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 March 30, 201829, 2019
Commission File Number 1-16137
_____________________________________
INTEGER HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
_____________________________________
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| | |
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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | | | | | | |
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
Securities registered pursuant to Section 12(b) of the Act:
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| | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.001 par value per share | | ITGR | | New York Stock Exchange |
The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of May 1, 2018April 26, 2019 was: 32,013,67432,621,376 shares.
INTEGER HOLDINGS CORPORATION
Form 10-Q
For the Quarterly Period Ended March 30, 201829, 2019
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) | March 30, 2018 | | December 29, 2017 | March 29, 2019 | | December 28, 2018 |
ASSETS | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | $ | 29,488 |
| | $ | 44,096 |
| $ | 13,538 |
| | $ | 25,569 |
|
Accounts receivable, net of allowance for doubtful accounts of $0.7 million and $0.8 million, respectively | 242,218 |
| | 242,456 |
| |
Accounts receivable, net of allowance for doubtful accounts of $0.6 million, respectively | | 216,756 |
| | 185,501 |
|
Inventories | 239,490 |
| | 227,534 |
| 181,200 |
| | 190,076 |
|
Refundable income taxes | 494 |
| | 37 |
| |
Prepaid expenses and other current assets | 17,071 |
| | 17,786 |
| 25,696 |
| | 15,104 |
|
Total current assets | 528,761 |
| | 531,909 |
| 437,190 |
| | 416,250 |
|
Property, plant and equipment, net | 367,664 |
| | 370,375 |
| 229,938 |
| | 231,269 |
|
Goodwill | 995,200 |
| | 990,238 |
| 829,306 |
| | 832,338 |
|
Other intangible assets, net | 914,398 |
| | 920,393 |
| 798,918 |
| | 812,338 |
|
Deferred income taxes | 4,388 |
| | 4,152 |
| 3,938 |
| | 3,937 |
|
Other assets | 36,647 |
| | 31,278 |
| |
Operating lease assets, net | | 39,136 |
| | — |
|
Other long-term assets | | 28,765 |
| | 30,549 |
|
Total assets | $ | 2,847,058 |
| | $ | 2,848,345 |
| $ | 2,367,191 |
| | $ | 2,326,681 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | |
Current liabilities: | | | | | | |
Current portion of long-term debt | $ | 32,813 |
| | $ | 30,469 |
| $ | 37,500 |
| | $ | 37,500 |
|
Accounts payable | 104,372 |
| | 83,517 |
| 72,172 |
| | 57,187 |
|
Income taxes payable | 12,549 |
| | 13,477 |
| 9,950 |
| | 9,393 |
|
Accrued expenses | 74,992 |
| | 81,540 |
| |
Accrued expenses and other current liabilities | | 51,881 |
| | 60,490 |
|
Total current liabilities | 224,726 |
| | 209,003 |
| 171,503 |
| | 164,570 |
|
Long-term debt | 1,528,944 |
| | 1,578,696 |
| 874,158 |
| | 888,007 |
|
Deferred income taxes | 150,578 |
| | 145,364 |
| 203,140 |
| | 203,910 |
|
Operating lease liabilities, net | | 33,760 |
| | — |
|
Other long-term liabilities | 22,421 |
| | 21,901 |
| 8,658 |
| | 9,701 |
|
Total liabilities | 1,926,669 |
| | 1,954,964 |
| 1,291,219 |
| | 1,266,188 |
|
Stockholders’ equity: | | | | | | |
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,138,402 and 31,977,953 shares issued, respectively; 32,011,286 and 31,871,427 shares outstanding, respectively | 32 |
| | 32 |
| |
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,788,062 and 32,624,494 shares issued, respectively; 32,617,241 and 32,473,167 shares outstanding, respectively | | 33 |
| | 33 |
|
Additional paid-in capital | 673,106 |
| | 669,756 |
| 694,910 |
| | 691,083 |
|
Treasury stock, at cost, 127,116 and 106,526 shares, respectively | (5,964 | ) | | (4,654 | ) | |
Treasury stock, at cost, 170,821 and 151,327 shares, respectively | | (10,026 | ) | | (8,125 | ) |
Retained earnings | 184,186 |
| | 176,068 |
| 365,591 |
| | 344,498 |
|
Accumulated other comprehensive income | 69,029 |
| | 52,179 |
| 25,464 |
| | 33,004 |
|
Total stockholders’ equity | 920,389 |
| | 893,381 |
| 1,075,972 |
| | 1,060,493 |
|
Total liabilities and stockholders’ equity | $ | 2,847,058 |
| | $ | 2,848,345 |
| $ | 2,367,191 |
| | $ | 2,326,681 |
|
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 | Three Months Ended |
(in thousands except per share data) | March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Sales | $ | 381,745 |
| | $ | 345,413 |
| $ | 314,676 |
| | $ | 292,426 |
|
Cost of sales | 285,975 |
| | 254,187 |
| 226,066 |
| | 208,894 |
|
Gross profit | 95,770 |
| | 91,226 |
| 88,610 |
| | 83,532 |
|
Operating expenses: | | | | | | |
Selling, general and administrative expenses | 41,238 |
| | 39,499 |
| 34,956 |
| | 36,429 |
|
Research, development and engineering costs | 14,538 |
| | 13,411 |
| 11,595 |
| | 13,276 |
|
Other operating expenses | 5,277 |
| | 11,771 |
| 2,890 |
| | 3,784 |
|
Total operating expenses | 61,053 |
| | 64,681 |
| 49,441 |
| | 53,489 |
|
Operating income | 34,717 |
| | 26,545 |
| 39,169 |
| | 30,043 |
|
Interest expense | 26,445 |
| | 28,893 |
| 13,830 |
| | 15,595 |
|
(Gain) loss on cost and equity method investments, net | (4,970 | ) | | 398 |
| |
(Gain) loss on equity investments, net | | 41 |
| | (4,970 | ) |
Other loss, net | 1,033 |
| | 1,449 |
| 166 |
| | 960 |
|
Income (loss) before income taxes | 12,209 |
| | (4,195 | ) | |
Income from continuing operations before income taxes | | 25,132 |
| | 18,458 |
|
Provision for income taxes | 4,091 |
| | 144 |
| 3,766 |
| | 5,374 |
|
Net income (loss) | $ | 8,118 |
| | $ | (4,339 | ) | |
Earnings (loss) per share: | | | | |
Basic | $ | 0.25 |
| | $ | (0.14 | ) | |
Diluted | $ | 0.25 |
| | $ | (0.14 | ) | |
Income from continuing operations | | $ | 21,366 |
| | $ | 13,084 |
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| | | | |
Discontinued operations: | | | | |
Income (loss) from discontinued operations before income taxes | | 386 |
| | (6,249 | ) |
Provision (benefit) for income taxes | | 83 |
| | (1,283 | ) |
Income (loss) from discontinued operations | | $ | 303 |
| | $ | (4,966 | ) |
| | | | |
Net income | | $ | 21,669 |
| | $ | 8,118 |
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| | | | |
Basic earnings (loss) per share: | | | | |
Income from continuing operations | | $ | 0.66 |
| | $ | 0.41 |
|
Income (loss) from discontinued operations | | 0.01 |
| | (0.16 | ) |
Basic earnings per share | | 0.67 |
| | 0.25 |
|
| | | | |
Diluted earnings (loss) per share: | | | | |
Income from continuing operations | | $ | 0.65 |
| | $ | 0.40 |
|
Income (loss) from discontinued operations | | 0.01 |
| | (0.15 | ) |
Diluted earnings per share | | 0.66 |
| | 0.25 |
|
| | | | |
Weighted average shares outstanding: | | | | | | |
Basic | 31,902 |
| | 31,016 |
| 32,536 |
| | 31,902 |
|
Diluted | 32,423 |
| | 31,016 |
| 32,980 |
| | 32,423 |
|
| | | | |
Comprehensive Income | | | | |
Net income (loss) | $ | 8,118 |
| | $ | (4,339 | ) | |
Other comprehensive income: | | | | |
Foreign currency translation gain | 13,441 |
| | 6,536 |
| |
Net change in cash flow hedges, net of tax | 3,409 |
| | 1,750 |
| |
Other comprehensive income | 16,850 |
| | 8,286 |
| |
Comprehensive income | $ | 24,968 |
| | $ | 3,947 |
| |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
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| | | | | | | |
| Three Months Ended |
(in thousands) | March 29, 2019 | | March 30, 2018 |
Comprehensive Income | | | |
Net income | $ | 21,669 |
| | $ | 8,118 |
|
Other comprehensive income (loss): | | | |
Foreign currency translation gain (loss) | (6,838 | ) | | 13,441 |
|
Net change in cash flow hedges, net of tax | (702 | ) | | 3,409 |
|
Other comprehensive income (loss) | (7,540 | ) | | 16,850 |
|
Comprehensive income | $ | 14,129 |
| | $ | 24,968 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | Three Months Ended | Three Months Ended |
(in thousands) | March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Cash flows from operating activities: | | | | | | |
Net income (loss) | $ | 8,118 |
| | $ | (4,339 | ) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Net income | | $ | 21,669 |
| | $ | 8,118 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization | 26,334 |
| | 24,606 |
| 19,658 |
| | 26,334 |
|
Debt related amortization included in interest expense | 2,871 |
| | 3,437 |
| |
Debt related charges included in interest expense | | 1,774 |
| | 2,871 |
|
Stock-based compensation | 3,222 |
| | 4,669 |
| 2,713 |
| | 3,222 |
|
Non-cash (gain) loss on cost and equity method investments | (4,970 | ) | | 398 |
| |
Other non-cash losses | 123 |
| | 1,101 |
| |
Non-cash (gain) loss on equity investments | | 41 |
| | (4,970 | ) |
Other non-cash (gains) losses | | (1,075 | ) | | 123 |
|
Deferred income taxes | 3,181 |
| | (1,753 | ) | 96 |
| | 3,181 |
|
Changes in operating assets and liabilities: | | | | | | |
Accounts receivable | 1,008 |
| | (8,700 | ) | (30,924 | ) | | 1,008 |
|
Inventories | (11,442 | ) | | (5,956 | ) | 8,612 |
| | (11,442 | ) |
Prepaid expenses and other current assets | 2,810 |
| | 1,853 |
| |
Prepaid expenses and other assets | | (12,402 | ) | | 2,810 |
|
Accounts payable | 22,466 |
| | 13,146 |
| 15,411 |
| | 22,466 |
|
Accrued expenses | (6,031 | ) | | 4,401 |
| |
Income taxes | (1,568 | ) | | 5,762 |
| |
Accrued expenses and other liabilities | | (15,894 | ) | | (6,031 | ) |
Income taxes payable | | 1,555 |
| | (1,568 | ) |
Net cash provided by operating activities | 46,122 |
| | 38,625 |
| 11,234 |
| | 46,122 |
|
Cash flows from investing activities: | | | | | | |
Acquisition of property, plant and equipment | (10,959 | ) | | (12,787 | ) | (7,447 | ) | | (10,959 | ) |
Proceeds from sale of property, plant and equipment | 898 |
| | 459 |
| 2 |
| | 898 |
|
Purchase of cost and equity method investments | — |
| | (260 | ) | |
Purchase of equity investments | | (42 | ) | | — |
|
Net cash used in investing activities | (10,061 | ) | | (12,588 | ) | (7,487 | ) | | (10,061 | ) |
Cash flows from financing activities: | | | | | | |
Principal payments of long-term debt | (50,032 | ) | | (79,151 | ) | (30,375 | ) | | (50,032 | ) |
Proceeds from issuance of long-term debt | — |
| | 50,000 |
| 15,000 |
| | — |
|
Proceeds from the exercise of stock options | 1,006 |
| | 7,449 |
| 1,338 |
| | 1,006 |
|
Payment of debt issuance costs | — |
| | (1,789 | ) | |
Withholding tax paid related to stock-based compensation | (2,188 | ) | | — |
| |
Tax withholdings related to net share settlements of restricted stock unit awards | | (2,123 | ) | | (2,188 | ) |
Net cash used in financing activities | (51,214 | ) | | (23,491 | ) | (16,160 | ) | | (51,214 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | 545 |
| | 219 |
| 382 |
| | 545 |
|
Net increase (decrease) in cash and cash equivalents | (14,608 | ) | | 2,765 |
| |
Net decrease in cash and cash equivalents | | (12,031 | ) | | (14,608 | ) |
Cash and cash equivalents, beginning of period | 44,096 |
| | 52,116 |
| 25,569 |
| | 44,096 |
|
Cash and cash equivalents, end of period | $ | 29,488 |
| | $ | 54,881 |
| $ | 13,538 |
| | $ | 29,488 |
|
Supplemental disclosure of cash flow information: | | | | |
Noncash investing and financing activities: | | | | |
Property, plant and equipment purchases included in accounts payable | $ | 2,007 |
| | $ | 3,243 |
| |
The accompanying notes are an integral part of these condensed consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
| | | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Income | | 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 29, 2017 | 31,978 |
| | $ | 32 |
| | $ | 669,756 |
| | (107 | ) | | $ | (4,654 | ) | | $ | 176,068 |
| | $ | 52,179 |
| | $ | 893,381 |
| |
December 28, 2018 | | 32,624 |
| | $ | 33 |
| | $ | 691,083 |
| | (151 | ) | | $ | (8,125 | ) | | $ | 344,498 |
| | $ | 33,004 |
| | $ | 1,060,493 |
|
Cumulative effect adjustment, net of taxes, of the adoption of ASC Topic 842 (Note 1) | | — |
| | — |
| | — |
| | — |
| | — |
| | (576 | ) | | — |
| | (576 | ) |
Comprehensive income: | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
|
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 8,118 |
| | — |
| | 8,118 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 21,669 |
| | — |
| | 21,669 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16,850 |
| | 16,850 |
| |
Other comprehensive loss, net | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,540 | ) | | (7,540 | ) |
Share-based compensation plans: | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | |
|
|
Stock-based compensation | — |
| | — |
| | 3,222 |
| | — |
| | — |
| | — |
| | — |
| | 3,222 |
| — |
| | — |
| | 2,713 |
| | — |
| | — |
| | — |
| | — |
| | 2,713 |
|
Net shares issued | 160 |
| | — |
| | 128 |
| | (20 | ) | | (1,310 | ) | | — |
| | — |
| | (1,182 | ) | 164 |
| | — |
| | 1,114 |
| | (20 | ) | | (1,901 | ) | | — |
| | — |
| | (787 | ) |
March 30, 2018 | 32,138 |
| | $ | 32 |
| | $ | 673,106 |
| | (127 | ) | | $ | (5,964 | ) | | $ | 184,186 |
| | $ | 69,029 |
| | $ | 920,389 |
| |
March 29, 2019 | | 32,788 |
| | $ | 33 |
| | $ | 694,910 |
| | (171 | ) | | $ | (10,026 | ) | | $ | 365,591 |
| | $ | 25,464 |
| | $ | 1,075,972 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 29, 2017 | 31,978 |
| | $ | 32 |
| | $ | 669,756 |
| | (107 | ) | | $ | (4,654 | ) | | $ | 176,068 |
| | $ | 52,179 |
| | $ | 893,381 |
|
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 8,118 |
| | — |
| | 8,118 |
|
Other comprehensive income, net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 16,850 |
| | 16,850 |
|
Share-based compensation plans: | | | | | | | | | | | | | | | |
Stock-based compensation | — |
| | — |
| | 3,222 |
| | — |
| | — |
| | — |
| | — |
| | 3,222 |
|
Net shares issued | 160 |
| | — |
| | 128 |
| | (20 | ) | | (1,310 | ) | | — |
| | — |
| | (1,182 | ) |
March 30, 2018 | 32,138 |
| | $ | 32 |
| | $ | 673,106 |
| | (127 | ) | | $ | (5,964 | ) | | $ | 184,186 |
| | $ | 69,029 |
| | $ | 920,389 |
|
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, vascular, 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 May 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical segment to Viant (formerly MedPlast, LLC), and on July 2, 2018 completed the sale. The results of operations of the AS&O Product Line are reported as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the discontinued operations due to Integer’s (parent) centralized treasury and cash management processes, and, accordingly, cash flow amounts for discontinued operations are disclosed in Note 2 “Discontinued Operations and Divestiture.” All results and information in the condensed consolidated financial statements are presented as continuing operations and exclude the AS&O Product Line unless otherwise noted specifically as discontinued operations. Refer to Note 2 “Discontinued Operations and Divestiture” for additional information.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. Intercompany transactions and balances have been fully eliminated in consolidation.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2017.28, 2018.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The first quarter of 20182019 and 20172018 each contained 13 weeks and ended on March 30,29 and March 31,30, respectively. The Company’s 2018 and 20172019 fiscal yearsyear will end oron January 3, 2020 and will be a fifty-three week period. Fiscal year 2018 ended on December 28, 2018 and December 29, 2017, respectively.was a fifty-two week period.
Recent Accounting Pronouncements (2.The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) INVENTORIES
Inventoriesissued by the Financial Accounting Standards Board ("FASB"). ASUs not yet adopted that are comprisednot listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated result of operations, financial position and cash flows. With the exception of the following (in thousands): |
| | | | | | | |
| March 30, 2018 | | December 29, 2017 |
Raw materials | $ | 96,405 |
| | $ | 97,615 |
|
Work-in-process | 104,612 |
| | 92,650 |
|
Finished goods | 38,473 |
| | 37,269 |
|
Total | $ | 239,490 |
| | $ | 227,534 |
|
accounting pronouncements adopted as discussed below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2018, that are of significance, or potential significance, to the Company.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1.)BASIS OF PRESENTATION (Continued)
Recently Adopted Accounting Guidance
Adoption of ASC Topic 842
Effective December 29, 2018, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company elected to transition to ASC 842 using the option to not restate comparative periods and apply the standard as of the date of initial application. In addition, certain practical expedients were elected which permit the Company to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, and to not reassess initial direct costs for any existing leases. The Company also elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets and the practical expedient related to land easements, allowing the Company to carry-forward its accounting treatment for land easements on existing agreements. The Company did not elect the practical expedient pertaining to the use of hindsight. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet for all classes of underlying assets.
As a result of the adoption of ASC 842, the Company recognized operating lease right-of-use assets of $40.9 million and lease liabilities of $43.4 million on December 29, 2018. The difference between the lease assets and lease liabilities primarily represents the existing prepaid rent assets, deferred rent liabilities, and tenant improvement allowances, along with a cumulative-effect adjustment to beginning retained earnings. The adoption of ASC 842 did not have a material impact on our Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for the three month period ended March 29, 2019.
Refer to Note 11 “Leases” for additional information on the Company’s leases.
Adoption of ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements. The new guidance removes the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument, including any ineffectiveness, in the same income statement line item in which the earnings effect of the hedged item is reported.
ASU 2017-12 continues to allow an entity to exclude the time value of options and forward points from the assessment of hedge effectiveness. For excluded components in cash flow hedges, the base recognition model under this ASU is an amortization approach. An entity still may elect to record changes in the fair value of the excluded component currently in earnings; however, such an election will need to be applied consistently to similar hedges. The Company has elected to continue to record changes in the fair value of the excluded components of its derivative instruments currently in earnings given their highly effective nature.
Finally, this ASU continues to require an initial prospective quantitative hedge effectiveness assessment and documentation at hedge inception. However, if certain criteria are met, entities can elect to subsequently perform prospective and retrospective effectiveness assessments qualitatively, unless facts and circumstances change, and the hedge effectiveness assessment generally does not need to be completed until the first quarterly hedge effectiveness assessment date (i.e., up to three months).
The Company adopted ASU 2017-12 on December 29, 2018, the first day of the Company’s 2019 fiscal year, and did not materially affect the Company’s results of operations. The Company adopted the guidance on the modified retrospective basis and did not recognize a cumulative effect adjustment upon adoption as the Company had not recognized ineffectiveness on any of the hedging instruments existing as of the date of adoption. Refer to Note 14 “Financial Instruments and Fair Value Measurements” for additional information and disclosures of the Company’s derivatives and hedging activities.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in ASU 2018-16 permit the use of the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in this update were effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance prospectively as of December 29, 2018, concurrent with the adoption of ASU 2017-12, to be applied on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. Adoption of this guidance had no impact on the Condensed Consolidated Financial Statements.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(2.)DISCONTINUED OPERATIONS AND DIVESTITURE
On May 3, 2018, the Company entered into a definitive agreement to sell its AS&O Product Line to Viant, and on July 2, 2018, completed the sale, collecting cash proceeds of approximately $581 million, which is net of transaction costs and adjustments set forth in the definitive agreement. In connection with the sale, the parties executed a transition services agreement whereby the Company 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 $1.7 million of income under the transition services agreement for the performance of services during the first quarter of fiscal 2019, of which $0.1 million is within Cost of sales and $1.6 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 during the year ended December 28, 2018. On April 14, 2019, the Company agreed to a net working capital adjustment with Viant, whereby Viant will pay the Company $4.8 million on or before June 14, 2019. The final net working capital adjustment will be recognized as an increase to the gain on sale from discontinued operations, net of the estimated income tax consequences, during the quarter ending June 28, 2019. Additionally, the income taxes associated with the gain on sale will be impacted by the final allocation of the sales price, which must be agreed to with Viant as required in the definitive agreement. The final allocation may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes resulting from the final allocation, which will be reflected in the filed corporate income tax return, will be recorded as an adjustment to discontinued operations during the quarter in which they are concluded.
The operating results of the AS&O Product Line have been classified as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The discontinued operations of the AS&O Product Line are reported in the Medical segment. Income (loss) from discontinued operations, net of taxes, were as follows (in thousands):
|
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Sales | $ | — |
| | $ | 89,319 |
|
Cost of sales | — |
| | 77,081 |
|
Gross profit | — |
| | 12,238 |
|
Selling, general and administrative expenses | — |
| | 4,809 |
|
Research, development and engineering costs | — |
| | 1,262 |
|
Other operating expenses | — |
| | 1,493 |
|
Interest expense | — |
| | 10,850 |
|
Other (income) loss, net | (386 | ) | | 73 |
|
Income (loss) from discontinued operations before income taxes | 386 |
| | (6,249 | ) |
Provision (benefit) for income taxes | 83 |
| | (1,283 | ) |
Income (loss) from discontinued operations | $ | 303 |
| | $ | (4,966 | ) |
Cash flow information from discontinued operations was as follows (in thousands):
|
| | | | | | | | | | | |
| | | | | Three Months Ended |
| | | | | March 29, 2019 | | March 30, 2018 |
Cash provided by (used in) operating activities | | | | | $ | (58 | ) | | $ | 7,299 |
|
Cash used in investing activities | | | | | — |
| | (2,617 | ) |
| | | | | | |
|
|
Depreciation and amortization | | | | | $ | — |
| | $ | 5,718 |
|
Capital expenditures | | | | | — |
| | 2,631 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
(3.) | SUPPLEMENTAL CASH FLOW INFORMATION |
The following is supplemental information relating to the Condensed Consolidated Statements of Cash Flows, including information related to discontinued operations:
|
| | | | | | | |
| Three Months Ended |
(in thousands) | March 29, 2019 | | March 30, 2018 |
Noncash investing and financing activities: | | | |
Property, plant and equipment purchases included in accounts payable | $ | 2,146 |
| | $ | 2,007 |
|
Refer to Note 2 “Discontinued Operations and Divestiture” for additional supplemental cash flow information pertaining to discontinued operations and Note 11 “Leases” for additional supplemental cash flow information pertaining to leases.
(4.) INVENTORIES
Inventories are comprised of the following (in thousands): |
| | | | | | | |
| March 29, 2019 | | December 28, 2018 |
Raw materials | $ | 78,005 |
| | $ | 80,213 |
|
Work-in-process | 73,299 |
| | 75,711 |
|
Finished goods | 29,896 |
| | 34,152 |
|
Total | $ | 181,200 |
| | $ | 190,076 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(5.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the quarterthree months ended March 30, 201829, 2019 were as follows (in thousands):
|
| | | | | | | | | | | |
| Medical | | Non- Medical | | Total |
December 29, 2017 | $ | 973,238 |
| | $ | 17,000 |
| | $ | 990,238 |
|
Foreign currency translation | 4,962 |
| | — |
| | 4,962 |
|
March 30, 2018 | $ | 978,200 |
| | $ | 17,000 |
| | $ | 995,200 |
|
|
| | | | | | | | | | | |
| Medical | | Non- Medical | | Total |
December 28, 2018 | $ | 815,338 |
| | $ | 17,000 |
| | $ | 832,338 |
|
Foreign currency translation | (3,032 | ) | | — |
| | (3,032 | ) |
March 29, 2019 | $ | 812,306 |
| | $ | 17,000 |
| | $ | 829,306 |
|
Intangible Assets
Intangible assets at March 30, 201829, 2019 and December 29, 201728, 2018 were as follows (in thousands): | | | Gross Carrying Amount | | Accumulated Amortization | | Foreign Currency Translation | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
March 30, 2018 | | | | | | |
| |
March 29, 2019 | | | | | |
|
Definite-lived: | | | | | | | | | | | | |
Purchased technology and patents | $ | 256,719 |
| | $ | (121,802 | ) | | $ | 3,432 |
| | $ | 138,349 |
| $ | 240,939 |
| | $ | (128,528 | ) | | $ | 112,411 |
|
Customer lists | 759,987 |
| | (95,149 | ) | | 20,872 |
| | 685,710 |
| 707,088 |
| | (110,880 | ) | | 596,208 |
|
Other | 4,534 |
| | (7,809 | ) | | 3,326 |
| | 51 |
| 3,503 |
| | (3,492 | ) | | 11 |
|
Total | $ | 1,021,240 |
| | $ | (224,760 | ) | | $ | 27,630 |
| | $ | 824,110 |
| $ | 951,530 |
| | $ | (242,900 | ) | | $ | 708,630 |
|
Indefinite-lived: | | | | | | | | | | | | |
Trademarks and tradenames |
|
| | | | | | $ | 90,288 |
|
|
| | | | $ | 90,288 |
|
| | | | | | | | | | | | |
December 29, 2017 | | | | | | |
| |
December 28, 2018 | | | | | |
|
Definite-lived: | | | | | | | | | | | | |
Purchased technology and patents | $ | 256,719 |
| | $ | (117,695 | ) | | $ | 2,483 |
| | $ | 141,507 |
| $ | 241,726 |
| | $ | (125,540 | ) | | $ | 116,186 |
|
Customer lists | 759,987 |
| | (87,555 | ) | | 16,103 |
| | 688,535 |
| 710,406 |
| | (104,556 | ) | | 605,850 |
|
Other | 4,534 |
| | (7,797 | ) | | 3,326 |
| | 63 |
| 3,503 |
| | (3,489 | ) | | 14 |
|
Total | $ | 1,021,240 |
| | $ | (213,047 | ) | | $ | 21,912 |
| | $ | 830,105 |
| $ | 955,635 |
| | $ | (233,585 | ) | | $ | 722,050 |
|
Indefinite-lived: | | | | | | | | | | | | |
Trademarks and tradenames |
|
| | | | | | $ | 90,288 |
|
|
| | | | $ | 90,288 |
|
Aggregate intangible asset amortization expense is comprised of the following (in thousands): | | | Three Months Ended | Three Months Ended |
| March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Cost of sales | $ | 4,068 |
| | $ | 4,084 |
| $ | 3,262 |
| | $ | 3,716 |
|
Selling, general and administrative expenses | 7,606 |
| | 6,758 |
| 6,592 |
| | 6,898 |
|
Research, development and engineering costs | 39 |
| | 136 |
| — |
| | 39 |
|
Total intangible asset amortization expense | $ | 11,713 |
| | $ | 10,978 |
| $ | 9,854 |
| | $ | 10,653 |
|
Estimated future intangible asset amortization expense based on the carrying value as of March 30, 201829, 2019 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | After 2022 |
Amortization Expense | $ | 33,872 |
| | $ | 45,724 |
| | $ | 46,349 |
| | $ | 45,470 |
| | $ | 43,430 |
| | $ | 609,265 |
|
|
| | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | After 2023 |
Amortization Expense | $ | 30,186 |
| | 40,318 |
| | 39,468 |
| | 38,438 |
| | 36,598 |
| | 523,622 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4.(6.) DEBT
Long-term debt is comprised of the following (in thousands): |
| | | | | | | |
| March 30, 2018 | | December 29, 2017 |
Senior secured term loan A | $ | 328,125 |
| | $ | 335,157 |
|
Senior secured term loan B | 830,286 |
| | 873,286 |
|
9.125% senior notes due 2023 | 360,000 |
| | 360,000 |
|
Revolving line of credit | 74,000 |
| | 74,000 |
|
Unamortized discount on term loan B and debt issuance costs | (30,654 | ) | | (33,278 | ) |
Total debt | 1,561,757 |
| | 1,609,165 |
|
Current portion of long-term debt | (32,813 | ) | | (30,469 | ) |
Total long-term debt | $ | 1,528,944 |
| | $ | 1,578,696 |
|
Senior Secured Credit Facilities |
| | | | | | | |
| March 29, 2019 | | December 28, 2018 |
Senior secured term loan A | $ | 295,312 |
| | $ | 304,687 |
|
Senior secured term loan B | 611,286 |
| | 632,286 |
|
Revolving line of credit | 20,000 |
| | 5,000 |
|
Unamortized discount on term loan B and debt issuance costs | (14,940 | ) | | (16,466 | ) |
Total debt | 911,658 |
| | 925,507 |
|
Current portion of long-term debt | (37,500 | ) | | (37,500 | ) |
Total long-term debt | $ | 874,158 |
| | $ | 888,007 |
|
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”), with $200 million borrowing capacity as described below, (ii) a $375$295 million term loan A facility (the “TLA Facility”), and (iii) a $1,025$611 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.
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 March 30, 2018,29, 2019, the Company had $74$20 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $116.8$173.2 million after giving effect to $9.2$6.8 million of outstanding standby letters of credit. As of March 30, 2018,29, 2019, the weighted average interest rate on all outstanding borrowings under the Revolving Credit Facility was 5.10%5.00%.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00. The outstanding amount of the Revolving Credit Facility approximated its fair value as of March 30, 2018 based upon the debt being variable rate and short-term in nature.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 2.25%2.00% or (ii) the applicable LIBOR rate plus 3.25%3.00%, with LIBOR subject to a 1.00% floor. As of March 30, 2018,29, 2019, the interest rates on the TLA Facility and TLB Facility were 5.13%5.00% and 4.99%5.49%, respectively. Additionally, if the Company receives both (a) a public corporate family credit rating from Moody’s Investors Services, Inc. of “B2” (stable outlook) or higher and (b) a public corporate credit rating from Standard & Poor’s Financial Services LLC of “B” (stable outlook) or higher, the interest rate margins for the TLB Facility will step down by an additional 25 basis points.
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 March 30, 2018, the estimated fair value of the TLB Facility was approximately $839 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 March 30, 2018 based upon the debt being variable rate in nature.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4.) DEBT (Continued)
Covenants
The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 6.0:5.00:1.00, subject to periodic step downs beginning in the third quarter of 20182019 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 2.75:1.00 subject to a step up beginning in the first quarter of 2019. As of March 30, 2018, the Company was in compliance with these financial covenants. 3.00:1.00.The TLB Facility does not contain any financial maintenance covenants.
The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of March 30, 2018,29, 2019, the Company was in compliance with all negative covenants under the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become immediately due and payable.
9.125% Senior Notes due 2023
On October 27, 2015, the Company completed a private offering of $360 million aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”). All of the Senior Notes are outstanding as of March 30, 2018.
As of March 30, 2018, the estimated fair value of the Senior Notes was approximately $390 million, based on quoted market prices of these Senior Notes, recent sales prices for the Senior Notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
The indenture for the Senior Notes contain certain restrictive covenants and provides for customary events of default, subject in certain cases to customary cure periods, as a result of which the Senior Notes and any unpaid interest would become due and payable. As of March 30, 2018, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.financial covenants.
Contractual maturities under the Senior Secured Credit Facilities and Senior Notes for the remainder of 20182019 and the next fourthree years and thereafter,(through maturity), excluding any discounts or premiums, as of March 30, 201829, 2019 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | After 2022 |
Future minimum principal payments | | $ | 23,437 |
| | $ | 37,500 |
| | $ | 111,500 |
| | $ | 229,688 |
| | $ | 830,286 |
| | $ | 360,000 |
|
Debt Issuance Costs and Discounts |
| | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 |
Future minimum principal payments | | $ | 28,125 |
| | 57,500 |
| | 229,687 |
| | 611,286 |
|
The change in deferredCompany prepaid portions of its TLB Facility during 2019 and 2018. The Company recognized losses from extinguishment of debt during the three months ended March 29, 2019 and March 30, 2018 of $0.4 million and $1.1 million, respectively. The loss from extinguishment of debt represents the portion of the unamortized discount and debt issuance costs related to the Revolving Creditportion of the TLB Facility that was prepaid and is as follows (in thousands):
|
| | | |
December 29, 2017 | $ | 2,808 |
|
Amortization during the period | (247 | ) |
March 30, 2018 | $ | 2,561 |
|
included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations.
Table of Contents
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(4.) DEBT (Continued)
The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows (in thousands):
|
| | | | | | | | | | | |
| Debt Issuance Costs | | Unamortized Discount on TLB Facility | | Total |
December 29, 2017 | $ | 26,889 |
| | $ | 6,389 |
| | $ | 33,278 |
|
Write-off of debt issuance costs and unamortized discount(1) | (745 | ) | | (312 | ) | | (1,057 | ) |
Amortization during the period | (1,279 | ) | | (288 | ) | | (1,567 | ) |
March 30, 2018 | $ | 24,865 |
| | $ | 5,789 |
| | $ | 30,654 |
|
| |
(1)
| The Company prepaid portions of its TLB Facility during 2018 and 2017. The Company recognized losses from extinguishment of debt during the quarters ended March 30, 2018 and March 31, 2017 of $1.1 million and $1.6 million, respectively, which is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Income. The loss from extinguishment of debt represents the portion of the unamortized discount and debt issuance costs related to the portion of the TLB Facility that was prepaid. |
Interest Rate Swap
During 2016, the Company entered into a three-year $200 million interest rate swap to hedge against potential changes in cash flows on the outstanding variable rate debt, which is indexed to the one-month LIBOR rate. The variable rate received on the interest rate swap and the variable rate paid on the outstanding debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same date. The swap is being accounted for as a cash flow hedge.
Information regarding the Company’s outstanding interest rate swap designated as a cash flow hedge as of March 30, 2018 is as follows (dollars in thousands): |
| | | | | | | | | | | | | | | | | | |
Notional Amount | | Start Date | | End Date | | Pay Fixed Rate | | Receive Current Floating Rate | | Fair Value | | Balance Sheet Location |
$ | 200,000 |
| | Jun-17 | | Jun-20 | | 1.1325 | % | | 1.8750 | % | | $ | 5,544 |
| | Other Long-Term Assets |
The estimated fair value of the interest rate swap agreement represents the amount the Company would receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swap during the quarters ended March 30, 2018 and March 31, 2017 was considered ineffective. The amounts recorded to Interest Expense during the quarters ended March 30, 2018 and March 31, 2017 related to the Company’s interest rate swap were a reduction of $0.2 million and $0.1 million, respectively. The estimated Accumulated Other Comprehensive Income related to the Company’s interest rate swaps that is expected to be reclassified into earnings within the next twelve months is a $2.0 million gain.
(5.) BENEFIT PLANS
The Company is required to provide its employees located in Switzerland, Mexico, France, and Germany certain statutorily mandated defined benefits. Components of net defined benefit cost for these plans were comprised of the following (in thousands): |
| | | | | | | |
| Three Months Ended |
| March 30, 2018 | | March 31, 2017 |
Service cost | $ | 127 |
| | $ | 110 |
|
Interest cost | 46 |
| | 38 |
|
Amortization of net loss | 16 |
| | 17 |
|
Expected return on plan assets | (4 | ) | | (4 | ) |
Net defined benefit cost | $ | 185 |
| | $ | 161 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6.(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 |
| March 30, 2018 | | March 31, 2017 |
Stock options | $ | 331 |
| | $ | 710 |
|
RSAs and RSUs (time-based) | 2,078 |
| | 2,204 |
|
Performance-based RSUs (“PSUs”) | 813 |
| | 1,755 |
|
Total stock-based compensation expense | $ | 3,222 |
| | $ | 4,669 |
|
| | | |
Cost of sales | $ | 220 |
| | $ | 142 |
|
Selling, general and administrative expenses | 2,965 |
| | 2,159 |
|
Research, development and engineering costs | 33 |
| | 105 |
|
Other operating expenses | 4 |
| | 2,263 |
|
Total stock-based compensation expense | $ | 3,222 |
| | $ | 4,669 |
|
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. |
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Stock options | $ | 101 |
| | $ | 314 |
|
RSAs and RSUs (time-based) | 1,920 |
| | 1,962 |
|
Performance-based RSUs (“PRSUs”) | 692 |
| | 707 |
|
Stock-based compensation expense - continuing operations | 2,713 |
| | 2,983 |
|
Discontinued operations | — |
| | 239 |
|
Total stock-based compensation expense | $ | 2,713 |
| | $ | 3,222 |
|
| | | |
Cost of sales | $ | 317 |
| | $ | 176 |
|
Selling, general and administrative expenses | 2,330 |
| | 2,779 |
|
Research, development and engineering costs | 66 |
| | 24 |
|
Other operating expenses | — |
| | 4 |
|
Discontinued operations | — |
| | 239 |
|
Total stock-based compensation expense | $ | 2,713 |
| | $ | 3,222 |
|
There were no stock options granted during the three months ended March 29, 2019. The weighted average fair value and assumptions used to value options granted during the three months ended March 30, 2018 are as follows: | | | Three Months Ended | | | |
| March 30, 2018 | | March 31, 2017 | March 30, 2018 |
Weighted average fair value | $ | 14.89 |
| | $ | 9.14 |
| $ | 14.89 |
|
Risk-free interest rate | 2.21 | % | | 1.63 | % | 2.21 | % |
Expected volatility | 39 | % | | 38 | % | 39 | % |
Expected life (in years) | 4.0 |
| | 3.7 |
| 4 |
|
Expected dividend yield | — | % | | — | % | — | % |
The following table summarizes the Company’s stock option activity: |
| | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (In Years) | | Aggregate Intrinsic Value (In Millions) |
Outstanding at December 29, 2017 | 931,353 |
| | $ | 30.89 |
| | | | |
Granted | 28,447 |
| | 45.13 |
| | | | |
Exercised | (27,322 | ) | | 36.81 |
| | | | |
Forfeited or expired | (818 | ) | | 48.43 |
| | | | |
Outstanding at March 30, 2018 | 931,660 |
| | $ | 31.14 |
| | 5.7 | | $ | 23.7 |
|
Exercisable at March 30, 2018 | 777,521 |
| | $ | 30.03 |
| | 5.0 | | $ | 20.6 |
|
|
| | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (In Years) | | Aggregate Intrinsic Value (In Millions) |
Outstanding at December 28, 2018 | 522,783 |
| | $ | 31.88 |
| | | | |
Exercised | (87,424 | ) | | 15.30 |
| | | | |
Outstanding at March 29, 2019 | 435,359 |
| | $ | 35.21 |
| | 5.8 | | $ | 17.5 |
|
Exercisable at March 29, 2019 | 401,044 |
| | $ | 34.87 |
| | 5.6 | | $ | 16.3 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(6.(7.) STOCK-BASED COMPENSATION (Continued)
During the three months ended March 30, 2018,29, 2019, the Company awarded grants to members of 0.3 million RSUs toits Board of Directors and certain members of management,management. The Board of which 0.2 million are performance-based RSUs (“PSUs”) and the remainder are time-basedDirectors received grants of RSUs that vest over three years. Ofin equal quarterly installments of 25% on the PSUs, 0.1 millionfirst day of each quarter of the sharesCompany’s 2019 fiscal year. The members of management received either RSUs or a mix of RSUs and PRSUs. The RSUs vest ratably, subject to eachthe recipient’s continuous service to the Company over a period of generally three to four years from the grant willdate. For the Company's PRSUs, in addition to service conditions, the ultimate number of shares to be earned based upondepends on the achievement of specific Companyfinancial performance metrics over a three-yearor market-based conditions. The financial performance period ending January 1, 2021, and 0.1 million ofcondition is based on the shares subject to each grant will be earnedCompany's sales targets. The market conditions are based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over a three-yearthree year performance period ending January 1, 2021. The number of PSUs earned based on the achievement of the Company performance metrics and TSR performance requirements, if any, will vest based on the recipient’s continuous service to the Company over a period of generally one to three years from the grant date. The time-based RSUs generally vest ratably over a three-year period.periods.
The Company uses a Monte Carlo simulation model to determine the grant-date fair value of the TSR portion of the PSUs granted during the three months ended March 30, 2018 was determined using the Monte Carlo simulation model on the date of grant, assuming the following (i) expected term of 2.92 years, (ii) risk free interest rate of 2.28%, (iii) expected dividend yield of 0.0% and (iv) expected stock price volatility over the expected term of the TSR award of 40%.awards. 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 weighted average fair value and assumptions used to value the TSR portion of the PRSUs granted are as follows: |
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Weighted average fair value | $ | 123.34 |
| | $ | 37.46 |
|
Risk-free interest rate | 2.49 | % | | 2.28 | % |
Expected volatility | 40 | % | | 40 | % |
Expected life (in years) | 2.8 |
| | 2.9 |
|
Expected dividend yield | — | % | | — | % |
The following table summarizes RSA and RSU activity: | | | Time-Vested Activity | | Weighted Average Fair Value | Time-Vested Activity | | Weighted Average Fair Value |
Nonvested at December 29, 2017 | 163,431 |
| | $ | 35.96 |
| |
Nonvested at December 28, 2018 | | 142,236 |
| | $ | 49.78 |
|
Granted | 147,878 |
| | 49.30 |
| 74,918 |
| | 87.28 |
|
Vested | (11,999 | ) | | 49.78 |
| (11,341 | ) | | 58.95 |
|
Forfeited | (4,453 | ) | | 43.62 |
| (1,580 | ) | | 42.65 |
|
Nonvested at March 30, 2018 | 294,857 |
| | $ | 41.97 |
| |
Nonvested at March 29, 2019 | | 204,233 |
| | $ | 63.08 |
|
The following table summarizes PSUPRSU activity: | | | Performance- Vested Activity | | Weighted Average Fair Value | Performance- Vested Activity | | Weighted Average Fair Value |
Nonvested at December 29, 2017 | 469,889 |
| | $ | 32.37 |
| |
Nonvested at December 28, 2018 | | 287,134 |
| | $ | 36.15 |
|
Granted | 159,669 |
| | 45.37 |
| 44,875 |
| | 104.70 |
|
Vested | (127,191 | ) | | 34.29 |
| (70,115 | ) | | 28.48 |
|
Forfeited | (129,311 | ) | | 33.36 |
| (59,443 | ) | | 31.59 |
|
Nonvested at March 30, 2018 | 373,056 |
| | $ | 36.93 |
| |
Nonvested at March 29, 2019 | | 202,451 |
| | $ | 55.34 |
|
(7.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.) OTHER OPERATING EXPENSES
Other Operating Expenses is comprised of the following (in thousands): |
| | | | | | | |
| Three Months Ended |
| March 30, 2018 | | March 31, 2017 |
Strategic reorganization and alignment | $ | 3,492 |
| | $ | — |
|
Manufacturing alignment to support growth | 513 |
| | — |
|
Consolidation and optimization initiatives | 605 |
| | 2,395 |
|
Acquisition and integration expenses | — |
| | 4,820 |
|
Asset dispositions, severance and other | 667 |
| | 4,556 |
|
Total other operating expenses | $ | 5,277 |
| | $ | 11,771 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(7.) OTHER OPERATING EXPENSES (Continued) |
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Strategic reorganization and alignment | $ | 1,734 |
| | $ | 2,054 |
|
Manufacturing alignment to support growth | 585 |
| | 513 |
|
Consolidation and optimization initiatives | — |
| | 575 |
|
Asset dispositions, severance and other | 571 |
| | 642 |
|
Other operating expenses - continuing operations | 2,890 |
| | 3,784 |
|
Discontinued operations | — |
| | 1,493 |
|
Total other operating expenses | $ | 2,890 |
| | $ | 5,277 |
|
Strategic Reorganization and Alignment
DuringAs a result of the fourth quarterstrategic review of 2017,its customers, competitors and markets, the Company began to taketaking steps in 2017 to better align its resources in order to enhance the profitability of its portfolio of products. This includesThese initiatives include improving its business processes and redirecting investments away from projects where the market does not justify the investment, as well as aligning resources with market conditions and the Company’s future strategic direction. The Company estimates that it will incur aggregate pre-tax charges in connection with the strategic reorganization and alignment plan, including projects reported in discontinued operations, of between approximately $10$20 million to $12$22 million, of which an estimated $8$16 million to $12$20 million are expected to result in cash outlays. During the three months ended March 30, 2018,29, 2019, 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 primarilyservices recorded within the Medical Segment.segment. As of March 30, 2018,29, 2019, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $9.4$18.2 million.These actions are expected to be substantially completed by the end of the second quarter of 2018.2019.
Manufacturing Alignment to Support Growth
In 2017, the Company initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth. The plan involves the relocation of certain manufacturing operations and expansion of certain of the Company's facilities. The Company estimates that it will incur aggregate pre-tax restructuring related charges in connection with the realignment plan of between approximately $9$7 million to $11$9 million, the majority of which are expected to be cash expenditures, and additional cash outlays for capital expenditures of between approximately $4$2 million to $6$4 million. Costs related to the Company’s manufacturing alignment to support growth initiative were primarily recorded within the Medical Segment.segment. As of March 30, 2018,29, 2019, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $0.9$4.0 million. These actions are expected to be substantially completed by the end of 2019.
Consolidation and Optimization Initiatives
In 2014, the Company initiated plans to transfer certain manufacturing functions performed at its facility in Beaverton, OR to a new facility in Tijuana, Mexico. Additionally, during 2016, the Company announced it would be closing its facility in Clarence, NY after transferring the machined component product lines manufactured in that facility to other Integer locations in the U.S. Costs related to the Company’s consolidation and optimization initiatives were primarily recorded within the Medical Segment.segment. The Company does not expect to incur any material additional costs associated with these activities as they were substantially completed as of March 30, 2018.activities.
The following table summarizes the change in accrued liabilities related to the initiatives described above (in thousands): |
| | | | | | | | | | | |
| Severance and Retention | | Other | | Total |
December 29, 2017 | $ | 1,308 |
| | $ | — |
| | $ | 1,308 |
|
Restructuring charges | 3,274 |
| | 1,336 |
| | 4,610 |
|
Cash payments | (3,136 | ) | | (897 | ) | | (4,033 | ) |
March 30, 2018 | $ | 1,446 |
| | $ | 439 |
| | $ | 1,885 |
|
Acquisition and Integration Expenses
The Company did not incur any additional costs associated with these activities during the three months ended March 30, 2018. During the three months ended March 31, 2017, the Company incurred $4.8 million in acquisition and integration costs related to the acquisition of Lake Region Medical, consisting primarily of integration costs. Integration costs primarily include professional, consulting, severance, retention, relocation, and travel costs. The $0.4 million of acquisition and integration costs accrued as of December 29, 2017 were paid during the three months ended March 30, 2018. These projects were completed as of December 29, 2017. |
| | | | | | | | | | | |
| Severance and Retention | | Other | | Total |
December 28, 2018 | $ | 1,668 |
| | $ | 202 |
| | $ | 1,870 |
|
Restructuring charges | 670 |
| | 1,649 |
| | 2,319 |
|
Cash payments | (9 | ) | | (1,545 | ) | | (1,554 | ) |
March 29, 2019 | $ | 2,329 |
| | $ | 306 |
| | $ | 2,635 |
|
Asset Dispositions, Severance and Other
During the first quarter of 2018three months ended March 29, 2019 and 2017,March 28, 2019, the Company recorded losses in connection with various asset disposals and/or write-downs. The 2017 amount also includes approximately $4.7 million in expenseexpenses related to the Company’s leadership transitions,other initiatives not described above which were recorded within the corporate unallocated segment.relate primarily to integration and operational initiatives to reduce costs and improve operational efficiencies.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.(9.) INCOME TAXES
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations. In addition, we continue to explore tax planning opportunities that may have a material impact on our effective tax rate.
On December 22, 2017,The Company’s income tax expense and effective tax rate for the three months ended March 29, 2019 and March 30, 2018 were impacted by the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”), which was signedenacted into law making significant changes toon December 22, 2017. For further discussion of 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,provisions and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.
Under GAAP, the effect of a change in tax laws or rates to be recognized in income from continuing operations for the period that includes the enactment date. As such, the Company recognized an estimate of the impact of the Tax Reform Act, in the year ended December 29, 2017. The Company had an estimated $147.5 million of undistributed foreign earnings and profit subject to the deemed mandatory repatriation as of December 29, 2017 and recognized a provisional $14.7 million in 2017 for the one-time transition tax. The Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with the repatriation tax. In addition, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 29, 2017 and recognized a $56.5 million tax benefit in the Company’s Consolidated Statement of Operations and Comprehensive Income (Loss) for the year ended December 29, 2017. For further discussion of the impact of the Tax Reform Act for the year ended December 29, 2017 reference is maderefer 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 20172018 Annual Report on Form 10-K for the year ended December 29, 2017.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the tax impact of the revaluation of deferred tax assets and liabilities and the provisional tax impact related to deemed repatriated earnings and included these amounts in its consolidated financial statements for the year ended December 29, 2017. The ultimate impact may differ from the provisional amount, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the Tax Reform Act. This accounting is expected to be complete by the date that the Company’s 2017 U.S. corporate income tax return is filed in28, 2018. During the three month period ended March 30, 2018, there were no changes made to the provisional amount recorded in 2017.
In addition to the reduction of the U.S. federal corporate tax rate and the one-time transition tax discussed above, the Tax Reform Act also established new tax laws that affect 2018, including, but not limited to: (i) a general elimination of U.S. federal income taxes on dividends from foreign subsidiaries; (ii) a new U.S. Income inclusion on certain earnings of foreign subsidiaries (Global Intangible Low-Taxed Income (“GILTI”)); (iii) the repeal of the domestic production activity deductions; (iv) limitations on the deductibility of certain executive compensation; (v) an elimination of the deduction for certain deemed “base erosion payments” made to foreign affiliates (Base Erosion and Anti-Abuse Tax (“BEAT”)); and (vi) a new provision that allows a domestic corporation an immediate deduction for a portion of its foreign derived intangible income (“FDII”).
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(8.) INCOME TAXES (Continued)
The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. The Company expects that it will be subject to incremental U.S. tax on GILTI income beginning in 2018. Because of the complexity of the new GILTI tax rules and the ongoing regulatory interpretation of the GILTI provisions, the Company is continuing its evaluation of this provision of the Tax Reform Act and the application of ASC 740, 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.
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 continuing operations for the first quarterquarters of 2019 and 2018 was 33.5%15.0% and 29.1%, respectively. The Company recognized a tax provision of $3.8 million on $12.2$25.1 million of income from continuing operations before the provision for income taxes for the first quarter of 2019, compared to (3.4)%a tax provision of $5.4 million on $4.2$18.5 million of lossesincome from continuing operations before the provision for income taxes for the same period in 2017.2018. The 2018 estimated annualdifference between the Company’s effective tax rate includesand the estimated impactU.S. federal statutory income tax rate for the first quarter of all Tax Reform Act provisions.
2019 is primarily attributable to discrete tax benefits of $1.7 million, which are predominately related to excess tax benefits recognized upon vesting of restricted stock units or exercise of stock options. The Company’s effective tax rate for the first quarter of 2018 differsdiffered from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of the GILTI tax. The Company’s earnings outside the United States are generally taxed at blended rates that are marginally lower than the U.S. federal rate. The GILTI provisions require the Company to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in its U.S. income tax return. There is a statutory deduction of 50% of the GILTI inclusion, however the deduction is subject to limitations based on U.S. taxable income. The Company currently has net operating losses to offset forecasted U.S. taxable income and as such, is temporarily subject to the deduction limitation which correspondingly imposes an incremental impact on U.S. income tax. The foreign jurisdictions in which the Company operates and where its foreign earnings are primarily derived, include Switzerland, Mexico, Germany, Uruguay, Malaysia and Ireland.
The Company’s2019 estimated annual effective tax rate for 2017 differs fromincludes the U.S. federal statutory tax rateestimated impact of 35% due principally to the Company’s earnings outside the U.S. which are generally taxed at rates lower than the U.S. federal rate. In addition, the Company had positive income before taxes in its foreign jurisdictions but losses before taxes in U.S. jurisdictions.all Tax Reform Act provisions.
As of March 30, 2018,29, 2019, the balance of unrecognized tax benefits from continuing operations is approximately $12.7$5.4 million. It is reasonably possible that a reduction of up to $1.1$0.9 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately $12.3$5.3 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
(9.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(9.) COMMITMENTS AND CONTINGENCIES
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 juryTwo juries in the U.S. District Court for the District of Delaware have returned a verdictverdicts finding that AVX infringed two Integeron three of the Company’s patents and awarded Integerthe Company $37.5 million in damages. Following a second trial in August 2017, a jury found that AVX infringed an additional Integer patent. OnIn March 30, 2018, the U.S. District Court for the District of Delaware vacated the original damage award and ordered a retrial on damages. In the January 2019 retrial on damages, whichthe jury awarded the Company $22.2 million in damages. That award is scheduled for January 2019. Thesubject to post-trial proceedings. To date, the Company has recorded no gains in connection with this litigation as no cash has been received.litigation.
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company does not expect future product warranty claims will have a material effect on its condensed consolidated results of operations, financial position, or cash flows. However, there can be no assurance that any future customer complaints or negative regulatory actions regarding the Company’s products, which the Company currently believes to be immaterial, does not become material in the future. The change in product warranty liability was comprised of the following (in thousands): | | December 29, 2017 | $ | 4,745 |
| |
December 28, 2018 | | $ | 2,600 |
|
Additions to warranty reserve | 256 |
| 92 |
|
Warranty claims settled | (69 | ) | (293 | ) |
March 30, 2018 | $ | 4,932 |
| |
March 29, 2019 | | $ | 2,399 |
|
Foreign Currency Contracts(11.) LEASES
The Company periodically enters into foreign currency forward contractsprimarily leases certain office and manufacturing facilities under operating leases, with additional operating leases for machinery, office equipment and vehicles. An arrangement is considered to hedge its exposurecontain a lease if it conveys the right to foreign currencyuse an identified asset for a period of time in exchange rate fluctuations in its international operations.for consideration. If it is determined that an arrangement contains a lease, classification of a lease as operating or finance is determined by evaluating the five criteria outlined within ASC 842 at inception. The Company has designated these foreign currency forward contractsdoes not currently have any finance leases. The Company’s lease agreements do not contain any residual value guarantees or any material restrictive covenants.
Right-of-use (“ROU”) lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use. Operating lease ROU assets are presented as cash flow hedges. Accordingly,Operating Lease Assets, the effective portionscurrent portion of operating lease liabilities are presented within Accrued Expense and Other Current Liabilities, and the unrealized gains and lossesnon-current portion of operating lease liabilities are presented as Operating Lease Liabilities on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are reclassified to earnings in the same periods during which the hedged transactions affect earnings.Sheets. 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 $2.2current portion of operating lease liabilities was $7.7 million loss.
The impact to the Company’s results of operations from its forward contract hedges is as follows (in thousands): |
| | | | | | | |
| Three Months Ended |
| March 30, 2018 | | March 31, 2017 |
Increase in sales | $ | 139 |
| | $ | 24 |
|
Increase (decrease) in cost of sales | (436 | ) | | 1,062 |
|
Ineffective portion of change in fair value | — |
| | — |
|
Information regarding outstanding foreign currency contracts designated as cash flow hedges as of March 30, 201829, 2019. Leases with a term of 12 months or less are not recorded on the balance sheet.
The discount rate implicit within our leases is as follows (dollarsgenerally not readily determinable, and therefore, the Company uses its estimated incremental borrowing rate in thousands):determining the present value of lease payments. The incremental borrowing rate is determined based on the Company’s recent debt issuances, lease term and the currency in which lease payments are made.
|
| | | | | | | | | | | | | | | | |
Aggregate Notional Amount | | Start Date | | End Date | | $/Foreign Currency | | Fair Value | | Balance Sheet Location |
$ | 2,313 |
| | Jan 2018 | | Jun 2018 | | 0.0514 |
| Peso | | $ | 142 |
| | Prepaid expenses and other current assets |
22,798 |
| | Jan 2018 | | Dec 2018 | | 0.0507 |
| Peso | | 1,403 |
| | Prepaid expenses and other current assets |
21,900 |
| | Jan 2018 | | Dec 2018 | | 1.2089 |
| Euro | | 644 |
| | Prepaid expenses and other current assets |
The Company’s real estate leases often contain options to renew, and less frequently, termination options. The exercise of such renewal and termination options are generally at the Company’s sole discretion. The Company evaluates renewal and termination options at lease commencement to determine if such options are reasonably certain to be exercised based on economic factors. As of March 29, 2019, the Company did not have any leases that have not yet commenced.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(10.(11.) LEASES (Continued)
The following table presents the weighted average remaining lease term and discount rate:
|
| | |
| March 29, 2019 |
Weighted-average remaining lease term of operating leases (in years) | 6.8 |
|
Weighted-average discount rate of operating leases | 5.4 | % |
For certain leases where rent escalates based upon a change in a financial index, such as the Consumer Price Index, the difference between the rate at lease inception and the subsequent fluctuations in that rate are included in variable lease costs. Additionally, because the Company has elected to not separate lease and non-lease components, variable costs also include payments to the landlord for common area maintenance, real estate taxes, insurance and other operating expenses. Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.
The components and classification of lease expense for the three months ended March 29, 2019 are as follows (in thousands): |
| | | |
Operating lease cost | $ | 2,449 |
|
Short-term lease cost | 17 |
|
Variable lease cost | 555 |
|
Sublease income | (467 | ) |
Total lease cost | $ | 2,554 |
|
| |
Cost of sales | $ | 2,152 |
|
Selling, general and administrative expenses | 255 |
|
Research, development and engineering costs | 139 |
|
Other operating expenses | 8 |
|
Total lease cost | $ | 2,554 |
|
At March 29, 2019, the maturities of operating lease liabilities were as follows (in thousands): |
| | | |
Remainder of 2019 | $ | 7,491 |
|
2020 | 8,520 |
|
2021 | 8,048 |
|
2022 | 5,938 |
|
2023 | 5,189 |
|
2024 | 4,653 |
|
Thereafter | 10,176 |
|
Total lease payments | 50,015 |
|
Less imputed interest | (8,521 | ) |
Total | $ | 41,494 |
|
The Company’s future minimum lease commitments, net of sublease income, as of December 28, 2018, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | After 2023 |
Future minimum lease payments | $ | 8,562 |
| | 7,290 |
| | 7,348 |
| | 5,269 |
| | 5,112 |
| | 14,589 |
|
Supplemental cash flow information related to leases for the three months ended March 29, 2019 is as follows (in thousands): |
| | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 2,538 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | — |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(12.) 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 |
| March 30, 2018 | | March 31, 2017 |
Numerator for basic and diluted EPS: | | | |
Net income (loss) | $ | 8,118 |
| | $ | (4,339 | ) |
Denominator for basic EPS: | | | |
Weighted average shares outstanding | 31,902 |
| | 31,016 |
|
Effect of dilutive securities: | | | |
Stock options, restricted stock and RSUs | 521 |
| | — |
|
Denominator for diluted EPS | 32,423 |
| | 31,016 |
|
Basic EPS | $ | 0.25 |
| | $ | (0.14 | ) |
Diluted EPS | $ | 0.25 |
| | $ | (0.14 | ) |
|
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Numerator for basic and diluted EPS: | | | |
Income from continuing operations | $ | 21,366 |
| | $ | 13,084 |
|
Income (loss) from discontinued operations | 303 |
| | (4,966 | ) |
Net income | $ | 21,669 |
| | $ | 8,118 |
|
| | | |
Denominator for basic and diluted EPS: | | | |
Weighted average shares outstanding - Basic | 32,536 |
| | 31,902 |
|
Dilutive effect of assumed exercise of stock options, restricted stock and RSUs | 444 |
| | 521 |
|
Weighted average shares outstanding - Diluted | 32,980 |
| | 32,423 |
|
| | | |
Basic earnings (loss) per share: | | | |
Income from continuing operations | $ | 0.66 |
| | $ | 0.41 |
|
Income (loss) from discontinued operations | 0.01 |
| | (0.16 | ) |
Basic earnings per share | 0.67 |
| | 0.25 |
|
| | | |
Diluted earnings (loss) per share: | | | |
Income from continuing operations | $ | 0.65 |
| | $ | 0.40 |
|
Income (loss) from discontinued operations | 0.01 |
| | (0.15 | ) |
Diluted earnings per share | 0.66 |
| | 0.25 |
|
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 |
| March 30, 2018 | | March 31, 2017 |
Time-vested stock options, restricted stock and RSUs | 150 |
| | 1,700 |
|
Performance-vested restricted stock and PSUs | 182 |
| | 593 |
|
(11.) ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount |
December 29, 2017 | $ | (1,422 | ) | | $ | 3,418 |
| | $ | 50,200 |
| | $ | 52,196 |
| | $ | (17 | ) | | $ | 52,179 |
|
Unrealized gain on cash flow hedges | — |
| | 5,124 |
| | — |
| | 5,124 |
| | (1,076 | ) | | 4,048 |
|
Realized gain on foreign currency hedges | — |
| | (575 | ) | | — |
| | (575 | ) | | 121 |
| | (454 | ) |
Realized gain on interest rate swap hedges | — |
| | (234 | ) | | — |
| | (234 | ) | | 49 |
| | (185 | ) |
Foreign currency translation gain | — |
| | — |
| | 13,441 |
| | 13,441 |
| | — |
| | 13,441 |
|
March 30, 2018 | $ | (1,422 | ) | | $ | 7,733 |
| | $ | 63,641 |
| | $ | 69,952 |
| | $ | (923 | ) | | $ | 69,029 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 30, 2016 | $ | (1,475 | ) | | $ | 1,420 |
| | $ | (15,660 | ) | | $ | (15,715 | ) | | $ | (285 | ) | | $ | (16,000 | ) |
Unrealized gain on cash flow hedges | — |
| | 1,712 |
| | — |
| | 1,712 |
| | (599 | ) | | 1,113 |
|
Realized loss on foreign currency hedges | — |
| | 1,086 |
| | — |
| | 1,086 |
| | (380 | ) | | 706 |
|
Realized gain on interest rate swap hedges | — |
| | (106 | ) | | — |
| | (106 | ) | | 37 |
| | (69 | ) |
Foreign currency translation gain | — |
| | — |
| | 6,536 |
| | 6,536 |
| | — |
| | 6,536 |
|
March 31, 2017 | $ | (1,475 | ) | | $ | 4,112 |
| | $ | (9,124 | ) | | $ | (6,487 | ) | | $ | (1,227 | ) | | $ | (7,714 | ) |
The realized loss (gain) relating to the Company’s foreign currency hedges were reclassified from Accumulated Other Comprehensive Income and included in Cost of Sales or Sales as the transactions they are hedging occur. The realized gain relating to the Company’s interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income and included in Interest Expense as interest on the corresponding debt being hedged is accrued. |
| | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Time-vested stock options, restricted stock and RSUs | 61 |
| | 150 |
|
Performance-vested restricted stock and PRSUs | 45 |
| | 182 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(12.(13.) ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income (“AOCI”) 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 |
December 28, 2018 | $ | (295 | ) | | $ | 3,439 |
| | $ | 30,539 |
| | $ | 33,683 |
| | $ | (679 | ) | | $ | 33,004 |
|
Unrealized loss on cash flow hedges | — |
| | (154 | ) | | — |
| | (154 | ) | | 32 |
| | (122 | ) |
Realized gain on foreign currency hedges | — |
| | (45 | ) | | — |
| | (45 | ) | | 9 |
| | (36 | ) |
Realized gain on interest rate swap hedge | — |
| | (689 | ) | | — |
| | (689 | ) | | 145 |
| | (544 | ) |
Foreign currency translation loss | — |
| | — |
| | (6,838 | ) | | (6,838 | ) | | — |
| | (6,838 | ) |
March 29, 2019 | $ | (295 | ) | | $ | 2,551 |
| | $ | 23,701 |
| | $ | 25,957 |
| | $ | (493 | ) | | $ | 25,464 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
December 29, 2017 | $ | (1,422 | ) | | $ | 3,418 |
| | $ | 50,200 |
| | $ | 52,196 |
| | $ | (17 | ) | | $ | 52,179 |
|
Unrealized gain on cash flow hedges | — |
| | 5,124 |
| | — |
| | 5,124 |
| | (1,076 | ) | | 4,048 |
|
Realized gain on foreign currency hedges | — |
| | (575 | ) | | — |
| | (575 | ) | | 121 |
| | (454 | ) |
Realized gain on interest rate swap hedge | — |
| | (234 | ) | | — |
| | (234 | ) | | 49 |
| | (185 | ) |
Foreign currency translation gain | — |
| | — |
| | 13,441 |
| | 13,441 |
| | — |
| | 13,441 |
|
March 30, 2018 | $ | (1,422 | ) | | $ | 7,733 |
| | $ | 63,641 |
| | $ | 69,952 |
| | $ | (923 | ) | | $ | 69,029 |
|
(14.) FINANCIAL INSTRUMENTS AND 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 methodis exposed to global market risks, including the effect of changes in interest rates and equity method investments whichforeign currency exchange rates, and uses derivatives to manage these exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. All derivatives are measuredrecorded at fair value on the balance sheet.
Interest Rate Swaps
The Company periodically enters into interest rate swap agreements in order to reduce the cash flow risk caused by interest rate changes on our outstanding floating rate borrowings. Under the swap agreements, the Company pays a nonrecurring basis.fixed rate of interest and receives a floating rate equal to one-month London Interbank Offered Rate (“LIBOR”). The variable rate received on the interest rate swaps 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 Company has designated these interest rate swap agreements as cash flow hedges. The unrealized gains and losses on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are subsequently reclassified into earnings when interest on the related debt is accrued.
The fair value of the Company’s interest rate swap contracts are 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 receives a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. The estimated fair value of the interest rate swap agreement represents the amount the Company would receive (pay) to terminate the contract.
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. The unrealized gains and losses on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are reclassified to earnings in the same periods during which the hedged transactions affect earnings.
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(14.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The fair value of foreign currency contracts wereare 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 receivedreceives fair value estimates from the foreign currency contract counterparties to verify the reasonableness of the Company’s estimates.
Derivative Instruments with Hedge Accounting Designation
The Company’s foreign currency contracts are categorized in Level 2 offollowing tables present the fair value hierarchy. Refer to Note 9 “Commitmentsvalues of derivative instruments formally designated as hedging instruments as of March 29, 2019 and Contingencies” for further discussion regarding the fair value of the Company’s foreign currency contracts.December 28, 2018 (in thousands).
The fair value of the Company’s interest rate swap contracts outstanding were determined through the use of a cash flow model that utilizes observable market data inputs. These observable market data inputs include LIBOR, swap rates, and credit spread curves. In addition, the Company received a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. Refer to Note 4 “Debt” for further discussion regarding the fair value of the Company’s interest rate swap. |
| | | | | | | | | | | | | | |
| | | | | | Fair Value(1) |
| | Fair Value Hierarchy | | Gross Notional Amount | | Assets | | Liabilities |
March 29, 2019 | | | | | | | | |
Interest rate swaps(1) | | Level 2 | | $ | 200,000 |
| | $ | 3,034 |
| | $ | — |
|
Foreign currency contracts | | Level 2 | | 44,418 |
| | — |
| | 483 |
|
| | | | | | | | |
December 28, 2018 | | | | | | | | |
Interest rate swaps | | Level 2 | | $ | 200,000 |
| | $ | 4,171 |
| | $ | — |
|
Foreign currency contracts | | Level 2 | | 55,665 |
| | — |
| | 732 |
|
__________
| |
(1) | Unless otherwise noted, derivative assets are classified within Other assets on the Condensed Consolidated Balance Sheets and derivative liabilities are classified within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. |
| |
(2) | On April 1, 2019, the Company entered into an additional interest rate swap agreement with a gross notional amount of $400 million and extended the current $200 million interest rate swap through June 2023. |
The following table provides information regarding assetspresents the amounts in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded and liabilities recorded at fair valuethe effects of cash flow hedge activity on a recurring basisthese line items for the three months ended March 29, 2019 and March 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
March 30, 2018 | | | | | | | | |
Assets: Foreign currency contracts (Note 9) | | $ | 2,189 |
| | $ | — |
| | $ | 2,189 |
| | $ | — |
|
Assets: Interest rate swap (Note 4) | | 5,544 |
| | — |
| | 5,544 |
| | — |
|
| | | | | | | | |
December 29, 2017 | | | | | | | | |
Assets: Interest rate swaps | | $ | 4,279 |
| | $ | — |
| | $ | 4,279 |
| | $ | — |
|
Liabilities: Foreign currency contracts | | 861 |
| | — |
| | 861 |
| | — |
|
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 29, 2019 | | Three Months Ended March 30, 2018 |
| | Total | | Amount of Gain (Loss) on Cash Flow Hedge Activity | | Total | | Amount of Gain on Cash Flow Hedge Activity |
Sales | | $ | 314,676 |
| | $ | (321 | ) | | $ | 292,426 |
| | $ | 139 |
|
Cost of sales | | 226,066 |
| | 366 |
| | 208,894 |
| | 436 |
|
Interest expense | | 13,830 |
| | 689 |
| | 15,595 |
| | 234 |
|
The following table present the amounts affecting the Condensed Consolidated Statements of Operations for the three months ended March 29, 2019 and March 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| | Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss) on Derivatives | | Amount of Gain (Loss) Reclassified from AOCI into Earnings |
| | Three months ended, | | Location of Gain (Loss) Reclassified from AOCI into Earnings | | Three months ended, |
| | March 29, 2019 | | March 30, 2018 | | | March 29, 2019 | | March 30, 2018 |
Interest rate swap | | $ | (448 | ) | | $ | 1,499 |
| | Interest expense | | $ | 689 |
| | $ | 234 |
|
Foreign exchange forwards | | (700 | ) | | 638 |
| | Sales | | (321 | ) | | 139 |
|
Foreign exchange forwards | | 994 |
| | 2,987 |
| | Cost of sales | | 366 |
| | 436 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(14.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The Company expects to reclassify net gains totaling $2.0 million related to its cash flow hedges from accumulated other comprehensive income into earnings during the next twelve months.
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
Borrowings under the Company’s Revolving Credit Facility, TLA Facility and TLB Facility accrue interest at a floating rate tied to Note 4 “Debt” for further discussion regardinga standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. The carrying amount of this floating rate debt approximates fair value ofbased upon 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:respective interest rates adjusting with market rate adjustments.
Cost and Equity Method Investments
The Company holds long-term, strategic investments in equitycompanies to promote business and other securities thatstrategic objectives. These investments are accounted for as either cost method or equity method investments, which are classified asincluded in Other Assets on the Condensed Consolidated Balance Sheets. Non-marketable equity securitiesare equity securities without readily determinable fair value. The total carrying value of these investments is reviewed quarterly forCompany has elected the practicability exception to use an alternative that measures the securities at cost minus impairment, if any, plus or minus changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of costresulting from qualifying observable price changes. Equity method investments and non-marketable equity securities are not adjusted if there are no identified events or changes in circumstances that may have a material effect onincluded within Level 2 of the fair value hierarchy.
Equity investments are comprised of the investments. The aggregate recorded amount of cost and equity method investments at March 30, 2018 and December 29, 2017 was $25.8 million and $20.8 million, respectively.
following (in thousands):
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
|
| | | | | | | | | | | |
| | | | | March 29, 2019 | | December 28, 2018 |
Equity method investment | | | | | $ | 15,149 |
| | $ | 15,148 |
|
Non-marketable equity securities | | | | | 7,667 |
| | 7,667 |
|
Total equity investments | | | | | $ | 22,816 |
| | $ | 22,815 |
|
(12.) FAIR VALUE MEASUREMENTS (Continued)The components of (Gain) Loss on Equity Investments, Net for each period were as follows (in thousands):
As of March 30, 2018 and December 29, 2017, the recorded amount of the Company’s equity method investment was $18.8 million and $13.8 million, respectively. |
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Equity method investment (income) loss | $ | 41 |
| | $ | (4,970 | ) |
Impairment charges | — |
| | — |
|
Observable price adjustments on non-marketable equity securities | — |
| | — |
|
Total (gain) loss on equity investments, net | $ | 41 |
| | $ | (4,970 | ) |
The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change. As of March 30, 2018,29, 2019, the Company owned 6.6% of this fund.During the three months ended March 30, 2018 and March 31, 2017, the Company recognized a net gain of $5.0 million and a net loss of $0.4 million, respectively, on its equity method investment.
The Company’s recorded amount of cost method investments was $7.0 million at March 30, 2018 and December 29, 2017.
The Company did not recognize any impairment charges related to cost method investments during the three months ended March 30, 2018 and March 31, 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 and categorized in Level 2 of the fair value hierarchy.- 23 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(13.(15.) SEGMENT INFORMATION
The Company organizes its business into two reportable segments: (1) Medical and (2) Non-Medical. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker (“CODM”), to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting. There were no sales between segments during the three months ended March 30, 201829, 2019 and March 31, 2017.30, 2018.
The following table presents sales from continuing operations by product line (in thousands).
| | | Three Months Ended | Three Months Ended |
| March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Segment sales by product line: | | | | |
Segment sales from continuing operations by product line: | | Segment sales from continuing operations by product line: | | |
Medical | | | | | | |
Cardio & Vascular | $ | 138,348 |
| | $ | 125,108 |
| $ | 152,574 |
| | $ | 136,863 |
|
Cardiac & Neuromodulation | 108,910 |
| | 103,813 |
| 116,911 |
| | 108,910 |
|
Advanced Surgical, Orthopedics & Portable Medical | 121,775 |
| | 105,146 |
| 31,588 |
| | 33,941 |
|
Total Medical | 369,033 |
| | 334,067 |
| 301,073 |
| | 279,714 |
|
Non-Medical | 12,712 |
| | 11,346 |
| 13,603 |
| | 12,712 |
|
Total sales | $ | 381,745 |
| | $ | 345,413 |
| |
Total sales from continuing operations | | $ | 314,676 |
| | $ | 292,426 |
|
The following table presents income from continuing operations for the Company’s reportable segments (in thousands).
| | | Three Months Ended | Three Months Ended |
| March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Segment income from operations: | | | | |
Segment income from continuing operations: | | | | |
Medical | $ | 52,127 |
| | $ | 50,360 |
| $ | 56,380 |
| | $ | 47,515 |
|
Non-Medical | 3,198 |
| | 1,562 |
| 4,311 |
| | 3,198 |
|
Total segment income from operations | 55,325 |
| | 51,922 |
| |
Total segment income from continuing operations | | 60,691 |
| | 50,713 |
|
Unallocated operating expenses | (20,608 | ) | | (25,377 | ) | (21,522 | ) | | (20,670 | ) |
Operating income | 34,717 |
| | 26,545 |
| |
Operating income from continuing operations | | 39,169 |
| | 30,043 |
|
Unallocated expenses, net | (22,508 | ) | | (30,740 | ) | (14,037 | ) | | (11,585 | ) |
Income (loss) before income taxes | $ | 12,209 |
| | $ | (4,195 | ) | |
Income before taxes from continuing operations | | $ | 25,132 |
| | $ | 18,458 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
| |
(14.(16.)
| REVENUE FROM CONTRACTS WITH CUSTOMERS |
Revenue Recognition
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 casesRevenue 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 expenserecognized 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 asUnder the ability to direct the use of and obtain substantially allprovisions of the remaining benefitsmajority of the product. The customer obtains control ofCompany’s contracts with customers, revenue is recognized at the productspoint in time when title and risk of ownership transfers to them,the customer, which is primarily determined based upon the shipping terms. Accordingly,When contracts with customers for products that do not have an alternative use to the majorityCompany contain provisions that provide the Company with an enforceable right to payment for performance completed to date with a recapture of costs incurred plus an applicable margin throughout the duration 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,contract, revenue is recognized over time as control is deemed to have transferred to the customer. The Company uses an input measure to determine progress towards completion and total estimated costs at that point in time.completion. Under this method, sales and gross profit are recognized as work is performed generally based on actual costs incurred. For arrangements recognized over time, the Company records a contract asset for unbilled revenue associated with non-cancellable customer orders. 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)
| |
(14.)
| 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 13,15, “Segment Information.” Additionally,
Revenue recognized from products and services transferred to customers over time represented 14% of total revenue for the tables below disaggregatethree months ended March 28, 2019, substantially all of which was within the Company’sMedical segment. The Company did not have any significant revenue related to contracts recognized over time for the three months ended March 30, 2018.
The following table presents revenues based uponby significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues.
|
| | | | | | |
| | Three Months Ended |
| | March 29, 2019 |
Customer | | Medical | | Non-Medical |
Customer A | | 25 | % | | — | % |
Customer B | | 19 | % | | — | % |
Customer C | | 12 | % | | — | % |
Customer D | | — | % | | 24 | % |
Customer E | | — | % | | 8 | % |
All other customers | | 44 | % | | 68 | % |
|
| | | | | | |
| | Three Months Ended |
| | March 30, 2018 |
Customer | | Medical | | Non-Medical |
Customer A | | 22 | % | | — | % |
Customer B | | 21 | % | | — | % |
Customer C | | 12 | % | | — | % |
Customer D | | — | % | | 19 | % |
Customer E | | — | % | | 11 | % |
All other customers | | 45 | % | | 70 | % |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(16.)REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
The following table presents revenues andby 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.
|
| | | | |
| | Three Months Ended |
| | March 29, 2019 |
Ship to Location | | Medical | | Non-Medical |
United States | | 56% | | 57% |
Puerto Rico | | 15% | | —% |
Canada | | —% | | 13% |
All other Countries | | 29% | | 30% |
|
| | | | |
| | Three Months Ended |
| | March 30, 2018 |
Ship to Location | | Medical | | Non-Medical |
United States | | 56% | | 69% |
Puerto Rico | | 13% | | —% |
Canada | | —% | | 11% |
All other Countries | | 31% | | 20% |
Contract Balances
The following table presents revenues by customer foropening and closing balances of the Company's contract assets and contract liabilities are as follows (in thousands):
|
| | | | | | | |
| March 29, 2019 | | December 28, 2018 |
Contract assets included in other current assets | $ | 11,497 |
| | $ | — |
|
Contract liabilities included in other current liabilities | 1,986 |
| | 2,264 |
|
During the three months ended March 30, 2018.
|
| | | | | | | |
Customer | | | Medical | | Non-Medical |
Customer A | | | 17 | % | | — | % |
Customer B | | | 16 | % | | — | % |
Customer C | | | 15 | % | | — | % |
Customer D | | | — | % | | 19 | % |
Customer E | | | — | % | | 11 | % |
All other customers | | | 52 | % | | 70 | % |
The following table presents revenues by ship to country for29, 2019, the three months ended March 30, 2018.
|
| | | | | | | |
Ship to Location | | | Medical | | Non-Medical |
United States | | | 55 | % | | 69 | % |
Puerto Rico | | | 10 | % | | — | % |
Canada | | | — | % | | 11 | % |
All other Countries | | | 35 | % | | 20 | % |
Contract Balances
The timingCompany recognized $0.3 million of revenue recognition, billings and cash collections resultsthat was included 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 $4.4 million and $3.6 millioncontract liability balance as of March 30, 2018 and December 29, 2017, respectively, and are classified as Accrued Expenses on the Condensed Consolidated Balance Sheets.28, 2018. During the three months ended March 30, 2018, wethe Company recognized $0.7$0.1 million 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)
| |
(15.)
| IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS |
The following table provides a brief description of recent Accounting Standard Updates ("ASU") issued by the Financial Accounting Standards Board ("FASB"):
|
| | | | | | |
Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
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. 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 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.
| | 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.
| | 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 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.
| | 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. 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 additional assets and corresponding liabilities related to leases upon adoption, but has not yet quantified these at this time. The Company plans to adopt the standard effective December 29, 2018. |
INTEGER HOLDINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(15.)IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)
|
| | | | | | |
Standard | | Description | | Effective Date | | Effect on the Financial Statements or Other Significant Matters |
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.
| | 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.
| | 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 14, “Revenue from Contracts with Customers”). |
Adoption of ASU 2017-07
On December 30, 2017, we retrospectively adopted the new accounting guidance on presentation of net periodic pension costs (ASU 2017-07). That guidance requires that we disaggregate the service cost component of net benefit costs and report those costs in the same line item or items in the Condensed Consolidated Statements of Operations and Comprehensive Income as other compensation costs arising from services rendered by the pertinent employees during the period. The other non-service components of net benefit costs are required to be presented separately from the service cost component.
Following the adoption of this guidance, we continue 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 remaining components of net benefit costs, amortization of net losses and expected return on plan assets, are now recorded in Other Loss, Net.
(16.) SUBSEQUENT EVENT
On May 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines within its Medical segment to MedPlast, LLC for $600 million in cash (the “Transaction”). The Company expects to close the Transaction in the third quarter of 2018, subject to regulatory clearance and other customary closing conditions. The net proceeds from the sale are expected to be used to accelerate debt payments to reduce leverage.
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 29, 2017.28, 2018. 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.
In this Form 10-Q, references to “Integer,” “we,” “us,” “our” and the “Company” mean Integer Holdings Corporation and its subsidiaries, unless the context indicates 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, andorthopedics, advanced surgical and portable medical markets. We also develop 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.
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The first quarter of 2019 and 2018 each contained 13 weeks and ended on March 29 and March 30, respectively. The Company’s 2019 fiscal year will end on January 3, 2020 and will be a fifty-three week period. Fiscal year 2018 ended on December 28, 2018 and was a fifty-two week period.
Discontinued Operations and Divestiture
On July 2, 2018, we completed the sale of the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) for net cash proceeds of approximately $581 million, resulting in the recognition of a pre-tax gain of approximately $195 million during the year ended December 28, 2018. 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.
On April 14, 2019, we agreed to a net working capital adjustment with Viant, whereby Viant will pay us $4.8 million on or before June 14, 2019. The final net working capital adjustment will be recognized as an increase to the pre-tax gain on sale from discontinued operations during the quarter ending June 28, 2019.
The results of operations of the AS&O Product Line have been classified as discontinued operations for all periods presented. Prior period amounts have been reclassified to conform to the continuing operations reporting presentation. 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 of the AS&O Product Line.
Strategic Overview
During 2017, we undertook a thorough strategic review of our customers, competitors and markets. As a result of this review, during the fourth quarter of 2017, we beganWe continue 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. These steps include focusingIn addition to our investment in research and development and manufacturing, improving our business processes and redirecting investments away from projects whereportfolio strategy, we have launched the market does not justify the investment. The execution of this strategysix key operational strategic imperatives designed to drive excellence in everything we do:
Sales Force Excellence: We are changing the organization structure to match product line growth strategies and customer needs. This change is about getting more out of the capability we already have, and will beincrease individual accountability and clarity of ownership.
Market Focused Innovation: We are ensuring we get the most return on our primary focus going forward.research & development investments. Integer is currently focusing on getting a clearer picture of how we spend our money and ensuring we are spending it in the right places so we can increase investments to drive future growth.
Manufacturing Process Excellence: The goal is to deliver world-class operational performance in the areas of safety, quality, delivery and overall efficiency. We want to transition our manufacturing into a competitive advantage through a single, enterprise-wide manufacturing structure known as the Integer Production System. This system will provide standardized systems and processes by leveraging best practices and applying them across all of our global sites.
Business Process Excellence: Integer is taking a systematic approach to driving excellence in everything we do by standardizing, optimizing and ultimately sustaining all of our processes.
Performance Excellence: We are raising the bar on associate performance to maximize our impact. This includes aligning key roles with critical capabilities, positioning the best talent against the biggest work, and putting tools and processes in place to provide higher financial rewards for top performers, so our top performers can see increased results in pay for increased results in their performance.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Leadership Capability: We have a robust plan to make leadership a competitive advantage for Integer, and since the success rate is higher with internal hires, we are focusing on finding and developing leaders from within the Company to build critical capabilities for future success.
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 expanded our medical device capabilities and are excited about opportunities to partner with customers to drive innovation. We believe we have the scale and global presence, supported by world-class manufacturing and quality capabilities, to capture these opportunities. We are confident in our abilitiescapabilities as one of the largest MDO manufacturers, with a long history of successfully integrating companies, driving down costs and growing revenues over the long-term. Ultimately, our strategic vision is to drive shareholder value by enhancing the lives of patients worldwide by being our customers’ partner of choice for innovative technologies and services.
20182019 Outlook(a)
(dollars in millions, except per share amounts) |
| | | | | | | | |
| | GAAP | | Non-GAAP(b)(c) |
Continuing Operations: | | As Reported | | Growth | | Adjusted | | Growth |
Sales | | $1,5101,265 to $1,550$1,280 | | 3%4% to 6%5% | | $1,5101,265 to $1,550$1,280 | | 3%4% to 6% |
Net Income | $50 to $60 | | (25%) to (10%) | | $10395 to $113$101 | | 14%102% to 25%116% | | $137 to $144 | | 10% to 16% |
EBITDA | | N/A | | N/A | | $310275 to $320$283 | | 9%6% to 12%9% |
Earnings per Diluted Share | | $1.552.87 to $1.85$3.07 | | (26%)99% to (11%)113% | | $3.204.15 to $3.50$4.35 | | 14%9% to 25%14% |
| |
(a) | Our 2018 Outlook does not reflect the potential impact of the planned divestiture of the Advanced Surgical and Orthopedics product lines that was announced on May 3, 2018. Refer to Note 16 “Subsequent Event” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the divestiture. |
| |
(b) | Except as described below, further reconciliations by line item to the closest corresponding GAAP financial measure prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for Adjusted NetSales, Adjusted Income, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and Adjusted EBITDA and Adjusted Earnings per Diluted Share and Adjusted EBITDA,diluted share (“EPS”), all from continuing operations, included in our “2018“2019 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 thisthese non-GAAP financial measure.measures. |
| |
(c)(b) | Adjusted Net Incomeincome and diluted EPS, both from continuing operations, for 2018 is2019 are expected to consist of GAAP Net Incomeincome from continuing operations and diluted EPS from continuing operations, excluding items such as intangible amortization, IP-related litigation costs, consolidation and realignment costs, asset disposition and write-down charges,dispositions, severance and loss on extinguishment of debt totaling approximately $63 million.$54 million, pre-tax. The after-tax impact of these items is estimated to be approximately $50$43 million, or approximately $1.54$1.30 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 approximately three to five years. 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 from continuing operations is expected to consist of Adjusted Net Income,income from continuing operations, excluding items such as depreciation, interest, stock-based compensation and taxes totaling approximately $207$139 million.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Financial Overview of Continuing Operations
Net incomeIncome from continuing operations for the first quarter of 20182019 was $8.1$21.4 million or $0.25$0.65 per diluted share compared to a net loss of $4.3$13.1 million or $0.14$0.40 per diluted share for the first quarter of 2017. This variance is2018. These variances are primarily the result of the following:
Sales increased $36.3 million or 11%. Foreign currency exchange rates increased sales by approximately $6 million. Organic salesfrom continuing operations for the first quarter of 2019 increased 8% over the first quarter of 2018 increased 9%, primarily drivendue to market growth and new business wins. During the first quarter of 2019, price concessions given to our larger OEM customers in return for long-term volume commitments lowered sales by approximately $3 million in comparison to the first quarter of 2018. Foreign currency exchange rates decreased sales growth in our Medical segment through strong demand for Integer-owned products in the Cardio & Vascular product line, as well as strong demand for Neuromodulation products and strength in the Advanced Surgical, Orthopedics & Portable Medical product line;
Gross profitby $0.9 million for the first quarter of 20182019 compared to the same quarter last year.
Gross profit from continuing operations for the first quarter of 2019 increased $4.5$5.1 million, primarily due to the increase in sales from continuing operations discussed above, partially offset by price concessions given to our larger OEM customers and higher incentive compensation based upon current quarter results;above.
Operating expenses for the first quarter of 20182019 were lower by $3.6$4.0 million, compared to the same period in 2018, due to a decreasedecreases in otherall categories of operating expenses ($6.5 million) attributable to the completion of spending on integration activities and various efficiencies and synergies gained as a result of our integration and consolidation initiatives partially offset by higher incentive compensation ($2.3 million);expenses.
Interest expense for the first quarter of 2019 decreased by $1.8 million compared to the same period in 2018, declined $2.4 million, primarily attributable toresulting from lower outstanding debt balances due to the repaymentand a $0.6 million decrease in extinguishment of debt over the last year;charges.
Net gains on cost and equity method investments, which are unpredictable in nature, increased first quarterdecreased income by $5.4 million as a result of a net gain of $5.0 million inwhen comparing the first quarter of 2018 compared2019 to a net loss of $0.4 million during the first quarter of 2017; and2018.
Other loss, net for the first quarter of 20182019 was lower by $0.4$0.2 million (lower net loss), which includes a $0.1compared to $1.0 million decrease in foreign currency exchange rate losses (favorable impact).
Income tax provision increasedduring the first quarter of 2018, primarily due to an increaselower foreign currency losses in pre-tax income, resulting from the factors discussed above andfirst quarter of 2019 compared to the estimated impactfirst quarter of the GILTI tax.
Use of Non-GAAP Financial Information2018.
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. Adjusted pre-tax income, adjusted net income and adjusted earnings per diluted share 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 income tax (benefit) related to these adjustments (not for adjusted pre-tax income) and (xi) 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 by diluted weighted average shares outstanding. Adjusted EBITDA consists of GAAP net income (loss) plus (i) the same adjustments as listed above except for items (x) and (xi), (ii) GAAP stock-based compensation, interest expense, and depreciation, (iii) GAAP provision (benefit)recorded provisions for income taxes and (iv) cash gains received from cost and equity method investments during the period. 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 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.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 |
| March 30, 2018 | | March 31, 2017 |
| Pre-Tax | | Net Income | | Per Diluted Share | | Pre-Tax | | Net Income (Loss) | | Per Diluted Share |
As reported (GAAP) | $ | 12,209 |
| | $ | 8,118 |
| | $ | 0.25 |
| | $ | (4,195 | ) | | $ | (4,339 | ) | | $ | (0.14 | ) |
Adjustments: | | | |
| | |
| | | | |
| | |
|
Amortization of intangibles(a) | 11,713 |
| | 9,304 |
| | 0.29 |
| | 10,978 |
| | 7,746 |
| | 0.24 |
|
IP related litigation (SG&A)(a)(b) | 321 |
| | 254 |
| | 0.01 |
| | 377 |
| | 245 |
| | 0.01 |
|
Strategic reorganization and alignment (OOE)(a)(c) | 3,492 |
| | 2,779 |
| | 0.09 |
| | — |
| | — |
| | — |
|
Manufacturing alignment to support growth (OOE)(a)(d) | 513 |
| | 369 |
| | 0.01 |
| | — |
| | — |
| | — |
|
Consolidation and optimization expenses (OOE)(a)(e) | 605 |
| | 473 |
| | 0.01 |
| | 2,395 |
| | 1,899 |
| | 0.06 |
|
Acquisition and integration expenses (OOE)(a)(f) | — |
| | — |
| | — |
| | 4,820 |
| | 3,133 |
| | 0.10 |
|
Asset dispositions, severance and other (OOE)(a)(g) | 667 |
| | 489 |
| | 0.02 |
| | 4,556 |
| | 2,957 |
| | 0.09 |
|
(Gain) loss on cost and equity method investments, net(a) | (4,970 | ) | | (3,926 | ) | | (0.12 | ) | | 398 |
| | 259 |
| | 0.01 |
|
Loss on extinguishment of debt(a)(h) | 1,057 |
| | 835 |
| | 0.03 |
| | 1,559 |
| | 1,013 |
| | 0.03 |
|
Tax adjustments(i) | — |
| | 1,021 |
| | 0.03 |
| | — |
| | — |
| | — |
|
Adjusted (Non-GAAP) | $ | 25,607 |
| | $ | 19,716 |
| | $ | 0.61 |
| | $ | 20,888 |
| | $ | 12,913 |
| | $ | 0.41 |
|
| | | | | | | | | | | |
Diluted weighted average shares for adjusted EPS(j) |
|
| | 32,423 |
| | |
| |
|
| | 31,685 |
| | |
|
| |
(a) | The difference between pre-tax and net income (loss) amounts is the estimated tax impact related to the respective adjustment. Net income amounts are computed using a 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 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 note (i) 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 jury awarding damages in the amount of $37.5 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 the first quarter of 2018 we incurred charges related to this strategy, which primarily consisted of severance 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 2018 and 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. |
| |
(f) | Reflects acquisition and integration costs related to the acquisition of Lake Region Medical, which occurred in October 2015. |
| |
(g) | Amounts for 2017 primarily include expenses related to our CEO and CFO transitions. |
| |
(h) | Represents debt extinguishment charges in connection with pre-payments made on our Term B Loan Facility, which are included in interest expense. |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
| |
(i) | 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 approximately three to five years. 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. |
| |
(j) | The diluted weighted average shares for adjusted EPS for the three month period ended March 31, 2017 includes 669,000 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. |
Adjusted diluted EPS, which excludes the impact of amortization of intangible assets, losses on extinguishment of debt and various other operating expenses, among others, was $0.61 per share for the first quarter of 2019 and 2018 compared to $0.41 per share for the first quarter of 2017. These results reflect the benefit of our increased sales, lower interest expense,$3.8 million and the completion of spending on integration activities, partially offset by higher incentive compensation.
A reconciliation of GAAP net income (loss) to EBITDA and adjusted EBITDA is as follows (dollars in thousands):
|
| | | | | | | |
| Three Months Ended |
| March 30, 2018 | | March 31, 2017 |
Net income (loss) (GAAP) | $ | 8,118 |
| | $ | (4,339 | ) |
| | | |
Interest expense | 26,445 |
| | 28,893 |
|
Provision for income taxes | 4,091 |
| | 144 |
|
Depreciation | 14,621 |
| | 13,628 |
|
Amortization | 11,713 |
| | 10,978 |
|
EBITDA | 64,988 |
| | 49,304 |
|
| | | |
IP related litigation | 321 |
| | 377 |
|
Stock-based compensation (excluding OOE) | 3,218 |
| | 2,406 |
|
Strategic reorganization and alignment | 3,492 |
| | — |
|
Manufacturing alignment to support growth | 513 |
| | — |
|
Consolidation and optimization expenses | 605 |
| | 2,395 |
|
Acquisition and integration expenses | — |
| | 4,820 |
|
Asset dispositions, severance and other | 667 |
| | 4,556 |
|
Non-cash (gain) loss on cost and equity method investments | (4,970 | ) | | 398 |
|
Adjusted EBITDA (Non-GAAP) | $ | 68,834 |
| | $ | 64,256 |
|
Our CEO’s View
We delivered another quarter of strong year-over-year sales growth, driven by strength in our Advanced Surgical, Orthopedics & Portable Medical, Cardio & Vascular, and Electrochem product lines as well as a return to growth in our Cardiac & Neuromodulation product line. Cash flow generation remains strong and enabled further accelerated debt pay down in the quarter. We have increased our 2018 guidance to reflect our strong first quarter results and our confidence in continued year over year revenue growth throughout the remainder of the year.
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 2018 and 2017, we recorded charges in Other Operating Expenses 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 Annual Cost Savings(a)
| | Expected Completion Date |
Strategic reorganization and alignment | | $10 - $12 | | - | | $8 - $12 | | 2018 |
Manufacturing alignment to support growth | | $9 - $11 | | $4 - $6 | | $2 - $3 | | 2019 |
Consolidation and optimization expenses | | $18 - $22 | | $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.
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;
productivity initiatives;
direct material and indirect expense savings opportunities; and
the establishment of centers of excellence.
$5.4 million, respectively. Refer to Note 7 “Other Operating Expenses”9 “Income Taxes” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report and the “Provision for Income Taxes” section of this Item for additional information aboutinformation.
Our CEO’s View
We delivered strong revenue and profit growth in the timing, cash flow impact,quarter, consistent with our 2019 quarterly growth expectations. We are on track to deliver on our improved full year guidance, which reflects a slight increase in sales and amountEPS.
With the executive leadership team in place, we are focused on executing our portfolio strategy to win in the markets we serve and our operational strategy to achieve excellence in everything we do. We remain in a strong position to deliver on our long-term objectives of future expenditures for our cost savingssales growth above the market, profit growth two times sales growth, and consolidation initiatives.earning a valuation premium.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Our Financial Results
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 first quarter of 2018 and 2017 ended on March 30, and March 31, respectively, and each contained 13 weeks.Continuing Operations
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 | | | | |
| March 30, | | March 31, | | Change | March 29, | | March 30, | | Change |
| 2018 | | 2017 | | $ | | % | 2019 | | 2018 | | $ | | % |
Medical Sales: | | | | | | | | | | | | | | |
Cardio & Vascular | $ | 138,348 |
| | $ | 125,108 |
| | $ | 13,240 |
| | 10.6 | % | $ | 152,574 |
| | $ | 136,863 |
| | $ | 15,711 |
| | 11.5 | % |
Cardiac & Neuromodulation | 108,910 |
| | 103,813 |
| | 5,097 |
| | 4.9 | % | 116,911 |
| | 108,910 |
| | 8,001 |
| | 7.3 | % |
Advanced Surgical, Orthopedics & Portable Medical | 121,775 |
| | 105,146 |
| | 16,629 |
| | 15.8 | % | 31,588 |
| | 33,941 |
| | (2,353 | ) | | (6.9 | )% |
Total Medical Sales | 369,033 |
| | 334,067 |
| | 34,966 |
| | 10.5 | % | 301,073 |
| | 279,714 |
| | 21,359 |
| | 7.6 | % |
Non-Medical | 12,712 |
| | 11,346 |
| | 1,366 |
| | 12.0 | % | 13,603 |
| | 12,712 |
| | 891 |
| | 7.0 | % |
Total Sales | 381,745 |
| | 345,413 |
| | 36,332 |
| | 10.5 | % | 314,676 |
| | 292,426 |
| | 22,250 |
| | 7.6 | % |
Cost of sales | 285,975 |
| | 254,187 |
| | 31,788 |
| | 12.5 | % | 226,066 |
| | 208,894 |
| | 17,172 |
| | 8.2 | % |
Gross profit | 95,770 |
| | 91,226 |
| | 4,544 |
| | 5.0 | % | 88,610 |
| | 83,532 |
| | 5,078 |
| | 6.1 | % |
Gross profit as a % of sales | 25.1 | % | | 26.4 | % | | | | | 28.2 | % | | 28.6 | % | | | | |
SG&A | 41,238 |
| | 39,499 |
| | 1,739 |
| | 4.4 | % | |
Selling, general and administrative expenses (“SG&A”) | | 34,956 |
| | 36,429 |
| | (1,473 | ) | | (4.0 | )% |
SG&A as a % of sales | 10.8 | % | | 11.4 | % | | | | | 11.1 | % | | 12.5 | % | | | | |
RD&E | 14,538 |
| | 13,411 |
| | 1,127 |
| | 8.4 | % | |
Research, development and engineering costs (“RD&E”) | | 11,595 |
| | 13,276 |
| | (1,681 | ) | | (12.7 | )% |
RD&E as a % of sales | 3.8 | % | | 3.9 | % | | | | | 3.7 | % | | 4.5 | % | | | | |
Other operating expenses | 5,277 |
| | 11,771 |
| | (6,494 | ) | | (55.2 | )% | 2,890 |
| | 3,784 |
| | (894 | ) | | (23.6 | )% |
Operating income | 34,717 |
| | 26,545 |
| | 8,172 |
| | 30.8 | % | 39,169 |
| | 30,043 |
| | 9,126 |
| | 30.4 | % |
Operating margin | 9.1 | % | | 7.7 | % | | | | | 12.4 | % | | 10.3 | % | | | | |
Interest expense | 26,445 |
| | 28,893 |
| | (2,448 | ) | | (8.5 | )% | 13,830 |
| | 15,595 |
| | (1,765 | ) | | (11.3 | )% |
(Gain) loss on cost and equity method investments, net | (4,970 | ) | | 398 |
| | (5,368 | ) | | NM | |
(Gain) loss on equity investments, net | | 41 |
| | (4,970 | ) | | 5,011 |
| | NM |
Other loss, net | 1,033 |
| | 1,449 |
| | (416 | ) | | (28.7 | )% | 166 |
| | 960 |
| | (794 | ) | | (82.7 | )% |
Income (loss) before income taxes | 12,209 |
| | (4,195 | ) | | 16,404 |
| | NM | |
Income from continuing operations before income taxes | | 25,132 |
| | 18,458 |
| | 6,674 |
| | 36.2 | % |
Provision for income taxes | 4,091 |
| | 144 |
| | 3,947 |
| | NM | 3,766 |
| | 5,374 |
| | (1,608 | ) | | (29.9 | )% |
Effective tax rate | 33.5 | % | | (3.4 | )% | | | | | 15.0 | % | | 29.1 | % | | | | |
Net income (loss) | $ | 8,118 |
| | $ | (4,339 | ) | | $ | 12,457 |
| | NM | |
Net income as a % of sales | 2.1 | % | | (1.3 | )% | | | | | |
Diluted earnings per share | $ | 0.25 |
| | $ | (0.14 | ) | | $ | 0.39 |
| | NM | |
Income from continuing operations | | $ | 21,366 |
| | $ | 13,084 |
| | $ | 8,282 |
| | 63.3 | % |
Income from continuing operations as a % of sales | | 6.8 | % | | 4.5 | % | | | | |
Diluted earnings per share from continuing operations | | $ | 0.65 |
| | $ | 0.40 |
| | $ | 0.25 |
| | 62.5 | % |
NM Calculated amount not meaningful
NM Calculated amount not meaningful
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Product Line Sales of Continuing Operations Highlights
In the first quarter of 2019, we signed a long-term agreement with a current customer for their existing products. This agreement contains terms resulting in an accrual of $11.5 million in sales for in-process material.
For the first quarter of 2018,2019, Cardio & Vascular sales increased $13.2$15.7 million, or 11%, versus the comparable 2017 period. These increases were primarilyfirst quarter of 2018. This increase was driven by continued strongcustomer share gains, new product launches, and the impact of the aforementioned long-term customer agreement. Electrophysiology and peripheral vascular led the growth with steady demand for Integer-owned products from new and existing customers and increased demand for contract manufactured products.catheter components. During the first quarter of 2018,2019, price concessions to our larger OEM customers reducedlowered Cardio & Vascular sales by approximately $1.6$1.8 million in comparison to the same periodfirst quarter of 2017.2018. Foreign currency exchange rate fluctuations increased first quarter 2018decreased Cardio & Vascular sales for the three months ended March 29, 2019 by approximately $1.5$0.8 million, in comparison to the 20172018 period primarily due to U.S. dollar fluctuations relative to the Euro.
For the first quarter of 2018,2019, Cardiac & Neuromodulation sales increased $5.1$8.0 million, or 5%7%, versus the comparable 2017 period.first quarter of 2018. The increase in Cardiac & Neuromodulation sales was mainly due to the impact of the aforementioned long-term customer agreement. Neuromodulation continued strong growth driven by strong Neuromodulation demandspinal cord stimulation and increasingly stronger revenue from early-stage neuromodulation companies. During the resolution of a supply constraint in the prior year. Price concessions to our larger OEM customers reduced first quarter 2018of 2019, price concessions lowered Cardiac & Neuromodulation sales by approximately $2.5$1.2 million in comparison to the same periodfirst quarter of 2017.2018. Foreign currency exchange rate fluctuations did not have a material impact on Cardiac & Neuromodulation sales during the first quarter of 20182019 in comparison to the same periodfirst quarter of 2017.2018.
In addition to Portable Medical sales, Advanced Surgical, OrthopedicsOrthopedic & Portable Medical first quarter 2018includes sales increased $16.6 million, or 16%, versusto the acquirer of our AS&O Product Line, Viant, under the Long-term Supply Agreements (“LSAs”) entered into between the Company and Viant as of the closing of the divestiture of the AS&O product line for the sale of products by the Company to Viant. The sales decline was due to a difficult Portable Medical prior year comparable, 2017 period. This increase was drivenpartially offset by volume strength with existing customers, new product ramps,strong demand in orthopedic markets. Price concessions and expected tailwind from customer inventory management. Forforeign currency exchange rate fluctuations did not have a material impact on Advanced Surgical, Orthopedic & Portable Medical sales during the first quarter of 2018, price concessions to our larger OEM customers reduced Advanced Surgical, Orthopedics & Portable Medical sales by approximately $0.8 million,2019 in comparison to the same period of 2017. Foreign currency exchange rate fluctuations increased first quarter 2018 sales by approximately $4.5 million in comparison to the 2017 period primarily due to U.S. dollar fluctuations relative to the Euro.of 2018.
For the first quarter of 2018,2019, Non-Medical sales increased $1.4$0.9 million, or 12%7%, versus the comparable 2017 period. Thisfirst quarter of 2018. The increase in Non-Medical sales was drivenprimarily due to recovery from prior year inventory reductions by energy customers and new business wins in a stable energy market. Foreignproduct launches. Price concessions and foreign currency exchange rates and pricerate fluctuations did not have a material impact on Non-Medical sales sales during the first quarter of 20182019 in comparison to the same periodfirst quarter of 2017.2018.
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 |
| Three Months |
Price(a) | (1.30.9 | )% |
Mix(b) | (0.40.2 | )
|
Incentive compensation(c) | (0.50.1 | ) |
Production efficiencies and volume(d) | 0.90.4 |
|
Total percentage point change to gross profit as a percentage of sales | (1.30.4 | )% |
__________
| |
(a) | Our Gross Margin for the first quarter of 20182019 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 first quarter of 20182019 has been negativelypositively impacted by a higher mix of sales of lowerhigher margin products. |
| |
(c) | Amounts represent the impact to our Gross Margin attributable to our cash and stock incentive programs, 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 the first quarter of 2018 has been2019 was positively impacted by production efficiencies and synergies gained as a result of our integration and consolidation initiatives as well as higher volume in comparison to the respective 2017 period.first quarter of 2018. |
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 | Change From Prior Year |
| Three Months | Three Months |
Legal expenses(a) | $ | (710 | ) | $ | 1,086 |
|
Intangible asset amortization(b) | 848 |
| (306 | ) |
Incentive compensation programs(c) | 1,813 |
| 331 |
|
Other(d) | (212 | ) | |
Net increase in SG&A Expenses | $ | 1,739 |
| |
Transition services agreement(d) | | (1,597 | ) |
Other(e) | | (987 | ) |
Net increase (decrease) in SG&A Expenses | | $ | (1,473 | ) |
__________
| |
(a) | Amount represents the change in legal costs compared to the prior year period, including legal expenses incurred related to our on-going patent infringement case. Refer to Note 910 “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. |
| |
(b) | Amount represents the increasedecrease 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. |
| |
(c) | Amount represents the impactincrease to our SG&A expenses attributable to our cash and stock incentive programs, 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 during the first quarter of 2019. 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.&A, resulting in a net decrease in SG&A expense from the first quarter of 2018 to the first quarter of 2019. |
RD&E
Changes to RD&E expenses from the prior year were due to the following (in thousands):
|
| | | |
| Change From Prior Year |
| Three Months |
Incentive compensation programs(a) | $ | 465 |
|
Other(b) | 662 |
|
Net increase in RD&E | $ | 1,127 |
|
|
| | | |
| Change From Prior Year |
| Three Months |
Intangible asset amortization(a) | $ | (39 | ) |
Incentive compensation programs(b) | 131 |
|
Other(c) | (1,773 | ) |
Net increase in RD&E | $ | (1,681 | ) |
__________
| |
(a) | Amount represents the decrease in intangible asset amortization, which is amortized based upon the forecasted cash flows at the time of acquisition for the respective asset. |
| |
(b) | Amount represents the impact to our RD&E attributable to our cash and stock incentive programs, including performance-based compensation, which is accrued based upon actual results achieved. |
| |
(b)(c) | Represents the net impact of increased customer funding and various increases and decreases to our RD&E.&E, resulting in a net decrease in RD&E expense forfrom the first quarter of 2018 reflects our increased investment in projects with a higher growth opportunity.to the first quarter of 2019. |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other Operating Expenses
Refer to “Cost Savings and Consolidation Efforts” section of this Item and Note 78 “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 is comprised of the following (in thousands):
| | | Three Months Ended | Three Months Ended |
| March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Strategic reorganization and alignment(a) | $ | 3,492 |
| | $ | — |
| $ | 1,734 |
| | $ | 2,054 |
|
Manufacturing alignment to support growth(b) | 513 |
| | — |
| 585 |
| | 513 |
|
Consolidation and optimization costs(c) | 605 |
| | 2,395 |
| — |
| | 575 |
|
Acquisition and integration expenses(d) | — |
| | 4,820 |
| |
Asset dispositions, severance and other(e) | 667 |
| | 4,556 |
| |
Asset dispositions, severance and other(d) | | 571 |
| | 642 |
|
Total other operating expenses | $ | 5,277 |
| | $ | 11,771 |
| $ | 2,890 |
| | $ | 3,784 |
|
__________
| |
(a) | As a result of the strategic review of our customers, competitors and markets, we undertook duringbegan taking steps in 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 willThese initiatives 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, duringExpenses for the first quarter of 2019 an 2018 we incurred charges related to this strategy, which primarily includedinclude severance costs and fees for 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 2018 and 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.facility. |
| |
(d) | Reflects acquisition and integration costs related to the acquisition of Lake Region Medical, which occurred in October 2015. This initiative was substantially complete as of December 29, 2017. |
| |
(e) | Amounts for 2017 primarily include expenses related to our CEOother initiatives not described above which relate primarily to integration and CFO transitions.operational initiatives to reduce costs and improve operational efficiencies. Expenses for the first quarter of 2019 and 2018 primarily include severance costs and fees for professional services. |
We continually evaluate our operating structure in order to maximize efficiencies and drive margin expansion. For 2018,2019, Other Operating Expenses is expected to be approximately $10 million to $15 million. Refer to the “Cost Savings and Consolidation Efforts” section of this Item for further details on these initiatives.
Interest Expense
Interest Expenseexpense decreased $1.8 million to $13.8 million for the quarter ended March 29, 2019, compared to $15.6 million for the quarter ended March 30, 2018 was $26.4 million, compared to $28.9 million for the quarter ended March 31, 2017.2018. The weighted average interest rates paid on all outstanding borrowings for the quarter ended March 30, 201829, 2019 was 5.80%5.12%, compared to 5.77%,4.84% for the comparable period in 2017. 2018.The weighted average interest ratesrate paid in the first quarter of2019 reflects an increase in LIBOR during 2018 reflect amendments of our Senior Secured Credit Facilities in March 2017 and again in November 2017, which resulted in2019, partially offset by a cumulative 100 basis point reductionreductions to the applicable interest rate margins of our Term Loan B facility, partially offset by an increase in LIBOR during 2017 and 2018.Term Loan A facilities. Cash interest expense decreased $1.9$1.0 million for the quarter ended March 30, 2018,29, 2019, when compared to the same period in 2017, primarily due to lower outstanding debt balances2018, due to the repayment of debt over the last year. Non-cashdecrease in outstanding borrowings. Debt related charges included in interest expense (i.e. deferred fee and discount amortization) decreased $0.6$0.8 million forduring the first quarter ended March 30, 2018of 2019 when compared to the same period in 2017,2018, primarily attributable to lower accelerated write-offs (losses from extinguishment of debt) of deferred fees and discounts dueoriginal issue discount related to prepayments of portions of our Term Loan B facility during the respective quarters.facility. We recognized losses from extinguishment of debt during the quarters ended March 30,first quarter of 2019 and 2018 and March 31, 2017 of $1.1$0.4 million and $1.6$1.1 million, respectively. We repaid $50.0paid down $15.4 million of debt during the first quarter of 2018.2019. See Note 46 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our debt.
As of March 29, 2019, approximately 78% of our principal amount of debt outstanding was subject to variable rates. In April 2019, we entered into additional interest rate swap agreements that we expect will further reduce our interest expense and exposure to fluctuations in the LIBOR rate. These agreements converted $400 million of our outstanding debt to a fixed rate for the next year as well as extended our current $200 million interest rate swap we have outstanding for an additional three years. Had these additional interest rate swap agreements been in place as of March 29, 2019, approximately 35% of our principal amount of debt outstanding would be subject to variable rates.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Gain) Loss on Cost and Equity Method Investments, Net
The Company holds investments in equity and other securities that are accounted for as either cost method or equity method investments. During the three months ended March 30, 2018 and March 31, 2017,29, 2019, we recognized a net loss of $0.04 million on our equity investments compared to a net gain of $5.0 million for the three months ended March 30, 2018. Gains and a net losslosses on equity investments are generally unpredictable in nature. The amounts for both 2019 and 2018 relate to our share of $0.4 million, respectively, on our equity method investment. Our cost method investments are in start-up researchinvestee gains/losses including unrealized appreciation of the underlying interests of the investee. As of March 29, 2019 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.December 28, 2018, we held $22.8 million of equity investments. See Note 12 “Fair14 “Financial Instruments and 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 methodfurther details regarding these investments.
Other Loss, Net
Other Loss, Net was $0.2 million and $1.0 million for the quartersthree months ended March 29, 2019 and March 30, 2018, and March 31, 2017 was $1.0 million and $1.5 million, respectively. 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 mainly on fluctuations of the U.S. dollar relative to the Euro, Mexican peso, Uruguayan pesos or Malaysian ringgits. The impact of foreign currency exchange rates on transactions denominated in foreign currencies included in Other Loss, Net for the quartersthree months ended March 29, 2019 and March 30, 2018 and March 31, 2017 were losses of $1.4$0.2 million and $1.5$1.3 million, respectively. These losses 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. 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 expense of $4.1$3.8 million for the first quarter of 20182019 on $12.2$25.1 million of pre-tax income from continuing operations compared to an income tax expense of $0.1$5.4 million on $4.2$18.5 million of pre-tax lossesincome from continuing operations for the same period of 2017, which represents a worldwide effective tax rate of 33.5% and (3.4%) for the first quarter of 2018 and 2017, respectively.2018. The 20182019 estimated annual effective tax rate includes the estimated impact of the U.S. Tax Reform Act provisions.
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 34%22% for 2018,2019, excluding discrete items. Our effective tax rate for 20182019 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 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. 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 primarily derived, include Switzerland, Mexico, Germany, Uruguay, Malaysia and 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 20182019 blended effective tax rate on foreign earnings is currently estimated to be approximately 18%. The foreign rate differential reduces our worldwide effective tax rate by approximately 2% as compared to the U.S. statutory federal income tax rate. 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 projected amount of Interest Expense.15% for continuing operations.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
| | (dollars in thousands) | March 30, 2018 | | December 29, 2017 | March 29, 2019 | | December 28, 2018 |
Cash and cash equivalents | $ | 29,488 |
| | $ | 44,096 |
| $ | 13,538 |
| | $ | 25,569 |
|
Working capital | 304,035 |
| | 322,906 |
| 265,687 |
| | 251,680 |
|
Current ratio | 2.35 |
| | 2.54 |
| 2.55 |
| | 2.53 |
|
Cash and cash equivalents at March 30, 201829, 2019 decreased by $14.6$12.0 million from year-endDecember 28, 2018 as excess cash flow from operationson hand was used to pay down our debt. Working capital decreased $18.9increased by $14.0 million from December 29, 201728, 2018, primarily due to an increase in accounts receivable and prepaid and other current assets, partially offset by the Company’s strategic initiatives to reduce working capitalreduced cash balance and increase in order to generate cash to pay down debt.accounts payable.
At March 30, 2018, $2129, 2019, $7.0 million of our cash and cash equivalents were held by foreign subsidiaries. As a result of the Tax Reform Act, we changed our permanent reinvestment assertion related to previously undistributed foreign earnings. Going forward, weWe intend to limit our distributions from foreign subsidiaries to previously taxed income.income or current period earnings. If distributions are made utilizing current period earnings, we will record foreign withholding taxes in the period of the distribution.
Summary of Cash Flow
| | | Three Months Ended | Three Months Ended |
(in thousands) | March 30, 2018 | | March 31, 2017 | March 29, 2019 | | March 30, 2018 |
Cash provided by (used in): | | | | | | |
Operating activities | $ | 46,122 |
| | $ | 38,625 |
| $ | 11,234 |
| | $ | 46,122 |
|
Investing activities | (10,061 | ) | | (12,588 | ) | (7,487 | ) | | (10,061 | ) |
Financing activities | (51,214 | ) | | (23,491 | ) | (16,160 | ) | | (51,214 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | 545 |
| | 219 |
| 382 |
| | 545 |
|
Net change in cash and cash equivalents | $ | (14,608 | ) | | $ | 2,765 |
| $ | (12,031 | ) | | $ | (14,608 | ) |
The cash flow information presented includes cash flows related to the discontinued operations.
Operating Activities – During the quarterthree months ended March 29, 2019, we generated cash from operations of $11.2 million compared to $46.1 million for the three months ended March 30, 2018, we generated cash of $46.1 million from operations compared to $38.6 million for the quarter ended March 31, 2017.2018. This increasedecrease was primarily due to a $10.8$40.9 million decrease in cash flow provided by working capital, partially offset by a $6.0 million increase in cash net income (i.e. net income plus adjustments to reconcile net income (loss) to net cash provided by operating activities), partially offset by a $3.3 million decrease in. The cash flow provided byfrom working capital. Other non-cash gains reported in cash flows from operating activities increased $6.3 millioncapital change during the period was primarily due to non-cash equity method investment gains.higher accounts receivable as a result of increased sales during the first quarter of 2019 as well as the payment of customer rebates.
Investing Activities – The $2.5$2.6 million decrease in net cash used in investing activities was primarily attributable to lower purchases of property, plant, and equipment. Our current expectation is that capital spending for 20182019 will be in the range of $50 million to $55 million, of which approximately half is discretionary in nature. million. 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.
Financing Activities – Net cash used in financing activities for the first quarter of 20182019 was $51.2$16.2 million compared to $23.5$51.2 million in the comparable 20172018 period. Financing activities during the first quarter of 20182019 included net payments of $50.0$15.4 million related to paying down our debt obligations which included prepayments of $43.0compared to $50.0 million on our Term Loan B facility.for the comparable 2018 period.
Capital Structure – As of March 30, 2018,29, 2019, our capital structure consists of $1.6 billion$912 million of debt, net of deferred fees and discounts, outstanding under our Senior Secured Credit Facilities and Senior Notes and 3233 million shares of common stock outstanding. If necessary, as of March 30, 2018, we hadWe have access to $116.8$173 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. We are also authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of March 30, 2018, ourOur debt service obligations, comprised of principal and interest payments for the remainder of 2018,2019, are estimated to be approximately $97$63 million.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents and potential borrowings under theour Revolving Credit Facility should beare sufficient to meet our working capital, debt service and fixed capital expenditure 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 existing financial resources. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all.
Credit Facilities - As of March 30, 2018,29, 2019, 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 $74available borrowing capacity of $173.2 million drawn as of March 30, 2018,29, 2019, (ii) a $328$295 million term loan A facility (the “TLA Facility”), and (iii) an $830$611 million term loan B facility (the “TLB Facility”). Additionally, as of March 30, 2018, 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.
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 6.0:5.00:1.0, subject to periodic step downs beginning in the third fiscal quarter of 20182019 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of 2.75:1.0 subject to a step up beginning in the first quarter of 2019.3.0:1.0.The TLB Facility does not contain any financial maintenance covenants. As of March 30, 2018,29, 2019, our total net leverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 4.93.0 to 1.00.1.0. For the twelve month period ended March 30, 2018,29, 2019, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 3.46.0 to 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 March 30, 2018,29, 2019, 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.
As of March 29, 2019, our adjusted EBITDA would have to decline by approximately $118 million, or approximately 39%, in order for us to not be in compliance with our financial covenants. The Revolving Credit Facility is supported by a consortium of thirteen lenders with no lender controlling more than 27% of the facility. As of March 30, 2018, the banks supporting the majority of the Revolving Credit Facility had an S&P credit rating of at least BBB+ or better, which is considered investment grade. The banks supporting the remaining Revolving Credit Facility are not currently being rated.
See Note 46 “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 quarter ended March 30, 2018, our subsidiaries that are non-Guarantors under our Senior Secured Credit Facilities represented approximately 40% and 49% of our revenue and EBITDA, respectively. In addition, as of March 30, 2018, the non-Guarantors under our Senior Secured Credit Facilities held approximately 32% of our total tangible assets and 5% of our total tangible liabilities. Tangible assets consist of total assets less intangible assets, intercompany receivables, and deferred taxes. Tangible liabilities consist of total liabilities less intercompany payables and deferred taxes.
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 15 “Impact1 “Basis of Recently Issued Accounting Standards”Presentation” 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.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Contractual Obligations
There have been no significant changes to our contractual obligations during the quarter ended March 30, 201829, 2019 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 for the year ended December 29, 2017. See Note 4 “Debt” and Note 9 “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.28, 2018.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 for the year ended December 29, 2017.28, 2018.
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 report and discuss in our earnings releases and investor presentations adjusted pre-tax income, adjusted income, adjusted earnings per diluted share (“EPS”), earnings before interest, taxes, depreciation, and amortization (“EBITDA”) and adjusted EBITDA, all from continuing operations.
Adjusted pre-tax income, adjusted income and adjusted diluted EPS 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, (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 equity 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 (xii) certain tax items that are outside the normal provision for the period (not for adjusted pre-tax income). Adjusted diluted EPS is calculated by dividing adjusted income from continuing operations by diluted weighted average shares outstanding.
Adjusted EBITDA from continuing operations consists of GAAP income from continuing operations plus (i) the same adjustments as listed above except for items (ix), (xi) and (xii), (ii) GAAP stock-based compensation, interest expense, and depreciation, and (iii) GAAP provision (benefit) for income taxes.
We believe that the presentation of adjusted income, adjusted diluted EPS, EBITDA, and adjusted EBITDA, 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, including compliance with our bank covenant calculations.
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
Income 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):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
| Pre-Tax | | Net of Tax | | Per Diluted Share | | Pre-Tax | | Net of Tax | | Per Diluted Share |
As reported income from continuing operations (GAAP) | $ | 25,132 |
| | $ | 21,366 |
| | $ | 0.65 |
| | $ | 18,458 |
| | $ | 13,084 |
| | $ | 0.40 |
|
Adjustments: | | | |
| | |
| | | | |
| | |
|
Amortization of intangibles(a) | 9,854 |
| | 7,796 |
| | 0.24 |
| | 10,653 |
| | 8,397 |
| | 0.26 |
|
IP related litigation (SG&A)(a)(b) | 1,396 |
| | 1,103 |
| | 0.03 |
| | 321 |
| | 254 |
| | 0.01 |
|
Strategic reorganization and alignment (OOE)(a)(c) | 1,734 |
| | 1,350 |
| | 0.04 |
| | 2,054 |
| | 1,627 |
| | 0.05 |
|
Manufacturing alignment to support growth (OOE)(a)(d) | 585 |
| | 414 |
| | 0.01 |
| | 513 |
| | 369 |
| | 0.01 |
|
Consolidation and optimization expenses (OOE)(a)(e) | — |
| | — |
| | — |
| | 575 |
| | 455 |
| | 0.01 |
|
Asset dispositions, severance and other (OOE)(a)(f) | 571 |
| | 453 |
| | 0.01 |
| | 642 |
| | 470 |
| | 0.01 |
|
(Gain) loss equity investments, net(a) | 41 |
| | 32 |
| | — |
| | (4,970 | ) | | (3,926 | ) | | (0.12 | ) |
Loss on extinguishment of debt(a)(g) | 412 |
| | 326 |
| | 0.01 |
| | 1,057 |
| | 835 |
| | 0.03 |
|
LSA adjustments(a)(h) | — |
| | — |
| | — |
| | (2,836 | ) | | (2,240 | ) | | (0.07 | ) |
Tax adjustments(i) | — |
| | — |
| | — |
| | — |
| | 1,094 |
| | 0.03 |
|
Adjusted income from continuing operations (Non-GAAP) | $ | 39,725 |
| | $ | 32,840 |
| | $ | 1.00 |
| | $ | 26,467 |
| | $ | 20,419 |
| | $ | 0.63 |
|
| | | | | | | | | | | |
Diluted weighted average shares for adjusted EPS |
|
| | 32,980 |
| | |
| |
|
| | 32,423 |
| | |
|
__________
| |
(a) | The difference between pre-tax and income (loss) amounts is the estimated tax impact related to the respective adjustment. Income (loss) amounts are computed using a 21% U.S. tax rate, and the statutory tax rates in Mexico, Netherlands, Uruguay, Ireland and Switzerland, as adjusted for the existence of net operating losses (“NOLs”). Amortization of intangibles and other operating expense for 2018 have also been adjusted to reflect the estimated impact relating to our disallowed deduction of the GILTI tax, as described in footnote (i) 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 jury awarding damages in the amount of $37.5 million. In March 2018, the court vacated that damage award and ordered a new trial on damages. In the January 2019 retrial on damages, the jury awarded damages in the amount of $22.2 million. This award is subject to post-trial proceedings. To date, no gains have been recognized in connection with this litigation. |
| |
(c) | Amounts include expenses related to implementing our strategy that is designed to better align our resources in order to invest to grow, protect, preserve and to enhance the profitability of our portfolio of products, including 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. During 2019 and 2018, we incurred charges related to this strategy, which primarily consisted of severance costs and fees for professional services. |
| |
(d) | Includes expenses related to 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 2018, we incurred costs primarily related to the closure of our Clarence, NY facility. |
| |
(f) | Amounts include expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to reduce costs and improve operational efficiencies. |
| |
(g) | Represents debt extinguishment charges in connection with pre-payments made on our Term B Loan Facility, which are included in interest expense. |
INTEGER HOLDINGS CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
| |
(h) | Reflects 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 further resale to customers and by the Company to Viant for further resale to customers. |
| |
(i) | The tax adjustment for 2018 represents 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 during 2018. This adjustment makes our Adjusted Diluted EPS from continuing operations 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. |
EBITDA and Adjusted EBITDA Reconciliation
A reconciliation of GAAP income from continuing operations to EBITDA from continuing operations and adjusted EBITDA from continuing operations is as follows (dollars in thousands):
|
| | | | | | | |
| Three Months Ended |
| March 29, 2019 | | March 30, 2018 |
Income from continuing operations (GAAP) | $ | 21,366 |
| | $ | 13,084 |
|
| | | |
Interest expense | 13,830 |
| | 15,595 |
|
Provision for income taxes | 3,766 |
| | 5,374 |
|
Depreciation | 9,804 |
| | 9,963 |
|
Amortization | 9,854 |
| | 10,653 |
|
EBITDA from continuing operations (Non-GAAP) | 58,620 |
| | 54,669 |
|
IP related litigation | 1,396 |
| | 321 |
|
Stock-based compensation (excluding OOE) | 2,713 |
| | 2,979 |
|
Strategic reorganization and alignment | 1,734 |
| | 2,054 |
|
Manufacturing alignment to support growth | 585 |
| | 513 |
|
Consolidation and optimization expenses | — |
| | 575 |
|
Asset dispositions, severance and other | 571 |
| | 642 |
|
(Gain) loss on equity investments, net | 41 |
| | (4,970 | ) |
LSA adjustments | — |
| | (2,836 | ) |
Adjusted EBITDA from continuing operations (Non-GAAP) | $ | 65,660 |
| | $ | 53,947 |
|
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 29, 2017.28, 2018. 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
| |
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 March 30, 2018.29, 2019. 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 March 30, 2018,29, 2019, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.
| |
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 March 30, 2018,29, 2019, 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 29, 2017, except that with respect to the AVX litigation, 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 2019.28, 2018.
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 29, 2017.28, 2018.
|
| | |
Exhibit Number | | Description |
| |
10.1#* | | |
| | |
10.2#* | | |
| | |
10.3#* | | |
| | |
10.4#* | | |
| | |
10.5#* | | |
| | |
10.6#* | | |
| | |
10.7#* | | |
| | |
31.1* | | |
| |
31.2* | | |
| |
32.1** | | |
| |
101.INS* | | XBRL Instance Document |
| |
101.SCH* | | XBRL Extension Schema Document |
| |
101.CAL* | | XBRL Extension Calculation Linkbase Document |
| |
101.LAB* | | XBRL Extension Label Linkbase Document |
| |
101.PRE* | | XBRL Extension Presentation Linkbase Document |
| |
101.DEF* | | XBRL Extension Definition Linkbase Document |
|
| |
* | 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: | May 4, 20183, 2019 | | INTEGER HOLDINGS CORPORATION |
| | | |
| | | 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 |
| | | | | Tom P. Thomas |
| | | | | Vice President, Corporate Controller |
| | | | | (Principal Accounting Officer) |