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 29, 201728, 2018
Commission File Number 1-16137
_____________________________________
INTEGER HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
_____________________________________
|
| | |
Delaware | | 16-1531026 |
(State of Incorporation) | | (I.R.S. Employer Identification No.) |
2595 Dallas5830 Granite Parkway
Suite 3101150
Frisco,Plano, Texas 7503475024
(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 | ¨ |
| | | | | | |
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 October 26, 20172018 was: 31,669,83032,382,687 shares.
INTEGER HOLDINGS CORPORATION
Form 10-Q
For the Quarterly Period Ended September 29, 201728, 2018
TABLE OF CONTENTS
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ITEM 1. | | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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ITEM 1. | | |
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ITEM 1A. | | |
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ITEM 6. | | |
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PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
| | (in thousands except share and per share data) | September 29, 2017 | | December 30, 2016 | September 28, 2018 | | December 29, 2017 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 43,637 |
| | $ | 52,116 |
| $ | 22,881 |
| | $ | 37,341 |
|
Accounts receivable, net of allowance for doubtful accounts of $1.0 million and $0.7 million, respectively | 221,520 |
| | 204,626 |
| |
Accounts receivable, net of allowance for doubtful accounts of $0.6 million and $0.5 million, respectively | | 200,147 |
| | 194,845 |
|
Inventories | 246,972 |
| | 225,151 |
| 193,631 |
| | 176,738 |
|
Refundable income taxes | 4 |
| | 13,388 |
| |
Prepaid expenses and other current assets | 16,167 |
| | 22,026 |
| 12,008 |
| | 16,239 |
|
Current assets of discontinued operations held for sale | | — |
| | 106,746 |
|
Total current assets | 528,300 |
| | 517,307 |
| 428,667 |
| | 531,909 |
|
Property, plant and equipment, net | 374,436 |
| | 372,042 |
| 232,108 |
| | 235,180 |
|
Goodwill | 987,316 |
| | 967,326 |
| 834,520 |
| | 839,870 |
|
Other intangible assets, net | 930,644 |
| | 940,060 |
| 825,359 |
| | 862,873 |
|
Deferred income taxes | 4,308 |
| | 3,970 |
| 3,618 |
| | 3,451 |
|
Other assets | 28,468 |
| | 31,838 |
| 31,724 |
| | 30,428 |
|
Noncurrent assets of discontinued operations held for sale | | — |
| | 344,634 |
|
Total assets | $ | 2,853,472 |
| | $ | 2,832,543 |
| $ | 2,355,996 |
| | $ | 2,848,345 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Current portion of long-term debt | $ | 28,125 |
| | $ | 31,344 |
| $ | 37,500 |
| | $ | 30,469 |
|
Accounts payable | 94,404 |
| | 77,896 |
| 69,270 |
| | 64,551 |
|
Income taxes payable | 5,419 |
| | 3,699 |
| 16,298 |
| | 5,904 |
|
Accrued expenses | 77,125 |
| | 72,281 |
| 54,922 |
| | 60,376 |
|
Current liabilities of discontinued operations held for sale | | — |
| | 47,703 |
|
Total current liabilities | 205,073 |
| | 185,220 |
| 177,990 |
| | 209,003 |
|
Long-term debt | 1,601,829 |
| | 1,698,819 |
| 916,694 |
| | 1,578,696 |
|
Deferred income taxes | 207,005 |
| | 208,579 |
| 210,303 |
| | 140,964 |
|
Other long-term liabilities | 16,136 |
| | 14,686 |
| 11,678 |
| | 11,335 |
|
Noncurrent liabilities of discontinued operations held for sale | | — |
| | 14,966 |
|
Total liabilities | 2,030,043 |
| | 2,107,304 |
| 1,316,665 |
| | 1,954,964 |
|
Stockholders’ equity: | | | | | | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 31,776,356 and 31,059,038 shares issued, respectively; 31,669,830 and 30,925,496 shares outstanding, respectively | 32 |
| | 31 |
| |
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,501,709 and 31,977,953 shares issued, respectively; 32,382,687 and 31,871,427 shares outstanding, respectively | | 33 |
| | 32 |
|
Additional paid-in capital | 662,729 |
| | 637,955 |
| 687,644 |
| | 669,756 |
|
Treasury stock, at cost, 106,526 and 133,542 shares, respectively | (4,654 | ) | | (5,834 | ) | |
Treasury stock, at cost, 119,022 and 106,526 shares, respectively | | (5,668 | ) | | (4,654 | ) |
Retained earnings | 121,730 |
| | 109,087 |
| 318,287 |
| | 176,068 |
|
Accumulated other comprehensive income (loss) | 43,592 |
| | (16,000 | ) | |
Accumulated other comprehensive income | | 39,035 |
| | 52,179 |
|
Total stockholders’ equity | 823,429 |
| | 725,239 |
| 1,039,331 |
| | 893,381 |
|
Total liabilities and stockholders’ equity | $ | 2,853,472 |
| | $ | 2,832,543 |
| $ | 2,355,996 |
| | $ | 2,848,345 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands except per share data) | September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Sales | $ | 305,088 |
| | $ | 286,168 |
| | $ | 911,978 |
| | $ | 833,820 |
|
Cost of sales | 213,165 |
| | 196,982 |
| | 637,758 |
| | 573,431 |
|
Gross profit | 91,923 |
| | 89,186 |
| | 274,220 |
| | 260,389 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 34,091 |
| | 35,064 |
| | 107,300 |
| | 105,004 |
|
Research, development and engineering costs | 12,234 |
| | 12,227 |
| | 38,445 |
| | 35,104 |
|
Other operating expenses | 4,139 |
| | 6,069 |
| | 12,615 |
| | 24,490 |
|
Total operating expenses | 50,464 |
| | 53,360 |
| | 158,360 |
| | 164,598 |
|
Operating income | 41,459 |
| | 35,826 |
| | 115,860 |
| | 95,791 |
|
Interest expense | 54,526 |
| | 15,808 |
| | 85,355 |
| | 49,233 |
|
(Gain) loss on cost and equity method investments, net | (291 | ) | | (1,906 | ) | | (5,545 | ) | | 2,919 |
|
Other loss, net | 1,684 |
| | 2,490 |
| | 257 |
| | 10,654 |
|
Income (loss) from continuing operations before taxes | (14,460 | ) | | 19,434 |
| | 35,793 |
| | 32,985 |
|
Provision (benefit) for income taxes | (6,157 | ) | | (448 | ) | | 7,956 |
| | 596 |
|
Income (loss) from continuing operations | $ | (8,303 | ) | | $ | 19,882 |
| | $ | 27,837 |
| | $ | 32,389 |
|
| | | | | | | |
Discontinued operations: | | | | | | | |
Income (loss) from discontinued operations before taxes | 195,874 |
| | (7,444 | ) | | 188,251 |
| | (21,074 | ) |
Provision (benefit) for income taxes | 73,492 |
| | (1,252 | ) | | 73,869 |
| | (1,026 | ) |
Income (loss) from discontinued operations | $ | 122,382 |
| | $ | (6,192 | ) | | $ | 114,382 |
| | $ | (20,048 | ) |
| | | | | | | |
Net income | $ | 114,079 |
| | $ | 13,690 |
| | $ | 142,219 |
| | $ | 12,341 |
|
| | | | | | | |
Basic earnings (loss) per share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.26 | ) | | $ | 0.63 |
| | $ | 0.87 |
| | $ | 1.03 |
|
Income (loss) from discontinued operations | 3.80 |
| | (0.20 | ) | | 3.57 |
| | (0.64 | ) |
Basic earnings per share | 3.54 |
| | 0.43 |
| | 4.44 |
| | 0.39 |
|
| | | | | | | |
Diluted earnings (loss) per share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.26 | ) | | $ | 0.62 |
| | $ | 0.86 |
| | $ | 1.01 |
|
Income (loss) from discontinued operations | 3.80 |
| | (0.19 | ) | | 3.52 |
| | (0.63 | ) |
Diluted earnings per share | 3.54 |
| | 0.43 |
| | 4.38 |
| | 0.39 |
|
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | 32,211 |
| | 31,594 |
| | 32,050 |
| | 31,304 |
|
Diluted | 32,211 |
| | 32,173 |
| | 32,451 |
| | 31,947 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands except per share data) | September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Sales | $ | 363,308 |
| | $ | 346,567 |
| | $ | 1,071,440 |
| | $ | 1,027,187 |
|
Cost of sales | 265,073 |
| | 248,658 |
| | 782,707 |
| | 741,779 |
|
Gross profit | 98,235 |
| | 97,909 |
| | 288,733 |
| | 285,408 |
|
Operating expenses: | | | | | | | |
Selling, general and administrative expenses | 39,733 |
| | 36,265 |
| | 118,956 |
| | 115,781 |
|
Research, development and engineering costs, net | 13,607 |
| | 11,412 |
| | 39,907 |
| | 42,358 |
|
Other operating expenses, net | 6,264 |
| | 13,370 |
| | 24,955 |
| | 50,004 |
|
Total operating expenses | 59,604 |
| | 61,047 |
| | 183,818 |
| | 208,143 |
|
Operating income | 38,631 |
| | 36,862 |
| | 104,915 |
| | 77,265 |
|
Interest expense, net | 26,485 |
| | 27,870 |
| | 81,025 |
| | 83,395 |
|
Other (income) loss, net | 156 |
| | 275 |
| | 11,979 |
| | (2,772 | ) |
Income (loss) before income taxes | 11,990 |
| | 8,717 |
| | 11,911 |
| | (3,358 | ) |
Benefit for income taxes | (1,700 | ) | | (2,741 | ) | | (430 | ) | | (1,386 | ) |
Net income (loss) | $ | 13,690 |
| | $ | 11,458 |
| | $ | 12,341 |
| | $ | (1,972 | ) |
Earnings (loss) per share: | | | | | | | |
Basic | $ | 0.43 |
| | $ | 0.37 |
| | $ | 0.39 |
| | $ | (0.06 | ) |
Diluted | $ | 0.43 |
| | $ | 0.37 |
| | $ | 0.39 |
| | $ | (0.06 | ) |
Weighted average shares outstanding: | | | | | | | |
Basic | 31,594 |
| | 30,782 |
| | 31,304 |
| | 30,756 |
|
Diluted | 32,173 |
| | 31,153 |
| | 31,724 |
| | 30,756 |
|
| | | | | | | |
Comprehensive Income | | | | | | | |
Net income (loss) | $ | 13,690 |
| | $ | 11,458 |
| | $ | 12,341 |
| | $ | (1,972 | ) |
Other comprehensive income: | | | | | | | |
Foreign currency translation gain | 16,728 |
| | 3,191 |
| | 57,863 |
| | 12,250 |
|
Net change in cash flow hedges, net of tax | (339 | ) | | 571 |
| | 1,729 |
| | (309 | ) |
Other comprehensive income | 16,389 |
| | 3,762 |
| | 59,592 |
| | 11,941 |
|
Comprehensive income | $ | 30,079 |
| | $ | 15,220 |
| | $ | 71,933 |
| | $ | 9,969 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
(in thousands) | September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Comprehensive Income | | | | | | | |
Net income | $ | 114,079 |
| | $ | 13,690 |
| | $ | 142,219 |
| | $ | 12,341 |
|
Other comprehensive income (loss): | | | | | | | |
Foreign currency translation gain (loss) | (2,809 | ) | | 16,728 |
| | (15,253 | ) | | 57,863 |
|
Net change in cash flow hedges, net of tax | 634 |
| | (339 | ) | | 1,957 |
| | 1,729 |
|
Other comprehensive income (loss) | (2,175 | ) | | 16,389 |
| | (13,296 | ) | | 59,592 |
|
Comprehensive income | $ | 111,904 |
| | $ | 30,079 |
| | $ | 128,923 |
| | $ | 71,933 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | Nine Months Ended | Nine Months Ended |
(in thousands) | September 29, 2017 | | September 30, 2016 | September 28, 2018 | | September 29, 2017 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | $ | 12,341 |
| | $ | (1,972 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net income | | $ | 142,219 |
| | $ | 12,341 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | 74,584 |
| | 67,414 |
| 68,447 |
| | 74,584 |
|
Debt related amortization included in interest expense | 8,850 |
| | 5,387 |
| |
Debt related amortization and extinguishment fees included in interest expense | | 47,173 |
| | 8,850 |
|
Stock-based compensation | 9,895 |
| | 7,179 |
| 7,684 |
| | 9,895 |
|
Other non-cash losses | 10,666 |
| | 1,938 |
| |
Non-cash (gain) loss on cost and equity method investments | | (1,043 | ) | | 3,833 |
|
Other non-cash (gains) losses | | (771 | ) | | 6,833 |
|
Deferred income taxes | (6,821 | ) | | (12,519 | ) | 66,953 |
| | (6,821 | ) |
Gain on sale of discontinued operations | | (194,734 | ) | | — |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | (13,958 | ) | | 12,510 |
| (4,805 | ) | | (13,958 | ) |
Inventories | (20,259 | ) | | (10,010 | ) | (19,688 | ) | | (20,259 | ) |
Prepaid expenses and other current assets | 8,460 |
| | (4,663 | ) | 5,155 |
| | 8,460 |
|
Accounts payable | 12,905 |
| | 4,885 |
| 10,488 |
| | 12,905 |
|
Accrued expenses | 4,191 |
| | (5,650 | ) | (14,904 | ) | | 4,191 |
|
Income taxes | 14,716 |
| | 7,300 |
| 8,562 |
| | 14,716 |
|
Net cash provided by operating activities | 115,570 |
| | 71,799 |
| 120,736 |
| | 115,570 |
|
Cash flows from investing activities: | | | | | | |
Acquisition of property, plant and equipment | (34,059 | ) | | (46,968 | ) | (33,340 | ) | | (34,059 | ) |
Proceeds from sale of property, plant and equipment | | 1,366 |
| | 464 |
|
Purchase of cost and equity method investments | (1,316 | ) | | (2,917 | ) | (1,230 | ) | | (1,316 | ) |
Proceeds from sale of discontinued operations | | 582,359 |
| | — |
|
Other investing activities | 673 |
| | (1,000 | ) | — |
| | 209 |
|
Net cash used in investing activities | (34,702 | ) | | (50,885 | ) | |
Net cash provided by (used in) investing activities | | 549,155 |
| | (34,702 | ) |
Cash flows from financing activities: | | | | | | |
Principal payments of long-term debt | (156,526 | ) | | (28,750 | ) | (670,094 | ) | | (156,526 | ) |
Proceeds from issuance of long-term debt | 50,000 |
| | 57,000 |
| — |
| | 50,000 |
|
Proceeds from the exercise of stock options | 17,074 |
| | 723 |
| 11,757 |
| | 17,074 |
|
Payment of debt issuance costs | (1,789 | ) | | (781 | ) | |
Distribution of cash and cash equivalents to Nuvectra Corporation | — |
| | (76,256 | ) | |
Purchase of non-controlling interests | — |
| | (6,818 | ) | |
Other financing activities | (76 | ) | | (3,983 | ) | |
Payment of debt issuance and redemption costs | | (31,991 | ) | | (1,789 | ) |
Tax withholdings related to net share settlements of restricted stock unit awards | | (2,568 | ) | | (76 | ) |
Net cash used in financing activities | (91,317 | ) | | (58,865 | ) | (692,896 | ) | | (91,317 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | 1,970 |
| | 468 |
| 1,790 |
| | 1,970 |
|
Net decrease in cash and cash equivalents | (8,479 | ) | | (37,483 | ) | (21,215 | ) | | (8,479 | ) |
Cash and cash equivalents, beginning of period | 52,116 |
| | 82,478 |
| 44,096 |
| | 52,116 |
|
Cash and cash equivalents, end of period | $ | 43,637 |
| | $ | 44,995 |
| $ | 22,881 |
| | $ | 43,637 |
|
Supplemental disclosure of cash flow information(1): | | | | |
Noncash investing and financing activities: | | | | |
Property, plant and equipment purchases included in accounts payable | | $ | 2,585 |
| | $ | 6,406 |
|
(1) Refer to Note 2 “Discontinued Operations and Divestiture” for additional supplemental cash flow information pertaining to discontinued operations.
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
| | | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Stockholders’ Equity | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | Total Stockholders’ Equity |
(in thousands) | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | |
December 30, 2016 | 31,059 |
| | $ | 31 |
| | $ | 637,955 |
| | (134 | ) | | $ | (5,834 | ) | | $ | 109,087 |
| | $ | (16,000 | ) | | $ | 725,239 |
| |
Cumulative effect adjustment of the adoption of ASU 2016-09 (Note 16) | — |
| | — |
| | (812 | ) | | — |
| | — |
| | 302 |
| | — |
| | (510 | ) | |
December 30, 2016, adjusted | 31,059 |
| | 31 |
| | 637,143 |
| | (134 | ) | | (5,834 | ) | | 109,389 |
| | (16,000 | ) | | 724,729 |
| |
December 29, 2017 | | 31,978 |
| | $ | 32 |
| | $ | 669,756 |
| | (107 | ) | | $ | (4,654 | ) | | $ | 176,068 |
| | $ | 52,179 |
| | $ | 893,381 |
|
Comprehensive income: | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
|
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 12,341 |
| | — |
| | 12,341 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 142,219 |
| | — |
| | 142,219 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 59,592 |
| | 59,592 |
| |
Other comprehensive loss, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (13,296 | ) | | (13,296 | ) |
Accumulated other comprehensive income reclassified to earnings, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 152 |
| | 152 |
|
Share-based compensation plans: | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
|
|
Stock-based compensation | — |
| | — |
| | 9,895 |
| | — |
| | — |
| | — |
| | — |
| | 9,895 |
| — |
| | — |
| | 7,684 |
| | — |
| | — |
| | — |
| | — |
| | 7,684 |
|
Net shares issued | 717 |
| | 1 |
| | 15,691 |
| | 27 |
| | 1,180 |
| | — |
| | — |
| | 16,872 |
| 524 |
| | 1 |
| | 10,204 |
| | (12 | ) | | (1,014 | ) | | — |
| | — |
| | 9,191 |
|
September 29, 2017 | 31,776 |
| | $ | 32 |
| | $ | 662,729 |
| | (107 | ) | | $ | (4,654 | ) | | $ | 121,730 |
| | $ | 43,592 |
| | $ | 823,429 |
| |
September 28, 2018 | | 32,502 |
| | $ | 33 |
| | $ | 687,644 |
| | (119 | ) | | $ | (5,668 | ) | | $ | 318,287 |
| | $ | 39,035 |
| | $ | 1,039,331 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1.) BASIS OF PRESENTATION
Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly traded corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is one of the largest medical device outsource manufacturers in the world serving the cardiac, neuromodulation, orthopedics, vascular advanced surgical and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition, it develops batteries for high-end niche applications in the energy, military, and environmental markets. The Company’s reportable segments are: (1) Medical and (2) Non-Medical. The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.
On March 14, 2016, IntegerMay 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical segment to Viant (formerly MedPlast, LLC), and on July 2, 2018 completed the spin-offsale. The results of a portion of its former QiG segment through a tax-free distribution of alloperations of the sharesAS&O Product Line are reported as discontinued operations in the Condensed Consolidated Statements of its QiG Group, LLC (“QiG”) subsidiaryOperations for all periods presented and the related assets and liabilities associated with the discontinued operations are classified as held for sale in the Condensed Consolidated Balance Sheet as of December 29, 2017. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the stockholders of Integer on a pro rata basis (the “Spin-off”). Seediscontinued 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 “Divestiture”“Discontinued Operations and Divestiture.” 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 are presented as continuing operations and exclude the AS&O Product Line unless otherwise noted specifically as discontinued operations. Refer to Note 2 “Discontinued Operations and Divestiture” for further description of this transaction. The Company’s results include the financial and operating results of QiG until the Spin-off on March 14, 2016.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)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.
Certain reclassifications have been made to prior year financial statements to conform to classifications used in the current year. Refer to Note 15 “Segment Information,” for a description of the changes made to reflect the current year product line sales reporting and changes made to the Company’s reportable segment structure during the fourth quarter of 2016.
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 30, 2016.29, 2017.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The third quarter of 2018 and first nine months of 2017 and 2016 each contained 13 weeks and 39 weeks, respectively, and ended on September 29,28 and September 30,29, respectively. The Company’s 20172018 and 20162017 fiscal years will end or ended on December 28, 2018 and December 29, 2017, and December 30, 2016, respectively.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.) DIVESTITURE
Spin-off of Nuvectra Corporation
On March 14, 2016, Integer completed the spin-off of a portion of its former 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 received one share of Nuvectra common stock for every three shares of Integer common stock held as of that 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 Centro de Construcción de Cardioestimuladores del Uruguay (“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.
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 periods ended September 29, 2017 and September 30, 2016.
(3.) SUPPLEMENTAL CASH FLOW INFORMATION
|
| | | | | | | |
| Nine Months Ended |
(in thousands) | September 29, 2017 | | September 30, 2016 |
Noncash investing and financing activities: | | | |
Property, plant and equipment purchases included in accounts payable | $ | 6,406 |
| | $ | 5,062 |
|
Purchase of technology included in accrued expenses | — |
| | 1,000 |
|
Divestiture of noncash assets | — |
| | 54,591 |
|
Divestiture of liabilities | — |
| | 2,119 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4.(2.)DISCONTINUED OPERATIONS AND DIVESTITURE
On May 3, 2018, the Company entered into a definitive agreement to sell its AS&O Product Line to Viant, and on July 2, 2018, completed the sale, collecting cash proceeds of approximately $582 million, which is net of transaction costs and adjustments set forth in the definitive agreement. In connection with the sale, the parties executed a transition services agreement whereby the Company will provide certain corporate services (including accounting, payroll, and information technology services) to Viant for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations. Viant will pay Integer for these services, with such payments varying in amount and length of time as specified in the transition services agreement. The Company recognized $1.9 million of income under the transition services agreement for the performance of services during the third quarter of fiscal 2018, of which $0.1 million is within Cost of sales and $1.8 million is within Selling, general and administrative expenses. In addition, the parties executed long-term supply agreements under which the Company and Viant have agreed to supply the other with certain products at prices specified in the agreements for a term of three years.
In connection with the closing of the transaction, the Company recognized a pre-tax gain on sale of discontinued operations of $194.7 million. The Company is in the process of finalizing the net working capital adjustment with Viant as provided for in the definitive agreement. The final net working capital adjustment, as determined through the established process outlined in the definitive agreement, may be different from the Company’s estimates. The impact of any changes in the net working capital adjustment will be recorded as an adjustment to the gain on sale from discontinued operations in the period such change occurs. Additionally, the income taxes associated with the gain will be impacted by the final allocation of the sales price, which must be agreed to with Viant as required in the definitive agreement and may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes will be recorded as an adjustment to discontinued operations in the period such change in estimate occurs.
The operating results of the AS&O Product Line have been classified as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented 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 Sheet at 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. Accordingly, the assets and liabilities of the AS&O Product Line, other than goodwill, are measured at carrying amount. ASC 350, Intangibles — Goodwill and Other, states that when a portion of a goodwill reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. As the AS&O Product Line was a portion of the Medical goodwill reporting unit, and management determined it met the definition of a business, goodwill was allocated to the AS&O Product Line on a relative fair value basis, as prescribed by ASC 350. The fair value of the AS&O Product Line assets was based primarily on the initial purchase price of $600 million.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.)DISCONTINUED OPERATIONS AND DIVESTITURE (Continued)
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):
|
| | | |
| December 29, 2017 |
Cash and cash equivalents | $ | 6,755 |
|
Accounts receivable, net of allowance for doubtful accounts of $0.3 million | 47,611 |
|
Inventories | 50,796 |
|
Prepaid expenses and other current assets | 1,584 |
|
Current assets of discontinued operations held for sale | 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 | 451,380 |
|
Accounts payable and other current liabilities held for sale | 47,703 |
|
Deferred taxes and other long-term liabilities held for sale | 14,966 |
|
Total liabilities | 62,669 |
|
Net assets | $ | 388,711 |
|
Income (loss) from discontinued operations, net of taxes, were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Sales | $ | — |
| | $ | 77,140 |
| | $ | 178,020 |
| | $ | 237,620 |
|
Cost of sales | — |
| | 68,091 |
| | 148,357 |
| | 209,276 |
|
Gross profit | — |
| | 9,049 |
| | 29,663 |
| | 28,344 |
|
Selling, general and administrative expenses | — |
| | 4,669 |
| | 8,905 |
| | 13,952 |
|
Research, development and engineering costs | — |
| | 1,380 |
| | 2,352 |
| | 4,803 |
|
Other operating expenses (income)(1) | (2,185 | ) | | 195 |
| | 1,805 |
| | 465 |
|
Interest expense | 976 |
| | 10,677 |
| | 22,833 |
| | 31,792 |
|
Gain on sale of discontinued operations | (194,734 | ) | | — |
| | (194,734 | ) | | — |
|
Other (income) loss, net | 69 |
| | (428 | ) | | 251 |
| | (1,594 | ) |
Income (loss) from discontinued operations before taxes | 195,874 |
| | (7,444 | ) | | 188,251 |
| | (21,074 | ) |
Provision (benefit) for income taxes | 73,492 |
| | (1,252 | ) | | 73,869 |
| | (1,026 | ) |
Income (loss) from discontinued operations | $ | 122,382 |
| | $ | (6,192 | ) | | $ | 114,382 |
| | $ | (20,048 | ) |
__________
| |
(1) | The Company recorded $2.2 million of transaction costs in Other operating expenses (income) from discontinued operations during the three months ended June 29, 2018, which were reclassified to the Gain on sale of discontinued operations during the three months ended September 28, 2018. |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.)DISCONTINUED OPERATIONS AND DIVESTITURE (Continued)
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 was required to be repaid with the proceeds from the sale of the AS&O Product Line.
Cash flow information from discontinued operations was as follows (in thousands):
|
| | | | | | | | | | | |
| | | | | Nine Months Ended |
| | | | | September 28, 2018 | | September 29, 2017 |
Cash used in operating activities | | | | | $ | (12,388 | ) | | $ | (2,580 | ) |
Cash provided by (used in) investing activities | | | | | 578,763 |
| | (11,659 | ) |
| | | | | | |
|
|
Depreciation and amortization | | | | | $ | 7,450 |
| | $ | 15,947 |
|
Capital expenditures | | | | | 3,610 |
| | 11,732 |
|
(3.) INVENTORIES
Inventories are comprised of the following (in thousands): | | | September 29, 2017 | | December 30, 2016 | September 28, 2018 | | December 29, 2017 |
Raw materials | $ | 102,247 |
| | $ | 100,738 |
| $ | 81,443 |
| | $ | 85,050 |
|
Work-in-process | 101,098 |
| | 89,224 |
| 78,966 |
| | 63,620 |
|
Finished goods | 43,627 |
| | 35,189 |
| 33,222 |
| | 28,068 |
|
Total | $ | 246,972 |
| | $ | 225,151 |
| $ | 193,631 |
| | $ | 176,738 |
|
Refer to Note 2 “Discontinued Operations and Divestiture” for inventories included in discontinued operations, which are not included above.
(5.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 nine months ended September 29, 201728, 2018 were as follows (in thousands):
|
| | | | | | | | | | | |
| Medical | | Non- Medical | | Total |
December 30, 2016 | $ | 950,326 |
| | $ | 17,000 |
| | $ | 967,326 |
|
Foreign currency translation | 19,990 |
| | — |
| | 19,990 |
|
September 29, 2017 | $ | 970,316 |
| | $ | 17,000 |
| | $ | 987,316 |
|
|
| | | | | | | | | | | |
| Medical | | Non- Medical | | Total |
December 29, 2017 | $ | 822,870 |
| | $ | 17,000 |
| | $ | 839,870 |
|
Foreign currency translation | (5,350 | ) | | — |
| | (5,350 | ) |
September 28, 2018 | $ | 817,520 |
| | $ | 17,000 |
| | $ | 834,520 |
|
Intangible Assets
Intangible assets at September 29, 201728, 2018 and December 30, 201629, 2017 were as follows (in thousands): | | | Gross Carrying Amount | | Accumulated Amortization | | Foreign Currency Translation | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
September 29, 2017 | | | | | | |
| |
September 28, 2018 | | | | | |
|
Definite-lived: | | | | | | | | | | | | |
Purchased technology and patents | $ | 256,719 |
| | $ | (113,460 | ) | | $ | 4,434 |
| | $ | 147,693 |
| $ | 242,292 |
| | $ | (121,743 | ) | | $ | 120,549 |
|
Customer lists | 759,987 |
| | (80,720 | ) | | 13,304 |
| | 692,571 |
| 712,795 |
| | (98,299 | ) | | 614,496 |
|
Other | 4,534 |
| | (5,230 | ) | | 788 |
| | 92 |
| 3,503 |
| | (3,477 | ) | | 26 |
|
Total | $ | 1,021,240 |
| | $ | (199,410 | ) | | $ | 18,526 |
| | $ | 840,356 |
| $ | 958,590 |
| | $ | (223,519 | ) | | $ | 735,071 |
|
Indefinite-lived: | | | | | | | | | | | | |
Trademarks and tradenames |
|
| | | | | | $ | 90,288 |
|
|
| | | | $ | 90,288 |
|
| | | | | | | | | | | | |
December 30, 2016 | | | | | | |
| |
December 29, 2017 | | | | | |
|
Definite-lived: | | | | | | | | | | | | |
Purchased technology and patents | $ | 256,719 |
| | $ | (100,719 | ) | | $ | 333 |
| | $ | 156,333 |
| $ | 243,679 |
| | $ | (111,185 | ) | | $ | 132,494 |
|
Customer lists | 759,987 |
| | (60,474 | ) | | (6,269 | ) | | 693,244 |
| 718,649 |
| | (78,621 | ) | | 640,028 |
|
Other | 4,534 |
| | (5,142 | ) | | 803 |
| | 195 |
| 4,660 |
| | (4,597 | ) | | 63 |
|
Total | $ | 1,021,240 |
| | $ | (166,335 | ) | | $ | (5,133 | ) | | $ | 849,772 |
| $ | 966,988 |
| | $ | (194,403 | ) | | $ | 772,585 |
|
Indefinite-lived: | | | | | | | | | | | | |
Trademarks and tradenames |
|
| | | | | | $ | 90,288 |
|
|
| | | | $ | 90,288 |
|
Aggregate intangible asset amortization expense is comprised of the following (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Cost of sales | $ | 3,367 |
| | $ | 3,786 |
| | $ | 10,756 |
| | $ | 11,282 |
|
Selling, general and administrative expenses | 6,490 |
| | 6,222 |
| | 20,196 |
| | 18,684 |
|
Research, development and engineering costs | 39 |
| | 137 |
| | 116 |
| | 409 |
|
Total intangible asset amortization expense | $ | 9,896 |
| | $ | 10,145 |
| | $ | 31,068 |
| | $ | 30,375 |
|
Estimated future intangible asset amortization expense based on the carrying value as of September 28, 2018 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | After 2022 |
Amortization Expense | $ | 9,918 |
| | $ | 40,491 |
| | $ | 40,804 |
| | $ | 39,948 |
| | $ | 38,807 |
| | $ | 565,103 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(5.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Continued)
Aggregate intangible asset amortization expense is comprised of the following (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Cost of sales | $ | 4,138 |
| | $ | 4,228 |
| | $ | 12,333 |
| | $ | 12,708 |
|
Selling, general and administrative expenses | 6,776 |
| | 5,109 |
| | 20,333 |
| | 15,368 |
|
Research, development and engineering costs, net | 137 |
| | 136 |
| | 409 |
| | 375 |
|
Total intangible asset amortization expense | $ | 11,051 |
| | $ | 9,473 |
| | $ | 33,075 |
| | $ | 28,451 |
|
Estimated future intangible asset amortization expense based on the carrying value as of September 29, 2017 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After 2021 |
Amortization Expense | $ | 11,083 |
| | $ | 45,543 |
| | $ | 45,653 |
| | $ | 46,266 |
| | $ | 45,138 |
| | $ | 646,673 |
|
(6.) DEBT
Long-term debt is comprised of the following (in thousands): | | | September 29, 2017 | | December 30, 2016 | September 28, 2018 | | December 29, 2017 |
Senior secured term loan A | $ | 342,188 |
| | $ | 356,250 |
| $ | 314,063 |
| | $ | 335,157 |
|
Senior secured term loan B | 883,286 |
| | 1,014,750 |
| 658,286 |
| | 873,286 |
|
9.125% senior notes due 2023 | 360,000 |
| | 360,000 |
| — |
| | 360,000 |
|
Revolving line of credit | 79,000 |
| | 40,000 |
| — |
| | 74,000 |
|
Unamortized discount on term loan B and debt issuance costs | (34,520 | ) | | (40,837 | ) | (18,155 | ) | | (33,278 | ) |
Total debt | 1,629,954 |
| | 1,730,163 |
| 954,194 |
| | 1,609,165 |
|
Less current portion of long-term debt | 28,125 |
| | 31,344 |
| |
Current portion of long-term debt | | (37,500 | ) | | (30,469 | ) |
Total long-term debt | $ | 1,601,829 |
| | $ | 1,698,819 |
| $ | 916,694 |
| | $ | 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$314 million term loan A facility (the “TLA Facility”), and (iii) a $1,025$658 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 facilityFacility was issued at a 1% discount.
On March 17, 2017,June 8, 2018, the Company amended the Senior Secured Credit Facilities to lowerpermit the interest rate onsale of the TLB Facility. The amendment reducedAS&O Product Line. As required by the applicable interest rate marginsamended terms of its TLB Facility for both base rate and adjusted LIBOR borrowings by 75 basis points. The amendment also includes a prepayment fee of 1.00% in the event of another repricing event (as defined in theCompany’s Senior Secured Credit Facilities)Facilities, the Company paid down indebtedness as a result of the disposition of the AS&O Product Line. On July 10, 2018, the Company completed the redemption in full of its 9.125% senior notes due on or beforeNovember 1, 2023 (the “Senior Notes”) at a redemption price of 100% of the six-month anniversaryprincipal amount of this amendment. Therethe Senior Notes plus the applicable “make-whole” premium of $31.3 million and accrued and unpaid interest through the redemption date. Upon completion of the redemption of the Senior Notes, the indenture governing the Senior Notes was no changesatisfied and discharged. The Company utilized the remaining net proceeds to maturities or covenantspay down an additional $188 million in debt outstanding under the Senior Secured Credit Facilities, as a resultconsisting of this repricing amendment.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6.) DEBT (Continued)$114 million on the TLB Facility and $74 million on the Revolving Credit Facility.
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 September 29, 2017,28, 2018, the Company had $79 million ofno outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $111.7$191.3 million after giving effect to $9.3$8.7 million of outstanding standby letters of credit. As of September 29, 2017, the weighted average interest rate on all outstanding borrowings under the Revolving Credit Facility was 4.49%.
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 outstandingDue to being variable rate and short-term in nature, the carrying amount of the Revolving Credit Facility approximated itsapproximates fair value asvalue.
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. As a result of the upgrade to the Company’s corporate family credit rating from Moody’s Investors Services, Inc. from B3 to B2 during the third quarter of 2018, the interest rate margin for the TLB Facility was stepped down by 25 basis points. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 2.50%2.00% or (ii) the applicable LIBOR rate plus 3.50%3.00%, with LIBOR subject to a 1.00% floor. As of September 29, 2017,28, 2018, the interest rates on the TLA Facility and TLB Facility were 4.49%4.74% and 4.74%5.14%, respectively.
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 29, 2017,28, 2018, the estimated fair value of the TLB Facility was approximately $890$664 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 29, 201728, 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 6.25:5.75:1.00, subject to periodic step downs in beginning in the firstfourth 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 2.50:2.75:1.00 subject to a step upsup beginning in the first quarter of 2018.2019. As of September 28, 2018, the Company was in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants. As of September 29, 2017, the Company was in compliance with these financial 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 September 29, 2017,28, 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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6.) DEBT (Continued)
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”). Interest onOn July 10, 2018, the Senior Notes is payable on May 1 and November 1 of each year.
As of September 29, 2017,Company completed the estimated fair valueredemption in full of the Senior Notes was approximately $392 million, based on quoted market pricesat a redemption price of these Senior Notes, recent sales prices for100% of the principal amount of the Senior Notes plus the applicable “make-whole” premium of $31.3 million and considerationaccrued and unpaid interest through the redemption date. The “make-whole” premium is included in Interest Expense in the accompanying Condensed Consolidated Statements of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements withinOperations. Upon completion of the fair value hierarchy.
The indenture forredemption of the Senior Notes, contain certain restrictive covenants and 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 29, 2017, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.Notes was satisfied and discharged.
Contractual maturities under the Senior Secured Credit Facilities and Senior Notes for the remainder of 20172018 and the fivenext four years and thereafter, excluding any discounts or premiums, as of September 29, 201728, 2018 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After 2021 |
Future minimum principal payments | | $ | 7,031 |
| | $ | 30,469 |
| | $ | 37,500 |
| | $ | 116,500 |
| | $ | 229,688 |
| | $ | 1,243,286 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 |
Future minimum principal payments | | $ | 9,375 |
| | $ | 37,500 |
| | $ | 37,500 |
| | $ | 229,688 |
| | $ | 658,286 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(5.) DEBT (Continued)
Debt Issuance Costs and Discounts
The change in deferred debt issuance costs related to the Revolving Credit Facility is as follows (in thousands):
|
| | | |
December 30, 2016 | $ | 3,800 |
|
Amortization during the period | (744 | ) |
September 29, 2017 | $ | 3,056 |
|
|
| | | |
December 29, 2017 | $ | 2,808 |
|
Amortization during the period | (743 | ) |
September 28, 2018 | $ | 2,065 |
|
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 30, 2016 | $ | 32,096 |
| | $ | 8,741 |
| | $ | 40,837 |
|
Financing costs incurred | 1,789 |
| | — |
| | 1,789 |
|
Write-off of debt issuance costs and unamortized discount(1) | (2,244 | ) | | (1,028 | ) | | (3,272 | ) |
Amortization during the period | (3,878 | ) | | (956 | ) | | (4,834 | ) |
September 29, 2017 | $ | 27,763 |
| | $ | 6,757 |
| | $ | 34,520 |
|
|
| | | | | | | | | | | |
| 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) | (9,373 | ) | | (1,448 | ) | | (10,821 | ) |
Amortization during the period | (3,497 | ) | | (805 | ) | | (4,302 | ) |
September 28, 2018 | $ | 14,019 |
| | $ | 4,136 |
| | $ | 18,155 |
|
__________
| |
(1) | The Company redeemed its Senior Notes and prepaid portions of its TLB Facility during 2018 and 2017. The Company recognized losses from extinguishment of debt during the three and nine months ended September 28, 2018 of $9.3 million and $10.8 million, respectively. The Company recognized losses from extinguishment of debt during the three and nine months ended September 29, 2017 of $0.8 million and $3.3 million, respectively, which is included in Interest Expense, Net in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income.respectively. The loss from extinguishment of debt represents the unamortized debt issuance costs related to the Senior Notes and the portion of the unamortized discount and debt issuance costs related to the portion of the TLB Facility that was prepaid.prepaid and is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations. |
Interest Rate SwapsSwap
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. During 2016, the Company entered into a one-year $250 million interest rate swap, which expired during the second quarter of 2017, and 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 swaps areswap is being accounted for as a cash flow hedges.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6.) DEBT (Continued)hedge.
Information regarding the Company’s outstanding interest rate swap designated as a cash flow hedge as of September 29, 201728, 2018 is as follows (dollars in thousands): | | Notional Amount | Notional Amount | | Start Date | | End Date | | Pay Fixed Rate | | Receive Current Floating Rate | | Fair Value | | Balance Sheet Location | Notional Amount | | Start Date | | End Date | | Pay Fixed Rate | | Receive Current Floating Rate | | Fair Value | | Balance Sheet Location |
$ | 200,000 |
| | Jun-17 | | Jun-20 | | 1.1325 | % | | 1.2367 | % | | $ | 3,054 |
| | Other Long-Term Assets | 200,000 |
| | Jun-17 | | Jun-20 | | 1.1325 | % | | 2.2300 | % | | $ | 5,690 |
| | 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 nine monthsquarters ended September 29, 201728, 2018 and September 30, 201629, 2017 was considered ineffective. The amountamounts recorded to Interest Expense Net during the nine months ended September 29, 201728, 2018 and September 30, 201629, 2017 related to the Company’s interest rate swaps was a reductionswap were reductions of $0.4$1.1 million and an increase of $0.05$0.4 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 $0.6$2.9 million gain.
(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): |
| | | |
December 30, 2016 | $ | 7,556 |
|
Net defined benefit cost | 505 |
|
Benefit payments | (70 | ) |
Foreign currency translation | 927 |
|
September 29, 2017 | $ | 8,918 |
|
Net defined benefit cost is comprised of the following (in thousands): |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Service cost | $ | 120 |
| | $ | 108 |
| | $ | 345 |
| | $ | 326 |
|
Interest cost | 42 |
| | 44 |
| | 120 |
| | 132 |
|
Amortization of net loss | 19 |
| | 47 |
| | 55 |
| | 140 |
|
Expected return on plan assets | (5 | ) | | (5 | ) | | (15 | ) | | (14 | ) |
Net defined benefit cost | $ | 176 |
| | $ | 194 |
| | $ | 505 |
| | $ | 584 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.(6.) BENEFIT PLANS
The Company is required to provide its employees located in Switzerland and Mexico certain statutorily mandated defined benefits. The following tables set forth the components of the Company’s net periodic expense from continuing operations relating to retirement benefit plans (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Service cost | $ | 54 |
| | $ | 52 |
| | $ | 162 |
| | $ | 150 |
|
Interest cost | 12 |
| | 11 |
| | 36 |
| | 31 |
|
Amortization of net loss | 8 |
| | 11 |
| | 25 |
| | 34 |
|
Expected return on plan assets | (4 | ) | | (4 | ) | | (13 | ) | | (14 | ) |
Net defined benefit cost | $ | 70 |
| | $ | 70 |
| | $ | 210 |
| | $ | 201 |
|
(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 | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 | September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Stock options | $ | 372 |
| | $ | 663 |
| | $ | 1,365 |
| | $ | 1,857 |
| $ | 215 |
| | $ | 325 |
| | $ | 726 |
| | $ | 1,303 |
|
Restricted stock and restricted stock units | 1,573 |
| | 1,554 |
| | 8,530 |
| | 5,322 |
| |
RSAs and RSUs (time-based) | | 1,161 |
| | 1,265 |
| | 4,330 |
| | 4,142 |
|
Performance-based RSUs (“PSUs”) | | 711 |
| | 182 |
| | 2,214 |
| | 3,695 |
|
Stock-based compensation expense - continuing operations | | 2,087 |
| | 1,772 |
| | 7,270 |
| | 9,140 |
|
Discontinued operations | | (510 | ) | | 173 |
| | 414 |
| | 755 |
|
Total stock-based compensation expense | $ | 1,945 |
| | $ | 2,217 |
| | $ | 9,895 |
| | $ | 7,179 |
| $ | 1,577 |
| | $ | 1,945 |
| | $ | 7,684 |
| | $ | 9,895 |
|
| | | | | | | | | | | | | | |
Cost of sales | $ | 131 |
| | $ | 158 |
| | $ | 612 |
| | $ | 505 |
| $ | 222 |
| | $ | 80 |
| | $ | 598 |
| | $ | 417 |
|
Selling, general and administrative expenses | 1,874 |
| | 1,677 |
| | 6,766 |
| | 4,860 |
| 1,821 |
| | 1,839 |
| | 6,568 |
| | 6,332 |
|
Research, development and engineering costs, net | 144 |
| | 115 |
| | 428 |
| | 408 |
| |
Other operating expenses, net | (204 | ) | | 267 |
| | 2,089 |
| | 1,406 |
| |
Research, development and engineering costs | | 44 |
| | 122 |
| | 99 |
| | 367 |
|
Other operating expenses | | — |
| | (269 | ) | | 5 |
| | 2,024 |
|
Discontinued operations | | (510 | ) | | 173 |
| | 414 |
| | 755 |
|
Total stock-based compensation expense | $ | 1,945 |
| | $ | 2,217 |
| | $ | 9,895 |
| | $ | 7,179 |
| $ | 1,577 |
| | $ | 1,945 |
| | $ | 7,684 |
| | $ | 9,895 |
|
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, Net. In connection with the Spin-off, certain awards granted to employees who transferred to Nuvectra were canceled. As required, the Company accelerated the remaining expense related to these canceled awardsExpenses.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(7.) STOCK-BASED COMPENSATION (Continued)
The weighted average fair value and assumptions used to value options granted are as follows: |
| | | | | | | |
| Nine Months Ended |
| September 29, 2017 | | September 30, 2016 |
Weighted average fair value | $ | 12.86 |
| | $ | 9.25 |
|
Risk-free interest rate | 1.77 | % | | 1.56 | % |
Expected volatility | 37 | % | | 26 | % |
Expected life (in years) | 4.5 |
| | 5.0 |
|
Expected dividend yield | — | % | | — | % |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.) STOCK-BASED COMPENSATION (Continued) |
| | | | | | | |
| Nine Months Ended |
| September 28, 2018 | | September 29, 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) | Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (In Years) | | Aggregate Intrinsic Value (In Millions) |
Outstanding at December 30, 2016 | 1,739,972 |
| | $ | 28.26 |
| | | |
Outstanding at December 29, 2017 | | 931,353 |
| | $ | 30.89 |
| | |
Granted | 125,020 |
| | 38.78 |
| | | 28,447 |
| | 45.13 |
| | |
Exercised | (680,065 | ) | | 25.11 |
| | | (381,793 | ) | | 30.80 |
| | |
Forfeited or expired | (118,167 | ) | | 45.87 |
| | | (23,700 | ) | | 41.28 |
| | |
Outstanding at September 29, 2017 | 1,066,760 |
| | $ | 29.55 |
| | 5.9 | | $ | 23.0 |
| |
Exercisable at September 29, 2017 | 818,663 |
| | $ | 27.24 |
| | 5.0 | | $ | 19.6 |
| |
Outstanding at September 28, 2018 | | 554,307 |
| | $ | 31.24 |
| | 6.2 | | $ | 28.7 |
|
Exercisable at September 28, 2018 | | 433,487 |
| | $ | 30.16 |
| | 5.6 | | $ | 22.9 |
|
During the nine months ended September 29, 2017,28, 2018, the Company awarded grants of 0.70.3 million RSUs to certain members of management, of which 0.40.2 million are performance-based RSUs (“PSUs”)PSUs and the remainder are time-based RSUs that vest ratably over a period of three to four years. Of the PSUs, 0.30.1 million of the shares subject to each grant will be earned based upon achievement of specific Company performance metrics for the Company’s fiscal yearover a three-year performance period ending December 29, 2017,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 two-yearthree-year performance period ending December 28, 2018.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 RSUs do not have rights to dividends or dividend equivalents.
The grant-date fair value of the TSR portion of the PSUs granted during the nine months ended September 29, 201728, 2018 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 1.842.92 years, (ii) risk free interest rate of 1.14%2.28%, (iii) expected dividend yield of 0.0% and (iv) expected stock price volatility over the expected term of the TSR award of 48%40%. The grant-date fair value of all other restricted stock awards is equal to the closing market price of Integer common stock on the date of grant.
The following table summarizes restricted stockRSA and RSU activity: |
| | | | | | |
| Time-Vested Activity | | Weighted Average Fair Value |
Nonvested at December 30, 2016 | 39,394 |
| | $ | 45.51 |
|
Granted | 304,857 |
| | 33.98 |
|
Vested | (62,543 | ) | | 32.45 |
|
Forfeited | (34,525 | ) | | 37.83 |
|
Nonvested at September 29, 2017 | 247,183 |
| | $ | 35.67 |
|
The following table summarizes PSU activity: | | | Performance- Vested Activity | | Weighted Average Fair Value | Time-Vested Activity | | Weighted Average Fair Value |
Nonvested at December 30, 2016 | 356,586 |
| | $ | 31.87 |
| |
Nonvested at December 29, 2017 | | 163,431 |
| | $ | 35.96 |
|
Granted | 419,112 |
| | 31.62 |
| 157,608 |
| | 50.76 |
|
Vested | | (28,197 | ) | | 46.62 |
|
Forfeited | (301,003 | ) | | 30.76 |
| (50,393 | ) | | 41.97 |
|
Nonvested at September 29, 2017 | 474,695 |
| | $ | 32.35 |
| |
Nonvested at September 28, 2018 | | 242,449 |
| | $ | 43.09 |
|
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 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Investments in capacity and capabilities | $ | 1,542 |
| | $ | 4,542 |
| | $ | 4,407 |
| | $ | 13,821 |
|
Lake Region Medical consolidations | 1,456 |
| | 2,908 |
| | 3,623 |
| | 7,355 |
|
Acquisition and integration costs | 2,267 |
| | 5,319 |
| | 10,057 |
| | 23,143 |
|
Asset dispositions, severance and other | 854 |
| | 272 |
| | 6,528 |
| | 5,057 |
|
Other consolidation and optimization initiatives | 145 |
| | 329 |
| | 340 |
| | 628 |
|
Total other operating expenses, net | $ | 6,264 |
| | $ | 13,370 |
| | $ | 24,955 |
| | $ | 50,004 |
|
Investments in Capacity and Capabilities
One of the Company’s strategic objectives is to invest in its capacity and capabilities in order to better align its resources to meet its customers’ needs and drive organic growth and profitability. Currently this initiative includes 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 by the end 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 occurred 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 $24.0 million and $25.0 million, of which $23.4 million has been expended through September 29, 2017. Total restructuring charges expected to be incurred in connection with these initiatives are between $54.0 million and $56.0 million, of which $53.5 million has been incurred through September 29, 2017. Expenses related to this initiative are primarily recorded within the Medical segment and include the following:
Severance and retention: $6.0 million - $7.0 million;
Accelerated depreciation and asset write-offs: $3.0 million; and
Other: $45.0 million - $46.0 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 Company’s investments in capacity and capabilities is as follows (in thousands): |
| | | | | | | | | | | | | | | |
| Severance and Retention | | Accelerated Depreciation/ Asset Write-offs | | Other | | Total |
December 30, 2016 | $ | 66 |
| | $ | — |
| | $ | — |
| | $ | 66 |
|
Restructuring charges | 264 |
| | — |
| | 4,143 |
| | 4,407 |
|
Cash payments | (259 | ) | | — |
| | (4,140 | ) | | (4,399 | ) |
September 29, 2017 | $ | 71 |
|
| $ | — |
| | $ | 3 |
| | $ | 74 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(9.(7.) STOCK-BASED COMPENSATION (Continued)
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 | (146,704 | ) | | 35.16 |
|
Forfeited | (180,003 | ) | | 35.18 |
|
Nonvested at September 28, 2018 | 302,851 |
| | $ | 36.20 |
|
(8.) OTHER OPERATING EXPENSES NET (Continued)
Lake Region Medical ConsolidationsOther Operating Expenses is comprised of the following (in thousands):In 2014, Lake Region Medical initiated plans |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Strategic reorganization and alignment | $ | 2,643 |
| | $ | — |
| | $ | 8,424 |
| | $ | — |
|
Manufacturing alignment to support growth | 877 |
| | — |
| | 2,493 |
| | — |
|
Consolidation and optimization initiatives | 137 |
| | 2,979 |
| | 698 |
| | 8,055 |
|
Acquisition and integration expenses | — |
| | 2,267 |
| | — |
| | 10,057 |
|
Asset dispositions, severance and other | 482 |
| | 823 |
| | 1,000 |
| | 6,378 |
|
Other operating expenses - continuing operations | 4,139 |
| | 6,069 |
| | 12,615 |
| | 24,490 |
|
Discontinued operations | (2,185 | ) | | 195 |
| | 1,805 |
| | 465 |
|
Total other operating expenses | $ | 1,954 |
| | $ | 6,264 |
| | $ | 14,420 |
| | $ | 24,955 |
|
Strategic Reorganization and Alignment
During the fourth quarter of 2017, the Company began to closetake steps to better align its Arvada, CO site, consolidateresources in order to enhance the profitability of its two Galway, Ireland sites into one facility,portfolio of products. This includes improving its business processes and other restructuring actionsredirecting 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 reported in discontinued operations, of between approximately $28 million to $30 million, of which an estimated $16 million to $20 million are expected to result in a reductioncash outlays. During the nine months ended September 28, 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 September 28, 2018, total expense incurred for this initiative since inception, including amounts reported in staff across manufacturing and administrative functions at certain locations. This initiativediscontinued operations, was $16.0 million. These actions are expected to be substantially completed by the end of 2016.2018.
DuringManufacturing Alignment to Support Growth
In 2017, the third quarterCompany 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 September 28, 2018, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $2.8 million. These actions are expected to be substantially completed by the end of 2019.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.) OTHER OPERATING EXPENSES (Continued)
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 the planned closure ofit would be closing its facility in Clarence, NY facility. Theafter transferring the machined component product lines manufactured in thisthat 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 $3.2 million has been expended through September 29, 2017. Total expense expected to be incurred for these initiatives are between $20.0 million and $25.0 million, of which $14.2 million has been incurred through September 29, 2017. ExpensesCosts related to thesethe Company’s consolidation and optimization initiatives have been and will bewere primarily recorded within the Medical segment and are expectedsegment. The Company does not expect to include the following:
Severance and retention: $5.0 million - $7.0 million;
Accelerated depreciation and asset write-offs: approximately $1.0 million - $2.0 million; and
Other: $14.0 million - $16.0 million.
Other expenses primarily consist of production inefficiencies, moving, revalidation, personnel, training, consulting, and travelincur any material additional costs associated with these consolidation projects. All expensesactivities as these activities are cash expenditures except accelerated depreciation and asset write-offs. substantially complete.
The following table summarizes the change in accrued liabilities related to the Lake Region Medical consolidation initiatives is as followsdescribed above (in thousands):
| | | Severance and Retention | | Accelerated Depreciation/ Asset Write-offs | | Other | | Total | Severance and Retention | | Other | | Total |
December 30, 2016 | $ | 729 |
| | $ | — |
| | $ | 402 |
| | $ | 1,131 |
| |
December 29, 2017 | | $ | 1,308 |
| | $ | — |
| | $ | 1,308 |
|
Restructuring charges | 1,129 |
| | — |
| | 2,494 |
| | 3,623 |
| 5,347 |
| | 6,268 |
| | 11,615 |
|
Cash payments | (856 | ) | | — |
| | (2,896 | ) | | (3,752 | ) | (5,438 | ) | | (5,981 | ) | | (11,419 | ) |
September 29, 2017 | $ | 1,002 |
|
| $ | — |
| | $ | — |
| | $ | 1,002 |
| |
September 28, 2018 | | $ | 1,217 |
| | $ | 287 |
| | $ | 1,504 |
|
Acquisition and integrationIntegration Expenses
The Company did not incur any additional costs
associated with these activities during the nine months ended September 28, 2018. During the firstthree and nine months ofended September 29, 2017, and 2016, the Company incurred $10.1$2.3 million and $23.1$10.1 million respectively, 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 first nine months of 2016 also includes transaction costs, primarily related to change-in-control payments to former Lake Region Medical executives, as well as professional and consulting fees. As of September 29, 2017 and December 30, 2016, $1.6$0.4 million and $4.5 million, respectively, of acquisition and integration costs related toaccrued as of December 29, 2017 were paid during the Lake Region Medical acquisitionfirst quarter of 2018. These projects were accrued.
Total expense expected to be incurred in connection with the integrationcompleted as of Lake Region Medical is between $45.0 million and $50.0 million, of which $42.6 million were incurred through September 29, 2017. Total capital expenditures for this initiative are expected to be between $15.0 million and $20.0 million, of which $10.6 million were incurred through SeptemberDecember 29, 2017.
Asset dispositions, severanceDispositions, Severance and otherOther
During the first nine months of 20172018 and 2016,2017, 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. The 2016 amount also includes legal and professional costs in connection with the Spin-off of $4.4 million. Expenses related to the Spin-off were primarily recorded within the corporate unallocated and the Medical segment. Refer to Note 2 “Divestiture” for additional information on the Spin-off.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(10.(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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(9.) INCOME TAXES (Continued)
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 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.
Based on additional analysis conducted, the Company updated the provisional amount of the one-time transition tax to $18.9 million, representing an increase of $4.2 million over the $14.7 million amount recorded as of December 29, 2017. The Company believes the remeasurement of its 2017 provisional amount is complete. As stated above, the Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with the repatriation tax. In part, due to the utilization of additional net operating losses to offset the additional transition tax, the Company adjusted its revaluation of the adjusted ending net deferred tax liabilities as of December 29, 2017, resulting in a recognized tax benefit of $60.7 million, representing an increase of $4.2 million to the originally recorded $56.5 million tax benefit recorded in the Company’s Consolidated Statement of Operations for the year ended December 29, 2017. The impact of these adjustments has been reflected in the Company’s financial results for the three month period ended September 28, 2018 and its timely filed 2017 U.S. corporate income tax return.
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”).
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, IncomeTaxes. 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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(9.) INCOME TAXES (Continued)
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 third quarter of 20172018 was (14.2)42.6% on $14.5 million of losses from continuing operations before taxes compared to (2.3)% on $12.0$19.4 million of income from continuing operations before the benefit for income taxes compared to (31.4)% on $8.7 million of income before the benefit for income taxes for the same period in 2016. An income tax benefit for the first nine months of 2017 of $0.4 million was recorded on $11.9 million of income before the benefit for income taxes compared to $1.4 million on $3.4 million of losses before the benefit for income taxes for the same period of 2016.2017. The difference between the Company’s effective tax rate and the U.S. federal statutory income tax rate infor the current yearthird quarter of 2018 is primarily attributable to discrete tax benefits of $3.0 million, which are predominately related to return to provision adjustments and deductible stock based compensation expense. The Company recognized a tax provision of $8.0 million on income from continuing operations before taxes of $35.8 million for the Company’s overall lowerfirst nine months of 2018 compared to $0.6 million on $33.0 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 itthe Company operates and where its foreign earnings are primarily derived, includinginclude 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 hashad positive income before taxes in its foreign jurisdictions but losses before taxes in U.S. jurisdictions. The Company currently has a tax holiday in Malaysia through April 2018, with a potential extension through April 2023 if certain conditions are met.
As of September 29, 2017,28, 2018, the balance of unrecognized tax benefits from continuing operations is approximately $11.5$5.2 million. It is reasonably possible that a reduction of up to $1.2$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 $10.8$5.2 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
(11.(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.
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. OnFollowing a second trial in August 10, 2017, a second 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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(10.) COMMITMENTS AND CONTINGENCIES (Continued)
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 30, 2016 | $ | 3,911 |
|
Additions to warranty reserve, net of reversals | 2,316 |
|
Warranty claims settled | (2,102 | ) |
September 29, 2017 | $ | 4,125 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(11.) COMMITMENTS AND CONTINGENCIES (Continued) |
| | | |
December 29, 2017 | $ | 2,820 |
|
Additions to warranty reserve | 570 |
|
Warranty claims settled | (317 | ) |
September 28, 2018 | $ | 3,073 |
|
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; and accordingly,hedges. Accordingly, the effective portions of the unrealized gains and losses on these contracts isare reported in Accumulated Other Comprehensive Income (Loss) in the Condensed Consolidated Balance Sheets and isare 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 $1.0$0.7 million gain.
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 counterparty during 2015. As of the date the contracts were terminated, the Company had $1.6 million recorded in Accumulated Other Comprehensive Income related to these contracts. This amount was fully amortized to Cost of Sales during 2016 as the inventory, which the contracts were hedging the cash flows to produce, was 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 | Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 | September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Increase in sales | $ | 594 |
| | $ | — |
| | $ | 733 |
| | $ | — |
| |
Increase (decrease) in sales | | $ | (252 | ) | | $ | 594 |
| | $ | (254 | ) | | $ | 733 |
|
Increase (decrease) in cost of sales | (512 | ) | | 929 |
| | 371 |
| | 2,316 |
| (393 | ) | | (512 | ) | | (988 | ) | | 371 |
|
Ineffective portion of change in fair value | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
|
Information regarding outstanding foreign currency contracts designated as cash flow hedges as of September 29, 201728, 2018 is as follows (dollars in thousands):
| | Aggregate Notional Amount | Aggregate Notional Amount | | Start Date | | End Date | | $/Foreign Currency | | Fair Value | | Balance Sheet Location | Aggregate Notional Amount | | Start Date | | End Date | | $/Foreign Currency | | Fair Value | | Balance Sheet Location |
$ | 6,163 |
| | Jan 2017 | | Dec 2017 | | 0.0514 |
| Peso | | $ | 366 |
| | Prepaid expenses and other current assets | 1,050 |
| | Jul 2018 | | Dec 2018 | | 0.0500 |
| Peso | | $ | 62 |
| | Prepaid expenses and other current assets |
$ | 6,448 |
| | Feb 2017 | | Dec 2017 | | 1.0747 |
| Euro | | $ | 660 |
| | Prepaid expenses and other current assets | |
7,599 | | 7,599 |
| | Jan 2018 | | Dec 2018 | | 0.0507 |
| Peso | | 340 |
| | Prepaid expenses and other current assets |
6,100 | | 6,100 |
| | Jan 2018 | | Dec 2018 | | 1.1961 |
| Euro | | (214 | ) | | Accrued expenses |
5,850 | | 5,850 |
| | Aug 2018 | | Dec 2018 | | 1.1699 |
| Euro | | (16 | ) | | Accrued expenses |
12,621 | | 12,621 |
| | Jan 2019 | | Jun 2019 | | 1.1686 |
| Euro | | 129 |
| | Prepaid expenses and other current assets |
10,991 | | 10,991 |
| | Jan 2019 | | Jun 2019 | | 0.0523 |
| Peso | | (95 | ) | | Accrued expenses |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(12.(11.) EARNINGS (LOSS) PER SHARE (“EPS”)
The following table illustratessets forth a reconciliation of the calculation ofinformation used in computing basic and diluted EPS (in thousands, except per share amounts): |
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Numerator for basic and diluted EPS: | | | | | | | |
Net income (loss) | $ | 13,690 |
| | $ | 11,458 |
| | $ | 12,341 |
| | $ | (1,972 | ) |
Denominator for basic EPS: | | | | | | | |
Weighted average shares outstanding | 31,594 |
| | 30,782 |
| | 31,304 |
| | 30,756 |
|
Effect of dilutive securities: | | | | | | | |
Stock options, restricted stock and RSUs | 579 |
| | 371 |
| | 420 |
| | — |
|
Denominator for diluted EPS | 32,173 |
| | 31,153 |
| | 31,724 |
| | 30,756 |
|
Basic EPS | $ | 0.43 |
| | $ | 0.37 |
|
| $ | 0.39 |
| | $ | (0.06 | ) |
Diluted EPS | $ | 0.43 |
| | $ | 0.37 |
| | $ | 0.39 |
| | $ | (0.06 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Numerator for basic and diluted EPS: | | | | | | | |
Income (loss) from continuing operations | $ | (8,303 | ) | | $ | 19,882 |
| | $ | 27,837 |
| | $ | 32,389 |
|
Income (loss) from discontinued operations | 122,382 |
| | $ | (6,192 | ) | | 114,382 |
| | (20,048 | ) |
Net income | $ | 114,079 |
| | $ | 13,690 |
| | $ | 142,219 |
| | $ | 12,341 |
|
| | | | | | | |
Denominator for basic and diluted EPS: | | | | | | | |
Weighted average shares outstanding - Basic | 32,211 |
| | 31,594 |
| | 32,050 |
| | 31,304 |
|
Dilutive effect of assumed exercise of stock options, restricted stock and RSUs | — |
| | 579 |
| | 401 |
| | 643 |
|
Weighted average shares outstanding - Diluted | 32,211 |
| | 32,173 |
| | 32,451 |
| | 31,947 |
|
| | | | | | | |
Basic earnings (loss) per share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.26 | ) | | $ | 0.63 |
| | $ | 0.87 |
| | $ | 1.03 |
|
Income (loss) from discontinued operations | 3.80 |
| | (0.20 | ) | | 3.57 |
| | (0.64 | ) |
Basic earnings per share | 3.54 |
| | 0.43 |
| | 4.44 |
| | 0.39 |
|
| | | | | | | |
Diluted earnings (loss) per share: | | | | | | | |
Income (loss) from continuing operations | $ | (0.26 | ) | | $ | 0.62 |
| | $ | 0.86 |
| | $ | 1.01 |
|
Income (loss) from discontinued operations | 3.80 |
| | (0.19 | ) | | 3.52 |
| | (0.63 | ) |
Diluted earnings per share | 3.54 |
| | 0.43 |
| | 4.38 |
| | 0.39 |
|
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 | Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 | September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Time-vested stock options, restricted stock and RSUs | 295 |
| | 629 |
| | 850 |
| | 1,862 |
| 797 |
| | 295 |
| | 436 |
| | 850 |
|
Performance-vested restricted stock and PSUs | 188 |
| | 373 |
| | 320 |
| | 417 |
| 303 |
| | 188 |
| | 220 |
| | 320 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.(12.) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated Other Comprehensive Income (Loss) 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 | Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount |
June 30, 2017 | $ | (1,475 | ) | | $ | 4,601 |
| | $ | 25,475 |
| | $ | 28,601 |
| | $ | (1,398 | ) | | $ | 27,203 |
| |
June 29, 2018 | | $ | (1,422 | ) | | $ | 5,094 |
| | $ | 37,756 |
| | $ | 41,428 |
| | $ | (370 | ) | | $ | 41,058 |
|
Unrealized gain on cash flow hedges | — |
| | 633 |
| | — |
| | 633 |
| | (222 | ) | | 411 |
| — |
| | 1,424 |
| | — |
| | 1,424 |
| | (299 | ) | | 1,125 |
|
Realized gain on foreign currency hedges | — |
| | (1,106 | ) | | — |
| | (1,106 | ) | | 387 |
| | (719 | ) | — |
| | (141 | ) | | — |
| | (141 | ) | | 30 |
| | (111 | ) |
Realized gain on interest rate swap hedges | — |
| | (49 | ) | | — |
| | (49 | ) | | 18 |
| | (31 | ) | — |
| | (482 | ) | | — |
| | (482 | ) | | 102 |
| | (380 | ) |
Foreign currency translation gain | — |
| | — |
| | 16,728 |
| | 16,728 |
| | — |
| | 16,728 |
| |
September 29, 2017 | $ | (1,475 | ) | | $ | 4,079 |
| | $ | 42,203 |
| | $ | 44,807 |
| | $ | (1,215 | ) | | $ | 43,592 |
| |
Foreign currency translation loss | | — |
| | — |
| | (2,809 | ) | | (2,809 | ) | | — |
| | (2,809 | ) |
Reclassifications to earnings(1) | | 948 |
| | — |
| | (514 | ) | | 434 |
| | (282 | ) | | 152 |
|
September 28, 2018 | | $ | (474 | ) | | $ | 5,895 |
| | $ | 34,433 |
| | $ | 39,854 |
| | $ | (819 | ) | | $ | 39,035 |
|
| | | | | | | | | | | | |
December 29, 2017 | | $ | (1,422 | ) | | $ | 3,418 |
| | $ | 50,200 |
| | $ | 52,196 |
| | $ | (17 | ) | | $ | 52,179 |
|
Unrealized gain on cash flow hedges | | — |
| | 4,325 |
| | — |
| | 4,325 |
| | (908 | ) | | 3,417 |
|
Realized gain on foreign currency hedges | | — |
| | (734 | ) | | — |
| | (734 | ) | | 154 |
| | (580 | ) |
Realized gain on interest rate swap hedges | | — |
| | (1,114 | ) | | — |
| | (1,114 | ) | | 234 |
| | (880 | ) |
Foreign currency translation loss | | — |
| | — |
| | (15,253 | ) | | (15,253 | ) | | — |
| | (15,253 | ) |
Reclassifications to earnings(1) | | 948 |
| | — |
| | (514 | ) | | 434 |
| | (282 | ) | | 152 |
|
September 28, 2018 | | $ | (474 | ) | | $ | 5,895 |
| | $ | 34,433 |
| | $ | 39,854 |
| | $ | (819 | ) | | $ | 39,035 |
|
| | June 30, 2017 | | $ | (1,475 | ) | | $ | 4,601 |
| | $ | 25,475 |
| | $ | 28,601 |
| | $ | (1,398 | ) | | $ | 27,203 |
|
Unrealized gain on cash flow hedges | | — |
| | 633 |
| | — |
| | 633 |
| | (222 | ) | | 411 |
|
Realized gain on foreign currency hedges | | — |
| | (1,106 | ) | | — |
| | (1,106 | ) | | 387 |
| | (719 | ) |
Realized gain on interest rate swap hedges | | — |
| | (49 | ) | | — |
| | (49 | ) | | 18 |
| | (31 | ) |
Foreign currency translation gain | | — |
| | — |
| | 16,728 |
| | 16,728 |
| | — |
| | 16,728 |
|
September 29, 2017 | | $ | (1,475 | ) | | $ | 4,079 |
| | $ | 42,203 |
| | $ | 44,807 |
| | $ | (1,215 | ) | | $ | 43,592 |
|
| Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount | | | | | | | | | | | |
December 30, 2016 | $ | (1,475 | ) | | $ | 1,420 |
| | $ | (15,660 | ) | | $ | (15,715 | ) | | $ | (285 | ) | | $ | (16,000 | ) | $ | (1,475 | ) | | $ | 1,420 |
| | $ | (15,660 | ) | | $ | (15,715 | ) | | $ | (285 | ) | | $ | (16,000 | ) |
Unrealized gain on cash flow hedges | — |
| | 3,414 |
| | — |
| | 3,414 |
| | (1,195 | ) | | 2,219 |
| — |
| | 3,414 |
| | — |
| | 3,414 |
| | (1,195 | ) | | 2,219 |
|
Realized gain on foreign currency hedges | — |
| | (362 | ) | | — |
| | (362 | ) | | 127 |
| | (235 | ) | — |
| | (362 | ) | | — |
| | (362 | ) | | 127 |
| | (235 | ) |
Realized gain on interest rate swap hedges | — |
| | (393 | ) | | — |
| | (393 | ) | | 138 |
| | (255 | ) | — |
| | (393 | ) | | — |
| | (393 | ) | | 138 |
| | (255 | ) |
Foreign currency translation gain | — |
| | — |
| | 57,863 |
| | 57,863 |
| | — |
| | 57,863 |
| — |
| | — |
| | 57,863 |
| | 57,863 |
| | — |
| | 57,863 |
|
September 29, 2017 | $ | (1,475 | ) | | $ | 4,079 |
| | $ | 42,203 |
| | $ | 44,807 |
| | $ | (1,215 | ) | | $ | 43,592 |
| $ | (1,475 | ) | | $ | 4,079 |
| | $ | 42,203 |
| | $ | 44,807 |
| | $ | (1,215 | ) | | $ | 43,592 |
|
__________
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount |
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 |
|
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 |
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 |
|
September 30, 2016 | $ | (1,179 | ) | | $ | (2,868 | ) | | $ | 15,859 |
| | $ | 11,812 |
| | $ | 1,499 |
| | $ | 13,311 |
|
| |
(1) | Accumulated foreign currency translation losses of $0.5 million and defined benefit plan liabilities of $0.7 million (net of income taxes of $0.3 million) were reclassified to earnings in during the three months ended September 28, 2018 as a result of the divestiture of the AS&O Product Line and are included in “Gain on sale of discontinued operations, net of tax” in the Condensed Consolidated Statements of Operations. |
The realized loss (gain) relating to the Company’s foreign currency hedges were reclassified from Accumulated Other Comprehensive Income (Loss) and included in Cost of Sales or Sales as the transactions they are hedging occur. The realized (gain) lossgain relating to the Company’s interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income (Loss) and included in Interest Expense Net as interest on the corresponding debt being hedged is accrued.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(14.(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 1110 “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 contractscontract 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 65 “Debt” for further discussion regarding the fair value of the Company’s interest rate swaps.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) |
September 29, 2017 | | | | | | | | |
Assets: Foreign currency contracts | | $ | 1,026 |
| | $ | — |
| | $ | 1,026 |
| | $ | — |
|
Assets: Interest rate swap | | 3,054 |
| | — |
| | 3,054 |
| | — |
|
| | | | | | | | |
December 30, 2016 | | | | | | | | |
Assets: Interest rate swaps | | $ | 3,482 |
| | $ | — |
| | $ | 3,482 |
| | $ | — |
|
Liabilities: Foreign currency contracts | | 2,063 |
| | — |
| | 2,063 |
| | — |
|
|
| | | | | | | | | | | | | | | | |
| | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
September 28, 2018 | | | | | | | | |
Assets: Interest rate swap (Note 5) | | $ | 5,690 |
| | $ | — |
| | $ | 5,690 |
| | $ | — |
|
Assets: Foreign currency contracts (Note 10) | | 531 |
| | — |
| | 531 |
| | — |
|
Liabilities: Foreign currency contracts (Note 10) | | 325 |
| | — |
| | 325 |
| | — |
|
| | | | | | | | |
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 65 “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 September 28, 2018 and December 29, 2017 was $23.1 million and $20.8 million, respectively.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(14.(13.) FAIR VALUE MEASUREMENTS (Continued)
GainsAs of September 28, 2018 and losses realized on cost and equity method investments are recorded in Other (Income) Loss, Net. The aggregateDecember 29, 2017, the recorded amount of cost andthe Company’s equity method investments at September 29, 2017 and December 30, 2016investment was $19.9$15.4 million and $22.8$13.8 million, respectively. The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. As of September 29, 2017 and December 30, 2016, the Company’s recorded amount of this equity method investment was $12.9 million and $10.7 million, respectively. 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 29, 2017,28, 2018, the Company owned 6.8%6.7% of this fund.
During the nine months ended September 28, 2018 and September 29, 2017, the Company determined that the fair valuesrecognized net gains of certain$5.5 million and $2.3 million, respectively, on its equity method investment.
The Company’s recorded amount of its cost method investments were below their carrying values and that the carrying values of these investments was not expected to be recoverable within a reasonable period of time. As a result, the Company recognized impairment charges of $0.3$7.7 million and $5.3$7.0 million during the threeat September 28, 2018 and nine months ended SeptemberDecember 29, 2017.2017, respectively. The Company did not recognize any impairment charges related to cost method investments during the nine months ended September 30, 2016.28, 2018. The Company recognized impairment charges of $5.3 million related to its cost method investments during the nine months September 29, 2017. The fair value of these investments is primarily determined by reference to recent sales data of similar shares to independent parties in an inactive market. This fair value calculation ismarket and categorized in Level 2 of the fair value hierarchy. During the nine month periods ended September 29, 2017 and September 30, 2016, the Company recognized a net loss of $2.9 million and income of $0.9 million, respectively, on its cost and equity method investments.
(15.(14.) SEGMENT INFORMATION
As a result of the Lake Region Medical acquisition and Spin-off, during 2016 theThe Company reorganizedorganizes its operations including its internal management and financial reporting structure. As a result of this reorganization, the Company reevaluated and revised its reportable business segments during the fourth quarter of 2016 and began to discloseinto two reportable segments: (1) Medical and (2) Non-Medical. Prior period amounts have been reclassifiedThis segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker (“CODM”), to conform tomake decisions regarding the newCompany’s business, including resource allocations and performance assessments. This segment reporting presentation. The two reportable segments, alongstructure reflects the Company’s current operating focus in compliance with their related product lines, are described below:
MedicalASC 280, - includes the (i) Cardio & Vascular product line, which includes 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; (ii) Cardiac & Neuromodulation product line, which includes batteries, capacitors, filtered and unfiltered feed-throughs, engineered components, implantable stimulation leads, and enclosures used in implantable medical devices; and (iii) Advanced Surgical, Orthopedics & Portable Medical product line, which includes 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.
Non-MedicalSegment Reporting - includes primary (lithium) cells, and primary and secondary battery packs for applications in the energy, military and environmental markets.
During the first quarter of 2017, the Company revised the method used to present sales by product line in order to align the legacy Greatbatch and Lake Region Medical methodologies. The Company believes the revised presentation will provide improved reporting and better transparency into the operational results of its business and markets. Prior period amounts have been reclassified to conform to the new product line sales reporting presentation.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(15.)SEGMENT INFORMATION (Continued)
The tables below present information about our reportable segments (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Segment sales by product line: | | | | | | | |
Medical | | | | | | | |
Cardio & Vascular | $ | 138,982 |
| | $ | 129,347 |
| | $ | 396,321 |
| | $ | 365,271 |
|
Cardiac & Neuromodulation | 101,616 |
| | 108,147 |
| | 311,614 |
| | 323,599 |
|
Advanced Surgical, Orthopedics & Portable Medical | 107,581 |
| | 100,203 |
| | 321,287 |
| | 307,956 |
|
Total Medical | 348,179 |
| | 337,697 |
| | 1,029,222 |
| | 996,826 |
|
Non-Medical | 15,129 |
| | 8,870 |
| | 42,218 |
| | 30,361 |
|
Total sales | $ | 363,308 |
| | $ | 346,567 |
| | $ | 1,071,440 |
| | $ | 1,027,187 |
|
. There were no sales between segments during the nine months ended September 29, 201728, 2018 and September 30, 2016.29, 2017.
The following table presents sales from continuing operations by product line (in thousands).
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Segment income from operations: | | | | | | | |
Medical | $ | 50,168 |
| | $ | 54,979 |
| | $ | 155,761 |
| | $ | 138,151 |
|
Non-Medical | 3,375 |
| | (1,425 | ) | | 9,877 |
| | 626 |
|
Total segment income from operations | 53,543 |
| | 53,554 |
| | 165,638 |
| | 138,777 |
|
Unallocated operating expenses | (14,912 | ) | | (16,692 | ) | | (60,723 | ) | | (61,512 | ) |
Operating income | 38,631 |
| | 36,862 |
| | 104,915 |
| | 77,265 |
|
Unallocated expenses, net | (26,641 | ) | | (28,145 | ) | | (93,004 | ) | | (80,623 | ) |
Income (loss) before income taxes | $ | 11,990 |
| | $ | 8,717 |
| | $ | 11,911 |
| | $ | (3,358 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Segment sales from continuing operations by product line: | | | | | | |
Medical | | | | | | | |
Cardio & Vascular | $ | 150,230 |
| | $ | 137,712 |
| | $ | 435,859 |
| | $ | 391,914 |
|
Cardiac & Neuromodulation | 109,620 |
| | 101,612 |
| | 334,471 |
| | 311,540 |
|
Advanced Surgical, Orthopedics & Portable Medical | 32,789 |
| | 31,715 |
| | 101,481 |
| | 88,148 |
|
Total Medical | 292,639 |
| | 271,039 |
| | 871,811 |
| | 791,602 |
|
Non-Medical | 12,449 |
| | 15,129 |
| | 40,167 |
| | 42,218 |
|
Total sales from continuing operations | $ | 305,088 |
| | $ | 286,168 |
| | $ | 911,978 |
| | $ | 833,820 |
|
The following table presents income from continuing operations for the Company’s reportable segments (in thousands).
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Segment income from continuing operations: | | | | | | | |
Medical | $ | 58,929 |
| | $ | 47,363 |
| | $ | 167,623 |
| | $ | 146,637 |
|
Non-Medical | 3,521 |
| | 3,375 |
| | 11,112 |
| | 9,877 |
|
Total segment income from continuing operations | 62,450 |
| | 50,738 |
| | 178,735 |
| | 156,514 |
|
Unallocated operating expenses | (20,991 | ) | | (14,912 | ) | | (62,875 | ) | | (60,723 | ) |
Operating income from continuing operations | 41,459 |
| | 35,826 |
| | 115,860 |
| | 95,791 |
|
Unallocated expenses, net | (55,919 | ) | | (16,392 | ) | | (80,067 | ) | | (62,806 | ) |
Income before taxes from continuing operations | $ | (14,460 | ) | | $ | 19,434 |
| | $ | 35,793 |
| | $ | 32,985 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
(15.) | REVENUE FROM CONTRACTS WITH CUSTOMERS |
The majority of the Company’s revenues consist of sales of various medical devices and products to large, multinational OEMs and their affiliated subsidiaries. The Company considers the customer’s purchase order, which in some cases is governed by a long-term agreement, and the Company’s corresponding sales order acknowledgment as the contract with the customer. The Company has elected to adopt the practical expedient provided in ASC 340-40-25-4 and recognize the incremental costs of obtaining a contract, which are primarily sales commissions, as expense when incurred because the amortization period is less than one year.
Performance Obligations
The Company considers each shipment of an individual product included on a purchase order to be a separate performance obligation, as each shipment is separately identifiable and the customer can benefit from each individual product separately from the other products included on the purchase order. Accordingly, a contract can have one or more performance obligations to manufacture products. Standard payment terms range from 30 to 90 days and can include a discount for early payment.
The Company does not offer its customers a right of return. Rather, the Company warrants that each unit received by the customer will meet the agreed upon technical and quality specifications and requirements. Only when the delivered units do not meet these requirements can the customer return the non-compliant units as a corrective action under the warranty. The remedy offered to the customer is repair of the returned units or replacement if repair is not viable. Accordingly, the Company records a warranty reserve and any warranty activities are not considered to be a separate performance obligation. Historically, warranty reserves have not been material.
Transaction Price
Generally, the transaction price of the Company’s contracts consists of a unit price for each individual product included in the contract, which can be fixed or variable based on the number of units ordered. In some instances, the transaction price also includes a rebate for meeting certain volume-based targets over a specified period of time. The transaction price of a contract is determined based on the unit price and the number of units ordered, reduced by the rebate expected to be earned on those units. Rebates are estimated based on the expected achievement of the volume-based target using the most likely amount method and updated quarterly. Any adjustments to these estimates are recognized under the cumulative catch-up method, such that impact of the adjustment is recognized in the period in which it is identified.
The transaction price is allocated to each performance obligation on a relative standalone selling price basis. As the majority of products sold to customers are manufactured to meet the specific requirements and technical specifications of that customer, the products are considered unique to that customer and the unit price stated in the contract is considered the standalone selling price.
The Company has elected to adopt the practical expedient provided in ASC 606-10-50-14 and not disclose the aggregate amount of the transaction price allocated to unsatisfied performance obligations and an expectation of when those amounts are expected to be recognized as revenue because the majority of contracts have an original expected duration of one year or less.
Revenue Recognition
The Company recognizes revenue at the point in time when a performance obligation is satisfied and the customer has obtained control of the products. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product. The customer obtains control of the products when title and risk of ownership transfers to them, which is primarily based upon shipping terms. Accordingly, the majority of the Company’s revenues are recognized at the point of shipment. In instances where title and risk of ownership do not transfer to the customer until the products have reached the customer’s location, revenue is recognized at that point in time. Revenue is recognized net of sales tax, value-added taxes and other taxes.
Contract Modifications
Contract modifications, which can include a change in either or both scope and price, most often occur related to contracts that are governed by a long-term arrangement. Contract modifications typically relate to the same products already governed by the long-term arrangement, and therefore, are accounted for as part of the existing contract. If a contract modification is for additional products, it is accounted for as a separate contract.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
(15.) | REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued) |
Disaggregated Revenue
In general, the Company's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment's results of operations. For a summary by disaggregated product line sales for each segment, refer to Note 14, “Segment Information.” Additionally, the tables below disaggregate the Company’s revenues based upon significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues, and ship to country, which is defined as any country where 10% or more of a segment’s total revenues are shipped to. The Company believes that these categories best depict how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors.
The following table presents revenues by customer.
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 28, 2018 | | September 28, 2018 |
Customer | | Medical | | Non-Medical | | Medical | | Non-Medical |
Customer A | | 23 | % | | — | % | | 22 | % | | — | % |
Customer B | | 20 | % | | — | % | | 19 | % | | — | % |
Customer C | | 12 | % | | — | % | | 12 | % | | — | % |
Customer D | | — | % | | 30 | % | | — | % | | 28 | % |
All other customers | | 45 | % | | 70 | % | | 47 | % | | 72 | % |
The following table presents revenues by ship to country.
|
| | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 28, 2018 | | September 28, 2018 |
Ship to Location | | Medical | | Non-Medical | | Medical | | Non-Medical |
United States | | 58% | | 65% | | 56% | | 68% |
Puerto Rico | | 13% | | —% | | 13% | | —% |
Canada | | —% | | 10% | | —% | | 10% |
All other Countries | | 29% | | 25% | | 31% | | 22% |
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and less frequently, unearned revenue. Accounts receivable are recorded when the right to consideration becomes unconditional. Unearned revenue is recorded when customers pay or are billed in advance of the Company’s satisfaction of performance obligations. Contract liabilities were $4.1 million and $2.2 million as of September 28, 2018 and December 29, 2017, respectively, and are classified as Accrued Expenses on the Condensed Consolidated Balance Sheets. During the three and nine months ended September 28, 2018, the Company recognized $0.2 million and $0.6 million, respectively, of revenue that was included in the contract liability balance as of December 29, 2017. The Company does not have any contract assets.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
(16.) | IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS |
In the normal courseThe following table provides a brief description of business, management evaluates all new accounting pronouncementsrecent Accounting Standard Updates ("ASU") issued by the Financial Accounting Standards Board (“FASB”("FASB"), Securities and Exchange Commission (“SEC”), or other authoritative accounting bodies to determine the potential impact they may have on the Company’s consolidated financial statements. Based upon this review, except as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Consolidated Financial Statements.:
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 simplifies various aspects of the accounting for stock-based payments. The simplifications include:
recording all tax effects associated with stock-based compensation through the income statement, as opposed to recording certain amounts in other paid-in capital, which eliminates the requirements to calculate a windfall pool;
allowing entities to withhold shares to satisfy the employer’s statutory tax withholding requirement up to the highest marginal tax rate applicable to employees rather than the employer’s minimum statutory rate, without requiring liability classification for the award;
modifying the requirement to estimate the number of awards that will ultimately vest by providing an accounting policy election to either estimate the number of forfeitures or recognize forfeitures as they occur;
changing certain presentation requirements in the statement of cash flows, including removing the requirement to present excess tax benefits as an inflow from financing activities and an outflow from operating activities, and requiring the cash paid to taxing authorities arising from withheld shares to be classified as a financing activity; and
the assumed proceeds from applying the treasury stock method when computing EPS is amended to exclude the amount of excess tax benefits that would be recognized in additional paid-in capital.
The Company adopted the provisions of ASU 2016-09 |
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Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | | The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop internal-use software, such that costs for implementation activities in the application development stage are capitalized and amortized over the life of term of the hosting arrangement, while costs incurred during the preliminary project and post implementation stages are expensed as performed. | | January 4, 2020 (beginning of 2020 fiscal year). Early adoption is permitted. | | The Company is currently evaluating the impact that the adoption of this ASU will have on December 31, 2016, the beginning of its 2017 fiscal year. The adoption of ASU 2016-09 resulted in the Company making an accounting policy election to change how it will recognize the number of stock awards that will ultimately vest. In the past, the Company applied a forfeiture rate to shares granted. With the adoption of ASU 2016-09, the Company will recognize forfeitures as they occur. This change resulted in the Company making a cumulative effect change to retained earnings of $0.3 million. In addition, the Company recorded the tax effects associated with stock-based compensation through the income statement, which resulted in $0.4 million, net tax benefit for the first nine months of 2017, and will continue to record amounts prospectively through the income statement in accordance with ASU 2016-09. Finally, the Company adjusted its dilutive shares calculation to remove the excess tax benefits from the calculation of EPS on a prospective basis. The revised calculation is more dilutive, but did not have a material impact on the Company's diluted EPS calculation for the first nine months of 2017.In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted this standard in the first quarter of fiscal year 2017 on a prospective basis. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU did not impact the Company’s consolidated financial statements.
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In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value | | The new guidance removes certain disclosure requirements from Topic 820, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. This ASU also clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and now requires disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average (or other quantitative information if more reasonable) of significant unobservable inputs used to develop Level 3 fair value measurements. | | January 4, 2020 (beginning of 2020 fiscal year). Early adoption is permitted. | | The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements. |
In July 2018, the FASB issued ASU 2018-11, Leases Targeted Improvements | | The new guidance provides entities with an additional (and optional) transition method to adopt the new standard by initially applying the standard at the adoption date (vs. the earliest period presented) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, lessors are provided with a practical expedient to not separate non-lease components from the associated lease component and accounts for those components as a single component if certain criteria are met. | | December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted. | | The Company plans to adopt ASC Topic 842 using the transition method offered through this ASU; refer to the discussion of ASC 2016-02 below for further detail. |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(16.) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships, making more hedges eligible for hedge accounting, particularly for rates and commodities hedges. It also aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements by requiring an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. This guidance is effective for the Company in the first quarter of fiscal year 2019, with early adoption permitted. |
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Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 Leases | | The new guidance amends and clarifies the following areas of Topic 842: residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transaction, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease and failed sale and leaseback transactions. | | December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted. | | These amendments will be considered and incorporated into the Company’s implementation of ASC Topic 842; refer to the discussion of ASC 2016-02 below for further detail. |
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. | | The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. | | December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted. | | The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements. |
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. | | The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. | | December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted. | | The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.In May 2017, the FASB issued ASU 2017-09, “Stock Compensation - Scope of Modification Accounting,” which provides guidance as to when a modification of a share-based award must be accounted for. In general, if a modification of the terms and conditions of an award does not change the fair value of the award (or calculated value or intrinsic value, if used instead of fair value), does not change the vesting conditions of the award, and does not change the classification of the award as an equity instrument or a liability instrument, then an entity need not account for the modification. This guidance is effective for the Company in the first quarter of fiscal year 2018, with early adoption permitted. The new rules are applied prospectively to awards modified after the adoption date. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (Topic 715),” which requires employers to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires other components of net periodic pension cost and net periodic postretirement benefit cost, including interest cost, return on plan assets and gains or losses, to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. This guidance is effective for the Company in the first quarter of fiscal year 2018 and is not expected to have a material impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which outlines new minimum requirements for a set of assets to be considered a business. The intent of this ASU is to sharpen the distinction between the purchase or disposal of a business versus the purchase or disposal of assets. ASU 2017-01 is effective for the Company in the first quarter of 2018, with early adoption permitted, and prospective application required. The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory,” which requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur. This ASU is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this ASU will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force.” ASU 2016-15 makes targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The areas specifically addressed include debt prepayment and debt extinguishment costs, the settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, cash premiums paid for and proceeds from corporate-owned life insurance policies, distributions received from equity method investees and cash receipts from payments on transferor’s beneficial interest on securitized trade receivables. Additionally, the amendment states that, in the absence of other prevailing guidance, cash receipts and payments that have characteristics of more than one class of cash flows should have each separately identifiable source or use of cash presented within the most predominant class of cash flows based on the nature of the underlying cash flows. This guidance is effective for the Company in the first quarter of fiscal year 2018, with early adoption permitted. The Company is currently evaluating this ASU, but does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.
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In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. | | The new guidance clarifies the presentation and classification of the components of net periodic benefit costs in the consolidated statement of operations. | | December 30, 2017 (beginning of 2018 fiscal year).
| | The Company adopted the new guidance effective December 30, 2017, the beginning of its 2018 fiscal year, using the retrospective transition method, as part of the FASB's simplification initiative. See Adoption ofASU 2017-07 section below for additional information. |
In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory. | | The new guidance requires the income tax consequences of an intra-entity transfer of assets other than inventory to be recognized when the transfer occurs rather than deferring until an outside sale has occurred. | | December 30, 2017 (beginning of 2018 fiscal year).
| | The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company. |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(16.) IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
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Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. | | The new guidance clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. | | December 30, 2017 (beginning of 2018 fiscal year).
| | The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company. |
In February 2016, the FASB issued ASU 2016-02, Leases. | | The new guidance supersedes the lease guidance under ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. | | December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted. | | The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for real estate operating leases. The Company anticipates recognition of right of use assets and corresponding lease liabilities related to leases upon adoption, but has not yet quantified these at this time. The Company plans to elect the package of three practical expedients and adopt the standard effective December 29, 2018, using the transition method made available in ASU 2018-11. |
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. | | The new guidance updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. | | December 30, 2017 (beginning of 2018 fiscal year).
| | The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09. | | The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance provides alternative methods of adoption. Subsequent guidance issued after May 2014 did not change the core principle of ASU 2014-09. | | December 30, 2017 (beginning of 2018 fiscal year).
| | The Company adopted the new guidance effective December 30, 2017, using the modified retrospective transition method applied to those contracts which were not completed as of December 30, 2017. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The adoption of this ASU did not have a material impact on the consolidated financial statements and therefore no cumulative adjustment was recorded to equity. The Company has updated its internal controls for changes and expanded disclosures have been made in the Notes to the Financial Statements as a result of adopting the standard. (See Note 15, “Revenue from Contracts with Customers”). |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(16.)IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
Adoption of ASU 2017-07
On December 30, 2017, the FASB issued ASU 2016-02, “Leases (Topic 842),” whichCompany retrospectively adopted the new accounting guidance on presentation of net periodic pension costs (ASU 2017-07). That guidance requires companies to recognize a lease liability that represents the discounted obligation to make future minimum lease payments,service cost component of net benefit costs be disaggregated and a corresponding right-of-use asset on the balance sheet for most leases. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leasesreported in the current accounting literature.same line item or items in the Condensed Consolidated Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The resultother non-service components of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, andnet benefit costs are required to be applied on a modified retrospective basis. Earlier application is permitted. The Company expectspresented separately from the adoption of ASU 2016-02 will result in a material increase in the assets and liabilities on its Consolidated Balance Sheets. The Company is currently evaluating the impact thatservice cost component.
Following the adoption of this ASU will have on its Consolidated Statements of Operations and Other Comprehensive Income.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and requires entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option. The new ASU is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption of the own credit provision is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which has been subsequently updated by ASU 2015-14, 2016-08, 2016-10 and 2016-12. The core principle behind ASU 2014-09 is that an entity should recognize revenue in an amount that reflects the consideration to which it expects to be entitled in exchange for delivering goods and services using a five-step model. Enhanced disclosures are required, including revenue recognition policies to identify performance obligations and significant judgments in measurement and recognition. This ASU can be adopted using either a full retrospective approach, where historical financial information is presented in accordance with the new standard, or a modified retrospective approach, where this ASU is applied to the most current period presented in the financial statements. This ASU is effective forguidance, the Company continues to record the service cost component of net benefit costs in Cost of Sales and Selling, General and Administrative expenses. The interest cost component of net benefit costs is now recorded in Interest Expense and the first quarterremaining components of fiscal year 2018.
The Company is continuing to evaluate the effect this guidance will havenet benefit costs, amortization of net losses and expected return on its consolidated financial statements, including potential impacts on the amount and timing of revenue recognition and additional information that may be necessary for the required expanded disclosures. The Company has substantially completed its inventory of all outstanding contracts and isplan assets, are now recorded in the process of applying the five-step model to those contracts to evaluate the quantitative and qualitative impacts the new standard will have on its business and reported revenues. Based on the assessment completed to date, the Company believes (1) that the warranties offered to its customers are primarily assurance-type warranties and do not represent a separate performance obligation and (2) that the majority of its revenues related to its manufacturing and supply agreements will continue to be recognized at a point in time, as the criteria for over time recognition are not met. Additionally, the Company has begun to assess when to recognize revenues related to its non-recurring engineering service arrangements under the new guidance. At this time, the Company is unable to quantify the impact this new guidance will have on its reported revenues. The Company expects to adopt this ASU, as amended, in the first quarter of fiscal year 2018 on a modified retrospective basis.Other (Income) Loss, Net.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q should be read in conjunction with the disclosures included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016.29, 2017. In addition, please read this section in conjunction with our Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contained herein.
Forward-Looking Statements
Some of the statements contained in this report and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations, and these statements are subject to known and unknown risks, uncertainties and assumptions. Forward-looking statements include statements relating to:
future sales, expenses, and profitability;
future development and expected growth of our business and industry;
our ability to execute our business model and our business strategy;
our ability to identify trends within our industries and to offer products and services that meet the changing needs of those markets;
our ability to remain in compliance with the financial covenants contained in the agreement governing our Senior Secured Credit Facilities; and
projected capital expenditures.
You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or “variations” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those stated or implied by these forward-looking statements. In evaluating these statements and our prospects, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this report.
Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors include the following: our high level of indebtedness, our inability to pay principal and interest on this high level of outstanding indebtedness or to remain in compliance with financial and other covenants under our Senior Secured Credit Facilities, and the risk that this high level of indebtedness limits our ability to invest in our business and overall financial flexibility; our dependence upon a limited number of customers; customer ordering patterns; product obsolescence; our inability to market current or future products; pricing pressure from customers; our ability to timely and successfully implement cost savings and consolidation initiatives; our reliance on third party suppliers for raw materials, products and subcomponents; fluctuating operating results; our inability to maintain high quality standards for our products; challenges to our intellectual property rights; product liability claims; product field actions or recalls; our inability to successfully consummate and integrate acquisitions and to realize synergies and to operate these acquired businesses in accordance with expectations; our unsuccessful expansion into new markets; our failure to develop new products; the timing, progress and ultimate success of pending regulatory actions and approvals; our inability to obtain licenses to key technology; regulatory changes, including health care reform, or consolidation in the healthcare industry; global economic factors, including currency exchange rates and interest rates; the resolution of various legal actions brought against the Company; enactment related and ongoing impacts related to the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”), including the Global Intangible Low-Taxed Income (“GILTI”) tax; and other risks and uncertainties that arise from time to time and are described in Item 1A “Risk Factors” of our Annual Report on Form 10-K and in other periodic filings with the Securities and Exchange Commission. Except as required by applicable law, the Company assumes no obligation to update forward-looking statements in this report whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Business
Integer Holdings Corporation is one of the largest medical device outsource (“MDO”) manufacturers in the world serving the cardiac, neuromodulation, orthopedics, vascular and advanced surgicalportable medical markets. We provide innovative, high-quality medical technologies that enhance the lives of patients worldwide. We also serve the non-medical power solutions market by developingdevelop batteries for high-end niche applications in the non-medical energy, military, and environmental markets. Our vision is to enhance the lives of patients worldwide by being our customers’ partner of choice for innovative technologies and services.
We organize our business into two reportable segments, Medical and Non-Medical, and derive our revenues from four principle product lines. The Medical segment includes the Advanced Surgical, Orthopedics & Portable Medical, Cardio & Vascular and Cardiac & Neuromodulation product lines and the Non-Medical segment is comprised of the Electrochem product line.
Discontinued Operations and Divestiture
On March 14, 2016,May 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical segment to Viant (formerly MedPlast, LLC). On July 2, 2018, we completed the spin-off of a portion of our former QiG segment through a tax-free distribution of allsale of the sharesAS&O Product Line for net cash proceeds of our QiG Group, LLC subsidiary to the stockholdersapproximately $582 million, resulting in a pre-tax gain of Integer on a pro rata basis (the “Spin-off”). 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”). Our results include the financial and operating results of Nuvectra until the Spin-off on March 14, 2016.
approximately $195 million. As a result, we 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 Sheet as of December 29, 2017. All results and information presented exclude the AS&O Product Line unless otherwise noted. Refer to Note 2 “Discontinued Operations and Divestiture” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the divestiture.
In connection with the sale, the parties executed a transition services agreement whereby we will provide certain corporate services (including accounting, payroll, and information technology services) to Viant for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations. Viant will pay us for these services, with such payments varying in amount and length of time as specified in the transition services agreement. In addition, the parties executed long-term supply agreements under which the parties have agreed to supply the other with certain products at prices specified in the agreements for a term of three years.
Strategic Overview
During 2017, we undertook a thorough strategic review of our Lake Region Medical acquisition in 2015customers, competitors and the Spin-off, during 2016 we reorganized our operations including our internal management and financial reporting structure.markets. As a result of this reorganization, we reevaluated and revised our reportable business segmentsreview, during the fourth quarter of 2016 and2017, we began to disclose two reportable segments: (1) Medicaltake steps to better align our resources in order to invest to grow, protect, preserve and (2) Non-Medical. Prior period amountsto enhance the profitability of our portfolio of products. These steps include focusing our investment in research and development and manufacturing, improving our business processes and redirecting investments away from projects where the market does not justify the investment. The execution of this reportstrategy will be our primary focus going forward.
We believe Integer is well-positioned within the medical technology and MDO manufacturing market and that there is a robust pipeline of opportunities to pursue. We have been reclassifiedexpanded our medical device capabilities and are excited about opportunities to conformpartner with customers to drive innovation. We believe we have the new segment reporting presentation.
Our Acquisitions
Withscale and global presence, supported by world-class manufacturing and quality capabilities, to capture these opportunities. We are confident in our abilities as one of the acquisitionlargest MDO manufacturers, with a long history of Lake Region Medical, our main strategic prioritiessuccessfully integrating companies, driving down costs and growing revenues over the next two years include, among others,long-term. Ultimately, our strategic vision is to drive shareholder value by enhancing the integrationlives of the legacy Greatbatch, Inc.patients worldwide by being our customers’ partner of choice for innovative technologies and Lake Region Medical companies, driving integration synergies, and paying down our outstanding debt. Our acquisition focus, if any, will be primarily directed at smaller “bolt-on” or adjacent acquisition opportunities that have a strategic fit with our existing core businesses, particularly opportunities that support our enterprise strategy and enhance the value propositionservices.
Revised 2018 Outlook(a)
(dollars in millions, except per share amounts) |
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| | GAAP | | Non-GAAP(b) |
Continuing Operations: | | As Reported | | Growth | | Adjusted | | Growth |
Sales | | $1,197 to $1,212 | | 5% to 7% | | $1,195 to $1,210 | | 6% to 7% |
Net Income | | $44 to $49 | | (50)% to (44)% | | $117 to $122 | | 18% to 23% |
EBITDA | | N/A | | N/A | | $255 to $265 | | 9% to 13% |
Earnings per Diluted Share | | $1.34 to $1.49 | | (51)% to (46)% | | $3.55 to $3.70 | | 15% to 20% |
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(a) | Except as described below, further reconciliations by line item to the closest corresponding GAAP financial measure for Adjusted Sales, Adjusted Net Income, Adjusted EBITDA, and Adjusted Earnings per Diluted Share, included in our “Revised 2018 Outlook” above, are not available without unreasonable efforts on a forward-looking basis due to the high variability, complexity and visibility of the charges excluded from these non-GAAP financial measures. |
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(b) | Adjusted Net Income and EPS for 2018 is expected to consist of GAAP Net Income and EPS, excluding items such as intangible amortization, IP-related litigation costs, consolidation and realignment costs, asset disposition and write-down charges, and loss on extinguishment of debt totaling approximately $89 million. The after-tax impact of these items is estimated to be approximately $70 million, or approximately $2.13 per diluted share. Additionally, Adjusted Net Income and EPS is expected to exclude the estimated impact relating to our disallowed deduction of the GILTI tax, as mandated by the Tax Reform Act. This disallowed deduction of the GILTI tax (approximately 50% of the total GILTI tax) is due to the Company making use of its U.S. net operating losses (“NOLs”), and will be eliminated once the Company’s U.S. NOLs are fully utilized, which is expected to be in 2019. This adjustment makes our Adjusted Diluted EPS more comparable with other global companies that are not subject to this disallowed GILTI tax deduction and more comparable to the Company’s results following the full utilization of its U.S. NOLs. |
Adjusted EBITDA is expected to consist of our product offerings.
Our Customers
Our products are designed to provide reliable, long-lasting solutions that meet the evolving requirements and needs of our customers. The nature and extent of our selling relationships with each customer are different in terms of breadth of products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management, and selling prices.
Our Medical customers include large multi-national medical device original equipment manufacturers (“OEMs”) and their subsidiariesAdjusted Net Income, excluding items such as Abbott Labs, Biotronik, Boehringer Ingelheim, Boston Scientific, Cardinal Health, Johnson & Johnson, LivaNova, Medtronic, Nevro Corp., Philips Healthcare, Smith & Nephew, Stryker,depreciation, interest, stock-based compensation and Zimmer Biomet. For the nine months ended September 29, 2017, Abbott Labs, Boston Scientific, Johnson & Johnson, and Medtronic collectively accounted fortaxes totaling approximately 55% of our total sales. We believe that the diversification of our sales among the various subsidiaries and market segments with those four customers reduces our exposure to negative developments with any one customer. The loss of a significant amount of business from any of these four customers or a further consolidation of such customers could have a material adverse effect on our financial condition and results of operations.
Our Non-Medical customers include large multi-national OEMs and their subsidiaries serving the energy, military and environmental services markets such as Halliburton, Teledyne Technologies and Weatherford International.$140 million.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Overview of Continuing Operations
Net incomeLoss from continuing operations for the third quarter (“QTD”) and first nine months (“YTD”) of 20172018 was $13.7$8.3 million, or $0.43$0.26 per diluted share, and $12.3compared to income from continuing operations of $19.9 million, or $0.39 per diluted share, respectively, compared to net income of $11.5 million, or $0.37 per diluted share, and a net loss of $2.0 million, or $0.06$0.62 per diluted share, for the third quarter andof 2017. Income from continuing operations for the first nine months of 2016, respectively.2018 was $27.8 million, or $0.86 per diluted share, compared to income from continuing operations of $32.4 million, or $1.01 per diluted share, for the first nine months of 2017. These year over year variances are primarily the result of the following:
Sales from continuing operations for the third quarter and first nine months of 20172018 increased 4.8%7% and 4.3%9%, respectively.respectively, primarily driven by market growth and new business wins. In comparison to the prior year periods, foreign currency exchange rates increaseddecreased sales by approximately $1.6$0.1 million for the third quarter of 2018 and decreasedincreased sales from continuing operations by approximately $1.0$2.3 million for the first nine months of 2017. Additionally, the Spin-off decreased sales by $1.2 million for the first nine months of 2017 compared to 2016. Excluding these amounts, organic sales2018.
Gross profit from continuing operations for the third quarter and first nine months of 20172018 increased 4.4% and 4.5%, respectively, primarily driven by market growth, recovery in the energy markets, new business wins, and lower comparables versus 2016 in our Advanced Surgical, Orthopedics & Portable Medical and Cardio & Vascular product lines due to the disruption of supply caused by the transfer of certain product lines in 2016;
Gross profit for the third quarter and first nine months of 2017 increased $0.3$2.7 million and $3.3$13.8 million, respectively, primarily due to the increase in sales from continuing operations discussed above, as well as production efficiencies, partially offset by price concessions given to our larger OEM customers (approximately $5.5 million QTD; $14 million YTD) and higher incentive compensation based upon current year results;year-to-date results.
Operating expenses for the third quarter and first nine months of 20172018 were lower by $1.4$2.9 million and $24.3$6.2 million, respectively, primarilycompared to the same periods in 2017, due to a decrease in other operating expenses attributable to the resultscompletion of Nuvectra not being included after the Spin-off ($4.7 million YTD), lower consolidation andspending on integration charges ($7.7 million QTD, $26.5 million YTD),activities and various efficiencies and synergies gained as a result of our integration and consolidation initiatives partially offset by higher incentive compensation ($1.6 million QTD, $3.0 million YTD);compensation.
Interest expense for the third quarter and first nine months of 2017 declined $1.42018 increased by $38.7 million and $2.4$36.1 million, respectively, compared to the same periods in 2017, primarily due to the amendmentextinguishment of our Term Loan B Facility in March 2017, which lowered the interest rate by 75 basis points, as well asdebt charges related to the repayment of $106.5 millionindebtedness in connection with the divestiture of debt during the AS&O Product Line. Debt extinguishment expenses included in interest expense for the third quarter and first nine months of 2017. These reductions2018 were partially offsethigher by the accelerated write-off of deferred fees$39.9 million and original issue discount due$38.9 million, respectively, compared to the accelerated pay downsame periods in 2017.
Net gains on cost and equity method investments, which are unpredictable in nature, increased income for the third quarter and first nine months of debt2018 by $0.3 million and $5.5 million, respectively, compared to income of $1.9 million and losses of $2.9 million during the first half of 2017 ($0.8 million QTD, $3.3 million YTD); andsame periods in 2017.
Other (income) loss, net for the third quarter and first nine months of 2018 was $1.7 million and $0.3 million, respectively, compared to $2.5 million and $10.7 million during the same periods in 2017, were lower by $0.1 million (lower net loss) and higher by $14.8 million (higher net loss), respectively. The year-to-date change is attributableprimarily due to higher losses on our cost and equity method investments ($3.9 million YTD) and higherthe non-recurrence of a non-cash foreign currency exchange rate losses ($10.9charge in the prior year on inter-company loans.
We recorded an income tax benefit of $6.2 million YTD) driven byfor the remeasurementthird quarter of intercompany loans and2018, compared to a benefit of $0.4 million for the weakeningsame period of the U.S. dollar relative to the Euro during2017. The income tax provision for the first nine months of 2018 and 2017 which are primarily non-cashwas $8.0 million and $0.6 million, respectively. Refer to Note 9 “Income Taxes” of the Notes to Condensed Consolidated Financial Statements contained in nature. DuringItem 1 of this report and the third quarter“Provision for Income Taxes” section of 2017, $2.0 million of foreign currency exchange rate losses were almost entirely offset by $1.9 million of gains on our cost and equity method investments.this Item for additional information.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Use of Non-GAAP Financial Information
We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Additionally, we consistently report and discuss in our earnings releases and investor presentations adjusted pre-tax income, adjusted net income, adjusted earnings per diluted share, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted EBITDA and organic sales growth rates.rates, all from continuing operations. Adjusted pre-tax income, adjusted net income and adjusted earnings per diluted share from continuing operations consist of GAAP amounts adjusted for the following to the extent occurring during the period: (i) acquisition and integration related charges and expenses, (ii) amortization of intangible assets including inventory step-up amortization, (iii) facility consolidation, optimization, manufacturing transfer and system integration charges, (iv) asset write-down and disposition charges, (v) charges in connection with corporate realignments or a reduction in force, (vi) certain litigation expenses, charges and gains, (vii) unusual or infrequently occurring items, (viii) gain/loss on cost and equity method investments, (ix) extinguishment of debt charges, (x) the net impact of Long-term Supply Agreements (“LSAs”) between the Company and Viant, (xi) the income tax (benefit) related to these adjustments (not for adjusted pre-tax income) and (xi)(xii) certain tax items that are outside the normal provision for the period (not for adjusted pre-tax income). Adjusted earnings per diluted share are calculated by dividing adjusted net income from continuing operations by diluted weighted average shares outstanding. Adjusted EBITDA from continuing operations consists of GAAP net income (loss) from continuing operations plus (i) the same adjustments as listed above except for items (x)(xi) and (xi)(xii), (ii) GAAP stock-based compensation, interest expense, and depreciation and (iii) GAAP provision (benefit) for income taxes and (iv) cash gains received from cost and equity method investments during the period.taxes. To calculate organic sales growth rates, which exclude the impact of changes in foreign currency exchange rates, as well as the impact of any acquisitions or divestitures of product lines on sales growth rates, we convert current period sales from local currency to U.S. dollars using the previous periods foreign currency exchange rates and exclude the amount of sales acquired/divested during the period from the current/previous period amounts, respectively. We believe that the presentation of adjusted net income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA, and organic sales growth rates, all from continuing operations, provides important supplemental information to management and investors seeking to understand the financial and business trends relating to our financial condition and results of operations.
A reconciliation of GAAP net income (loss) and diluted earnings (loss) per share (“EPS”) to adjusted amounts is as follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 29, 2017 | | September 30, 2016 |
| Pre-Tax | | Net Income | | Per Diluted Share | | Pre-Tax | | Net Income | | Per Diluted Share |
As reported (GAAP) | $ | 11,990 |
| | $ | 13,690 |
| | $ | 0.43 |
| | $ | 8,717 |
| | $ | 11,458 |
| | $ | 0.37 |
|
Adjustments: | | | |
| | |
| | | | |
| | |
|
Amortization of intangibles(a) | 11,051 |
| | 7,840 |
| | 0.24 |
| | 9,473 |
| | 6,702 |
| | 0.22 |
|
IP related litigation (SG&A)(a)(b) | 1,735 |
| | 1,128 |
| | 0.04 |
| | 499 |
| | 324 |
| | 0.01 |
|
Consolidation and optimization expenses (OOE)(a)(c) | 3,143 |
| | 2,737 |
| | 0.09 |
| | 7,779 |
| | 6,409 |
| | 0.21 |
|
Acquisition and integration expenses (OOE)(a)(d) | 2,267 |
| | 1,106 |
| | 0.03 |
| | 5,319 |
| | 3,492 |
| | 0.11 |
|
Asset dispositions, severance and other (OOE)(a)(e) | 854 |
| | 563 |
| | 0.02 |
| | 272 |
| | 36 |
| | — |
|
(Gain) loss on cost and equity method investments, net(a) | (1,906 | ) | | (1,239 | ) | | (0.04 | ) | | 245 |
| | 159 |
| | 0.01 |
|
Loss on extinguishment of debt(a)(f) | 778 |
| | 506 |
| | 0.02 |
| | — |
| | — |
| | — |
|
Tax adjustments(g) | — |
| | — |
| | — |
| | — |
| | (2,784 | ) | | (0.09 | ) |
Adjusted (Non-GAAP) | $ | 29,912 |
| | $ | 26,331 |
| | $ | 0.82 |
| | $ | 32,304 |
| | $ | 25,796 |
| | $ | 0.83 |
|
Diluted weighted average shares for adjusted EPS |
|
| | 32,173 |
| | |
| |
|
| | 31,153 |
| | |
|
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income (Loss) from Continuing Operations and Diluted EPS Reconciliations
A reconciliation of GAAP income from continuing operations and diluted earnings per share (“EPS”) from continuing operations to adjusted amounts is as follows (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended |
| September 29, 2017 | | September 30, 2016 |
| Pre-Tax | | Net Income | | Per Diluted Share | | Pre-Tax | | Net Income (Loss) | | Per Diluted Share |
As reported (GAAP) | $ | 11,911 |
| | $ | 12,341 |
| | $ | 0.39 |
| | $ | (3,358 | ) | | $ | (1,972 | ) | | $ | (0.06 | ) |
Adjustments: | | | | | | | | | | | |
Amortization of intangibles(a) | 33,075 |
| | 23,401 |
| | 0.73 |
| | 28,451 |
| | 20,125 |
| | 0.64 |
|
IP related litigation (SG&A)(a)(b) | 3,027 |
| | 1,968 |
| | 0.06 |
| | 2,691 |
| | 1,749 |
| | 0.06 |
|
Consolidation and optimization expenses (OOE)(a)(c) | 8,370 |
| | 6,729 |
| | 0.21 |
| | 21,804 |
| | 17,698 |
| | 0.57 |
|
Acquisition and integration expenses (OOE)(a)(d) | 10,057 |
| | 6,276 |
| | 0.20 |
| | 23,143 |
| | 15,148 |
| | 0.49 |
|
Asset dispositions, severance and other (OOE)(a)(e) | 6,528 |
| | 4,247 |
| | 0.13 |
| | 5,057 |
| | 4,459 |
| | 0.14 |
|
(Gain) loss on cost and equity method investments, net(a) | 2,919 |
| | 1,897 |
| | 0.06 |
| | (932 | ) | | (606 | ) | | (0.02 | ) |
Loss on extinguishment of debt(a)(f) | 3,272 |
| | 2,127 |
| | 0.07 |
| | — |
| | — |
| | — |
|
Nuvectra results prior to Spin-off (a)(h) | — |
| | — |
| | — |
| | 4,037 |
| | 2,624 |
| | 0.08 |
|
Tax adjustments(g) | — |
| | — |
| | — |
| | — |
| | (2,784 | ) | | (0.09 | ) |
Adjusted (Non-GAAP) | $ | 79,159 |
| | $ | 58,986 |
| | $ | 1.85 |
| | $ | 80,893 |
| | $ | 56,441 |
| | $ | 1.81 |
|
Diluted weighted average shares for adjusted EPS(i) | | | 31,947 |
| | | | | | 31,211 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| September 28, 2018 | | September 29, 2017 |
| Pre-Tax Income (Loss) | | Income (Loss) | | Per Diluted Share | | Pre-Tax Income (Loss) | | Income (Loss) | | Per Diluted Share |
As reported income from continuing operations (GAAP) | $ | (14,460 | ) | | $ | (8,303 | ) | | $ | (0.26 | ) | | $ | 19,434 |
| | $ | 19,882 |
| | $ | 0.62 |
|
Adjustments: | | | |
| | |
| | | | |
| | |
|
Amortization of intangibles(a) | 9,896 |
| | 7,830 |
| | 0.24 |
| | 10,145 |
| | 7,103 |
| | 0.22 |
|
IP related litigation (SG&A)(a)(b) | 749 |
| | 591 |
| | 0.02 |
| | 1,735 |
| | 1,128 |
| | 0.04 |
|
Strategic reorganization and alignment (OOE)(a)(c) | 2,643 |
| | 2,085 |
| | 0.06 |
| | — |
| | — |
| | — |
|
Manufacturing alignment to support growth (OOE)(a)(d) | 877 |
| | 657 |
| | 0.02 |
| | — |
| | — |
| | — |
|
Consolidation and optimization expenses (OOE)(a)(e) | 137 |
| | 108 |
| | — |
| | 2,979 |
| | 2,630 |
| | 0.08 |
|
Acquisition and integration expenses (OOE)(a)(f) | — |
| | — |
| | — |
| | 2,267 |
| | 1,106 |
| | 0.03 |
|
Asset dispositions, severance and other (OOE)(a)(g) | 482 |
| | 412 |
| | 0.01 |
| | 823 |
| | 546 |
| | 0.02 |
|
(Gain) loss on cost and equity method investments, net(a) | (291 | ) | | (230 | ) | | (0.01 | ) | | (1,906 | ) | | (1,239 | ) | | (0.04 | ) |
Loss on extinguishment of debt(a)(h) | 40,654 |
| | 32,117 |
| | 0.98 |
| | 778 |
| | 506 |
| | 0.02 |
|
LSA adjustments(a)(i) | — |
| | — |
| | — |
| | (3,450 | ) | | (2,242 | ) | | (0.07 | ) |
Tax adjustments(j) | — |
| | (417 | ) | | (0.01 | ) | | — |
| | — |
| | — |
|
Adjusted income from continuing operations (Non-GAAP) | $ | 40,687 |
| | $ | 34,850 |
| | $ | 1.06 |
| | $ | 32,805 |
| | $ | 29,420 |
| | $ | 0.91 |
|
| | | | | | | | | | | |
Diluted weighted average shares for adjusted EPS |
|
| | 32,899 |
| | |
| |
|
| | 32,173 |
| | |
|
| | | | | | | | | | | |
| Nine Months Ended |
| September 28, 2018 | | September 29, 2017 |
| Pre-Tax Income (Loss) | | Income (Loss) | | Per Diluted Share | | Pre-Tax Income (Loss) | | Income (Loss) | | Per Diluted Share |
As reported income from continuing operations (GAAP) | $ | 35,793 |
| | $ | 27,837 |
| | $ | 0.86 |
| | $ | 32,985 |
| | $ | 32,389 |
| | $ | 1.01 |
|
Adjustments: | | | |
| | |
| | | | |
| | |
|
Amortization of intangibles(a) | 31,068 |
| | 24,523 |
| | 0.75 |
| | 30,375 |
| | 21,205 |
| | 0.66 |
|
IP related litigation (SG&A)(a)(b) | 1,546 |
| | 1,221 |
| | 0.04 |
| | 3,027 |
| | 1,968 |
| | 0.06 |
|
Strategic reorganization and alignment (OOE)(a)(c) | 8,424 |
| | 6,662 |
| | 0.20 |
| | — |
| | — |
| | — |
|
Manufacturing alignment to support growth (OOE)(a)(d) | 2,493 |
| | 1,841 |
| | 0.06 |
| | — |
| | — |
| | — |
|
Consolidation and optimization expenses (OOE)(a)(e) | 698 |
| | 553 |
| | 0.02 |
| | 8,055 |
| | 6,525 |
| | 0.20 |
|
Acquisition and integration expenses (OOE)(a)(f) | — |
| | — |
| | — |
| | 10,057 |
| | 6,276 |
| | 0.20 |
|
Asset dispositions, severance and other (OOE)(a)(g) | 1,000 |
| | 776 |
| | 0.02 |
| | 6,378 |
| | 4,144 |
| | 0.13 |
|
(Gain) loss on cost and equity method investments, net(a) | (5,545 | ) | | (4,381 | ) | | (0.13 | ) | | 2,919 |
| | 1,897 |
| | 0.06 |
|
Loss on extinguishment of debt(a)(h) | 42,128 |
| | 33,281 |
| | 1.02 |
| | 3,272 |
| | 2,127 |
| | 0.07 |
|
LSA adjustments(a)(i) | (6,119 | ) | | (4,834 | ) | | (0.15 | ) | | (9,361 | ) | | (6,084 | ) | | (0.19 | ) |
Tax adjustments(j) | — |
| | 2,534 |
| | 0.08 |
| | — |
| | — |
| | — |
|
Adjusted income from continuing operations (Non-GAAP) | $ | 111,486 |
| | $ | 90,013 |
| | $ | 2.75 |
| | $ | 87,707 |
| | $ | 70,447 |
| | $ | 2.21 |
|
| | | | | | | | | | | |
Diluted weighted average shares for adjusted EPS | | | 32,681 |
| | |
| | | | 31,947 |
| | |
|
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
| |
(a) | The difference between pre-tax and net income (loss) amounts is the estimated tax impact related to the respective adjustment. Net incomeIncome (loss) amounts are computed using a 35%21% U.S. tax rate (35% U.S. tax rate for 2017 periods), and the statutory tax rates in Mexico, Germany, France, Netherlands, Uruguay, Ireland and Switzerland, as adjusted for the existence of net operating losses.NOLs. Amortization of intangibles and OOE expense have also been adjusted to reflect the estimated impact relating to our disallowed deduction of the GILTI tax, as described in footnote (j) below. Expenses that are not deductible for tax purposes (i.e. permanent tax differences) are added back at 100%. |
| |
(b) | In 2013, we filed suit against AVX Corporation alleging they were infringing our intellectual property. Given the complexity and significant costs incurred pursuing this litigation, we are excluding these litigation expenses from adjusted amounts. This matter proceeded to trial during the first quarter of 2016 and again in the third quarter of 2017 that resulted in a federal jury awardedawarding damages in the Companyamount of $37.5 million in damages.million. In March 2018, the court vacated that damage award and ordered a new trial on damages, which is scheduled for January 2019. To date, no gains have been recognized in connection with this litigation. |
| |
(c) | As a result of the strategic review of our customers, competitors and markets we undertook during the fourth quarter of 2017, we began to take steps to better align our resources in order to invest to grow, protect, preserve and to enhance the profitability of our portfolio of products. This will include focusing our investment in RD&E and manufacturing, improving our business processes and redirecting investments away from projects where the market does not justify the investment. As a result, during 2018 we incurred charges related to this strategy, which primarily consisted of severance costs and fees for professional services. |
| |
(d) | In 2017, we initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth. The plan involves the relocation of certain manufacturing operations and expansion of certain of our facilities. |
| |
(e) | During 20172018 and 2016,2017, we incurred costs primarily related to the closure of our Clarence, NY facility and the transfer of our Beaverton, OR portable medical and Plymouth, MN vascular manufacturing operations to Tijuana, Mexico, the closure of our Arvada, CO site and the consolidation of our two Galway, Ireland sites. In addition, 2017 costs also include expenses related to the closure of our Clarence, NY facility.Mexico. |
| |
(d)(f) | Reflects acquisition and integration costs related to the acquisition of Lake Region Medical, which was acquiredoccurred in October 2015. |
| |
(e)(g) | Amounts for the nine months ended September 29, 2017 primarily include approximately $5.3 million of expenseexpenses related to our CEO and CFO and Chief Human Resources Officer transitions. Amounts for 2016 primarily include legal and professional fees incurred in connection with the Spin-off, which was completed in March 2016. |
| |
(f)(h) | Represents debt extinguishment charges in connection with pre-payments made on our Term B Loan B Facility during 2017,and Senior Notes, which are included in Interest Expense, Net. |
| |
(g) | Tax adjustments forinterest expense. In addition, the 20162018 periods include a discrete tax benefit related to certain transaction costs“make-whole” premium of the Lake Region Medical acquisition and the Spin-off. |
| |
(h) | Represents the results$31.3 million, paid as a result of Nuvectra prior to the Spin-off on March 14, 2016.redeeming our Senior Notes in July 2018. |
| |
(i) | The diluted weighted average sharesReflects the net impact of the LSAs entered into as of the closing of the divestiture of the AS&O Product Line. These LSAs govern the sale of products supplied by Viant to the Company for adjustedfurther resale to customers and by the Company to Viant for further resale to customers. |
| |
(j) | Tax adjustments primarily includes the estimated impact relating to our disallowed deduction of the GILTI tax, as mandated by the Tax Reform Act. This disallowed deduction of the GILTI tax (approximately 50% of the total GILTI tax) is due to the Company making use of its U.S. NOLs, and will be eliminated once the Company’s U.S. NOLs are fully utilized, which is expected to be in 2019. This adjustment makes our Adjusted Diluted EPS forfrom continuing operations more comparable with other global companies that are not subject to this disallowed GILTI tax deduction and more comparable to the nine month periods ended September 29, 2017 and September 30, 2016 include 223,000 and 455,000, respectively,Company’s results following the full utilization of potentially dilutive shares not included in the computation of diluted weighted average common shares for GAAP diluted EPS purposes because their effect would have been anti-dilutive in that period.its U.S. NOLs. |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Adjusted diluted EPS from continuing operations, which excludes the impact of amortization of intangible assets, losses on extinguishment of debt and various other operating expenses, among others, was $0.82$1.06 and $1.85$2.75 per share for the third quarter and first nine months of 2018, respectively, compared to $0.91 and $2.21 per share for the third quarter and first nine months of 2017, respectively, compared to $0.83 and $1.81 per share, respectively, for the same prior year periods.respectively. These results reflect the benefit of our increased sales lower interest expense, and the various efficiencies and synergies gained from ourcompletion of spending on integration and consolidation initiatives,activities, partially offset by higher foreign currency exchange rate lossesincentive compensation and higher incentive compensation. The increaseinterest expense in losses from foreign exchange rate changes was $2.0 million ($1.6 million net of tax, $0.05 per diluted share)2018 compared to 2017.
EBITDA and $10.9 million($8.7 million net of tax, $0.27 per diluted share) for the third quarter and first nine months of 2017, respectively, in comparison to the prior year periods.Adjusted EBITDA Reconciliation
A reconciliation of GAAP net income (loss)from continuing operations to EBITDA from continuing operations and adjusted EBITDA from continuing operations is as follows (dollars in thousands):
| | | Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 | September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Net income (loss) (GAAP) | $ | 13,690 |
| | $ | 11,458 |
| | $ | 12,341 |
| | $ | (1,972 | ) | |
Income (loss) from continuing operations (GAAP) | | $ | (8,303 | ) | | $ | 19,882 |
| | $ | 27,837 |
| | $ | 32,389 |
|
| | | | | | | | | | | | | | |
Interest expense | 26,485 |
| | 27,870 |
| | 81,025 |
| | 83,395 |
| 54,526 |
| | 15,808 |
| | 85,355 |
| | 49,233 |
|
Benefit for income taxes | (1,700 | ) | | (2,741 | ) | | (430 | ) | | (1,386 | ) | |
Provision for income taxes | | (6,157 | ) | | (448 | ) | | 7,956 |
| | 596 |
|
Depreciation | 14,068 |
| | 12,893 |
| | 41,509 |
| | 38,963 |
| 9,960 |
| | 9,534 |
| | 29,929 |
| | 28,262 |
|
Amortization | 11,051 |
| | 9,473 |
| | 33,075 |
| | 28,451 |
| 9,896 |
| | 10,145 |
| | 31,068 |
| | 30,375 |
|
EBITDA | 63,594 |
| | 58,953 |
| | 167,520 |
| | 147,451 |
| |
| | | | | | | | |
EBITDA from continuing operations | | 59,922 |
| | 54,921 |
| | 182,145 |
| | 140,855 |
|
IP related litigation | 1,735 |
| | 499 |
| | 3,027 |
| | 2,691 |
| 749 |
| | 1,735 |
| | 1,546 |
| | 3,027 |
|
Stock-based compensation (excluding OOE) | 2,149 |
| | 1,950 |
| | 7,806 |
| | 5,773 |
| 2,087 |
| | 2,041 |
| | 7,265 |
| | 7,116 |
|
Strategic reorganization and alignment | | 2,643 |
| | — |
| | 8,424 |
| | — |
|
Manufacturing alignment to support growth | | 877 |
| | — |
| | 2,493 |
| | — |
|
Consolidation and optimization expenses | 3,143 |
| | 7,779 |
| | 8,370 |
| | 21,804 |
| 137 |
| | 2,979 |
| | 698 |
| | 8,055 |
|
Acquisition and integration expenses | 2,267 |
| | 5,319 |
| | 10,057 |
| | 23,143 |
| — |
| | 2,267 |
| | — |
| | 10,057 |
|
Asset dispositions, severance and other | 854 |
| | 272 |
| | 6,528 |
| | 5,057 |
| 482 |
| | 823 |
| | 1,000 |
| | 6,378 |
|
Noncash (gain) loss on cost and equity method investments | (992 | ) | | 245 |
| | 3,833 |
| | (270 | ) | |
Nuvectra results prior to Spin-off | — |
| |
|
| | — |
| | 3,665 |
| |
Adjusted EBITDA (Non-GAAP) | $ | 72,750 |
| | $ | 75,017 |
| | $ | 207,141 |
| | $ | 209,314 |
| |
Non-cash (gain) loss on cost and equity method investments | | (291 | ) | | (992 | ) | | (5,545 | ) | | 3,833 |
|
LSA adjustments | | $ | — |
| | $ | (3,450 | ) | | $ | (6,119 | ) | | $ | (9,361 | ) |
Adjusted EBITDA from continuing operations (Non-GAAP) | | $ | 66,606 |
| | $ | 60,324 |
| | $ | 191,907 |
| | $ | 169,960 |
|
2017 Outlook
Our current full-year 2017 outlook is as follows (in millions, except for per share amounts):
|
| | | | | | | |
| GAAP | | Non-GAAP(b)
|
| As Reported | | Growth | | Adjusted | | Growth |
Sales | $1,420 to $1,435 | | 2.5% to 3.5% | | $1,420 to $1,435 | | 2.5% to 3.5% |
Earnings per Diluted Share(a)
| $0.60 to $0.80 | | Favorable | | $2.55 - $2.75 | | (5%) to 3% |
Cash Flow from Operations | ~$150 | | 42% | | | | |
| |
(a) | Except as described below, further reconciliations by line item to the closest corresponding GAAP financial measures for Adjusted EPS, included in our “2017 Outlook” above, are not available without unreasonable efforts on a forward-looking basis due to the high variability, complexity and visibility of the charges excluded from this non-GAAP financial measure. |
| |
(b) | Adjusted EPS for 2017 is expected to consist of GAAP Net Income and EPS, excluding items such as intangible amortization ($44 million), IP related litigation costs, and consolidation, acquisition, integration, asset disposition and write-down charges, and loss on extinguishment of debt totaling approximately $90 million. The after-tax impact of these items is estimated to be approximately $62 million, or approximately $1.95 per diluted share. |
Our CEO’s View
IntegerWe delivered another solid quarter of solid year-over-year sales growth, driven by strong performanceleading to another increase in our Cardio & Vascular, Advanced Surgical, Orthopedicsrevenue and Portable Medical,EPS guidance. We also reduced our debt dramatically during the quarter and Non-Medical product lines. Cash flow generation remains stronglowered our debt leverage ratio from the beginning of the year.
At the beginning of the fourth quarter we hired Jason Garland as our new Executive Vice President and enabled further accelerated debt pay downChief Financial Officer. Jason brings nearly 25 years of public company, global financial leadership experience and significant manufacturing and customer contract expertise to Integer.
With the executive leadership team in place, we are focused on executing our portfolio strategy to win in the quarter.markets we serve and our operational strategy to achieve excellence in everything we do. We are on trackremain in a strong position to deliver results withinon our original 2017 guidance after adjusting forlong-term objectives of sales growth above the impactmarket, profit growth two times sales growth, and earning a valuation premium.
We are pleased with our sustained quarterly growth demonstrating our progress towards transitioning our business back to a long-term growth trajectory. As we look forward, we believe we have significant opportunities to further expand and grow our business. We have a unique breadth of capabilities to serve our customers across the entire product continuum and across multiple product categories. Whether a customer needs an engineered component or a complete device that we’ve developed, or anything in between, we can deliver. Our innovative design and manufacturing capabilities, our global footprint and scalability, our high-quality, and our customer focus enable us to deliver more for our customers.INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Cost Savings and Consolidation Efforts
In 20172018 and 2016,2017, we recorded charges in Other Operating Expenses Net related to various cost savings and consolidation initiatives. These initiatives were undertaken to improve our operational efficiencies and profitability, the most significant of which are as follows (dollars in millions):
|
| | | | | | | | |
Initiative | | Expected Expense | | Expected Capital Expenditures | | Expected Benefit to Operating IncomeAnnual Cost Savings(a) | | Expected Completion Date |
Investments in capacityStrategic reorganization and capabilitiesalignment | | $54$28 - $56$30(b) | | $24 - $25 | | > $20 | | 2017 |
Lake Region Medical consolidations | | $208 - $25$12 | | 2018 |
Manufacturing alignment to support growth | | $9 - $11 | | $4 - $6 | | $2 - $3 | | 2019 |
Consolidation and optimization expenses | | $18 - $22(b) | | $5 - $6 | | $12 - $13 | | 2018 |
(a) Represents the annual benefit to our operating income expected to be realized from these initiatives through cost savings and/or increased capacity. These benefits will be phased in over time as the various initiatives are completed, some of which are already included in our current period results.
| |
(a)(b) | Represents the annual benefit to our operating income expected to be realized fromExpected expense for these initiatives through cost savings and/or increased capacity. These benefits will be phased in over timeinclude amounts classified as the various initiatives are completed, and some of which are already included in our current period results.discontinued operations. |
See Note 9 “Other Operating Expenses, Net” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the timing, cash flow impact and amount of future expenditures for these initiatives. We continually evaluate our operating structure in order to maximize efficiencies and drive margin expansion. Future charges are expected to be incurred as we seek to create an optimized manufacturing footprint, leveraging our increased scale and product capabilities while also supporting the needs of our customers. Our efforts will include:
| |
◦ | potential manufacturing consolidations; |
| |
◦ | continuous improvement and productivity initiatives; |
| |
◦ | direct material and indirect expense savings opportunities; and |
| |
◦ | the establishment of centers of excellence around the world. |
potential manufacturing consolidations;
continuous improvement;
productivity initiatives;
direct material and indirect expense savings opportunities; and
the establishment of centers of excellence.
Refer to Note 8 “Other Operating Expenses” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the timing, cash flow impact, and amount of future expenditures for our cost savings and consolidation initiatives.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Financial Results of Continuing Operations
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. For 52-week years, each quarter contains 13 weeks. The third quarter and first nine months of 20172018 and 20162017 ended on September 29,28 and September 30,29, respectively, and each contained 13 weeks and 3926 weeks, respectively.
During the first quarter of 2017, we revised the method used to present sales by product line in order to align the legacy Greatbatch and Lake Region Medical methodologies. We believe the revised presentation will provide improved reporting and better transparency into the operational results of our business and markets. Prior period amounts have been reclassified to conform to the new product line sales reporting presentation.
The following tables present selected financial information from continuing operations derived from our Condensed Consolidated Financial Statements, contained in Item 1 of this report, for the periods presented (dollars in thousands, except per share):. All financial information presented is from continuing operations unless otherwise specified. | | | Three Months Ended | | | | | Three Months Ended | | | | |
| September 29, | | September 30, | | Change | September 28, | | September 29, | | Change |
| 2017 | | 2016 | | $ | | % | 2018 | | 2017 | | $ | | % |
Medical Sales: | | | | | | | | | | | | | | |
Cardio & Vascular | $ | 138,982 |
| | $ | 129,347 |
| | $ | 9,635 |
| | 7.4 | % | $ | 150,230 |
| | $ | 137,712 |
| | $ | 12,518 |
| | 9.1 | % |
Cardiac & Neuromodulation | 101,616 |
| | 108,147 |
| | (6,531 | ) | | (6.0 | )% | 109,620 |
| | 101,612 |
| | 8,008 |
| | 7.9 | % |
Advanced Surgical, Orthopedics & Portable Medical | 107,581 |
| | 100,203 |
| | 7,378 |
| | 7.4 | % | 32,789 |
| | 31,715 |
| | 1,074 |
| | 3.4 | % |
Total Medical Sales | 348,179 |
| | 337,697 |
| | 10,482 |
| | 3.1 | % | 292,639 |
| | 271,039 |
| | 21,600 |
| | 8.0 | % |
Non-Medical | 15,129 |
| | 8,870 |
| | 6,259 |
| | 70.6 | % | 12,449 |
| | 15,129 |
| | (2,680 | ) | | (17.7 | )% |
Total Sales | 363,308 |
| | 346,567 |
| | 16,741 |
| | 4.8 | % | 305,088 |
| | 286,168 |
| | 18,920 |
| | 6.6 | % |
Cost of sales | 265,073 |
| | 248,658 |
| | 16,415 |
| | 6.6 | % | 213,165 |
| | 196,982 |
| | 16,183 |
| | 8.2 | % |
Gross profit | 98,235 |
| | 97,909 |
| | 326 |
| | 0.3 | % | 91,923 |
| | 89,186 |
| | 2,737 |
| | 3.1 | % |
Gross profit as a % of sales | 27.0 | % | | 28.3 | % | | | | | 30.1 | % | | 31.2 | % | | | | |
SG&A | 39,733 |
| | 36,265 |
| | 3,468 |
| | 9.6 | % | 34,091 |
| | 35,064 |
| | (973 | ) | | (2.8 | )% |
SG&A as a % of sales | 10.9 | % | | 10.5 | % | | | | | 11.2 | % | | 12.3 | % | | | | |
RD&E, Net | 13,607 |
| | 11,412 |
| | 2,195 |
| | 19.2 | % | |
RD&E, Net as a % of sales | 3.7 | % | | 3.3 | % | | | | | |
Other operating expenses, net | 6,264 |
| | 13,370 |
| | (7,106 | ) | | (53.1 | )% | |
RD&E | | 12,234 |
| | 12,227 |
| | 7 |
| | 0.1 | % |
RD&E as a % of sales | | 4.0 | % | | 4.3 | % | | | | |
Other operating expenses | | 4,139 |
| | 6,069 |
| | (1,930 | ) | | (31.8 | )% |
Operating income | 38,631 |
| | 36,862 |
| | 1,769 |
| | 4.8 | % | 41,459 |
| | 35,826 |
| | 5,633 |
| | 15.7 | % |
Operating margin | 10.6 | % | | 10.6 | % | | | | | 13.6 | % | | 12.5 | % | | | | |
Interest expense, net | 26,485 |
| | 27,870 |
| | (1,385 | ) | | (5.0 | )% | |
Interest expense | | 54,526 |
| | 15,808 |
| | 38,718 |
| | NM |
Gain on cost and equity method investments, net | | (291 | ) | | (1,906 | ) | | 1,615 |
| | (84.7 | )% |
Other loss, net | 156 |
| | 275 |
| | (119 | ) | | (43.3 | )% | 1,684 |
| | 2,490 |
| | (806 | ) | | (32.4 | )% |
Income before benefit for income taxes | 11,990 |
| | 8,717 |
| | 3,273 |
| | 37.5 | % | |
Income (loss) from continuing operations before income taxes | | (14,460 | ) | | 19,434 |
| | (33,894 | ) | | NM |
Benefit for income taxes | (1,700 | ) | | (2,741 | ) | | 1,041 |
| | (38.0 | )% | (6,157 | ) | | (448 | ) | | (5,709 | ) | | NM |
Effective tax rate | (14.2 | )% | | (31.4 | )% | | | | | 42.6 | % | | (2.3 | )% | | | | |
Net income | $ | 13,690 |
| | $ | 11,458 |
| | $ | 2,232 |
| | 19.5 | % | |
Net income as a % of sales | 3.8 | % | | 3.3 | % | | | | | |
Diluted earnings per share | $ | 0.43 |
| | $ | 0.37 |
| | $ | 0.06 |
| | 16.2 | % | |
Income (loss) from continuing operations | | $ | (8,303 | ) | | $ | 19,882 |
| | $ | (28,185 | ) | | NM |
Income (loss) from continuing operations as a % of sales | | (2.7 | )% | | 6.9 | % | | | | |
Diluted earnings (loss) per share from continuing operations | | $ | (0.26 | ) | | $ | 0.62 |
| | $ | (0.88 | ) | | NM |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
| | | Nine Months Ended | | | | | Nine Months Ended | | | | |
| September 29, | | September 30, | | Change | September 28, | | September 29, | | Change |
| 2017 | | 2016 | | $ | | % | 2018 | | 2017 | | $ | | % |
Medical Sales: | | | | | | | | | | | | | | |
Cardio & Vascular | $ | 396,321 |
| | $ | 365,271 |
| | $ | 31,050 |
| | 8.5 | % | $ | 435,859 |
| | $ | 391,914 |
| | $ | 43,945 |
| | 11.2 | % |
Cardiac & Neuromodulation | 311,614 |
| | 323,599 |
| | (11,985 | ) | | (3.7 | )% | 334,471 |
| | 311,540 |
| | 22,931 |
| | 7.4 | % |
Advanced Surgical, Orthopedics & Portable Medical | 321,287 |
| | 307,956 |
| | 13,331 |
| | 4.3 | % | 101,481 |
| | 88,148 |
| | 13,333 |
| | 15.1 | % |
Total Medical Sales | 1,029,222 |
| | 996,826 |
| | 32,396 |
| | 3.2 | % | 871,811 |
| | 791,602 |
| | 80,209 |
| | 10.1 | % |
Non-Medical | 42,218 |
| | 30,361 |
| | 11,857 |
| | 39.1 | % | 40,167 |
| | 42,218 |
| | (2,051 | ) | | (4.9 | )% |
Total Sales | 1,071,440 |
| | 1,027,187 |
| | 44,253 |
| | 4.3 | % | 911,978 |
| | 833,820 |
| | 78,158 |
| | 9.4 | % |
Cost of sales | 782,707 |
| | 741,779 |
| | 40,928 |
| | 5.5 | % | 637,758 |
| | 573,431 |
| | 64,327 |
| | 11.2 | % |
Gross profit | 288,733 |
| | 285,408 |
| | 3,325 |
| | 1.2 | % | 274,220 |
| | 260,389 |
| | 13,831 |
| | 5.3 | % |
Gross profit as a % of sales | 26.9 | % | | 27.8 | % | | | | | 30.1 | % | | 31.2 | % | | | | |
SG&A | 118,956 |
| | 115,781 |
| | 3,175 |
| | 2.7 | % | 107,300 |
| | 105,004 |
| | 2,296 |
| | 2.2 | % |
SG&A as a % of sales | 11.1 | % | | 11.3 | % | | | | | 11.8 | % | | 12.6 | % | | | | |
RD&E, Net | 39,907 |
| | 42,358 |
| | (2,451 | ) | | (5.8 | )% | |
RD&E | | 38,445 |
| | 35,104 |
| | 3,341 |
| | 9.5 | % |
RD&E, Net as a % of sales | 3.7 | % | | 4.1 | % | | | | | 4.2 | % | | 4.2 | % | | | | |
Other operating expenses, net | 24,955 |
| | 50,004 |
| | (25,049 | ) | | (50.1 | )% | |
Other operating expenses | | 12,615 |
| | 24,490 |
| | (11,875 | ) | | (48.5 | )% |
Operating income | 104,915 |
| | 77,265 |
| | 27,650 |
| | 35.8 | % | 115,860 |
| | 95,791 |
| | 20,069 |
| | 21.0 | % |
Operating margin | 9.8 | % | | 7.5 | % | | | | | 12.7 | % | | 11.5 | % | | | | |
Interest expense, net | 81,025 |
| | 83,395 |
| | (2,370 | ) | | (2.8 | )% | |
Other (income) loss, net | 11,979 |
| | (2,772 | ) | | 14,751 |
| | NM | |
Income (loss) before benefit for income taxes | 11,911 |
| | (3,358 | ) | | 15,269 |
| | NM | |
Benefit for income taxes | (430 | ) | | (1,386 | ) | | 956 |
| | (69.0 | )% | |
Interest expense | | 85,355 |
| | 49,233 |
| | 36,122 |
| | 73.4 | % |
(Gain) loss on cost and equity method investments, net | | (5,545 | ) | | 2,919 |
| | (8,464 | ) | | NM |
Other loss, net | | 257 |
| | 10,654 |
| | (10,397 | ) | | (97.6 | )% |
Income from continuing operations before income taxes | | 35,793 |
| | 32,985 |
| | 2,808 |
| | 8.5 | % |
Provision for income taxes | | 7,956 |
| | 596 |
| | 7,360 |
| | NM |
Effective tax rate | (3.6 | )% | | 41.3 | % | | | | | 22.2 | % | | 1.8 | % | | | | |
Net income (loss) | $ | 12,341 |
| | $ | (1,972 | ) | | $ | 14,313 |
| | NM | |
Net income (loss) as a % of sales | 1.2 | % | | (0.2 | )% | | | | | |
Diluted earnings (loss) per share | $ | 0.39 |
| | $ | (0.06 | ) | | $ | 0.45 |
| | NM | |
Income from continuing operations | | $ | 27,837 |
| | $ | 32,389 |
| | $ | (4,552 | ) | | (14.1 | )% |
Income from continuing operations as a % of sales | | 3.1 | % | | 3.9 | % | | | | |
Diluted earnings per share from continuing operations | | $ | 0.86 |
| | $ | 1.01 |
| | $ | (0.15 | ) | | (14.9 | )% |
NM Calculated amount not meaningful
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Sales of Continuing Operations Highlights
For the third quarter and first nine months of 2017,2018, Cardio & Vascular sales increased $9.6$12.5 million, or 7.4%,9% and $31.1$43.9 million or 8.5%11%, respectively, versus the comparable 20162017 periods. These increases were primarily attributable to market growth and new business wins, as well as lower comparables in 2016 due to continued strong demand in the disruption of supply causedelectrophysiology market stemming from customer share gains, new product launches, and timing from customer inventory replenishment. The Cardio & Vascular growth trend is expected to remain above market from increased focus on high growth market segments. Foreign currency exchange rate fluctuations decreased Cardio & Vascular sales for the three months ended September 28, 2018 by our consolidation initiatives, which occurred throughout 2016. During the third quarter$0.1 million and first nine months of 2017, price concessions to our larger OEM customers reducedincreased Cardio & Vascular sales by approximately $2$2.3 million and $4 million,for the nine months ended September 28, 2018, respectively, in comparison to the same2017 periods of 2016. During the third quarter and first nine months of 2017, foreign currency exchange rateprimarily due to U.S. dollar fluctuations did not materially impact our Cardio & Vascular sales in comparisonrelative to the same periods of 2016.Euro.
For the third quarter and first nine months of 2017,2018, Cardiac & Neuromodulation sales decreased $6.5increased $8.0 million, or 6.0%8% and $12.0$22.9 million, or 3.7%7%, respectively, versus the comparable 20162017 periods. Approximately $1.2 million of the year-to-dateThe increases in Cardiac & Neuromodulation sales were driven by increased components market penetration and lower 2017 comparables from customer inventory adjustments. Neuromodulation remained strong, with growth driven by spinal cord stimulation market demand and increased components market penetration. Cardiac & Neuromodulation sales are expected to decrease was a result of the Spin-off of Nuvectra in the firstfourth quarter of 2016.2018 compared to extremely strong fourth quarter of 2017. Foreign currency exchange rate fluctuations did not have a material impact on Cardiac & Neuromodulation sales during the third quarter and first nine months of 20172018 periods in comparison to the same periods of 2016.2017.
Advanced Surgical, Orthopedic & Portable Medical includes sales to the acquirer of our AS&O Product Lines, Viant, under supply agreements associated with the divestiture. For the third quarter and first nine months of 2018, AS&O sales increased $1.1 million, or 3%, and $13.3 million, or 15%, respectively, versus the comparable 2017 organic Cardiac & Neuromodulationperiods. The sales which excludesincrease was driven by above market demand. Sales are expected to level off from strong first half and growth is expected to be more in line with the impact of the Spin-off andoverall market. Foreign currency exchange rate fluctuations decreased 6.0% and 3.4%, respectively. These decreases were primarily the result of market declines, as well as customer inventory management initiatives. Additionally,did not have a material impact on AS&O sales during the third quarter and first nine months of 2017, price concessions to our larger OEM customers reduced Cardiac & Neuromodulation sales by approximately $2 million and $6 million, respectively,2018 periods in comparison to the same periods of 2016. Partially offsetting these decreases was growth in our neuromodulation products, which was not enough to offset the declines in our legacy cardiac rhythm management products.2017.
For the third quarter and first nine months of 2017, Advanced Surgical, Orthopedics & Portable Medical2018, Non-Medical sales increased $7.4decreased $2.7 million, or 7.4%,18% and $13.3$2.1 million, or 4.3%5%, respectively, versus the comparable 20162017 periods. The decline in Non-Medical sales was primarily due to North American drilling activity leveling off which has led to customer inventory adjustments. The quarter was also impacted by a planned phase out of certain rechargeable battery pack products. We expect fourth quarter 2018 year-over-year sales to be flat and we expect solid sales growth in 2019 from new customers and products, and renewed military market government funding. Foreign currency exchange rate fluctuations increased third quarter 2017 sales by approximately $1 million and reduced the first nine months of 2017 sales by approximately $1 million in comparison to the 2016 periods primarily due to U.S. dollar fluctuations relative to the Euro. For the third quarter and first nine months of 2017, organic Advanced Surgical, Orthopedics & Portable Medical sales, which excludes the impact of foreign currency exchange rate fluctuations, increased 6.4% and 4.7%, respectively, in comparison to the respective 2016 periods. These increases were primarily due to advanced surgical market growth and the timing of customer inventory builds and new product ramps, as well as lower comparables due to the disruption of supply caused by our consolidation initiatives which occurred during the first quarter of 2016. For the third quarter and first nine months of 2017, price concessions to our larger OEM customers reduced Advanced Surgical, Orthopedics & Portable Medical sales by approximately $2 million and $4 million, respectively, in comparison to the same periods of 2016.
For the third quarter and first nine months of 2017, Non-Medical sales increased $6.3 million, or 70.6%, and $11.9 million, or 39.1%, respectively, versus the comparable 2016 periods. These increases were primarily driven by continued recovery in the energy markets, as well as, new business wins and market share gains. Foreign currency exchange rates and price fluctuations did not have a material impact on Non-Medical sales during the third quarter and first nine months of 20172018 periods in comparison to the same periods of 2016.2017.
Gross Profit
Changes to gross profit as a percentage of sales (“Gross Margin”) from the prior year were due to the following: | | | Change From Prior Year | Change From Prior Year |
| Three Months | | Nine Months | Three Months | | Nine Months |
Price(a) | (1.5 | )% | | (1.3 | )% | (1.4 | )% | | (1.3 | )% |
Mix(b) | (0.3 | ) | | (0.2 | ) | — |
| | (0.2 | ) |
Incentive compensation(c) | (0.6 | ) | | (0.4 | ) | (0.7 | ) | | (0.6 | ) |
Production efficiencies and volume(d) | 1.1 |
| | 1.0 |
| 1.0 |
| | 1.0 |
|
Total percentage point change to gross profit as a percentage of sales | (1.3 | )% | | (0.9 | )% | (1.1 | )% | | (1.1 | )% |
| |
(a) | Our Gross Margin for 2017the third quarter and first nine months of 2018 has been negatively impacted by price concessions given to our larger OEM customers in return for long-term volume commitments. |
| |
(b) | Our Gross Margin for the third quarter and first nine months of 20172018 has been negatively impacted by a higher mix of sales of lower margin products. |
| |
(c) | Amounts represent the impact to our Gross Margin attributable to our cash and stock incentive programs. Performance-basedprograms, including performance-based compensation, which is accrued based upon actual results achieved. |
| |
(d) | Represents various increases and decreases to our Gross Margin. Overall, our Gross Margin for 2017the third quarter and first nine months of 2018 has been positively impacted by production efficiencies and synergies gained as a result of our integration and consolidation initiatives as well as higher volumesvolume in comparison to the respective 2016 periods.2017 period. |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SG&A Expenses
Changes to SG&A expenses from the prior year were due to the following (in thousands): |
| | | | | | | |
| Change From Prior Year |
| Three Months | | Nine Months |
Nuvectra SG&A(a) | $ | — |
| | $ | (1,913 | ) |
Legal expenses(b) | 1,060 |
| | 614 |
|
Intangible asset amortization(c) | 1,667 |
| | 4,965 |
|
Incentive compensation programs(d) | 822 |
| | 1,929 |
|
Other(e) | (81 | ) | | (2,420 | ) |
Net increase in SG&A Expenses | $ | 3,468 |
| | $ | 3,175 |
|
|
| | | | | | | |
| Change From Prior Year |
| Three Months | | Nine Months |
Legal expenses(a) | $ | (838 | ) | | $ | (1,358 | ) |
Intangible asset amortization(b) | 268 |
| | 1,512 |
|
Incentive compensation programs(c) | 1,884 |
| | 5,111 |
|
Transition services agreement(d) | (1,834 | ) | | (1,834 | ) |
Other(e) | (453 | ) | | (1,135 | ) |
Net increase (decrease) in SG&A Expenses | $ | (973 | ) | | $ | 2,296 |
|
| |
(a) | Amount represents the impact to our SG&A related to the over-head costs divested as a result of the Spin-off of Nuvectra in March 2016. |
| |
(b) | Amounts represent the change in legal costs compared to the prior year period. These variances were primarily due to the timing ofperiod, including legal expenses incurred related to our on-going patent infringement case. Refer to Note 1110 “Commitments and Contingencies” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for information related to this patent infringement litigation. |
| |
(c)(b) | Amounts representAmount represents the increase in intangible asset amortization (i.e. customer list), which is amortized based upon the forecasted cash flows at the time of acquisition for the respective asset. |
| |
(d)(c) | Amounts representAmount represents the impact to our SG&A attributable to our cash and stock incentive programs. Performance-basedprograms, including performance-based compensation, which is accrued based upon actual results achieved. |
| |
(d) | Represents the amount included in SG&A Expenses, which was charged to Viant for transition services provided for the three months ended September 28, 2018. We executed a transition services agreement in conjunction with the sale of the AS&O Product Line, whereby we will provide certain corporate services (including accounting, payroll, and information technology services) to Viant for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations. |
| |
(e) | Represents various increases and decreases to our SG&A. Overall, our SG&A for 2017 has been positively impacted by efficiencies and synergies gained as a result of our integration and consolidation initiatives. |
RD&E Net
Changes to RD&E Net expenses from the prior year were due to the following (in thousands):
|
| | | | | | | |
| Change From Prior Year |
| Three Months | | Nine Months |
Nuvectra RD&E(a) | $ | — |
| | $ | (2,830 | ) |
Customer cost reimbursements(b) | 885 |
| | 476 |
|
Incentive compensation programs(c) | 799 |
| | 1,051 |
|
Other(d) | 511 |
| | (1,148 | ) |
Net increase (decrease) in RD&E, Net | $ | 2,195 |
| | $ | (2,451 | ) |
|
| | | | | | | |
| Change From Prior Year |
| Three Months | | Nine Months |
Intangible asset amortization(a) | $ | (98 | ) | | $ | (293 | ) |
Incentive compensation programs(b) | 389 |
| | 1,120 |
|
Other(c) | (284 | ) | | 2,514 |
|
Net increase in RD&E | $ | 7 |
| | $ | 3,341 |
|
| |
(a) | Amount represents the impact to our RD&E, Net related todecrease in intangible asset amortization, which is amortized based upon the divested costs as a resultforecasted cash flows at the time of acquisition for the Spin-off of Nuvectra in March 2016.respective asset. |
| |
(b) | Amount represents the change in customer cost reimbursements from the prior year. Customer cost reimbursements vary from period to period depending on the timing of achievement of project milestones. |
| |
(c) | Amounts represent the impact to our RD&E Net attributable to our cash and stock incentive programs. Performance-basedprograms, including performance-based compensation, which is accrued based upon actual results achieved. |
| |
(d)(c) | Represents the net impact of various increases and decreases to our RD&E, Net. Overall, our&E. RD&E Netexpense for 2017 has been positively impacted by efficienciesthe third quarter and synergies gained asfirst nine months of 2018 reflects our increased investment in projects with a result of our integration and consolidation initiatives.higher growth opportunity. |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Operating Expenses Net
Refer to “Cost Savings and Consolidation Efforts” section of this Item and Note 8 “Other Operating Expenses” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for further information related to these initiatives. Other Operating Expenses Net is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 29, 2017 | | September 30, 2016 | | September 29, 2017 | | September 30, 2016 |
Investments in capacity and capabilities(a) | $ | 1,542 |
| | $ | 4,542 |
| | $ | 4,407 |
| | $ | 13,821 |
|
Lake Region Medical consolidations(a) | 1,456 |
| | 2,908 |
| | 3,623 |
| | 7,355 |
|
Acquisition and integration costs(b) | 2,267 |
| | 5,319 |
| | 10,057 |
| | 23,143 |
|
Asset dispositions, severance and other(c) | 854 |
| | 272 |
| | 6,528 |
| | 5,057 |
|
Other consolidation and optimization initiatives | 145 |
| | 329 |
| | 340 |
| | 628 |
|
Total other operating expenses, net | $ | 6,264 |
| | $ | 13,370 |
| | $ | 24,955 |
| | $ | 50,004 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 28, 2018 | | September 29, 2017 | | September 28, 2018 | | September 29, 2017 |
Strategic reorganization and alignment(a) | $ | 2,643 |
| | $ | — |
| | $ | 8,424 |
| | $ | — |
|
Manufacturing alignment to support growth(b) | 877 |
| | — |
| | 2,493 |
| | — |
|
Consolidation and optimization costs(c) | 137 |
| | 2,979 |
| | 698 |
| | 8,055 |
|
Acquisition and integration expenses(d) | — |
| | 2,267 |
| | — |
| | 10,057 |
|
Asset dispositions, severance and other(e) | 482 |
| | 823 |
| | 1,000 |
| | 6,378 |
|
Total other operating expenses | $ | 4,139 |
| | $ | 6,069 |
| | $ | 12,615 |
| | $ | 24,490 |
|
| |
(a) | Refer to “Cost Savings and Consolidation Efforts” section of this Item and Note 9 “Other Operating Expenses, Net”As a result of the Notesstrategic review of our customers, competitors and markets we undertook during the fourth quarter of 2017, we began to take steps to better align our resources in order to invest to grow, protect, preserve and to enhance the Condensed Consolidated Financial Statements containedprofitability of our portfolio of products. This will include focusing our investment in Item 1RD&E and manufacturing, improving our business processes and redirecting investments away from projects where the market does not justify the investment. As a result, during the first nine months of this report for disclosures2018, we incurred charges related to the timingthis strategy, which primarily included severance costs and level of remaining expendituresfees for these initiatives.professional services. |
| |
(b) | In 2017, we initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth. The plan involves the relocation of certain manufacturing operations and expansion of certain of our facilities. |
| |
(c) | During the third quarter2018 and first nine months of 2017, and 2016, we incurred costs primarily related to the closure of our Clarence, NY facility and the transfer of our Beaverton, OR portable medical and Plymouth, MN vascular manufacturing operations to Tijuana, Mexico. |
| |
(d) | Reflects acquisition and integration costs related to the acquisition of Lake Region Medical, consisting primarilywhich occurred in October 2015. This initiative was substantially complete as of professional, consulting, severance, retention, relocation, and travel costs. In addition, the third quarter and first nine months of 2016 includes change-in-control payments to former Lake Region Medical executives. Refer to Note 9 “Other Operating Expenses, Net” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for disclosures related to the timing and level of remaining expenditures for acquisition and integration costs.December 29, 2017. |
| |
(c)(e) | The first nine months ofAmounts for 2017 amountprimarily include approximately $5.3 million in expenseexpenses related to our CEO and CFO and Chief Human Resources Officer transitions, most of which were recognized in the first and second quarters. The transition expenses for the third quarter were not material. The 2016 amounts primarily include legal and professional costs incurred in connection with the Spin-off.transitions. |
We continually evaluate our operating structure in order to maximize efficiencies and drive margin expansion. For 2018, Other Operating Expenses Net for 2017 areis expected to be approximately $30$15 million to $35$20 million. Refer to the “Cost Savings and Consolidation Efforts” section of this Item for further details on these initiatives.
Interest Expense Net
Interest Expense Netfor the three and nine months ended September 28, 2018 was $54.5 million and $85.4 million, respectively, compared to $15.8 million and $49.2 million for the three and nine months ended September 29, 2017 was $26.5 million and $81.0 million, respectively, compared to $27.9 million and $83.4 million for the three and nine months ended September 30, 2016.2017. The weighted average interest rates paid on all outstanding borrowings for the three and nine months ended September 29, 2017 were 5.64%28, 2018 was 4.95% and 5.56%4.97%, respectively, compared to 5.78%4.72% and 5.76%4.67%, respectively, for the comparable periods in 2016.2017. The lower weighted average interest rates paid in the third quarter and first nine months of 2018 reflect an increase in LIBOR during 2017 were primarily due to our amending our Senior Secured Credit Facilities during March of 2017, which resulted inand 2018, partially offset by a cumulative 125 basis point and 75 basis point reduction to the applicable interest rate margins of our TLB facility, partially offset byTerm Loan B and Term Loan A facilities. The Term Loan B margin decrease resulted from amendments of our Senior Secured Credit Facilities in March 2017 and again in November 2017, and the increasestep down in the LIBOR rate during 2017.third quarter of 2018 resulting from the upgrade of our corporate family credit rating, while the Term Loan A decrease resulted from contractual reductions due to our lower leverage ratio. Cash interest expense decreased $2.2$1.1 million and $5.8$2.4 million for the three and nine months ended September 29, 2017,28, 2018, respectively, when compared to the same periods in 2016, primarily due to the previously mentioned rate reduction combined with lower outstanding debt balances due to the repayment of debt over the last year.2017. Non-cash interest expense (i.e. deferred fee and discount amortization) increased $0.8$39.8 million and $3.5$38.6 million for the three and nine months ended September 29, 2017,28, 2018, respectively, when compared to the same periodsperiod in 2016,2017, primarily attributable to thehigher accelerated write-offwrite-offs (losses from extinguishment of debt) of deferred fees and discounts dueoriginal issue discount related to prepayments of a portionportions of our TLB FacilityTerm Loan B facility and Senior Notes during the first nine monthsrespective periods and a “make-whole” premium of 2017.$31.3 million paid as a result of redeeming our Senior Notes in July 2018. We recognized losses from extinguishment of debt during the three and nine months ended September 29, 201728, 2018 of $0.8$40.7 million and $3.3$42.1 million, respectively. We have repaid $106.5$595.0 million of debt during the third quarter of 2018 and $670.1 million during the first nine months of 2017, including $37.7 million during the third quarter.2018. See Note 65 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our debt.
Other (Income)(Gain) Loss on Cost and Equity Method Investments, Net
Other (Income) Loss, NetThe Company holds investments in equity and other securities that are accounted for as either cost method or equity method investments. During the three and nine months ended September 28, 2018, we recognized net gains of $0.3 million and $5.5 million, respectively, compared to a net gain of $1.9 million and a net loss of $2.9 million for the three and nine months ended September 29, 2017, was a loss of $0.2 million and $12.0 million, respectively, compared to a loss of $0.3 million and income of $2.8 million for the three and nine months ended September 30, 2016, respectively. Other (Income) Loss, Net is primarily comprised of income (loss) on our cost and equity method investments. The Company did not recognize any impairment charges related to cost method investments andduring the impact of foreign currency exchange rates on transactions denominated in foreign currencies.
Other (Income) Loss, Net for thenine months ended September 28, 2018. The three and nine months ended September 29, 2017 includes net income realized on our cost and equity method investments of $1.9 million and a net loss of $2.9 million, respectively, compared to a net loss of $0.2 million and net income of $0.9 million for the three and nine months ended September 30, 2016, respectively. During the three and nine months ended September 29, 2017, we recognizedincluded impairment charges of $0.3 million and $5.3 million, respectively, recognized on our cost method investments. TheseOur cost method investments are in start-up research and development companies whose fair value is highly subjective in nature and could be subject to significant fluctuations in the future that could result in material gains or losses. See Note 1413 “Fair Value Measurements” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our cost and equity method investments.
Other Loss, Net
Other Loss, Net for the three and nine months ended September 28, 2018 was $1.7 million and $0.3 million, respectively, compared to other loss of $2.5 million and $10.7 million for the three and nine months ended September 29, 2017. Other Loss, Net is primarily comprised of income (loss) from the impact of foreign currency exchange rates on transactions denominated in foreign currencies.
Our foreign currency transaction gains/losses are based on fluctuations of the U.S. dollar relative to the Euro or Peso. The impact of foreign currency exchange rates on transactions denominated in foreign currencies included in Other (Income) Loss, Net for the three and nine months ended September 29, 2017 was a loss28, 2018 were losses of $2.0$1.7 million and $9.0$0.8 million, respectively, compared to a losslosses of $0.004$2.5 million and a gain of $1.8$10.6 million for the three and nine months ended September 30, 2016,29, 2017, respectively. The losses in 2017 were primarily driven by the impact of the weakening U.S. dollar relative to the Euro on our inter-company loans and are primarily non-cash in nature. We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. During 2017, we have taken and will continue to take steps to manage the impact of currency exchange fluctuations on earnings and believe our exposure has been significantly reduced. However, fluctuations in foreign currency exchange rates could have a significant impact, positive or negative, on our financial results in the future.
Provision for Income Taxes
We recognized an income tax benefit of $1.7$6.2 million for the third quarter of 20172018 on $12.0$14.5 million of pre-tax loss from continuing operations compared to income tax benefit of $0.4 million on $19.4 million of pre-tax income compared to an income tax benefit of $2.7 million on $8.7 million of pre-tax incomefrom continuing operations for the same period of 2016. An2017. The income tax benefitexpense for the first nine months of 20172018 was $7.9 million on income from continuing operations before taxes of $0.4 million was recorded on pre-tax income of $11.9$35.8 million compared to $1.4$0.6 million on a pre-tax loss$33.0 million of $3.4 millionincome from continuing operations before taxes for the same period of 2016. The effective tax rate for the third quarter and first nine months of 2017 includes discrete tax benefits of $0.6 million and discrete tax charges of $0.6 million, respectively, primarily related to stock based compensation expense in accordance with new guidance under Accounting Standards Update (“ASU”) 2016-09, return to provision adjustments, and the taxation of currency gains and losses arising from qualified business units (e.g., Branches) that operate in a currency other than the currency of their owner, in accordance with new guidance under temporary regulations and Internal Revenue Code Section 987. The effective tax rate for the third quarter and first nine months of 2016 includes discrete tax benefits of $3.3 million and $1.9 million, respectively, primarily related to return to provision adjustments and non-deductible Lake Region Medical and Spin-off related transaction costs, respectively.2017.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
We expect there to be continued volatility ofin our effective tax rate due to several factors including: changes in the mix of pre-tax income from continuing operations 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. We continuously evaluate and currently have various tax planning initiatives in place that are aimed at reducing our effective tax rate over the long-term.long term.
Our worldwide effective tax rate is expected to be approximately (9%)32% for 2017,2018, excluding discrete items. The difference between ourOur effective tax rate andfor 2018 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of the GILTI tax. Our earnings outside the U.S. are generally taxed at blended rates that are marginally lower than the U.S. federal rate. The GILTI provisions require us to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in our U.S. income tax rate inreturn. There is a statutory deduction of 50% of the current yearGILTI inclusion, however the deduction is primarily attributablesubject to our overall lower effective tax rate inlimitations based on U.S. taxable income. We currently have NOLs to offset forecasted U.S. taxable income and as such, are temporarily subject to the deduction limitation, which correspondingly imposes an incremental impact on U.S. income tax. The foreign jurisdictions in which we operate and where our foreign earnings are derived. The lower tax rate jurisdictions in which we operate and the respective statutory tax rate for each respective jurisdictionprimarily derived, include Switzerland, (22%), Mexico, (30%), Uruguay, (25%),Malaysia and Ireland (12.5%). In addition, we currently have a tax holiday in Malaysia through April 2018, with a potential extension through April 2023 if certain conditions are met.Ireland. While we are not currently aware of any material trends in these jurisdictions that are likely to impact our current or future tax expense, our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower effective tax rates and higher than anticipated in countries where we have higher effective tax rates, or by changes in tax laws or regulations. We regularly assess any significant exposure associated with increases in tax rates in international jurisdictions and adjustments are made as events occur that warrant adjustment to our tax provisions.
Our 20172018 blended effective tax rate on foreign earnings is currently estimated to be approximately 22%. The foreign rate differential reduces our worldwide effective tax rate by approximately 20% as compared to the U.S. statutory federal income tax rate.15% for continuing operations. For the year, we expect to have positive income before taxes in our foreign jurisdictions but losses before taxes in U.S. jurisdictions due to our large amountprojected amounts of Other Operating Expenses, Net and Interest Expense, Net.Expense.
Liquidity and Capital Resources
| | (dollars in thousands) | September 29, 2017 | | December 30, 2016 | September 28, 2018 | | December 29, 2017 |
Cash and cash equivalents | $ | 43,637 |
| | $ | 52,116 |
| $ | 22,881 |
| | $ | 37,341 |
|
Working capital | 323,227 |
| | 332,087 |
| 250,677 |
| | 263,863 |
|
Current ratio | 2.58 |
| | 2.79 |
| 2.41 |
| | 2.64 |
|
Cash and cash equivalents at September 29, 201728, 2018 decreased by $8.5$14.5 million from year-end as excess cash flow from operationson hand was used to pay down our debt. Working capital from continuing operations decreased $8.9by $13.2 million from December 30, 201629, 2017, primarily due to the Company’s strategic initiatives to reduce working capital in order to generatereduced cash to pay down debt.balances.
At September 29, 2017, approximately $2428, 2018, $10 million of the Company's $43.6 million ofour cash and cash equivalents resided in jurisdictions outside the United States. It is the Company's practicewere held by foreign subsidiaries. We intend to use available cashlimit our distributions from foreign subsidiaries to previously taxed income. If distributions are made utilizing current period earnings, we will record foreign withholding taxes in the United States to pay down its Senior Secured Credit Facilities in order to minimize total interest expense. Repatriationperiod of funds residing in jurisdictions located outside the United States to the United States could be subject to domestic and foreign taxes and some portion may be subject to governmental restrictions.distribution.
Summary of Cash FlowsFlow
| | | Nine Months Ended | Nine Months Ended |
(in thousands) | September 29, 2017 | | September 30, 2016 | September 28, 2018 | | September 29, 2017 |
Cash provided by (used in): | | | | | | |
Operating activities | $ | 115,570 |
| | $ | 71,799 |
| $ | 120,736 |
| | $ | 115,570 |
|
Investing activities | (34,702 | ) | | (50,885 | ) | 549,155 |
| | (34,702 | ) |
Financing activities | (91,317 | ) | | (58,865 | ) | (692,896 | ) | | (91,317 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | 1,970 |
| | 468 |
| 1,790 |
| | 1,970 |
|
Net change in cash and cash equivalents | $ | (8,479 | ) | | $ | (37,483 | ) | $ | (21,215 | ) | | $ | (8,479 | ) |
Operating Activities – During the nine months ended September 29, 2017, we generatedThe cash of $115.6 million from operations compared to $71.8 million for the nine months ended September 30, 2016. This increase was primarily due to a $42.1 million increase in cash net income. Other Non-cash Losses reported inflow information presented includes cash flows from operating activities increased $8.7 million primarily duerelated to our foreign currency exchange rate losses and cost method investment write-downs recorded during the first nine months of 2017, which are non-cash in nature.discontinued operations.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating Activities – During the nine months ended September 28, 2018, we generated cash of $120.7 million from operations compared to $115.6 million for the nine months ended September 29, 2017. This increase was primarily due to a $26.4 million increase in cash income (i.e. income from continuing operations plus adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities) partially offset by a $21.2 million decrease in cash flow provided by working capital. The cash flow from working capital change during the period was primarily due to lower accrued interest as a result of our lower debt levels.
Investing Activities – The $16.2$583.9 million decreaseincrease in net cash used inflows from investing activities was primarily attributable to lower purchasesnet cash proceeds from the sale of property, plant, and equipment.the AS&O Product Line of approximately $582 million. Our current expectation is that capital spending for 2017continuing operations for 2018 will be in the range of $50$37 million to $55$42 million, of which approximately half is discretionary in nature. We anticipate that cash on hand, cash flows from operations and available borrowing capacity under our Revolving Credit Facility will be sufficient to fund these capital expenditures. Property, plant, and equipment purchases related to our AS&O Product Line were approximately $15 million per year.
Financing Activities – Net cash used in financing activities for the first nine months of 20172018 was $91.3$692.9 million compared to $58.9$91.3 million in the comparable 20162017 period. Financing activities during the first nine months of 20172018 included net payments of $108.3$670.1 million related to paying down our debt obligations partially offset by $17.1compared to $106.5 million for the comparable 2017 period.
In connection with the completion of the sale of our AS&O Product Line, during the third quarter of 2018 we repaid $548 million of proceeds from the exercise of stock options. Financing activities during the nine months of 2016our debt, which included $76.3$360 million of cash divested with the Spin-off, which was partially funded by $55.0our 9.125% Senior Notes, $114 million in borrowings incurred underof our Term Loan B Facility and $74 million outstanding on our Revolving Credit Facility, and $6.8 million paid to purchase the remaining non-controlling interests in Nuvectra’s Algostim and PelviStim subsidiaries. See Note 2 “Divestiture” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for a further description of the Spin-off. During October 2017, the Company repaid an additional $10 million on its TLB Facility.
Capital Structure – As of September 29, 2017,28, 2018, our capital structure consists of $1.6 billion$954 million of debt outstanding under our Senior Secured Credit Facilities and Senior Notes and 31.733 million shares of common stock outstanding. If necessary, we currentlyWe have access to $111.7$191 million of borrowing capacity under our Revolving Credit Facility. This amount may vary from period to period based upon our debt and EBITDA levels, which impacts our covenant calculations. If necessary, weWe are also authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of September 29, 2017, ourOur debt service obligations, comprised of principal and interest payments for the remainder of 2017,2018, are estimated to be approximately $30$22 million.
Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents and potential borrowings under the Revolving Credit Facility should be sufficient to meet our working capital and fixed capital requirements for the next twelve months. If our future financing needs increase, we may need to arrange additional debt or equity financing. Accordingly, we evaluate and consider from time to time various financing alternatives to supplement our financial resources. However, weresources and optimize our capital structure. We cannot be assured that, if needed, we will be able to enter into any such arrangements on acceptable terms or at all.
Credit Facilities - As of September 29, 2017,28, 2018, we had senior secured credit facilities (the “Senior Secured Credit Facilities”) that consist of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), which had $79letters of credit totaling $9 million drawn against it as of September 29, 2017,28, 2018, (ii) a $342$314 million term loan A facility (the “TLA Facility”), and (iii) an $883$658 million term loan B facility (the “TLB Facility”). Additionally, as of September 29, 2017, we had $360 million aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”) outstanding. The Revolving Credit Facility will mature on October 27, 2020, the TLA Facility will mature on October 27, 2021 and the TLB Facility will mature on October 27, 2022. The Senior Secured Credit Facilities include a mandatory prepayment provision customary for credit facilities of its nature.
On March 17, 2017, we amended the Senior Secured Credit Facilities to lower the interest rate on the TLB Facility. The amendment reduces the applicable interest rate margins on our TLB Facility for both base rate and adjusted LIBOR borrowings by 75 basis points. The amendment also includes a prepayment fee of 1.00% in the event of another repricing event (as defined in the Senior Secured Credit Facilities) on or before the six-month anniversary of this amendment. There is no change to maturities or covenants under the Senior Secured Credit Facilities as a result of this repricing amendment.
The Revolving Credit Facility and TLA Facility contain financial covenants requiring (A) a maximum total net leverage ratio (as defined in the agreement governing the Senior Secured Credit Facilities) of 6.25:5.75:1.0, subject to periodic step downs beginning in the firstfourth fiscal 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 2.5:2.75:1.0 subject to a step upsup beginning in the first quarter of 2018.2019. As of September 29, 2017,28, 2018, our total net leverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 5.403.4 to 1.00. For the twelve month period ended September 29, 2017,28, 2018, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 3.085.4 to 1.00.1.0.
Failure to comply with these financial covenants would result in an event of default as defined under the Revolving Credit Facility and TLA Facility unless waived by the lenders. An event of default may result in the acceleration of our indebtedness. As a result, management believes that compliance with these covenants is material to us. As of September 29, 2017,28, 2018, we were in full compliance with the financial covenants described above. However, a significant increase in the LIBOR interest rate and/or a decline in our operating performance, and in particular our sales and/or adjusted EBITDA, could result in our inability to meet these financial covenants and lead to an event of default if a waiver or amendment could not be obtained from our lenders.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Revolving Credit Facility is supported by a consortium of thirteen lenders with no lender controlling more than 27% of the facility. As of September 29, 2017, the banks supporting 88%
Upon completion of the Revolving Credit Facility each had an S&P credit rating of at least BBB+ or better, which is considered investment grade. The banks which support the remaining 12%redemption in full of the Revolving Credit Facility are not currently being rated.
Senior Notes in July 2018, the indenture governing the Senior Notes was satisfied and discharged. See Note 65 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for a further descriptioninformation on the Company’s outstanding debt.
Non-Guarantor Information – For the nine months ended September 29, 2017, our subsidiaries that are non-Guarantors under our Senior Secured Credit Facilities represented approximately 33% and 44%
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 16 “Impact of Recently Issued Accounting Standards” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.
Contractual Obligations
There have been no significant changes to ourPresented below is a summary of contractual obligations as of September 28, 2018, reflecting the redemption in full of the Senior Notes, repayment of our Term Loan B Facility and Revolving Credit Facility during the nine months ended September 29, 2017 as comparedthird quarter of 2018. |
| | | | | | | | | | | | | | | | | | | |
| Payments due by period |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
Total debt obligations | $ | 972,349 |
| | $ | 37,500 |
| | $ | 75,000 |
| | $ | 859,849 |
| | $ | — |
|
Interest on debt(a) | 174,548 |
| | 47,612 |
| | 89,891 |
| | 37,045 |
| | — |
|
| |
(a) | Interest payments in the table above reflect the contractual interest payments on our outstanding debt based upon the balance outstanding and applicable interest rates at September 28, 2018, and exclude the impact of the debt discount amortization and impact of interest rate swap agreements. |
Refer to those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Form 10-K. See Note 65 “Debt” and Note 1110 “Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for further discussion on our contractual obligations.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.
There have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K.10-K for the year ended December 29, 2017.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q. Furthermore, a discussion of market risk exposures is included in Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 30, 2016.29, 2017. There have been no material changes in reported market risk since the inclusion of this discussion in the Company’s Annual Report on Form 10-K referenced above.
ITEM 4. CONTROLS AND PROCEDURES
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a. | Evaluation of Disclosure Controls and Procedures |
Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the Securities and Exchange Commission as of September 29, 2017.28, 2018. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their evaluation, as of September 29, 2017,28, 2018, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.
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b. | Changes in Internal Control Over Financial Reporting |
During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
There were no new material legal proceedings that are required to be reported in the quarter ended September 29, 2017,28, 2018, and no material developments during the quarter in the Company’s legal proceedings as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 30, 2016, except that with respect to the AVX litigation, on August 10, 2017, a second jury found that AVX infringed an additional Integer patent.29, 2017.
There have been no material changes to the Company’s risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 30, 2016.29, 2017.
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Exhibit Number | | Description |
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10.1#* | | |
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31.1* | | |
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31.2* | | |
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32.1** | | |
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101.INS* | | XBRL Instance Document |
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101.SCH* | | XBRL Extension Schema Document |
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101.CAL* | | XBRL Extension Calculation Linkbase Document |
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101.LAB* | | XBRL Extension Label Linkbase Document |
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101.PRE* | | XBRL Extension Presentation Linkbase Document |
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101.DEF* | | XBRL Extension Definition Linkbase Document |
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* | Filed herewith. |
** | Furnished herewith. |
# | Indicates exhibits that are management contracts or compensation plans or arrangements. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Dated: | October 30, 2017November 2, 2018 | | INTEGER HOLDINGS CORPORATION |
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| | | By: | | /s/ Joseph W. Dziedzic |
| | | | | Joseph W. Dziedzic |
| | | | | President and Chief Executive Officer |
| | | | | (Principal Executive Officer) |
| | | | | |
| | | By: | | /s/ Gary J. HaireJason K. Garland |
| | | | | Gary J. HaireJason K. Garland |
| | | | | Executive Vice President and Chief Financial Officer |
| | | | | (Principal Financial Officer) |
| | | | |
| | | By: | | /s/ Tom P. Thomas J. Mazza |
| | | | | Tom P. Thomas J. Mazza |
| | | | | Vice President, Corporate Controller and Treasurer |
| | | | | (Principal Accounting Officer) |