Edgar Filing: Integer Holdings Corp

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________

FORM 10-Q

_____________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2018

Commission File Number 1-16137

_____________________________________

INTEGER HOLDINGS CORPORATION

(Exact name of Registrant as specified in its charter)

_____________________________________



Delaware		16-1531026
(State of Incorporation)		(I.R.S. Employer Identification No.)

5830 Granite Parkway

Suite 1150

Plano, Texas 75024

(Address of principal executive offices)

(214) 618-5243

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of July 27, 2018 was: 32,165,953 shares.

INTEGER HOLDINGS CORPORATION

Form 10-Q

For the Quarterly Period Ended June 29, 2018

TABLE OF CONTENTS



		Page
PART I—FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited)	3

	Condensed Consolidated Statements of Operations (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows (Unaudited)	6

	Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	48

ITEM 4.	Controls and Procedures	48

PART II—OTHER INFORMATION

ITEM 1.	Legal Proceedings	49

ITEM 1A.	Risk Factors	49

ITEM 6.	Exhibits	49

SIGNATURES		50

- 2 -

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)



(in thousands except share and per share data)	June 29, 2018			December 29, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	18,856		$	37,341
Accounts receivable, net of allowance for doubtful accounts of $0.5 million, respectively	206,890			194,845
Inventories	194,977			176,738
Refundable income taxes	101			37
Prepaid expenses and other current assets	13,903			16,202
Current assets of discontinued operations held for sale	439,752			106,746
Total current assets	874,479			531,909
Property, plant and equipment, net	230,217			235,180
Goodwill	835,558			839,870
Other intangible assets, net	836,512			862,873
Deferred income taxes	3,573			3,451
Other assets	31,078			30,428
Noncurrent assets of discontinued operations held for sale	—			344,634
Total assets	$	2,811,417		$	2,848,345
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	35,156		$	30,469
Accounts payable	74,852			64,551
Income taxes payable	2,790			5,904
Accrued expenses	61,342			60,376
Current liabilities of discontinued operations held for sale	56,243			47,703
Total current liabilities	230,383			209,003
Long-term debt	1,503,534			1,578,696
Deferred income taxes	149,442			140,964
Other long-term liabilities	10,324			11,335
Noncurrent liabilities of discontinued operations held for sale	—			14,966
Total liabilities	1,893,683			1,954,964
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,218,208 and 31,977,953 shares issued, respectively; 32,096,437 and 31,871,427 shares outstanding, respectively	32			32
Additional paid-in capital	678,156			669,756
Treasury stock, at cost, 121,771 and 106,526 shares, respectively	(5,720		)	(4,654		)
Retained earnings	204,208			176,068
Accumulated other comprehensive income	41,058			52,179
Total stockholders’ equity	917,734			893,381
Total liabilities and stockholders’ equity	$	2,811,417		$	2,848,345

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

- 3 -

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



	Three Months Ended						Six Months Ended
(in thousands except per share data)	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Sales	$	314,464		$	280,916		$	606,890		$	547,652
Cost of sales	215,699			191,741			424,593			376,449
Gross profit	98,765			89,175			182,297			171,203
Operating expenses:
Selling, general and administrative expenses	36,780			35,146			73,209			69,940
Research, development and engineering costs	12,935			11,240			26,211			22,877
Other operating expenses	4,692			6,727			8,476			18,421
Total operating expenses	54,407			53,113			107,896			111,238
Operating income	44,358			36,062			74,401			59,965
Interest expense	15,234			15,058			30,829			33,425
(Gain) loss on cost and equity method investments, net	(284		)	4,427			(5,254		)	4,825
Other (income) loss, net	(2,387		)	6,763			(1,427		)	8,164
Income from continuing operations before taxes	31,795			9,814			50,253			13,551
Provision for income taxes	8,739			255			14,113			1,044
Income from continuing operations	$	23,056		$	9,559		$	36,140		$	12,507

Discontinued operations:
Loss from operations of discontinued operations	(1,374		)	(5,698		)	(7,623		)	(13,630		)
Provision for income taxes	1,660			871			377			226
Loss from discontinued operations	$	(3,034	)	$	(6,569	)	$	(8,000	)	$	(13,856	)

Net income (loss)	$	20,022		$	2,990		$	28,140		$	(1,349	)

Basic earnings (loss) per share:
Income from continuing operations	$	0.72		$	0.31		$	1.13		$	0.40
Loss from discontinued operations	(0.09		)	(0.21		)	(0.25		)	(0.44		)
Basic earnings (loss) per share	0.62			0.10			0.88			(0.04		)

Diluted earnings (loss) per share:
Income from continuing operations	$	0.70		$	0.30		$	1.11		$	0.39
Loss from discontinued operations	(0.09		)	(0.21		)	(0.25		)	(0.44		)
Diluted earnings (loss) per share	0.61			0.09			0.86			(0.04		)

Weighted average shares outstanding:
Basic	32,038			31,302			31,970			31,159
Diluted	32,720			31,982			32,572			31,833

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

- 4 -

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)



	Three Months Ended					Six Months Ended
(in thousands)	June 29, 2018			June 30, 2017		June 29, 2018			June 30, 2017
Comprehensive Income (Loss)
Net income (loss)	$	20,022		$	2,990	$	28,140		$	(1,349	)
Other comprehensive income (loss):
Foreign currency translation gain (loss)	(25,885		)	34,599		(12,444		)	41,135
Net change in cash flow hedges, net of tax	(2,086		)	318		1,323			2,068
Other comprehensive income (loss)	(27,971		)	34,917		(11,121		)	43,203
Comprehensive income (loss)	$	(7,949	)	$	37,907	$	17,019		$	41,854

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

- 5 -

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Six Months Ended
(in thousands)	June 29, 2018			June 30, 2017
Cash flows from operating activities:
Net income (loss)	$	28,140		$	(1,349	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	48,591			49,465
Debt related amortization included in interest expense	5,083			6,241
Stock-based compensation	6,107			7,950
Non-cash (gain) loss on cost and equity method investments	(763		)	4,825
Other non-cash (gains) losses	(2,307		)	6,542
Deferred income taxes	8,894			(2,447		)
Changes in operating assets and liabilities:
Accounts receivable	(11,306		)	(6,313		)
Inventories	(20,948		)	(9,451		)
Prepaid expenses and other current assets	3,306			2,515
Accounts payable	8,898			15,373
Accrued expenses	(3,929		)	215
Income taxes	(2,547		)	3,599
Net cash provided by operating activities	67,219			77,165
Cash flows from investing activities:
Acquisition of property, plant and equipment	(19,224		)	(22,438		)
Purchase of cost and equity method investments	(831		)	(497		)
Other investing activities	960			672
Net cash used in investing activities	(19,095		)	(22,263		)
Cash flows from financing activities:
Principal payments of long-term debt	(75,062		)	(118,839		)
Proceeds from issuance of long-term debt	—			50,000
Proceeds from the exercise of stock options	3,625			8,725
Payment of debt issuance costs	(688		)	(1,789		)
Withholding tax paid related to stock-based compensation	(2,206		)	—
Other financing activities	(192		)	—
Net cash used in financing activities	(74,523		)	(61,903		)
Effect of foreign currency exchange rates on cash and cash equivalents	2,363			1,418
Net decrease in cash and cash equivalents	(24,036		)	(5,583		)
Cash and cash equivalents, beginning of period	44,096			52,116
Cash and cash equivalents, end of period	$	20,060		$	46,533
Cash and cash equivalents, end of period, are comprised of:
Cash and cash equivalents	18,856			40,969
Cash included in current assets of discontinued operations held for sale	1,204			5,564
Total cash and cash equivalents, end of period	$	20,060		$	46,533
Supplemental disclosure of cash flow information:
Noncash investing and financing activities:
Property, plant and equipment purchases included in accounts payable	$	3,002		$	4,825

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

- 6 -

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)



	Common Stock			Additional Paid-In Capital		Treasury Stock					Retained Earnings		Accumulated Other Comprehensive Income			Total Stockholders’ Equity
(in thousands)	Shares	Amount		Additional Paid-In Capital		Shares		Amount			Retained Earnings		Accumulated Other Comprehensive Income			Total Stockholders’ Equity
December 29, 2017	31,978	$	32	$	669,756	(107	)	$	(4,654	)	$	176,068	$	52,179		$	893,381
Comprehensive income:
Net income	—	—		—		—		—			28,140		—			28,140
Other comprehensive loss, net	—	—		—		—		—			—		(11,121		)	(11,121		)
Share-based compensation plans:
Stock-based compensation	—	—		6,107		—		—			—		—			6,107
Net shares issued	240	—		2,293		(15	)	(1,066		)	—		—			1,227
June 29, 2018	32,218	$	32	$	678,156	(122	)	$	(5,720	)	$	204,208	$	41,058		$	917,734

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

- 7 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1.) BASIS OF PRESENTATION

Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly traded corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is one of the largest medical device outsource manufacturers in the world serving the cardiac, neuromodulation, vascular and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition, it develops batteries for high-end niche applications in the energy, military, and environmental markets. The Company’s reportable segments are: (1) Medical and (2) Non-Medical. The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.

On May 3, 2018, the Company announced that it entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical segment to Viant (formerly MedPlast, LLC), and on July 2, 2018, completed the sale for $600 million in cash, subject to certain post-closing adjustments. As a result, the Company classified the results of operations of the AS&O Product Line as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations as held for sale in the Condensed Consolidated Balance Sheets. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the discontinued operations due to Integer’s (parent) centralized treasury and cash management processes, and accordingly cash flow amounts for discontinued operations are disclosed in Note 2 “Discontinued Operations.” The Condensed Consolidated Balance Sheet as of December 29, 2017 was derived from the Company’s audited financial statements and has been retrospectively adjusted to reflect discontinued operations. All results and information in the condensed consolidated financial statements is presented as continuing operations and exclude the AS&O Product Line unless otherwise noted specifically as discontinued operations. Refer to Note 2 “Discontinued Operations” and Note 17 “Subsequent Events” for additional information.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. Intercompany transactions and balances have been fully eliminated in consolidation.

Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2017.

The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The second quarter of 2018 and 2017 each contained 13 weeks and ended on June 29, and June 30, respectively. The Company’s 2018 and 2017 fiscal years will end or ended on December 28, 2018 and December 29, 2017, respectively.

- 8 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(2.) DISCONTINUED OPERATIONS

On May 3, 2018, the Company announced that it entered into a definitive agreement to sell its AS&O Product Line to Viant, and on July 2, 2018, completed the sale for $600 million in cash, subject to certain post-closing adjustments. Refer to Note 17 “Subsequent Events” for additional information.

For disposal transactions, a component of an entity that is anticipated to be sold in the future is reported in discontinued operations after it meets the criteria for held-for-sale classification, and if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. The Company evaluated the quantitative and qualitative factors related to the expected sale of the AS&O Product Line and concluded that it met the held-for-sale criteria and that all other conditions for discontinued operations presentation were met as of May 3, 2018. Property, plant and equipment are not depreciated, and intangibles assets are not amortized once classified as held-for-sale.

As a result, the operating results of the AS&O Product Line have been classified as discontinued operations in the Condensed Consolidated Statements of Operations and for all periods presented and the assets and liabilities of the AS&O Product Line have been classified as assets and liabilities of discontinued operations in the Condensed Consolidated Balance Sheets at June 29, 2018 and December 29, 2017. The discontinued operations of the AS&O Product Line are reported in the Medical segment.

The assets and liabilities of a discontinued operation held for sale, other than goodwill, are measured at the lower of carrying amount or fair value less cost to sell. The assets of the AS&O Product Line, other than goodwill based on relative fair value, are measured at carrying amount. The fair value of the AS&O Product Line assets was based primarily on the purchase price of $600 million. In accordance with the guidance set forth in ASC 350, the Company calculated the portion of goodwill included in the AS&O Product Line and, using a relative fair value approach, allocated goodwill to discontinued operations from the Medical segment.

As of June 29 2018, all assets and liabilities of the AS&O Product Line are presented as current in the Condensed Consolidated Balance Sheet as management believes the sale transaction is deemed probable and proceeds will be collected within one year. The carrying amounts of the AS&O Product Line assets and liabilities that were classified as assets and liabilities of discontinued operations held for sale were as follows (in thousands):



	June 29, 2018		December 29, 2017
Cash and cash equivalents	$	1,204	$	6,755
Accounts receivable, net of allowance for doubtful accounts of $0.2 million and $0.3 million, respectively	45,757		47,611
Inventories	52,953		50,796
Prepaid expenses and other current assets	3,325		1,584
Property, plant and equipment, net	131,007		—
Goodwill	149,733		—
Other intangible assets, net	55,773		—
Current assets of discontinued operations held for sale	439,752		106,746
Property, plant and equipment, net	—		135,195
Goodwill	—		150,368
Other intangible assets, net	—		57,520
Other noncurrent assets	—		1,551
Noncurrent assets of discontinued operations held for sale	—		344,634
Total assets	439,752		451,380
Accounts payable and other current liabilities	51,843		47,703
Deferred taxes	4,400		—
Current liabilities of discontinued operations held for sale	56,243		47,703
Deferred taxes and other long-term liabilities	—		14,966
Total liabilities	56,243		62,669
Net assets	$	383,509	$	388,711

- 9 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(2.) DISCONTINUED OPERATIONS (Continued)

Loss from discontinued operations, net of taxes, were as follows (in thousands):



	Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Sales	$	88,701		$	81,803		$	178,020		$	160,480
Cost of sales	71,276			71,706			148,357			141,185
Gross profit	17,425			10,097			29,663			19,295
Selling, general and administrative expenses	4,096			4,578			8,905			9,283
Research, development and engineering costs	1,090			1,649			2,352			3,423
Other operating expenses	2,497			193			3,990			270
Interest expense	11,007			10,589			21,857			21,115
Other (income) loss, net	109			(1,214		)	182			(1,166		)
Loss from operations of discontinued operations	(1,374		)	(5,698		)	(7,623		)	(13,630		)
Provision for income taxes	1,660			871			377			226
Loss from discontinued operations	$	(3,034	)	$	(6,569	)	$	(8,000	)	$	(13,856	)

The Company allocates interest to discontinued operations if the interest is directly attributable to the discontinued operations or is interest on debt that is required to be repaid as a result of the disposal transaction. Interest expense included in discontinued operations reflects an estimate of interest expense related to the debt that will be required to be repaid with the proceeds from the sale of the AS&O Product Line. Refer to Note 17 “Subsequent Events” for additional information.

Cash flow information from discontinued operations was as follows (in thousands):



	Six Months Ended
	June 29, 2018			June 30, 2017
Cash used in operating activities	$	(5,465	)	$	(1,692	)
Cash used in investing activities	(3,596		)	(9,141		)

Depreciation and amortization	$	7,450		$	10,507
Capital expenditures	3,610			9,214

(3.) INVENTORIES

Inventories are comprised of the following (in thousands):



	June 29, 2018		December 29, 2017
Raw materials	$	85,767	$	85,050
Work-in-process	76,761		63,620
Finished goods	32,449		28,068
Total	$	194,977	$	176,738

Refer to Note 2 “Discontinued Operations” for inventories included in discontinued operations, which are not included above.

- 10 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(4.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The changes in the carrying amount of goodwill by reportable segment for the quarter ended June 29, 2018 were as follows (in thousands):



	Medical			Non- Medical		Total
December 29, 2017	$	822,870		$	17,000	$	839,870
Foreign currency translation	(4,312		)	—		(4,312		)
June 29, 2018	$	818,558		$	17,000	$	835,558

Intangible Assets

Intangible assets at June 29, 2018 and December 29, 2017 were as follows (in thousands):



	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
June 29, 2018
Definite-lived:
Purchased technology and patents	$	242,561	$	(118,399	)	$	124,162
Customer lists	713,930		(91,906		)	622,024
Other	4,660		(4,622		)	38
Total	$	961,151	$	(214,927	)	$	746,224
Indefinite-lived:
Trademarks and tradenames						$	90,288

December 29, 2017
Definite-lived:
Purchased technology and patents	$	243,679	$	(111,185	)	$	132,494
Customer lists	718,649		(78,621		)	640,028
Other	4,660		(4,597		)	63
Total	$	966,988	$	(194,403	)	$	772,585
Indefinite-lived:
Trademarks and tradenames						$	90,288

Aggregate intangible asset amortization expense is comprised of the following (in thousands):



	Three Months Ended				Six Months Ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017
Cost of sales	$	3,673	$	3,761	$	7,389	$	7,496
Selling, general and administrative expenses	6,808		6,250		13,706		12,462
Research, development and engineering costs	38		136		77		272
Discontinued operations	350		899		1,410		1,794
Total intangible asset amortization expense	$	10,869	$	11,046	$	22,582	$	22,024

Estimated future intangible asset amortization expense based on the carrying value as of June 29, 2018 is as follows (in thousands):



	2018		2019		2020		2021		2022		After 2022
Amortization Expense	$	19,842	$	40,556	$	40,870	$	40,013	$	38,871	$	566,072

- 11 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(5.) DEBT

Long-term debt is comprised of the following (in thousands):



	June 29, 2018			December 29, 2017
Senior secured term loan A	$	321,094		$	335,157
Senior secured term loan B	812,286			873,286
9.125% senior notes due 2023	360,000			360,000
Revolving line of credit	74,000			74,000
Unamortized discount on term loan B and debt issuance costs	(28,690		)	(33,278		)
Total debt	1,538,690			1,609,165
Current portion of long-term debt	(35,156		)	(30,469		)
Total long-term debt	$	1,503,534		$	1,578,696

Senior Secured Credit Facilities

The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), (ii) a $375 million term loan A facility (the “TLA Facility”), and (iii) a $1,025 million term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB facility was issued at a 1% discount.

On June 8, 2018, the Company amended the Senior Secured Credit Facilities to permit the sale of the AS&O Product Line, provided that the net cash proceeds from the sale be applied first, to redeem all of the Company’s outstanding 9.125% Senior Notes due 2023, second to repay the outstanding balance of the Company’s Revolving Credit Facility, and third, to the extent of any remaining net cash proceeds, to prepay outstanding loans under the TLB Facility. The amendment also amends the definition of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to permit adjustments consisting of certain non-recurring actual expenses incurred in connection with the sale of the AS&O Product Line.

The Company completed the sale of the AS&O Product Line on July 2, 2018 and subsequently utilized the net cash proceeds to repay the debt in accordance with the amended terms of the Senior Secured Credit Facilities. Refer to Note 17 “Subsequent Events” for additional information.

Revolving Credit Facility

The Revolving Credit Facility matures on October 27, 2020. The Revolving Credit Facility also includes a $15 million sublimit for swingline loans and a $25 million sublimit for standby letters of credit. The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.175% and 0.25%, depending on the Company’s Total Net Leverage Ratio (as defined in the Senior Secured Credit Facilities agreement). Interest rates on the Revolving Credit Facility, as well as the TLA Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s Total Net Leverage Ratio, or (ii) the applicable LIBOR rate plus the applicable margin, which will range between 1.75% and 3.25%, based on the Company’s Total Net Leverage Ratio.

As of June 29, 2018, the Company had $74 million million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $116.8 million after giving effect to $9.2 million of outstanding standby letters of credit. As of June 29, 2018, the weighted average interest rate on all outstanding borrowings under the Revolving Credit Facility was 5.34%.

Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00. The outstanding amount of the Revolving Credit Facility approximated its fair value as of June 29, 2018 based upon the debt being variable rate and short-term in nature.

- 12 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(5.) DEBT (Continued)

Term Loan Facilities

The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 2.25% or (ii) the applicable LIBOR rate plus 3.25%, with LIBOR subject to a 1.00% floor. As of June 29, 2018, the interest rates on the TLA Facility and TLB Facility were 5.36% and 5.30%, respectively. Additionally, if the Company receives both (a) a public corporate family credit rating from Moody’s Investors Services, Inc. of “B2” (stable outlook) or higher and (b) a public corporate credit rating from Standard & Poor’s Financial Services LLC of “B” (stable outlook) or higher, the interest rate margins for the TLB Facility will step down by an additional 25 basis points. Refer to Note 17 “Subsequent Events” for additional information.

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 June 29, 2018, the estimated fair value of the TLB Facility was approximately $815 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 June 29, 2018 based upon the debt being variable rate in nature.

Covenants

The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 6.0:1.00, subject to periodic step downs beginning in the third quarter of 2018 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 2.75:1.00 subject to a step up beginning in the first quarter of 2019. As of June 29, 2018, the Company was in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants.

The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of June 29, 2018, the Company was in compliance with all negative covenants under the Senior Secured Credit Facilities.

The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become immediately due and payable.

9.125% Senior Notes due 2023

On October 27, 2015, the Company completed a private offering of $360 million aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”). All of the Senior Notes are outstanding as of June 29, 2018.

On June 8, 2018, the Company gave notice of a conditional full redemption for all of the Senior Notes. The redemption price for the Senior Notes is 100% of the principal amount of the Senior Notes plus the applicable premium (as set forth in the indenture governing the Senior Notes) and accrued and unpaid interest through the redemption date. The redemption was conditioned on the closing of the sale of the AS&O Product Line. On July 10, 2018, the Company completed the redemption in full of the Senior Notes. Refer to Note 17 “Subsequent Events” for additional information.

As of June 29, 2018, the estimated fair value of the Senior Notes was approximately $392 million, based on quoted market prices of these Senior Notes, recent sales prices for the Senior Notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.

The indenture for the Senior Notes contain certain restrictive covenants and provides for customary events of default, subject in certain cases to customary cure periods, as a result of which the Senior Notes and any unpaid interest would become due and payable. As of June 29, 2018, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.

- 13 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(5.) DEBT (Continued)

Contractual maturities under the Senior Secured Credit Facilities and Senior Notes for the remainder of 2018 and the next four years and thereafter, excluding any discounts or premiums, as of June 29, 2018 are as follows (in thousands):



	2018		2019		2020		2021		2022		After 2022
Future minimum principal payments	$	16,406	$	37,500	$	111,500	$	229,688	$	812,286	$	360,000

Debt Issuance Costs and Discounts

The change in deferred debt issuance costs related to the Revolving Credit Facility is as follows (in thousands):



December 29, 2017	$	2,808
Amortization during the period	(495		)
June 29, 2018	$	2,313

The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows (in thousands):



	Debt Issuance Costs			Unamortized Discount on TLB Facility			Total
December 29, 2017	$	26,889		$	6,389		$	33,278
Write-off of debt issuance costs and unamortized discount⁽¹⁾	(1,039		)	(435		)	(1,474		)
Amortization during the period	(2,544		)	(570		)	(3,114		)
June 29, 2018	$	23,306		$	5,384		$	28,690

⁽¹⁾

The Company prepaid portions of its TLB Facility during 2018 and 2017. The Company recognized losses from extinguishment of debt during the three and six months ended June 29, 2018 of $0.4 million and $1.5 million, respectively. The Company recognized losses from extinguishment of debt during the three and six months ended June 30, 2017 of $0.9 million and $2.5 million, respectively. The loss from extinguishment of debt represents the portion of the unamortized discount and debt issuance costs related to the portion of the TLB Facility that was prepaid and is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations.

Interest Rate Swap

During 2016, the Company entered into a three-year $200 million interest rate swap to hedge against potential changes in cash flows on the outstanding variable rate debt, which is indexed to the one-month LIBOR rate. The variable rate received on the interest rate swap and the variable rate paid on the outstanding debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same date. The swap is being accounted for as a cash flow hedge.

Information regarding the Company’s outstanding interest rate swap designated as a cash flow hedge as of June 29, 2018 is as follows (dollars in thousands):



Notional Amount		Start Date	End Date	Pay Fixed Rate		Receive Current Floating Rate		Fair Value		Balance Sheet Location
$	200,000	Jun-17	Jun-20	1.1325	%	2.1029	%	$	5,756	Other Long-Term Assets

The estimated fair value of the interest rate swap agreement represents the amount the Company would receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swap during the quarters ended June 29, 2018 and June 30, 2017 was considered ineffective. The amounts recorded to Interest Expense during the six months ended June 29, 2018 and June 30, 2017 related to the Company’s interest rate swap were reductions of $0.6 million and $0.3 million, respectively. The estimated Accumulated Other Comprehensive Income related to the Company’s interest rate swaps that is expected to be reclassified into earnings within the next twelve months is a $2.5 million gain.

- 14 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) BENEFIT PLANS

The Company is required to provide its employees located in Switzerland, Mexico, France, and Germany certain statutorily mandated defined benefits. Net defined benefit cost attributable to employees of the AS&O Product Line located in France and Germany are reported within discontinued operations.

The following tables set forth the components of the Company’s net periodic expense relating to retirement benefit plans (in thousands):



	Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Service cost	$	122		$	115		$	249		$	225
Interest cost	45			40			91			78
Amortization of net loss	16			19			32			36
Expected return on plan assets	(5		)	(6		)	(9		)	(10		)
Net defined benefit cost	178			168			363			329
Less: Discontinued operations	109			101			223			198
Net defined benefit cost - continuing operations	$	69		$	67		$	140		$	131

(7.) STOCK-BASED COMPENSATION

The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders and are administered by the Board of Directors, or the Compensation and Organization Committee of the Board. The stock-based compensation plans provide for the granting of stock options, shares of restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.

The components and classification of stock-based compensation expense were as follows (in thousands):



	Three Months Ended				Six Months Ended
	June 29, 2018		June 30, 2017		June 29, 2018		June 30, 2017
Stock options	$	214	$	283	$	545	$	993
RSAs and RSUs (time-based)	1,338		1,155		3,416		3,359
Performance-based RSUs (“PSUs”)	1,333		1,843		2,146		3,598
Total stock-based compensation expense	2,885		3,281		6,107		7,950
Less: Discontinued operations	685		349		924		582
Stock-based compensation expense - continuing operations	$	2,200	$	2,932	$	5,183	$	7,368

Cost of sales	$	200	$	259	$	376	$	337
Selling, general and administrative expenses	1,968		2,493		4,747		4,493
Research, development and engineering costs	31		150		55		245
Other operating expenses	1		30		5		2,293
Discontinued operations	685		349		924		582
Total stock-based compensation expense	$	2,885	$	3,281	$	6,107	$	7,950

- 15 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7.) STOCK-BASED COMPENSATION (Continued)

During the first quarter of 2017, the Company recorded $2.2 million of accelerated stock-based compensation expense in connection with the transition of its former Chief Executive Officer per the terms of his contract, which was classified as Other Operating Expenses.

The weighted average fair value and assumptions used to value options granted are as follows:



	Six Months Ended
	June 29, 2018			June 30, 2017
Weighted average fair value	$	14.89		$	10.58
Risk-free interest rate	2.21		%	1.69		%
Expected volatility	39		%	37		%
Expected life (in years)	4.0			4.1
Expected dividend yield	—		%	—		%

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



	Number of Stock Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (In Millions)
Outstanding at December 29, 2017	931,353		$	30.89
Granted	28,447		45.13
Exercised	(108,305	)	33.47
Forfeited or expired	(17,542	)	38.77
Outstanding at June 29, 2018	833,953		$	30.87	5.4	$	28.2
Exercisable at June 29, 2018	701,729		$	29.88	4.8	$	24.4

During the six months ended June 29, 2018, the Company awarded grants of 0.3 million RSUs to certain members of management, of which 0.2 million are PSUs and the remainder are time-based RSUs that vest over three years. Of the PSUs, 0.1 million of the shares subject to each grant will be earned based upon achievement of specific Company performance metrics over a three-year performance period ending January 1, 2021, and 0.1 million of the shares subject to each grant will be earned based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over a three-year performance period ending January 1, 2021. The number of PSUs earned based on the achievement of the Company performance metrics and TSR performance requirements, if any, will vest based on the recipient’s continuous service to the Company over a period of generally one to three years from the grant date. The time-based RSUs generally vest ratably over a three-year period.

The grant-date fair value of the TSR portion of the PSUs granted during the six months ended June 29, 2018 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.92 years, (ii) risk free interest rate of 2.28%, (iii) expected dividend yield of 0.0% and (iv) expected stock price volatility over the expected term of the TSR award of 40%. The grant-date fair value of all other restricted stock awards is equal to the closing market price of Integer common stock on the date of grant.

- 16 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7.) STOCK-BASED COMPENSATION (Continued)

The following table summarizes RSA and RSU activity:



	Time-Vested Activity		Weighted Average Fair Value
Nonvested at December 29, 2017	163,431		$	35.96
Granted	147,878		49.30
Vested	(11,999	)	49.78
Forfeited	(4,453	)	43.62
Nonvested at June 29, 2018	294,857		$	41.97

The following table summarizes PSU activity:



	Performance- Vested Activity		Weighted Average Fair Value
Nonvested at December 29, 2017	469,889		$	32.37
Granted	159,669		45.37
Vested	(127,191	)	34.29
Forfeited	(147,555	)	34.31
Nonvested at June 29, 2018	354,812		$	36.72

(8.) OTHER OPERATING EXPENSES

Other Operating Expenses is comprised of the following (in thousands):



	Three Months Ended					Six Months Ended
	June 29, 2018			June 30, 2017		June 29, 2018		June 30, 2017
Strategic reorganization and alignment	$	3,727		$	—	$	5,781	$	—
Manufacturing alignment to support growth	1,103			—		1,616		—
Consolidation and optimization initiatives	(14		)	2,729		561		5,076
Acquisition and integration expenses	—			2,970		—		7,790
Asset dispositions, severance and other	(124		)	1,028		518		5,555
Other operating expenses - continuing operations	4,692			6,727		8,476		18,421
Discontinued operations	2,497			193		3,990		270
Total other operating expenses	$	7,189		$	6,920	$	12,466	$	18,691

Strategic Reorganization and Alignment

During the fourth quarter of 2017, the Company began to take steps to better align its resources in order to enhance the profitability of its portfolio of products. This includes improving its business processes and redirecting investments away from projects where the market does not justify the investment, as well as aligning resources with market conditions and the Company’s future strategic direction. The Company estimates that it will incur aggregate pre-tax charges in connection with the strategic reorganization and alignment plan, including projects currently classified as discontinued operations, of between approximately $28 million to $30 million, of which an estimated $16 million to $20 million are expected to result in cash outlays. During the six months ended June 29, 2018, the Company incurred charges relating to this initiative which primarily included severance and personnel related costs for terminated employees and fees for professional services. These expenses were primarily recorded within the Medical segment. As of June 29, 2018, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $15.5 million. These actions are expected to be substantially completed by the end of the third quarter of 2018.

- 17 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(8.) OTHER OPERATING EXPENSES (Continued)

Manufacturing Alignment to Support Growth

In 2017, the Company initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth. The plan involves the relocation of certain manufacturing operations and expansion of certain of the Company's facilities. The Company estimates that it will incur aggregate pre-tax restructuring related charges in connection with the realignment plan of between approximately $9 million to $11 million, the majority of which are expected to be cash expenditures, and capital expenditures of between approximately $4 million to $6 million. Costs related to the Company’s manufacturing alignment to support growth initiative were primarily recorded within the Medical segment. As of June 29, 2018, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $2.0 million. These actions are expected to be substantially completed by the end of 2019.

Consolidation and Optimization Initiatives

In 2014, the Company initiated plans to transfer certain manufacturing functions performed at its facility in Beaverton, OR to a new facility in Tijuana, Mexico. Additionally, during 2016, the Company announced it would be closing its facility in Clarence, NY after transferring the machined component product lines manufactured in that facility to other Integer locations in the U.S. Costs related to the Company’s consolidation and optimization initiatives were primarily recorded within the Medical segment. The Company does not expect to incur any material additional costs associated with these activities are substantially complete.

The following table summarizes the change in accrued liabilities related to the initiatives described above (in thousands):



	Severance and Retention			Other			Total
December 29, 2017	$	1,308		$	—		$	1,308
Restructuring charges	4,427			3,531			7,958
Cash payments	(4,514		)	(1,336		)	(5,850		)
June 29, 2018	$	1,221		$	2,195		$	3,416

Acquisition and Integration Expenses

The Company did not incur any additional costs associated with these activities during the six months ended June 29, 2018. During the three and six months ended June 30, 2017, the Company incurred $3.0 million and $7.8 million in acquisition and integration costs related to the acquisition of Lake Region Medical, consisting primarily of integration costs. Integration costs primarily include professional, consulting, severance, retention, relocation, and travel costs. The $0.4 million of acquisition and integration costs accrued as of December 29, 2017 were paid during the first quarter of 2018. These projects were completed as of December 29, 2017.

Asset Dispositions, Severance and Other

During the first six months of 2018 and 2017, the Company recorded losses in connection with various asset disposals and/or write-downs. The 2017 amount also includes approximately $5.3 million in expense related to the Company’s leadership transitions, which were recorded within the corporate unallocated segment.

- 18 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(9.) INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations.

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

Under GAAP, the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. As such, the Company recognized an estimate of the impact of the Tax Reform Act in the year ended December 29, 2017. The Company had an estimated $147.5 million of undistributed foreign earnings and profit subject to the deemed mandatory repatriation as of December 29, 2017 and recognized a provisional $14.7 million in 2017 for the one-time transition tax. The Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with the repatriation tax. In addition, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 29, 2017 and recognized a $56.5 million tax benefit in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 29, 2017. For further discussion of the impact of the Tax Reform Act for the year ended December 29, 2017, reference is made to Note 12 of the Company’s consolidated financial statements as of and for the year ended December 29, 2017 included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 29, 2017.

On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the tax impact of the revaluation of deferred tax assets and liabilities and the provisional tax impact related to deemed repatriated earnings and included these amounts in its consolidated financial statements for the year ended December 29, 2017. The ultimate impact may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. This accounting is expected to be complete by the date that the Company’s 2017 U.S. corporate income tax return is filed in 2018. During the six month period ended June 29, 2018, there were no changes made to the provisional amount recorded in 2017.

In addition to the reduction of the U.S. federal corporate tax rate and the one-time transition tax discussed above, the Tax Reform Act also established new tax laws that affect 2018, including, but not limited to: (i) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (ii) a new U.S. Income inclusion on certain earnings of foreign subsidiaries (Global Intangible Low-Taxed Income (“GILTI”)); (iii) the repeal of the domestic production activity deductions; (iv) limitations on the deductibility of certain executive compensation; (v) an elimination of the deduction for certain deemed “base erosion payments” made to foreign affiliates (Base Erosion and Anti-Abuse Tax (“BEAT”)); and (vi) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).

- 19 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(9.) INCOME TAXES (Continued)

The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018. Because of the complexity of the new GILTI tax rules and the ongoing regulatory interpretation of the GILTI provisions, the Company is continuing its evaluation of this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company's measurement of its deferred taxes (the “deferred method”). The Company's selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not only the Company's current structure and estimated future results of global operations, but also its intent and ability to modify its structure. While the Company has included an estimate of GILTI in its estimated effective tax rate for 2018, it has not finalized its analysis and is not yet able to determine which method to elect. Adjustments related to the amount of GILTI Tax recorded in its condensed consolidated financial statements may be required based on the outcome of this election.

The BEAT provisions in the Tax Reform Act eliminate the deduction of certain base-erosion payments made to related foreign corporations, and impose a minimum tax if greater than regular tax.

The Company does not expect to be materially impacted by the BEAT or FDII provisions and has not included any impact of the provisions in its estimated effective tax rate for 2018, however, it is still in the process of analyzing the effect of these provisions of the Tax Reform Act.

The Company’s worldwide effective tax rate for the second quarter of 2018 was 27.5% on $31.8 million of income from continuing operations before taxes compared to 2.6% on $9.8 million of income from continuing operations before taxes for the same period in 2017. The Company recognized a tax provision of $14.1 million on income from continuing operations before taxes of $50.3 million for the first six months of 2018 compared to $1.0 million on $13.6 million of income from continuing operations before taxes for the same period of 2017. The 2018 estimated annual effective tax rate includes the estimated impact of all Tax Reform Act provisions.

The Company’s effective tax rate for 2018 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of the GILTI tax. The Company’s earnings outside the United States are generally taxed at blended rates that are marginally lower than the U.S. federal rate. The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. There is a statutory deduction of 50% of the GILTI inclusion, however the deduction is subject to limitations based on U.S. taxable income. The Company currently has net operating losses to offset forecasted U.S. taxable income and as such, is temporarily subject to the deduction limitation which correspondingly imposes an incremental impact on U.S. income tax. The foreign jurisdictions in which the Company operates and where its foreign earnings are primarily derived, include Switzerland, Mexico, Germany, Uruguay, Malaysia and Ireland.

The Company’s effective tax rate for 2017 differs from the U.S. federal statutory tax rate of 35% due principally to the Company’s earnings outside the U.S. which are generally taxed at rates lower than the U.S. federal rate. In addition, the Company had positive income before taxes in its foreign jurisdictions but losses before taxes in U.S. jurisdictions.

As of June 29, 2018, the balance of unrecognized tax benefits from continuing operations is approximately $6.5 million. It is reasonably possible that a reduction of up to $1.1 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately $6.2 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.

(10.) COMMITMENTS AND CONTINGENCIES

Litigation

The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future.

- 20 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(10.) COMMITMENTS AND CONTINGENCIES (Continued)

In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. On January 26, 2016, a jury in the U.S. District Court for the District of Delaware returned a verdict finding that AVX infringed two Integer patents and awarded Integer $37.5 million in damages. Following a second trial in August 2017, a jury found that AVX infringed an additional Integer patent. On March 30, 2018, the U.S. District Court for the District of Delaware vacated the original damage award and ordered a retrial on damages, which is scheduled for January 2019. The Company has recorded no gains in connection with this litigation as no cash has been received.

Product Warranties

The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company does not expect future product warranty claims will have a material effect on its condensed consolidated results of operations, financial position, or cash flows. However, there can be no assurance that any future customer complaints or negative regulatory actions regarding the Company’s products, which the Company currently believes to be immaterial, does not become material in the future. The change in product warranty liability was comprised of the following (in thousands):



December 29, 2017	$	2,820
Additions to warranty reserve	555
Warranty claims settled	(78		)
June 29, 2018	$	3,297

Foreign Currency Contracts

The Company periodically enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate fluctuations in its international operations. The Company has designated these foreign currency forward contracts as cash flow hedges. Accordingly, the effective portions of the unrealized gains and losses on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are reclassified to earnings in the same periods during which the hedged transactions affect earnings. The estimated Accumulated Other Comprehensive Income related to the Company’s foreign currency contracts that is expected to be reclassified into earnings within the next twelve months is a $0.7 million gain.

The impact to the Company’s results of operations from its forward contract hedges is as follows (in thousands):



	Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Increase (decrease) in sales	$	(141	)	$	163		$	(2	)	$	139
Increase (decrease) in cost of sales	(159		)	(179		)	(595		)	883
Ineffective portion of change in fair value	—			—			—			—

Information regarding outstanding foreign currency contracts designated as cash flow hedges as of June 29, 2018 is as follows (dollars in thousands):



Aggregate Notional Amount		Start Date	End Date	$/Foreign Currency		Fair Value			Balance Sheet Location
$	3,000	Jul 2018	Dec 2018	0.0500	Peso	$	(16	)	Accrued expenses
15,199		Jan 2018	Dec 2018	0.0507	Peso	(313		)	Accrued expenses
12,300		Jan 2018	Dec 2018	1.2059	Euro	(333		)	Accrued expenses

- 21 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(11.) EARNINGS (LOSS) PER SHARE (“EPS”)

The following table sets forth a reconciliation of the information used in computing basic and diluted EPS (in thousands, except per share amounts):



	Three Months Ended						Six Months Ended
	June 29, 2018			June 30, 2017			June 29, 2018			June 30, 2017
Numerator for basic and diluted EPS:
Income from continuing operations	$	23,056		$	9,559		$	36,140		$	12,507
Loss from operations of discontinued operations	(3,034		)	$	(6,569	)	(8,000		)	(13,856		)
Net income (loss)	$	20,022		$	2,990		$	28,140		$	(1,349	)

Denominator for basic and diluted EPS:
Weighted average shares outstanding - Basic	32,038			31,302			31,970			31,159
Dilutive effect of assumed exercise of stock options, restricted stock and RSUs	682			680			602			674
Weighted average shares outstanding - Diluted	32,720			31,982			32,572			31,833

Basic earnings (loss) per share:
Income from continuing operations	$	0.72		$	0.31		$	1.13		$	0.40
Loss from discontinued operations	(0.09		)	(0.21		)	(0.25		)	(0.44		)
Basic earnings (loss) per share	0.62			0.10			0.88			(0.04		)

Diluted earnings (loss) per share:
Income from continuing operations	$	0.70		$	0.30		$	1.11		$	0.39
Loss from discontinued operations	(0.09		)	(0.21		)	(0.25		)	(0.44		)
Diluted earnings (loss) per share	0.61			0.09			0.86			(0.04		)

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		Six Months Ended
	June 29, 2018	June 30, 2017	June 29, 2018	June 30, 2017
Time-vested stock options, restricted stock and RSUs	—	556	50	1,599
Performance-vested restricted stock and PSUs	92	180	122	451

- 22 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(12.) 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
March 30, 2018	$	(1,422	)	$	7,733		$	63,641		$	69,952		$	(923	)	$	69,029
Unrealized loss on cash flow hedges	—			(2,223		)	—			(2,223		)	467			(1,756		)
Realized gain on foreign currency hedges	—			(18		)	—			(18		)	3			(15		)
Realized gain on interest rate swap hedges	—			(398		)	—			(398		)	83			(315		)
Foreign currency translation loss	—			—			(25,885		)	(25,885		)	—			(25,885		)
June 29, 2018	$	(1,422	)	$	5,094		$	37,756		$	41,428		$	(370	)	$	41,058

December 29, 2017	$	(1,422	)	$	3,418		$	50,200		$	52,196		$	(17	)	$	52,179
Unrealized gain on cash flow hedges	—			2,901			—			2,901			(609		)	2,292
Realized gain on foreign currency hedges	—			(593		)	—			(593		)	124			(469		)
Realized gain on interest rate swap hedges	—			(632		)	—			(632		)	132			(500		)
Foreign currency translation loss	—			—			(12,444		)	(12,444		)	—			(12,444		)
June 29, 2018	$	(1,422	)	$	5,094		$	37,756		$	41,428		$	(370	)	$	41,058



March 31, 2017	$	(1,475	)	$	4,112		$	(9,124	)	$	(6,487	)	$	(1,227	)	$	(7,714	)
Unrealized gain on cash flow hedges	—			1,069			—			1,069			(374		)	695
Realized gain on foreign currency hedges	—			(342		)	—			(342		)	120			(222		)
Realized gain on interest rate swap hedges	—			(238		)	—			(238		)	83			(155		)
Foreign currency translation gain	—			—			34,599			34,599			—			34,599
June 30, 2017	$	(1,475	)	$	4,601		$	25,475		$	28,601		$	(1,398	)	$	27,203

December 30, 2016	$	(1,475	)	$	1,420		$	(15,660	)	$	(15,715	)	$	(285	)	$	(16,000	)
Unrealized gain on cash flow hedges	—			2,781			—			2,781			(973		)	1,808
Realized loss on foreign currency hedges	—			744			—			744			(260		)	484
Realized gain on interest rate swap hedges	—			(344		)	—			(344		)	120			(224		)
Foreign currency translation gain	—			—			41,135			41,135			—			41,135
June 30, 2017	$	(1,475	)	$	4,601		$	25,475		$	28,601		$	(1,398	)	$	27,203

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

- 23 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(13.) FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis. The Company also holds cost method and equity method investments which are measured at fair value on a nonrecurring basis.

Foreign Currency Contracts

The fair value of foreign currency contracts were determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs included foreign exchange rate and credit spread curves. In addition, the Company received fair value estimates from the foreign currency contract counterparties to verify the reasonableness of the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair value hierarchy. Refer to Note 10 “Commitments and Contingencies” for further discussion regarding the fair value of the Company’s foreign currency contracts.

Interest Rate Swaps

The fair value of the Company’s interest rate swap contracts outstanding were determined through the use of a cash flow model that utilizes observable market data inputs. These observable market data inputs include LIBOR, swap rates, and credit spread curves. In addition, the Company received a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. Refer to Note 5 “Debt” for further discussion regarding the fair value of the Company’s interest rate swap.

The following table provides information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands):



	Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 29, 2018
Assets: Interest rate swap (Note 5)	$	5,756	$	—	$	5,756	$	—
Liabilities: Foreign currency contracts (Note 10)	662		—		662		—

December 29, 2017
Assets: Interest rate swaps	$	4,279	$	—	$	4,279	$	—
Liabilities: Foreign currency contracts	861		—		861		—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. Refer to Note 5 “Debt” for further discussion regarding the fair value of the Company’s Senior Secured Credit Facilities and Senior Notes. A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:

Cost and Equity Method Investments

The Company holds investments in equity and other securities that are accounted for as either cost method or equity method investments, which are classified as Other Assets on the Condensed Consolidated Balance Sheets. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost method investments are not adjusted if there are no identified events or changes in circumstances that may have a material effect on the fair value of the investments. The aggregate recorded amount of cost and equity method investments at June 29, 2018 and December 29, 2017 was $22.4 million and $20.8 million, respectively.

- 24 -

Table of Contents

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(13.) FAIR VALUE MEASUREMENTS (Continued)

As of June 29, 2018 and December 29, 2017, the recorded amount of the Company’s equity method investment was $14.7 million and $13.8 million, respectively. The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change. As of June 29, 2018, the Company owned 6.6% of this fund. During the six months ended June 29, 2018 and June 30, 2017, the Company recognized net gains of $5.0 million and $0.2 million, respectively, on its equity method investment.

The Company’s recorded amount of cost method investments was $7.7 million at J