance, to the Company.
- 7 -

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


(2.)    BUSINESS ACQUISITION
On February 19, 2020, the Company acquired certain assets and liabilities of InoMec Ltd. (“InoMec”), a privately-held company based in Israel that specializes in the research, development and manufacturing of medical devices, including minimally invasive tools, delivery systems, tubing and catheters, surgery tools, drug-device combination, laser combined devices, and tooling and production. The acquisition enables the Company to create a research and development center in Israel, closer to the customer base in the region. The fair value of the consideration transferred was $7.0 million, which included an initial cash payment of $5.3 million and $1.7 million in estimated fair value of contingent consideration.
The contingent consideration represents the estimated fair value of the Company’s obligation, under the asset purchase agreement, to make additional payments of up to $3.5 million over the four years following the acquisition based on specified conditions being met. Based on the final purchase price allocation, the assets acquired principally comprise $2.0 million of intangible assets, $4.8 million of goodwill, $0.3 million of acquired property, plant and equipment, and a net liability for other working capital items of $0.1 million. Intangible assets included developed technology, customer relationships and non-compete provisions, which are being amortized over a weighted average period of 5.9 years from the date of acquisition.
The amount allocated to goodwill for this acquisition is deductible for income tax purposes. The fair value of the contingent consideration was estimated using the Monte Carlo valuation approach. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.
For segment reporting purposes, the results of operations and assets from this acquisition have been included in the Company’s Medical segment since the acquisition date. Sales and earnings related to the operations consisting of the assets and liabilities acquired from InoMec for the three and nine months ended October 1, 2021 and October 2, 2020 were not material. There were no direct costs incurred for this acquisition during 2021. During the three and nine months ended October 2, 2020, direct costs of this acquisition of $0.1 million and $0.9 million, respectively, were expensed as incurred and included in Other operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.
Pro forma financial information has not been presented for this acquisition as the net effects were not significant or material to the Company’s results of operations or financial position.
(3.)    SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the Condensed Consolidated Statements of Cash Flows (in thousands):
Nine Months Ended
October 1,
2021
October 2,
2020
Noncash investing and financing activities:
Property, plant and equipment purchases included in accounts payable$4,311 $3,756 
Debt issuance costs incurred but not yet paid1,713  
Supplemental lease disclosures:
Operating lease assets obtained in exchange for new or remeasured operating
   lease liabilities
7,772 8,139 
(4.)    INVENTORIES
Inventories comprise the following (in thousands):
October 1,
2021
December 31,
2020
Raw materials$65,108 $72,477 
Work-in-process73,556 58,806 
Finished goods10,571 18,040 
Total$149,235 $149,323 
- 8 -

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 nine months ended October 1, 2021 were as follows (in thousands):
MedicalNon- MedicalTotal
December 31, 2020$842,442 $17,000 $859,442 
Foreign currency translation(9,756) (9,756)
October 1, 2021$832,686 $17,000 $849,686 
Intangible Assets
Intangible assets comprise the following (in thousands):
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
October 1, 2021
Definite-lived:
Purchased technology and patents$254,924 $(161,375)$93,549 
Customer lists713,126 (181,009)532,117 
Other4,140 (4,034)106 
Total amortizing intangible assets$972,190 $(346,418)$625,772 
Indefinite-lived:
Trademarks and tradenames$90,288 
December 31, 2020
Definite-lived:
Purchased technology and patents$257,453 $(152,798)$104,655 
Customer lists723,791 (161,856)561,935 
Other4,142 (3,796)346 
Total amortizing intangible assets$985,386 $(318,450)$666,936 
Indefinite-lived:
Trademarks and tradenames$90,288 
Aggregate intangible asset amortization expense comprises the following (in thousands):
 Three Months EndedNine Months Ended
 October 1,
2021
October 2,
2020
October 1,
2021
October 2,
2020
Cost of sales$3,216 $3,219 $9,717 $9,660 
Selling, general and administrative expenses7,068 7,080 21,356 21,234 
Total intangible asset amortization expense$10,284 $10,299 $31,073 $30,894 
Estimated future intangible asset amortization expense based on the carrying value as of October 1, 2021 is as follows (in thousands):
Remainder of 20212022202320242025After 2025
Amortization Expense$10,240 40,010 38,595 37,646 36,336 462,945 
- 9 -

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


(6.)     DEBT
Long-term debt related to the 2021 Credit Agreement and 2015 Credit Agreement (each as defined below) as of October 1, 2021 and December 31, 2020, respectively, comprises the following (in thousands):
 October 1,
2021
December 31,
2020
Senior secured term loan A$250,000 $229,687 
Senior secured term loan B350,000 508,286 
Senior secured revolving credit facility37,300  
Unamortized discount on term loan B and debt issuance costs(6,645)(6,715)
Total debt630,655 731,258 
Current portion of long-term debt(20,250)(37,500)
Total long-term debt$610,405 $693,758 
On September 2, 2021, the Company entered into a new credit agreement (the “2021 Credit Agreement”) which permits borrowings and other extensions of credit in an initial aggregate principal amount of up to $1 billion (as may be increased from time to time in accordance with the terms). The 2021 Credit Agreement governs the Company’s senior secured credit facilities (the “Senior Secured Credit Facilities”), which consist of a five-year $400 million revolving credit facility (the “Revolving Credit Facility”), a five-year “term A” loan (the “TLA Facility”) and a seven-year “term B” loan (the “TLB Facility” and, together with the TLA Facility, the “Term Loan Facilities”). The TLB Facility was issued at a 0.50% discount. The 2021 Credit Agreement also includes an alternative benchmark rate as a replacement to the London Interbank Offered Rate (“LIBOR”) in the event LIBOR is no longer available.
The obligations under the 2021 Credit Agreement are guaranteed by certain specified subsidiaries of the Company. Among other things, the 2021 Credit Agreement contains covenants that restrict the Company’s and certain of its subsidiaries’ ability to incur liens on certain assets, incur indebtedness, make material changes in corporate structure or materially alter the nature of its business, dispose of material assets, engage in mergers, consolidations and certain other fundamental changes, or engage in certain transactions with affiliates. The 2021 Credit Agreement contains customary default provisions, including, but not limited to, failure to pay interest or principal when due and failure to comply with covenants.
Prior to September 2, 2021, the Company was party to an amended and restated credit agreement (the “2015 Credit Agreement”), dated as of October 27, 2015. The 2015 Credit Agreement provided for certain credit facilities to the Company in an aggregate principal amount not to initially exceed $1.6 billion. The 2015 Credit Agreement was terminated concurrently with entering into the 2021 Credit Agreement.
Revolving Credit Facility
The Revolving Credit Facility matures on September 2, 2026 and includes $40 million sublimits for swingline loans and for standby letters of credit. As of October 1, 2021, the Company had available borrowing capacity on the Revolving Credit Facility of $357.0 million after giving effect to $37.3 million of outstanding borrowings and $5.7 million of outstanding standby letters of credit.
Interest rates on the Revolving Credit Facility, as well as the TLA Facility, are at the Company’s option, either at: (i) the applicable LIBOR (or an applicable benchmark replacement) plus the applicable margin, which will range between 1.25% and 2.25%, based on the Company’s Total Net Leverage Ratio, or (ii) the Base Rate (as defined below) plus the applicable margin, which will range between 0.25% and 1.25%, based on the Company’s Total Net Leverage Ratio. The Base Rate is defined, for any day, as the per annum rate equal to the highest of (i) the prime rate (as defined in the 2021 Credit Agreement), (ii) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 0.50%, and (iii) one-month LIBOR plus 1.00%. As of October 1, 2021, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 1.83%.
The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.15% and 0.25%, depending on the Company’s Total Net Leverage Ratio (as defined in the 2021 Credit Agreement). As of October 1, 2021, the commitment fee on the unused portion of the Revolving Credit Facility was 0.20%.
- 10 -

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


(6.)     DEBT (Continued)
Term Loan Facilities
The TLA Facility and TLB Facility mature on September 2, 2026 and September 2, 2028, respectively, and require quarterly installments which increase over the term of the loans. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the applicable LIBOR rate plus 2.50%, with LIBOR subject to a 0.50% floor, or (ii) the Base Rate plus 1.50%. As of October 1, 2021, the interest rates on the TLA Facility and TLB Facility were 1.83% and 3.00%, respectively.
Covenants
The 2021 Credit Agreement contains customary terms and conditions, including representations and warranties and affirmative and negative covenants, as well as financial covenants for the benefit of the lenders under the Revolving Credit Facility and the TLA Facility, which require that (i) the Company maintain a Total Net Leverage Ratio not to exceed 5.50:1.00 (stepping down to 5.00:1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following qualified acquisitions, but at no time shall exceed 5.50:1.00) and (ii) the Company maintain an interest coverage ratio of at least 2.50:1.00. The TLB Facility does not contain any financial maintenance covenants. As of October 1, 2021, the Company was in compliance with these financial covenants.
Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2021 and through maturity, excluding any discounts or premiums, as of October 1, 2021 are as follows (in thousands):
20212022202320242025After 2025
Future minimum principal payments$5,063 20,250 21,812 28,063 32,750 529,362 
Debt Issuance Costs and Discounts
In connection with terminating the 2015 Credit Agreement and entering into the 2021 Credit Agreement, for each separate debt instrument on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred.
Based on this assessment, $1.2 million of unamortized debt issuance costs and discount related to the 2015 Credit Agreement were deemed to be related to the issuance of new debt, or the modification of existing debt, and therefore will continue to be deferred and amortized over the term of the associated debt. The remaining $3.3 million of unamortized debt issuance costs and discount related to the 2015 Credit Agreement were deemed to be related to the extinguishment of debt and were expensed and included in Interest Expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.
Additionally, during the nine month period ended October 1, 2021, in connection with prepayments on TLB Facility under the 2015 Credit Agreement, $0.5 million of unamortized debt issuance costs and discount were treated as extinguishment of debt and were expensed and included in Interest Expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.
In connection with the 2021 Credit Agreement, the Company incurred and capitalized $8.8 million of issuance costs, including an original issue discount on the TLB Facility of $1.8 million. An aggregate of $6.0 million of original issue discount and debt issuance costs have been recorded as a reduction of the carrying value of the related debt and $2.8 million of debt issuance costs attributable to the Revolving Credit Facility have been recorded as a component of Other assets on the Condensed Consolidated Balance Sheets as of October 1, 2021.
- 11 -

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 (the “Board”) or the Compensation and Organization Committee of the Board. The stock-based compensation plans provide for the granting of stock options, restricted stock awards, restricted stock units (“RSUs”), stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.
On March 25, 2021, the Company’s Board adopted, subject to stockholder approval, the Integer Holdings Corporation 2021 Omnibus Incentive Plan (the “2021 Plan”). The Company’s stockholders approved the 2021 Plan at the Company’s 2021 annual meeting of stockholders on May 19, 2021, at which time the 2021 Plan replaced the Company’s 2016 Stock Incentive Plan (the “2016 Plan”) and the Company ceased granting any new awards under the 2016 Plan. The number of shares initially reserved for issuance under the 2021 Plan is (i) 1,450,000 plus (ii) the total number of shares of common stock available for issuance under the 2016 Plan, plus (iii) any shares of common stock that are subject to awards forfeited, cancelled, expired, terminated or otherwise lapsed or settled in cash, in whole or in part, without the delivery of shares under the 2016 Plan. Each of the Company’s 2011 Stock Incentive Plan, the 2009 Stock Incentive Plan and the 2005 Stock Incentive Plan have expired, and no awards are available for issuance under these expired plans.
The components and classification of stock-based compensation expense were as follows (in thousands):
 Three Months EndedNine Months Ended
 October 1,
2021
October 2,
2020
October 1,
2021
October 2,
2020
Stock options$ $10 $ $33 
RSUs3,282 2,977 12,235 6,196 
Total stock-based compensation expense$3,282 $2,987 $12,235 $6,229 
Cost of sales$649 $530 $2,586 $1,214 
Selling, general and administrative2,177 2,319 8,747 4,608 
Research, development and engineering302 138 748 407 
Other operating expenses154  154  
Total stock-based compensation expense$3,282 $2,987 $12,235 $6,229 
Stock Options
The following table summarizes the Company’s stock option activity for the nine month period ended October 1, 2021:
Number of
Stock
Options
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(In Years)
Aggregate
Intrinsic
Value
(In Millions)
Outstanding at December 31, 2020281,873 $36.05 
Exercised(27,002)22.01 
Outstanding and exercisable at October 1, 2021254,871 $37.53 4.3$13.9 
- 12 -

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


(7.)     STOCK-BASED COMPENSATION (Continued)
Restricted Stock Units
During the nine months ended October 1, 2021, the Company awarded grants of either time-based RSUs or a mix of time-based RSUs and performance-based RSUs (“PRSUs”) to certain members of its Board and management. New Board members appointed during the first quarter of 2021 received a pro-rated portion of the their annual equity retainer in the form of time-based RSUs that vest in accordance with the regularly scheduled vesting schedule applicable to existing members of the Board. All other time-based RSUs granted during the nine months ended October 1, 2021 vest over a period of three years from the grant date, subject to the recipient’s continuous service to the Company. For the Company’s PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of market-based conditions. The market-based conditions are 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 three year performance periods.
The Company uses a Monte Carlo simulation model to determine the grant-date fair value of awards with TSR-based performance conditions. The grant-date fair value of all other RSUs is equal to the closing market price of Integer common stock on the date of grant.
The weighted average fair value and assumptions used to value the TSR portion of the PRSUs granted are as follows:
 Nine Months Ended
 October 1,
2021
October 2,
2020
Weighted average fair value$85.16 $107.42 
Risk-free interest rate0.19 %1.53 %
Expected volatility41 %30 %
Expected life (in years)3.02.9
Expected dividend yield % %
The valuation of the TSR portion of the PRSUs granted during 2021 and 2020 also reflects a weighted average illiquidity discount of 8.19% and 8.00%, respectively, related to the six-month period that recipients are restricted from selling, transferring, pledging or assigning the underlying shares, in the event of vesting.
The following table summarizes time-vested RSU activity for the nine month period ended October 1, 2021:
Time-Vested
Activity
Weighted
Average
Grant Date Fair Value
Nonvested at December 31, 2020207,923 $75.38 
Granted190,143 82.20 
Vested(90,740)66.97 
Forfeited(15,912)79.59 
Nonvested at October 1, 2021291,414 $82.22 
The following table summarizes PRSU activity for the nine month period ended October 1, 2021:
Performance-
Vested
Activity
Weighted
Average
Grant Date Fair Value
Nonvested at December 31, 2020219,391 $72.33 
Granted92,345 85.16 
Vested(38,882)37.75 
Forfeited(69,333)51.16 
Nonvested at October 1, 2021203,521 $91.97 
- 13 -

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


(8.)     OTHER OPERATING EXPENSES
Other operating expenses comprise the following (in thousands):
 Three Months EndedNine Months Ended
 October 1,
2021
October 2,
2020
October 1,
2021
October 2,
2020
Operational excellence initiatives$1,727 $858 $2,572 $2,275 
Strategic reorganization and alignment   686 
Manufacturing alignment to support growth 36  224 
Acquisition and integration182 107 292 510 
Other general expenses554 1,673 793 3,936 
Total other operating expenses$2,463 $2,674 $3,657 $7,631 
Operational excellence initiatives
The Company’s operational excellence (“OE”) initiatives mainly consist of costs associated with executing on its sales force, manufacturing, business process and performance excellence operational strategic imperatives. These projects focus on changing the Company’s organizational structure to match product line growth strategies and customer needs, transitioning its manufacturing process into a competitive advantage and standardizing and optimizing its business processes.
2021 OE Initiatives - Costs related to the Company’s 2021 OE initiatives are primarily recorded within the Medical segment or unallocated operating expenses and mainly include termination benefits. The Company estimates that it will incur aggregate pre-tax charges in connection with the 2021 OE initiatives of between approximately $3 million to $4 million, the majority of which are expected to be cash expenditures. As of October 1, 2021, total restructuring and related charges incurred since inception was $2.3 million. These actions are expected to be substantially complete by the end of 2021.
2020 OE Initiatives - Costs related to the Company’s 2020 OE initiatives are primarily recorded within the Medical segment and mainly include termination benefits. As of October 1, 2021, total restructuring and related charges incurred since inception was $3.1 million. These actions were substantially complete at the end of 2020.
Strategic reorganization and alignment
These initiatives primarily included aligning resources with the Company’s strategic direction, improving profitability to invest in accelerated growth and the expansion of a facility. These actions began in 2017 and were completed during the second quarter of 2020. The Company recorded, primarily within the Medical segment, $23.0 million of restructuring and related charges since inception.
Manufacturing alignment to support growth
These initiatives were designed to reduce costs, increase manufacturing capacity to accommodate growth and improve operating efficiencies by relocating certain manufacturing operations and expanding certain facilities. These actions began in 2017 and were completed during the fourth quarter of 2020. The Company recorded, primarily within the Medical segment, $5.8 million of restructuring and related charges since inception.
The following table summarizes the change in accrued liabilities, presented within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets, related to the initiatives described above (in thousands):
Operational
excellence
initiatives
December 31, 2020$291 
Charges incurred, net of reversals1,927 
Cash payments(928)
October 1, 2021$1,290 
- 14 -

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


(8.)     OTHER OPERATING EXPENSES (Continued)
Acquisition and integration
Acquisition and integration costs primarily consist of professional fees and other costs related to business acquisitions. During the nine months ended October 1, 2021 and October 2, 2020, acquisition and integration costs included $0.1 million and $1.0 million, respectively, of expenses related to the acquisition of certain assets and liabilities of InoMec, which was acquired in February 2020, and US BioDesign, LLC (“USB”), which was acquired in October 2019. Acquisition and integration costs for the nine months ended October 2, 2020, also includes a $0.5 million adjustment to reduce the fair value of acquisition-related contingent consideration liability associated with the Company’s acquisition of USB. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.
Other general expenses
During the nine months ended October 1, 2021 and October 2, 2020, the Company recorded expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to reduce future costs and improve efficiencies. The 2021 and 2020 amounts primarily include termination benefits, information technology systems conversion expenses, and expenses related to the restructuring of certain legal entities of the Company.
(9.)    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. In addition, the Company continues to explore tax planning opportunities that may have a material impact on its effective tax rate.
The Company’s effective tax rate for the third quarter of 2021 was 4.8% on $23.2 million of income before taxes compared to 3.4% on $31.4 million of income before taxes for the same period in 2020. The Company’s effective tax rate for the first nine months of 2021 was 7.5% on $78.9 million of income before taxes compared to 9.3% on $68.2 million of income before taxes for the same period in 2020. The difference between the Company’s effective tax rates and the U.S. federal statutory income tax rate of 21% for the third quarter and first nine months of 2021 and 2020 is due principally to the net impact of the Company’s earnings outside the U.S., which are generally taxed at rates that differ from the U.S federal rate, the Global Intangible Low-Taxed Income (“GILTI”) tax, the availability of tax credits, and the recognition of certain discrete tax benefits. The Company recorded discrete tax benefits of $1.6 million and $6.1 million, respectively, for the third quarter and first nine months of 2021, compared to discrete tax benefits of $4.9 million and $5.9 million, respectively, for the third quarter and first nine months of 2020. Approximately $3.5 million of the discrete tax benefits recognized for the first nine months of 2021 relate to the reversal of unrecognized tax benefits resulting from the effective settlement of tax audits during the second quarter of 2021. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs or exercise of stock options during those quarters and favorable return to provision adjustments related to the 2020 tax year.
Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements. As of October 1, 2021, the Company had unrecognized tax benefits of approximately $4.4 million, of which approximately $4.4 million would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized. As of October 1, 2021, the Company believes the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to its consolidated financial statements.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income- based tax laws. The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due January 3, 2022 and the remaining 50% due January 3, 2023. As of October 1, 2021 and December 31, 2020, the Company had deferred a total of $9.7 million of payroll taxes. The deferred payroll taxes are included within Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.
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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)


(10.)    COMMITMENTS AND CONTINGENCIES
Contingent Consideration Arrangements
The Company records contingent consideration liabilities related to the earn-out provisions for certain acquisitions. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information.
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.
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. Following four trials and an appeal, the United States Court of Appeals for the Federal Circuit affirmed, in all respects, a judgment in favor of the Company. The Company received the payment of $28.9 million in October 2020, and after recognizing certain related expenses, recognized a net gain of $28.2 million.
Selling, general and administrative expenses
The net gain on patent litigation of $28.2 million is recorded in Selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended October 2, 2020.
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The product warranty liability is presented within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The change in product warranty liability comprised the following (in thousands):
December 31, 2020$163 
Additions to warranty