INTEGER HOLDINGS CORPORATION

Form 10-Q

For the Quarterly Period Ended ~~September~~June 28, ~~2018~~2019

TABLE OF CONTENTS



		Page
PART I—FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited)	3

	Condensed Consolidated Statements of Operations (Unaudited)	4

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

	Condensed Consolidated Statements of Cash Flows (Unaudited)	6

	Condensed Consolidated ~~Statement~~Statements of Stockholders’ Equity (Unaudited)	7

	Notes to Condensed Consolidated Financial Statements (Unaudited)	8

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3328

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	5145

ITEM 4.	Controls and Procedures	5145

PART II—OTHER INFORMATION

ITEM 1.	Legal Proceedings	5246

ITEM 1A.	Risk Factors	5246

ITEM 6.	Exhibits	5246

SIGNATURES		5347

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands except share and per share data) September 28,
2018 December 29,
2017
ASSETS
Current assets:
Cash and cash equivalents $ 22,881
$ 37,341
Accounts receivable, net of allowance for doubtful accounts of $0.6 million and
$0.5 million, respectively
200,147
194,845
Inventories 193,631
176,738
Prepaid expenses and other current assets 12,008
16,239
Current assets of discontinued operations held for sale —
106,746
Total current assets 428,667
531,909
Property, plant and equipment, net 232,108
235,180
Goodwill 834,520
839,870
Other intangible assets, net 825,359
862,873
Deferred income taxes 3,618
3,451
Other assets 31,724
30,428
Noncurrent assets of discontinued operations held for sale —
344,634
Total assets $ 2,355,996
$ 2,848,345
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt $ 37,500
$ 30,469
Accounts payable 69,270
64,551
Income taxes payable 16,298
5,904
Accrued expenses 54,922
60,376
Current liabilities of discontinued operations held for sale —
47,703
Total current liabilities 177,990
209,003
Long-term debt 916,694
1,578,696
Deferred income taxes 210,303
140,964
Other long-term liabilities 11,678
11,335
Noncurrent liabilities of discontinued operations held for sale —
14,966
Total liabilities 1,316,665
1,954,964
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,501,709 and 31,977,953 shares issued, respectively; 32,382,687 and 31,871,427 shares outstanding, respectively 33
32
Additional paid-in capital 687,644
669,756
Treasury stock, at cost, 119,022 and 106,526 shares, respectively (5,668 ) (4,654 )
Retained earnings 318,287
176,068
Accumulated other comprehensive income 39,035
52,179
Total stockholders’ equity 1,039,331
893,381
Total liabilities and stockholders’ equity $ 2,355,996
$ 2,848,345

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

~~INTEGER HOLDINGS CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)~~

Three Months Ended Nine Months Ended
(in thousands except per share data) September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Sales $ 305,088
$ 286,168
$ 911,978
$ 833,820
Cost of sales 213,165
196,982
637,758
573,431
Gross profit 91,923
89,186
274,220
260,389
Operating expenses:
Selling, general and administrative expenses 34,091
35,064
107,300
105,004
Research, development and engineering costs 12,234
12,227
38,445
35,104
Other operating expenses 4,139
6,069
12,615
24,490
Total operating expenses 50,464
53,360
158,360
164,598
Operating income 41,459
35,826
115,860
95,791
Interest expense 54,526
15,808
85,355
49,233
(Gain) loss on cost and equity method investments, net (291 ) (1,906 ) (5,545 ) 2,919
Other loss, net 1,684
2,490
257
10,654
Income (loss) from continuing operations before taxes (14,460 ) 19,434
35,793
32,985
Provision (benefit) for income taxes (6,157 ) (448 ) 7,956
596
Income (loss) from continuing operations $ (8,303 ) $ 19,882
$ 27,837
$ 32,389

Discontinued operations:
Income (loss) from discontinued operations before taxes 195,874
(7,444 ) 188,251
(21,074 )
Provision (benefit) for income taxes 73,492
(1,252 ) 73,869
(1,026 )
Income (loss) from discontinued operations $ 122,382
$ (6,192 ) $ 114,382
$ (20,048 )

Net income $ 114,079
$ 13,690
$ 142,219
$ 12,341

Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.26 ) $ 0.63
$ 0.87
$ 1.03
Income (loss) from discontinued operations 3.80
(0.20 ) 3.57
(0.64 )
Basic earnings per share 3.54
0.43
4.44
0.39

Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.26 ) $ 0.62
$ 0.86
$ 1.01
Income (loss) from discontinued operations 3.80
(0.19 ) 3.52
(0.63 )
Diluted earnings per share 3.54
0.43
4.38
0.39

Weighted average shares outstanding:
Basic 32,211
31,594
32,050
31,304
Diluted 32,211
32,173
32,451
31,947



(in thousands except share and per share data)	June 28, 2019			December 28, 2018
ASSETS
Current assets:
Cash and cash equivalents	$	15,922		$	25,569
Accounts receivable, net of allowance for doubtful accounts of $0.6 million, respectively	217,732			185,501
Inventories	187,154			190,076
Prepaid expenses and other current assets	24,978			15,104
Total current assets	445,786			416,250
Property, plant and equipment, net	229,209			231,269
Goodwill	831,368			832,338
Other intangible assets, net	791,472			812,338
Deferred income taxes	4,099			3,937
Operating lease assets	44,793			—
Other long-term assets	26,926			30,549
Total assets	$	2,373,653		$	2,326,681
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	37,500		$	37,500
Accounts payable	73,120			57,187
Income taxes payable	12,034			9,393
Accrued expenses and other current liabilities	61,288			60,490
Total current liabilities	183,942			164,570
Long-term debt	825,438			888,007
Deferred income taxes	201,350			203,910
Operating lease liabilities	39,788			—
Other long-term liabilities	11,440			9,701
Total liabilities	1,261,958			1,266,188
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,816,622 and 32,624,494 shares issued, respectively; 32,640,614 and 32,473,167 shares outstanding, respectively	33			33
Additional paid-in capital	697,648			691,083
Treasury stock, at cost, 176,008 and 151,327 shares, respectively	(10,565		)	(8,125		)
Retained earnings	398,648			344,498
Accumulated other comprehensive income	25,931			33,004
Total stockholders’ equity	1,111,695			1,060,493
Total liabilities and stockholders’ equity	$	2,373,653		$	2,326,681

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

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INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME~~OPERATIONS (Unaudited)

Three Months Ended Nine Months Ended
(in thousands) September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Comprehensive Income
Net income $ 114,079
$ 13,690
$ 142,219
$ 12,341
Other comprehensive income (loss):
Foreign currency translation gain (loss) (2,809 ) 16,728
(15,253 ) 57,863
Net change in cash flow hedges, net of tax 634
(339 ) 1,957
1,729
Other comprehensive income (loss) (2,175 ) 16,389
(13,296 ) 59,592
Comprehensive income $ 111,904
$ 30,079
$ 128,923
$ 71,933

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

~~INTEGER HOLDINGS CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)~~

Nine Months Ended
(in thousands) September 28,
2018 September 29,
2017
Cash flows from operating activities:
Net income $ 142,219
$ 12,341
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 68,447
74,584
Debt related amortization and extinguishment fees included in interest expense 47,173
8,850
Stock-based compensation 7,684
9,895
Non-cash (gain) loss on cost and equity method investments (1,043 ) 3,833
Other non-cash (gains) losses (771 ) 6,833
Deferred income taxes 66,953
(6,821 )
Gain on sale of discontinued operations (194,734 ) —
Changes in operating assets and liabilities:
Accounts receivable (4,805 ) (13,958 )
Inventories (19,688 ) (20,259 )
Prepaid expenses and other current assets 5,155
8,460
Accounts payable 10,488
12,905
Accrued expenses (14,904 ) 4,191
Income taxes 8,562
14,716
Net cash provided by operating activities 120,736
115,570
Cash flows from investing activities:
Acquisition of property, plant and equipment (33,340 ) (34,059 )
Proceeds from sale of property, plant and equipment 1,366
464
Purchase of cost and equity method investments (1,230 ) (1,316 )
Proceeds from sale of discontinued operations 582,359
—
Other investing activities —
209
Net cash provided by (used in) investing activities 549,155
(34,702 )
Cash flows from financing activities:
Principal payments of long-term debt (670,094 ) (156,526 )
Proceeds from issuance of long-term debt —
50,000
Proceeds from the exercise of stock options 11,757
17,074
Payment of debt issuance and redemption costs (31,991 ) (1,789 )
Tax withholdings related to net share settlements of restricted stock unit awards (2,568 ) (76 )
Net cash used in financing activities (692,896 ) (91,317 )
Effect of foreign currency exchange rates on cash and cash equivalents 1,790
1,970
Net decrease in cash and cash equivalents (21,215 ) (8,479 )
Cash and cash equivalents, beginning of period 44,096
52,116
Cash and cash equivalents, end of period $ 22,881
$ 43,637
Supplemental disclosure of cash flow information⁽¹⁾:

Noncash investing and financing activities:
Property, plant and equipment purchases included in accounts payable $ 2,585
$ 6,406

⁽¹⁾~~Refer to Note 2 “Discontinued Operations and Divestiture” for additional supplemental cash flow information pertaining to discontinued operations.~~

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

~~INTEGER HOLDINGS CORPORATION~~

~~CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)~~

Common Stock
Additional
Paid-In
Capital
Treasury Stock
Retained
Earnings

Accumulated
Other
Comprehensive
Income

Total
Stockholders’
Equity
(in thousands) Shares Amount Shares Amount
December 29, 2017 31,978
$ 32
$ 669,756
(107 ) $ (4,654 ) $ 176,068
$ 52,179
$ 893,381
Comprehensive income:

Net income —
—
—
—
—
142,219
—
142,219
Other comprehensive loss, net —
—
—
—
—
—
(13,296 ) (13,296 )
Accumulated other comprehensive income reclassified to earnings, net —
—
—
—
—
—
152
152
Share-based compensation plans:

Stock-based compensation —
—
7,684
—
—
—
—
7,684
Net shares issued 524
1
10,204
(12 ) (1,014 ) —
—
9,191
September 28, 2018 32,502
$ 33
$ 687,644
(119 ) $ (5,668 ) $ 318,287
$ 39,035
$ 1,039,331



	Three Months Ended						Six Months Ended
(in thousands except per share data)	June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Sales	$	314,194		$	314,464		$	628,870		$	606,890
Cost of sales	217,210			215,699			443,276			424,593
Gross profit	96,984			98,765			185,594			182,297
Operating expenses:
Selling, general and administrative expenses	33,143			36,780			68,099			73,209
Research, development and engineering costs	11,396			12,935			22,991			26,211
Other operating expenses	3,108			4,692			5,998			8,476
Total operating expenses	47,647			54,407			97,088			107,896
Operating income	49,337			44,358			88,506			74,401
Interest expense	13,612			15,234			27,442			30,829
(Gain) loss on equity investments, net	1,611			(284		)	1,652			(5,254		)
Other income, net	(718		)	(2,387		)	(552		)	(1,427		)
Income from continuing operations before taxes	34,832			31,795			59,964			50,253
Provision for income taxes	6,610			8,739			10,376			14,113
Income from continuing operations	$	28,222		$	23,056		$	49,588		$	36,140

Discontinued operations:
Income (loss) from discontinued operations before taxes	4,930			(1,374		)	5,316			(7,623		)
Provision for income taxes	95			1,660			178			377
Income (loss) from discontinued operations	$	4,835		$	(3,034	)	$	5,138		$	(8,000	)

Net income	$	33,057		$	20,022		$	54,726		$	28,140

Basic earnings (loss) per share:
Income from continuing operations	$	0.87		$	0.72		$	1.52		$	1.13
Income (loss) from discontinued operations	0.15			(0.09		)	0.16			(0.25		)
Basic earnings per share	1.01			0.62			1.68			0.88

Diluted earnings (loss) per share:
Income from continuing operations	$	0.85		$	0.70		$	1.50		$	1.11
Income (loss) from discontinued operations	0.15			(0.09		)	0.16			(0.25		)
Diluted earnings per share	1.00			0.61			1.66			0.86

Weighted average shares outstanding:
Basic	32,621			32,038			32,579			31,970
Diluted	33,009			32,720			32,995			32,572

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

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INTEGER HOLDINGS CORPORATION

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



	Three Months Ended						Six Months Ended
(in thousands)	June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Comprehensive Income (Loss)
Net income	$	33,057		$	20,022		$	54,726		$	28,140
Other comprehensive income (loss):
Foreign currency translation gain (loss)	4,510			(25,885		)	(2,328		)	(12,444		)
Change in fair value of cash flow hedges, net of tax	(4,043		)	(2,086		)	(4,745		)	1,323
Other comprehensive income (loss)	467			(27,971		)	(7,073		)	(11,121		)
Comprehensive income (loss)	$	33,524		$	(7,949	)	$	47,653		$	17,019

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

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INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Six Months Ended
(in thousands)	June 28, 2019			June 29, 2018
Cash flows from operating activities:
Net income	$	54,726		$	28,140
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	38,535			48,591
Debt related charges included in interest expense	3,676			5,083
Stock-based compensation	5,433			6,107
Non-cash (gain) loss on equity investments	1,652			(763		)
Other non-cash gains	(311		)	(2,307		)
Deferred income taxes	(1,126		)	8,894
Gain on sale of discontinued operations	(4,974		)	—
Changes in operating assets and liabilities:
Accounts receivable	(30,545		)	(11,306		)
Inventories	2,846			(20,948		)
Prepaid expenses and other assets	(12,942		)	3,306
Accounts payable	16,289			8,898
Accrued expenses and other liabilities	(8,593		)	(3,929		)
Income taxes payable	2,884			(2,547		)
Net cash provided by operating activities	67,550			67,219
Cash flows from investing activities:
Acquisition of property, plant and equipment	(15,506		)	(19,224		)
Proceeds from sale of property, plant and equipment	5			960
Purchase of equity investments	(327		)	(831		)
Proceeds from sale of discontinued operations	4,734			—
Net cash used in investing activities	(11,094		)	(19,095		)
Cash flows from financing activities:
Principal payments of long-term debt	(80,750		)	(75,062		)
Proceeds from issuance of long-term debt	15,000			—
Proceeds from the exercise of stock options	1,600			3,625
Payment of debt issuance and redemption costs	—			(688		)
Tax withholdings related to net share settlements of restricted stock unit awards	(2,123		)	(2,206		)
Other financing activities	—			(192		)
Net cash used in financing activities	(66,273		)	(74,523		)
Effect of foreign currency exchange rates on cash and cash equivalents	170			2,363
Net decrease in cash and cash equivalents	(9,647		)	(24,036		)
Cash and cash equivalents, beginning of period	25,569			44,096
Cash and cash equivalents, end of period	$	15,922		$	20,060

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

- 6 -

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)



	Three Months Ended						Six Months Ended
(in thousands)	June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Total equity, beginning balance	$	1,075,972		$	920,389		$	1,060,493		$	893,381

Common stock and additional paid-in capital
Balance, beginning of period	694,943			673,138			691,116			669,788
Stock awards exercised or vested	18			2,165			1,132			2,293
Stock-based compensation	2,720			2,885			5,433			6,107
Balance, end of period	697,681			678,188			697,681			678,188
Treasury stock
Balance, beginning of period	(10,026		)	(5,964		)	(8,125		)	(4,654		)
Treasury shares purchased	(782		)	(21		)	(2,905		)	(2,209		)
Treasury shares reissued	243			265			465			1,143
Balance, end of period	(10,565		)	(5,720		)	(10,565		)	(5,720		)
Retained earnings
Balance, beginning of period	365,591			184,186			344,498			176,068
Adoption of ASC 842 (Note 1)	—			—			(576		)	—
Net income	33,057			20,022			54,726			28,140
Balance, end of period	398,648			204,208			398,648			204,208
Accumulated other comprehensive income
Balance, beginning of period	25,464			69,029			33,004			52,179
Other comprehensive income (loss)	467			(27,971		)	(7,073		)	(11,121		)
Balance, end of period	25,931			41,058			25,931			41,058
Total equity, ending balance	$	1,111,695		$	917,734		$	1,111,695		$	917,734

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

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1.)BASIS OF PRESENTATION

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

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 and the related assets and liabilities associated with the discontinued operations are classified as held for sale in the Condensed Consolidated Balance Sheet as of December 29, 2017.~~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.” ~~The Condensed Consolidated Balance Sheet as of December 29, 2017 was derived from the Company’s audited financial statements and has been retrospectively adjusted to reflect discontinued operations.~~ All results and information in the condensed consolidated financial statements are presented as continuing operations and exclude the AS&O Product Line unless otherwise noted specifically as discontinued operations. Refer to Note 2 “Discontinued Operations and Divestiture” for 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 ~~third~~second quarter of ~~2018~~2019 and ~~2017~~2018 each contained 13 weeks and ended on ~~September~~June 28 and ~~September~~June 29, respectively. The Company’s ~~2018 and 2017~~2019 fiscal ~~years~~year will end oron 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.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board ("FASB"). ASUs not yet adopted that are not 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 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 ~~29, 2017, respectively.~~28, 2018, that are of significance, or potential significance, to the Company.

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~~Table of Contents~~

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 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 and no purchase option the Company is reasonably certain to exercise 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 the Company’s Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for the periods presented.

Refer to Note 11 “Leases” for additional information on the Company’s leases.

Adoption of ASU 2017-12 and ASU 2018-16

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, which 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.

- 9 -

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 ~~$582~~$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~~would 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~~paid Integer for these services ~~with such payments varying in amount and length of time~~ as specified in the transition services ~~agreement. The~~agreement, which ended during the second quarter of 2019. For the performance of services during the three and six months ended June 28, 2019, the Company recognized ~~$1.9~~$1.2 million and $2.9 million, respectively, of income under the transition services ~~agreement for~~agreement. For the ~~performance of services during the third quarter of fiscal 2018, of which~~six months ended June 28, 2019, $0.1 million is ~~within~~recorded as a reduction of Cost of sales and ~~$1.8~~for the three and six months ended June 28, 2019, $1.2 million and $2.8 million, respectively, is ~~within~~recorded as a reduction of 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 but prior to a net working capital adjustment, the Company recognized a pre-tax gain on sale of discontinued operations of ~~$194.7 million. The~~$195.0 million during the year ended December 28, 2018. During the quarter ended June 28, 2019, the Company ~~is in the process of finalizing the~~received $4.8 million due to a net working capital adjustment agreed to with ~~Viant~~Viant. This was recognized as provided for in the definitive agreement. The final net working capital adjustment, as determined through the established process outlined in the definitive agreement, may be different from the Company’s estimates. The impact of any changes in the net working capital adjustment will be recorded as an adjustment to the gain on sale from discontinued operations, induring the period such change occurs. Additionally, the income taxes associated with the gain will be impacted by the final allocation of the sales price, which must be agreed to with Viant as required in the definitive agreement and may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes will be recorded as an adjustment to discontinued operations in the period such change in estimate occurs.quarter ended June 28, 2019.

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

The assets and liabilities of a discontinued operation held for sale, other than goodwill, are measured at the lower of carrying amount or fair value less cost to sell. Accordingly, the assets and liabilities of the AS&O Product Line, other than goodwill, are measured at carrying amount. ASC 350, ~~Intangibles — Goodwill and Other~~, states that when a portion of a goodwill reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. As the AS&O Product Line was a portion of the Medical goodwill reporting unit, and management determined it met the definition of a business, goodwill was allocated to the AS&O Product Line on a relative fair value basis, as prescribed by ASC 350. The fair value of the AS&O Product Line assets was based primarily on the initial purchase price of $600 million.

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~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(2.)DISCONTINUED OPERATIONS AND DIVESTITURE (Continued)~~

~~The carrying amounts of the AS&O Product Line assets and liabilities that were classified as assets and liabilities of discontinued operations held for sale were as follows (in thousands):~~

December 29,
2017
Cash and cash equivalents $ 6,755
Accounts receivable, net of allowance for doubtful accounts of $0.3 million
47,611
Inventories 50,796
Prepaid expenses and other current assets 1,584
Current assets of discontinued operations held for sale 106,746
Property, plant and equipment, net 135,195
Goodwill 150,368
Other intangible assets, net 57,520
Other noncurrent assets 1,551
Noncurrent assets of discontinued operations held for sale 344,634
Total assets 451,380
Accounts payable and other current liabilities held for sale 47,703
Deferred taxes and other long-term liabilities held for sale 14,966
Total liabilities 62,669
Net assets $ 388,711

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



	Three Months Ended						Six Months Ended
	June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Sales	$	—		$	88,701		$	—		$	178,020
Cost of sales	—			71,276			—			148,357
Gross profit	—			17,425			—			29,663
Selling, general and administrative expenses	—			4,096			—			8,905
Research, development and engineering costs	—			1,090			—			2,352
Other operating expenses	—			2,497			—			3,990
Interest expense	—			11,007			—			21,857
Gain on sale of discontinued operations	(4,974		)	—			(4,974		)	—
Other (income) loss, net	44			109			(342		)	182
Income (loss) from discontinued operations before taxes	4,930			(1,374		)	5,316			(7,623		)
Provision for income taxes	95			1,660			178			377
Income (loss) from discontinued operations	$	4,835		$	(3,034	)	$	5,138		$	(8,000	)

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Sales $ —
$ 77,140
$ 178,020
$ 237,620
Cost of sales —
68,091
148,357
209,276
Gross profit —
9,049
29,663
28,344
Selling, general and administrative expenses —
4,669
8,905
13,952
Research, development and engineering costs —
1,380
2,352
4,803
Other operating expenses (income)⁽¹⁾
(2,185 ) 195
1,805
465
Interest expense 976
10,677
22,833
31,792
Gain on sale of discontinued operations (194,734 ) —
(194,734 ) —
Other (income) loss, net 69
(428 ) 251
(1,594 )
Income (loss) from discontinued operations
before taxes
195,874
(7,444 ) 188,251
(21,074 )
Provision (benefit) for income taxes 73,492
(1,252 ) 73,869
(1,026 )
Income (loss) from discontinued operations $ 122,382
$ (6,192 ) $ 114,382
$ (20,048 )

^__________


⁽¹⁾	The Company recorded $2.2 million of transaction costs in Other operating expenses (income) from discontinued operations during the three months ended June 29, 2018, which were reclassified to the Gain on sale of discontinued operations during the three months ended September 28, 2018.

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~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(2.)DISCONTINUED OPERATIONS AND DIVESTITURE (Continued)~~

The Company allocates interest to discontinued operations if the interest is directly attributable to the discontinued operations or is interest on debt that is required to be repaid as a result of the disposal transaction. Interest expense included in discontinued operations reflects an estimate of interest expense related to the debt that was required to be repaid with the proceeds from the sale of the AS&O Product Line.

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



	Six Months Ended
	June 28, 2019			June 29, 2018
Cash used in operating activities	$	(58	)	$	(5,465	)
Cash provided by (used in) investing activities	4,734			(3,596		)

Depreciation and amortization	$	—		$	7,450
Capital expenditures	—			3,610

Nine Months Ended
September 28,
2018 September 29,
2017
Cash used in operating activities $ (12,388 ) $ (2,580 )
Cash provided by (used in) investing activities 578,763
(11,659 )

Depreciation and amortization $ 7,450
$ 15,947
Capital expenditures 3,610
11,732

~~(3.) INVENTORIES~~

~~Inventories are comprised of the following (in thousands):~~

September 28,
2018 December 29,
2017
Raw materials $ 81,443
$ 85,050
Work-in-process 78,966
63,620
Finished goods 33,222
28,068
Total $ 193,631
$ 176,738

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

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~~Table of Contents~~

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:



	Six Months Ended
(in thousands)	June 28, 2019		June 29, 2018
Noncash investing and financing activities:
Property, plant and equipment purchases included in accounts payable	$	2,297	$	3,002

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):



	June 28, 2019		December 28, 2018
Raw materials	$	81,155	$	80,213
Work-in-process	73,999		75,711
Finished goods	32,000		34,152
Total	$	187,154	$	190,076

- 11 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(5.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The changes in the carrying amount of goodwill by reportable segment for the ~~nine~~six months ended ~~September~~June 28, 2019 were as follows (in thousands):



	Medical			Non- Medical		Total
December 28, 2018	$	815,338		$	17,000	$	832,338
Foreign currency translation	(970		)	—		(970		)
June 28, 2019	$	814,368		$	17,000	$	831,368

Intangible Assets

Intangible assets at June 28, 2019 and December 28, 2018 were as follows (in thousands):



	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
June 28, 2019
Definite-lived:
Purchased technology and patents	$	241,473	$	(131,882	)	$	109,591
Customer lists	709,344		(117,759		)	591,585
Other	3,503		(3,495		)	8
Total	$	954,320	$	(253,136	)	$	701,184
Indefinite-lived:
Trademarks and tradenames						$	90,288

December 28, 2018
Definite-lived:
Purchased technology and patents	$	241,726	$	(125,540	)	$	116,186
Customer lists	710,406		(104,556		)	605,850
Other	3,503		(3,489		)	14
Total	$	955,635	$	(233,585	)	$	722,050
Indefinite-lived:
Trademarks and tradenames						$	90,288

Medical Non- Medical Total
December 29, 2017 $ 822,870
$ 17,000
$ 839,870
Foreign currency translation (5,350 ) —
(5,350 )
September 28, 2018 $ 817,520
$ 17,000
$ 834,520

~~Intangible Assets~~

~~Intangible assets at September 28, 2018 and December 29, 2017 were as follows (in thousands):~~

Gross
Carrying
Amount

Accumulated
Amortization

Net
Carrying
Amount
September 28, 2018
Definite-lived:
Purchased technology and patents $ 242,292
$ (121,743 ) $ 120,549
Customer lists 712,795
(98,299 ) 614,496
Other 3,503
(3,477 ) 26
Total $ 958,590
$ (223,519 ) $ 735,071
Indefinite-lived:
Trademarks and tradenames

$ 90,288

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

$ 90,288

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



	Three Months Ended				Six Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Cost of sales	$	3,195	$	3,673	$	6,457	$	7,389
Selling, general and administrative expenses	6,636		6,808		13,228		13,706
Research, development and engineering costs	—		38		—		77
Discontinued operations	—		350		—		1,410
Total intangible asset amortization expense	$	9,831	$	10,869	$	19,685	$	22,582

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Cost of sales $ 3,367
$ 3,786
$ 10,756
$ 11,282
Selling, general and administrative expenses 6,490
6,222
20,196
18,684
Research, development and engineering costs 39
137
116
409
Total intangible asset amortization expense $ 9,896
$ 10,145
$ 31,068
$ 30,375

Estimated future intangible asset amortization expense based on the carrying value as of ~~September~~June 28, ~~2018~~2019 is as follows (in thousands):



	2019		2020	2021	2022	2023	After 2023
Amortization Expense	$	20,427	40,449	39,597	38,564	36,721	525,426

2018 2019 2020 2021 2022 After 2022
Amortization Expense $ 9,918
$ 40,491
$ 40,804
$ 39,948
$ 38,807
$ 565,103

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~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(5.~~(6.) DEBT

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



	June 28, 2019			December 28, 2018
Senior secured term loan A	$	285,937		$	304,687
Senior secured term loan B	580,286			632,286
Revolving line of credit	10,000			5,000
Unamortized discount on term loan B and debt issuance costs	(13,285		)	(16,466		)
Total debt	862,938			925,507
Current portion of long-term debt	(37,500		)	(37,500		)
Total long-term debt	$	825,438		$	888,007

September 28,
2018 December 29,
2017
Senior secured term loan A $ 314,063
$ 335,157
Senior secured term loan B 658,286
873,286
9.125% senior notes due 2023 —
360,000
Revolving line of credit —
74,000
Unamortized discount on term loan B and debt issuance costs (18,155 ) (33,278 )
Total debt 954,194
1,609,165
Current portion of long-term debt (37,500 ) (30,469 )
Total long-term debt $ 916,694
$ 1,578,696

~~Senior Secured Credit Facilities~~

The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a ~~$200 million~~ revolving credit facility (the “Revolving Credit Facility”), with $200 million borrowing capacity as described below, (ii) a ~~$314~~$286 million term loan A facility (the “TLA Facility”), and (iii) a ~~$658~~$580 million term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB Facility was issued at a 1% discount.

On June 8, 2018, the Company amended the Senior Secured Credit Facilities to permit the sale of the AS&O Product Line. As required by the amended terms of the Company’s Senior Secured Credit Facilities, the Company paid down indebtedness as a result of the disposition of the AS&O Product Line. On July 10, 2018, the Company completed the redemption in full of its 9.125% senior notes due on November 1, 2023 (the “Senior Notes”) at a redemption price of 100% of the principal amount of the Senior Notes plus the applicable “make-whole” premium of $31.3 million and accrued and unpaid interest through the redemption date. Upon completion of the redemption of the Senior Notes, the indenture governing the Senior Notes was satisfied and discharged. The Company utilized the remaining net proceeds to pay down an additional $188 million in debt outstanding under the Senior Secured Credit Facilities, consisting of $114 million on the TLB Facility and $74 million on the Revolving Credit Facility.

Revolving Credit Facility

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

As of ~~September~~June 28, ~~2018,~~2019, the Company had no$10 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of ~~$191.3~~$183.2 million after giving effect to ~~$8.7~~$6.8 million of outstanding standby letters of credit.

~~Subject to certain conditions, commitments~~ As of June 28, 2019, the weighted average interest rate on outstanding borrowings 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. Due to being variable rate and short-term in nature, the carrying amount of the Revolving Credit Facility approximates fair value.

~~- 13 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(5.) DEBT (Continued)~~was 4.91%.

Term Loan Facilities

The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. As a result of the upgrade to the Company’s corporate family credit rating from Moody’s Investors Services, Inc. from B3 to B2 during the third quarter of 2018, the interest rate margin for the TLB Facility was stepped down by 25 basis points. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 2.00% or (ii) the applicable LIBOR rate plus 3.00%, with LIBOR subject to a 1.00% floor. As of ~~September~~June 28, ~~2018,~~2019, the interest rates on the TLA Facility and TLB Facility were ~~4.74%~~4.91% and ~~5.14%~~5.42%, respectively.

Subject to certain conditions, one or more incremental term loan facilities may be added to the Term Loan Facilities so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.

~~As of September 28, 2018, the estimated fair value of the TLB Facility was approximately $664 million~~, based on quoted market prices for the debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. The par amount of the TLA Facility approximated its fair value as of September 28, 2018 based upon the debt being variable rate in nature.

Covenants

The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of ~~5.75:~~5.00:1.00, subject to periodic step downs in beginning in the ~~fourth~~third quarter of ~~2018~~2019 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 September 28, 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 ~~September~~June 28, ~~2018,~~2019, the Company was in compliance with ~~all negative covenants under the Senior Secured Credit Facilities.~~these financial covenants.

~~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~~Contractual maturities under the Senior Secured Credit Facilities ~~become immediately due~~for the remainder of 2019 and ~~payable.~~the next three years (through maturity), excluding any discounts or premiums, as of June 28, 2019 are as follows (in thousands):

~~9.125% Senior Notes due 2023~~



	2019		2020	2021	2022
Future minimum principal payments	$	18,750	47,500	229,687	580,286

~~On October 27, 2015,~~The Company prepaid portions of its TLB Facility during 2019 and 2018. The Company recognized losses from extinguishment of debt during the ~~Company completed a private offering~~three and six months ended June 28, 2019 of ~~$360~~$0.6 million ~~aggregate principal amount~~and $1.0 million, respectively, and $0.4 million and $1.5 million, during the three and six months ended June 29, 2018, respectively. The loss from extinguishment of ~~9.125% senior notes due on November 1, 2023 . On July 10, 2018,~~debt represents the ~~Company completed the redemption in full~~portion of the ~~Senior Notes at a redemption price of 100%~~unamortized discount and debt issuance costs related to the portion of the ~~principal amount of the Senior Notes plus the applicable “make-whole” premium of $31.3 million~~TLB Facility that was prepaid and ~~accrued and unpaid interest through the redemption date. The “make-whole” premium~~ is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations. ~~Upon completion of the redemption of the Senior Notes, the indenture governing the Senior Notes was satisfied and discharged.~~

Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2018 and the next four years and thereafter, excluding any discounts or premiums, as of September 28, 2018 are as follows (in thousands):

2018 2019 2020 2021 2022
Future minimum principal payments $ 9,375
$ 37,500
$ 37,500
$ 229,688
$ 658,286

- 1413 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(5.) DEBT (Continued)~~

~~Debt Issuance Costs and Discounts~~

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

December 29, 2017 $ 2,808
Amortization during the period (743 )
September 28, 2018 $ 2,065

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

Debt Issuance Costs Unamortized Discount on TLB Facility Total
December 29, 2017 $ 26,889
$ 6,389
$ 33,278
Write-off of debt issuance costs and unamortized discount⁽¹⁾
(9,373 ) (1,448 ) (10,821 )
Amortization during the period (3,497 ) (805 ) (4,302 )
September 28, 2018 $ 14,019
$ 4,136
$ 18,155

^__________

⁽¹⁾

The Company redeemed its Senior Notes and prepaid portions of its TLB Facility during 2018 and 2017. The Company recognized losses from extinguishment of debt during the three and nine months ended September 28, 2018 of $9.3 million and $10.8 million, respectively. The Company recognized losses from extinguishment of debt during the three and nine months ended September 29, 2017 of $0.8 million and $3.3 million, respectively. The loss from extinguishment of debt represents the unamortized debt issuance costs related to the Senior Notes and the portion of the unamortized discount and debt issuance costs related to the portion of the TLB Facility that was prepaid and is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations.

~~Interest Rate Swap~~

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

~~Information regarding the Company’s outstanding interest rate swap designated as a cash flow hedge as of September 28, 2018 is as follows (dollars in thousands):~~

Notional Amount Start Date End Date Pay Fixed Rate Receive Current Floating Rate Fair Value Balance Sheet Location
$ 200,000
Jun-17 Jun-20 1.1325 % 2.2300 % $ 5,690
Other Long-Term Assets

The estimated fair value of the interest rate swap agreement represents the amount the Company would receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swap during the quarters ended September 28, 2018 and September 29, 2017 was considered ineffective. The amounts recorded to Interest Expense during the nine months ended September 28, 2018 and September 29, 2017 related to the Company’s interest rate swap were reductions of $1.1 million and $0.4 million, respectively. The estimated Accumulated Other Comprehensive Income related to the Company’s interest rate swaps that is expected to be reclassified into earnings within the next twelve months is a $2.9 million gain.

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~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(6.) BENEFIT PLANS~~

The Company is required to provide its employees located in Switzerland and Mexico certain statutorily mandated defined benefits. The following tables set forth the components of the Company’s net periodic expense from continuing operations relating to retirement benefit plans (in thousands):

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Service cost $ 54
$ 52
$ 162
$ 150
Interest cost 12
11
36
31
Amortization of net loss 8
11
25
34
Expected return on plan assets (4 ) (4 ) (13 ) (14 )
Net defined benefit cost $ 70
$ 70
$ 210
$ 201

(7.) STOCK-BASED COMPENSATION

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

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



	Three Months Ended				Six Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Stock options	$	102	$	197	$	203	$	511
RSAs and RSUs (time-based)	1,545		1,207		3,465		3,169
Performance-based RSUs (“PRSUs”)	1,073		796		1,765		1,503
Stock-based compensation expense - continuing operations	2,720		2,200		5,433		5,183
Discontinued operations	—		685		—		924
Total stock-based compensation expense	$	2,720	$	2,885	$	5,433	$	6,107

Cost of sales	$	281	$	200	$	598	$	376
Selling, general and administrative expenses	2,334		1,968		4,664		4,747
Research, development and engineering costs	58		31		124		55
Other operating expenses	47		1		47		5
Discontinued operations	—		685		—		924
Total stock-based compensation expense	$	2,720	$	2,885	$	5,433	$	6,107

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Stock options $ 215
$ 325
$ 726
$ 1,303
RSAs and RSUs (time-based) 1,161
1,265
4,330
4,142
Performance-based RSUs (“PSUs”) 711
182
2,214
3,695
Stock-based compensation expense
- continuing operations
2,087
1,772
7,270
9,140
Discontinued operations (510 ) 173
414
755
Total stock-based compensation expense $ 1,577
$ 1,945
$ 7,684
$ 9,895

Cost of sales $ 222
$ 80
$ 598
$ 417
Selling, general and administrative expenses 1,821
1,839
6,568
6,332
Research, development and engineering costs 44
122
99
367
Other operating expenses —
(269 ) 5
2,024
Discontinued operations (510 ) 173
414
755
Total stock-based compensation expense $ 1,577
$ 1,945
$ 7,684
$ 9,895
There were no stock options granted during the six months ended June 28, 2019. The weighted average fair value and assumptions used to value options granted during the six months ended June 29, 2018 are as follows:



Weighted average fair value	$	14.89
Risk-free interest rate	2.21		%
Expected volatility	39		%
Expected life (in years)	4.0
Expected dividend yield	—		%

~~During~~The following table summarizes 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.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 28, 2018	522,783		$	31.88
Exercised	(93,472	)	17.12
Outstanding at June 28, 2019	429,311		$	35.09	5.5	$	21.0
Exercisable at June 28, 2019	394,996		$	34.74	5.3	$	19.4

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7.) STOCK-BASED COMPENSATION (Continued)

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

Nine Months Ended
September 28,
2018 September 29,
2017
Weighted average fair value $ 14.89
$ 10.58
Risk-free interest rate 2.21 % 1.69 %
Expected volatility 39 % 37 %
Expected life (in years) 4.0
4.1
Expected dividend yield — % — %

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

Number of
Stock
Options

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Life
(In Years)

Aggregate
Intrinsic
Value
(In Millions)
Outstanding at December 29, 2017 931,353
$ 30.89

Granted 28,447
45.13

Exercised (381,793 ) 30.80

Forfeited or expired (23,700 ) 41.28

Outstanding at September 28, 2018 554,307
$ 31.24
6.2 $ 28.7
Exercisable at September 28, 2018 433,487
$ 30.16
5.6 $ 22.9

During the ~~nine~~six months ended ~~September~~June 28, ~~2018,~~2019, the Company awarded grants to members of ~~0.3 million RSUs to~~its Board of Directors and certain members of ~~management,~~management. The Board of ~~which 0.2 million are PSUs and the remainder are time-based~~Directors received grants of RSUs that vest in equal quarterly installments of 25% on the first day of each quarter of the Company’s 2019 fiscal year. The members of management received either RSUs or a mix of RSUs and PRSUs. The RSUs vest ratably, subject to the recipient’s continuous service to the Company over a period of generally three to four ~~years. Of~~years from the ~~PSUs, 0.1 million~~grant date. For the Company's PRSUs, in addition to service conditions, the ultimate number of ~~the~~ shares ~~subject~~ to ~~each grant will~~ be earned ~~based upon~~depends on the achievement of ~~specific Company~~financial performance ~~metrics over a three-year~~or market-based conditions. The financial performance ~~period ending January 1, 2021, and 0.1 million of~~condition is based on the ~~shares subject to each grant will be earned~~Company'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-year~~three year performance period ending January 1, 2021. The number of PSUs earned based on the achievement of the Company performance metrics and TSR performance requirements, if any, will vest based on the recipient’s continuous service to the Company over a period of generally one to three years from the grant date. The time-based RSUs generally vest ratably over a three-year period.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 nine months ended September 28, 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:



	Six Months Ended
	June 28, 2019			June 29, 2018
Weighted average fair value	$	117.03		$	37.46
Risk-free interest rate	2.46		%	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	157,608		50.76		97,296		83.70
Vested	(28,197	)	46.62		(18,310	)	59.66
Forfeited	(50,393	)	41.97		(5,310	)	48.57
Nonvested at September 28, 2018	242,449		$	43.09
Nonvested at June 28, 2019					215,912		$	64.29

The following table summarizes PRSU activity:



	Performance- Vested Activity		Weighted Average Fair Value
Nonvested at December 28, 2018	287,134		$	36.15
Granted	50,492		101.17
Vested	(75,008	)	28.41
Forfeited	(65,293	)	32.68
Nonvested at June 28, 2019	197,325		$	56.87

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(7.) STOCK-BASED COMPENSATION (Continued)~~

~~The following table summarizes PSU activity:~~

Performance-
Vested
Activity

Weighted
Average
Fair Value
Nonvested at December 29, 2017 469,889
$ 32.37
Granted 159,669
45.37
Vested (146,704 ) 35.16
Forfeited (180,003 ) 35.18
Nonvested at September 28, 2018 302,851
$ 36.20

(8.) OTHER OPERATING EXPENSES

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



	Three Months Ended					Six Months Ended
	June 28, 2019		June 29, 2018			June 28, 2019		June 29, 2018
Strategic reorganization and alignment	$	1,656	$	3,727		$	3,390	$	5,781
Manufacturing alignment to support growth	561		1,103			1,146		1,616
Consolidation and optimization initiatives	—		(14		)	—		561
Asset dispositions, severance and other	891		(124		)	1,462		518
Other operating expenses - continuing operations	3,108		4,692			5,998		8,476
Discontinued operations	—		2,497			—		3,990
Total other operating expenses	$	3,108	$	7,189		$	5,998	$	12,466

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Strategic reorganization and alignment $ 2,643
$ —
$ 8,424
$ —
Manufacturing alignment to support growth 877
—
2,493
—
Consolidation and optimization initiatives 137
2,979
698
8,055
Acquisition and integration expenses —
2,267
—
10,057
Asset dispositions, severance and other 482
823
1,000
6,378
Other operating expenses - continuing operations 4,139
6,069
12,615
24,490
Discontinued operations (2,185 ) 195
1,805
465
Total other operating expenses $ 1,954
$ 6,264
$ 14,420
$ 24,955

Strategic Reorganization and Alignment

~~During~~As a result of the ~~fourth quarter~~strategic review of ~~2017,~~its customers, competitors and markets, the Company began ~~to take~~taking steps in 2017 to better align its resources in order to enhance the profitability of its portfolio of products. ~~This includes~~These 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 ~~$28~~$20 million to ~~$30~~$22 million, of which an estimated $16 million to $20 million are expected to result in cash outlays. During the ~~nine~~six months ended ~~September~~June 28, ~~2018,~~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 primarily~~services recorded within the Medical segment. As of ~~September~~June 28, ~~2018,~~2019, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was ~~$16.0~~$19.9 million.These actions are expected to be substantially completed by the end 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.~~growth and improve operating efficiencies. 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 capital expenditures of between approximately $4 million to $6 million.~~expenditures. Costs related to the Company’s manufacturing alignment to support growth initiative were primarily recorded within the Medical segment. As of ~~September~~June 28, ~~2018,~~2019, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was ~~$2.8~~$4.6 million. These actions are expected to be substantially completed by the end of 2019.

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(8.) OTHER OPERATING EXPENSES (Continued)~~

Consolidation and Optimization Initiatives

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

The following table summarizes the change in accrued liabilities, presented within Accrued Expense and Other Current Liabilities on the Condensed Consolidated Balance Sheets, related to the initiatives described above (in thousands):



	Severance and Retention			Other			Total
December 28, 2018	$	1,668		$	202		$	1,870
Restructuring charges	1,263			3,273			4,536
Cash payments	(887		)	(3,469		)	(4,356		)
June 28, 2019	$	2,044		$	6		$	2,050

Severance and Retention Other Total
December 29, 2017 $ 1,308
$ —
$ 1,308
Restructuring charges 5,347
6,268
11,615
Cash payments (5,438 ) (5,981 ) (11,419 )
September 28, 2018 $ 1,217
$ 287
$ 1,504

~~Acquisition and Integration Expenses~~

The Company did not incur any additional costs associated with these activities during the nine months ended September 28, 2018. During the three and nine months ended September 29, 2017, the Company incurred $2.3 million and $10.1 million in acquisition and integration costs related to the acquisition of Lake Region Medical, consisting primarily of integration costs. Integration costs primarily include professional, consulting, severance, retention, relocation, and travel costs. The $0.4 million of acquisition and integration costs accrued as of December 29, 2017 were paid during the first quarter of 2018. These projects were completed as of December 29, 2017.

Asset Dispositions, Severance and Other

During the ~~first nine~~six months ofended June 28, 2019 and June 29, 2018, ~~and 2017,~~ the Company recorded ~~losses in connection with various asset disposals and/or write-downs. The 2017 amount also includes approximately $5.3 million in expense~~expenses 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 future operating costs and improve operational efficiencies.

- 16 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(9.) INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations. 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 Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporateThe Company’s effective tax rate ~~decrease from 35% to 21% effective~~ for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017.

~~- 19 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(9.) INCOME TAXES (Continued)~~

~~Under GAAP, the effect of a change in tax laws or rates to be recognized in income from~~ continuing operations for the ~~period that includes the enactment date. As such, the Company recognized an estimate~~second quarter of ~~the impact of the Tax Reform Act in the year ended December 29, 2017. The Company had an estimated $147.5~~2019 was 19.0% on $34.8 million of undistributed foreign earnings and profit subject to the deemed mandatory repatriation as of December 29, 2017 and recognized a provisional $14.7 million in 2017 for the one-time transition tax. The Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with the repatriation tax. In addition, as a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Reform Act, the Company revalued its ending net deferred tax liabilities at December 29, 2017 and recognized a $56.5 million tax benefit in the Company’s Consolidated Statement of Operations for the year ended December 29, 2017. For further discussion of the impact of the Tax Reform Act for the year ended December 29, 2017, reference is made to Note 12 of the Company’s consolidated financial statements as of and for the year ended December 29, 2017 included in the Company’s 2017 Annual Report on Form 10-K for the year ended December 29, 2017.

On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. The Company recognized the tax impact of the revaluation of deferred tax assets and liabilities and the provisional tax impact related to deemed repatriated earnings and included these amounts in its consolidated financial statements for the year ended December 29, 2017.

Based on additional analysis conducted, the Company updated the provisional amount of the one-time transition tax to $18.9 million, representing an increase of $4.2 million over the $14.7 million amount recorded as of December 29, 2017. The Company believes the remeasurement of its 2017 provisional amount is complete. As stated above, the Company has sufficient U.S. net operating losses to offset cash tax liabilities associated with the repatriation tax. In part, due to the utilization of additional net operating losses to offset the additional transition tax, the Company adjusted its revaluation of the adjusted ending net deferred tax liabilities as of December 29, 2017, resulting in a recognized tax benefit of $60.7 million, representing an increase of $4.2 million to the originally recorded $56.5 million tax benefit recorded in the Company’s Consolidated Statement of Operations for the year ended December 29, 2017. The impact of these adjustments has been reflected in the Company’s financial results for the three month period ended September 28, 2018 and its timely filed 2017 U.S. corporate income tax return.

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

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

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

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~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(9.) INCOME TAXES (Continued)~~

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

~~The Company’s worldwide effective tax rate for the third quarter of 2018 was 42.6% on $14.5 million of losses~~ from continuing operations before taxes compared to ~~(2.3)%~~27.5% on ~~$19.4~~$31.8 million of income from continuing operations before taxes for the same period in ~~2017.~~2018. The ~~difference between the~~ Company’s effective tax rate ~~and the U.S. federal statutory income tax rate~~for continuing operations for the ~~third quarter~~first six months of ~~2018 is primarily attributable to discrete tax benefits~~2019 was 17.3% on $60.0 million of ~~$3.0 million, which are predominately related to return to provision adjustments and deductible stock based compensation expense. The Company recognized a tax provision of $8.0 million on~~ income from continuing operations before taxes ~~of $35.8 million for the first nine months of 2018~~ compared to ~~$0.6 million~~28.1% on ~~$33.0~~$50.3 million of income from continuing operations before taxes for the same period of ~~2017.~~2018. The ~~2018 estimated annual effective tax rate includes~~difference between the ~~estimated impact of all Tax Reform Act provisions.~~

~~The~~ Company’s effective tax ~~rate for 2018 differs from~~rates and the U.S. federal statutory income tax rate of 21% ~~due principally~~for the second quarter and first six months of 2019 is primarily attributable to discrete tax benefits of $0.4 million and $2.1 million, respectively, as well as the estimated net 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. incomeGlobal Intangible Low-Taxed 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, Uruguay, Malaysia and Ireland.

~~The Company’s effective tax rate for 2017 differs from the U.S. federal statutory tax rate of 35% due principally to~~ the Company’s earnings outside the U.S., which are generally taxed at rates ~~lower than~~that differ from the ~~U.S.~~U.S federal ~~rate. In addition,~~rate, and the ~~Company had positive income before taxes in its foreign jurisdictions but losses before taxes in U.S. jurisdictions.~~availability of certain tax credits. The discrete tax benefits for 2019 are predominately related to excess tax benefits recognized upon vesting of RSUs or exercise of stock options.

As of ~~September~~June 28, ~~2018,~~2019, the balance of unrecognized tax benefits from continuing operations is approximately ~~$5.2~~$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 ~~$5.2~~$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.

(10.) COMMITMENTS AND CONTINGENCIES

Litigation

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

In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. ~~On January 26, 2016, a jury~~Two juries in the U.S. District Court for the District of Delaware have returned ~~a verdict~~verdicts finding that AVX infringed ~~two Integer~~on three of the Company’s patents and awarded ~~Integer~~the Company $37.5 million in damages. ~~Following a second trial in August 2017, a jury found that AVX infringed an additional Integer patent. On~~In 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, ~~which~~the jury awarded the Company $22.2 million in damages. That award is ~~scheduled~~subject to post-trial proceedings. On July 31, 2019, the U. S. District Court for ~~January 2019. The~~the District of Delaware entered an order in the AVX litigation denying AVX’s post-trial motion to overturn the jury verdict in favor of the Company. To date, the Company has recorded no gains in connection with this ~~litigation as no cash has been received.~~litigation.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(10.) COMMITMENTS AND CONTINGENCIES (Continued)

Product Warranties

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



December 28, 2018	$	2,600
Additions to warranty reserve	195
Adjustments to pre-existing warranties	(635		)
Warranty claims settled	(465		)
June 28, 2019	$	1,695

December 29, 2017 $ 2,820
Additions to warranty reserve 570
Warranty claims settled (317 )
September 28, 2018 $ 3,073

~~Foreign Currency Contracts~~(11.) LEASES

The Company ~~periodically enters into foreign currency forward contracts~~primarily 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 exposure~~contain a lease if it conveys the right to ~~foreign currency~~use 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 contracts~~does 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 portions~~current portion of operating lease liabilities are presented within Accrued Expense and Other Current Liabilities, and the ~~unrealized gains and losses~~non-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~~Sheets. The current portion of operating lease liabilities was $7.3 million as of June 28, 2019. Leases with a term of 12 months or less are not recorded on the balance sheet.

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 ~~reclassified~~generally at the Company’s sole discretion. The Company evaluates renewal and termination options at lease commencement to ~~earnings~~determine if such options are reasonably certain to be exercised based on economic factors.

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 ~~same periods during which~~period those payments are incurred.

The discount rate implicit within our leases is not readily determinable, and therefore, the ~~hedged transactions affect earnings.~~Company uses its estimated incremental borrowing rate in determining the present value of lease payments. The ~~estimated Accumulated Other Comprehensive Income related to~~incremental borrowing rate is determined based on the Company’s ~~foreign~~recent debt issuances, lease term and the currency ~~contracts that is expected to be reclassified into earnings within~~in which lease payments are made.

The following table presents the ~~next twelve months is a $0.7 million gain.~~

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

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Increase (decrease) in sales $ (252 ) $ 594
$ (254 ) $ 733
Increase (decrease) in cost of sales (393 ) (512 ) (988 ) 371
Ineffective portion of change in fair value —
—
—
—

~~Information regarding outstanding foreign currency contracts designated as cash flow hedges as of September 28, 2018 is as follows (dollars in thousands):~~weighted average remaining lease term and discount rate:



	June 28, 2019
Weighted-average remaining lease term of operating leases (in years)	7.7
Weighted-average discount rate of operating leases	5.5	%

Aggregate
Notional
Amount

Start
Date

End
Date
$/Foreign Currency
Fair
Value
Balance Sheet Location
$ 1,050
Jul 2018 Dec 2018 0.0500
Peso $ 62
Prepaid expenses and other current assets
7,599
Jan 2018 Dec 2018 0.0507
Peso 340
Prepaid expenses and other current assets
6,100
Jan 2018 Dec 2018 1.1961
Euro (214 ) Accrued expenses
5,850
Aug 2018 Dec 2018 1.1699
Euro (16 ) Accrued expenses
12,621
Jan 2019 Jun 2019 1.1686
Euro 129
Prepaid expenses and other current assets
10,991
Jan 2019 Jun 2019 0.0523
Peso (95 ) Accrued expenses

- 2218 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(11.) LEASES (Continued)

The components and classification of lease cost are as follows (in thousands):



	Three Months Ended June 28, 2019			Six Months Ended June 28, 2019
Operating lease cost	$	2,442		$	4,891
Short-term lease cost (leases with initial term of 12 months or less)	17			34
Variable lease cost	652			1,207
Sublease income	(478		)	(945		)
Total lease cost	$	2,633		$	5,187

Cost of sales	$	2,190		$	4,342
Selling, general and administrative expenses	297			552
Research, development and engineering costs	139			278
Other operating expenses	7			15
Total lease cost	$	2,633		$	5,187

The Company’s sublease income is derived primarily from certain real estate leases to several non-affiliated tenants under operating sublease arrangements.

At June 28, 2019, the maturities of operating lease liabilities were as follows (in thousands):



Remainder of 2019	$	5,178
2020	9,268
2021	8,964
2022	6,865
2023	6,119
2024	5,600
Thereafter	16,399
Total lease payments	58,393
Less imputed interest	(11,273		)
Total	$	47,120

As of June 28, 2019, the Company did not have any leases that have not yet commenced.

Supplemental cash flow information related to leases for the six months ended June 28, 2019 is as follows (in thousands):



Cash paid for amounts included in the measurement of operating lease liabilities	$	5,107
ROU assets obtained in exchange for new operating lease liabilities	7,249

During the three months ended June 28, 2019, the Company extended the lease terms of three of its manufacturing facilities. As a result of these lease modifications, the Company re-measured the lease liability and adjusted the ROU asset on the modification dates.

The Company’s future minimum lease commitments, net of sublease income, as of December 28, 2018, under ASC 840, the predecessor to ASC 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

- 19 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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



	Three Months Ended					Six Months Ended
	June 28, 2019		June 29, 2018			June 28, 2019		June 29, 2018
Numerator for basic and diluted EPS:
Income from continuing operations	$	28,222	$	23,056		$	49,588	$	36,140
Income (loss) from discontinued operations	4,835		(3,034		)	5,138		(8,000		)
Net income	$	33,057	$	20,022		$	54,726	$	28,140

Denominator for basic and diluted EPS:
Weighted average shares outstanding - Basic	32,621		32,038			32,579		31,970
Dilutive effect of assumed exercise of stock options, restricted stock and RSUs	388		682			416		602
Weighted average shares outstanding - Diluted	33,009		32,720			32,995		32,572

Basic earnings (loss) per share:
Income from continuing operations	$	0.87	$	0.72		$	1.52	$	1.13
Income (loss) from discontinued operations	0.15		(0.09		)	0.16		(0.25		)
Basic earnings per share	1.01		0.62			1.68		0.88

Diluted earnings (loss) per share:
Income from continuing operations	$	0.85	$	0.70		$	1.50	$	1.11
Income (loss) from discontinued operations	0.15		(0.09		)	0.16		(0.25		)
Diluted earnings per share	1.00		0.61			1.66		0.86

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Numerator for basic and diluted EPS:
Income (loss) from continuing operations $ (8,303 ) $ 19,882
$ 27,837
$ 32,389
Income (loss) from discontinued operations 122,382
$ (6,192 ) 114,382
(20,048 )
Net income $ 114,079
$ 13,690
$ 142,219
$ 12,341

Denominator for basic and diluted EPS:
Weighted average shares outstanding - Basic 32,211
31,594
32,050
31,304
Dilutive effect of assumed exercise of stock options, restricted stock and RSUs —
579
401
643
Weighted average shares outstanding - Diluted 32,211
32,173
32,451
31,947

Basic earnings (loss) per share:
Income (loss) from continuing operations $ (0.26 ) $ 0.63
$ 0.87
$ 1.03
Income (loss) from discontinued operations 3.80
(0.20 ) 3.57
(0.64 )
Basic earnings per share 3.54
0.43
4.44
0.39

Diluted earnings (loss) per share:
Income (loss) from continuing operations $ (0.26 ) $ 0.62
$ 0.86
$ 1.01
Income (loss) from discontinued operations 3.80
(0.19 ) 3.52
(0.63 )
Diluted earnings per share 3.54
0.43
4.38
0.39

The diluted weighted average share calculations do not include the following securities, which are not dilutive to the EPS calculations or the performance criteria have not been met (in thousands):



	Three Months Ended		Six Months Ended
	June 28, 2019	June 29, 2018	June 28, 2019	June 29, 2018
Time-vested stock options, restricted stock and RSUs	53	—	56	50
Performance-vested restricted stock and PRSUs	48	92	47	122

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Time-vested stock options, restricted stock and RSUs 797
295
436
850
Performance-vested restricted stock and PSUs 303
188
220
320

- 2320 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(12.~~(13.) ~~ACCUMULATED OTHER COMPREHENSIVE INCOME~~STOCKHOLDERS’ EQUITY

The following is a summary of the number of shares of common stock issued, treasury stock and common stock outstanding for the six month periods ended June 28, 2019 and June 29, 2018:



	Six months ended June 28, 2019						Six months ended June 29, 2018
	Issued		Treasury Stock		Outstanding		Issued		Treasury Stock		Outstanding
Balance, beginning of period	32,624,494		(151,327	)	32,473,167		31,977,953		(106,526	)	31,871,427
Stock options exercised	93,472		—		93,472		108,305		—		108,305
RSAs issued, net of forfeitures	(2,354	)	—		(2,354	)	(2,354	)	20,092		17,738
Vesting of RSUs	30,895		(3,683	)	27,212		7,113		2,766		9,879
Vesting of PSUs	70,115		(20,998	)	49,117		127,191		(38,103	)	89,088
Balance, end of period	32,816,622		(176,008	)	32,640,614		32,218,208		(121,771	)	32,096,437

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
June 29, 2018 $ (1,422 ) $ 5,094
$ 37,756
$ 41,428
$ (370 ) $ 41,058
Unrealized gain on cash flow hedges —
1,424
—
1,424
(299 ) 1,125
Realized gain on foreign currency hedges —
(141 ) —
(141 ) 30
(111 )
Realized gain on interest rate swap hedges —
(482 ) —
(482 ) 102
(380 )
Foreign currency translation loss —
—
(2,809 ) (2,809 ) —
(2,809 )
Reclassifications to earnings⁽¹⁾
948
—
(514 ) 434
(282 ) 152
September 28, 2018 $ (474 ) $ 5,895
$ 34,433
$ 39,854
$ (819 ) $ 39,035

December 29, 2017 $ (1,422 ) $ 3,418
$ 50,200
$ 52,196
$ (17 ) $ 52,179
Unrealized gain on cash flow hedges —
4,325
—
4,325
(908 ) 3,417
Realized gain on foreign currency hedges —
(734 ) —
(734 ) 154
(580 )
Realized gain on interest rate swap hedges —
(1,114 ) —
(1,114 ) 234
(880 )
Foreign currency translation loss —
—
(15,253 ) (15,253 ) —
(15,253 )
Reclassifications to earnings⁽¹⁾
948
—
(514 ) 434
(282 ) 152
September 28, 2018 $ (474 ) $ 5,895
$ 34,433
$ 39,854
$ (819 ) $ 39,035



	Defined Benefit Plan Liability			Cash Flow Hedges			Foreign Currency Translation Adjustment			Total Pre-Tax Amount			Tax			Net-of-Tax Amount
March 29, 2019	$	(295	)	$	2,551		$	23,701		$	25,957		$	(493	)	$	25,464
Unrealized loss on cash flow hedges	—			(4,415		)	—			(4,415		)	927			(3,488		)
Realized loss on foreign currency hedges	—			11			—			11			(2		)	9
Realized gain on interest rate swap hedge	—			(714		)	—			(714		)	150			(564		)
Foreign currency translation gain	—			—			4,510			4,510			—			4,510
June 28, 2019	$	(295	)	$	(2,567	)	$	28,211		$	25,349		$	582		$	25,931

December 28, 2018	$	(295	)	$	3,439		$	30,539		$	33,683		$	(679	)	$	33,004
Unrealized loss on cash flow hedges	—			(4,569		)	—			(4,569		)	959			(3,610		)
Realized gain on foreign currency hedges	—			(34		)	—			(34		)	7			(27		)
Realized gain on interest rate swap hedges	—			(1,403		)	—			(1,403		)	295			(1,108		)
Foreign currency translation loss	—			—			(2,328		)	(2,328		)	—			(2,328		)
June 28, 2019	$	(295	)	$	(2,567	)	$	28,211		$	25,349		$	582		$	25,931



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

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

June 30, 2017 $ (1,475 ) $ 4,601
$ 25,475
$ 28,601
$ (1,398 ) $ 27,203
Unrealized gain on cash flow hedges —
633
—
633
(222 ) 411
Realized gain on foreign currency hedges —
(1,106 ) —
(1,106 ) 387
(719 )
Realized gain on interest rate swap hedges —
(49 ) —
(49 ) 18
(31 )
Foreign currency translation gain —
—
16,728
16,728
—
16,728
September 29, 2017 $ (1,475 ) $ 4,079
$ 42,203
$ 44,807
$ (1,215 ) $ 43,592

December 30, 2016 $ (1,475 ) $ 1,420
$ (15,660 ) $ (15,715 ) $ (285 ) $ (16,000 )
Unrealized gain on cash flow hedges —
3,414
—
3,414
(1,195 ) 2,219
Realized gain on foreign currency hedges —
(362 ) —
(362 ) 127
(235 )
Realized gain on interest rate swap hedges —
(393 ) —
(393 ) 138
(255 )
Foreign currency translation gain —
—
57,863
57,863
—
57,863
September 29, 2017 $ (1,475 ) $ 4,079
$ 42,203
$ 44,807
$ (1,215 ) $ 43,592

^__________

⁽¹⁾

Accumulated foreign currency translation losses of $0.5 million and defined benefit plan liabilities of $0.7 million (net of income taxes of $0.3 million) were reclassified to earnings in during the three months ended September 28, 2018 as a result of the divestiture of the AS&O Product Line and are included in “Gain on sale of discontinued operations, net of tax” in the Condensed Consolidated Statements of Operations.

The realized loss (gain) relating to the Company’s foreign currency hedges were reclassified from Accumulated Other Comprehensive Income 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.

- 2421 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(13.~~(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 method~~is exposed to global market risks, including the effect of changes in interest rates and ~~equity method investments which~~foreign 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 ~~measured~~recorded at fair value on ~~a nonrecurring basis.~~

~~Foreign Currency Contracts~~

~~The fair value of foreign currency contracts were determined through~~ the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs included foreign exchange rate and credit spread curves. In addition, the Company received fair value estimates from the foreign currency contract counterparties to verify the reasonableness of the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair value hierarchy. Refer to Note 10 “Commitments and Contingencies” for further discussion regarding the fair value of the Company’s foreign currency contracts.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 its outstanding floating rate borrowings. Under these swap agreements, the Company pays a fixed rate of interest and receives a floating rate equal to one-month London Interbank Offered Rate (“LIBOR”). The variable rate received from the swap agreements 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 swap agreements as cash flow hedges based on concluding the hedged forecasted transaction is probable of occurring within the period the cash flow hedge is anticipated to affect earnings. The unrealized gains and losses on these contracts are reported in AOCI 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 ~~contract outstanding were~~agreements 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 ~~received~~receives a fair value estimate from the ~~interest rate~~ swap agreement counterparty to verify the reasonableness of the Company’s estimate. ~~Refer to Note 5 “Debt” for further discussion regarding the~~The estimated fair value of the swap agreements represents the amount the Company would receive (pay) to terminate the contracts.

Information regarding the Company’s outstanding interest rate ~~swap.~~swaps designated as cash flow hedges as of June 28, 2019 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 2017	Jun 2020	1.1325	%	2.4041	%	$	1,448		Accrued expenses and other current liabilities
200,000		Jun 2020	Jun 2023	2.1785		^(a)		(2,794		)	Other long-term liabilities
400,000		Apr 2019	Apr 2020	2.4150		2.4185		(1,485		)	Accrued expenses and other current liabilities

^__________

^(a)The interest rate swap is not in effect until June 2020.

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 AOCI in the Condensed Consolidated Balance Sheets and are reclassified to earnings in the same periods during which the hedged transactions affect earnings.

Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of June 28, 2019 is as follows (dollars in thousands):



Notional Amount		Start Date	End Date	$/Foreign Currency		Fair Value			Balance Sheet Location
$	11,337	Jul 2019	Sep 2019	1.1628	Euro	$	(195	)	Prepaid expenses and other current assets
10,499		Jul 2019	Dec 2019	0.0500	Peso	254			Prepaid expenses and other current assets
12,085		Jul 2019	Dec 2019	0.0504	Peso	205			Prepaid expenses and other current assets

- 22 -

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 are determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs include foreign exchange rates and credit spread curves. In addition, the Company receives 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 following ~~table provides information regarding assets~~tables present the fair values of derivative instruments formally designated as hedging instruments as of June 28, 2019 and ~~liabilities~~December 28, 2018 (in thousands).



		Fair Value
	Fair Value Hierarchy	Assets		Liabilities
June 28, 2019
Interest rate swaps	Level 2	$	—	$	2,831
Foreign currency contracts	Level 2	264		—

December 28, 2018
Interest rate swaps	Level 2	$	4,171	$	—
Foreign currency contracts	Level 2	—		732

The following tables present the amounts in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded ~~at fair value~~and the effects of cash flow hedge activity on ~~a recurring basis~~these line items for the three and six months ended June 28, 2019 and June 29, 2018 (in thousands):



	Three Months Ended
	June 28, 2019					June 29, 2018
	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity			Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Sales	$	314,194	$	(473	)	$	314,464	$	(141	)
Cost of sales	217,210		462			215,699		159
Interest expense	13,612		714			15,234		398

Fair Value
Quoted
Prices in
Active
Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
September 28, 2018
Assets: Interest rate swap (Note 5) $ 5,690
$ —
$ 5,690
$ —
Assets: Foreign currency contracts (Note 10) 531
—
531
—
Liabilities: Foreign currency contracts (Note 10) 325
—
325
—

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



	Six Months Ended
	June 28, 2019					June 29, 2018
	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity			Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Sales	$	628,870	$	(794	)	$	606,890	$	(2	)
Cost of sales	443,276		828			424,593		595
Interest expense	27,442		1,403			30,829		632

- 23 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(14.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

The following tables present the amounts affecting the Condensed Consolidated Statements of Operations for the three and six months ended June 28, 2019 and June 29, 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,
	June 28, 2019			June 29, 2018				June 28, 2019			June 29, 2018
Interest rate swap	$	(5,151	)	$	610		Interest expense	$	714		$	398
Foreign exchange forwards	1			(1,114		)	Sales	(473		)	(141		)
Foreign exchange forwards	735			(1,719		)	Cost of sales	462			159

	Six months ended,						Location of Gain (Loss) Reclassified from AOCI into Earnings	Six months ended,
	June 28, 2019			June 29, 2018				June 28, 2019			June 29, 2018
Interest rate swap	$	(5,599	)	$	2,109		Interest expense	$	1,403		$	632
Foreign exchange forwards	(699		)	(476		)	Sales	(794		)	(2		)
Foreign exchange forwards	1,729			1,268			Cost of sales	828			595

The Company expects to reclassify net gains totaling $0.2 million related to its cash flow hedges from AOCI 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 5 “Debt” for further discussion regarding~~a 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 ~~equity~~companies to promote business and ~~other securities that~~strategic objectives. These investments are ~~accounted for as either cost method or equity method investments, which are classified as~~included in Other Long-Term 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~~Company has elected the practicability exception to use an alternative approach that measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. If an impairment is ~~reviewed quarterly for changes in circumstance or the occurrence of events that suggest~~recognized on the Company’s ~~investment may not be recoverable. The fair value of cost method investments~~non-marketable equity securities during the period, these assets are ~~not adjusted if there are no identified events or changes in circumstances that may have a material effect on~~classified as Level 3 within the fair value hierarchy based on the nature of the ~~investments. The aggregate recorded amount~~fair value inputs.

Equity investments are comprised of ~~cost and equity method investments at September 28, 2018 and December 29, 2017 was $23.1 million and $20.8 million, respectively.~~the following (in thousands):



	June 28, 2019		December 28, 2018
Equity method investment	$	14,910	$	15,148
Non-marketable equity securities	6,092		7,667
Total equity investments	$	21,002	$	22,815

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

~~(13.~~(14.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)

AsThe components of ~~September 28, 2018~~(Gain) Loss on Equity Investments, Net for each period were as follows (in thousands):



	Three Months Ended					Six Months Ended
	June 28, 2019		June 29, 2018			June 28, 2019		June 29, 2018
Equity method investment (income) loss	$	36	$	(284	)	77		(5,254		)
Impairment charges	1,575		—			1,575		—
Observable price adjustments on non-marketable equity securities	—		—			—		—
Total (gain) loss on equity investments, net	$	1,611	$	(284	)	$	1,652	$	(5,254	)

In May 2019, the Company determined that an investment in one of its non-marketable equity securities was impaired and ~~December 29, 2017,~~determined the ~~recorded amount~~fair value to be zero based upon available market information. An impairment charge of $1.6 million was recognized during the second quarter of 2019. This assessment was based on qualitative indications of impairment. Factors that significantly influenced the determination of the ~~Company’s~~impairment loss included the equity ~~method investment was $15.4 million~~security’s investee’s financial condition, priority claims to the equity security, distributions rights and ~~$13.8 million, respectively.~~ preferences, and status of the regulatory approval required to bring its product to market.

The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. ~~This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change.~~ As of ~~September~~June 28, ~~2018,~~2019, the Company owned 6.7% of this fund.~~During the nine months ended September 28, 2018 and September 29, 2017, the Company recognized net gains of $5.5 million and $2.3 million, respectively, on its equity method investment.~~

The Company’s recorded amount of cost method investments was $7.7 million and $7.0 million at September 28, 2018 and December 29, 2017, respectively. The Company did not recognize any impairment charges related to cost method investments during the nine months ended September 28, 2018. The Company recognized impairment charges of $5.3 million related to its cost method investments during the nine months September 29, 2017. The fair value of these investments is primarily determined by reference to recent sales data of similar shares to independent parties in an inactive market and categorized in Level 2 of the fair value hierarchy.

~~(14.~~(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 ~~nine~~six months ended ~~September~~June 28, ~~2018~~2019 and ~~September~~June 29, ~~2017.~~2018.

The following table presents sales from continuing operations by product line (in thousands).



	Three Months Ended				Six Months Ended
	June 28, 2019		June 29, 2018		June 28, 2019		June 29, 2018
Segment sales from continuing operations by product line:
Medical
Cardio & Vascular	$	150,397	$	148,766	$	302,971	$	285,629
Cardiac & Neuromodulation	114,488		115,941		231,399		224,851
Advanced Surgical, Orthopedics & Portable Medical	32,646		34,751		64,234		68,692
Total Medical	297,531		299,458		598,604		579,172
Non-Medical	16,663		15,006		30,266		27,718
Total sales from continuing operations	$	314,194	$	314,464	$	628,870	$	606,890

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Segment sales from continuing operations by product line:
Medical
Cardio & Vascular $ 150,230
$ 137,712
$ 435,859
$ 391,914
Cardiac & Neuromodulation 109,620
101,612
334,471
311,540
Advanced Surgical, Orthopedics & Portable Medical 32,789
31,715
101,481
88,148
Total Medical 292,639
271,039
871,811
791,602
Non-Medical 12,449
15,129
40,167
42,218
Total sales from continuing operations $ 305,088
$ 286,168
$ 911,978
$ 833,820

(15.)SEGMENT INFORMATION (Continued)

The following table presents income from continuing operations for the Company’s reportable segments (in thousands).



	Three Months Ended						Six Months Ended
	June 28, 2019			June 29, 2018			June 28, 2019			June 29, 2018
Segment income from continuing operations:
Medical	$	63,706		$	61,179		$	120,086		$	108,694
Non-Medical	5,298			4,393			9,609			7,591
Total segment income from continuing operations	69,004			65,572			129,695			116,285
Unallocated operating expenses	(19,667		)	(21,214		)	(41,189		)	(41,884		)
Operating income from continuing operations	49,337			44,358			88,506			74,401
Unallocated expenses, net	(14,505		)	(12,563		)	(28,542		)	(24,148		)
Income before taxes from continuing operations	$	34,832		$	31,795		$	59,964		$	50,253

Three Months Ended Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Segment income from continuing operations:
Medical $ 58,929
$ 47,363
$ 167,623
$ 146,637
Non-Medical 3,521
3,375
11,112
9,877
Total segment income from continuing operations 62,450
50,738
178,735
156,514
Unallocated operating expenses (20,991 ) (14,912 ) (62,875 ) (60,723 )
Operating income from continuing operations 41,459
35,826
115,860
95,791
Unallocated expenses, net (55,919 ) (16,392 ) (80,067 ) (62,806 )
Income before taxes from continuing operations $ (14,460 ) $ 19,434
$ 35,793
$ 32,985

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~


~~(15.~~(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 cases~~Revenue 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 as~~Under the ~~ability to direct the use of and obtain substantially all~~provisions of the ~~remaining benefits~~majority of the ~~product. The customer obtains control of~~Company’s contracts with customers, revenue is recognized at the ~~products~~point 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 ~~majority~~Company 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.

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~


~~(15.)~~	~~REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)~~

Disaggregated Revenue

In general, the Company's business segmentation is aligned according to the nature and economic characteristics of its products and customer relationships and provides meaningful disaggregation of each business segment's results of operations. For a summary by disaggregated product line sales for each segment, refer to Note ~~14,~~15, “Segment Information.” ~~Additionally,~~

Revenue recognized from products and services transferred to customers over time represented 10% and 12%, respectively, of total revenue for the ~~tables below disaggregate~~three and six months ended June 28, 2019, substantially all of which was within the ~~Company’s~~Medical segment. The Company did not have any significant revenue related to contracts recognized over time for the six months ended June 29, 2018.

The following table presents revenues ~~based upon~~by significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues.



	Three Months Ended				Six Months Ended
	June 28, 2019				June 28, 2019
Customer	Medical		Non-Medical		Medical		Non-Medical
Customer A	21	%			23	%
Customer B	18	%			18	%
Customer C	13	%			12	%
Customer D			25	%			25	%
All other customers	48	%	75	%	47	%	75	%

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(16.)REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)



	Three Months Ended				Six Months Ended
	June 29, 2018				June 29, 2018
Customer	Medical		Non-Medical		Medical		Non-Medical
Customer A	21	%			21	%
Customer B	20	%			20	%
Customer C	11	%			11	%
Customer D			35	%			28	%
All other customers	48	%	65	%	48	%	72	%

The following table presents revenues ~~and~~by significant ship to ~~country,~~location, which is defined as any country where 10% or more of a segment’s total revenues are shipped to. ~~The Company believes that these categories best depict how the nature, amount, timing and uncertainty of revenues and cash flows are affected by economic factors.~~

~~The following table presents revenues by customer.~~



	Three Months Ended		Six Months Ended
	June 28, 2019		June 28, 2019
Ship to Location	Medical	Non-Medical	Medical	Non-Medical
United States	56%	56%	56%	56%
Puerto Rico	12%		13%
Canada		14%		14%
Singapore		10%
All other countries	32%	20%	31%	30%

Three Months Ended Nine Months Ended
September 28, 2018 September 28, 2018
Customer Medical Non-Medical Medical Non-Medical
Customer A 23 % — % 22 % — %
Customer B 20 % — % 19 % — %
Customer C 12 % — % 12 % — %
Customer D — % 30 % — % 28 %
All other customers 45 % 70 % 47 % 72 %

~~The following table presents revenues by ship to country.~~



	Three Months Ended		Six Months Ended
	June 29, 2018		June 29, 2018
Ship to Location	Medical	Non-Medical	Medical	Non-Medical
United States	55%	69%	56%	69%
Puerto Rico	13%		13%
Canada				10%
All other countries	32%	31%	31%	21%

Three Months Ended Nine Months Ended
September 28, 2018 September 28, 2018
Ship to Location Medical Non-Medical Medical Non-Medical
United States 58% 65% 56% 68%
Puerto Rico 13% —% 13% —%
Canada —% 10% —% 10%
All other Countries 29% 25% 31% 22%

Contract Balances

The ~~timing of revenue recognition, billings~~opening and cash collections results in billed accounts receivable and less frequently, unearned revenue. Accounts receivable are recorded when the right to consideration becomes unconditional. Unearned revenue is recorded when customers pay or are billed in advanceclosing balances of the ~~Company’s satisfaction of performance obligations. Contract~~Company's contract assets and contract liabilities ~~were $4.1 million and $2.2 million~~are as ~~of September 28, 2018 and December 29, 2017, respectively, and are classified as Accrued Expenses on the Condensed Consolidated Balance Sheets.~~ follows (in thousands):



	June 28, 2019		December 28, 2018
Contract assets included in prepaid expenses and other current assets	$	11,180	$	—
Contract liabilities included in accrued expenses and other current liabilities	2,363		2,264

During the three and ~~nine~~six months ended ~~September~~June 28, 2019, the Company recognized $0.1 million and $0.4 million, respectively, of revenue that was included in the contract liability balance as of December 28, 2018. During the three and six months ended June 29, 2018, the Company recognized ~~$0.2~~$0.9 million and ~~$0.6~~$1.3 million, respectively, of revenue that was included in the contract liability balance as of December 29, 2017. ~~The Company does not have any contract assets.~~

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~


~~(16.)~~	~~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 August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract~~	The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop internal-use software, such that costs for implementation activities in the application development stage are capitalized and amortized over the life of term of the hosting arrangement, while costs incurred during the preliminary project and post implementation stages are expensed as performed.	~~January 4, 2020 (beginning of 2020 fiscal year). Early adoption is permitted.~~	~~The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.~~
~~In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value~~	The new guidance removes certain disclosure requirements from Topic 820, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. This ASU also clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date and now requires disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average (or other quantitative information if more reasonable) of significant unobservable inputs used to develop Level 3 fair value measurements.	~~January 4, 2020 (beginning of 2020 fiscal year). Early adoption is permitted.~~	~~The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.~~
~~In July 2018, the FASB issued ASU 2018-11, Leases Targeted Improvements~~	The new guidance provides entities with an additional (and optional) transition method to adopt the new standard by initially applying the standard at the adoption date (vs. the earliest period presented) and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Additionally, lessors are provided with a practical expedient to not separate non-lease components from the associated lease component and accounts for those components as a single component if certain criteria are met.	~~December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted.~~	~~The Company plans to adopt ASC Topic 842 using the transition method offered through this ASU; refer to the discussion of ASC 2016-02 below for further detail.~~

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(16.)IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)~~



~~Standard~~	~~Description~~	~~Effective Date~~	~~Effect on the Financial Statements or Other Significant Matters~~
~~In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 Leases~~	The new guidance amends and clarifies the following areas of Topic 842: residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transaction, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease and failed sale and leaseback transactions.	~~December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted.~~	~~These amendments will be considered and incorporated into the Company’s implementation of ASC Topic 842; refer to the discussion of ASC 2016-02 below for further detail.~~
~~In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.~~	The new guidance allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users.	~~December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted.~~	~~The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial statements.~~
~~In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.~~	The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.	~~December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted.~~	~~The Company does not believe the adoption of this guidance will have a material impact on its consolidated financial statements.~~
~~In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.~~	~~The new guidance clarifies the presentation and classification of the components of net periodic benefit costs in the consolidated statement of operations.~~	~~December 30, 2017 (beginning of 2018 fiscal year).~~	~~The Company adopted the new guidance effective December 30, 2017, the beginning of its 2018 fiscal year, using the retrospective transition method, as part of the FASB's simplification initiative. See~~ ~~Adoption ofASU 2017-07~~ ~~section below for additional information.~~
~~In October 2016, the FASB issued ASU 2016-16, Intra-Entity Transfers of Assets Other Than Inventory.~~	The new guidance requires the income tax consequences of an intra-entity transfer of assets other than inventory to be recognized when the transfer occurs rather than deferring until an outside sale has occurred.	~~December 30, 2017 (beginning of 2018 fiscal year).~~	~~The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company.~~

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(16.)IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)~~



~~Standard~~	~~Description~~	~~Effective Date~~	~~Effect on the Financial Statements or Other Significant Matters~~
~~In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments.~~	~~The new guidance clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows.~~	~~December 30, 2017 (beginning of 2018 fiscal year).~~	~~The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company.~~
~~In February 2016, the FASB issued ASU 2016-02, Leases.~~	~~The new guidance supersedes the lease guidance under ASC Topic 840,~~ ~~Leases, resulting in the creation of FASB ASC Topic 842,~~ ~~Leases~~. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.	~~December 29, 2018 (beginning of 2019 fiscal year). Early adoption is permitted.~~	The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for real estate operating leases. The Company anticipates recognition of right of use assets and corresponding lease liabilities related to leases upon adoption, but has not yet quantified these at this time. The Company plans to elect the package of three practical expedients and adopt the standard effective December 29, 2018, using the transition method made available in ASU 2018-11.
~~In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.~~	~~The new guidance updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments.~~	~~December 30, 2017 (beginning of 2018 fiscal year).~~	~~The Company adopted the new guidance effective December 30, 2017. The adoption of the new guidance did not have a material impact to the Company.~~
~~In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09.~~	The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance provides alternative methods of adoption. Subsequent guidance issued after May 2014 did not change the core principle of ASU 2014-09.	~~December 30, 2017 (beginning of 2018 fiscal year).~~	The Company adopted the new guidance effective December 30, 2017, using the modified retrospective transition method applied to those contracts which were not completed as of December 30, 2017. Prior period amounts have not been adjusted and continue to be reflected in accordance with the Company’s historical accounting. The adoption of this ASU did not have a material impact on the consolidated financial statements and therefore no cumulative adjustment was recorded to equity. The Company has updated its internal controls for changes and expanded disclosures have been made in the Notes to the Financial Statements as a result of adopting the standard. (See Note 15, “Revenue from Contracts with Customers”).

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~~INTEGER HOLDINGS CORPORATION~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)~~

~~(16.)IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Continued)~~

~~Adoption of ASU 2017-07~~

On December 30, 2017, the Company retrospectively adopted the new accounting guidance on presentation of net periodic pension costs (ASU 2017-07). That guidance requires that the service cost component of net benefit costs be disaggregated and reported in the same line item or items in the Condensed Consolidated Statements of Operations as other compensation costs arising from services rendered by the pertinent employees during the period. The 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, the Company continues to record the service cost component of net benefit costs in Cost of Sales and Selling, General and Administrative expenses. The interest cost component of net benefit costs is now recorded in Interest Expense and the remaining components of net benefit costs, amortization of net losses and expected return on plan assets, are now recorded in Other (Income) Loss, Net.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q should be read in conjunction with the disclosures included in our Annual Report on Form 10-K for the fiscal year ended December ~~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.

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~~Table of Contents~~

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, vascular, orthopedics, 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~~principal 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 second quarter of 2019 and 2018 each contained 13 weeks and ended on June 28 and June 29, 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 ~~May 3,~~July 2, 2018, we completed the ~~Company entered into a definitive agreement to sell~~sale of the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) ~~within its Medical segment to Viant (formerly MedPlast, LLC). On July 2, 2018, we completed the sale of the AS&O Product Line~~ for net cash proceeds of approximately ~~$582~~$581 million, resulting in the recognition of a pre-tax gain of approximately $195 ~~million. As a result, we classified~~million during the results of operations of the AS&O Product Line as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented and classified the related assets and liabilities associated with the discontinued operations as held for sale in the Condensed Consolidated Balance Sheet as ofyear ended December 29, 2017. All results and information presented exclude the AS&O Product Line unless otherwise noted. Refer to Note 2 “Discontinued Operations and Divestiture” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the divestiture.

28, 2018. In connection with the sale, the parties executed a transition services agreement whereby we ~~will provide~~provided 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~~paid us for these services, ~~with such payments varying in amount and length~~the performance of ~~time~~which by Integer was substantially complete as ~~specified in the transition services agreement.~~of June 28, 2019. 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 June 14, 2019, Viant paid us $4.8 million for the final net working capital adjustment, which was recognized as gain on sale from discontinued operations, net of taxes, 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 began~~We 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 focusing~~In addition to our ~~investment in research and development and manufacturing, improving our business processes and redirecting investments away from projects where~~portfolio strategy, we have launched the ~~market does not justify the investment. The~~ execution of ~~this strategy~~six 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.

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.

- 29 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

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 ~~abilities~~capabilities 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.

~~Revised 2018~~2019 Outlook^(a)

(dollars in millions, except per share amounts)



	GAAP		Non-GAAP^(b)
Continuing Operations:	As Reported	Growth	Adjusted	Growth
Sales	$~~1,197~~1,265 to ~~$1,212~~$1,280	5%4% to 7%5%	$~~1,195~~1,265 to ~~$1,210~~$1,280	6%4% to 7%6%
~~Net~~ Income	$4495 to ~~$49~~$102	~~(50)%~~102% to ~~(44)%~~117%	$~~117~~140 to ~~$122~~$147	~~18%~~13% to ~~23%~~18%
EBITDA	N/A	N/A	$~~255~~277 to ~~$265~~$285	9%7% to ~~13%~~10%
Earnings per Diluted Share	$~~1.34~~2.89 to ~~$1.49~~$3.09	~~(51)%~~101% to ~~(46)%~~115%	$~~3.55~~4.25 to ~~$3.70~~$4.45	~~15%~~12% to ~~20%~~17%

(a)

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 Sales, Adjusted ~~Net~~ Income, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), and Adjusted EBITDA and Adjusted Earnings per ~~Diluted Share,~~diluted share (“EPS”), all from continuing operations, included in our ~~“Revised 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 these non-GAAP financial measures.

(b)

Adjusted ~~Net Income~~income and diluted EPS, both from continuing operations, for ~~2018 is~~2019 are expected to consist of GAAP ~~Net Income~~income 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 ~~$89 million.~~$57 million, pre-tax. The after-tax impact of these items is estimated to be approximately ~~$70~~$45 million, or approximately ~~$2.13~~$1.36 per diluted share. Additionally, Adjusted Net Income and EPS is expected to exclude the estimated impact relating to our disallowed deduction of the GILTI tax, as mandated by the Tax Reform Act. This disallowed deduction of the GILTI tax (approximately 50% of the total GILTI tax) is due to the Company making use of its U.S. net operating losses (“NOLs”), and will be eliminated once the Company’s U.S. NOLs are fully utilized, which is expected to be in 2019. This adjustment makes our Adjusted Diluted EPS more comparable with other global companies that are not subject to this disallowed GILTI tax deduction and more comparable to the Company’s results following the full utilization of its U.S. NOLs.

Adjusted EBITDA 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 ~~$140~~$138 million.

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~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Financial Overview of Continuing Operations

~~Loss~~Income from continuing operations for the ~~third~~ secondquarter and first six months of ~~2018~~2019 was ~~$8.3~~$28.2 million, or ~~$0.26~~$0.85 per diluted share, and $49.6 million, or $1.50 per diluted share, respectively, compared to income from continuing operations of ~~$19.9~~$23.1 million, or ~~$0.62~~$0.70 per diluted share, and $36.1 million, or $1.11 per diluted share, for the ~~third~~second quarter ~~of 2017. Income from continuing operations for the~~and first ~~nine~~six months of 2018, ~~was $27.8 million, or $0.86 per diluted share, compared to income from continuing operations of $32.4 million, or $1.01 per diluted share, for the first nine months of 2017.~~respectively. These year over year variances are primarily the result of the following:

~~Sales from continuing operations for the third quarter and first nine months of 2018 increased 7% and 9%, respectively~~, primarily driven by market growth and new business wins. In comparison to the prior year periods, foreign currency exchange rates decreased sales by $0.1 million for the third quarter of 2018 and increased sales from continuing operations by approximately $2.3 million for the first nine months of 2018.

•

Sales from continuing operations for the second quarter of 2019 decreased $0.3 million and increased $22.0 million for the first six months of 2019 when compared to the same periods in 2018. The increase for the first six months of 2019 was due to growth in Cardio & Vascular, Cardiac & Neuromodulation and Electrochem sales, partially offset by lower Advanced Surgical, Orthopedic & Portable Medical in comparison to the first six months of 2018. During the second quarter and first six months of 2019, price reductions given to our larger OEM customers in return for long-term volume commitments lowered sales by $3.7 million and $6.4 million, respectively, in comparison to the same periods in 2018. In comparison to the prior year periods, foreign currency exchange rates decreased sales from continuing operations by approximately $0.7 million and $1.6 million for the second quarter and first six months of 2019, respectively.

Gross profit from continuing operations for the ~~third~~second quarter of 2019 decreased $1.8 million, compared to the same period in 2018, primarily due to price reductions and inflation, partially mitigated by production efficiencies. Gross profit from continuing operations for the first ~~nine~~six months of ~~2018~~2019 increased ~~$2.7~~$3.3 million, ~~and $13.8 million, respectively,~~compared to the same period in 2018, primarily due to the increase in sales from continuing operations ~~discussed above,~~and benefits of production efficiencies achieved, partially offset by ~~higher incentive compensation based upon current year-to-date results.~~price reductions given to our customers and inflation.

Operating expenses for the ~~third~~second quarter and first ~~nine~~six months of ~~2018~~2019 were lower by ~~$2.9~~$6.8 million and ~~$6.2~~$10.8 million, respectively, compared to the same periods in ~~2017,~~2018, due to ~~a decrease~~decreases in ~~other~~all categories of operating expenses 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.expenses.

Interest expense for the ~~third~~second quarter and first ~~nine~~six months of ~~2018 increased~~2019 decreased by ~~$38.7~~$1.6 million and ~~$36.1~~$3.4 million, respectively, compared to the same periods in ~~2017,~~2018, primarily due to ~~extinguishment of~~lower outstanding debt ~~charges related~~balances due to the repayment of ~~indebtedness in connection with~~debt over the ~~divestiture of~~last year.

During the ~~AS&O Product Line. Debt extinguishment expenses included in interest expense for the third~~second quarter and first ~~nine~~six months of 2019, we recognized net losses on equity investments of $1.6 million and $1.7 million, respectively, and net gains for the second quarter and first six months of 2018 ~~were higher by $39.9~~of $0.3 million and ~~$38.9~~$5.3 million, respectively. Gains and losses on equity investments are generally unpredictable in nature.

Other income, net for the second quarter and first six months of 2019 was $0.7 million and $0.6 million, respectively, compared to $2.4 million and $1.4 million during the same periods in 2018, primarily due to lower foreign currency gains in the 2019 periods compared to the same periods in ~~2017.~~2018.

~~Net gains on cost and equity method investments, which are unpredictable in nature, increased~~We recorded provisions for income taxes for the ~~third~~second quarter and first ~~nine~~six months of ~~2018 by $0.3~~2019 of $6.6 million and ~~$5.5~~$10.4 million, respectively, compared ~~to income of $1.9~~with $8.7 million and ~~losses of $2.9~~$14.1 million during the same periods in ~~2017.~~

Other loss, net for the third quarter and first nine months of 2018 was $1.7 million and $0.3 million, respectively, compared to $2.5 million and $10.7 million during the same periods in 2017, primarily due to the non-recurrence of a non-cash foreign currency charge in the prior year on inter-company loans.

We recorded an income tax benefit of $6.2 million for the third quarter of 2018, compared to a benefit of $0.4 million for the same period of 2017. The income tax provision for the first nine months of 2018 and 2017 was $8.0 million and $0.6 million, respectively.2018. Refer to Note 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.

Our CEO’s View

We delivered strong organic profit growth in the second quarter, on flat revenue which was in line with our expectations. We are on track to deliver on our improved full year guidance, which reflects slight increases in income, adjusted EBITDA and EPS.

Strong cash flow generation enabled continued debt leverage reduction to 3.1 times adjusted EBITDA. We continue to execute our operational strategy and have increased our full year profit outlook.

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~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

~~Use of Non-GAAP Financial Information~~

We prepare our condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Additionally, we report and discuss in our earnings releases and investor presentations adjusted pre-tax income, adjusted income, adjusted earnings per diluted share, earnings before interest, taxes, depreciation, and amortization (“EBITDA”), adjusted EBITDA and organic sales growth rates, all from continuing operations. Adjusted pre-tax income, adjusted income and adjusted earnings per diluted share from continuing operations consist of GAAP amounts adjusted for the following to the extent occurring during the period: (i) acquisition and integration related charges and expenses, (ii) amortization of intangible assets including inventory step-up amortization, (iii) facility consolidation, optimization, manufacturing transfer and system integration charges, (iv) asset write-down and disposition charges, (v) charges in connection with corporate realignments or a reduction in force, (vi) certain litigation expenses, charges and gains, (vii) unusual or infrequently occurring items, (viii) gain/loss on cost and equity method investments, (ix) extinguishment of debt charges, (x) the net impact of Long-term Supply Agreements (“LSAs”) between the Company and Viant, (xi) the income tax (benefit) related to these adjustments and (xii) certain tax items that are outside the normal provision for the period (not for adjusted pre-tax income). Adjusted earnings per diluted share are calculated by dividing adjusted income from continuing operations by diluted weighted average shares outstanding. Adjusted EBITDA from continuing operations consists of GAAP net income (loss) from continuing operations plus (i) the same adjustments as listed above except for items (xi) and (xii), (ii) GAAP stock-based compensation, interest expense, and depreciation and (iii) GAAP provision (benefit) for income taxes. To calculate organic sales growth rates, which exclude the impact of changes in foreign currency exchange rates, as well as the impact of any acquisitions or divestitures of product lines on sales growth rates, we convert current period sales from local currency to U.S. dollars using the previous periods foreign currency exchange rates and exclude the amount of sales acquired/divested during the period from the current/previous period amounts, respectively. We believe that the presentation of adjusted income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA, and organic sales growth rates, all from continuing operations, provides important supplemental information to management and investors seeking to understand the financial and business trends relating to our financial condition and results of operations.

~~- 37 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~Income (Loss) from Continuing Operations and Diluted EPS Reconciliations~~

A reconciliation of GAAP income from continuing operations and diluted earnings per share (“EPS”) from continuing operations to adjusted amounts is as follows (in thousands, except per share amounts):

Three Months Ended
September 28, 2018 September 29, 2017
Pre-Tax Income (Loss) Income (Loss)
Per
Diluted
Share
Pre-Tax Income (Loss) Income (Loss)
Per
Diluted
Share
As reported income from continuing operations (GAAP) $ (14,460 ) $ (8,303 ) $ (0.26 ) $ 19,434
$ 19,882
$ 0.62
Adjustments:

Amortization of intangibles^(a)
9,896
7,830
0.24
10,145
7,103
0.22
IP related litigation (SG&A)^(a)(b)
749
591
0.02
1,735
1,128
0.04
Strategic reorganization and alignment (OOE)^(a)(c)
2,643
2,085
0.06
—
—
—
Manufacturing alignment to support growth (OOE)^(a)(d)
877
657
0.02
—
—
—
Consolidation and optimization expenses (OOE)^(a)(e)
137
108
—
2,979
2,630
0.08
Acquisition and integration expenses (OOE)^(a)(f)
—
—
—
2,267
1,106
0.03
Asset dispositions, severance and other (OOE)^(a)(g)
482
412
0.01
823
546
0.02
(Gain) loss on cost and equity method investments, net^(a)
(291 ) (230 ) (0.01 ) (1,906 ) (1,239 ) (0.04 )
Loss on extinguishment of debt^(a)(h)
40,654
32,117
0.98
778
506
0.02
LSA adjustments^(a)(i)
—
—
—
(3,450 ) (2,242 ) (0.07 )
Tax adjustments^(j)
—
(417 ) (0.01 ) —
—
—
Adjusted income from continuing operations (Non-GAAP) $ 40,687
$ 34,850
$ 1.06
$ 32,805
$ 29,420
$ 0.91

Diluted weighted average shares for adjusted EPS

32,899

32,173

Nine Months Ended
September 28, 2018 September 29, 2017
Pre-Tax Income (Loss) Income (Loss)
Per
Diluted
Share
Pre-Tax Income (Loss) Income (Loss)
Per
Diluted
Share
As reported income from continuing operations (GAAP) $ 35,793
$ 27,837
$ 0.86
$ 32,985
$ 32,389
$ 1.01
Adjustments:

Amortization of intangibles^(a)
31,068
24,523
0.75
30,375
21,205
0.66
IP related litigation (SG&A)^(a)(b)
1,546
1,221
0.04
3,027
1,968
0.06
Strategic reorganization and alignment (OOE)^(a)(c)
8,424
6,662
0.20
—
—
—
Manufacturing alignment to support growth (OOE)^(a)(d)
2,493
1,841
0.06
—
—
—
Consolidation and optimization expenses (OOE)^(a)(e)
698
553
0.02
8,055
6,525
0.20
Acquisition and integration expenses (OOE)^(a)(f)
—
—
—
10,057
6,276
0.20
Asset dispositions, severance and other (OOE)^(a)(g)
1,000
776
0.02
6,378
4,144
0.13
(Gain) loss on cost and equity method investments, net^(a)
(5,545 ) (4,381 ) (0.13 ) 2,919
1,897
0.06
Loss on extinguishment of debt^(a)(h)
42,128
33,281
1.02
3,272
2,127
0.07
LSA adjustments^(a)(i)
(6,119 ) (4,834 ) (0.15 ) (9,361 ) (6,084 ) (0.19 )
Tax adjustments^(j)
—
2,534
0.08
—
—
—
Adjusted income from continuing operations (Non-GAAP) $ 111,486
$ 90,013
$ 2.75
$ 87,707
$ 70,447
$ 2.21

Diluted weighted average shares for adjusted EPS 32,681

31,947

~~- 38 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

~~(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 (35% U.S. tax rate for 2017 periods), and the statutory tax rates in Mexico, 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 footnote (j) below. Expenses that are not deductible for tax purposes (i.e. permanent tax differences) are added back at 100%.

~~(b)~~

In 2013, we filed suit against AVX Corporation alleging they were infringing our intellectual property. Given the complexity and significant costs incurred pursuing this litigation, we are excluding these litigation expenses from adjusted amounts. This matter proceeded to trial during the first quarter of 2016 and again in the third quarter of 2017 that resulted in a 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 2018 we incurred charges related to this strategy, which primarily consisted of severance costs and fees for professional services.


~~(d)~~	In 2017, we initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth. The plan involves the relocation of certain manufacturing operations and expansion of certain of our facilities.


~~(e)~~	During 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 and Senior Notes, which are included in interest expense. In addition, the 2018 periods include a “make-whole” premium of $31.3 million, paid as a result of redeeming our Senior Notes in July 2018.


~~(i)~~	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.

~~(j)~~

Tax adjustments primarily includes the estimated impact relating to our disallowed deduction of the GILTI tax, as mandated by the Tax Reform Act. This disallowed deduction of the GILTI tax (approximately 50% of the total GILTI tax) is due to the Company making use of its U.S. NOLs, and will be eliminated once the Company’s U.S. NOLs are fully utilized, which is expected to be in 2019. This adjustment makes our Adjusted Diluted EPS 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.

~~- 39 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

Adjusted diluted EPS from continuing operations, which excludes the impact of amortization of intangible assets, losses on extinguishment of debt and various other operating expenses, among others, was $1.06 and $2.75 per share for the third quarter and first nine months of 2018, respectively, compared to $0.91 and $2.21 per share for the third quarter and first nine months of 2017, respectively. These results reflect the benefit of our increased sales and the completion of spending on integration activities, partially offset by higher incentive compensation and higher interest expense in 2018 compared to 2017.

~~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 Nine Months Ended
September 28,
2018 September 29,
2017 September 28,
2018 September 29,
2017
Income (loss) from continuing operations (GAAP) $ (8,303 ) $ 19,882
$ 27,837
$ 32,389

Interest expense 54,526
15,808
85,355
49,233
Provision for income taxes (6,157 ) (448 ) 7,956
596
Depreciation 9,960
9,534
29,929
28,262
Amortization 9,896
10,145
31,068
30,375
EBITDA from continuing operations 59,922
54,921
182,145
140,855
IP related litigation 749
1,735
1,546
3,027
Stock-based compensation (excluding OOE) 2,087
2,041
7,265
7,116
Strategic reorganization and alignment 2,643
—
8,424
—
Manufacturing alignment to support growth 877
—
2,493
—
Consolidation and optimization expenses 137
2,979
698
8,055
Acquisition and integration expenses —
2,267
—
10,057
Asset dispositions, severance and other 482
823
1,000
6,378
Non-cash (gain) loss on cost and equity
method investments
(291 ) (992 ) (5,545 ) 3,833
LSA adjustments $ —
$ (3,450 ) $ (6,119 ) $ (9,361 )
Adjusted EBITDA from continuing operations
(Non-GAAP)
$ 66,606
$ 60,324
$ 191,907
$ 169,960

~~Our CEO’s View~~

We delivered another solid quarter of sales growth, leading to another increase in our revenue and EPS guidance. We also reduced our debt dramatically during the quarter and lowered our debt leverage ratio from the beginning of the year.

At the beginning of the fourth quarter we hired Jason Garland as our new Executive Vice President and Chief Financial Officer. Jason brings nearly 25 years of public company, global financial leadership experience and significant manufacturing and customer contract expertise to Integer.

With the executive leadership team in place, we are focused on executing our portfolio strategy to win in the 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 sales growth above the market, profit growth two times sales growth, and earning a valuation premium.

~~- 40 -~~

~~Table of Contents~~

~~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~~	~~$28 - $30~~^(b)	-	~~$8 - $12~~	~~2018~~
~~Manufacturing alignment to support growth~~	~~$9 - $11~~	~~$4 - $6~~	~~$2 - $3~~	~~2019~~
~~Consolidation and optimization expenses~~	~~$18 - $22~~^(b)	~~$5 - $6~~	~~$12 - $13~~	~~2018~~

(a) Represents the annual benefit to our operating income expected to be realized from these initiatives through cost savings and/or increased capacity. These benefits will be phased in over time as the various initiatives are completed, some of which are already included in our current period results.


~~(b)~~	~~Expected expense for these initiatives include amounts classified as discontinued operations.~~

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.~~

Refer to Note 8 “Other Operating Expenses” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about the timing, cash flow impact, and amount of future expenditures for our cost savings and consolidation initiatives.

~~- 41 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

Our Financial Results of Continuing Operations

We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. For 52-week years, each quarter contains 13 weeks. The third quarter and first nine months of 2018 and 2017 ended on September 28 and September 29, respectively, and each contained 13 weeks and 26 weeks, respectively.

The following tables present selected financial information from continuing operations derived from our Condensed Consolidated Financial Statements, contained in Item 1 of this report, for the periods presented (dollars in thousands, except per share). All financial information presented is from continuing operations unless otherwise specified.


	Three Months Ended											Three Months Ended
	September 28,			September 29,			Change					June 28,			June 29,			Change
	2018			2017			$			%		2019			2018			$			%
Medical Sales:
Cardio & Vascular	$	150,230		$	137,712		$	12,518		9.1	%	$	150,397		$	148,766		$	1,631		1.1	%
Cardiac & Neuromodulation	109,620			101,612			8,008			7.9	%	114,488			115,941			(1,453		)	(1.3	)%
Advanced Surgical, Orthopedics & Portable Medical	32,789			31,715			1,074			3.4	%	32,646			34,751			(2,105		)	(6.1	)%
Total Medical Sales	292,639			271,039			21,600			8.0	%	297,531			299,458			(1,927		)	(0.6	)%
Non-Medical	12,449			15,129			(2,680		)	(17.7	)%	16,663			15,006			1,657			11.0	%
Total Sales	305,088			286,168			18,920			6.6	%	314,194			314,464			(270		)	(0.1	)%
Cost of sales	213,165			196,982			16,183			8.2	%	217,210			215,699			1,511			0.7	%
Gross profit	91,923			89,186			2,737			3.1	%	96,984			98,765			(1,781		)	(1.8	)%
Gross profit as a % of sales	30.1		%	31.2		%						30.9		%	31.4		%
SG&A	34,091			35,064			(973		)	(2.8	)%
Selling, general and administrative expenses (“SG&A”)												33,143			36,780			(3,637		)	(9.9	)%
SG&A as a % of sales	11.2		%	12.3		%						10.5		%	11.7		%
RD&E	12,234			12,227			7			0.1	%
Research, development and engineering costs (“RD&E”)												11,396			12,935			(1,539		)	(11.9	)%
RD&E as a % of sales	4.0		%	4.3		%						3.6		%	4.1		%
Other operating expenses	4,139			6,069			(1,930		)	(31.8	)%	3,108			4,692			(1,584		)	(33.8	)%
Operating income	41,459			35,826			5,633			15.7	%	49,337			44,358			4,979			11.2	%
Operating margin	13.6		%	12.5		%						15.7		%	14.1		%
Interest expense	54,526			15,808			38,718			^NM		13,612			15,234			(1,622		)	(10.6	)%
Gain on cost and equity method investments, net	(291		)	(1,906		)	1,615			(84.7	)%
Other loss, net	1,684			2,490			(806		)	(32.4	)%
Income (loss) from continuing operations before income taxes	(14,460		)	19,434			(33,894		)	^NM
Benefit for income taxes	(6,157		)	(448		)	(5,709		)	^NM
(Gain) loss on equity investments, net												1,611			(284		)	1,895			^NM
Other income, net												(718		)	(2,387		)	1,669			(69.9	)%
Income from continuing operations before income taxes												34,832			31,795			3,037			9.6	%
Provision for income taxes												6,610			8,739			(2,129		)	(24.4	)%
Effective tax rate	42.6		%	(2.3		)%						19.0		%	27.5		%
Income (loss) from continuing operations	$	(8,303	)	$	19,882		$	(28,185	)	^NM
Income (loss) from continuing operations as a % of sales	(2.7		)%	6.9		%
Diluted earnings (loss) per share from continuing operations	$	(0.26	)	$	0.62		$	(0.88	)	^NM
Income from continuing operations												$	28,222		$	23,056		$	5,166		22.4	%
Income from continuing operations as a % of sales												9.0		%	7.3		%
Diluted earnings per share from continuing operations												$	0.85		$	0.70		$	0.15		21.4	%

- 4232 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS


	Nine Months Ended											Six Months Ended
	September 28,			September 29,			Change					June 28,			June 29,			Change
	2018			2017			$			%		2019			2018			$			%
Medical Sales:
Cardio & Vascular	$	435,859		$	391,914		$	43,945		11.2	%	$	302,971		$	285,629		$	17,342		6.1	%
Cardiac & Neuromodulation	334,471			311,540			22,931			7.4	%	231,399			224,851			6,548			2.9	%
Advanced Surgical, Orthopedics & Portable Medical	101,481			88,148			13,333			15.1	%	64,234			68,692			(4,458		)	(6.5	)%
Total Medical Sales	871,811			791,602			80,209			10.1	%	598,604			579,172			19,432			3.4	%
Non-Medical	40,167			42,218			(2,051		)	(4.9	)%	30,266			27,718			2,548			9.2	%
Total Sales	911,978			833,820			78,158			9.4	%	628,870			606,890			21,980			3.6	%
Cost of sales	637,758			573,431			64,327			11.2	%	443,276			424,593			18,683			4.4	%
Gross profit	274,220			260,389			13,831			5.3	%	185,594			182,297			3,297			1.8	%
Gross profit as a % of sales	30.1		%	31.2		%						29.5		%	30.0		%
SG&A	107,300			105,004			2,296			2.2	%	68,099			73,209			(5,110		)	(7.0	)%
SG&A as a % of sales	11.8		%	12.6		%						10.8		%	12.1		%
RD&E	38,445			35,104			3,341			9.5	%	22,991			26,211			(3,220		)	(12.3	)%
RD&E, Net as a % of sales	4.2		%	4.2		%						3.7		%	4.3		%
Other operating expenses	12,615			24,490			(11,875		)	(48.5	)%	5,998			8,476			(2,478		)	(29.2	)%
Operating income	115,860			95,791			20,069			21.0	%	88,506			74,401			14,105			19.0	%
Operating margin	12.7		%	11.5		%						14.1		%	12.3		%
Interest expense	85,355			49,233			36,122			73.4	%	27,442			30,829			(3,387		)	(11.0	)%
(Gain) loss on cost and equity method investments, net	(5,545		)	2,919			(8,464		)	^NM
Other loss, net	257			10,654			(10,397		)	(97.6	)%
(Gain) loss on equity investments, net												1,652			(5,254		)	6,906			^NM
Other income, net												(552		)	(1,427		)	875			(61.3	)%
Income from continuing operations before income taxes	35,793			32,985			2,808			8.5	%	59,964			50,253			9,711			19.3	%
Provision for income taxes	7,956			596			7,360			^NM		10,376			14,113			(3,737		)	(26.5	)%
Effective tax rate	22.2		%	1.8		%						17.3		%	28.1		%
Income from continuing operations	$	27,837		$	32,389		$	(4,552	)	(14.1	)%	$	49,588		$	36,140		$	13,448		37.2	%
Income from continuing operations as a % of sales	3.1		%	3.9		%						7.9		%	6.0		%
Diluted earnings per share from continuing operations	$	0.86		$	1.01		$	(0.15	)	(14.9	)%	$	1.50		$	1.11		$	0.39		35.1	%

^NM Calculated amount not meaningful

- 4333 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Product Line Sales of Continuing Operations Highlights

For the ~~third~~second quarter and first ~~nine~~six months of ~~2018,~~2019, Cardio & Vascular sales increased ~~$12.5~~$1.6 million, or 9%1%, and ~~$43.9~~$17.3 million or ~~11%~~6%, respectively, versus the comparable ~~2017~~2018 periods. ~~These increases were~~The increase in the second quarter of 2019 compared to the same quarter in 2018 was primarily due to ~~continued~~ strong ~~demand~~peripheral vascular and structural heart growth, partially offset by the expected impact of an electrophysiology program maturing life cycle and a supplier quality related delay. The increase in the ~~electrophysiology market stemming from~~first six months of 2019 was driven by customer share gains, new product launches, and ~~timing from~~the impact of a long-term agreement with a current customer ~~inventory replenishment. The~~related to their existing products. During the second quarter and first six months of 2019, price reductions lowered Cardio & Vascular ~~growth trend is expected~~sales by $1.7 million and $3.5 million, respectively, in comparison to ~~remain above market from increased focus on high growth market segments.~~the 2018 periods. Foreign currency exchange rate fluctuations decreased Cardio & Vascular sales for the ~~three~~second quarter and first six months ~~ended September 28, 2018~~of 2019 by ~~$0.1~~$0.7 million and ~~increased Cardio & Vascular sales by $2.3~~$1.6 million, ~~for the nine months ended September 28, 2018,~~ respectively, in comparison to the ~~2017~~2018 periods primarily due to U.S. dollar fluctuations relative to the Euro.

For the ~~third~~second quarter and first ~~nine~~six months of ~~2018,~~2019, Cardiac & Neuromodulation sales ~~increased $8.0~~decreased $1.5 million, or 8%1%, and ~~$22.9~~increased $6.5 million or 7%3%, respectively, versus the comparable ~~2017~~2018 periods. The ~~increases~~increase in the first six months of 2019 in Cardiac & Neuromodulation sales ~~were driven by increased components market penetration and lower 2017 comparables from~~was mainly due to the impact of the aforementioned long-term customer ~~inventory adjustments.~~agreement. Neuromodulation ~~remained strong, with~~continued growth driven by spinal cord stimulation ~~market demand~~ and ~~increased components market penetration.~~increasingly stronger revenue from early-stage neuromodulation companies. During the second quarter and first six months of 2019, price reductions lowered Cardiac & Neuromodulation sales ~~are expected~~by $2.1 million and $3.3 million, respectively, in comparison to ~~decrease in~~ the ~~fourth quarter of~~to the 2018 ~~compared to extremely strong fourth quarter of 2017.~~periods. Foreign currency exchange rate fluctuations did not have a material impact on Cardiac & Neuromodulation sales during the ~~2018 periods~~second quarter and first six months of 2019 in comparison to the same periods of ~~2017.~~2018.

In addition to Portable Medical sales, Advanced Surgical, Orthopedic & Portable Medical includes sales to the acquirer of our AS&O Product ~~Lines,~~Line, Viant, under the long-term supply agreements ~~associated with~~(“LSAs”) entered into as of the ~~divestiture.~~closing of the divestiture for the sale of products by the Company to Viant. For the ~~third~~second quarter and first ~~nine~~six months of ~~2018, AS&O~~2019, Advanced Surgical, Orthopedic & Portable Medical sales ~~increased $1.1~~decreased $2.1 million, or 3%6%, and ~~$13.3~~$4.5 million or ~~15%~~6%, respectively, versus the comparable ~~2017~~2018 periods. The sales ~~increase was driven~~declines were due to Portable Medical growth being offset by ~~above market demand. Sales are expected to level off from strong first half~~a decline in advanced surgical and ~~growth is expected to be more in line with the overall market. Foreign~~orthopedic products. Price reductions and foreign currency exchange rate fluctuations did not have a material impact on ~~AS&O~~Advanced Surgical, Orthopedic & Portable Medical sales during the ~~2018 periods~~second quarter and first six months of 2019 in comparison to the same periods of ~~2017.~~2018.

For the ~~third~~second quarter and first ~~nine~~six months of ~~2018,~~2019, Non-Medical sales ~~decreased $2.7~~increased $1.7 million, or ~~18%~~11%, and ~~$2.1~~$2.5 million or 5%9%, respectively, versus the comparable ~~2017~~2018 periods. The ~~decline~~increases in Non-Medical sales ~~was~~were primarily due to ~~North American drilling activity leveling off which has led to~~energy market demand and increased customer ~~inventory adjustments. The quarter was also impacted by a planned phase out of certain rechargeable battery pack products. We expect fourth quarter 2018 year-over-year sales to be flat~~penetration. Price reductions and ~~we expect solid sales growth in 2019 from new customers and products, and renewed military market government funding. Foreign~~foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during the ~~2018 periods~~second quarter and first six months of 2019 in comparison to the same periods of ~~2017.~~2018.

- 34 -

Gross Profit

Changes to gross profit as a percentage of sales (“Gross Margin”) from the prior year were due to the following:


	Change From Prior Year				Change From Prior Year
	Three Months		Nine Months		Three Months		Six Months
Price^(a)	(1.4	)%	(1.3	)%	(1.2	)%	(1.0	)%
Mix^(b)	—		(0.2	)	0.1		0.2
Incentive compensation^(c)	(0.7	)	(0.6	)	(0.3	)	(0.2	)
Production efficiencies and volume^(d)	1.0		1.0
Production efficiencies and volume leverage^(d)					0.9		0.5
Total percentage point change to gross profit as a percentage of sales	(1.1	)%	(1.1	)%	(0.5	)%	(0.5	)%

^__________


^(a)	Our Gross Margin for the ~~third~~second quarter and first ~~nine~~six months of ~~2018~~2019 has been negatively impacted by price ~~concessions~~reductions given to our larger OEM customers in return for long-term volume commitments.


^(b)	Our Gross Margin for the second quarter and first ~~nine~~six months of ~~2018~~2019 has been ~~negatively~~positively impacted by a higher mix of sales of ~~lower~~higher 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 ~~third~~second quarter and first ~~nine~~six months of ~~2018 has been~~2019 was positively impacted by production efficiencies, lower amortization expense and, ~~synergies gained as~~on a ~~result of our integration and consolidation initiatives as well as~~year-to-date basis, higher ~~volume in comparison to the respective 2017 period.~~sales volume.

~~- 44 -~~

~~Table of Contents~~

~~INTEGER HOLDINGS CORPORATION~~

~~MANAGEMENT'S DISCUSSION AND ANALYSIS~~

SG&A Expenses

Changes to SG&A expenses from the prior year were due to the following (in thousands):

Change From Prior Year

Three
Months

Nine
Months
Legal expenses^(a)
$ (838 ) $ (1,358 )
Intangible asset amortization^(b)
268
1,512
Incentive compensation programs^(c)
1,884
5,111
Transition services agreement^(d)
(1,834 ) (1,834 )
Other^(e)
(453 ) (1,135 )
Net increase (decrease) in SG&A Expenses $ (973 ) $ 2,296



	Change From Prior Year
	Three Months			Six Months
Transition services agreement^(a)	$	(1,161	)	$	(2,758	)
Professional fees^(b)	(659		)	173
Compensation and benefit costs	(513		)	(724		)
Intangible asset amortization	(172		)	(477		)
Other general and administrative expenses	(1,132		)	(1,324		)
Net decrease in SG&A Expenses	$	(3,637	)	$	(5,110	)

^__________

^(a)

~~Amount represents~~Represents the ~~change~~amount included in ~~legal costs~~SG&A Expenses, which was charged to Viant for transition services provided during the second quarter and first six months of 2019. We executed a transition services agreement in conjunction with the sale of the AS&O Product Line, whereby we agreed to provide certain corporate services (including accounting, payroll, and information technology services) to Viant to facilitate an orderly transfer of business operations. This provision of services under the agreement was completed during the second quarter of 2019.

^(b)

Professional fees decreased during the second quarter of 2019 compared to the prior year period, primarily due to lower legal costs, including legal expenses incurred related to our on-going patent infringement case. Refer to Note 10 “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 increase in intangible asset amortization (i.e. customer list), which is amortized based upon the forecasted cash flows at the time of acquisition for the respective asset.~~


~~(c)~~	~~Amount represents the impact to our SG&A 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 for the three months ended September 28, 2018. We executed a transition services agreement in conjunction with the sale of the AS&O Product Line, whereby we will provide certain corporate services (including accounting, payroll, and information technology services) to Viant for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations.


~~(e)~~	~~Represents various increases and decreases to our SG&A.~~

RD&E

~~Changes~~RD&E expense for the three and six months ended June 28, 2019 was $11.4 million and $23.0 million, respectively, compared to $12.9 million and $26.2 million for the three and six months ended June 29, 2018. RD&E ~~expenses from~~expense is influenced by the ~~prior year were due~~number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the ~~following (in thousands):~~development of new technological platform innovations.

Change From Prior Year

Three
Months

Nine
Months
Intangible asset amortization^(a)
$ (98 ) $ (293 )
Incentive compensation programs^(b)
389
1,120
Other^(c)
(284 ) 2,514
Net increase in RD&E $ 7
$ 3,341


~~(a)~~	~~Amount represents the 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.~~


~~(c)~~	Represents the net impact of various increases and decreases to our RD&E. RD&E expense for the third quarter and first nine months of 2018 reflects our increased investment in projects with a higher growth opportunity.

- 4535 -

~~Table of Contents~~

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Other Operating Expenses

Refer to ~~“Cost Savings and Consolidation Efforts” section of this Item and~~ Note 8 “Other Operating Expenses” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for further information related to these initiatives. Other Operating Expenses (“OOE”) is comprised of the following (in thousands):


	Three Months Ended				Nine Months Ended				Three Months Ended					Six Months Ended
	September 28, 2018		September 29, 2017		September 28, 2018		September 29, 2017		June 28, 2019		June 29, 2018			June 28, 2019		June 29, 2018
Strategic reorganization and alignment^(a)	$	2,643	$	—	$	8,424	$	—	$	1,656	$	3,727		$	3,390	$	5,781
Manufacturing alignment to support growth^(b)	877		—		2,493		—		561		1,103			1,146		1,616
Consolidation and optimization costs^(c)	137		2,979		698		8,055
Acquisition and integration expenses^(d)	—		2,267		—		10,057
Asset dispositions, severance and other^(e)	482		823		1,000		6,378
Consolidation and optimization expenses^(c)									—		(14		)	—		561
Asset dispositions, severance and other^(d)									891		(124		)	1,462		518
Total other operating expenses	$	4,139	$	6,069	$	12,615	$	24,490	$	3,108	$	4,692		$	5,998	$	8,476



Delaware		16-1531026
(State or other jurisdiction of ~~Incorporation)~~ incorporation or organization)		(I.R.S. Employer Identification No.)



5830 Granite Parkway,	Suite 1150	Plano,	Texas	75024
(Address of principal executive offices)				(Zip Code)



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



Large accelerated filer	ý☒	Accelerated filer	¨☐	Non-accelerated filer	¨☐

Smaller reporting company	¨☐	Emerging growth company	¨☐



(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



(in thousands except share and per share data)	September 28, 2018			December 29, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	22,881		$	37,341
Accounts receivable, net of allowance for doubtful accounts of $0.6 million and $0.5 million, respectively	200,147			194,845
Inventories	193,631			176,738
Prepaid expenses and other current assets	12,008			16,239
Current assets of discontinued operations held for sale	—			106,746
Total current assets	428,667			531,909
Property, plant and equipment, net	232,108			235,180
Goodwill	834,520			839,870
Other intangible assets, net	825,359			862,873
Deferred income taxes	3,618			3,451
Other assets	31,724			30,428
Noncurrent assets of discontinued operations held for sale	—			344,634
Total assets	$	2,355,996		$	2,848,345
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	37,500		$	30,469
Accounts payable	69,270			64,551
Income taxes payable	16,298			5,904
Accrued expenses	54,922			60,376
Current liabilities of discontinued operations held for sale	—			47,703
Total current liabilities	177,990			209,003
Long-term debt	916,694			1,578,696
Deferred income taxes	210,303			140,964
Other long-term liabilities	11,678			11,335
Noncurrent liabilities of discontinued operations held for sale	—			14,966
Total liabilities	1,316,665			1,954,964
Stockholders’ equity:
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,501,709 and 31,977,953 shares issued, respectively; 32,382,687 and 31,871,427 shares outstanding, respectively	33			32
Additional paid-in capital	687,644			669,756
Treasury stock, at cost, 119,022 and 106,526 shares, respectively	(5,668		)	(4,654		)
Retained earnings	318,287			176,068
Accumulated other comprehensive income	39,035			52,179
Total stockholders’ equity	1,039,331			893,381
Total liabilities and stockholders’ equity	$	2,355,996		$	2,848,345



	Common Stock			Additional Paid-In Capital		Treasury Stock					Retained Earnings		Accumulated Other Comprehensive Income			Total Stockholders’ Equity
(in thousands)	Shares	Amount		Additional Paid-In Capital		Shares		Amount			Retained Earnings		Accumulated Other Comprehensive Income			Total Stockholders’ Equity
December 29, 2017	31,978	$	32	$	669,756	(107	)	$	(4,654	)	$	176,068	$	52,179		$	893,381
Comprehensive income:
Net income	—	—		—		—		—			142,219		—			142,219
Other comprehensive loss, net	—	—		—		—		—			—		(13,296		)	(13,296		)
Accumulated other comprehensive income reclassified to earnings, net	—	—		—		—		—			—		152			152
Share-based compensation plans:
Stock-based compensation	—	—		7,684		—		—			—		—			7,684
Net shares issued	524	1		10,204		(12	)	(1,014		)	—		—			9,191
September 28, 2018	32,502	$	33	$	687,644	(119	)	$	(5,668	)	$	318,287	$	39,035		$	1,039,331



	December 29, 2017
Cash and cash equivalents	$	6,755
Accounts receivable, net of allowance for doubtful accounts of $0.3 million	47,611
Inventories	50,796
Prepaid expenses and other current assets	1,584
Current assets of discontinued operations held for sale	106,746
Property, plant and equipment, net	135,195
Goodwill	150,368
Other intangible assets, net	57,520
Other noncurrent assets	1,551
Noncurrent assets of discontinued operations held for sale	344,634
Total assets	451,380
Accounts payable and other current liabilities held for sale	47,703
Deferred taxes and other long-term liabilities held for sale	14,966
Total liabilities	62,669
Net assets	$	388,711



December 29, 2017	$	2,808
Amortization during the period	(743		)
September 28, 2018	$	2,065



	Debt Issuance Costs			Unamortized Discount on TLB Facility			Total
December 29, 2017	$	26,889		$	6,389		$	33,278
Write-off of debt issuance costs and unamortized discount⁽¹⁾	(9,373		)	(1,448		)	(10,821		)
Amortization during the period	(3,497		)	(805		)	(4,302		)
September 28, 2018	$	14,019		$	4,136		$	18,155



Notional Amount		Start Date	End Date	Pay Fixed Rate		Receive Current Floating Rate		Fair Value		Balance Sheet Location
$	200,000	Jun-17	Jun-20	1.1325	%	2.2300	%	$	5,690	Other Long-Term Assets



December 29, 2017	$	2,820
Additions to warranty reserve	570
Warranty claims settled	(317		)
September 28, 2018	$	3,073



Aggregate Notional Amount		Start Date	End Date	$/Foreign Currency		Fair Value			Balance Sheet Location
$	1,050	Jul 2018	Dec 2018	0.0500	Peso	$	62		Prepaid expenses and other current assets
7,599		Jan 2018	Dec 2018	0.0507	Peso	340			Prepaid expenses and other current assets
6,100		Jan 2018	Dec 2018	1.1961	Euro	(214		)	Accrued expenses
5,850		Aug 2018	Dec 2018	1.1699	Euro	(16		)	Accrued expenses
12,621		Jan 2019	Jun 2019	1.1686	Euro	129			Prepaid expenses and other current assets
10,991		Jan 2019	Jun 2019	0.0523	Peso	(95		)	Accrued expenses



June 30, 2017	$	(1,475	)	$	4,601		$	25,475		$	28,601		$	(1,398	)	$	27,203
Unrealized gain on cash flow hedges	—			633			—			633			(222		)	411
Realized gain on foreign currency hedges	—			(1,106		)	—			(1,106		)	387			(719		)
Realized gain on interest rate swap hedges	—			(49		)	—			(49		)	18			(31		)
Foreign currency translation gain	—			—			16,728			16,728			—			16,728
September 29, 2017	$	(1,475	)	$	4,079		$	42,203		$	44,807		$	(1,215	)	$	43,592

December 30, 2016	$	(1,475	)	$	1,420		$	(15,660	)	$	(15,715	)	$	(285	)	$	(16,000	)
Unrealized gain on cash flow hedges	—			3,414			—			3,414			(1,195		)	2,219
Realized gain on foreign currency hedges	—			(362		)	—			(362		)	127			(235		)
Realized gain on interest rate swap hedges	—			(393		)	—			(393		)	138			(255		)
Foreign currency translation gain	—			—			57,863			57,863			—			57,863
September 29, 2017	$	(1,475	)	$	4,079		$	42,203		$	44,807		$	(1,215	)	$	43,592



	Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 28, 2018
Assets: Interest rate swap (Note 5)	$	5,690	$	—	$	5,690	$	—
Assets: Foreign currency contracts (Note 10)	531		—		531		—
Liabilities: Foreign currency contracts (Note 10)	325		—		325		—

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


^(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.


~~(e)~~	Amounts ~~for 2017 primarily~~ include expenses related to ~~our CEO~~other initiatives not described above, which relate primarily to integration and ~~CFO transitions.~~operational initiatives to reduce costs and improve operational efficiencies. Expenses for the second quarter and first six months of 2019 and 2018 primarily include severance costs and fees for professional services.


(dollars in thousands)	September 28, 2018		December 29, 2017		June 28, 2019		December 28, 2018
Cash and cash equivalents	$	22,881	$	37,341	$	15,922	$	25,569
Working capital	250,677		263,863		261,844		251,680
Current ratio	2.41		2.64		2.42		2.53



	Payments due by period
	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Total debt obligations	$	972,349	$	37,500	$	75,000	$	859,849	$	—
Interest on debt^(a)	174,548		47,612		89,891		37,045		—


~~(a)~~	Interest payments in the table above reflect the contractual interest payments on our outstanding debt based upon the balance outstanding and applicable interest rates at September 28, 2018, and exclude the impact of the debt discount amortization and impact of interest rate swap agreements.


^(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 Loan B Facility, which are included in interest expense.


^(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.



Exhibit Number		Description

10.1#*		Employment Offer Letter, dated ~~September 14, 2018,~~November 30, 2017, between Integer Holdings Corporation and ~~Jason Garland.~~Kirk Thor

31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.

32.1**		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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.



Dated:	~~November 2, 2018~~August 1, 2019	INTEGER HOLDINGS CORPORATION

		By:	/s/ Joseph W. Dziedzic
			Joseph W. Dziedzic
			President and Chief Executive Officer
			(Principal Executive Officer)

		By:	/s/ Jason K. Garland
			Jason 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)