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Table of Contents

 
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 September 30, 2016
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)
(716) 759-5600
(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
  
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
  
Smaller reporting company
¨
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 November 2, 2016 was: 30,854,544 shares.

Table of Contents

Integer Holdings Corporation
Table of Contents for Form 10-Q
As of and for the Quarterly Period Ended September 30, 2016
 
 
 
Page No.
 
 
 
 
ITEM 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 2.
 
 
 
ITEM 3.
 
 
 
ITEM 4.
 
 
 
 
 
 
 
ITEM 1.
 
 
 
ITEM 1A.
 
 
 
ITEM 6.
 
 
 
 
 
 


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Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS—Unaudited
(in thousands except share and per share data)
 
As of
 
September 30, 2016
 
January 1, 2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
44,995

 
$
82,478

Accounts receivable, net of allowance for doubtful accounts of $1.1 million and $1.0 million, respectively
191,409

 
207,342

Inventories
262,232

 
252,166

Refundable income taxes
3,257

 
11,730

Prepaid expenses and other current assets
23,246

 
20,888

Total current assets
525,139

 
574,604

Property, plant and equipment, net
381,671

 
379,492

Amortizing intangible assets, net
872,659

 
893,977

Indefinite-lived intangible assets
90,288

 
90,288

Goodwill
977,335

 
1,013,570

Deferred income taxes
3,081

 
3,587

Other assets
30,794

 
26,618

Total assets
$
2,880,967

 
$
2,982,136

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
29,000

 
$
29,000

Accounts payable
86,290

 
84,362

Income taxes payable
2,641

 
3,221

Accrued expenses
81,960

 
97,257

Total current liabilities
199,891

 
213,840

Long-term debt
1,717,164

 
1,685,053

Deferred income taxes
207,183

 
221,804

Other long-term liabilities
15,704

 
10,814

Total liabilities
2,139,942

 
2,131,511

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding
—

 
—

Common stock, $0.001 par value; 100,000,000 shares authorized; 30,939,907 and 30,664,119 shares issued, respectively; 30,805,320 and 30,601,167 shares outstanding, respectively
31

 
31

Additional paid-in capital
632,409

 
620,470

Treasury stock, at cost, 134,587 and 62,952 shares, respectively
(5,880
)
 
(3,100
)
Retained earnings
101,154

 
231,854

Accumulated other comprehensive income
13,311

 
1,370

Total stockholders’ equity
741,025

 
850,625

Total liabilities and stockholders’ equity
$
2,880,967

 
$
2,982,136

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

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INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME—Unaudited
(in thousands except per share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Sales
$
346,567

 
$
146,637

 
$
1,027,187

 
$
482,847

Cost of sales
248,658

 
94,991

 
741,779

 
320,852

Gross profit
97,909

 
51,646

 
285,408

 
161,995

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
36,265

 
22,308

 
115,781

 
69,021

Research, development and engineering costs, net
11,412

 
14,299

 
42,358

 
39,907

Other operating expenses, net
13,370

 
13,844

 
50,004

 
29,449

Total operating expenses
61,047

 
50,451

 
208,143

 
138,377

Operating income
36,862

 
1,195

 
77,265

 
23,618

Interest expense, net
27,870

 
5,825

 
83,395

 
8,151

Other expense (income), net
275

 
(4,636
)
 
(2,772
)
 
(6,294
)
Income (loss) before provision (benefit) for income taxes
8,717

 
6

 
(3,358
)
 
21,761

Provision (benefit) for income taxes
(2,741
)
 
(16
)
 
(1,386
)
 
4,448

Net income (loss)
$
11,458

 
$
22

 
$
(1,972
)
 
$
17,313

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.37

 
$
—

 
$
(0.06
)
 
$
0.68

Diluted
$
0.37

 
$
—

 
$
(0.06
)
 
$
0.66

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
30,782

 
25,536

 
30,756

 
25,424

Diluted
31,153

 
26,441

 
30,756

 
26,372

Comprehensive Income
 
 
 
 
 
 
 
Net income (loss)
$
11,458

 
$
22

 
$
(1,972
)
 
$
17,313

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
3,191

 
144

 
12,250

 
(1,467
)
Net change in cash flow hedges, net of tax
571

 
689

 
(309
)
 
—

Other comprehensive income (loss)
3,762

 
833

 
11,941

 
(1,467
)
Comprehensive income
$
15,220

 
$
855

 
$
9,969

 
$
15,846

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


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INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—Unaudited
(in thousands)
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(1,972
)
 
$
17,313

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
67,414

 
26,941

Debt related amortization included in interest expense
5,387

 
5,368

Stock-based compensation
7,179

 
9,044

Other non-cash losses (gains), net
1,938

 
(1,549
)
Deferred income taxes
(12,519
)
 
(3,614
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
12,510

 
17,395

Inventories
(10,010
)
 
(34,992
)
Prepaid expenses and other current assets
(4,663
)
 
(1,371
)
Accounts payable
4,885

 
3,347

Accrued expenses
(5,650
)
 
(5,823
)
Income taxes
7,300

 
(1,074
)
Net cash provided by operating activities
71,799

 
30,985

Cash flows from investing activities:
 
 
 
Acquisition of property, plant and equipment
(46,968
)
 
(31,307
)
Purchase of cost and equity method investments, net
(2,917
)
 
(6,300
)
Other investing activities
(1,000
)
 
732

Net cash used in investing activities
(50,885
)
 
(36,875
)
Cash flows from financing activities:
 
 
 
Principal payments of long-term debt
(28,750
)
 
(7,500
)
Proceeds from issuance of long-term debt
57,000

 
—

Issuance of common stock
723

 
5,988

Payment of debt issuance costs
(781
)
 
—

Distribution of cash and cash equivalents to Nuvectra Corporation
(76,256
)
 
—

Purchase of non-controlling interests
(6,818
)
 
—

Other financing activities
(3,983
)
 
(318
)
Net cash used in financing activities
(58,865
)
 
(1,830
)
Effect of foreign currency exchange rates on cash and cash equivalents
468

 
(510
)
Net decrease in cash and cash equivalents
(37,483
)
 
(8,230
)
Cash and cash equivalents, beginning of period
82,478

 
76,824

Cash and cash equivalents, end of period
$
44,995

 
$
68,594

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


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INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY—Unaudited
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
Treasury
 
 
 
Other
 
Total
 
Common Stock
 
Paid-In
 
Stock
 
Retained
 
Comprehensive
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income
 
Equity
At January 1, 2016
30,664

 
$
31

 
$
620,470

 
(63
)
 
$
(3,100
)
 
$
231,854

 
$
1,370

 
$
850,625

Stock-based compensation
—

 
—

 
7,179

 
—

 
—

 
—

 
—

 
7,179

Net shares issued (acquired) under stock incentive plans
276

 
—

 
(481
)
 
(72
)
 
(2,780
)
 
—

 
—

 
(3,261
)
Spin-off of Nuvectra Corporation
—

 
—

 
5,241

 
—

 
—

 
(128,728
)
 
—

 
(123,487
)
Net loss
—

 
—

 
—

 
—

 
—

 
(1,972
)
 
—

 
(1,972
)
Total other comprehensive income, net
—

 
—

 
—

 
—

 
—

 
—

 
11,941

 
11,941

At September 30, 2016
30,940

 
$
31

 
$
632,409

 
(135
)
 
$
(5,880
)
 
$
101,154

 
$
13,311

 
$
741,025

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


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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation – 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”). Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. 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 Integer Holdings Corporation and its subsidiaries (collectively “Integer” or the “Company”) for the periods presented. 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. The January 1, 2016 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements but does not include all disclosures required by GAAP. 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 January 1, 2016. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The third quarter and first nine months of 2016 and 2015 each contained 13 weeks and 39 weeks, respectively, and ended on September 30, and October 2, respectively.
Effective June 30, 2016, the Company changed its name from Greatbatch, Inc. (“Greatbatch”) to Integer Holdings Corporation. The new name represents the union of the Greatbatch Medical, Lake Region Medical and Electrochem brands. Integer, as in whole or complete, signifies the Company’s more comprehensive products and service offerings, and a new dimension in its combined capabilities.
Nature of Operations – On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake Region Medical”). As a result, the Company has three reportable segments: Greatbatch Medical, QiG Group (“QiG”) and Lake Region Medical. On March 14, 2016, Integer completed the spin-off of a portion of its QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Integer on a pro rata basis (the “Spin-off”). See Note 2 “Divestiture and Acquisition” for further description of these transactions. As a result of the Lake Region Medical acquisition and the Spin-off, the Company is in the process of re-evaluating its internal management and financial reporting structure, which may change its product line and segment reporting in the future. This process is expected to be finalized in 2016.
Greatbatch Medical designs and manufactures products where the Company either owns the intellectual property or has unique manufacturing and assembly expertise. These products include medical devices and components for the cardiac, neuromodulation, orthopedics, portable medical, vascular and energy markets among others.
The QiG segment focuses on the design and development of complete medical device systems and components for our customers. After completion of the Spin-off, the operations of QiG primarily consists of Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”), which was acquired in 2014. QiG seeks to assist customers in accelerating the velocity of innovation while delivering an optimized supply chain and critical cost efficiencies. The medical devices QiG designs and develops are full product solutions that utilize the medical technology expertise and capabilities residing within Greatbatch Medical and Lake Region Medical. See Note 2 “Divestiture and Acquisition” for further description of the Spin-off and how it impacted the QiG segment.
Lake Region Medical has operated as a segment of Integer since it was acquired during the fourth quarter of 2015. This segment specializes in the design, development, and manufacturing of products across the medical component and device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management to its customers.
The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.

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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

2.
DIVESTITURE AND ACQUISITION
Spin-off of Nuvectra Corporation
On March 14, 2016, Integer completed the spin-off of a portion of its QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Integer on a pro rata basis. Immediately prior to completion of the Spin-off, QiG Group, LLC was converted into a corporation organized under the laws of Delaware and changed its name to Nuvectra Corporation (“Nuvectra”). On March 14, 2016, each of the Company’s stockholders of record as of the close of business on March 7, 2016 (the “Record Date”) received one share of Nuvectra common stock for every three shares of Integer common stock held as of the Record Date. Upon completion of the Spin-off, Nuvectra became an independent publicly traded company whose common stock is listed on the NASDAQ stock exchange under the symbol “NVTR.”
The portion of the QiG segment spun-off consisted of QiG Group, LLC and its subsidiaries: (i) Algostim, LLC (“Algostim”), (ii) PelviStim LLC (“PelviStim”), and (iii) the Company’s NeuroNexus Technologies (“NeuroNexus”) subsidiary. The operations of CCC and certain other existing QiG research and development capabilities were retained by the Company and not included as part of the Spin-off. As the Company continues to focus on the design and development of complete medical device systems and components, and more specifically on medical device systems and components in the neuromodulation market, the Spin-off was not considered a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the Spin-off is not presented as a discontinued operation in the Company’s Condensed Consolidated Financial Statements. The results of Nuvectra are included in the Condensed Consolidated Statements of Operations and Comprehensive Income through the date of the Spin-off.
In connection with the Spin-off, during the first quarter of 2016, the Company made a cash capital contribution of $75 million to Nuvectra and divested the following assets and liabilities (in thousands):
Assets divested
 
  Cash and cash equivalents
$
76,256

  Other current assets
977

  Property, plant and equipment, net
4,407

  Amortizing intangible assets, net
1,931

  Goodwill
40,830

  Deferred income taxes
6,446

Total assets divested
130,847

Liabilities transferred
 
     Current liabilities
2,119

Net assets divested
$
128,728

For the first quarter of 2016, Nuvectra contributed a pre-tax loss of $5.2 million to the Company’s results of operations. Nuvectra contributed a pre-tax loss of $7.0 million and $18.7 million, respectively, to the Company’s results of operations for the three and nine month periods ended October 2, 2015.
In connection with the Spin-off, on March 14, 2016, Integer entered into several agreements with Nuvectra that govern its post Spin-off relationship with Nuvectra, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement. The Transition Services Agreement contains customary mutual indemnification provisions. Amounts earned by Integer under the Transition Services Agreement were immaterial for the nine month period ended September 30, 2016. Accounts Receivable, Net within the Condensed Consolidated Balance Sheet at September 30, 2016 includes $7.0 million due from Nuvectra for payments made by the Company on Nuvectra’s behalf.
Acquisition of Lake Region Medical Holdings, Inc.
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. for a total purchase price, including debt assumed, of approximately $1.77 billion. Lake Region Medical specializes in the design, development, and manufacturing of products across the medical component and device spectrum primarily serving the cardio, vascular and advanced surgical markets.

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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

2.
DIVESTITURE AND ACQUISITION (Continued)
The aggregate consideration paid to the stockholders and equity award holders of Lake Region Medical consisted of the following (in thousands):
Cash
$
478,490

Fair value of Integer common stock
245,368

Replacement stock options attributable to pre-acquisition service
4,508

Total purchase consideration
$
728,366

The fair value of the Integer common stock issued as part of the consideration was determined based upon the closing stock price of Integer’s shares as of the acquisition date. The fair value of the Integer stock options issued as part of the consideration was determined utilizing a Black-Scholes option pricing model as of the acquisition date. Concurrent with the closing of the acquisition, the Company repaid all of the outstanding debt of Lake Region Medical of approximately $1.0 billion. The cash portion of the purchase price and the repayment of Lake Region Medical’s debt was primarily funded through new senior secured credit facilities and the issuance of senior notes. See Note 6 “Debt” for additional information regarding the Company’s debt. The Company believes that the combination of Greatbatch and Lake Region Medical brings together two highly complementary organizations that can provide a new level of industry leading capabilities and services to OEM customers while building value for stockholders. Through this acquisition, the Company believes that it will be at the forefront of innovating technologies and products that help change the face of healthcare, providing its customers with a distinct advantage as they bring complete systems and solutions to market. In turn, Integer’s customers will be able to accelerate patient access to life enhancing therapies. The transaction is consistent with Integer's strategy of achieving profitable growth and continuous improvement to drive margin expansion.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the cost of the acquisition was allocated to the Lake Region Medical assets acquired and liabilities assumed based on their fair values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill. Measurement-period adjustments made during the first nine months of 2016 were primarily to goodwill ($1.1 million) and deferred tax liabilities ($2.6 million), and did not impact the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income. The measurement-period for this acquisition is now closed and no further purchase price adjustments will be made.
The following table summarizes the allocation of the Lake Region Medical purchase price to the assets acquired and liabilities assumed (in thousands):
Assets acquired
 
Current assets
$
269,815

Property, plant and equipment
216,473

Amortizing intangible assets
849,000

Indefinite-lived intangible assets
70,000

Goodwill
660,670

Other non-current assets
1,629

Total assets acquired
2,067,587

Liabilities assumed
 
Current liabilities
103,986

Debt assumed
1,044,675

Other long-term liabilities
190,560

Total liabilities assumed
1,339,221

Net assets acquired
$
728,366


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

2.
DIVESTITURE AND ACQUISITION (Continued)
The fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, technology life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Current Assets and Liabilities – The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the market approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $23.0 million. This step-up in the fair value of inventory was amortized as the inventory to which the step-up relates was sold and was fully amortized as of January 1, 2016.
Property, Plant and Equipment – The fair value of property, plant & equipment acquired was estimated by applying the cost approach for personal property, buildings and building improvements and the market approach for land. The cost approach was applied by developing a replacement cost and adjusting for depreciation and obsolescence. The value of the land acquired was derived from market prices for comparable properties.
Intangible Assets – The purchase price was allocated to intangible assets as follows (dollars in thousands):
Amortizing Intangible Assets
 
Fair Value Assigned
 
Weighted Average Amortization Period (Years)
 
Estimated Useful Life (Years)
 
Weighted Average Discount Rate
Technology
 
$
160,000

 
7
 
19
 
11.5%
Customer lists
 
689,000

 
14
 
29
 
11.5%
 
 
$
849,000

 
13
 
27
 
11.5%
Indefinite-lived Intangible Assets
 
 
 
 
 
 
 
 
Trademarks and tradenames
 
$
70,000

 
N/A
 
N/A
 
11.5%
The weighted average amortization period is less than the estimated useful life, as the Company is using an accelerated amortization method, which approximates the distribution of cash flows used to fair value those intangible assets.
Technology – Technology consists of technical processes, patented and unpatented technology, manufacturing know-how, trade secrets and the understanding with respect to products or processes that have been developed by Lake Region Medical and that will be leveraged in current and future products. The fair value of technology acquired was determined utilizing the relief from royalty method, a form of the income approach, with a royalty rate that ranged from 0.5% to 7%. The estimated useful life of the technology is based upon management’s estimate of the product life cycle associated with the technology before it will be replaced by new technologies.

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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

2.
DIVESTITURE AND ACQUISITION (Continued)
Customer Lists – Customer lists represent the estimated fair value of non-contractual customer relationships Lake Region Medical had as of the acquisition date. The primary customers of Lake Region Medical are large OEMs in various geographic locations around the world. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 5%, as well as management’s understanding of the industry and product life cycles.
Trademarks and Tradenames – Trademarks and tradenames represent the estimated fair value of Lake Region Medical’s corporate and product names. These tradenames were valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the trademarks and tradenames was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate that ranged from 0.25% to 1%. Trademarks and tradenames were assumed to have an indefinite useful life based upon the significant value the Lake Region Medical name has with OEMs in the medical component and device industries, their long history of being an industry leader and producing quality and innovative components, and given management’s current intention of using this tradename indefinitely, which was assumed to be consistent with what a reasonable market participant would also assume.
Goodwill – The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including the value of Lake Region Medical’s highly trained assembled work force and management team, the incremental value resulting from Lake Region Medical’s capabilities and services to OEMs, enhanced synergies, and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. The goodwill acquired in connection with the acquisition was allocated to the Lake Region Medical segment and is not deductible for tax purposes.
Long-term Debt – The fair value of long-term debt was assumed to be equal to what was paid by Integer at the time of closing of the acquisition in order to retire the debt, including prepayment penalties and fees.
Statements of Operations and Comprehensive Income
The operating results of Lake Region Medical have been included in the Company’s Lake Region Medical segment from the date of acquisition. For the nine months ended September 30, 2016, Lake Region Medical added $607.1 million to the Company’s revenue and decreased the Company’s net loss by approximately $27.9 million.
Unaudited Pro Forma Financial Information
The following unaudited pro forma information presents the consolidated results of operations of the Company and Lake Region Medical as if that acquisition occurred as of the beginning of fiscal year 2014 (in thousands, except per share amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 2, 2015
 
October 2, 2015
Sales
 
$
349,561

 
$
1,085,912

Net loss
 
(9,215
)
 
(3,540
)
Loss per share:
 
 
 
 
     Basic
 
$
(0.30
)
 
$
(0.12
)
     Diluted
 
$
(0.30
)
 
$
(0.12
)




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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

2.
DIVESTITURE AND ACQUISITION (Continued)
The unaudited pro forma financial information presents the combined operating results of Greatbatch and Lake Region Medical with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisition at Integer’s interest rates, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate. The unaudited pro forma consolidated basic and diluted loss per share calculations are based on the consolidated basic and diluted weighted average shares of Greatbatch outstanding for the respective period plus an adjustment for the additional shares and stock options issued in connection with the Lake Region Medical acquisition as discussed above. The unaudited pro forma financial information is presented for illustrative purposes only and does not reflect the realization of potential cost savings, and any related integration costs. Costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have been obtained by the combined company, or to be a projection of results that may be obtained in the future by the combined company.
3.     SUPPLEMENTAL CASH FLOW INFORMATION
 
Nine Months Ended
(in thousands)
September 30, 2016
 
October 2, 2015
Noncash investing and financing activities:
 
 
 
Property, plant and equipment purchases included in accounts payable
$
5,062

 
$
892

Purchase of technology included in accrued expenses
1,000

 
—

Common stock contributed to 401(k) Plan
—

 
3,920

Deferred financing costs included in accounts payable
—

 
7,922

Divestiture of noncash assets
54,591

 
—

Divestiture of liabilities
2,119

 
—

4.
INVENTORIES
Inventories are comprised of the following (in thousands):
 
As of
 
September 30, 2016
 
January 1, 2016
Raw materials
$
114,335

 
$
107,296

Work-in-process
99,892

 
93,729

Finished goods
48,005

 
51,141

Total
$
262,232

 
$
252,166


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

5.
INTANGIBLE ASSETS
Amortizing intangible assets are comprised of the following (in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Foreign
Currency
Translation
 
Net
Carrying
Amount
At September 30, 2016
 
 
 
 
 
 

Purchased technology and patents
$
256,719

 
$
(96,381
)
 
$
2,750

 
$
163,088

Customer lists
759,987

 
(55,416
)
 
4,771

 
709,342

Other
4,534

 
(5,126
)
 
821

 
229

Total amortizing intangible assets
$
1,021,240

 
$
(156,923
)
 
$
8,342

 
$
872,659

At January 1, 2016
 
 
 
 
 
 
 
Purchased technology and patents
$
255,776

 
$
(83,708
)
 
$
1,444

 
$
173,512

Customer lists
761,857

 
(40,815
)
 
(986
)
 
720,056

Other
4,534

 
(4,946
)
 
821

 
409

Total amortizing intangible assets
$
1,022,167

 
$
(129,469
)
 
$
1,279

 
$
893,977

During the first quarter of 2016, the Company made an asset purchase of technology totaling $2.0 million, which is being amortized over a weighted average period of approximately 15 years.
Aggregate intangible asset amortization expense is comprised of the following (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Cost of sales
$
4,228

 
$
1,324

 
$
12,708

 
$
4,240

Selling, general and administrative expenses
5,109

 
1,831

 
15,368

 
5,474

Research, development and engineering costs, net
136

 
88

 
375

 
294

Total intangible asset amortization expense
$
9,473

 
$
3,243

 
$
28,451

 
$
10,008

Estimated future intangible asset amortization expense based on the carrying value as of September 30, 2016 is as follows (in thousands):
 
Estimated
Amortization
Expense
Remainder of 2016
$
9,478

2017
44,129

2018
45,048

2019
45,135

2020
45,734

Thereafter
683,135

Total estimated amortization expense
$
872,659

Indefinite-lived intangible assets are comprised of the following (in thousands):
 
Trademarks
and
Tradenames
At January 1, 2016
$
90,288

At September 30, 2016
$
90,288



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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

5.
INTANGIBLE ASSETS (Continued)
The change in goodwill is as follows (in thousands):
 
Greatbatch Medical
 
QiG
 
Lake Region Medical
 
Total
At January 1, 2016
$
303,929

 
$
50,096

 
$
659,545

 
$
1,013,570

Goodwill divested (Note 2)
—

 
(40,830
)
 
—

 
(40,830
)
Purchase accounting adjustments (Note 2)
—

 
—

 
(1,118
)
 
(1,118
)
Foreign currency translation
123

 
—

 
5,590

 
5,713

At September 30, 2016
$
304,052

 
$
9,266

 
$
664,017

 
$
977,335

6.
DEBT
Long-term debt is comprised of the following (in thousands):
 
As of
 
September 30, 2016
 
January 1, 2016
Senior secured term loan A
$
360,938

 
$
375,000

Senior secured term loan B
1,017,312

 
1,025,000

9.125% senior notes due 2023
360,000

 
360,000

Revolving line of credit
50,000

 
—

Less unamortized discount on term loan B and debt issuance costs
(42,086
)
 
(45,947
)
Total debt
1,746,164

 
1,714,053

Less current portion of long-term debt
29,000

 
29,000

Total long-term debt
$
1,717,164

 
$
1,685,053

Senior Secured Credit Facilities - In connection with the Lake Region Medical acquisition, on October 27, 2015, the Company replaced its existing credit facility with new 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.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLA Facility, as well as the Revolving Credit 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, as defined in the Senior Secured Credit Facilities agreement 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. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 3.25% or (ii) the applicable LIBOR rate plus 4.25%, with LIBOR subject to a 1.00% floor.
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 September 30, 2016, the estimated fair value of the TLB Facility was approximately $1,005 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 September 30, 2016 based upon the debt being variable rate in nature.

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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

6.
DEBT (Continued)
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 of September 30, 2016, the Company had $50 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $141.1 million after giving effect to $8.9 million of outstanding standby letters of credit.
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.
Covenants
The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 6.50:1.00, subject to step downs beginning in the fourth quarter of 2016 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the agreements governing 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 September 30, 2016, the Company was in compliance with these financial covenants. Based upon the Company’s current expectations for its 2016 adjusted EBITDA, there is a potential that it will not be able to meet its minimum interest coverage ratio at year-end 2016. The Company is working with the administrative agent under its Senior Secured Credit Facilities to obtain an amendment or waiver of the financial covenants before year-end.
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 September 30, 2016, 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. The Senior Secured Credit Facilities are guaranteed by Integer Holdings Corporation, as a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries (other than Greatbatch Ltd. (which is the borrower under the Senior Secured Credit Facilities), non-wholly owned joint ventures, and certain other excluded subsidiaries). The Senior Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; i) the present and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except Integer Holdings Corporation); ii) sixty-six percent (66%) of all present and future shares of voting capital stock of each specified first-tier foreign subsidiary; iii) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal property; and iv) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other guarantors.
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”).

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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

6.
DEBT (Continued)
Interest on the Senior Notes is payable on May 1 and November 1 of each year. The Company may redeem the Senior Notes, in whole or in part, prior to November 1, 2018 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium.  Prior to November 1, 2018, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes using the proceeds from certain equity offerings at a redemption price equal to 109.125% of the aggregate principal amount of the Senior Notes. On or after November 1, 2018, the Company may redeem the Senior Notes, in whole or in part, pursuant to a customary schedule of declining redemption prices. As of September 30, 2016, the estimated fair value of the Senior Notes was approximately $351 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 Senior Notes are senior unsecured obligations of the Company. The indenture for the Senior Notes contains restrictive covenants that, among other things, limit the ability of the Company to: (i) incur or guarantee additional indebtedness or issue certain disqualified stock or preferred stock; (ii) create certain liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) make certain other restricted payments; (v) enter into agreements that restrict certain dividends or other payments; (vi) enter into sale-leaseback agreements; (vii) engage in certain transactions with affiliates; and (viii) consolidate or merge with, or sell substantially all of their assets to, another person. These covenants are subject to a number of limitations and exceptions that are described in the indenture for the Senior Notes. The indenture for the Senior Notes provides for customary events of default, subject in certain cases to customary cure periods, in which the Senior Notes and any unpaid interest would become due and payable. As of September 30, 2016, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.
As of September 30, 2016, the weighted average interest rate on all outstanding borrowings is 5.69%.
Contractual maturities under the Senior Secured Credit Facilities and Senior Notes for the remainder of 2016 and the five years and thereafter, excluding any discounts or premiums, as of September 30, 2016 are as follows (in thousands):
Remaining in 2016
$
7,250

2017
31,344

2018
40,719

2019
47,750

2020
97,750

Thereafter
1,563,437

    Total
$
1,788,250

Interest Rate Swaps – From time to time, the Company enters into interest rate swap agreements in order to hedge against potential changes in cash flows on its outstanding variable rate debt. In July 2016, the Company entered into a one-year $250 million interest rate swap with an effective date of July 27, 2016. The Company entered into the 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 day. The swap is being accounted for as a cash flow hedge.
In June 2016, the Company entered into a three-year $200 million interest rate swap with an effective date of June 27, 2017. The Company entered into the 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.

- 16 -
Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

6.
DEBT (Continued)
During 2012, the Company entered into a three-year $150 million interest rate swap, which amortized $50 million per year. During 2014, the Company entered into an additional interest rate swap. The first $45 million of notional amount of the swap was effective February 20, 2015 and the second $45 million of notional amount was scheduled to be effective February 22, 2016. These swaps were accounted for as cash flow hedges. As a result of the Lake Region Medical acquisition, the forecasted cash flows that the Company’s interest rate swaps were hedging were no longer expected to occur. During the fourth quarter of 2015, the Company terminated these interest rate swap agreements.
Information regarding the Company’s outstanding interest rate swaps designated as cash flow hedges as of September 30, 2016 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
%
 
N/A

 
$
(974
)
 
Other Long-Term Liabilities
$
250,000

 
Jul-16
 
Jun-17
 
0.615
%
 
0.53
%
 
$
75

 
Prepaid Expenses and Other Current Assets
The estimated fair value of the interest rate swap agreements represents the amount the Company expects to receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swaps during the nine months ended September 30, 2016 and October 2, 2015 was considered ineffective. The amount recorded as Interest Expense during the nine months ended September 30, 2016 and October 2, 2015 related to the Company’s interest rate swaps was $0.05 million and $3.5 million, respectively.
Debt Issuance Costs and Discounts – The change in deferred debt issuance costs related to the Revolving Credit Facility is as follows (in thousands):
At January 1, 2016
$
4,791

Amortization during the period
(745
)
At September 30, 2016
$
4,046

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
At January 1, 2016
$
35,908

 
$
10,039

 
$
45,947

Financing costs incurred
781

 
—

 
781

Amortization during the period
(3,669
)
 
(973
)
 
(4,642
)
At September 30, 2016
$
33,020

 
$
9,066

 
$
42,086


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

7.
BENEFIT PLANS
The Company is required to provide its employees located in Switzerland, Mexico, France, and Germany certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan provided to the Company’s employees located in Switzerland is a funded contributory plan, while the plans that provide benefits to the Company’s employees located in Mexico, France, and Germany are unfunded and noncontributory. The liability and corresponding expense related to these benefit plans is based on actuarial computations of current and future benefits for employees.
The change in net defined benefit plan liability is as follows (in thousands):
At January 1, 2016
$
7,121

Net defined benefit cost
584

Benefit payments
(76
)
Foreign currency translation
125

At September 30, 2016
$
7,754

Net defined benefit cost is comprised of the following (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Service cost
$
108

 
$
76

 
$
326

 
$
233

Interest cost
44

 
15

 
132

 
45

Amortization of net loss
47

 
13

 
140

 
39

Expected return on plan assets
(5
)
 
(2
)
 
(14
)
 
(8
)
Net defined benefit cost
$
194

 
$
102

 
$
584

 
$
309


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

8.
STOCK-BASED COMPENSATION
At the 2016 Annual Meeting of Stockholders held on May 24, 2016, the Company’s stockholders approved the Company’s 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan provides for the granting of stock options, shares of restricted stock, restricted stock units, stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers. The 2016 Plan supplements the Company’s existing 2009 and 2011 Stock Incentive Plans, as amended.
In connection with the Spin-off, under the provisions of the Company’s existing 2009 and 2011 stock incentive plans, employee stock options, restricted stock awards, and restricted stock unit awards were adjusted to preserve the fair value of the awards immediately before and after the Spin-off. As such, the Company did not record any modification expense related to the conversion of the awards. Certain awards granted to employees who transferred to Nuvectra in connection with the Spin-off were canceled. As required, the Company accelerated the remaining expense related to these canceled awards of $0.5 million during the first quarter of 2016, which was classified as Other Operating Expenses, Net. The stock awards held as of March 14, 2016 were modified as follows:
•
Stock options: Holders of the Company’s stock option awards continued to hold stock options to purchase the same number of shares of Integer common stock at an adjusted exercise price and one new Nuvectra stock option for every three Integer stock options held as of the Record Date, which, in the aggregate, preserved the fair value of the overall awards granted. The adjusted exercise price for Integer stock options was equal to approximately 93% of the original exercise price. The stock option awards will continue to vest over their original vesting period.
•
Restricted stock and restricted stock units: Holders of the Company’s restricted stock and restricted stock unit awards received one new share of Nuvectra restricted stock and restricted stock unit awards for every three Integer restricted stock and restricted stock unit awards held as of the Record Date. Integer restricted stock and restricted stock unit awards will continue to vest in accordance with their original performance metrics and over their original vesting period.
The components and classification of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Stock options
$
663

 
$
697

 
$
1,857

 
$
1,979

Restricted stock and restricted stock units
1,554

 
1,701

 
5,322

 
5,081

401(k) Plan stock contribution
—

 
674

 
—

 
1,984

Total stock-based compensation expense
$
2,217

 
$
3,072

 
$
7,179

 
$
9,044

 
 
 
 
 
 
 
 
Cost of sales
$
158

 
$
685

 
$
505

 
$
2,039

Selling, general and administrative expenses
1,677

 
1,981

 
4,860

 
5,890

Research, development and engineering costs, net
115

 
361

 
408

 
1,070

Other operating expenses, net
267

 
45

 
1,406

 
45

Total stock-based compensation expense
$
2,217

 
$
3,072

 
$
7,179

 
$
9,044

The weighted average fair value and assumptions used to value options granted are as follows:
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
Weighted average fair value
$
9.25

 
$
12.18

Risk-free interest rate
1.56
%
 
1.55
%
Expected volatility
26
%
 
26
%
Expected life (in years)
5

 
5

Expected dividend yield
—
%
 
—
%

- 19 -
Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

8.
STOCK-BASED COMPENSATION (Continued)
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 January 1, 2016
1,678,900

 
$
28.32

 
 
 
 
Granted
245,439

 
49.58

 
 
 
 
Exercised
(32,833
)
 
22.00

 
 
 
 
Forfeited or expired
(91,385
)
 
46.13

 
 
 
 
Adjustment due to Spin-off
—

 
(2.02
)
 
 
 
 
Outstanding at September 30, 2016
1,800,121

 
$
28.41

 
5.8
 
$
2.3

Exercisable at September 30, 2016
1,432,312

 
$
23.87

 
5.0
 
$
2.3

The following table summarizes time-vested restricted stock and restricted stock unit activity:
 
Time-Vested
Activity
 
Weighted Average Fair Value
Nonvested at January 1, 2016
39,235

 
$
47.40

Granted
48,702

 
50.15

Vested
(15,391
)
 
51.39

Forfeited
(10,835
)
 
48.67

Nonvested at September 30, 2016
61,711

 
$
48.35

The following table summarizes performance-vested restricted stock unit activity:
 
Performance-
Vested
Activity
 
Weighted
Average
Fair Value
Nonvested at January 1, 2016
577,825

 
$
25.11

Granted
163,651

 
31.20

Vested
(249,153
)
 
15.86

Forfeited
(119,005
)
 
32.15

Nonvested at September 30, 2016
373,318

 
$
31.70


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

9.
OTHER OPERATING EXPENSES, NET
Other Operating Expenses, Net is comprised of the following (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
2014 investments in capacity and capabilities
$
4,542

 
$
5,116

 
$
13,821

 
$
17,854

Orthopedic facilities optimization
329

 
357

 
628

 
1,348

Lake Region Medical consolidations
2,908

 
—

 
7,355

 
—

Acquisition and integration costs
5,319

 
5,202

 
23,143

 
5,366

Asset dispositions, severance and other
272

 
3,169

 
5,057

 
4,881

 
$
13,370

 
$
13,844

 
$
50,004

 
$
29,449

2014 investments in capacity and capabilities. In 2014, the Company announced several initiatives to invest in capacity and capabilities and to better align its resources to meet its customers’ needs and drive organic growth and profitability. These included the following:
•
Functions performed at the Company’s facility in Plymouth, MN to manufacture catheters and introducers will transfer into the Company’s existing facility in Tijuana, Mexico. This initiative is expected to be substantially completed in the first half of 2017 and is dependent upon our customers’ validation and qualification of the transferred products as well as regulatory approvals worldwide.
•
Functions performed at the Company’s facilities in Beaverton, OR and Raynham, MA to manufacture products for the portable medical market were transferred to a new facility in Tijuana, Mexico. Products manufactured at the Beaverton facility, which do not serve the portable medical market, were transferred to the Company’s Raynham facility. This initiative was substantially completed during the first half of 2016. The final closure of the Beaverton, OR site will occur in the fourth quarter of 2016.
•
The design engineering responsibilities previously performed at the Company’s Cleveland, OH facility were transferred to the Company’s facilities in Minnesota in 2015.
•
The realignment of the Company’s commercial sales operations was completed in 2015.
The total capital investment expected for these initiatives is between $25.0 million and $28.0 million, of which $23.2 million has been expended through September 30, 2016. Total restructuring charges expected to be incurred in connection with this realignment are between $46.0 million and $52.0 million, of which $45.8 million has been incurred through September 30, 2016. Expenses related to this initiative are recorded within the applicable segment and corporate cost centers that the expenditures relate to and include the following:
•Severance and retention: $5.0 million - $6.0 million;
•Accelerated depreciation and asset write-offs: $2.0 million - $3.0 million; and
•Other: $39.0 million - $43.0 million
Other expenses primarily consist of costs to relocate certain equipment and personnel, duplicate personnel costs, excess overhead, disposal, and travel expenditures. All expenses are cash expenditures except accelerated depreciation and asset write-offs. The change in accrued liabilities related to the 2014 investments in capacity and capabilities is as follows (in thousands):
 
Severance and
Retention
 
Accelerated
Depreciation/Asset
Write-offs
 
Other
 
Total
At January 1, 2016
$
1,429

 
$
—

 
$
1,595

 
$
3,024

Restructuring charges
—

 
1,787

 
12,034

 
13,821

Write-offs
—

 
(1,787
)
 
—

 
(1,787
)
Cash payments
(1,246
)
 
—

 
(13,629
)
 
(14,875
)
At September 30, 2016
$
183


$
—

 
$
—

 
$
183


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

9.
OTHER OPERATING EXPENSES, NET (Continued)
Orthopedic facilities optimization. In 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate two buildings, increase capacity, further expand capabilities, and reduce dependence on outside suppliers. This initiative was completed in 2011.
In 2011, the Company began construction of an orthopedic manufacturing facility in Fort Wayne, IN and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was completed in 2012.
In 2012, the Company transferred manufacturing and development operations performed at its facilities in Orvin and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. This initiative was completed in 2013.
During 2013, the Company began a project to expand its Chaumont, France facility in order to enhance its capabilities and fulfill larger volume customer supply agreements. This initiative is expected to be completed over the next year.
The total capital investment expected to be incurred for these initiatives is between $31.0 million and $35.0 million, of which $30.0 million has been expended through September 30, 2016. Total expense expected to be incurred for these initiatives is between $45.0 million and $48.0 million, of which $44.5 million has been incurred through September 30, 2016. All expenses have been and will be recorded within the Greatbatch Medical segment and are expected to include the following:
•
Severance and retention: approximately $11.0 million;
•
Accelerated depreciation and asset write-offs: approximately $13.0 million; and
•
Other: $21.0 million – $24.0 million
Other expenses include production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and asset write-offs.
The change in accrued liabilities related to the orthopedic facilities optimization is as follows (in thousands):
 
Severance and
Retention
 
Accelerated
Depreciation/Asset
Write-offs
 
Other
 
Total
At January 1, 2016
$
—

 
$
—

 
$
—

 
$
—

Restructuring charges
—

 
202

 
426

 
628

Write-offs
—

 
(202
)
 
—

 
(202
)
Cash payments
—

 


 
(426
)
 
(426
)
At September 30, 2016
$
—

 
$
—

 
$
—

 
$
—


Lake Region Medical consolidations. In 2014, Lake Region Medical initiated plans to close its Arvada, CO site, consolidate its two Galway, Ireland sites into one facility, and other restructuring actions that will result in a reduction in staff across manufacturing and administrative functions at certain locations. This initiative is expected to be substantially completed by the end of 2016.
During the third quarter of 2016, the Company announced the planned closure of its Clarence, NY facility. The machined component product lines manufactured in this facility will be transferred to other Integer locations in the U.S. The project is expected to be completed by the first quarter of 2018.
The total capital investment expected to be incurred for these initiatives is between $5.0 million and $6.0 million, of which $1.7 million has been expended through September 30, 2016. Total expense expected to be incurred for these initiatives are between $20.0 million and $25.0 million, of which $9.3 million has been incurred through September 30, 2016. All expenses related to these initiatives have been and will be recorded within the applicable segment and corporate cost centers that the expenditures relate to and are expected to include the following:
•
Employee costs: $8.0 million - $10.0 million;
•
Accelerated depreciation and asset write-offs: approximately $1.0 million - $2.0 million; and
•
Other: $11.0 million - $13.0 million.

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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

9.
OTHER OPERATING EXPENSES, NET (Continued)
Other expenses primarily consist of production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures.
The change in accrued liabilities related to the Lake Region Medical consolidation initiatives is as follows (in thousands):
 
Employee Costs
 
Accelerated
Depreciation/Asset
Write-offs
 
Other
 
Total
At January 1, 2016
$
3,667

 
$
—

 
$
596

 
$
4,263

Restructuring charges
4,646

 
907

 
1,802

 
7,355

Write-offs
—

 
(907
)
 
—

 
(907
)
Cash payments
(7,392
)
 
—

 
(1,942
)
 
(9,334
)
At September 30, 2016
$
921


$
—

 
$
456

 
$
1,377

Acquisition and integration costs. During the third quarter and first nine months of 2016, the Company incurred $0.2 million and $4.2 million, respectively, in transaction costs related to the acquisition of Lake Region Medical. During the third quarter of 2015, the Company incurred $5.1 million of such costs. Transaction costs primarily relate to change-in-control payments to former Lake Region Medical executives, as well as professional and consulting fees. Additionally, during the third quarter and first nine months of 2016, the Company incurred $5.2 million and $18.9 million, respectively, in Lake Region Medical integration costs, which primarily included professional, consulting, severance, retention, relocation, and travel costs. As of September 30, 2016, $5.8 million of acquisition and integration costs related to the Lake Region Medical acquisition are accrued. Total expense expected to be incurred in connection with the integration of Lake Region Medical is between $40.0 million and $50.0 million, of which $31.7 million were incurred through September 30, 2016. Total capital expenditures for this initiative are expected to be between $20.0 million and $25.0 million, the incurrence of which have not been material to date. Expenses related to this initiative were recorded to corporate unallocated expenses, the Greatbatch Medical segment and the Lake Region Medical segment.
Asset dispositions, severance and other. During 2016 and 2015, the Company recorded losses in connection with various asset disposals and/or write-downs. In addition, during the first nine months of 2016 and 2015, the Company incurred legal and professional costs in connection with the Spin-off of $4.4 million ($0.02 million in the third quarter of 2016) and $4.6 million ($3.1 million in the third quarter of 2015), respectively. Total transaction related costs incurred for the Spin-off since inception were $10.4 million. Expenses related to the Spin-off were primarily recorded within the corporate unallocated and the QiG segment. Refer to Note 2 “Divestiture and Acquisition” for additional information on the Spin-off.

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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

10.
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 of the 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. The effective tax rate for the first nine months of 2016 and 2015 was 41.3% and 20.4%, respectively. The effective tax rate for the first nine months of 2016 includes the impact of a $1.6 million ($2.9 million for the third quarter of 2016) of net discrete tax benefits related to Lake Region Medical and Spin-off transaction costs. For fiscal year 2016, the effective tax rate is expected to be approximately (30%). The tax benefit for the third quarter and expected tax benefit for full year 2016 is due to these discrete tax items, as well as Company having projected losses in higher tax rate jurisdictions and income in lower tax rate jurisdictions.
As of September 30, 2016, the balance of unrecognized tax benefits is approximately $9.8 million. It is reasonably possible that a reduction of up to $0.1 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately $9.0 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
11.
COMMITMENTS AND CONTINGENCIES
Litigation – 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 on two Integer patents and awarded Integer $37.5 million in damages. The finding is subject to post-trial proceedings, including a possible appeal by AVX. The Company has recorded no gains in connection with this litigation as no cash has been received.
The Company is a party to various other legal actions arising in the normal course of business. The Company does not expect that the ultimate resolution of any other 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.
Environmental Matters – The Company’s Collegeville, PA facility, which was acquired as part of the Lake Region Medical acquisition, is subject to two administrative consent orders entered into with the U.S. Environmental Protection Agency (the “EPA”), which require ongoing groundwater treatment and monitoring at the site as a result of historic leaks from underground storage tanks. Upon approval by the EPA of the Company’s proposed post remediation care plan, which requires a continuation of the groundwater treatment and monitoring process at the site, the Company expects that the consent orders will be terminated. The Company expects a decision from the EPA on whether the Company’s post remediation care plan has been approved during the fourth quarter of 2016 or early 2017. The groundwater treatment process at the Collegeville facility consists of a groundwater extraction and treatment system and the performance of annual sampling of a defined set of groundwater wells as a means to monitor containment within approved boundaries. The Company does not expect this environmental matter will have a material effect on its condensed consolidated results of operations, financial position or cash flows.

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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

11.
COMMITMENTS AND CONTINGENCIES (Continued)
In January 2015, Lake Region Medical was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of the NJDEP’s intent to revoke a no further action determination made by the NJDEP in favor of Lake Region Medical in 2002 pertaining to a property on which a subsidiary of Lake Region Medical operated a manufacturing facility in South Plainfield, New Jersey beginning in 1971. Lake Region Medical sold the property in 2004 and vacated the facility in 2007. In response to the NJDEP’s notice, the Company further investigated the matter and submitted a technical report to the NJDEP in August of 2015 that concluded that the NJDEP’s notice of intent to revoke was unwarranted. After reviewing the Company’s technical report, the NJDEP issued a draft response in May 2016, stating that the NJDEP would not revoke the no further action determination at that time, but would require some additional site investigation to support the Company’s conclusion. The Company is cooperating with the NJDEP and has met with NJDEP representatives to discuss the appropriate scope of the requested additional investigation. The Company does not expect this environmental matter will have a material effect on its condensed consolidated results of operations, financial position or cash flows.
As of September 30, 2016 and January 1, 2016, there was $1.1 million recorded in Other Long-Term Liabilities in the Condensed Consolidated Balance Sheets in connection with these environmental matters.
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):
At January 1, 2016
$
3,316

Additions to warranty reserve
1,568

Warranty claims settled
(2,351
)
At September 30, 2016
$
2,533

Foreign Currency Contracts – From time to time, the Company enters into forward contracts to purchase Mexican pesos in order to hedge the risk of peso-denominated payments associated with operations at its facilities in Mexico. In connection with the Lake Region Medical acquisition, the Company terminated its outstanding forward contracts resulting in a $2.4 million payment to the foreign currency contract counter-party during the fourth quarter of 2015. As of September 30, 2016, the Company had a $0.3 million loss recorded in Accumulated Other Comprehensive Income related to these contracts, which will be amortized to Cost of Sales as the inventory, which the contracts were hedging the cash flows to produce, is sold.
The impact to the Company’s results of operations from its forward contract hedges is as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Addition in cost of sales
$
929

 
$
562

 
$
2,316

 
$
1,226

Ineffective portion of change in fair value
—

 
—

 
—

 
—

Information regarding outstanding foreign currency contracts designated as cash flow hedges as of September 30, 2016 is as follows (dollars in thousands):
Aggregate
Notional
Amount
 
Start
Date
 
End
Date
 
$/Peso
 
Fair
Value
 
Balance Sheet Location
$
4,120

 
Jan 2016
 
Dec 2016
 
0.0584

 
$
(506
)
 
Accrued Expenses
2,795

 
Apr 2016
 
Dec 2016
 
0.0565

 
(258
)
 
Accrued Expenses
18,490

 
Jan 2017
 
Sep 2017
 
0.0514

 
(415
)
 
Accrued Expenses
6,164

 
Oct 2017
 
Dec 2017
 
0.0514

 
(268
)
 
Other Long-Term Liabilities

- 25 -
Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

11.
COMMITMENTS AND CONTINGENCIES (Continued)
Self-Insurance Liabilities – As of September 30, 2016, and at various times in the past, the Company self-funded its workers' compensation and employee medical expenses. The Company has established reserves to cover these self-insured liabilities and also maintains stop-loss insurance to limit its exposures under these programs. Claims reserves represent accruals for the estimated uninsured portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but not reported claims. Claims incurred but not reported are estimated based on the Company’s historical experience, which is continually monitored, and accruals are adjusted when warranted by changes in facts and circumstances. The Company’s actual experience may be different than its estimates, sometimes significantly. Changes in assumptions, as well as changes in actual experience could cause these estimates to change. Insurance and claims expense will vary from period to period based on the severity and frequency of claims incurred in a given period. The Company’s self-insurance reserves totaled $6.7 million and $7.9 million as of September 30, 2016 and January 1, 2016, respectively. These accruals are recorded in Accrued Expenses and Other Long-Term Liabilities in the Condensed Consolidated Balance Sheets.
12.
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
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Numerator for basic and diluted EPS:
 
 
 
 
 
 
 
Net income (loss)
$
11,458

 
$
22

 
$
(1,972
)
 
$
17,313

Denominator for basic EPS:
 
 
 
 
 
 
 
Weighted average shares outstanding
30,782

 
25,536

 
30,756

 
25,424

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options, restricted stock and restricted stock units
371

 
905

 
—

 
948

Denominator for diluted EPS
31,153

 
26,441

 
30,756

 
26,372

Basic EPS
$
0.37

 
$
—


$
(0.06
)
 
$
0.68

Diluted EPS
$
0.37

 
$
—

 
$
(0.06
)
 
$
0.66

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
 
Nine Months Ended
 
September 30, 2016
 
October 2, 2015
 
September 30, 2016
 
October 2, 2015
Time-vested stock options, restricted stock and restricted stock units
629

 
260

 
1,862

 
268

Performance-vested restricted stock units
373

 
11

 
417

 
10


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Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

13.
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
At July 1, 2016
$
(1,179
)
 
$
(3,746
)
 
$
12,668

 
$
7,743

 
$
1,806

 
$
9,549

Unrealized loss on cash flow hedges
—

 
(101
)
 
—

 
(101
)
 
35

 
(66
)
Realized loss on foreign currency hedges
—

 
929

 
—

 
929

 
(324
)
 
605

Realized loss on interest rate swap hedges
—

 
50

 
—

 
50

 
(18
)
 
32

Foreign currency translation gain
—

 
—

 
3,191

 
3,191

 
—

 
3,191

At September 30, 2016
$
(1,179
)
 
$
(2,868
)
 
$
15,859

 
$
11,812

 
$
1,499

 
$
13,311

 
Defined
Benefit
Plan
Liability
 
Cash
Flow
Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Pre-Tax
Amount
 
Tax
 
Net-of-Tax
Amount
At January 1, 2016
$
(1,179
)
 
$
(2,392
)
 
$
3,609

 
$
38

 
$
1,332

 
$
1,370

Unrealized loss on cash flow hedges
—

 
(2,842
)
 
—

 
(2,842
)
 
995

 
(1,847
)
Realized loss on foreign currency hedges
—

 
2,316

 
—

 
2,316

 
(810
)
 
1,506

Realized loss on interest rate swap hedges
—

 
50

 
—

 
50

 
(18
)
 
32

Foreign currency translation gain
—

 
—

 
12,250

 
12,250

 
—

 
12,250

At September 30, 2016
$
(1,179
)
 
$
(2,868
)
 
$
15,859

 
$
11,812

 
$
1,499

 
$
13,311

 
Defined
Benefit
Plan
Liability
 
Cash
Flow
Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Pre-Tax
Amount
 
Tax
 
Net-of-Tax
Amount
At July 3, 2015
$
(1,181
)
 
$
(3,619
)
 
$
9,839

 
$
5,039

 
$
1,784

 
$
6,823

Unrealized loss on cash flow hedges
—

 
(1,670
)
 
—

 
(1,670
)
 
584

 
(1,086
)
Realized loss on foreign currency hedges
—

 
562

 
—

 
562

 
(197
)
 
365

Realized loss on interest rate swap hedges
—

 
2,169

 
—

 
2,169

 
(759
)
 
1,410

Foreign currency translation gain
—

 
—

 
144

 
144

 
—

 
144

At October 2, 2015
$
(1,181
)
 
$
(2,558
)
 
$
9,983

 
$
6,244

 
$
1,412

 
$
7,656

 
Defined
Benefit
Plan
Liability
 
Cash
Flow
Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Pre-Tax
Amount
 
Tax
 
Net-of-Tax
Amount
At January 2, 2015
$
(1,181
)
 
$
(2,558
)
 
$
11,450

 
$
7,711

 
$
1,412

 
$
9,123

Unrealized loss on cash flow hedges
—

 
(3,857
)
 
—

 
(3,857
)
 
1,350

 
(2,507
)
Realized loss on foreign currency hedges
—

 
1,226

 
—

 
1,226

 
(429
)
 
797

Realized loss on interest rate swap hedges
—

 
2,631

 
—

 
2,631

 
(921
)
 
1,710

Foreign currency translation loss
—

 
—

 
(1,467
)
 
(1,467
)
 
—

 
(1,467
)
At October 2, 2015
$
(1,181
)
 
$
(2,558
)
 
$
9,983

 
$
6,244

 
$
1,412

 
$
7,656

The realized loss relating to the Company’s foreign currency and interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income and included in Cost of Sales and Interest Expense, Net, respectively, in the Condensed Consolidated Statements of Operations and Comprehensive Income.

- 27 -
Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

14.
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.
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. The fair value of the Company’s foreign currency contracts will be realized as Cost of Sales as the inventory, which the contracts are hedging the cash flows to produce, is sold, of which approximately $1.7 million is expected to be realized within the next twelve months.
Interest Rate Swaps – The fair value of the Company’s interest rate swaps outstanding at September 30, 2016 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 swaps counterparty to verify the reasonableness of the Company’s estimate. This fair value calculation was categorized in Level 2 of the fair value hierarchy. The fair value of the Company’s interest rate swaps will be realized as Interest Expense as interest on the corresponding borrowings is accrued.
The following table provides information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands):
 
 
Fair Value Measurements Using
 
 
At 
 September 30,
 
Quoted
Prices in
Active Markets
for Identical
Assets
 
Significant
Other
Observable
Inputs
 
Significant
Unobservable
Inputs
Description
 
2016
 
(Level 1)
 
(Level 2)
 
(Level 3)
Assets
 
 
 
 
 
 
 
 
Interest rate swap (Note 6)
 
$
75

 
$
—

 
$
75

 
$
—

Liabilities
 
 
 
 
 
 
 
 
Foreign currency contracts (Note 11)
 
$
1,447

 
$
—

 
$
1,447

 
$
—

Interest rate swap (Note 6)
 
$
974

 
$
—

 
$
974

 
$
—

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 6 “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:
Long-lived Assets – The Company reviews the carrying amount of its long-lived assets to be held and used, other than goodwill and indefinite-lived intangible assets, for potential impairment whenever certain indicators are present such as: a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which the long-lived asset or asset group is being used or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of the long-lived asset or asset group, including an action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.

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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

14.
FAIR VALUE MEASUREMENTS (Continued)
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group’s carrying amount to its fair value. When it is determined that useful lives are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives. The Company recorded $1.0 million of impairment charges related to its long-lived assets, which is included in Other Operating Expenses, Net during the first nine months of 2016. The Company did not record any impairment charges related to its long-lived assets during the first nine months of 2015.
Goodwill and Indefinite-lived Intangible Assets – Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for impairment. The Company assesses goodwill for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above. Goodwill is evaluated for impairment through the comparison of the fair value of the reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. This qualitative assessment is referred to as a “step zero” approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a step zero assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, the Company must perform a two-step impairment test, and calculate the estimated fair value of the reporting unit. If, based upon the two-step impairment test, it is determined that the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Under the two-step approach, fair values for reporting units are determined based on discounted cash flows and market multiples.
Other indefinite lived intangible assets are assessed for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above, by comparing the fair value of the intangible asset to its carrying value. The fair value is determined by using the income approach.
The Company did not record any impairment charges related to its indefinite-lived intangible assets, including goodwill, during the first nine months of 2016 or 2015, respectively. See Note 5 “Intangible Assets” for additional information on the Company’s intangible assets.
Cost and Equity Method Investments – The Company holds investments in equity and other securities that are accounted for as either cost 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 or equity method investments is 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. Gains and losses realized on cost and equity method investments are recorded in Other Expense (Income), Net, unless separately stated. The aggregate recorded amount of cost and equity method investments at September 30, 2016 and January 1, 2016 was $24.4 million and $20.6 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 September 30, 2016, the Company owned 7.0% of this fund.
During the nine month periods ended September 30, 2016 and October 2, 2015, the Company did not recognize any impairment charges related to its cost method investments. 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. This fair value calculation is categorized in Level 2 of the fair value hierarchy. During the nine month periods ended September 30, 2016 and October 2, 2015, the Company recognized a net gain on cost and equity method investments of $0.9 million and $5.1 million, respectively. During the third quarter of 2015, the Company recognized $4.6 million of income from its equity method investment and received a $3.4 million cash distribution, which was classified as a cash flow from operating activities in the Condensed Consolidated Statement of Cash Flows as it represented a return on investment.

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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

15.
BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION
As a result of the acquisition of Lake Region Medical, the Company has three reportable segments: Greatbatch Medical, QiG and Lake Region Medical. During the first quarter of 2016, the Company completed the Spin-off of a portion of its QiG segment. See Note 2 “Divestiture and Acquisition” for further description of these transactions. As a result of the Lake Region Medical acquisition and the Spin-off, the Company is re-evaluating its internal management and financial reporting structure, which may change its product line and segment reporting in the future. This process is expected to be finalized in 2016.
Greatbatch Medical designs and manufactures medical devices and components where Integer either owns the intellectual property or has unique manufacturing and assembly expertise. Greatbatch Medical provides medical devices and components to the cardiac, neuromodulation, orthopedics, portable medical, vascular and energy markets among others. Greatbatch Medical also offers value-added assembly and design engineering services for medical devices that utilize its component products.
The QiG segment focuses on the design and development of complete medical device systems and components for our OEM customers. After completion of the Spin-off, the operations of QiG primarily consists of CCC. The medical devices QiG designs and develops are full product solutions that utilize the medical technology expertise and capabilities residing within Greatbatch Medical and Lake Region Medical. QiG revenue consists primarily of sales of various medical device products such as implantable pulse generators, programmer systems, battery chargers, patient wands and leads to medical device companies. Once the medical devices developed by QiG reach significant production levels, the responsibility for manufacturing these products may be transferred to Greatbatch Medical.
Lake Region Medical has operated as a segment for Integer since it was acquired during the fourth quarter of 2015. This segment specializes in the design, development, and manufacturing of products across the medical component and device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management.
As a result of the Lake Region Medical acquisition and the Spin-off, the Company has recast its product line sales into the following four categories:
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Cardio and Vascular: Includes the legacy Greatbatch Vascular product line sales plus the legacy Lake Region Medical Cardio and Vascular product line sales less the legacy Lake Region Medical Cardiac/Neuromodulation sales. Products include introducers, steerable sheaths, guidewires, catheters, and stimulation therapy components, subassemblies and finished devices that deliver therapies for various markets such as coronary and neurovascular disease, peripheral vascular disease, interventional radiology, vascular access, atrial fibrillation, and interventional cardiology, plus products for medical imaging and pharmaceutical delivery.
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Cardiac/Neuromodulation: Includes the legacy Greatbatch Cardiac/Neuromodulation and QiG sales plus the legacy Lake Region Medical Cardiac/Neuromodulation sales previously included in their Cardio and Vascular product line sales. Products include batteries, capacitors, filtered and unfiltered feed-throughs, engineered components, implantable stimulation leads, and enclosures used in implantable medical devices.
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Advanced Surgical, Orthopedics, and Portable Medical: Includes legacy Greatbatch Orthopedics and Portable Medical product line sales plus the legacy Lake Region Medical Advanced Surgical product line sales. Products include components, sub-assemblies, finished devices, implants, instruments and delivery systems for a range of surgical technologies to the advanced surgical market, including laparoscopy, orthopedics and general surgery, biopsy and drug delivery, joint preservation and reconstruction, arthroscopy, and engineered tubing solutions. Products also include life-saving and life-enhancing applications comprising of automated external defibrillators, portable oxygen concentrators, ventilators, and powered surgical tools.
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Electrochem: Includes the legacy Greatbatch Energy, Military and Environmental product line sales. Products include primary (lithium) cells, and primary and secondary battery packs for demanding applications such as down hole drilling tools.


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INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

15.
BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMA