2019
Annual
Report
Dear fellow stockholders:
I am writing to you during an unprecedented time. As Integer navigates through the turbulent
environment created by the COVID-19 pandemic, our top priority remains the health and safety
of our team, our families, our customers, and the communities in which we live and work. We
are executing our Pandemic plan in response to this crisis, including operating protocols
consistent with national and international guidance. Integer is an integral partner to the medical
device industry. The mission-critical devices and components that we produce enhance, sustain
and save lives. Our customers and local governments are counting on us to remain open to
ensure the patients who use the devices we support continue to receive the care they need.
Integer is making tremendous progress on the strategy we launched in 2018. Our Journey to
Excellence has positioned us to invest through these uncertain times to come out on the other
side even stronger. We have transformed our organization with a strong, new leadership team
that is aligned around a clear strategy to win in the markets we serve and achieve excellence in
all that we do. Through effective execution of our strategy, we have delivered on our
commitments for profit growth, margin expansion and deleveraging, while investing in our
future.
We are making Manufacturing Excellence a competitive differentiator with the development and
implementation of our Integer Production System (IPS). The IPS defines how we operate,
ensuring consistency with LEAN as our foundation. We have hired more LEAN experts, trained
all our manufacturing leaders, and conducted diagnoses at every site. As a result, we are
approaching world-class standards for quality and on-time delivery, and continue to make
improvements. During this rapidly evolving situation, these investments will afford us the
flexibility to meet changing customer demand in the most efficient manner possible.
Customers are recognizing our overall improved service, relationships and innovation. In turn,
we are making significant investments to support their innovation and growth strategies. This
includes expanding our manufacturing footprint, investing in new technology and quick turn
capabilities at several of our existing plants, and completing bolt-on acquisitions that bring
additional manufacturing capability and technology. We are also investing more in Sales,
Marketing and R&D, and are confident these investments will yield significant returns.
As we build our Corporate Citizenship program, we are actively establishing activities and
actions that demonstrate our commitment to the environment, social and governance (ESG)
matters that impact our stakeholders and the communities in which we operate. As we continue
to give back to the communities where we live and work, we are doing our part to help those
affected by COVID-19 by ramping our production of ventilator and patient monitoring device
batteries. We are proud of how our teams around the world have stepped up to continue to take
care of our customers and the patients who use their products during these very uncertain times.
Our strong 2019 financial performance, combined with the successful execution of our
manufacturing and performance excellence strategy, has provided Integer with ample liquidity to
maintain business continuity for our customers. Our unmatched scale, global presence, world-
class manufacturing capabilities and high standards for excellence create a clear competitive
advantage. Our associates are passionate about serving our customers who deliver the therapies
to the patients whose lives we enhance, and we look forward to strengthening our position as
their partner of choice for innovative medical technologies.
It is difficult to know how the COVID-19 pandemic will impact 2020. However, Integer will do
everything possible to serve the needs of our customers in order to provide critical medical
products to the patients that we serve. Given our size, scale, diverse product portfolio and global
presence, we are well positioned and have ample liquidity and flexibility to meet our customers’
requirements. We will continue to execute our strategy and invest prudently to grow our business
while delivering on our commitments to our employees, our families, our customers and our
communities. We believe we will emerge from this pandemic with even stronger associate and
customer relationships and be well positioned to grow our market leadership position.
Finally, I would like to take this opportunity to acknowledge and thank Peter Soderberg, who
will be retiring after the annual shareholder meeting. Peter has served on the Board of Directors
for nearly two decades. His leadership and commitment will be missed.
On behalf of the Board of Directors and management, thank you for your continued interest in
Integer. Stay safe and healthy.
Sincerely,
Joseph W. Dziedzic
President & Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________
FORM 10-K
_____________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 1-16137
_____________________________________
INTEGER HOLDINGS CORPORATION
(Exact name of Registrant as specified in its charter)
_____________________________________
Delaware
(State or other jurisdiction of incorporation or organization)
16-1531026
(I.R.S. Employer Identification No.)
5830 Granite Parkway, Suite 1150
Plano, Texas
(Address of principal executive offices)
75024
(Zip Code)
(214) 618-5243
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, Par Value $0.001 Per Share
Trading Symbol(s)
ITGR
Name of each exchange on which registered
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of common stock held by non-affiliates as of June 28, 2019 (the last business day of the registrant’s
most recently completed second fiscal quarter), based on the last sale price of $83.92, as reported on the New York Stock Exchange on
that date: $2.7 billion. Solely for the purpose of this calculation, shares held by directors and officers and 10 percent stockholders of
the registrant have been excluded. This exclusion should not be deemed a determination or an admission that these individuals are, in
fact, affiliates of the registrant.
Shares of common stock outstanding as of February 14, 2020: 32,805,570
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are specifically incorporated by reference into the indicated parts of this report:
Document
Proxy Statement for the 2020 Annual Meeting of
Stockholders
Part
Part III, Item 10
“Directors, Executive Officers and Corporate Governance”
Part III, Item 11
“Executive Compensation”
Part III, Item 12
“Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters”
Part III, Item 13
“Certain Relationships and Related Transactions, and
Director Independence”
Part III, Item 14
“Principal Accounting Fees and Services”
TABLE OF CONTENTS
PART I
PAGE
Item 1.
Business.....................................................................................................................................................................
Item 1A. Risk Factors...............................................................................................................................................................
Item 1B. Unresolved Staff Comments......................................................................................................................................
Item 2.
Properties...................................................................................................................................................................
Item 3.
Legal Proceedings.....................................................................................................................................................
Item 4. Mine Safety Disclosures............................................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data.............................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations....................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................................................
Item 8.
Financial Statements and Supplementary Data.........................................................................................................
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure...................................
Item 9A. Controls and Procedures............................................................................................................................................
Item 9B. Other Information......................................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance........................................................................................
Item 11. Executive Compensation...........................................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................
Item 13. Certain Relationships and Related Transactions, and Director Independence..........................................................
Item 14. Principal Accounting Fees and Services....................................................................................................................
Item 15. Exhibits and Financial Statement Schedules.............................................................................................................
Item 16. Form 10-K Summary.................................................................................................................................................
Signatures..................................................................................................................................................................
PART IV
3
14
24
24
25
25
26
27
28
40
42
88
89
89
90
90
90
90
90
91
94
95
PART I
ITEM 1.
BUSINESS
OVERVIEW
Integer Holdings Corporation, headquartered in Plano, Texas, is among the world’s largest medical device outsource (“MDO”)
manufacturing companies, serving the cardiac, neuromodulation, orthopedics, vascular, advanced surgical and portable medical
markets. We provide innovative, high quality medical technologies that enhance the lives of patients worldwide. In addition to
medical technologies, we develop batteries for high-end niche applications in energy, military, and environmental markets. Our
brands include Greatbatch Medical®, Lake Region MedicalTM and ElectrochemTM. Our primary customers include large, multi-
national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries. When used in this report, the terms
“Integer,” “we,” “us,” “our” and the “Company” mean Integer Holdings Corporation and its subsidiaries.
We organize our business into two reportable segments, Medical and Non-Medical, and derive our revenues from four principal
product lines. The Medical segment includes the Cardio & Vascular, Cardiac Rhythm Management & Neuromodulation
(“Cardiac & Neuromodulation”) and Advanced Surgical, Orthopedics & Portable Medical product lines and the Non-Medical
segment comprises the Electrochem product line.
Our Acquisitions and Divestitures
On October 7, 2019, we purchased certain assets from US BioDesign, LLC (“USB”), a developer and manufacturer of complex
braided biomedical structures for disposable and implantable medical devices. The acquisition adds a differentiated capability related
to the development and manufacture of complex braided and formed biomedical structures to our broad portfolio, that we believe
further positions us as a partner of choice for innovative medical technologies. Refer to Note 2 “Acquisition, Divestiture and
Discontinued Operations” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional
information about the acquisition.
On July 2, 2018, we completed the sale of the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) to Viant.
As a result, we classified the results of operations of the AS&O Product Line as discontinued operations in the 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 Consolidated Balance Sheet as of December 29, 2017. All results and information presented exclude the AS&O
Product Line unless otherwise noted. Refer to Note 2 “Acquisition, Divestiture and Discontinued Operations” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report for additional information about the divestiture.
On March 14, 2016, we completed the spin-off of a portion of our former QiG segment through a tax-free distribution of all of the
shares of our former QiG Group, LLC subsidiary to Integer’s stockholders. Integer retained no ownership interest in the newly
formed company, Nuvectra Corporation (“Nuvectra”).
On October 27, 2015, we completed the acquisition of Lake Region Medical Holdings, Inc. (“LRM”), headquartered in
Wilmington, MA, in a cash and stock transaction for a total purchase price including debt assumed of approximately $1.77 billion.
LRM was primarily a manufacturer of interventional and diagnostic wire-formed medical devices and components specializing in
minimally invasive devices for cardiovascular, endovascular, and neurovascular applications. The acquisition of LRM added scale
and diversity to our legacy operations, which has enhanced our opportunities to access customers and customer experience by
providing a more comprehensive portfolio of technologies.
- 3 -
MEDICAL SEGMENT
Cardio & Vascular
The Cardio & Vascular product line leverages a global footprint to produce a full range of components, subassemblies, and
finished devices used in interventional cardiology, structural heart, heart failure, peripheral vascular, neurovascular, interventional
oncology, electrophysiology, vascular access, infusion therapy, hemodialysis, urology, and gastroenterology procedures.
The following are the principal products and services offered by our Cardio & Vascular product line:
Interventional Cardiology. Our interventional cardiology portfolio is focused primarily on the design, development and
manufacture of catheter and wire-based technologies intended to diagnose and treat cardiac disease. Key products and
capabilities span a full suite of devices including coronary stents, balloon catheters, atherectomy devices, imaging and sensing
devices, chronic total occlusion solutions, percutaneous transluminal coronary amgioplasty and access guidewires, introducer
sheaths, and vascular closure devices. Core areas of technical expertise include laser-cut hypotubes, catheter shafts (extrusion,
filmcast, and reflow), integrated hub assemblies, pad printing, tip shaping, polytetrafluoroethylene (PTFE) coating, complex
machining, and sensor integration.
Structural Heart and Heart Failure. Structural heart and heart failure products include those used by cardiologists,
echocardiographers, cardiac surgeons, and heart failure specialists to treat diseases or defects of the heart, such as valvular
diseases and congenital defects. Integer provides components, subassemblies, and finished devices to these markets leveraging a
wide range of technologies and capabilities. These include laser-cut and machined components, complex braided meshes,
guidewires, introducer sheaths, steerable sheaths and delivery catheters, and implants used in transcatheter aortic valve
replacement, balloon aortic valvuloplasty, transcatheter mitral valve repair and replacement, atrial and defect closure, left
ventricular assist, and shunt procedures.
Peripheral Vascular, Neurovascular, and Interventional Oncology. Our peripheral vascular, neurovascular, urology and
oncology portfolio is primarily focused on the design, development and manufacture of devices used during the treatment of
peripheral artery disease, transcatheter embolization and occlusion, aortic aneurysm repair, and neurovascular stroke prevention.
Our broad portfolio of devices, capabilities and technology platforms provides our customers with cost effective, high quality
solutions ranging from device components to complex assemblies to finished devices such as regulatory approved guidewires and
introducers.
Integer’s broad technology and capability portfolio within the peripheral vascular markets enables us to address the full spectrum
of devices needed in the diagnoses and treatment of peripheral vascular disease. In the peripheral artery disease markets our
technologies are focused on the manufacture and development of interventional guidewires, support catheters, introducers and
guiding sheaths, balloon catheters, self-expanding stents and stent grafts as well as embolic protection devices. Our
neurovascular technology portfolio encompasses micro guidewires, micro and access catheters, aspiration catheters, stent
retrievers, embolization coils, as well as flow diverters. In the interventional oncology market, we offer customers guidewires and
microcatheters designed to enable the effective delivery of embolic agents.
Electrophysiology. Electrophysiology products include devices used by electrophysiologists and interventional cardiologists for
the treatment of cardiac arrythmias, such as atrial fibrillation. Integer primarily produces devices used for treatment of atrial
fibrillation, the most prevalent cardiac arrythmia. These devices include sheaths and needles for transseptal access, diagnostic
and mapping catheters to record and map the arrythmia sources, and ablation catheters to create lesions for blocking the arrythmia
signals. Integer has the technical capabilities and expertise to provide the full spectrum of products from components to finished
devices. Typical components include polyimide tubing, electrode rings, platinum tips and fine wires. Sub-assemblies include
electrode ring and wire assemblies, steerable handle assemblies, and spline and basket assemblies. Finished devices include
steerable transseptal sheaths, diagnostic catheters and ablation catheters.
Vascular Access, Infusion Therapy and Hemodialysis. Our solutions in these markets are focused on vessel access, treatment and
device placement for medication and fluid delivery in patients with severe conditions requiring repeated vessel access. We design
and manufacture a wide range of vascular access guidewires, stylets, catheters, valved / non-valved peelable and micro
introducers. Our portfolio of market-ready vascular access guidewires and introducers kits enables a range of venous and arterial
access applications, including transradial access. Additionally, we support customers with custom introducer sheaths and kit
solutions leveraging our deep expertise in thin-wall sheath design, hydrophilic coatings and guidewire manufacturing (including
poly-jacketed, mandrel, and nitinol core guidewire constructions).
Non-vascular Markets: Within the Cardio & Vascular group, we also manage non-vascular markets for which we have expertise
and a broad offering of products, technologies and capabilities. Those markets include:
Urology. Our main focus is in endourology for which we develop and manufacture finished devices and components for access
and interventional devices such as guidewires, ureteral access sheaths, dilation devices, retrieval devices, ureteral stents, biopsy
forceps, holmium laser fibers, and endoscopes.
- 4 -
Gastroenterology. Our comprehensive range of technologies and capabilities enable us to support our customers’ needs with a
broad variety of products such as guidewires, dilatation devices, retrieval devices, snares, wire-formed and polymer stents, stent
delivery systems, RF ablation devices, and endoscopes.
Cardiac & Neuromodulation
The Cardiac & Neuromodulation product line offers design, development and manufacturing capabilities for components, sub-
assemblies, assemblies, and finished medical device systems. We support a variety of clinical markets, with an emphasis on the
following markets:
Cardiac Rhythm Management. The Cardiac Rhythm Management (“CRM”) market comprises implanted medical devices
(“IMDs”), implanted leads, procedure accessories, as well as external devices that monitor and treat heart rhythm disorders and
heart disease. Examples of CRM products include implantable pacemakers, implantable cardioverter defibrillators (“ICDs”),
insertable cardiac monitors (“ICMs”), implantable cardiac pacing and defibrillation leads, and heart failure therapies such as
ventricular assist devices and cardiac resynchronization devices (“CRT-p” and “CRT-D”). An IMD system generally includes an
implantable pulse generator (“IPG”) and one or more stimulation leads. An IPG is a battery powered device that produces
electrical pulses. A lead then carries this electrical pulse from the IPG to the heart. A lead also senses heart signals and carries the
signal from the heart back to the IPG.
Our portfolio of technologies and products include components, sub-assemblies, and assemblies for active IPGs, implanted
sensing and stimulation leads, accessories, or external instruments. Our investments in research and development have generated
battery and capacitor products and we also have developed and provide feedthrough technology and filtering. We are also a
supplier of medical stamped components, and shallow and deep draw casings and assemblies.
Beyond the IPG, Integer’s CRM product line provides lead development and manufacturing solutions including expertise in low-
polarization specialty-coated electrodes and components, and lead and device accessories such as stylets, guidewires, introducers,
epicardial pacing leads and lead adapters.
Neuromodulation. Similar to the CRM market, the Neuromodulation (“Neuro”) market comprises IPGs, implanted leads,
procedure accessories, and external devices, such as battery chargers, trial stimulators and patient controllers. Examples of Neuro
products include implantable spinal cord stimulators for chronic pain, sacral nerve stimulators for incontinence, deep brain
stimulators for movement disorders and other IMDs to treat psychiatric disorders, sleep disorders and hearing loss. The Neuro
market also includes several new emerging applications, such as implanted bioelectronic devices aimed at treating chronic
diseases.
Within the Neuro market we offer IMD component technologies that have been developed to meet the needs of our customers
including our XcellionTM line of lithium-ion rechargeable batteries, QMR® and CFx non-rechargeable batteries, feedthroughs,
device enclosures, machined components and lead components and sub-assemblies. Additionally, Integer helps OEMs and other
emerging companies with the development and manufacture of complete neuromodulation IMD solutions, including custom IPGs,
programmer systems, battery chargers, patient controllers, fully finished lead systems and accessories from initial development
through commercial quantities.
Advanced Surgical, Orthopedics & Portable Medical
The Advanced Surgical, Orthopedics & Portable Medical (“AS&O”) product line offers a broad range of products and services
across the many businesses it serves. This product line includes sales to the acquirer of our AS&O Product Line, Viant. In
partnership with customers, AS&O offers advanced development, engineering and program management, which provides us with
an in-depth understanding of our customers’ market drivers and end-user needs.
The following are the principal products and services offered by our AS&O product line:
Portable Medical. We provide complete mission critical batteries and other power solutions through the combined efforts of
innovative research, product development, manufacturing and customer partnerships to advance the way healthcare is
powered. Our offerings include state of the art customized rechargeable batteries and chargers and non-rechargeable batteries. We
design and develop basic and “smart” chargers and docking stations of varying complexities to safely and reliably maximize the
efficiency of the rechargeable batteries. We develop batteries, and the attendant chargers, for patient monitoring, portable
defibrillators, and portable ultrasound, X-Ray machines, hearing devices and other devices. We collaborate with our customers on
product development opportunities incorporating our power solutions into Class I, II or III medical devices.
Arthroscopic Devices & Components. Our arthroscopic devices and component products include devices used for minimally
invasive surgery in the joint space, also referred to as “sports medicine.” Our products include shaver blades and burrs, ablation
probes, and suture anchors, which are used in procedures such as arthroscopic ACL reconstruction, arthroscopic repair, rotator
cuff repair, and hip labrum repair.
- 5 -
Laparoscopic & General Surgery. Our laparoscopic and general surgery products include devices used primarily for minimally
invasive procedures in the abdominal space, but may also be used in open or general surgery. Customers of our laparoscopy and
general surgery products require energy-based devices and endomechanical devices that are efficient and reliable. Our products
include, harmonic scalpels, radio frequency probes, and ophthalmic surgery devices.
Orthopedic. Our orthopedic products include hip and shoulder joint reconstruction implants, plates, screws and spinal devices, as
well as instruments and delivery systems used in hip and knee replacement, trauma fixation, extremity and spine surgeries.
Orthopedic implants are used in reconstructive surgeries to replace or repair hips, knees and other joints, such as shoulders, ankles
and elbows that have deteriorated as a result of disease or injury. Trauma implant systems are used primarily to reattach or
stabilize damaged bone or tissue while the body heals. Spinal implant systems are used by orthopedic surgeons and neurosurgeons
in the treatment of degenerative diseases, deformities and injuries in various regions of the spine.
Each implant system typically has an associated instrument set that is used specifically in the surgical implant procedure.
Instruments included in a set vary by implant system. Orthopedic trays have generally been designed to allow for sterilization and
re-use after an implant or other surgical procedure is performed. Recently, the industry trend is moving towards single use
instrumentation. Cases are used to store, transport and arrange implant systems and other medical devices and related surgical
instruments. The majority of cases are tailored for a specific implant procedure so that the instruments, implants, and other
devices are arranged to match the order of use in the procedure and are securely held in clearly labeled, custom-formed pockets or
brackets.
NON-MEDICAL SEGMENT
Our power solutions enable the success and advancement of our customers’ critical non-medical applications. We provide custom
battery packs to the energy, military and environmental markets for use in extreme environments where failure is not an option.
The following are the principal products and services offered by our Non-Medical product line:
Electrochem. Electrochem provides customized battery power and management systems, charging and docking stations, and
power supplies to markets where safety, reliability, quality and durability are critical. We design customized primary (non-
rechargeable) and secondary (rechargeable) battery solutions, which are used in the energy, military and environmental markets.
Electrochem’s primary lithium power solutions, which include high, moderate and low rate non-rechargeable cell solutions, are
utilized in extreme conditions and can withstand exceptionally high and low temperatures, and high shock and vibration.
Electrochem’s product design capability includes protective circuitry, glass-to-metal hermetic seals, fuses and diodes to help
ensure safe, durable and reliable power as devices using our battery solutions are subjected to harsh conditions. Our primary
batteries are often used in remote and demanding environments, including down hole drilling tools, military devices, and
oceanographic buoys.
In addition to primary power solutions, Electrochem offers customized secondary or rechargeable battery packs, in a diverse range
of chemistries for critical applications requiring rechargeable solutions.
OTHER FACTORS IMPACTING OUR OPERATIONS
Customers
Our products are designed to provide reliable, long-lasting solutions that meet the evolving requirements and needs of our
customers. The nature and extent of our commercial relationships with each of our customers are different in terms of breadth of
products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management,
and selling prices. Contracts with customers can include rebates and tiered pricing arrangements based on pre-determined volume
levels, in which higher volume levels typically have lower pricing, or fixed annual price downs that are offered to customers in
exchange for increased volume levels and/or longer contract terms. Typically, our contracts specify minimum order quantities and
lead times. Revenue from contracts with customers is recognized based upon the transaction price and when performance
obligations are satisfied and the customer has obtained control of the products, which typically occurs when title and risk of loss
ownership transfers to the customer, primarily determined by shipping terms. The transaction price is determined based on the
unit price and the number of units ordered, less any rebates or other price concessions expected to be earned on those units, and is
allocated to each performance obligation on a relative standalone selling price basis.
- 6 -
Visibility into our customers’ future purchases is over a relatively short period of time. Our customers may have inventory
management programs, vertical integration plans and/or alternate supply arrangements that may not be communicated to or shared
with us. Additionally, the relative market share among the OEM manufacturers changes periodically. Consequently, these and
other factors can significantly impact our sales in any given period. Our customers may initiate field actions with respect to
market-released products. These actions may include product recalls or communications with a significant number of physicians
about a product or labeling issue. The scope of such actions can range from very minor issues affecting a small number of units to
more significant actions. There are a number of factors, both short-term and long-term, related to these field actions that may
impact our results. In the short-term, if a product has to be replaced, or customer inventory levels have to be restored, demand will
increase. Also, changing customer order patterns due to market share shifts or accelerated device replacements may also have a
positive or negative impact on our sales results in the near-term. These same factors may have longer-term implications as well.
Customer inventory levels may ultimately have to be rebalanced to match new demand.
Our Medical customers include large multi-national medical device OEMs and their subsidiaries such as Abbott Laboratories,
Biotronik, Boehringer Ingelheim, Boston Scientific, Cardinal Health, Johnson & Johnson, LivaNova, Medtronic, Nevro Corp.,
Philips Healthcare, Smith & Nephew, Stryker, Viant and Zimmer Biomet. Our Non-Medical customers include large multi-
national OEMs and their subsidiaries serving the energy, military and environmental services markets such as Baker Hughes,
Halliburton, Weatherford International and Teledyne Technologies. During 2019, sales to Abbott Laboratories, Medtronic and
Boston Scientific were each in excess of 10% of total sales and collectively accounted for 50% of our total sales. We believe that
the diversification of our sales among the various subsidiaries and market segments with those three customers reduces our
exposure to negative developments with any one customer. The loss of a significant amount of business from any large customer
or a further consolidation of such customers could have a material adverse effect on our financial condition and results of
operations, as further explained in Item 1A “Risk Factors” of this report.
Sales and Marketing
We sell our products directly to our customers. In 2019, approximately 56% of our products were sold in the U.S. Sales within
and outside the U.S. are primarily to customers whose corporate offices are located and headquartered in the U.S. Information
regarding our sales by geographic area is set forth in Note 18 “Segment and Geographic Information” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report.
Although the majority of our customers contract with us to develop custom components and assemblies to fit their product
specifications, we also provide system and device solutions ready for market distribution by OEMs. We have established close
working relationships between our internal program managers and our customers. We market our products and technologies at
industry meetings and trade shows domestically and internationally. We have placed additional emphasis on reaching long-term
agreements with our OEM customers in order to secure our revenue base and incentivize growth.
Internal account executives support all sales activity and involve engineers and technology professionals in the sales process to
address customer requests across all product lines. For system and device solutions, we partner with our customers’ research,
marketing, and clinical groups to jointly develop technology platforms in alignment with their product roadmaps and therapy
needs.
We leverage our account executives with support from our engineers to design and sell product solutions into our targeted
markets. Our account executives are trained to assist our customers in selecting appropriate materials and configurations. We
market our products and services through well-defined selling strategies and marketing campaigns that are customized for each of
the industries we target.
Firm backlog orders at December 31, 2019 were approximately $308 million. The majority of the orders outstanding at
December 31, 2019 are expected to be shipped within one year.
Competition
The MDO manufacturing industry has traditionally been highly fragmented with several thousand companies, many of which we
believe have limited manufacturing capabilities and limited sales and marketing expertise. We believe that very few companies
offer the scope of manufacturing capabilities and services that we provide to medical device companies, however, we may
compete in the future against other companies that provide broad manufacturing capabilities and related services. We compete
against different companies depending on the type of product or service offered or the geographic area served. We also face
competition from existing and prospective customers that employ in-house capabilities to produce some of the products we
provide.
- 7 -
Our existing or potential competitors include suppliers with different subsets of our manufacturing capabilities, suppliers that
concentrate in niche markets, and suppliers that have, are developing, or may in the future develop, broad manufacturing
capabilities and related services. We compete for new business at all phases of the product life cycle, which includes development
of new products, the redesign of existing products and transfer of mature product lines to outsourced manufacturers. Competitive
advantage is generally based on reputation, quality, delivery, responsiveness, breadth of capabilities, including design and
engineering support, price, customer relationships and increasingly the ability to provide complete supply chain solutions rather
than only producing and providing individual components.
Many of our customers also have the capability to manufacture similar products, in house, to those that we currently supply to
them.
Acquisitions and Investments
One facet of our growth strategy is to acquire additional technology or manufacturing capability to expand our product offering in
our key existing growth markets. We expect to continue to engage in business development activities and technology licensing
arrangements to support our growth in these markets.
As our customers grow and consolidate, they seek suppliers who can offer broad product capabilities, manufacturing scale and
facilitate speed to market. Our strategy aligns with enhancing our portfolio from both organic and inorganic means to partner
more broadly with our customers to support their growth. Our inorganic strategy will be primarily focused on smaller strategic
“bolt-on” acquisitions that will supplement our existing product portfolio.
Research and Product Development
Our position as a leading developer and manufacturer of medical devices and components is largely the result of our long history
of technological innovation. Our scientists, engineers and technicians focus on developing new products, improving and
enhancing existing products, and expanding the use of our products in new or tangential applications. In addition to our internal
technology and capability development efforts aimed at providing our customers with differentiated solutions, we also engage
outside research institutions for unique technology projects.
Medical. We believe our core business is well positioned because our OEM customers leverage our portfolio of intellectual
property. We continue to build a healthy pipeline of diverse medical technology opportunities and provide a new level of industry
leading capabilities and services to our OEM customers across the full range of medical device products and services continuum.
We are at the forefront of innovating technologies and products that help change the face of healthcare, enabling us to provide our
customers with a distinct advantage as they bring complete medical systems and solutions to market. In turn, our customers are
able to accelerate patient access to life enhancing therapies. We offer our customers a comprehensive portfolio comprising the
best technologies, providing a single point of support, and driving optimal outcomes.
Some of the more significant product development opportunities our Medical segment is pursuing are as follows:
Product Line
Cardio & Vascular
Cardiac & Neuromodulation
Product Development Projects
Active projects in structural heart delivery systems, structural heart delivery
accessories, structural heart implants, electrophysiology catheters and
subassemblies, neurovascular therapies to prevent hemorrhagic, neurovascular
therapies to treat ischemic stroke, enhanced access introducers, gastrointestinal
scope components, fractional flow reserve (“FFR”) guidewire subassemblies,
sensor-enabled catheters and guidewires, and oncology catheters. Technology
investments to enable our customer’s catheter, delivery system, introducer,
guidewire, and implant development programs in our core Cardio & Vascular
markets.
Active projects to develop next generation technology programs for our
batteries, filtered feedthroughs, high voltage capacitors and lead solutions that
reduce the size and cost, while increasing performance, for cardiac and
neuromodulation devices.
Non-Medical. Some of the more significant product development opportunities our Non-Medical segment is pursuing include
developing the next generation medium-rate and high rate batteries, as well as products with extended performance such as higher
power pulsing capabilities and increased operating temperature range.
- 8 -
Patents and Proprietary Technology
Our policy is to protect our intellectual property rights related to our technologies and products, and we rely on a combination of
patents, licenses, trade secrets and know-how to establish and protect our rights. Where appropriate, we apply for U.S. and
foreign patents. We also are a party to license agreements with third parties under which we have obtained, on varying terms,
exclusive or non-exclusive rights to patents held by them. In the aggregate, these intellectual property assets and licenses are of
material importance to our business; however, we believe that no single patent, technology, trademark, intellectual property asset
or license is material in relation to any segment of our business or to our business as a whole. As of December 31, 2019, we
owned 617 U.S. and foreign patents and held licenses to an additional 288 U.S. and foreign patents.
Design, development and regulatory aspects of our business also provide competitive advantages, and we require our employees,
consultants and other parties having access to our confidential information to execute confidentiality agreements. These
agreements prohibit disclosure of confidential information to third parties, except in specified circumstances. In the case of
employees and consultants, the agreements generally provide that all confidential information relating to our business is the
exclusive property of Integer.
Manufacturing and Quality Assurance
We leverage our strength as an innovative designer and manufacturer of finished devices and components to the medical device
industry. Our manufacturing and engineering services include: design, testing, component assembly and production, and device
assembly. We have integrated our proprietary technologies in our own products and those of our customers. Our flexible, high
productivity manufacturing capabilities span sites across the United States, Mexico, Uruguay, Ireland, and Malaysia.
Due to the highly regulated nature of the products we produce, we have implemented strong quality systems across all sites. The
quality systems at our sites are compliant with and certified to various recognized international standards, requirements, and
directives. Each site’s quality system is certified under an applicable International Organization for Standardization (“ISO”)
quality system standard, such as ISO 13485 or ISO 9001. This certification requires, among other things, an implemented quality
system that applies (where applicable) to the design and manufacture of components, assemblies and finished medical devices,
including component quality and supplier control. Maintenance of these certifications for each facility requires periodic re-
examination from an independent notified body.
Along with ISO 13485, the facilities producing finished medical devices are subject to oversight by Notified Bodies and extensive
and rigorous regulation by numerous government bodies, including the U.S. Food and Drug Administration (“FDA”) and other
international regulatory agencies and, in order to assure the conformance of devices and components of a worldwide basis. For
these facilities, we maintain FDA registration and compliance with all applicable domestic and international regulations.
Compliance with applicable regulatory requirements is subject to continual review and is monitored through periodic inspections
by the FDA and other international regulatory bodies.
Suppliers and Raw Materials
We purchase critical raw materials from a limited number of suppliers due to the technically challenging requirements of the
supplied product and/or the lengthy process required to qualify these materials both internally and with our customers. We cannot
quickly establish additional or replacement suppliers for these materials because of these rigid requirements. For these critical raw
materials, we maintain minimum safety stock levels and partner with suppliers through contract to help ensure the continuity of
supply. Historically, we have not experienced any significant interruptions or delays in obtaining critical raw materials.
Many of the raw materials that are used in our products are subject to fluctuations in market price. In particular, the prices of
stainless steel, titanium and precious metals, such as platinum, have historically fluctuated, and the prices that we pay for these
materials, and, in some cases, their availability, are dependent upon general market conditions. In most cases, we have pass-
through pricing arrangements with our customers that purchase components containing precious metals or have established firm-
pricing agreements with our suppliers that are designed to minimize our exposure to market fluctuations.
For non-critical raw material purchases, we utilize competitive pricing methods such as bulk purchases, precious metal pool buys,
blanket orders, and long-term contracts to secure supply. We believe that there are alternative suppliers or substitute products
available at competitive prices for all of these non-critical raw materials.
As discussed more fully in Item 1A “Risk Factors” of this report, our business depends on a continuous supply of raw materials
from a limited number of suppliers. If an unforeseen interruption of supply were to occur, we may be unable to obtain substitute
sources for these raw materials on a timely basis, on terms acceptable to us or at all, which could harm our ability to manufacture
our products profitably or on time. Additionally, we may be unable to quickly establish additional or replacement suppliers for
these materials as there are a limited number of worldwide suppliers.
- 9 -
Working Capital Practices
Our goal is to carry sufficient levels of inventory to ensure that we have adequate supply of raw materials from suppliers and meet
the product delivery needs of our customers. We also provide payment terms to customers in the normal course of business and
rights to return product under warranty to meet the operational demands of our customers. It will continue to be a priority for us to
maintain appropriate working capital levels while improving our operating cash flow and pay down outstanding debt.
Government Regulation
Medical Device Regulation
The development, manufacture and sale of our products is subject to regulation by numerous agencies and legislative bodies,
including the FDA and comparable foreign counterparts. In the U.S., these regulations were enacted under the Medical Device
Amendments of 1976 to the Federal Food, Drug and Cosmetic Act and its subsequent amendments, and the regulations issued or
proposed thereunder. These regulatory requirements subject our products and our business to numerous risks that are specifically
discussed within “Risks Related to Our Industries” under Item 1A “Risk Factors” of this report. A summary of critical aspects of
our regulatory environment is included below.
The FDA’s Quality System Regulations set forth requirements for our product design and manufacturing processes, require the
maintenance of certain records, and provide for on-site inspection of our facilities and continuing review by the FDA.
Authorization to commercially market our non-exempt products in the U.S. is granted by the FDA under procedures referred to as
510(k) pre-market notification or pre-market approval (“PMA”). These processes require us to notify the FDA of the new product
and obtain FDA clearance or approval before marketing the device.
The FDA classifies medical devices based on the risks associated with the device. Devices are classified into one of three
categories - Class I, Class II, or Class III. Class I devices are deemed to be low risk and are therefore subject to the least
regulatory controls. Class II devices are higher risk devices than Class I and require greater regulatory controls, generally a
510(k) pre-market notification, to provide reasonable assurance of the device’s safety and effectiveness as well as substantial
equivalence to a previously cleared device, as demonstrated by data. Class III devices are generally the highest risk devices and
are therefore subject to the highest level of regulatory control, requiring a PMA by the FDA before they are marketed.
We market our products in numerous foreign countries and therefore are subject to regulations affecting, among other things,
product standards, sterilization, packaging requirements, labeling requirements, import laws and onsite inspection by independent
bodies with the authority to issue or not issue certifications we may require to be able to sell products in certain countries. Many
of the regulations applicable to our devices and products in these countries are similar to those of the FDA. The member
countries of the European Union (“EU”) have adopted the European Medical Device Directives, which create a single set of
medical device regulations for all member countries. The European Medical Device Directives is being replaced by the European
Medical Device Regulation that goes into effect in May 2020. These regulations require companies that wish to manufacture and
distribute medical devices in the EU to maintain quality system certifications through EU recognized Notified Bodies. These
Notified Bodies authorize the use of the CE Mark, which allows for free movement of our products throughout the member
countries. Requirements pertaining to our products vary widely from country to country, ranging from simple product
registrations to detailed submissions such as those required by the FDA.
In the U.S., our introducer, guidewire, and delivery catheter products are considered Class II devices and generally the 510(k)
process applies. Orthopedic instruments are considered Class I exempt, while pacing leads are subject to the Class III PMA
process. In Europe, these devices are considered either Class I, Class IIa, Class III, or AIMD, under European Medical Device
Directives. These directives require, and the European Medical Device Regulation that goes into effect in May 2020 will require,
companies that wish to manufacture and distribute medical devices in EU member countries to obtain a CE Mark for those
products, which indicate that the products meet minimum standards of performance, essential requirements, safety conformity
assessment and quality.
We believe that the procedures we use for quality controls, development, testing, manufacturing, labeling, marketing and
distribution of our medical devices conform to the requirements of all pertinent regulations.
- 10 -
Environmental Health and Safety Laws
We are subject to direct governmental regulation, including the laws and regulations generally applicable to all businesses in the
jurisdictions in which we operate. We are subject to federal, state and local environmental laws and regulations governing the
emission, discharge, use, storage and disposal of hazardous materials and the remediation of contamination associated with the
release of these materials at our facilities and at off-site disposal locations. Our manufacturing and RD&E activities may involve
the controlled use of small amounts of hazardous materials. Liabilities associated with hazardous material releases arise
principally under the Federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws
that impose strict, joint and several liability on owners and operators of contaminated facilities and parties that arrange for the off-
site disposal of hazardous materials. We are not aware of any material noncompliance with the environmental laws currently
applicable to our business and we are not subject to any material claim for liability with respect to contamination at any of our
facilities or any off-site location. We may, however, become subject to these environmental liabilities in the future as a result of
our historic or current operations.
Conflict Minerals and Supply Chain
We are subject to Securities and Exchange Commission (“SEC”) rules adopted pursuant to the Dodd-Frank Wall Street Reform
and Consumer Protection Act concerning “conflict minerals” (generally tin, tantalum, tungsten and gold) and similar rules are
being implemented by the EU. Certain of these conflict minerals are used in the manufacture of our products. These rules require
us to investigate the source of any conflict minerals necessary to the production or functionality of our products. If any such
conflict minerals originated in the Democratic Republic of the Congo or adjoining countries (the “DRC region”), we must
undertake due diligence efforts to determine whether such minerals financed or benefited armed groups in the DRC region. Since
our supply chain is complex, our ongoing compliance with these rules could affect the pricing, sourcing and availability of
conflict minerals used in the manufacture of our products.
We are also subject to disclosure requirements regarding abusive labor practices in portions of our supply chain under the
California Transparency in Supply Chains Act and the UK Modern Slavery Act.
Other Laws and Regulations
Our sales and marketing practices are subject to regulation by the U.S. Department of Health and Human Services pursuant to
federal anti-kickback laws, and are also subject to similar state laws.
Employees
As of December 31, 2019, we employed approximately 8,250 persons, of whom approximately 3,750 are located in the U.S.,
2,600 are located in Mexico, 1,350 are located in Europe, 300 are located in South America, and 250 are located in Asia. We also
employ approximately 150 temporary employees worldwide to assist us with various projects and service functions and address
peaks in staff requirements. We believe that we have a good relationship with our employees.
Seasonality
Our business is generally not seasonal in nature. However, since our customers are large OEM businesses, our sales are
influenced by the inventory levels they carry, which can cause shifts in our sales volume as their inventories fluctuate.
Available Information
Our Internet address is www.integer.net. We also make available free of charge through our website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file those reports with, or
furnish them to, the SEC. The information contained on our website is not incorporated by reference in this annual report on
Form 10-K and should not be considered a part of this report. The SEC maintains a website that contains reports, proxy and
information statements, and other information regarding issuers, including the Company, that file electronically with the SEC. The
public can obtain any documents that we file with the SEC at www.sec.gov.
- 11 -
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
Information concerning our executive officers is presented below as of February 20, 2020. The officers’ terms of office run from
year to year until the first meeting of the Board of Directors occurring immediately following our Annual Meeting of
Stockholders, and until their successors are elected and qualified, except in the case of earlier death, retirement, resignation or
removal.
Joseph W. Dziedzic, age 51, is President and Chief Executive Officer of the Company and a member of our Board of Directors.
He assumed that role on July 16, 2017 following his appointment as interim President & Chief Executive Officer on March 27,
2017. Mr. Dziedzic was the Executive Vice President and Chief Financial Officer of The Brink’s Company from 2009 to 2016,
and prior to joining The Brink’s Company in 2009, he had a 20-year career with General Electric.
Jason K. Garland, age 46, is the Company’s Executive Vice President and Chief Financial Officer. Mr. Garland had served as
Divisional Vice President & Chief Financial Officer, Global Sales, for Tiffany & Co. from October 2017 until joining the
Company in October 2018, and had served as Divisional Vice President & Chief Financial Officer, Diamond & Jewelry Supply,
for Tiffany & Co. from July 2015 to October 2017. From 1995 to 2015, Mr. Garland served in various financial and operational
roles at General Electric, including as Chief Financial Officer, GE Industrial Solutions, from March 2010 to June 2015.
Joel Becker, age 52, is President, CRM & Neuromodulation, and joined the Company in April 2019. Mr. Becker is also the leader
for the Sales Force Excellence strategic imperative. Prior to joining the Company, he was the President of Viking North Ventures
from October 2016 to April 2019 and served as the Chief Executive Officer of XchangeLabs LLC from August 2017 to August
2018. Prior to those positions, Mr. Becker had a nearly 20-year career with St. Jude Medical where he held a variety of different
roles including President, Americas Division from July 2013 to February 2016, and President, United States Division from
October 2011 to July 2013.
Jennifer M. Bolt, age 51, is Senior Vice President, Global Operations, and has served in that position since April 2019. In
November 2017, Ms. Bolt assumed leadership of the Portable Medical product line, and in February 2018, she assumed
leadership for the Integer Manufacturing Excellence strategic imperative. From October 2015 to April 2019, Ms. Bolt served as
President, Electrochem. From June 2013 to October 2015, she was Vice President, Supply Chain and Operational Excellence for
Greatbatch. Ms. Bolt held the position of Vice President, Operations for Electrochem from May 2012 to June 2013, and prior to
that served as Director of Operations of our Raynham, MA facility from September 2007 to May 2012. Ms. Bolt joined our
Company in May 2005 as the Manufacturing Engineering Manager for our Alden, New York facility. Prior to joining our
Company, she served in a variety of engineering and operational roles at General Motors/Delphi and Eastman Kodak.
Anthony Borowicz, age 63, is Senior Vice President, Strategy, Corporate Development & Investor Relations and joined the
Company in April 2002 and has served in various leadership roles including Vice President, Business Development from
December 2014 to December 2018 and Executive Director, Business Development from July 2013 to December 2014. Mr.
Borowicz had served as the Vice President, Finance for Kendall Healthcare from April 2001 until joining the Company.
Previously, he was the Vice President & Chief Financial Officer for Graphic Controls Corporation from January 1995 to April
2001.
Joseph Flanagan, age 61, is Executive Vice President for Quality and Regulatory Affairs, a position he has held since October
2015. In February 2018, he assumed leadership for the Integer Business Process Excellence strategic imperative. From January
2012 until the Company’s acquisition of Lake Region Medical in October 2015, he was Vice President of Quality and Regulatory
Affairs for Lake Region Medical. Prior to joining Lake Region Medical, Mr. Flanagan served as Vice President of Quality and
Regulatory Affairs for NP Medical from April 2008 until January 2012.
Elizabeth Giddens, age 49, is Senior Vice President, General Counsel, Chief Ethics and Compliance Officer and Corporate
Secretary, and has served in that position since joining the Company in August 2019. Prior to joining the Company, Ms. Giddens
was Senior Vice President, Deputy General Counsel and Corporate Secretary at Mr. Cooper Group Inc. (formerly known as
Nationstar Mortgage Holdings Inc.) from June 2012 to August 2019. Between 2005 to 2012, she served in a variety of senior
legal roles for Quicksilver Resources. She also worked as an attorney in private practice from 1998 to 2005, including at the
Jones Day law firm.
Carter Houghton, age 51, is President, Electrochem and Power Solutions. From December 2016 until joining the Company in
May 2019, Mr. Houghton was President of the Hospital Business Unit at Haemonetics Corporation. Prior to joining Haemonetics,
Mr. Houghton had over an 11-year career with Hologic where he served in various leadership roles including Senior Vice
President & General Manager, GYN Surgical Solutions Division from February 2013 to August 2015, and Vice President &
General Manager, Interventional Breast Solutions Division from February 2010 to September 2013.
- 12 -
Payman Khales, age 50, is President, Cardio & Vascular, and joined the Company on February 20, 2018. Mr. Khales is also the
leader for the Integer Market Focused Innovation strategic imperative. Prior to joining Integer, Mr. Khales was the President of
the Environmental Technologies Segment at CECO Environmental Company from May 2014 through July 2017. Previously, he
was employed by Ingersoll Rand Company where he held a variety of different roles in the United States and Canada, including
Vice President Product Management for the global Power Tools division from January 2012 through April 2014, and Vice
President Strategic Accounts & Channels from February 2010 through December 2011.
Kirk Thor, age 56, is Executive Vice President and Chief Human Resources Officer. From 2013 until joining the Company in
January 2018, Mr. Thor was Vice President for Global Talent Management & Organization Effectiveness at Flowserve
Corporation. From 2007 to 2012, he served as Vice President for Talent Management & Organization Development at JC Penney.
In February 2018, he assumed leadership for the Integer Culture strategic imperative.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
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
(the “Exchange Act”). 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 development and expected growth of our business and industry;
our ability to execute our business model and our business strategy;
having available sufficient cash and borrowing capacity to meet working capital, debt service and capital
expenditure requirements for the next twelve months; and
projected capital spending.
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 dependence upon a limited number of customers;
pricing pressures that we face from customers;
our ability to respond to changes in technology;
the intense competition we face and our ability to successfully market our products;
our ability to develop new products and expand into new geographic and product markets;
our reliance on third party suppliers for raw materials, key products and subcomponents;
the potential for harm to our reputation caused by quality problems related to our products;
regulatory issues resulting from products complaints, recalls or regulatory audits;
the potential of becoming subject to product liability claims;
our ability to protect our intellectual property and proprietary rights;
our significant amount of outstanding indebtedness and our ability to remain in compliance with financial and other
covenants under our senior secured credit facilities;
our ability to integrate acquisitions and operate acquired businesses in accordance with expectations;
our dependence upon our senior management team and technical personnel;
our ability to realize the benefits from cost savings and consolidation initiatives;
interruptions in our manufacturing operations;
our ability to comply with environmental regulations;
our complex international tax profile;
our dependence upon our information technology systems and our ability to prevent cyber-attacks and other failures;
•
•
•
•
•
•
•
• market, financial and other risks related to our international operations and sales;
global economic factors, including currency exchange rates and interest rates;
•
the fact that the healthcare industry is highly regulated and subject to various regulatory changes;
•
the dependence of our energy market-related revenues on the conditions in the oil and natural gas industry; and
•
other risks and uncertainties that arise from time to time and are described in Item 1A “Risk Factors” of this report.
•
- 13 -
ITEM 1A. RISK FACTORS
Our business faces many risks, and you should carefully consider the following risk factors, together with all of the other
information included in this report, including the financial statements and related notes, when deciding to invest in us. Any of the
risks discussed below, or elsewhere in this report or in our other SEC filings, could have a material impact on our business,
financial condition or results of operations. Additional risks not currently known to us or that we currently consider immaterial
also may materially adversely affect our business, financial condition or results of operations in the future.
Risks Related To Our Business
We depend heavily on a limited number of customers, and if we lose any of them or they reduce their business with us, we
would lose a substantial portion of our revenues.
In 2019, our top three customers collectively accounted for approximately 50% of our revenues. These customers may not agree
to renew or extend our supply agreements with them. Furthermore, many of our supply agreements do not contain minimum
purchase level requirements and therefore there is no guaranteed source of revenue that we can depend upon under these
agreements. In addition, we are dependent on the continued growth, viability and financial stability of these customers. The
markets in which these customers operate are subject to rapid technological change, vigorous competition and short product life
cycles. As a result, when these customers are adversely affected by these factors, we may be similarly adversely affected. The
loss of any large customer, a material reduction of business with that customer, or a delay or failure by that customer to make
payments due to us, would harm our business, financial condition and results of operations.
We are subject to pricing pressures from customers, which could harm our operating results.
Given the highly competitive industry in which we operate, we have reduced price to some of our customers in recent years and
we expect customer pressure for continued price reductions. These price reductions may cause our operating results to suffer.
If we do not respond to changes in technology, our products may become obsolete or less competitive and we may
experience a loss of customers and lower revenues.
We sell our products to customers in several industries that are characterized by extensive research and development, rapid
technological changes, new product introductions and evolving industry standards. Without the timely introduction of new
products, technologies and enhancements, our products and services will likely become technologically obsolete or less
competitive over time and we may lose or see a reduction in business from a significant number of our customers. We dedicate a
significant amount of effort and resources to the development of our products, technologies and enhancements. Our product
development efforts may be affected by a number of factors, including our ability to anticipate customer needs, develop or acquire
new technologies and enhancements, secure intellectual property protection for our products, and manufacture products in a cost
effective manner. We would be harmed if we did not meet customer requirements and expectations. Our inability, for
technological or other reasons, to successfully develop and introduce new and innovative products, technologies and
enhancements could result in a loss of customers and lower revenues.
We may face intense competition that could harm our business and we may be unable to compete successfully against new
entrants and established companies with greater resources.
Competition in connection with the manufacturing of our medical products across all of our product lines has intensified in recent
years and may continue to intensify in the future. We encounter significant competition across our product lines and in each
market in which our medical products are sold from various medical device companies, many of which may have greater
financial, technical and marketing resources than we do and are more well-established. In addition, one or more of our medical
customers may undertake additional vertical integration and/or supplier diversification initiatives and begin to manufacture or
dual-source some or all of the components or products that we currently supply to them, which could cause our operating results
to suffer. The market for commercial power sources is competitive, fragmented and subject to rapid technological change. Many
other commercial power source suppliers are larger than us and have greater financial, operational, personnel, sales, technical and
marketing resources and are able to take advantage of greater economies of scale than we can. These and other companies may
develop products that are superior, technologically or otherwise, or more cost effective than our products, which could result in
lower revenues and operating results.
- 14 -
If we are unable to successfully market our current or future products, our business will be harmed and our revenues and
operating results will be adversely affected.
The markets for our products have been changing in recent years. If the markets for our products do not grow as we or industry
experts forecast, our revenues could be less than expected. Furthermore, it is difficult to predict the rate at which the markets for
our products will grow or if new and increased competition will result in market saturation. Slower growth in the cardiac rhythm,
neuromodulation, cardio and vascular, environmental, military or energy markets in particular would adversely impact our
revenues. In addition, we face the risk that our products will lose widespread market acceptance. Our customers may not continue
to utilize the products we offer and a market may not develop for our future products.
We may at times determine that it is not technically or economically feasible for us to continue to manufacture certain products
and we may not be successful in developing or marketing replacement products. Additionally, new technologies that we develop
may not be rapidly accepted because of industry-specific factors, including the need for regulatory clearance, entrenched patterns
of clinical practice and uncertainty over third party reimbursement. If any of these events occurs, our business will be harmed and
our revenues and operating results will be adversely affected.
We intend to develop new products and expand into new geographic and product markets, which may not be successful
and could harm our operating results.
We intend to develop new and modified products using our existing technologies and engineering capabilities and expand into
new geographic and product markets. These efforts have required and will continue to require us to make substantial investments,
including significant RD&E expenditures and capital expenditures for new, expanded or improved manufacturing facilities.
Additionally, many of the new products we are developing take longer and more resources to develop and commercialize than
those products we are currently marketing, including more time and resources required to obtain regulatory approvals.
Specific risks in connection with expanding into new products and product markets include: longer product development cycles,
the inability to transfer our quality standards and technology into new products, the failure to receive or the delay in receipt of
regulatory approval for new products or modifications to existing products, and the failure of our existing customers or the market
generally to accept the new or modified products. Our inability to develop new products or expand into new geographic and
product markets, as currently intended, could hurt our business, financial condition and results of operations.
We rely on third party suppliers for raw materials, key products and subcomponents. Increased prices for, or
unavailability of, these materials, products or subcomponents could adversely affect our results of operations.
Our business depends on a continuous supply of raw materials. The principal raw materials used in our business include lithium,
iodine, gold, CFx, palladium, stainless steel, aluminum, cobalt chrome, tantalum, platinum, ruthenium, gallium trichloride,
vanadium oxide, iridium, titanium and plastics. The supply and price of these raw materials are susceptible to fluctuations due to
transportation issues, government regulations, price controls, foreign civil unrest, tariffs, worldwide economic conditions or other
unforeseen circumstances. Increasing global demand for these raw materials has caused prices of these materials to increase.
Significant increases in the cost of raw materials that cannot be recovered through increases in the prices of our products could
adversely affect our results of operations. There can be no assurance that the marketplace will support higher prices or that price
increases and productivity gains will fully offset any raw material cost increases in the future. In addition, there are a limited
number of worldwide suppliers of several raw materials needed to manufacture our products. For reasons of quality, cost
effectiveness or availability, we obtain some raw materials from a single supplier. Although we work closely with our suppliers to
seek to ensure continuity of supply, we may not be able to continue to procure raw materials critical to our business at all or to
procure them at acceptable price levels. A disruption in deliveries from our suppliers, price increases or decreased availability of
raw materials could have an adverse effect on our ability to meet our commitments to our customers and increase our operating
costs.
In addition, we rely on third party manufacturers to supply many of the products and subcomponents that are incorporated into
our products and components. These third party manufacturers have their own complex supply chains. Manufacturing problems
may occur with these and other outside sources, as a supplier may fail to develop or manufacture products and subcomponents for
us on a timely basis, or may supply us with products and subcomponents that do not meet our quality, quantity and cost
requirements. If any of these problems occur, we may be unable to obtain substitute sources for these products and
subcomponents on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our own products and
components profitably or on time. In addition, to the extent the processes our suppliers use to manufacture products and
subcomponents are proprietary, we may be unable to obtain comparable products and subcomponents from alternative suppliers.
Our business is also subject to risks associated with U.S. and foreign legislation, regulations and trade agreements relating to the
materials we import, including the tariffs on steel that the U.S. has imposed and other quotas, duties, tariffs or taxes or restrictions
on imports, which could adversely affect our operations and our ability to import materials used in our products at current or
increased levels. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or
countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased or
other restrictions on our imports will be imposed in the future or adversely modified, or what effect such actions would have on
- 15 -
our costs of operations. Future quotas, duties or tariffs may adversely affect our business, financial condition, results of operations
or cash flows. Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either
of which could adversely affect our business, financial condition, results of operations or cash flows.
Quality problems with our products could harm our reputation and erode our competitive advantage.
Quality is important to us and our customers, and our products, given their intended uses, are held to high quality and
performance standards. In the event our products fail to meet these standards, we could be subject to negative publicity and our
reputation could be harmed. This could erode our competitive advantage over competitors, causing us to lose or see a material
reduction in business from customers and resulting in lower revenues.
Quality problems with our products could result in warranty claims and additional costs.
We generally allow customers to return defective or damaged products for credit, replacement or repair. We generally warrant that
our products will meet customer specifications and will be free from defects in materials and workmanship. Additionally, we carry
a safety stock of inventory for our customers that may be impacted by warranty claims. We reserve for our exposure to warranty
claims based upon recent historical experience and other specific information as it becomes available. However, these reserves
may not be adequate to cover future warranty claims. In addition, we might be required to devote significant resources to address
any quality issues associated with our products, which could reduce the resources available for product development and other
matters. If our reserves for warranty claims are inadequate, additional warranty costs or inventory write-offs may need to be
incurred in the future, which could harm our operating results.
Regulatory issues resulting from product complaints, or recalls, or regulatory audits could harm our ability to produce
and supply products or bring new products to market.
The products that we design, manufacture and distribute, including our customers’ finished medical devices, product components
that are incorporated into our customers’ finished medical devices, and our own finished medical devices, are designed,
manufactured and distributed globally in compliance with applicable regulations and standards. However, a product complaint,
recall or negative regulatory audit may cause our products, including product components and finished medical devices, to be
removed from the market and harm our operating results or financial condition. In addition, during the period in which corrective
action is being taken by us to remedy a complaint, recall or negative audit, regulators may not allow our new products to be
cleared for marketing and sale.
If we become subject to product liability claims, our operating results and financial condition could suffer.
Our business exposes us to potential product liability claims, which may take the form of a one-off claim from a single claimant
or a class action lawsuit covering multiple claimants. Product failures, including those that arise from the failure to meet product
specifications, misuse or malfunction, or design flaws, or the use of our products with other components, systems or medical
devices not manufactured or sold by us could result in product liability claims or a recall. Many of our products are components
that interact with our customers’ medical devices. For example, our batteries are produced to meet electrical performance,
longevity and other specifications, but the actual performance of those products is dependent on how they are utilized as part of
our customers’ devices over the lifetime of their products. Product performance and device interaction from time to time have
been, and may in the future be, different than expected for a number of reasons. Consequently, it is possible that customers may
experience problems with their medical devices that could require device recall or other corrective action, where our batteries met
the specification at delivery, and for reasons that are not related primarily or at all to any failure by our product to perform in
accordance with specifications. It is possible that our customers (or end-users) may in the future assert that our products caused or
contributed to device failure. Even if these assertions do not lead to product liability or contract claims, they could harm our
reputation and our customer relationships. Furthermore, the design and manufacturing of finished medical devices of the types
that we also produce entail an inherent risk of product liability claims. Some of the medical devices that we manufacture and sell
are designed to be implanted into the human body. A number of factors could result in an unsafe condition or injury to, or death
of, a patient with respect to these medical devices. These factors could also result in product liability claims, a recall of one or
more of our medical devices or a safety alert relating to one or more of our medical devices.
Provisions contained in our agreements with key customers attempting to limit our damages, including provisions to limit
damages to liability for negligence, may not be enforceable in all instances or may otherwise fail to adequately protect us from
liability for damages. Product liability claims or product recalls, regardless of their ultimate outcome and whether related to a
product component or a finished medical device, could require us to spend significant time and money in litigation and require us
to pay significant damages and could divert the attention of our management from our business operations. The occurrence of
product liability claims or product recalls could affect our operating results and financial condition.
We carry product liability insurance with coverage that is limited in scope and amount. We may not be able to maintain this
insurance at a reasonable cost or on reasonable terms, or at all. This insurance may not be adequate to protect us against product
liability claims made against us.
- 16 -
Our operating results may fluctuate, which may make it difficult to forecast our future performance and may result in
volatility in our stock price.
Our operating results have fluctuated in the past and are likely to continue to fluctuate from quarter to quarter, making forecasting
future performance difficult and resulting in volatility in our stock price. These fluctuations are due to a variety of factors,
including the following:
•
•
•
•
timing of orders placed by our customers;
changes in the mix of our revenue represented by our various products and customers could result in reductions in our
profits if the mix of our revenue represented by lower margin products increases;
a portion of our costs are fixed in nature, which results in our operations being particularly sensitive to fluctuations in
production volumes; and
increased costs and decreased availability of raw materials or supplies.
If we are unable to protect our intellectual property and proprietary rights, our business could be harmed.
We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our rights to our technologies
and products. However, these measures afford only limited protection, and our patent rights, whether issued, subject to license or
in process, and our other intellectual property protections may be misappropriated, circumvented or invalidated. The laws of some
foreign countries do not offer the same level of protection for our intellectual property as the laws of the U.S. Further, no
assurances can be given that any patent application we have filed or will file will result in a patent being issued, or that any
existing or future patents will afford adequate or meaningful protection against competitors or against similar technologies. In
addition, competitors may design around our technology or develop competing technologies that do not infringe our proprietary
rights. As patents and other intellectual property protection expire, we may lose our competitive advantage. If third parties
infringe or misappropriate our patents or other proprietary rights, our businesses could be seriously harmed.
In addition, we cannot be assured that our existing or planned products do not or will not infringe on the intellectual property
rights of others or that others will not claim such infringement. Our industry has experienced extensive ongoing patent litigation
which can result in the incurrence of significant legal costs for indeterminate periods of time, injunctions against the manufacture
or sale of infringing products and significant royalty payments. At any given time, we may be a plaintiff or defendant in these
types of actions. We cannot assure you that we will be able to prevent competitors from challenging our patents or other
intellectual property rights or entering markets we currently serve.
In addition to seeking formal patent protection whenever possible, we attempt to protect our proprietary rights and trade secrets
by entering into confidentiality agreements with employees, consultants and third parties with which we do business. However,
these agreements may be breached and, if a breach occurs, there may be no adequate remedies available to us and we may be
unable to prevent the unauthorized disclosure or use of our technical knowledge, practices or procedures. If our trade secrets
become known, we may lose our competitive advantages.
We may be subject to intellectual property claims, which could be costly and time consuming and could divert our
management’s attention from our business operations.
In producing our products, third parties may claim that we are infringing on their intellectual property rights, and we may be
found to have infringed on those intellectual property rights. We may be unaware of the intellectual property rights of others that
may be used in our technology and products. In addition, third parties may claim that our patents have been improperly granted
and may seek to invalidate our existing or future patents. If any claim for invalidation prevailed, third parties may manufacture
and sell products that compete with our products and our revenues from any related license agreements would decrease
accordingly. Former employers of our associates may assert claims that these associates have improperly disclosed to us the
confidential or proprietary information of those former employers. We also typically do not receive significant indemnification
from parties that license technology to us against third party claims of intellectual property infringement.
Any litigation or other challenges regarding our patents or other intellectual property, with or without merit, could be costly and
time consuming and could divert the attention of our management and key personnel from our business operations. The
complexity of the technology involved in producing our products and the uncertainty of intellectual property litigation increases
these risks. If we are not successful in defending these claims, we could be required to stop selling, delay shipments of, or
redesign our products, discontinue the use of related technologies or designs, pay monetary amounts as damages, and satisfy
indemnification obligations that we have with some of our customers. Claims of intellectual property infringement may also
require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements
on terms acceptable to us, or at all. We also may be made subject to significant damages or injunctions against development and
sale of our products.
- 17 -
A failure to comply with customer-driven policies and standards and third-party certification requirements or standards
could adversely affect our business and reputation.
Our customers may require us to comply with their own or third-party quality standards, business policies, commercial terms, or
other policies or standards, which may be even more restrictive than current laws and regulations as well as our pre-existing
policies or terms with our suppliers, before they commence, or continue, doing business with us. These policies or standards may
be customer-driven, established by the market sectors in which we operate or imposed by third party organizations.
Our compliance with these heightened or additional policies, standards and third-party certification requirements, and managing a
supply chain in accordance with those policies, standards and requirements, could be costly, and our failure to comply could
adversely affect our operations, customer relationships, reputation and profitability. In addition, our adoption of these standards
could adversely affect our cost competiveness and ability to provide customers with required service levels. In certain
circumstances, to meet the requirements or standards of our customers, we may be obligated to select certain suppliers or make
other sourcing choices, and we may bear responsibility for adverse outcomes even if these matters are the result of third-party
actions or outside of our control.
Our failure to obtain licenses from third parties for new technologies or the loss of these licenses could impair our ability
to design and manufacture new products and reduce our revenues.
We occasionally license technologies from third parties rather than depending exclusively on our own proprietary technology and
developments. Our ability to license new technologies from third parties is and will continue to be critical to our ability to offer
new and improved products. We may not be able to continue to identify new technologies developed by others and even if we are
able to identify new technologies, we may not be able to negotiate licenses on favorable terms, or at all. Additionally, we may lose
rights granted under licenses for reasons beyond our control or if the license has a finite term and cannot be renewed on favorable
terms or at all.
We may never realize the full value of our intangible assets, which represent a significant portion of our total assets.
At December 31, 2019, we had $1.6 billion of goodwill and other intangible assets, representing 69% of our total assets. These
intangible assets consist primarily of goodwill, trademarks, tradenames, customer lists and patented technology arising from our
acquisitions. Goodwill and other intangible assets with indefinite lives are not amortized, but are tested annually or upon the
occurrence of certain events that indicate that the assets may be impaired. Definite lived intangible assets are amortized over their
estimated useful lives and are tested for impairment upon the occurrence of certain events that indicate that the assets may be
impaired. We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. In addition,
our significant amount of intangible assets increases the risk of a large charge to earnings in the event that the recoverability of
these intangible assets is impaired. In the event of a significant charge to earnings, the market price of our common stock could be
adversely affected. In addition, intangible assets with definite lives, which represent $685.5 million of our net intangible assets at
December 31, 2019, will continue to be amortized. These expenses will continue to reduce our future earnings or increase our
future losses.
We have significant indebtedness that could affect our operations and financial condition, and our failure to meet certain
financial covenants required by our debt agreements may materially and adversely affect our assets, financial position and
cash flows.
At December 31, 2019,we had $825 million in principal amount of debt outstanding. As of December 31, 2019, our debt service
obligations, comprised of principal and interest, are estimated to be approximately $70 million for 2020. The outstanding
indebtedness and the terms and covenants of the agreements under which this debt was incurred, could, among other things:
•
•
•
•
•
•
require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our outstanding
indebtedness, thereby reducing funds available for working capital, capital expenditures, RD&E expenditures and other
general corporate requirements;
limit our ability to obtain additional financing to fund future working capital, capital expenditures, RD&E expenditures
and other general corporate requirements in the future;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;
place us at a competitive disadvantage compared to our competitors that have less outstanding indebtedness; and
adversely affect the market price of our common stock.
- 18 -
We may be adversely affected by proposals to reform LIBOR.
Certain of our financial arrangements, including under our Senior Secured Credit Facility, are made at variable interest rates that
use the London Interbank Offered Rate (“LIBOR”) (or metrics derived from or related to LIBOR), as a benchmark for
establishing the interest rate. On July 27, 2017, the United Kingdom’s Financial Conduct Authority announced that it intends to
stop persuading or compelling banks to submit LIBOR rates after 2021. These reforms may cause LIBOR to cease to exist, new
methods of calculating LIBOR to be established, or alternative reference rates to be established. At this time, we cannot fully
predict the potential consequences of these reforms. These reforms could have an adverse impact on the market value for or value
of LIBOR-linked loans, and other financial obligations or extensions of credit held by or due to us. Changes in market interest
rates may influence our financing costs and returns on financial investments, and could reduce our earnings and cash flows.
Economic and credit market uncertainty could interrupt our access to capital markets, borrowings, or financial
transactions to hedge certain risks, which could adversely affect our financial condition.
To date, we have been able to access debt and equity financing that has allowed us to complete acquisitions, make investments in
growth opportunities and fund working capital requirements. In addition, we enter into financial transactions to hedge certain
risks, including foreign exchange and interest rate risk. Our continued access to capital markets, the stability of our lenders under
our Senior Secured Credit Facility and their willingness to support our needs, and the stability of the parties to our financial
transactions that hedge risks are essential for us to meet our current and long-term obligations, fund operations, and fund our
strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could affect our
business prospects and financial condition.
If we are not successful in making acquisitions to expand and develop our business, our operating results may suffer.
One facet of our growth strategy is to make acquisitions that complement our core competencies in technology and manufacturing
to enable us to manufacture and sell additional or enhanced products to our existing customers and to expand our business into
related markets. Our continued growth may depend on our ability to successfully identify and acquire companies that complement
or enhance our existing business on acceptable terms. We may not be able to identify or complete future acquisitions. In addition,
we will need to comply with the terms of our Senior Secured Credit Facility in order to pursue and complete future acquisitions.
In connection with pursuing this growth strategy, some of the risks that we may encounter include expenses associated with and
difficulties in identifying potential targets, the costs associated with unsuccessful acquisitions, and higher prices for acquired
companies because of significant competition for attractive acquisition targets.
Successful integration and anticipated benefits of acquisitions cannot be assured and integration matters could divert
attention of management away from operations.
Part of our business strategy includes acquiring additional businesses and assets. If we do not successfully integrate acquisitions,
we may not realize anticipated operating advantages and cost savings. Our ability to realize the anticipated benefits from
acquisitions will depend, to a large extent, on our ability to integrate these acquired businesses with our legacy businesses.
Integrating and coordinating aspects of the operations and personnel of the acquired business with legacy businesses involves
complex operational, technological and personnel-related challenges. This process is time-consuming and expensive, disrupts the
businesses of both companies and may not result in the achievement of the full benefits expected by us, including cost synergies
expected to arise from supply chain efficiencies and overlapping general and administrative functions.
The potential difficulties, and resulting costs and delays, include:
• managing a larger combined company;
•
•
•
•
•
•
•
consolidating corporate and administrative infrastructures;
issues in integrating manufacturing, warehouse and distribution facilities, RD&E and sales forces;
difficulties attracting and retaining key personnel;
loss of customers and suppliers and inability to attract new customers and suppliers;
unanticipated issues in integrating information technology, communications and other systems;
incompatibility of purchasing, logistics, marketing, administration and other systems and processes; and
unforeseen and unexpected liabilities related to the acquired business.
Additionally, the integration of our legacy businesses with an acquired company’s operations, products and personnel may place a
significant burden on management and other internal resources. The attention of our management may be directed towards
integration considerations and may be diverted from our day-to-day business operations, and matters related to the integration
may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have
been beneficial to us and our business. The diversion of management’s attention, and any difficulties encountered in the transition
and integration process, could harm our business, financial condition and operating results.
- 19 -
We may not be able to maintain the levels of operating efficiency that acquired companies have achieved or might achieve
separately. Successful integration of each acquisition will depend upon our ability to manage those operations and to eliminate
redundant and excess costs. Difficulties in integration may be magnified if we make multiple acquisitions over a relatively short
period of time. Because of difficulties in combining and expanding operations, we may not be able to achieve the cost savings and
other size-related benefits that we hoped to achieve after these acquisitions.
We may not be able to attract, train and retain a sufficient number of qualified associates to maintain and grow our
business.
We monitor the markets in which we compete and assess opportunities to better align expenses with revenues, while preserving
our ability to make needed investments in RD&E projects, capital and our associates that we believe are critical to our long-term
success. Our success will depend in large part upon our ability to attract, train, retain and motivate highly skilled associates. There
is currently aggressive competition for employees who have experience in technology and engineering. We compete intensely
with other companies to recruit and hire from this limited pool. The industries in which we compete for employees are
characterized by high levels of employee attrition. Although we believe we offer competitive salaries and benefits, we may have
to increase spending in order to attract, train and retain qualified personnel.
We are dependent upon our senior management team and key technical personnel and the loss of any of them could
significantly harm us.
Our future performance depends to a significant degree upon the continued contributions of our senior management team and key
technical personnel. In general, only highly qualified and trained scientists have the necessary skills to develop our products,
which are often highly technical in nature. The loss or unavailability to us of any member of our senior management team or a key
technical employee could significantly harm us. We face intense competition for these professionals from our competitors,
customers and companies operating in our industry. To the extent that the services of members of our senior management team
and key technical personnel would be unavailable to us for any reason, we would be required to hire other personnel to manage
and operate our Company and to develop our products and technology, which could adversely impact our business. We may not
be able to locate or employ these qualified personnel on acceptable terms or may need to increase spending in order to attract
these qualified personnel.
We may not realize the expected benefits from our cost savings and consolidation initiatives or those initiatives may have
unintended consequences, which may harm our business.
We have incurred significant charges related to various cost savings and consolidation initiatives. These initiatives were
undertaken to improve our operational effectiveness, efficiencies and profitability. Information regarding some of these initiatives
is discussed in Note 11 “Other Operating Expenses” of the Notes to Consolidated Financial Statements contained in Item 8 of this
report. Cost reduction efforts under these initiatives include various cost and efficiency improvement measures, such as headcount
reductions, the relocation of resources and administrative and functional activities, the closure of facilities, the transfer of
production lines, the sale of non-strategic assets and other efforts to streamline our business, among other actions. These measures
could yield unintended consequences, such as distraction of our management and associates, business disruption, disputes with
customers, attrition beyond our planned reduction in workforce and reduced associate productivity. If any of these unintended
consequences were to occur, they could adversely affect our business, financial condition and results of operations. In addition,
headcount reductions and customer disputes may subject us to the risk of litigation, which could result in the incurrence of
substantial costs. Moreover, our cost reduction efforts result in charges and expenses that impact our operating results. Our cost
savings and consolidation initiatives, or other expense reduction measures we take in the future, may not result in the expected
cost savings.
- 20 -
Interruptions of our manufacturing operations could delay production and adversely affect our operations.
Our products are designed and manufactured in facilities located around the world. In most cases, the manufacturing of specific
product lines is concentrated in one or a few locations. If an event (including any weather or natural disaster-related event)
occurred that resulted in material damage or loss of one or more of these manufacturing facilities or we lacked sufficient labor to
fully operate the facility, we might be unable to transfer the manufacture of the relevant products to another facility or location in
a cost-effective or timely manner, if at all. This potential inability to transfer production could occur for a number of reasons,
including but not limited to a lack of necessary relevant manufacturing capability at another facility, or the regulatory
requirements of the FDA or other governmental regulatory bodies. Other disruptions in our manufacturing operations for any
reason, including equipment malfunction, failure to follow specific protocols and procedures, or environmental factors could lead
to an inability to supply our customers with our products, unanticipated costs, lost revenues and damage to our reputation. In
addition, our business involves complex manufacturing processes and the use of various hazardous materials,chemicals and other
regulated substances, such as trichloroethylene, that can be dangerous to our associates. We must also comply with various health
and safety regulations in the United States and abroad in connection with our operations. Although we employ safety procedures
in the design and operation of our facilities, there is a risk that an accident or death could occur. Any accident, such as a chemical
spill or fire, could result in significant manufacturing delays or claims for damages resulting from injuries, which would harm our
operations and financial condition. The potential liability resulting from any such accident or death, to the extent not covered by
insurance, could harm our financial condition or operating results. Any disruption of operations at any of our facilities, and in
particular our larger facilities, could result in production delays, which could adversely affect our operations and harm our
business.
Our business is subject to environmental regulations that could be costly to comply with.
Federal, state and local regulations impose various environmental controls on the manufacturing, transportation, storage, use and
disposal of batteries and hazardous chemicals and other materials used in, and hazardous waste produced by the manufacturing of
our products. Conditions relating to our historical operations, including a former manufacturing facility located in South
Plainfield, New Jersey previously operated by a subsidiary of Lake Region Medical, may require expenditures for clean-up in the
future. In addition, changes in environmental laws and regulations may impose costly compliance requirements on us or
otherwise subject us to future liabilities. Additional or modified regulations relating to the manufacture, transportation, storage,
use and disposal of materials used to manufacture our products or restricting disposal or transportation of batteries may be
imposed that may result in higher costs or lower operating results. In addition, we cannot predict the effect that additional or
modified environmental regulations may have on us or our customers.
We have a complex tax profile due to the global nature of our operations and may experience significant variability in our
quarterly and annual effective tax rate due to several factors, including changes in the mix of pre-tax income and the
jurisdictions to which it relates, business acquisitions, settlements with taxing authorities, and changes in tax rates.
Our global operations encompass multiple taxing jurisdictions. Variability in the mix and profitability of domestic and
international activities, identification and resolution of various tax uncertainties, changes in tax laws and rates, and the extent to
which we are able to realize net operating loss and other carryforwards included in deferred tax assets and avoid potential adverse
outcomes included in deferred tax liabilities, among other matters, may significantly affect our effective income tax rate in the
future.
Changes in international tax laws or additional changes in U.S. tax laws could materially affect our financial position and results
of operations. In addition, many countries in the EU, as well as a number of other countries and organizations such as the
Organization for Economic Cooperation and Development, are also actively considering changes to existing tax laws. If tax laws
and related regulations change, our financial results could be materially impacted. Given the unpredictability of these possible
changes and their potential interdependency, it is possible such changes could adversely impact our financial results.
Our effective income tax rate is the result of the income tax rates in the various countries in which we do business. Our mix of
income and losses in these jurisdictions affects our effective tax rate. For example, relatively more income in higher tax rate
jurisdictions would increase our effective tax rate and thus lower our net income. Similarly, if we generate losses in tax
jurisdictions for which no benefits are available, our effective income tax rate will increase. Our effective income tax rate may
also be impacted by the recognition of discrete income tax items, such as required adjustments to our liabilities for uncertain tax
positions or our deferred tax asset valuation allowance. A significant increase in our effective income tax rate could have a
material adverse impact on our earnings.
- 21 -
We have recorded deferred tax assets based on our assessment that we will be able to realize the benefits of our net operating
losses and other favorable tax attributes. Realization of deferred tax assets involve significant judgments and estimates which are
subject to change and ultimately depends on generating sufficient taxable income of the appropriate character during the
appropriate periods. Changes in circumstances may affect the likelihood of such realization, which in turn may trigger a write-
down of our deferred tax assets, the amount of which would depend on a number of factors. A write-down would reduce our
reported net income, which may adversely impact our financial condition or results of operations or cash flows. In addition, we
are potentially subject to ongoing and periodic tax examinations and audits in various jurisdictions, including with respect to the
amount of our net operating losses and any limitation thereon. An adjustment to such net operating loss carryforwards, including
an adjustment from a taxing authority, could result in higher tax costs, penalties and interest, thereby adversely impacting our
financial condition, results of operations or cash flows.
Our operations are subject to cyber-attacks that could have a material adverse effect on our business, consolidated results
of operations and consolidated financial condition.
In the ordinary course of business, our operations are, and in the future are expected to continue to be, dependent on digital
technologies and information technology systems. We use these technologies and systems for internal purposes, including data
storage, processing and transmissions, as well as in our interactions with customers and suppliers. The security of this information
and these systems are important to our operations and business strategy. Digital technologies and systems have been, and in the
future are expected to continue to be, subject to the risk of cyber-attacks. Despite our security measures, our information
technology systems and infrastructure may be vulnerable to cyber-attacks by hackers or malware, or breached due to associate
error, malfeasance or other disruptions. As the techniques used to obtain unauthorized access, disable or degrade service, or
sabotage infrastructure and systems change frequently and may be difficult to detect for long periods of time, we may be unable to
anticipate these techniques or implement adequate preventive measures. If our systems for protecting against cybersecurity risks
prove insufficient, we could be adversely affected by, among other things: loss of or damage to intellectual property, proprietary
or confidential information, or customer, supplier, or employee data; interruption of our business operations; and increased costs
required to prevent, respond to, or mitigate cybersecurity attacks. In addition, any such breach could compromise our networks
and the information stored there could be accessed, publicly disclosed or stolen. These risks could harm our reputation and brand,
and our relationships with customers, suppliers, employees and other third parties, and may result in claims or proceedings against
us. In certain circumstances, we may rely on third party vendors to process, store and transmit data for our business whose
operations are subject to similar risks. These risks could have a material adverse effect on our business, financial condition and
results of operations. While we maintain cyber-liability insurance, our insurance may not be sufficient to cover us against all
losses that could potentially result from a breach of our systems or loss of sensitive data.
The failure of our information technology systems to perform as anticipated could disrupt our business and affect our
financial condition.
The efficient operation of our business is dependent on our information technology (“IT”) systems. Accordingly, we rely upon the
capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this
infrastructure in response to our changing needs. Despite our implementation of security measures, our systems and the systems
of our third parties with whom we do business are vulnerable to damages from computer viruses, natural disasters, incursions by
intruders or hackers, failures in hardware or software, power fluctuations, cyber terrorists and other similar disruptions. The
failure of our IT systems to perform as anticipated for any reason or any significant breach of security could disrupt our business
and result in numerous consequences, including reduced effectiveness and efficiency of operations, inappropriate disclosure of
confidential information, increased overhead costs and loss of important information, which could have a material effect on our
business and results of operations. In addition, we may be required to incur significant costs to protect against damage caused by
these disruptions or security breaches in the future. Furthermore, if we fail to comply with an applicable law or regulation, such
as the European Union-wide General Data Protection Regulation or any other data privacy regulation, or we or a third party suffer
a loss or disclosure of our business or stakeholder information due to any number of causes ranging from catastrophic events or
power outages to improper data handling or security breaches and our business continuity plans do not effectively address these
failures on a timely basis, we may be exposed to potential disruption in operations, loss of customers, reputational, competitive
and business harm as well as significant costs from remediation, litigation and regulatory actions.
- 22 -
Our international sales and operations are subject to a variety of market and financial risks and costs that could affect our
profitability and operating results.
Our sales outside the U.S., which accounted for 44% of sales for 2019, and our operations in Europe, Asia, Mexico and South
America are and will continue to be subject to a number of risks and potential costs, including:
•
•
•
•
•
•
•
changes in foreign economic conditions or regulatory requirements;
changes in foreign currency exchange rates;
local product preferences and product requirements;
outstanding accounts receivables that take longer to collect than is typical in the U.S.;
difficulties in enforcing agreements through foreign legal systems;
less protection of intellectual property in some countries outside of the U.S.;
trade protection measures and import and export licensing requirements;
• work force instability;
•
•
political and economic instability; and
complex tax and cash management issues.
These risks are also present in connection with our entry into new geographic markets.
We earn revenue and incur expenses related to our foreign sales and operations that are denominated in a foreign currency.
Additionally, to the extent that monetary assets and liabilities, including short-term and long-term intercompany loans, are
recorded in a currency other than the functional currency of our foreign subsidiaries, these amounts are remeasured each period,
with the resulting gain or loss being recorded in Other (Income) Loss, Net. We may buy hedges in certain currencies to reduce or
offset our exposure to currency exchange fluctuations; however, these transactions may not be adequate or effective to protect us
from the exposure for which they are purchased. Historically, foreign currency fluctuations have not had a material effect on our
net financial results. However, fluctuations in foreign currency exchange rates could have a significant impact, positive or
negative, on our financial results in the future.
Our international operations expose us to legal and regulatory risks, which could adversely affect our business.
Our profitability and international operations are, and will continue to be, subject to risks relating to changes in foreign legal and
regulatory requirements. In addition, our international operations are governed by various U.S. laws and regulations, including the
U.S. Foreign Corrupt Practices Act (“FCPA”) and other similar anti-corruption laws in other countries that prohibit us and our business
partners and other intermediaries from making improper payments or offers of payment to foreign governments and their officials
and political parties for the purpose of obtaining or retaining business. Any alleged or actual violations of these regulations may
subject us to government scrutiny, severe criminal or civil sanctions and other liabilities and could adversely affect our business,
reputation, operating results, and financial condition.
Risks Related To Our Industries
The healthcare industry is highly regulated and subject to various political, economic and regulatory changes that could
increase our compliance costs and force us to modify how we develop and price our products.
The healthcare industry is highly regulated and is influenced by changing political, economic and regulatory factors. Several of
our product lines are subject to international, federal, state and local health and safety, packaging and product content regulations,
including the new European Medical Device Regulation that goes into effect in May 2020, which was adopted by the European
Union as a common legal framework for all European Union member states. In addition, medical devices are subject to
regulation by the FDA and similar governmental agencies. These regulations cover a wide variety of product activities from
design and development to labeling, manufacturing, promotion, sales and distribution. Compliance with these regulations is time
consuming, burdensome and expensive and could adversely affect our ability to sell products. This may result in higher than
anticipated costs or lower than anticipated revenues.
Furthermore, healthcare industry regulations are complex, change frequently and have tended to become more stringent over time.
Federal and state legislatures have periodically considered and implemented programs to reform or amend the U.S. healthcare
system at both the federal and state levels. In addition, these regulations may contain proposals to increase governmental
involvement in healthcare, lower reimbursement rates or otherwise change the environment in which healthcare industry
participants operate. We may be required to incur significant expenses to comply with these regulations or remedy past violations
of these regulations. Our failure to comply with applicable government regulations could also result in cessation of portions or all
of our operations, impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because
many of our products are sold into regulated industries, we must comply with additional regulations in marketing our products.
- 23 -
In response to perceived increases in healthcare costs in recent years, there have been and continue to be proposals by the
Presidential administrations, members of Congress, state governments, regulators and third-party payors to control these costs
and, more generally, to reform the U.S. healthcare system, including by repealing or replacing the Patient Protection and
Affordable Care Act. Elements of health care reform such as comparative effectiveness research, an independent payment
advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way
healthcare is developed and delivered, and may materially adversely impact numerous aspects of our business, results of
operations and financial condition.
Our business is indirectly subject to healthcare industry cost containment measures that could result in reduced sales of
our products.
Several of our customers rely on third party payors, such as government programs and private health insurance plans, to
reimburse some or all of the cost of the procedures in which our products are used. The continuing efforts of governments,
insurance companies and other payors of healthcare costs to contain or reduce those costs could lead to patients being unable to
obtain approval for payment from these third party payors for procedures in which our products are used. If this occurs, sales of
medical devices may decline significantly and our customers may reduce or eliminate purchases of our products, or demand
further price reductions. The cost containment measures that healthcare payors are instituting, both in the U.S. and internationally,
could reduce our revenues and harm our operating results.
Consolidation in the healthcare industry could result in greater competition and reduce our revenues and harm our
business.
Many healthcare industry companies are consolidating to create new companies with greater market power. As the healthcare
industry consolidates, competition to provide products and services to industry participants will become more intense. These
industry participants may try to use their market power to negotiate price reductions for our products or may undertake additional
vertical integration or supplier diversification initiatives. If we are forced to reduce our prices, our revenues would decrease and
our operating results would suffer.
Our energy market revenues are dependent on conditions in the oil and natural gas industry, which historically have been
volatile.
Sales of our products into the energy market depends upon the condition of the oil and gas industry. In the recent past, oil and
natural gas prices have been subject to significant fluctuation and the oil and gas exploration and production industry has
historically been cyclical, and it is likely that oil and natural gas prices will continue to fluctuate in the future. The current and
anticipated prices of oil and natural gas influence the oil and gas exploration and production business and are affected by a variety
of political and economic factors, including worldwide demand for oil and natural gas, worldwide and domestic supplies of oil
and natural gas, the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels
and pricing, the level of production of non-OPEC countries, the price and availability of alternative fuels, political stability in oil
producing regions and the policies of the various governments regarding exploration and development of their oil and natural gas
reserves. A change in the oil and gas exploration and production industry or a reduction in the exploration and production
expenditures of oil and gas companies could cause our energy market revenues to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our principal executive office and headquarters is located in Plano, Texas, in a leased facility. As of December 31, 2019, we
operated 19 facilities in the U.S., three in Europe, three in Mexico, one in South America, and two in Asia. Of these facilities, 20
were leased and 8 were owned. We occupy approximately 1.8 million square feet of manufacturing and RD&E space worldwide.
We believe the facilities we operate and their equipment are effectively utilized, well maintained, generally are in good condition,
and will be able to accommodate our capacity needs to meet current levels of demand. We continuously review our anticipated
requirements for facilities and, on the basis of that review, may from time to time acquire additional facilities, expand or dispose
of existing facilities.
- 24 -
ITEM 3.
LEGAL PROCEEDINGS
In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”)
alleging that AVX had infringed 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. Two juries in the
United States District Court for the District of Delaware have returned verdicts finding that AVX infringed three of the
Company’s patents and awarded the Company $37.5 million in damages. In March 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, the jury
awarded the Company $22.2 million in damages. On July 31, 2019, the U.S. District Court for the District of Delaware entered
an order denying AVX’s post-trial motion to overturn the jury verdict in favor of the Company. On August 23, 2019, AVX filed
its notice of appeal with the United States Court of Appeals for the Federal Circuit. On September 5, 2019, the Company filed its
notice of cross-appeal with the United States Court of Appeals for the Federal Circuit.
In January 2015, LRM was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of NJDEP’s intent to
revoke a no further action determination made by NJDEP in favor of LRM in 2002 pertaining to a property on which a subsidiary
of LRM operated a manufacturing facility in South Plainfield, New Jersey beginning in 1971. LRM sold the property in 2004 and
vacated the facility in 2007. In response to NJDEP’s notice, LRM further investigated the matter and submitted a technical report
to NJDEP in August of 2015 that concluded that NJDEP’s notice of intent to revoke was unwarranted. After reviewing the
technical report, NJDEP issued a draft response in May 2016 stating that NJDEP would not revoke the no further action
determination at that time but would require some additional site investigation to support the Company’s conclusion. The
Company is cooperating with NJDEP and has begun the requested additional investigation. In late 2019, NJDEP informed LRM
that NJDEP was considering taking over the investigation of the property in light of LRM’s difficulty in securing access to the
property from the current owner. Separately, in April 2019, NJDEP indicated it believes the property to be a contributing source
to local groundwater contamination. The Company disagrees with NJDEP’s assertion; however, the Company is cooperating with
NJDEP on this matter. The Company does not expect that this environmental matter will have a material effect on its
consolidated results of operations, financial position or cash flows.
We are party to various other legal actions arising in the normal course of business. A description of pending legal actions against
the Company is set forth in Note 13 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements
contained in Item 8 of this report. Other than as discussed in Note 13, we do not believe that the ultimate resolution of any
pending legal actions will have a material effect on our consolidated results of operations, financial position or cash flows.
However, litigation is subject to inherent uncertainties and there can be no assurance that any pending legal action, which we
currently believe to be immaterial, does not become material in the future.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
- 25 -
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock. The Company’s common stock trades on the New York Stock Exchange (“NYSE”) under
the symbol “ITGR.”
Stockholders. According to the records of our transfer agent, there were approximately 100 holders of record of our common
stock on February 14, 2020. Because many of these shares are held by brokers and other institutions on behalf of the ultimate
beneficial holders of these shares, we are unable to estimate the total number of stockholders represented by these record holders.
Dividends. We have not paid cash dividends and do not anticipate paying any cash dividends in the foreseeable future.
PERFORMANCE GRAPH
The following graph compares, for the five year period ended December 31, 2019, the cumulative total stockholder return for
Integer Holdings Corporation, the S&P SmallCap 600 Index, and the Hemscott Peer Group Index. The Hemscott Peer Group
Index includes approximately 100 comparable companies included in the Hemscott Industry Group 520 Medical Instruments &
Supplies and 521 Medical Appliances & Equipment. The graph assumes that $100 was invested on January 2, 2015 and assumes
reinvestment of dividends. No adjustments have been made for the value provided to shareholders for spin-offs, including the
spin-off of Nuvectra by the Company in March 2016. The stock price performance shown on the following graph is not
necessarily indicative of future price performance.
Company/Index
01/02/15
01/01/16
12/30/16
12/29/17
12/28/18
12/31/19
Integer Holdings Corporation
$
100.00 $
107.89 $
71.22 $
109.54 $
183.86 $
S&P Smallcap 600
Hemscott Peer Group Index
100.00
100.00
98.03
106.65
- 26 -
124.06
112.99
140.48
148.70
128.56
166.10
194.50
157.85
215.99
ITEM 6.
SELECTED FINANCIAL DATA
Five-Year Summary Financial Data
(in thousands, except per share amounts)
This data should be read along with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and Item 8 “Financial Statements and Supplementary Data” appearing elsewhere in this report. Operating results for
the 2015 though 2017 fiscal years were retrospectively revised from previously reported amounts to reclassify the operations for
the AS&O Product Line as discontinued operations.
Historically, we have utilized a 52/53-week fiscal year ending on the Friday nearest December 31. In October 2019, the Board of
Directors of Integer approved a change to the Company’s fiscal year from a year ending on the Friday nearest December 31 to a
calendar year ending on December 31. Fiscal years subsequent to 2019 will begin on January 1 and end on December 31 of each
year. The Company’s 2019 fiscal year began on December 29, 2018 and ended on December 31, 2019. Fiscal years 2018, 2017,
2016 and 2015 each consisted of fifty-two weeks and ended on December 28, 2018, December 29, 2017, December 30, 2016 and
January 1, 2016, respectively.
2019(1)
2018(1)(2)
2017(1)(2)(3)
2016(1)(2)
2015(1)(2)
Summary of Operations for the Fiscal Year:
Sales
$ 1,258,094
$ 1,215,012
$ 1,136,080
$ 1,075,502
$
638,995
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
91,218
5,118
96,336
47,033
120,931
167,964
87,087
(20,408)
66,679
24,878
(18,917)
5,961
(3,176)
(4,418)
(7,594)
Basic earnings (loss) per share:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Basic earnings (loss) per share
Diluted earnings (loss) per share:
Income (loss) from continuing operations
Income (loss) from discontinued operations
Diluted earnings (loss) per share
Financial Position at Year End:
Working capital
Total assets
Long-term obligations
__________
$
$
$
$
2.80
0.16
2.95
2.76
0.15
2.92
$
$
1.46
3.76
5.23
1.44
3.71
5.15
$
$
2.77
(0.65)
2.12
2.72
(0.64)
2.08
$
$
0.81
(0.61)
0.19
0.80
(0.61)
0.19
(0.12)
(0.17)
(0.29)
(0.12)
(0.17)
(0.29)
$
236,317
$
251,680
$
322,906
$
332,087
$
360,764
2,353,093
2,326,681
2,848,345
2,832,543
2,982,136
1,021,527
1,101,618
1,745,961
1,922,084
1,917,671
(1)
In 2019, we acquired certain assets from USB. In 2016, we spun-off a portion of our former QiG segment, which became
Nuvectra Corporation. In 2015, we acquired LRM. This data includes the results of operations of USB and LRM
subsequent to acquisition and does not include the result of operations of Nuvectra subsequent to the Spin-off.
(2) From 2015 to 2019, we recorded material charges in Other Operating Expenses (“OOE”), primarily related to our cost
savings and consolidation initiatives and our acquisitions. Additional information is set forth in Note 11 “Other Operating
Expenses” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
(3)
In the fourth quarter of 2017, we recognized a net benefit of $39.4 million as a result of the Tax Reform Act.
- 27 -
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our
selected financial data and our consolidated financial statements and the related notes appearing elsewhere in this report.
This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but
not limited to those under the heading “Risk Factors” in Item 1A of this report.
Our Business
•
•
•
•
•
Our business
Discontinued operations and divestiture
Recent acquisitions
Strategic overview
Financial overview
Our Financial Results
•
•
•
•
•
Fiscal 2019 compared with fiscal 2018
Liquidity and capital resources
Off-balance sheet arrangements
Contractual obligations
Impact of recently issued accounting standards
Critical Accounting Estimates
•
•
Inventories
Valuation of goodwill, intangible and other long-lived assets
Our Business
Integer Holdings Corporation is one of the largest MDO manufacturers in the world serving the cardiac, neuromodulation,
orthopedics, vascular and advanced surgical markets. We also develop batteries for high-end niche applications in the non-medical
energy, military, and environmental markets. Our vision is to enhance the lives of patients worldwide by being our customers’
partner of choice for innovative technologies and services.
We organize our business into two reportable segments, Medical and Non-Medical, and derive our revenues from four principle
product lines. The Medical segment includes the Cardio & Vascular, Cardiac & Neuromodulation and Advanced Surgical,
Orthopedics & Portable Medical product lines and the Non-Medical segment is comprised of the Electrochem product line. For
more information on our segments, please refer to Note 18 “Segment and Geographic Information” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report.
Discontinued Operations and Divestiture
In July 2018, we completed the sale of the AS&O Product Line for net cash proceeds of approximately $581 million, resulting in
the recognition of a pre-tax gain of approximately $195 million during the year ended December 28, 2018. In connection with the
sale, the parties executed a transition services agreement whereby we provided certain corporate services (including accounting,
payroll, and information technology services) to Viant to facilitate an orderly transfer of business operations. Viant paid us for these
services as specified in the transition services agreement, which were complete as 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.
In June 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 ended 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.
- 28 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Recent Acquisitions
In October 2019, we purchased certain assets of USB, a developer and manufacturer of complex braided biomedical structures for
disposable and implantable medical devices. The acquisition adds a differentiated capability related to the development and
manufacture of complex braided and formed biomedical structures to our broad portfolio, that we believe further positions us as a
partner of choice for innovative medical technologies.
Refer to Note 2 “Acquisition, Divestiture and Discontinued Operations” of the Notes to Consolidated Financial Statements contained
in Item 8 of this report for additional information about the acquisition of certain assets of USB and the divestiture of the AS&O
Product Line.
Strategic Overview
We continue to take steps to better align our resources in order to invest to grow and protect, and preserve our portfolio of
products. In addition to our portfolio strategy, we have launched the execution of 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 capabilities we already have, and will increase individual
accountability and clarity of ownership, while serving customers more effectively.
• Market Focused Innovation: We are ensuring we get the most return on our research and 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 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.
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 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.
- 29 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financial Overview
Fiscal 2019 Compared with Fiscal 2018
Income from continuing operations for 2019 was $91.2 million or $2.76 per diluted share compared to $47.0 million or $1.44 per
diluted share for 2018. These variances are primarily the result of the following:
•
•
•
•
Sales from continuing operations for 2019 increased 4% primarily driven by growth in Cardio & Vascular and Cardiac &
Neuromodulation sales.
Gross profit for 2019 decreased $7.7 million, primarily due to higher costs of sales due to inventory write-downs and other
expenses totaling $21.4 million related to a customer who filed bankruptcy in 2019 (see “Customer Bankruptcy”), partially
offset by a $43.1 million increase in sales from continuing operations.
Operating expenses for 2019 decreased by 5% compared to 2018, due to decreases of $3.7 million in SG&A expenses, $2.1
million in RD&E expenses and $3.9 million in Other Operating Expenses.
Interest expense for 2019 decreased by $46.8 million primarily due to lower outstanding debt balances due to the repayment
of debt over the last year and extinguishment of debt charges included in 2018 related to the repayment of indebtedness in
connection with the divestiture of the AS&O Product Line. Debt extinguishment expenses included in interest expense for
2019 were lower by $40.1 million compared to 2018.
• We recognized a net loss on equity investments of $0.5 million in 2019, compared to a net gain on equity investments of
$5.6 million during 2018. Gains and losses on equity investments are generally unpredictable in nature.
•
Other income, net for 2019 was $0.6 million compared to other loss, net of $0.8 million during 2018, primarily due to foreign
currency gains in 2019 compared to foreign currency losses in 2018.
• We recorded an income tax provision of $14.0 million for 2019, compared to a provision of $14.1 million for 2018. Refer to
Note 12 “Income Taxes” of the Notes to Consolidated Financial Statements contained in Item 8 of this report and the
“Provision for Income Taxes” section of this Item for additional information.
Fiscal 2018 Compared with Fiscal 2017
Income from continuing operations for 2018 was $47.0 million or $1.44 per diluted share compared to $87.1 million or $2.72 per
diluted share for 2017. These variances were primarily the result of the following:
•
•
•
•
•
•
Sales from continuing operations for 2018 increased 7% primarily driven by market growth and new business wins. During
2018, price concessions given to our larger OEM customers in return for long-term volume commitments and foreign
currency exchange rate lowered sales by approximately $15 million and $2 million, respectively in comparison to 2017.
Gross profit for 2018 increased $8.7 million primarily due to the increase in sales from continuing operations discussed
above, partially offset by higher incentive compensation ($5.1 million) costs.
Operating expenses for 2018 were lower by $21.3 million compared to 2017, due to a decrease in other operating expenses
($20.4 million) attributable to the completion of spending on integration activities partially offset by higher incentive
compensation ($6.0 million).
Interest expense for 2018 increased by $35.3 million primarily due to extinguishment of debt charges related to the
repayment of indebtedness in connection with the divestiture of the AS&O Product Line. We recognized losses from
extinguishment of debt during 2018 and 2017 of $42.7 million and $3.5 million, respectively. The 2018 amount includes a
“make-whole” premium of $31.3 million, paid as a result of redeeming our 9.125% senior notes due on November 1, 2023
(the “Senior Notes”) in July 2018.
Net gains on equity investments increased income by $5.6 million in 2018 compared to losses of $1.6 million during 2017.
Other loss, net for 2018 was $0.8 million compared to $10.9 million during 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 provision of $14.1 million for 2018, compared to a benefit of $37.8 million for 2017. The 2017
amount included a tax benefit of $39.4 million related to the Tax Reform Act that was recorded in the fourth quarter of 2017.
- 30 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Our Financial Results
The following table presents selected financial information derived from our Consolidated Financial Statements, contained in
Item 8 of this report, for the periods presented (dollars in thousands, except per share amounts):
2019
2018
2017
Change
2019 vs. 2018
%
$
Change
2018 vs. 2017
%
$
Medical Sales:
Cardio & Vascular
Cardiac & Neuromodulation
Advanced Surgical, Orthopedics &
Portable Medical
10 %
4 %
11 %
8 %
(7)%
7 %
9 %
2 %
$ 610,056
$ 585,464
$ 530,831
$ 24,592
4 % $ 54,633
457,194
443,347
428,275
13,847
3 %
15,072
132,429
133,225
120,006
Total Medical Sales
1,199,679
1,162,036
1,079,112
Non-Medical
Total sales
Cost of sales
Gross profit
58,415
52,976
56,968
1,258,094
1,215,012
1,136,080
903,084
355,010
852,347
362,665
782,070
354,010
(796)
37,643
5,439
43,082
50,737
(7,655)
(1)%
3 %
10 %
4 %
6 %
(2)%
13,219
82,924
(3,992)
78,932
70,277
8,655
Gross profit as a % of sales
28.2%
29.8%
31.2 %
Selling, general and administrative
expenses (“SG&A”)
138,695
142,441
143,073
(3,746)
(3)%
(632) — %
SG&A as a % of sales
11.0%
11.7%
12.6 %
Research, development and engineering
costs (“RD&E”)
46,529
48,604
48,850
(2,075)
(4)%
(246)
(1)%
RD&E as a % of sales
3.7%
4.0%
4.3 %
Other operating expenses
Operating income
12,151
157,635
16,065
155,555
36,438
125,649
(3,914)
2,080
(24)% (20,373)
29,906
1 %
(56)%
24 %
Operating income as a % of sales
12.5%
12.8%
11.1 %
Interest expense
(Gain) loss on equity investments, net
Other (income) loss, net
Income from continuing operations
before taxes
Provision (benefit) for income taxes
52,545
475
(578)
105,193
13,975
99,310
(5,623)
752
61,116
14,083
63,972
1,565
10,853
(46,765)
6,098
(1,330)
(47)%
NM
NM
35,338
(7,188)
(10,101)
49,259
(37,828)
44,077
(108)
72 %
(1)%
11,857
51,911
55 %
NM
NM
24 %
NM
Income from continuing operations
$
91,218
$
47,033
$ 87,087
$ 44,185
94 % $ (40,054)
97 %
Effective tax rate
13.3%
23.0%
(76.8)%
Income from continuing
operations as a % of sales
7.3%
3.9%
7.7 %
Diluted earnings per share from
continuing operations
NM - Calculated change not meaningful.
Customer Bankruptcy
$
2.76
$
1.44
$
2.72
$
1.32
92 % $
(1.28)
106 %
In November 2019, one of our customers, Nuvectra, filed a voluntary petition in U.S. Bankruptcy Court for the Eastern District of
Texas seeking relief under Chapter 11 of the U.S. Bankruptcy Code (the “Customer Bankruptcy”). During the fourth quarter of
2019, we recorded pre-tax charges totaling $24.2 million in connection with the Customer Bankruptcy. These charges were
primarily non-cash and were associated with certain Nuvectra-related assets, primarily consisting of inventory, accounts
receivable, as well as certain non-cancelable inventory commitments. These charges were included in cost of sales ($21.4
million), SG&A expenses ($2.4 million) and Other Operating Expenses ($0.4 million) in our Consolidated Statement of
Operations for the year ended December 31, 2019.
- 31 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following discussion is a comparison between fiscal year 2019 and fiscal year 2018 results. For a discussion of our results of
operations for the fiscal year ended December 28, 2018 compared to the fiscal year ended December 29, 2017, please refer to
Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual
Report on Form 10-K for the fiscal year ended December 28, 2018, which was filed with the SEC on February 22, 2019.
Fiscal 2019 Compared with Fiscal 2018
Sales
Sales by product line for 2019 and 2018 were as follows (dollars in thousands):
Medical Sales:
Cardio & Vascular
Cardiac & Neuromodulation
Advanced Surgical, Orthopedics & Portable Medical
Total Medical Sales
Non-Medical
Total sales
2019
2018
$
%
Change
$
610,056
$
585,464
$
457,194
132,429
443,347
133,225
1,199,679
1,162,036
58,415
52,976
$
1,258,094
$
1,215,012
$
24,592
13,847
(796)
37,643
5,439
43,082
4.2 %
3.1 %
(0.6)%
3.2 %
10.3 %
3.5 %
Total 2019 sales increased 4% to $1.258 billion in comparison to 2018. The most significant drivers of this increase were as
follows:
Cardio & Vascular sales for 2019 increased $24.6 million or 4% in comparison to 2018. This increase was driven by incremental
sales from the signing of a customer contract on existing business (“new customer agreement”) and growth of peripheral vascular
and structural heart, partially offset by the impact of an end of life electrophysiology program. During 2019, price reductions
reduced Cardio & Vascular sales by $6.7 million in comparison to 2018. Foreign currency exchange rate fluctuations decreased
Cardio & Vascular sales for 2019 by $2.5 million in comparison to 2018 primarily due to U.S. dollar fluctuations relative to the
Euro.
Cardiac & Neuromodulation sales for 2019 increased $13.8 million or 3% in comparison to 2018. The increase in Cardiac &
Neuromodulation sales was mainly due to CRM growth, partially offset by a decline in neuromodulation sales. Higher market
demand and the new customer agreement on existing business drove the CRM increase, whereas neuromodulation sales declined
as a result of the Customer Bankruptcy and market contraction. During 2019, price reductions reduced Cardiac &
Neuromodulation sales by approximately $6.9 million in comparison to 2018. Foreign currency exchange rate fluctuations did
not have a material impact on Cardiac & Neuromodulation sales during 2019 in comparison to 2018.
In addition to Portable Medical sales, Advanced Surgical, Orthopedic & Portable Medical includes sales to the acquirer of our
AS&O Product Lines, Viant, under the LSA for the sale of products by the Company to Viant. Advanced Surgical, Orthopedics &
Portable Medical sales for 2019 decreased by $0.8 million in comparison to 2018. Price reductions reduced Advanced Surgical,
Orthopedic & Portable Medical sales by $0.7 million in comparison to 2018. Foreign currency exchange rate fluctuations did not
have a material impact on Advanced Surgical, Orthopedic & Portable Medical sales during 2019 in comparison to 2018.
Non-Medical sales for 2019 increased $5.4 million or 10% in comparison to 2018. The increases in Non-Medical sales were
primarily driven by strong demand in the military market and high-single-digit growth with energy customers. Price and foreign
currency exchange rate fluctuations did not have a material impact on Non-Medical sales during 2019 in comparison to 2018.
- 32 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Gross Profit
Changes to gross profit as a percentage of sales (“Gross Margin”) from the prior year were due to the following:
Price(a)
Mix(b)
Customer Bankruptcy(c)
Production efficiencies and volume(d)
Total percentage point change to gross profit as a percentage of sales
% Change
2019 vs. 2018
(1.1)%
0.1
(1.7)
1.1
(1.6)%
__________
(a) Our Gross Margin for 2019 was negatively impacted by price concessions given to our larger OEM customers in return for
long-term volume commitments.
(b) Amount represents the impact to our Gross Margin attributable to changes in the mix of product sales during the period.
(c) Amount represents the impact to our Gross Margin attributable to the aforementioned Customer Bankruptcy.
(d) Represents various increases and decreases to our Gross Margin. Overall, our Gross Margin for 2019 was positively
impacted by production efficiencies, mainly due to our Manufacturing Excellence imperative, as well as higher sales volume
and lower amortization expense.
Over the long-term, we expect our Gross Margin to improve as we execute our manufacturing excellence strategic imperative and
continue to deliver supply chain savings. However, we also expect our Gross Margin to continue to be negatively impacted by
pricing pressures from our customers. It is imperative to drive manufacturing efficiencies and supply chain savings to offset these
pricing pressures.
SG&A Expenses
Changes to SG&A expenses were primarily due to the following (in thousands):
Customer Bankruptcy(a)
Professional fees(b)
Compensation and benefit costs
All other SG&A, net(c)
Net decrease in SG&A Expenses
$ Change
2019 vs. 2018
$
$
2,384
(2,265)
(1,693)
(2,172)
(3,746)
__________
(a) Amount consists primarily of a $2.3 million reserve against outstanding receivables attributable to the aforementioned
Customer Bankruptcy.
(b) Professional fees decreased during 2019 compared to 2018, primarily due to lower legal costs, including legal expenses
incurred related to our on-going patent infringement case. Refer to Note 13 “Commitments and Contingencies” of the Notes
to the Condensed Consolidated Financial Statements contained in Item 8 of this report for information related to this patent
infringement litigation.
(c) Represents net decreases in SG&A expenses, primarily from lower expense for contract services, utilities, depreciation and
recruiting and relocation.
RD&E Expenses
RD&E expenses for 2019 and 2018 were $46.5 million and $48.6 million, respectively, which reflects the impact of increased
customer projects. RD&E expenses are influenced by the 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 development of new technological platform innovations.
- 33 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Other Operating Expenses
OOE was comprised of the following for 2019 and 2018 (in thousands):
Strategic reorganization and alignment(a)
Manufacturing alignment to support growth(b)
Consolidation and optimization costs(c)
Acquisition and integration expenses(d)
Other general expenses(e)
Other operating expenses
2019
2018
Change
$
5,812
$
10,624
$
2,145
—
377
3,817
3,089
844
—
1,508
$
12,151
$
16,065
$
(4,812)
(944)
(844)
377
2,309
(3,914)
__________
(a) As a result of the strategic review of our customers, competitors and markets, we began taking steps in the fourth quarter of
2017 to better align our resources in order to enhance the profitability of our portfolio of products. These initiatives include
improving our 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 our future strategic direction. Expenses for 2019 and
2018 primarily consist of severance costs and fees for professional services.
(b)
In 2017, we initiated several initiatives designed to reduce costs, increase manufacturing capacity to accommodate growth
and improve operating efficiencies. The plan involves the relocation of certain manufacturing operations and expansion of
certain of our facilities.
(c) During 2018, we incurred costs primarily related to the closure of our Clarence, NY facility.
(d) Amounts include expenses related to the purchase of certain assets from USB.
(e) 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. The 2019 amount primarily includes systems
conversion expenses, expenses incurred in connection with the Customer Bankruptcy, and expenses related to the
restructuring of certain legal entities of the Company. Expenses for 2018 primarily include severance costs and fees for
professional services.
Refer to Note 11 “Other Operating Expenses” of the Notes to Consolidated Financial Statements contained in Item 8 of this
report for additional information regarding these initiatives.
Interest Expense
Interest expense decreased $46.8 million to $52.5 million in 2019 from $99.3 million in 2018. We paid down $116.5 million of
debt on our Senior Secured Credit Facilities during 2019. The weighted average interest rates paid on the average principal
amount of debt outstanding during 2019 and 2018 was 4.99% and 4.97%, respectively. The weighted average interest rates paid
in 2019 reflect increases in LIBOR during 2018, partially offset by reductions to the applicable interest rate margin of our Term
Loan A facility. In November 2019, we reduced the applicable interest rate margins by amending our Senior Secured Credit
Facilities. Cash interest expense decreased $6.2 million for 2019 when compared to 2018, primarily due to the decrease in
outstanding borrowings. Debt related charges included in interest expense (i.e. deferred fee and discount amortization) for 2019
were $7.8 million for 2019 compared to $48.4 million for 2018. The decrease in debt related charges during 2019 compared to
2018 is primarily attributable to lower accelerated write-offs (losses from extinguishment of debt) of deferred fees and original
issue discount related to prepayments of portions of our Term Loan B facility and Senior Notes during the respective periods and
a “make-whole” premium of $31.3 million paid as a result of redeeming our Senior Notes in July 2018. We recognized losses
from extinguishment of debt during 2019 and 2018 of $2.5 million and $42.7 million, respectively.
As of December 31, 2019, approximately 20% of our principal amount of debt outstanding was subject to variable rates, in
comparison to approximately 80% as of December 28, 2018. During 2019, we entered into interest rate swap agreements that we
expect will further reduce our exposure to fluctuations in the LIBOR rate. These swap agreements convert $465 million of our
outstanding debt to fixed rate indebtedness for the next three to seven months, as well as extended our $200 million interest rate
swap for an additional three years.
See Note 8 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information
pertaining to our debt.
- 34 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
(Gain) Loss on Equity Investments, Net
During 2019, we realized net losses of $0.5 million on our equity investments compared to net gains of $5.6 million for 2018.
Gains and losses on equity investments are generally unpredictable in nature. During 2019, we recognized an impairment charge
of $1.6 million related to an investment in one of our non-marketable equity securities. The residual amounts for 2019 and 2018
relate to our share of equity method investee gains/losses, including unrealized appreciation of the underlying interests of the
investee. As of December 31, 2019 and December 28, 2018, the carrying value of our equity investments were $22.3 million and
$22.8 million, respectively. See Note 17 “Financial Instruments and Fair Value Measurements” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report for further details regarding these investments.
Other (Income) Loss, Net
Other (Income) Loss, Net was income of $0.6 million during 2019 compared to losses of $0.8 million during 2018. Other
(Income) Loss, Net includes the impact of foreign currency exchange rates on transactions denominated in foreign currencies.
Our foreign currency transaction gains/losses are based on fluctuations of the U.S. dollar relative to the Euro, Mexican peso,
Uruguayan pesos or Malaysian ringgits. The impact of foreign currency exchange rates on transactions denominated in foreign
currencies included in Other (Income) Loss, Net for 2019 and 2018 were losses of $0.04 million and $1.6 million, respectively.
We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. However, fluctuations in
foreign currency exchange rates could have a significant impact, positive or negative, on our financial results in the future.
Provision for Income Taxes
During 2019 and 2018, our provision for income taxes was $14.0 million and $14.1 million, respectively. The stand-alone U.S.
component of the effective tax rate for 2019 reflected a $5.7 million provision on $40.2 million of pre-tax book income (14.2%)
versus a $7.0 million provision on $4.3 million of pre-tax book losses for 2018. The stand-alone International component of the
effective tax rate for 2019 reflected an $8.3 million provision on $65.0 million of pre-tax book income (12.7%) versus a $7.1
million provision on $65.4 million of pre-tax book income (10.9%) for 2018. The provision for income taxes for 2019 differs
from the U.S. statutory rate due to the following (dollars in thousands):
Income before provision for income taxes
$ 40,203
$ 64,990
$ 105,193
U.S.
International
Combined
$
%
$
%
$
%
Provision at statutory rate
Federal tax credits (including R&D)
Foreign rate differential
Stock-based compensation
Uncertain tax positions
State taxes, net of federal benefit
U.S. tax on foreign earnings, net of §250 deduction
Valuation allowance
Other
Provision for income taxes
$
$
8,443
(4,751)
—
(2,422)
(920)
1,106
5,201
(956)
(5)
5,696
21.0% $ 13,648
(46)
(11.8)
(5,479)
—
(6.0)
—
(2.3)
2.8
—
—
21.0% $ 22,091
(4,797)
(0.1)
(5,479)
(8.4)
(2,422)
—
(920)
1,106
—
—
12.9
(2.4)
—
—
(650)
806
—
(1.0)
1.2
5,201
(1,606)
801
21.0%
(4.6)
(5.2)
(2.3)
(0.9)
1.1
4.9
(1.5)
0.8
14.2% $
8,279
12.7% $ 13,975
13.3%
On December 22, 2017, the Tax Reform Act was signed into law. This legislation significantly changes U.S. tax law by, among
other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on
deemed repatriated earnings of foreign subsidiaries. The Tax Reform Act permanently reduces the U.S. corporate income tax rate
from a maximum of 35% to a flat 21% rate, effective January 1, 2018.
While the Tax Reform Act provides for a territorial tax system, beginning in 2018, it also includes a new U.S. tax on foreign
earnings, the global intangible low-taxed income (“GILTI”) provision.
- 35 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
The GILTI provision requires us to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s
tangible assets in our U.S. income tax return. The Company has adopted the approach of recording the consequences of the new
GILTI provision of the Tax Reform Act as a period cost when incurred.
The Company’s effective tax rate for 2019 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated
impact of Federal Tax Credits (including R&D credits and Foreign tax credits), stock based compensation windfalls, and the
impact of the Company’s earnings realized in foreign jurisdictions with statutory rates that are different than the U.S. federal
statutory rate. These benefits are partially offset by the impact of U.S taxes on foreign earnings, including the GILTI provision
which requires the Company to include foreign subsidiary earnings in excess of a deemed return on a foreign subsidiary’s tangible
assets in its U.S. income tax return. The U.S. tax on foreign earnings is reflected net of a statutory deduction of 50% of the GILTI
inclusion (subject to limitations based on U.S. taxable income, if any) and net of the Tax Reform Act provision (Foreign Derived
Intangible Income, or “FDII”) that provides a 37.5% deduction to domestic companies for certain foreign sales and services
income. The primary foreign jurisdictions in which we operate and the statutory tax rate for each respective jurisdiction include
Switzerland (22%), Mexico (30%), Uruguay (25%), and Ireland (12.5%). We currently have a tax holiday in Malaysia through
April 2023 if certain conditions are met.
In addition to the impact of the Tax Reform Act described above, there is a prospective potential for volatility of our effective tax
rate due to several factors, including changes in the mix of pre-tax income and the jurisdictions to which it relates, business
acquisitions, settlements with taxing authorities, changes in tax rates, and foreign currency exchange rate fluctuations. In addition,
we continue to explore tax planning opportunities that may have a material impact on our effective tax rate.
We believe it is reasonably possible that a reduction of approximately $0.6 million of the balance of unrecognized tax benefits
may occur within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of
December 31, 2019, approximately $4.4 million of unrecognized tax benefits would favorably impact the effective tax rate (net of
federal impact on state issues), if recognized.
Liquidity and Capital Resources
(dollars in thousands)
Cash and cash equivalents
Working capital from continuing operations
Current ratio from continuing operations
December 31,
2019
December 28,
2018
$
13,535
$
236,317
2.32
25,569
251,680
2.53
Cash and cash equivalents at December 31, 2019 decreased by $12.0 million from December 28, 2018 as excess cash on hand
was used to pay down our debt. Working capital from continuing operations decreased by $15.4 million from December 28,
2018, primarily due to a decrease in inventory and cash balances, an increase in accounts payable and accrued expenses, partially
offset by an increase in contract assets and accounts receivable.
At December 31, 2019, $12.6 million of our cash and cash equivalents were held by foreign subsidiaries. We intend to limit our
distributions from foreign subsidiaries to previously taxed income or current period earnings. If distributions are made utilizing
current period earnings, we will record foreign withholding taxes in the period of the distribution.
Summary of Cash Flow
The following cash flow summary information includes cash flows related to discontinued operations (in thousands):
Cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effect of foreign currency exchange rates on cash and cash equivalents
Net change in cash and cash equivalents
2019
2018
$
$
$
165,358
(58,862)
(117,926)
(604)
(12,034) $
167,299
536,670
(725,080)
2,584
(18,527)
- 36 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Operating Activities - During 2019, we generated $165.4 million in cash from operations compared to $167.3 million in 2018.
Cash income (i.e. net income plus adjustments to reconcile net income to net cash provided by operating activities) increased by
$28.3 million in fiscal year 2019 primarily as a result of production efficiencies realized and lower interest payments, which
outpaced the loss of operating income associated with the sale of the AS&O Product Line. This increase was offset by other
significant changes in assets and liabilities affecting cash flows, mainly from a decrease in cash flows from accounts receivable
and contract assets, which increased to support our sales growth, partially offset by an increase in cash flows from inventory.
Investing Activities – The $595.5 million decrease in net cash used in investing activities was primarily attributable to the lower
net cash proceeds from the sale of the AS&O Product Line in 2018 and cash paid of $15.0 million for the acquisition of certain
assets from USB in 2019. Investing activities for the 2019 included $4.8 million of cash proceeds from Viant resulting from the
final net working capital adjustment for the sale of the AS&O Product Line, compared to net cash proceeds from the sale of the
AS&O Product Line of approximately $582 million in 2018. Capital spending for 2019 increased by $3.3 million to $48.2
million compared to 2018. Our current expectation is that capital spending for for 2020 will be in the range of $60 million to $70
million. We anticipate that cash on hand, cash flows from operations and available borrowing capacity under our Revolving
Credit Facility will be sufficient to fund these capital expenditures.
Financing Activities – Net cash used in financing activities during 2019 was $117.9 million compared to $725.1 million in 2018.
Financing activities during 2019 included payments of $117.9 million related to paying down our debt obligations compared to
$732.5 million in 2018. In connection with the completion of the sale of our AS&O Product Line, during 2018 we paid $579.3
million to pay down our debt, which included $360 million of our 9.125% Senior Notes, a “make-whole” premium of $31.3
million, $114 million of our Term Loan B facility and $74 million outstanding on our $200 million revolving credit facility (the
“Revolving Credit Facility”).
Capital Structure - As of December 31, 2019, our capital structure consists of $815 million of debt, net of deferred fees and
discounts, under our senior secured credit facilities (the “Senior Secured Credit Facilities”) and approximately 33 million shares
of common stock outstanding. We have access to $193 million of borrowing capacity under our Revolving Credit Facility. We
are also authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of
December 31, 2019, our contractual debt service obligations for 2020, consisting of principal and interest on our outstanding debt,
are estimated to be approximately $70 million. Actual principal and interest payments may be higher if, for instance, the
applicable interest rates on our Senior Secured Credit Facilities increase or we pay principal amounts in excess of the required
minimums reflected in the contractual debt service obligations above.
Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash
equivalents and potential borrowings under our Revolving Credit Facility are sufficient to meet our working capital, debt service
and capital expenditure requirements for the next twelve months. If our future financing needs increase, we may need to arrange
additional debt or equity financing. We continually evaluate and consider from time to time various financing alternatives to
supplement our existing financial resources, including our Senior Secured Credit Facilities. However, we cannot be assured that
we will be able to enter into any such arrangements on acceptable terms or at all.
Credit Facilities - As of December 31, 2019, we had senior secured credit facilities (the “Senior Secured Credit Facilities”) that
consist of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), which had available borrowing capacity of
$193.2 million as of December 31, 2019, (ii) a $267 million term loan A facility (the “TLA Facility”), and (iii) an $558 million
term loan B facility (the “TLB Facility”). The Senior Secured Credit Facilities will mature on October 27, 2022. The Senior
Secured Credit Facilities include a mandatory prepayment provision customary for credit facilities of its nature.
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum total net leverage ratio of
4.50:1.00, subject to step downs of 25 basis points in both the first and second quarters of 2020 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
3.00:1.00. As of December 31, 2019, the Company was in compliance with these financial covenants. The TLB Facility does not
contain any financial maintenance covenants. As of December 31, 2019, our total net leverage ratio, calculated in accordance
with our credit agreement, was approximately 2.6 to 1.0. For the twelve month period ended December 31, 2019, our ratio of
adjusted EBITDA to interest expense, calculated in accordance with our credit agreement, was approximately 7.0 to 1.0.
Failure to comply with these financial covenants would result in an event of default as defined under the Revolving Credit
Facility and TLA Facility unless waived by the lenders. An event of default may result in the acceleration of our indebtedness. As
a result, management believes that compliance with these covenants is material to us. As of December 31, 2019, our adjusted
EBITDA would have to decline by approximately $129 million, or approximately 41%, in order for us to not be in compliance
with our financial covenants. The Revolving Credit Facility is supported by a consortium of twelve lenders with no lender
controlling more than 27% of the facility.
Refer to Note 8 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for further description
of our outstanding debt.
- 37 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Contractual Obligations
Presented below is a summary of contractual obligations and other minimum commitments as of December 31, 2019. Refer to
Note 13 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report
for additional information regarding self-insurance liabilities, which are not reflected in the table below.
Payments due by period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
Principal amount of debt outstanding
Interest on debt(a)
Operating lease obligations(b)
Other(c)
$
825,474
$
37,500
$
787,974
$
89,036
54,871
86,367
32,822
9,793
78,018
56,214
16,420
8,349
— $
—
12,034
—
Total
$
1,055,748
$
158,133
$
868,957
$
12,034
$
—
—
16,624
—
16,624
(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 December 31, 2019, and exclude the impact of the debt discount amortization and
impact of interest rate swap agreements. Refer to Note 8 “Debt” of the Notes to Consolidated Financial Statements contained
in Item 8 of this report for additional information regarding long-term debt.
(b) Refer to Note 14 “Leases” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional
information about our operating lease obligations.
(c) Amounts include inventory purchase commitments, which are legally binding and specify minimum purchase quantities.
These commitments do not include open purchase orders.
This table does not reflect $4.4 million of unrecognized tax benefits, as we are uncertain if or when such amounts may be settled.
Refer to Note 12 “Income Taxes” of the Notes to Consolidated Financial Statements in Item 8 of this report for additional
information about these unrecognized tax benefits.
Impact of Recently Issued Accounting Standards
In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards
Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our
Consolidated Financial Statements. Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards
and their potential impact on our financial condition or results of operations.
CRITICAL ACCOUNTING ESTIMATES
Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial
statements which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our
consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related
disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors
that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material
adjustment to the consolidated financial statements.
We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the
estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the
estimates and assumptions would have a material effect on the consolidated financial statements. This listing is not a
comprehensive list of all of our accounting policies. For further information regarding the application of these and other
accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements
contained in Item 8 of this report.
- 38 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
Inventories
Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of
saleable quality.
Historically, our inventory adjustment has been adequate to cover our losses. However, variations in methods or assumptions
could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we
fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a
greater amount of overhead costs, which would negatively impact our net income.
Valuation of Goodwill, Intangible and Other Long-Lived Assets
We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our goodwill,
intangible and other long-lived assets. Goodwill and intangible assets determined to have an indefinite useful life are not
amortized. Instead, these assets are evaluated for impairment on an annual basis on the last day of our fiscal year and whenever
events or business conditions change that could indicate that the asset is impaired. Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.
Evaluation of goodwill for impairment
We test each reporting unit’s goodwill for impairment on the last day of our fiscal year and between annual tests if an event occurs
or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. In
conducting this annual impairment testing, we may first perform a qualitative assessment of whether it is more-likely-than-not
that a reporting unit’s fair value is less than its carrying value. If not, no further goodwill impairment testing is required. If it is
more-likely-than-not that a reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative
assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its
carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized equal to the
excess, limited to the amount of goodwill allocated to that reporting unit.
We performed a qualitative assessment of our Medical reporting unit as of December 31, 2019. As part of this analysis, we
evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic
conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall
financial performance of the reporting unit. The assessment indicated that it was more likely than not that the fair value of the
Medical reporting unit exceeded its carrying value. We elected to bypass the qualitative assessment and performed a quantitative
analysis for our Non-Medical reporting unit. Resulting from the quantitative analysis, the fair value exceeded the carrying value
of the Non-Medical reporting unit by approximately 160%. We do not believe that any of our reporting units are at risk for
impairment. However, changes to the factors considered above could affect the estimated fair value of one or more of our
reporting units and could result in a goodwill impairment charge in a future period. We may be unaware of one or more
significant factors that, if we had been aware of, would cause our conclusion to change, which could result in a goodwill
impairment charge in a future period.
Evaluation of indefinite-lived intangible assets for impairment
Our indefinite-lived intangible assets include the Greatbatch Medical and Lake Region Medical tradenames. Similar to goodwill,
we perform an annual impairment review of our indefinite-lived intangible assets on the last day of our fiscal year, unless events
occur that trigger the need for an interim impairment review. We have the option to first assess qualitative factors in determining
whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we
determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to
estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value. Fair value is
estimated using the relief-from-royalty method. Significant assumptions inherent in this methodology include estimates of
royalty rates and discount rates. The discount rate applied is based on the risk inherent in the respective intangible assets and
royalty rates are based on the rates at which comparable tradenames are being licensed in the marketplace. Impairment, if any, is
based on the excess of the carrying value over the fair value of these assets.
- 39 -
MANAGEMENT’S DISCUSSION AND ANALYSIS
We performed a quantitative assessment to test our indefinite-lived intangible assets for impairment as of December 31, 2019.
For the Greatbatch Medical tradename, the excess of the estimated fair value over carrying value (expressed as a percentage of
carrying value) was in excess of its carrying value of $20 million by approximately 288% as of December 31, 2019. The Lake
Region Medical tradename had an excess of the estimated fair value over carrying value of approximately 55% and a carrying
value of $70 million at December 31, 2019. We do not believe that our indefinite-lived intangible assets are at risk for
impairment. However, a significant increase in the discount rate, decrease in the terminal growth rate, increase in tax rates,
decrease in the royalty rate or substantial reductions in our end-markets and volume assumptions could have a negative impact on
the estimated fair values of either of our tradenames and require us to recognize impairments of these indefinite-lived intangible
assets in a future period.
Evaluation of long-lived assets for impairment
Our long-lived assets consist primarily of property, plant and equipment and definite-lived intangible assets, including purchased
technology and patents, and customer lists. Property, plant and equipment and definite-lived intangible assets are carried at cost.
The cost of property, plant and equipment is charged to depreciation expense over the estimated life of the operating assets,
primarily on a straight-line basis. Definite-lived intangible assets are amortized over the expected life of the asset. We assess
long-lived assets and definite-lived intangible assets for impairment when events occur or circumstances change that would
indicate that the carrying value of the asset may not be recoverable.
Factors that we consider in deciding when to perform an impairment review include, but are not limited to: a significant decrease
in the market price of the asset (asset group); a significant change in the extent or manner in which the asset (asset group) is being
used or in its physical condition; a significant change in legal factors or business climate that could affect the value of a long-lived
asset (asset group), including an action or assessment by a regulator; an accumulation of costs significantly in excess of the
amount originally expected for the acquisition or construction of a long-lived asset (asset group); a current-period operating or
cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing
losses associated with the use of a long-lived asset (asset group); and a current expectation that it is more likely than not that a
long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful
life.
When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) or definite-lived intangible
asset(s) exceeds the related undiscounted future cash flows. In cases where the carrying value exceeds the undiscounted future
cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow
analysis. When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there
are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/
amortization in order to fully depreciate/amortize the asset over its shorter useful life.
Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant
management judgment. Events could occur that would materially affect our estimates and assumptions. Unforeseen changes,
such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, amongst
other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived
assets, definite-lived intangible assets or their estimated useful lives. Also, as we make manufacturing process conversions and
other facility consolidation decisions, we must make subjective judgments regarding the remaining cash flows and useful lives of
our assets, primarily manufacturing equipment and buildings. Significant changes in these estimates and assumptions could
change the amount of future depreciation or amortization expense or could create future impairments of these long-lived assets
(asset groups) or definite-lived intangible assets.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
In the normal course of business, we are exposed to market risk primarily due to changes in foreign currency exchange rates and
interest rates. Changes in these rates could result in fluctuations in our earnings and cash flows. We regularly assess these risks
and have established policies and business practices to help protect against the adverse effects of these and other potential
exposures. However, fluctuations in foreign currency exchange rates and interest rates could have a significant impact, positive or
negative, on our financial results in the future.
- 40 -
Foreign Currency Exchange Rate Risk
We have foreign operations in Ireland, Israel, Malaysia, Mexico, Switzerland, and Uruguay which expose us to foreign currency
exchange rate fluctuations due to transactions denominated in Euros, Israeli shekels, Malaysian ringgits, Mexican pesos, Swiss
francs, and Uruguayan pesos, respectively. We continuously evaluate our foreign currency risk, and we use operational hedges, as
well as forward currency exchange rate contracts, to manage the impact of currency exchange rate fluctuations on earnings and
cash flows. We do not enter into currency exchange rate derivative instruments for speculative purposes. A hypothetical 10%
change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of
approximately $5 million on our 2019 annual sales. This amount is not indicative of the hypothetical net earnings impact due to
the partially offsetting impacts on cost of sales and operating expenses in those currencies. We estimate that foreign currency
exchange rate fluctuations during 2019 decreased sales in comparison to 2018 by $2.6 million.
We had currency derivative instruments outstanding in the notional amount of $11.2 million as of December 31, 2019 and $55.7
million as of December 28, 2018. As of December 31, 2019 and December 28, 2018, we recorded a $0.7 million asset and $0.7
million liability, respectively, to recognize the fair value of these derivative instruments on our Consolidated Balance Sheets. The
amounts recorded during 2019 related to our forward contracts were a decrease in Sales of $1.3 million and a decrease in Cost of
Sales of $1.5 million. Refer to Note 17 “Financial Instruments and Fair Value Measurements” to the Consolidated Financial
Statements contained in Item 8 of this report for additional information regarding our outstanding forward contracts.
To the extent that our monetary assets and liabilities, including short-term and long-term intercompany loans, are recorded in a
currency other than the functional currency of the subsidiary, these amounts are remeasured each period at the period-end
exchange rate, with the resulting gain or loss being recorded in Other (Income) Loss, Net, in the Consolidated Statements of
Operations. Net foreign currency transaction gains and losses included in Other (Income) Loss, Net, amounted to a loss of $0.04
million for 2019 and a loss of $1.6 million for 2018. The loss in 2018 was primarily related to the remeasurement of
intercompany loans and fluctuations of the U.S. dollar relative to the Euro. During 2017 and 2018, we took steps to eliminate the
majority of these intercompany balances, resulting in the significantly lower foreign currency exchange rate losses in 2019
compared to 2018.
We translate all assets and liabilities of our foreign operations where the U.S. dollar is not the functional currency at the period-
end exchange rate and translate sales and expenses at the average exchange rates in effect during the period. The net effect of
these translation adjustments is recorded in the Consolidated Financial Statements as Comprehensive Income (Loss). The
translation adjustment for 2019 was a $7.9 million loss and primarily related to the strengthening of the U.S. dollar relative to the
Euro. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign
subsidiaries. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency net
assets would have had an impact of approximately $33 million on our foreign net assets as of December 31, 2019.
Interest Rate Risk
We regularly monitor interest rate risk attributable to our outstanding debt obligations. From time to time, we enter into interest
rate swap agreements in order to reduce the cash flow risk caused by interest rate changes on our outstanding floating rate
borrowings.
As of December 31, 2019, we had $825 million in principal amount of debt outstanding. Interest rates on our Revolving Credit
Facility, TLA Facility and TLB Facility, reset, at our option, based upon the prime rate or LIBOR rate, thus subjecting us to
interest rate risk. Our TLB Facility has a 1.00% LIBOR floor, thus is only variable when LIBOR interest rates are above 1.00%.
A hypothetical one percentage point (100 basis points) change in the LIBOR rate on the $160 million of unhedged variable rate
debt outstanding at December 31, 2019 would increase our interest expense by approximately $2 million.
As of December 31, 2019, approximately 20% of our principal amount of debt outstanding was subject to variable rates, in
comparison to approximately 80% as of December 28, 2018. During 2019, we entered into interest rate swap agreements that we
expect will further reduce our exposure to fluctuations in the LIBOR rate. These swap agreements convert $465 million of our
outstanding debt to fixed rate indebtedness for the next three to six months, as well as extended our $200 million interest rate
swap for an additional three years.
Under these swap agreements, we pay a fixed rate of interest and receive a floating rate equal to one-month 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 amount recorded during 2019 related to these
interest rate swaps was a reduction of $1.6 million to Interest Expense. The swaps are being accounted for as cash flow hedges.
As of December 31, 2019, these swaps had an unfavorable fair value of $3.1 million.
Refer to Note 8 “Debt” and Note 17 “Financial Instruments and Fair Value Measurements” of the Notes to Consolidated Financial
Statements in Item 8 of this report for additional information about our outstanding debt and interest rate swap agreements,
respectively.
- 41 -
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEGER HOLDINGS CORPORATION
Index to Consolidated Financial Statements
Page
Management’s Report on Internal Control Over Financial Reporting.....................................................................................
43
Reports of Independent Registered Public Accounting Firm...................................................................................................
44
Consolidated Balance Sheets as of December 31, 2019 and December 28, 2018...................................................................
47
Consolidated Statements of Operations for the years ended December 31, 2019, December 28, 2018 and
December 29, 2017..............................................................................................................................................................
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, December 28, 2018
and December 29, 2017........................................................................................................................................................
Consolidated Statements of Cash Flows for the years ended December 31, 2019, December 28, 2018 and
December 29, 2017..............................................................................................................................................................
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, December 28, 2018
and December 29, 2017........................................................................................................................................................
48
49
50
51
Notes to Consolidated Financial Statements............................................................................................................................
52
- 42 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s certifying officers are responsible for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is designed and maintained under the supervision of its
certifying officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally
accepted in the United States of America.
As of December 31, 2019, management conducted an assessment of the effectiveness of the Company’s internal control over
financial reporting based on the framework established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined
that the Company’s internal control over financial reporting as of December 31, 2019 is effective. As permitted by guidance
issued by the Securities and Exchange Commission, management excluded from its assessment of its system of internal control
over financial reporting the operations associated with the assets acquired from US BioDesign, LLC, which were acquired on
October 7, 2019. The acquired assets and operations constitute 1% of net assets, less than 1% of total assets, less than 1% of
sales, and less than 1% of net income of the consolidated financial statement amounts as of and for the year ended December 31,
2019.
The effectiveness of internal control over financial reporting as of December 31, 2019 has been audited by Deloitte & Touche
LLP, the Company’s independent registered public accounting firm.
Dated: February 20, 2020
/s/ Joseph W. Dziedzic
Joseph W. Dziedzic
President & Chief Executive Officer
/s/ Jason K. Garland
Jason K. Garland
Executive Vice President & Chief Financial Officer
- 43 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Integer Holdings Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Integer Holdings Corporation and subsidiaries (the “Company”)
as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2019
of the Company and our report dated February 20, 2020 expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule and included an explanatory paragraph regarding the Company’s adoption of a new
accounting standard.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment
the internal control over financial reporting at US BioDesign, LLC, which was acquired on October 7, 2019, and whose financial
statements constitute 1% and less than 1% of net and total assets, respectively, less than 1% of sales, and less than 1% of net
income of the consolidated financial statement amounts as of and for the year ended December 31, 2019. Accordingly, our audit
did not include the internal control over financial reporting at US BioDesign, LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Williamsville, New York
February 20, 2020
- 44 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Integer Holdings Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Integer Holdings Corporation and subsidiaries (the
“Company”) as of December 31, 2019 and December 28, 2018, the related consolidated statements of operations, comprehensive
income, cash flows, and stockholders’ equity for the years ended December 31, 2019, December 28, 2018, and December 29,
2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2019 and December 28, 2018, and the results of its operations and its cash flows for the years ended December 31,
2019, December 28, 2018, and December 29, 2017, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 20, 2020 expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in fiscal year
2019 due to the adoption of Accounting Standards Update No. 2016-02, Leases (Topic 842), as amended, using the option to not
restate comparative periods and apply the standard as of the date of initial application.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that
were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are
material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and
we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Inventories - Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
Inventories are stated at the lower of cost, determined using the first-in first-out method, or net realizable value. The valuation of
inventory requires the Company to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.
Variations in assumptions used could have a material impact to the amount of write-downs for excess, obsolete or expired
inventory. A significant change in the timing or level of demand for specific products may result in recording material adjustments
for excess, obsolete or expired inventory in the future.
Because the calculation for the valuation of the obsolete or excess inventory, as well as inventory that is not of saleable quality
involved the use of both future customer orders and forecasted demand expectations to determine the timing or level of demand
for the specific product, auditing the valuation of the reserve involved especially subjective judgment.
- 45 -
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the valuation of obsolete or excess inventory, as well as inventory that is not of saleable quality,
included the following, among others:
• We tested the effectiveness of controls over management’s review of the periodic calculation of the valuation for slow
moving, excess, and obsolete inventory.
• We tested management’s process for determining the valuations of inventory, including:
We tested the accuracy and completeness of the source information underlying the determination of the
valuation for slow moving, excess, and obsolete inventory.
We tested the demand forecasts by obtaining documentation to support customer orders, contracts, historical
and future sales that corroborate the amount stated for demand.
We evaluated whether the methodology and assumptions applied by management are reasonable and consistent
with the nature of the inventory.
We performed a retrospective review of the prior-year estimates for slow moving, excess, and obsolete
inventories to determine whether management’s judgments and assumptions relating to those estimates indicate
a possible bias.
Other Intangible Assets, Net - Lake Region Medical Tradename - Refer to Notes 1 and 6 to the financial statements
Critical Audit Matter Description
The carrying value of the Lake Region Medical tradename intangible asset was $70 million as of December 31, 2019. The
Company assesses its indefinite-lived intangible assets for impairment at least annually by comparing the fair value of the
indefinite-lived asset to the carrying value. The fair value of the tradename is estimated using the relief-from-royalty method. The
determination of the fair value requires management to make estimates and use assumptions, including those assumptions related
to royalty rates for similar transactions and the discount rate to estimate the net present value of cash flows that would be derived
from the royalties. Changes in these assumptions could have a significant impact on the fair value of the Lake Region Medical
tradename asset and a significant change in fair value could cause a material impairment of the asset.
Given the determination of fair value of the Lake Region Medical tradename asset requires management to make significant
estimates and assumptions relating to the selection of royalty and discount rates, performing audit procedures to evaluate the
reasonableness of such estimates and assumptions required a high degree of auditor judgment and an increased extent of effort,
including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the assumptions used for the selection of the royalty rate and discount rate, included the following,
among others:
• We performed sensitivity analysis of significant assumptions to evaluate changes in the fair value of the Lake Region
Medical tradename asset that would result from changes in the assumptions.
• We tested the effectiveness of controls over management’s intangible asset impairment evaluation, including those over
the determination of the fair value of the Lake Region Medical tradename asset, such as controls related to
management’s selection of the royalty and discount rates.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the royalty rate and discount rate by:
Testing the source information underlying the determination of the royalty and discount rates and the
mathematical accuracy of the calculation.
Developing a range of independent estimates and comparing those to both market and industry data as well as to
the royalty and discount rates selected by management.
/s/ Deloitte & Touche LLP
Williamsville, New York
February 20, 2020
We have served as the Company’s auditor since 1985.
- 46 -
INTEGER HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $2.4 million and $0.6
million, respectively
Inventories
Contract assets
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangible assets, net
Deferred income taxes
Operating lease assets
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Income taxes payable
Operating lease liabilities
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Operating lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or
outstanding
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,847,017 and
32,624,494 shares issued, respectively; 32,700,471 and 32,473,167 shares
outstanding, respectively
Additional paid-in capital
Treasury stock, at cost, 146,546 and 151,327 shares, respectively
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2019
December 28,
2018
$
13,535
$
25,569
191,985
167,256
24,767
17,852
415,395
246,185
839,617
775,784
4,438
42,379
29,295
185,501
190,076
—
15,104
416,250
231,269
832,338
812,338
3,937
—
30,549
$
2,353,093
$
2,326,681
$
37,500
$
64,975
3,023
7,507
66,073
179,078
777,272
187,978
37,114
19,163
37,500
57,187
9,393
—
60,490
164,570
888,007
203,910
—
9,701
1,200,605
1,266,188
—
33
701,018
(8,809)
440,258
19,988
—
33
691,083
(8,125)
344,498
33,004
1,152,488
1,060,493
$
2,353,093
$
2,326,681
The accompanying notes are an integral part of these consolidated financial statements.
- 47 -
INTEGER HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
Sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative expenses
Research, development and engineering costs
Other operating expenses
Total operating expenses
Operating income
Interest expense
(Gain) loss on equity investments, net
Other (income) loss, net
Income from continuing operations before taxes
Provision (benefit) for income taxes
Income from continuing operations
Discontinued operations:
Income (loss) from discontinued operations before taxes
Provision (benefit) for income taxes
Income (loss) from discontinued operations
Net income
Basic earnings (loss) per share:
Income from continuing operations
Income (loss) from discontinued operations
Basic earnings per share
Diluted earnings (loss) per share:
Income from continuing operations
Income (loss) from discontinued operations
Diluted earnings per share
Weighted average shares outstanding:
Basic
Diluted
December 31,
2019
Fiscal Year Ended
December 28,
2018
December 29,
2017
$
1,258,094
$
1,215,012
$
1,136,080
903,084
355,010
138,695
46,529
12,151
197,375
157,635
52,545
475
(578)
105,193
13,975
852,347
362,665
142,441
48,604
16,065
207,110
155,555
99,310
(5,623)
752
61,116
14,083
$
91,218
$
47,033
$
$
$
$
$
5,296
178
5,118
96,336
2.80
0.16
2.95
2.76
0.15
2.92
$
$
$
$
188,313
67,382
120,931
167,964
1.46
3.76
5.23
1.44
3.71
5.15
$
$
$
$
782,070
354,010
143,073
48,850
36,438
228,361
125,649
63,972
1,565
10,853
49,259
(37,828)
87,087
(27,432)
(7,024)
(20,408)
66,679
2.77
(0.65)
2.12
2.72
(0.64)
2.08
32,627
33,037
32,136
32,596
31,402
32,056
The accompanying notes are an integral part of these consolidated financial statements.
- 48 -
INTEGER HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands except per share data)
Comprehensive Income
Net income
Other comprehensive income (loss):
Foreign currency translation gain (loss)
Net change in cash flow hedges, net of tax
Defined benefit plan liability adjustment, net of tax
Other comprehensive income (loss), net
Comprehensive income
December 31,
2019
Fiscal Year Ended
December 28,
2018
December 29,
2017
$
96,336
$
167,964
$
66,679
(7,900)
(4,580)
(536)
(13,016)
83,320
$
(19,925)
16
302
(19,607)
148,357
$
65,860
2,243
76
68,179
$
134,858
The accompanying notes are an integral part of these consolidated financial statements.
- 49 -
INTEGER HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
Debt related charges included in interest expense
Stock-based compensation
Non-cash charges related to customer bankruptcy
Non-cash lease expense
Non-cash (gain) loss on equity investments
Other non-cash (gains) losses
Deferred income taxes
Gain on sale of discontinued operations
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchase of equity investments
Proceeds from sale of discontinued operations
Acquisition
Other investing activities
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Principal payments of long-term debt
Proceeds from senior secured revolving line of credit
Payments of senior secured revolving line of credit
Proceeds from the exercise of stock options
Payment of debt issuance and redemption costs
Tax withholdings related to net share settlements of restricted stock awards
Net cash used in financing activities
Effect of foreign currency exchange rates on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
December 31,
2019
Fiscal Year Ended
December 28,
2018
December 29,
2017
$
96,336
$
167,964
$
66,679
77,895
7,772
9,294
21,695
7,443
475
(162)
(10,285)
(4,974)
(6,976)
3,724
(31,060)
1,887
(2,744)
(4,962)
165,358
(48,198)
28
(417)
4,734
(15,009)
—
(58,862)
(111,500)
34,000
(39,000)
3,242
(1,385)
(3,283)
(117,926)
(604)
(12,034)
25,569
88,988
49,110
10,470
—
—
(5,623)
148
61,126
(194,965)
9,289
(16,094)
8,527
(94)
(11,756)
209
167,299
(44,908)
1,379
(1,230)
581,429
—
—
102,796
10,911
14,680
—
—
2,965
7,110
(59,212)
—
(34,597)
(986)
4,854
4,887
14,977
14,293
149,357
(47,301)
472
(1,316)
—
—
209
536,670
(47,936)
(631,469)
5,000
(74,000)
12,409
(31,991)
(5,029)
(725,080)
2,584
(18,527)
44,096
(162,558)
50,000
(16,000)
19,324
(2,360)
(75)
(111,669)
2,228
(8,020)
52,116
44,096
The accompanying notes are an integral part of these consolidated financial statements.
- 50 -
$
13,535
$
25,569
$
INTEGER HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Total equity, beginning balance
Common stock and additional paid-in capital
Balance, beginning of period
Cumulative effect adjustment of the adoption of ASU 2016-09
Stock awards exercised or vested
Stock-based compensation
Balance, end of period
Treasury stock
Balance, beginning of period
Treasury shares purchased
Treasury shares reissued
Balance, end of period
Retained earnings
Balance, beginning of period
Cumulative effect adjustment of the adoption of ASU 2016-09
Reclassification of certain tax effects related to the adoption of
ASU 2018-02
Adoption of ASC 842 (Note 1)
Net income
Balance, end of period
Accumulated other comprehensive income
Balance, beginning of period
Other comprehensive income (loss)
Reclassification of certain tax effects related to the adoption of
ASU 2018-02
Reclassified to earnings, net (Note 16)
Balance, end of period
Total equity, ending balance
December 31,
2019
Fiscal Year Ended
December 28,
2018
December 29,
2017
$
1,060,493
$
893,381
$
725,239
691,116
—
641
9,294
701,051
(8,125)
(2,961)
2,277
(8,809)
344,498
—
—
(576)
96,336
440,258
33,004
(13,016)
—
—
19,988
669,788
—
10,858
10,470
691,116
(4,654)
(5,025)
1,554
(8,125)
176,068
—
466
—
167,964
344,498
52,179
(19,607)
(466)
898
33,004
$
1,152,488
$
1,060,493
$
637,986
(812)
17,934
14,680
669,788
(5,834)
—
1,180
(4,654)
109,087
302
—
—
66,679
176,068
(16,000)
68,179
—
—
52,179
893,381
The accompanying notes are an integral part of these consolidated financial statements.
- 51 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly traded
corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is one of the largest medical device
outsource manufacturers in the world serving the cardiac, neuromodulation, orthopedics, vascular, advanced surgical and
portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of
patients worldwide. In addition to medical technologies, the Company develops batteries for high-end niche applications in the
energy, military, and environmental markets. 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. Refer to Note 2 “Acquisition, Divestiture and Discontinued Operations” for further details of these transactions.
Basis of Presentation and Principles of Consolidation
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the
United States of America (“GAAP”) and include the accounts of Integer Holdings Corporation and its wholly owned
subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The results of operations of the AS&O Product Line are reported as discontinued operations in the Consolidated Statements of
Operations for all periods presented. The 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 “Acquisition, Divestiture and Discontinued Operations.” All
results and information in the consolidated financial statements are presented as continuing operations and exclude the AS&O
Product Line unless otherwise noted specifically as discontinued operations.
The Company organizes its business into two reportable segments: (1) Medical and (2) Non-Medical. The discontinued
operations of the AS&O Product Line were reported in the Medical segment. Refer to Note 18 “Segment and Geographic
Information,” for additional information on the Company’s reportable segments.
Fiscal Year
Historically, the Company has utilized a 52/53-week fiscal year ending on the Friday nearest December 31. On October 9,
2019, the Board of Directors of Integer approved a change to the Company’s fiscal year from a year ending on the Friday
nearest December 31 to a calendar year ending on December 31. The Company’s current fiscal year began on December 29,
2018 and ended on December 31, 2019. Fiscal years subsequent to 2019 will begin on January 1 and end on December 31 of
each year. The Company’s first three fiscal quarters in each fiscal year will continue to end on the Friday nearest March 31,
June 30 and September 30, respectively. Fiscal years 2018 and 2017 consisted of fifty-two weeks and ended on December 28,
2018 and December 29, 2017, respectively.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of sales and expenses during the reporting periods. Actual results could differ materially from
those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year's presentation, which management does not
consider to be material.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of
three months or less.
- 52 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts
receivable. A significant portion of the Company’s sales and accounts receivable are to three customers, all in the medical
device industry, and, as such, the Company is directly affected by the condition of those customers and that industry. However,
the credit risk associated with trade receivables is partially mitigated due to the stability of those customers. The Company
performs on-going credit evaluations of its customers. Note 18 “Segment and Geographic Information” contains information
on sales and accounts receivable for these customers. The Company maintains cash deposits with major banks, which from time
to time may exceed insured limits. The Company performs on-going credit evaluations of its banks.
Trade Accounts Receivable and Allowance for Doubtful Accounts
The Company provides credit, in the normal course of business, to its customers in the form of trade receivables. Credit is
extended based on evaluation of a customer’s financial condition and collateral is not required. The Company maintains an
allowance for those customer receivables that it does not expect to collect. The Company accrues its estimated losses from
uncollectable accounts receivable to the allowance based upon recent historical experience, the length of time the receivable has
been outstanding and other specific information as it becomes available. Provisions to the allowance for doubtful accounts are
charged to current operating expenses. Actual losses are charged against this allowance when incurred. In connection with a
customer bankruptcy in the fourth quarter of 2019, the Company increased the reserve against outstanding receivables by $2.3
million.
Inventories
Inventories are stated at the lower of cost, determined using the first-in first-out method, or net realizable value. Net realizable
value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal,
and transportation. Write-downs for excess, obsolete or expired inventory are based primarily on how long the inventory has
been held, historical sales volume, and estimates of forecasted net sales of that product. A significant change in the timing or
level of demand for products may result in recording additional write-downs for excess, obsolete or expired inventory in the
future. Note 4 “Inventories” contains additional information on the Company’s inventory. In connection with a customer
bankruptcy in the fourth quarter of 2019, the Company increased the reserve for excess, obsolete or expired inventory by $19.0
million.
Leases
The Company determines if an arrangement is, or contains, a lease at inception and classifies it at as finance or operating. The
Company does not currently have any finance leases. The Company primarily leases certain office and manufacturing facilities
under operating leases, with additional operating leases for machinery, office equipment and vehicles.
Lease right-of-use (“ROU”) assets and corresponding liabilities are recognized based on the present value of the lease
payments over the lease term at commencement date. When discount rates implicit in leases cannot be readily determined, the
Company uses its incremental borrowing rate based on information available at commencement date in determining the present
value of future payments. The incremental borrowing rate is determined based on the Company’s recent debt issuances, the
Company’s specific credit rating, lease term and the currency in which lease payments are made.
Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise
such option. Lease expense is recognized on a straight-line basis over the lease term. The Company elected to combine lease
and non-lease components for all asset classes. 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. In addition, the Company does not apply the recognition requirements to leases with lease terms of
12 months or less.
- 53 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property, Plant and Equipment (“PP&E”)
PP&E is carried at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated
useful lives of the assets, as follows: buildings and building improvements 12-30 years; machinery and equipment 3-10 years;
office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term,
whichever is shorter. The costs of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized.
Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization is removed from the accounts
and any gain or loss is recorded in operating income or expense. The Company also reviews its PP&E for impairment when
impairment indicators exist. When impairment indicators exist, the Company determines if the carrying value of its fixed assets
exceeds the related undiscounted future cash flows. In cases where the carrying value of the Company's long-lived assets or
asset groups (excluding goodwill and indefinite-lived intangible assets) exceeds the related undiscounted cash flows, the
carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. Note 5
“Property, Plant and Equipment, Net” contains additional information on the Company’s PP&E.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an
orderly transaction between market participants at the measurement date. Accounting Standards Codification (“ASC”) 820,
Fair Value Measurements, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data
obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions
about the assumptions market participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access. Level 1 valuations do not entail a significant degree of judgment.
Level 2 – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for
identical instruments in markets that are not active or by model-based techniques in which all significant inputs are
observable in the market.
Level 3 – Valuation is based on unobservable inputs that are significant to the overall fair value measurement. The degree
of judgment in determining fair value is greatest for Level 3 valuations.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific
measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that
market participants would use in pricing the asset or liability at the measurement date. Note 17 “Financial Instruments and Fair
Value Measurements” contains additional information on assets and liabilities recorded at fair value in the consolidated
financial statements.
Acquisitions
Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition
dates. The purchase price of each acquisition is allocated to the net assets acquired based on estimates of their fair values at the
date of the acquisition. Any purchase price in excess of these net assets is recorded as goodwill.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability
equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company re-measures this
liability each reporting period and records changes in the fair value through Other Operating Expenses. Increases or decreases
in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as
changes in the timing, amount of, or the likelihood of achieving the applicable contingent consideration.
All direct acquisition-related costs are expensed as incurred. The allocation of purchase price in certain cases may be subject to
revision based on the final determination of fair values during the measurement period, which may be up to one year from the
acquisition date.
- 54 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Discontinued Operations
In determining whether a group of assets which has been disposed of (or is to be disposed of) should be presented as a
discontinued operation, the Company analyzes whether the group of assets being disposed of represented a component of the
entity; that is, whether it had historic operations and cash flows that were clearly distinguished (both operationally and for
financial reporting purposes). In addition, the Company considers whether the disposal represents a strategic shift that has or
will have a major effect on the Company’s operations and financial results.
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. When a portion of a goodwill reporting unit that constitutes a business is to be disposed
of, the goodwill associated with that business is 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. 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.
Goodwill
Goodwill represents the excess of cost over the fair value of identifiable net assets of a business acquired and is assigned to one
or more reporting units. The Company’s reporting units are the same as its reportable segments, Medical and Non-Medical.
The Company tests each reporting unit’s goodwill for impairment at least annually as of the last day of the fiscal year and
between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a
reporting unit below its carrying amount. In conducting its goodwill test, the Company either performs a qualitative assessment
or a quantitative assessment. A qualitative assessment requires that the Company consider events or circumstances including,
but not limited to, macro-economic conditions, market and industry conditions, cost factors, competitive environment, changes
in strategy, changes in customers, changes in the Company’s stock price, results of the last impairment test, and the operational
stability and the overall financial performance of the reporting units. If, after assessing the totality of events or circumstances,
the Company determines that it is more likely than not that the fair values of its reporting units are greater than the carrying
amounts, then the quantitative goodwill impairment test is not performed. The Company may elect to bypass the qualitative
analysis and perform a quantitative analysis.
If the qualitative assessment indicates that the quantitative analysis should be performed or if management elects to bypass a
qualitative analysis to perform a quantitative analysis, the Company then evaluates goodwill for impairment by comparing the
fair value of each of its reporting units to its carrying value, including the associated goodwill. To determine the fair values, the
Company uses a weighted combination of the market approach based on comparable publicly traded companies and the income
approach based on estimated discounted future cash flows. The cash flow assumptions consider historical and forecasted
revenue, operating costs and other relevant factors.
The Company completed its annual goodwill impairment test as of December 31, 2019 and determined, after performing a
qualitative review of its Medical reporting unit, that it is more likely than not that the fair value of the Medical reporting unit
exceeds its carrying amount. Accordingly, there was no indication of impairment and the quantitative goodwill impairment test
was not performed for the Medical reporting unit. The Company bypassed the qualitative analysis for its Non-Medical
reporting unit and performed a quantitative analysis. The fair value of the Non-Medical reporting unit exceeded its carrying
amount as of December 31, 2019.
Other Intangible Assets
Other intangible assets consist of purchased technology and patents, customer lists and trademarks. Definite-lived intangible
assets are amortized on an accelerated or straight-line basis, which approximates the projected cash flows used to determine the
fair value of those definite-lived intangible assets at the time of acquisition, as follows: purchased technology and patents 5-15
years; customer lists 7-20 years and other intangible assets 1-10 years. Certain trademark assets are considered indefinite-lived
intangible assets and are not amortized. The Company expenses the costs incurred to renew or extend the term of intangible
assets.
The Company reviews its definite-lived intangible assets for impairment when impairment indicators exist. When impairment
indicators exist, the Company determines if the carrying value of its definite-lived intangible assets or asset groups exceeds the
related undiscounted future cash flows. In cases where the carrying value exceeds the undiscounted future cash flows, the
carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis.
- 55 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company assesses its indefinite-lived intangible assets for impairment periodically to determine if any adverse conditions
exist that would indicate impairment or when impairment indicators exist. The Company assesses its indefinite-lived intangible
assets for impairment at least annually by comparing the fair value of the indefinite-lived intangible asset to its carrying value.
The fair value is determined using the relief from royalty method.
Refer to Note 6 “Goodwill and Other Intangible Assets, Net” for further details of the Company’s goodwill and other intangible
assets.
Equity Investments
The Company holds long-term, strategic investments in companies to promote business and strategic objectives. These
investments are included in Other Assets on the Consolidated Balance Sheets. Equity investments are measured and recorded as
follows:
• Non-marketable equity securities are equity securities without readily determinable fair value that are measured and
recorded at fair value with changes in fair value recognized within net income. The Company has elected the
practicability exception to use an alternative that measures the securities at cost minus impairment, if any, plus or
minus changes resulting from qualifying observable price changes. If an impairment is recognized on the Company’s
non-marketable equity securities during the period, these assets are classified as Level 3 within the fair value hierarchy
based on the nature of the fair value inputs.
• Equity method investments are equity securities in investees the Company does not control but over which it has the
ability to exercise influence. Equity method investments are measured at cost minus impairment, if any, plus or minus
our share of equity method investee income or loss.
Realized and unrealized gains and losses resulting from changes in fair value or the sale of these equity investments is recorded
through (Gain) Loss on Equity Investments, Net. The carrying value of the Company’s non-marketable equity securities is
adjusted for qualifying observable price changes resulting from the issuance of similar or identical securities by the same issuer.
Determining whether an observed transaction is similar to a security within the Company’s portfolio requires judgment based
on the rights and preferences of the securities. Recording upward and downward adjustments to the carrying value of the
Company’s equity securities as a result of observable price changes requires quantitative assessments of the fair value of these
securities using various valuation methodologies and involves the use of estimates.
Non-marketable equity securities and equity method investments (collectively referred to as non-marketable equity
investments) are also subject to periodic impairment reviews. The Company’s quarterly impairment analysis considers both
qualitative and quantitative factors that may have a significant impact on the investee's fair value. Qualitative factors considered
include the investee's financial condition and business outlook, market for technology, operational and financing cash flow
activities, technology and regulatory approval progress, and other relevant events and factors affecting the investee. When
indicators of impairment exist, quantitative assessments of the fair value of the Company’s non-marketable equity investments
are prepared.
To determine the fair value of these investments, the Company uses all pertinent financial information available related to the
investees, including financial statements, market participant valuations from recent and proposed equity offerings, and other
third-party data.
• Non-marketable equity securities are tested for impairment using a qualitative model similar to the model used for
goodwill and long-lived assets. Upon determining that an impairment may exist, the security's fair value is calculated
and compared to its carrying value and an impairment is recognized immediately if the carrying value exceeds the fair
value.
• Equity method investments are subject to periodic impairment reviews using the other-than-temporary impairment
model, which considers the severity and duration of a decline in fair value below cost and the Company’s ability and
intent to hold the investment for a sufficient period of time to allow for recovery.
The Company has determined that its investments are not considered variable interest entities. The Company’s exposure related
to these entities is limited to its recorded investment. These investments are in start-up research and development companies
whose fair value is highly subjective in nature and subject to future fluctuations, which could be significant. Refer to Note 17
“Financial Instruments and Fair Value Measurements” for additional information on the Company’s equity investments.
- 56 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Debt Issuance Costs and Discounts
Debt issuance costs and discounts associated with the issuance of debt by the Company are deferred and amortized over the
lives of the related debt. Debt issuance costs incurred in connection with the Company’s issuance of its revolving credit facility
are classified within Other Assets and amortized to Interest Expense on a straight-line basis over the contractual term of the
revolving credit facility. Debt issuance costs and discounts related to the Company’s term-debt are recorded as a reduction of
the carrying value of the related debt and are amortized to Interest Expense using the effective interest method over the period
from the date of issuance to the put option date (if applicable) or the maturity date, whichever is earlier. The amortization of
debt issuance costs and discounts are included in Debt Related Charges Included in Interest Expense in the Consolidated
Statements of Cash Flows. Upon prepayment of the related debt, the Company accelerates the recognition of a proportionate
amount of the costs as refinancing or extinguishment of debt. Note 8 “Debt” contains additional information on the Company’s
debt issuance costs and discounts.
Income Taxes
The consolidated financial statements of the Company have been prepared using the asset and liability approach to account for
income taxes, which requires the recognition of deferred income taxes for the expected future tax consequences of net operating
losses, credits, and temporary differences between the financial statement carrying amounts and the tax bases of assets and
liabilities. A valuation allowance is provided on deferred tax assets if it is determined, within each taxing jurisdiction, that it is
more likely than not that the asset will not be realized.
The Company accounts for uncertain tax positions using a more likely than not recognition threshold. The evaluation of
uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions
taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes
in facts or circumstances related to a tax position. These tax positions are evaluated on a quarterly basis. The Company
recognizes interest expense related to uncertain tax positions as Provision (Benefit) for Income Taxes. Penalties, if incurred, are
recognized as a component of Selling, General and Administrative Expenses (“SG&A”).
The Company and its subsidiaries file a consolidated U.S. federal income tax return. State tax returns are filed on a combined or
separate basis depending on the applicable laws in the jurisdictions where the tax returns are filed. The Company also files
foreign tax returns on a separate company basis in the countries in which it operates.
Derivative Financial Instruments
The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value. Changes in
the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. Under master
agreements with the respective counterparties to our derivative contracts, subject to applicable requirements, we have the right
of set-off and are allowed to net settle transactions of the same type with a single net amount payable by one party to the other.
The Company designated its interest rate swaps and foreign currency forward contracts as cash flow hedges (refer to Note 17
“Financial Instruments and Fair Value Measurements”). Gains and losses on cash flow hedges are recorded in Accumulated
Other Comprehensive Income in the Consolidated Balance Sheets until the underlying transaction is recorded in earnings.
When the hedged item is realized, gains or losses are reclassified from Accumulated Other Comprehensive Income to the
Consolidated Statement of Operations on the same line item as the underlying transaction. In the event the forecasted
transactions do not occur, or it becomes probable that they will not occur, the Company reclassifies any gain or loss on the
related cash flow hedge to earnings in the respective period. Cash flows related to these derivative financial instruments are
included in cash flows from operating activities. The resulting cash flow from the termination of interest rate swap agreements
is reported in cash flows from operations in the Consolidated Statements of Cash Flows.
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 is governed by a
long-term agreement, and the Company’s corresponding sales order acknowledgment as the contract with the customer.
Consideration payable to customers is included in the transaction price. The Company has elected to adopt the practical
expedient provided in ASC 340-40-25-4 and recognize the incremental costs of obtaining a contract, which are primarily sales
commissions, as expense when incurred because the amortization period is less than one year.
- 57 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company evaluates revenue recognition in contracts with customers as performance obligations are satisfied and the
customer obtains control of the products. Control is defined as the ability to direct the use of and obtain substantially all of the
remaining benefits of the products. The customer obtains control of the products when title and risk of ownership transfers to
them, which is primarily based upon shipping terms. Most of the Company’s revenues are recognized at the point in time when
the products are shipped to customers. When contracts with customers for products that do not have an alternative use to the
Company contain provisions that provide the Company with an enforceable right to payment for performance completed to date
for costs incurred plus a reasonable profit throughout the duration of the contract, revenue is recognized over time as control is
transferred to the customer. In contracts with customers where revenue is recognized over time, the Company uses an input
measure to determine progress towards completion and total estimated costs at 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, which is recorded
within Contract Assets on the Consolidated Balance Sheets. Revenue is recognized net of sales tax, value-added taxes and
other taxes.
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.
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable and less frequently,
unearned revenue. Accounts receivable are recorded when the right to consideration becomes unconditional. Unearned
revenue is recorded when customers pay or are billed in advance of the Company’s satisfaction of performance obligations.
Contract liabilities are classified as Accrued Expenses and Other Current Liabilities on the Consolidated Balance Sheets.
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. When contracts with customers include consideration
payable at the beginning of the contract, the transaction price is reduced at the later of when the Company recognizes revenue
for the transfer of the related goods to the customer or when we pay or promise to pay the consideration. Volume discounts and
rebates and other pricing concessions earned by customers are offset against their receivable balances.
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.
Contract Modifications
Contract modifications, which can include a change in scope, price, or both, 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.
- 58 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Environmental Costs
Environmental expenditures that relate to an existing condition caused by past operations and that do not provide future benefits
are expensed as incurred. Liabilities are recorded when environmental assessments are made, the requirement for remedial
efforts is probable and the amount of the liability can be reasonably estimated. Liabilities are recorded generally no later than
the completion of feasibility studies. The Company has a process in place to monitor, identify, and assess how the current
activities for known exposures are progressing against the recorded liabilities. The process is also designed to identify other
potential remediation sites that are not presently known.
Restructuring Expenses
The Company continually evaluates alternatives to align the business with the changing needs of its customers and to lower
operating costs. This includes realignment of existing manufacturing capacity, facility closures, or similar actions, either in the
normal course of business or pursuant to significant restructuring programs. These actions may result in voluntary or
involuntary employee termination benefits. Voluntary termination benefits are accrued when an employee accepts the related
offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and the benefit arrangement is
communicated to affected employees, or when liabilities are determined to be probable and estimable, depending on the
existence of a substantive plan for severance or termination. All other exit costs are expensed as incurred. Refer to Note 11
“Other Operating Expenses” for additional information.
Product Warranties
The Company allows customers to return defective or damaged products for credit, replacement, or repair. The Company
warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The
Company accrues its estimated exposure to warranty claims, through Cost of Sales, based upon experience and other specific
information as it becomes available. The product warranty liability is classified as Accrued Expenses and Other Current
Liabilities on the Consolidated Balance Sheets. Adjustments to pre-existing estimated exposure for warranties are made as
changes to the obligations become reasonably estimable. Note 13 “Commitments and Contingencies” contains additional
information on the Company’s product warranties.
Research, Development and Engineering Costs (“RD&E”)
RD&E costs are expensed as incurred. The primary costs are salary and benefits for personnel, material costs used in
development projects and subcontracting costs.
Stock-Based Compensation
The Company recognizes stock-based compensation expense for its compensation plans. These plans include stock options,
restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based restricted stock units (“PRSUs”). For
the Company's PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the
achievement of targets based on market conditions, such as total shareholder return, or performance conditions based on the
Company’s operating results. The Company records forfeitures of equity awards in the period in which they occur.
The fair value of the stock-based compensation is determined at the grant date. The Company uses the Black-Scholes standard
option pricing model (“Black-Scholes model”) to determine the fair value of stock options. The fair value of each RSU and
RSA is determined based on the Company's closing stock price on the date of grant. The fair value of each PRSU is determined
based on either the Company's closing stock price on the date of grant or through a Monte Carlo simulation valuation model
(“Monte Carlo model”) for those awards that include a market-based condition. In addition to the closing stock price on the
date of grant, the determination of the fair value of awards using both the Black-Scholes and Monte Carlo models is affected by
other assumptions, including the following:
Expected Term - The Company analyzes historical employee exercise and termination data to estimate the expected term
assumption for stock options. For market-based awards, the term is commensurate with the performance period remaining
as of the grant date.
Risk-free Interest Rate - A risk-free rate is based on the U.S. Treasury rates in effect on the grant date for a maturity equal to
or approximating the expected term of the award.
Expected Volatility - For stock options, expected volatility is calculated using historical volatility based on the daily closing
prices of the Company's common stock over a period equal to the expected term. For market-based awards, a combination
of historical and implied volatilities for the Company and members of its peer group are used in developing the expected
volatility assumption.
Dividend Yield - The dividend yield assumption is based on the Company’s history and the expected annual dividend yield
on the grant date.
- 59 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company recognizes compensation expense over the required service or vesting period based on the fair value of the award
on the date of grant. Certain executive stock-based awards contain market, performance and service conditions. Compensation
expense for awards with market conditions is recognized over the service period and is not reversed if the market condition is
not met. Compensation expense for awards with performance conditions is reassessed each reporting period and recognized
based upon the probability that the performance targets will be achieved.
All stock option awards granted under the Company’s compensation plans have an exercise price equal to the closing stock
price on the date of grant, a ten-year contractual life and generally, vest annually over a three-year vesting term. RSUs typically
vest in equal annual installments over a three or four year period. RSUs issued to members of the Company’s Board of
Directors as a portion of their annual retainer vest quarterly over a one-year vesting term. Earned PRSUs typically vest two or
three years from the date of grant.
The Company records deferred tax assets for awards that result in deductions on the Company's income tax returns, based on
the amount of stock-based compensation expense recognized and the statutory tax rate in the jurisdiction in which it will
receive a deduction. Differences between the deferred tax assets recognized for financial reporting purposes and the actual tax
deduction reported on the income tax return are recorded as a component of Provision (Benefit) for Income Taxes in the
Consolidated Statements of Operations. Note 10 “Stock-Based Compensation” contains additional information on the
Company’s stock-based compensation.
Foreign Currency Translation and Remeasurement
The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency,
at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period.
The net effect of this translation is recorded in the consolidated financial statements as a component of Accumulated Other
Comprehensive Income. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in
the Company’s foreign subsidiaries.
The Company has foreign operations in Ireland, Israel, Malaysia, Mexico, Switzerland, and Uruguay, which expose the
Company to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Israeli shekel, Malaysian
ringgits, Mexican pesos, Swiss francs, and Uruguayan pesos. To the extent that monetary assets and liabilities, including short-
term and long-term intercompany loans, are recorded in a currency other than the functional currency of the subsidiary, these
amounts are remeasured each period at the period-end exchange rate, with the resulting gain or loss being recorded in Other
(Income) Loss, Net in the Consolidated Statements of Operations. Net foreign currency transaction losses included in Other
(Income) Loss, Net amounted to $0.1 million, $1.6 million and $10.9 million for 2019, 2018 and 2017, respectively, and
primarily related to the remeasurement of intercompany loans and the fluctuation of the U.S. dollar relative to the Euro.
Defined Benefit Plans
The Company recognizes in its balance sheet as an asset or liability the overfunded or underfunded status of its defined benefit
plans provided to its employees located in Mexico and Switzerland. This asset or liability is measured as the difference
between the fair value of plan assets, if any, and the benefit obligation of those plans. For these plans, the benefit obligation is
the projected benefit obligation, which is calculated based on actuarial computations of current and future benefits for
employees. Actuarial gains or losses and prior service costs or credits that arise during the period, but are not included as
components of net periodic benefit expense, are recognized as a component of Accumulated Other Comprehensive Income.
The Company records the service cost component of net benefit costs in Cost of Sales and SG&A Expenses. The interest cost
component of net benefit costs is recorded in Interest Expense and the remaining components of net benefit costs, amortization
of net losses and expected return on plan assets, are recorded in Other (Income) Loss, Net.
Earnings Per Share (“EPS”)
Basic EPS is calculated by dividing Net Income (Loss) by the weighted average number of shares outstanding during the
period. Diluted EPS is calculated by adjusting the weighted average number of shares outstanding for potential common shares
if dilutive to the EPS calculation. Note 15 “Earnings Per Share” contains additional information on the computation of the
Company’s EPS.
- 60 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
The Company’s comprehensive income as reported in the Consolidated Statements of Comprehensive Income includes net
income, foreign currency translation adjustments, the net change in cash flow hedges, net of tax, and defined benefit plan
liability adjustments, net of tax. The Consolidated Statements of Comprehensive Income and Note 16 “Stockholders’ Equity”
contain additional information on the computation of the Company’s comprehensive income.
Recent Accounting Pronouncements
In the normal course of business, management evaluates all new Accounting Standards Updates (“ASU”) and other accounting
pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission
(“SEC”), or other authoritative accounting bodies to determine the potential impact they may have on the Company’s
Consolidated Financial Statements. Except as noted below, management does not expect any of the recently issued accounting
pronouncements, which have not already been adopted, to have a material impact on the Company’s Consolidated Financial
Statements.
Accounting Guidance Adopted in Fiscal Year 2019
Adoption of ASC Topic 842
The Company adopted ASC 842, Leases, effective December 29, 2018, the first day of the Company’s 2019 fiscal year. ASC
842 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
operating 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 Consolidated Statement of Operations and Consolidated Statement of Cash Flows for the periods presented.
Refer to Note 14 “Leases” for additional information on the Company’s leases.
Adoption of ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities. ASU 2017-12 amends the designation and measurement guidance for qualifying hedging transactions
and the presentation of hedge results in an entity’s financial statements. The new guidance removes the concept of separately
measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument,
including any ineffectiveness, in the same income statement line item in which the earnings effect of the hedged item is
reported.
ASU 2017-12 continues to allow an entity to exclude the time value of options and forward points from the assessment of
hedge effectiveness. For excluded components in cash flow hedges, the base recognition model under this ASU is an
amortization approach. An entity still may elect to record changes in the fair value of the excluded component currently in
earnings; however, such an election will need to be applied consistently to similar hedges. The Company has elected to continue
to record changes in the fair value of the excluded components of its derivative instruments currently in earnings given their
highly effective nature.
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 17 “Financial Instruments and Fair Value
Measurements” for additional information and disclosures of the Company’s derivatives and hedging activities.
- 61 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements Not Yet Effective
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments, which replaces the current incurred loss impairment methodology for most financial assets with the
current expected credit loss (“CECL”) methodology. Under the CECL method, the Company will be required to immediately
recognize an estimate of credit losses expected to occur over the life of the financial asset at the time financial asset is
originated or acquired. Estimated credit losses are determined by taking into consideration historical loss conditions, current
conditions and reasonable and supportable forecasts. Changes to the expected lifetime credit losses are required to be
recognized each period. The standard was effective for the Company on January 1, 2020 and will be adopted using a modified
retrospective transition method through a cumulative-effect adjustment to retained earnings. The Company does not expect the
new credit loss standard to have a material impact to the Consolidated Financial Statements.
(2.) ACQUISITION, DIVESTITURE AND DISCONTINUED OPERATIONS
Acquisition of Assets from US BioDesign, LLC
On October 7, 2019, the Company acquired certain assets of US BioDesign, LLC, (“USB”) a privately held developer and
manufacturer of complex braided biomedical structures for disposable and implantable medical devices. The acquisition adds a
differentiated capability related to the complex development and manufacture of braided and formed biomedical structures to
the Company’s broad portfolio. The fair value of the consideration transferred was $19.2 million, which included an initial
cash payment of $15.0 million and $4.2 million in estimated fair value of contingent consideration. The contingent
consideration represents the estimated fair value of the Company's obligation, under the acquisition agreement, to make
additional payments of up to $5.5 million if certain revenue goals are met through 2023. Based on the preliminary purchase
price allocation, the assets acquired principally consist of $7.4 million of technology, $10.5 million of goodwill, $0.7 million of
acquired property plant and equipment, and $0.6 million of other working capital items. The technology intangible asset is
being amortized over a useful life of 8 years. The fair value of the contingent consideration was estimated using the Monte
Carlo valuation approach. See Note 17 “Financial Instruments and Fair Value Measurements” for additional information
related to the fair value measurement of the contingent consideration. Goodwill arising from the acquisition is tax deductible.
The operating results of this acquisition are included in our consolidated financial statements beginning on the date of
acquisition. For the year ended December 31, 2019, sales related to USB were $0.8 million. Earnings related to the operations
consisting of the assets acquired from USB for the year ended December 31, 2019 were not material. Direct costs of the
acquisition of $0.4 million were expensed as incurred and were included in Other Operating Expenses in the Consolidated
Statement of Operations for the year ended December 31, 2019. Pro forma information for the acquisition is not presented as
the operations of the acquired business are not material to the overall operations of the Company. The acquired assets and
operations are reported in the Company’s Medical segment.
Discontinued Operations and Divestiture of AS&O Product Line
On May 3, 2018, the Company entered into a definitive agreement to sell its AS&O Product Line to Viant, and on July 2, 2018,
completed the sale, collecting cash proceeds of approximately $581 million, which is net of transaction costs and adjustments set
forth in the definitive purchase agreement. In connection with the sale, the parties executed a transition services agreement whereby
the Company will provide certain corporate services (including accounting, payroll, and information technology services) to Viant
for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations. Viant paid Integer
for these services as specified in the transition services agreement, which services were completed during 2019. The Company
recognized $2.9 million of income under the transition services agreement for the performance of services during 2019, of which
$0.1 million is recorded as a reduction of Cost of Sales and $2.8 million is recorded as a reduction of SG&A Expenses in the
Consolidated Statement of Operations for the year ended December 31, 2019. The Company recognized $3.6 million of income
under the transition services agreement for the performance of services during 2018, of which $0.2 million is recorded as a reduction
of Cost of Sales and $3.4 million is recorded as a reduction of SG&A Expenses in the Consolidated Statement of Operations for
the year ended December 28, 2018. 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 $195.0 million during the year ended December 28, 2018. During 2019, the Company
received, and recognized as gain on sale from discontinued operations, $4.8 million due to the final net working capital adjustment
agreed to with Viant.
- 62 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2.) ACQUISITION, DIVESTITURE AND DISCONTINUED OPERATIONS (Continued)
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 totaling $150.4 million was allocated to the AS&O Product Line on a relative fair value basis.
The fair value of the AS&O Product Line assets was based primarily on the purchase price of $600 million prior to closing
adjustments.
Income (loss) from discontinued operations for fiscal years 2019, 2018 and 2017 were as follows (in thousands):
2019
2018
2017
Sales
Cost of sales
Gross profit
SG&A expenses
Research, development and engineering costs
Other operating expenses
Interest expense
Gain on sale of discontinued operations
Other (income) loss, net
Income (loss) from discontinued operations before taxes
Provision (benefit) for income taxes
$
— $
178,020
$
—
—
—
—
—
—
(4,974)
(322)
5,296
178
148,357
29,663
8,905
2,352
1,805
22,833
(194,965)
420
188,313
67,382
Income (loss) from discontinued operations
$
5,118
$
120,931
$
325,841
286,300
39,541
18,500
6,397
854
42,488
—
(1,266)
(27,432)
(7,024)
(20,408)
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 for fiscal years 2019, 2018 and 2017 was as follows (in thousands):
Cash provided by (used in) operating activities
Cash provided by (used in) investing activities
Depreciation and amortization
Capital expenditures
Acquisition of Assets from InoMec Ltd.
2019
2018
2017
$
$
(78) $
4,734
— $
—
(12,498) $
577,833
7,450
$
3,610
3,167
(16,771)
21,613
16,844
On February 19, 2020, the Company acquired certain assets of InoMec Ltd., a privately held company based in Israel that
specializes in the research, development and manufacturing of medical devices, including minimally invasive tools, delivery
systems, tubing and catheters, surgery tools, drug-device combination, laser combined devices, and tooling and production.
The acquisition enables the Company to create a research and development center in the region, and adds catheter assembly
capabilities to its portfolio.
The Company paid $5 million in cash and may pay up to an additional $3.5 million of contingent earn out over the next four
years based on specified conditions being met. The Company expects to determine the preliminary purchase price allocation
prior to the end of the first quarter of 2020.
- 63 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3.) SUPPLEMENTAL CASH FLOW INFORMATION
The following represents supplemental cash flow information for fiscal years 2019, 2018 and 2017 (in thousands):
Non-cash investing and financing activities:
Property, plant and equipment purchases included in accounts payable
$
8,646
$
2,303
$
3,474
2019
2018
2017
Cash paid (refunded) during the year for:
Interest
Income taxes
(4.) INVENTORIES
Inventories comprise the following (in thousands):
Raw materials
Work-in-process
Finished goods
Total
(5.) PROPERTY, PLANT AND EQUIPMENT, NET
PP&E comprises the following (in thousands):
Manufacturing machinery and equipment
Buildings and building improvements
Information technology hardware and software
Leasehold improvements
Furniture and fixtures
Land and land improvements
Construction work in process
Other
Accumulated depreciation
Total
44,784
30,034
79,661
23,155
93,839
(8,185)
December 31,
2019
December 28,
2018
$
$
79,742
$
60,042
27,472
80,213
75,711
34,152
167,256
$
190,076
December 31,
2019
December 28,
2018
$
285,793
$
261,912
96,539
64,328
69,012
15,517
11,541
37,470
1,181
95,886
60,901
61,418
15,082
11,544
23,886
1,048
581,381
(335,196)
246,185
$
531,677
(300,408)
231,269
$
Depreciation expense for PP&E was as follows for fiscal years 2019, 2018 and 2017 (in thousands):
Depreciation expense
2019
2018
2017
$
37,819
$
40,078
$
38,077
- 64 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The change in the carrying amount of goodwill by reportable segment during fiscal years 2019 and 2018 was as follows (in
thousands):
December 29, 2017
Foreign currency translation
December 28, 2018
Goodwill related to acquisition (Note 2)
Foreign currency translation
December 31, 2019
Medical
Non-Medical
Total
$
$
822,870
(7,532)
815,338
10,527
(3,248)
822,617
$
17,000
$
—
17,000
—
—
$
17,000
$
839,870
(7,532)
832,338
10,527
(3,248)
839,617
As of December 31, 2019, no accumulated impairment loss has been recognized for the goodwill allocated to the Company’s
Medical or Non-Medical segments.
Intangible Assets
Intangible assets comprise the following (in thousands):
December 31, 2019
Definite-lived:
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
Indefinite-lived:
Trademarks and tradenames
December 28, 2018
Definite-lived:
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
Indefinite-lived:
Trademarks and tradenames
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
$
$
$
$
248,264
706,852
3,503
958,619
241,726
710,406
3,503
955,635
$
$
$
$
(138,435) $
(131,185)
(3,503)
(273,123) $
109,829
575,667
—
685,496
$
90,288
(125,540) $
(104,556)
(3,489)
(233,585) $
116,186
605,850
14
722,050
$
90,288
See Note 2 “Acquisition, Divestiture and Discontinued Operations.” for additional details regarding intangible assets acquired
during 2019. Included in the Company’s indefinite-lived intangible assets is the Lake Region Medical tradename with a
carrying value of $70.0 million.
- 65 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET (Continued)
Aggregate intangible asset amortization expense is comprised of the following for fiscal years 2019, 2018 and 2017 (in
thousands):
Cost of Sales
SG&A
RD&E
Other Operating Expenses (“OOE”)
Total intangible asset amortization expense
2019
2018
2017
$
$
13,111
$
14,134
$
26,965
26,658
—
—
154
514
40,076
$
41,460
$
15,183
24,840
545
2,538
43,106
Estimated future intangible asset amortization expense based upon the carrying value as of December 31, 2019 is as follows (in
thousands):
Amortization Expense
$
40,438
$
39,898
$
39,161
$
37,755
$
36,798
$
491,446
2020
2021
2022
2023
2024
After 2024
(7.) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the following (in thousands):
Profit sharing and bonuses
Salaries and benefits
Deferred revenue
Product warranties
Accrued interest
Other
Total
(8.) DEBT
Long-term debt is comprised of the following (in thousands):
Senior secured term loan A
Senior secured term loan B
Revolving line of credit
Unamortized discount on term loan B and debt issuance costs
Total debt
Current portion of long-term debt
Total long-term debt
Senior Secured Credit Facilities
December 31,
2019
December 28,
2018
$
$
26,060
20,997
1,975
1,933
1,885
13,223
66,073
$
$
22,912
21,830
2,482
2,600
1,944
8,722
60,490
December 31,
2019
December 28,
2018
$
267,188
$
304,687
558,286
—
(10,702)
814,772
(37,500)
777,272
$
632,286
5,000
(16,466)
925,507
(37,500)
888,007
$
The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a $200 million
revolving credit facility (the “Revolving Credit Facility”), (ii) a $267 million term loan A facility (the “TLA Facility”), and (iii)
a $558 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.
- 66 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8.) DEBT (Continued)
On November 21, 2019, the Company amended the Senior Secured Credit Facilities to extend the maturity dates for both the
Revolving Credit Facility and the TLA Facility to coincide with the maturity date of the TLB Facility, and reduce the interest
rate margins applicable to the Revolving Credit Facility, TLA Facility and TLB Facility.
Revolving Credit Facility
The Revolving Credit Facility matures on October 27, 2022. The Revolving Credit Facility 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 0.50% and 2.00%, based on the Company’s Total Net Leverage Ratio, or (ii) the
applicable London Interbank Offered Rate (“LIBOR”) rate plus the applicable margin, which will range between 1.50% and
3.00%, based on the Company’s Total Net Leverage Ratio.
As of December 31, 2019, the Company had no outstanding borrowings on the Revolving Credit Facility and an available
borrowing capacity of $193.2 million after giving effect to $6.8 million of outstanding standby letters of credit.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental
revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2022. Interest rates on the TLB Facility are, at the Company’s
option, either at: (i) the prime rate plus 1.50% or (ii) the applicable LIBOR rate plus 2.50%, with LIBOR subject to a 1.00%
floor. As of December 31, 2019, the interest rates on the TLA Facility and TLB Facility were 3.80% and 4.22%, 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.
Covenants
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum total net leverage ratio of
4.50:1.0, subject to step downs of 25 basis points in both the first and second quarters of 2020 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
3.00:1.00. As of December 31, 2019, the Company was in compliance with these financial covenants. The TLB Facility does
not contain any financial maintenance covenants.
The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional
indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s
subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or
other amounts from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire
capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances
and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its
subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of
business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior
Secured Credit Facilities agreement. As of December 31, 2019, the Company was in compliance with all negative covenants
under the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance
of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become
immediately due and payable.
- 67 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8.) DEBT (Continued)
9.125% Senior Notes due 2023
On October 27, 2015, the Company completed a private offering of $360 million aggregate principal amount of 9.125% senior
notes due on November 1, 2023 (the “Senior Notes”). On July 10, 2018, the Company completed the redemption in full of 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. The “make-whole” premium is
included in Interest Expense in the accompanying Consolidated Statements of Operations for the year ended December 28,
2018. Upon completion of the redemption of the Senior Notes, the indenture governing the Senior Notes was satisfied and
discharged.
As of December 31, 2019, the weighted average interest rate on all outstanding borrowings is 4.08%.
Contractual maturities of the Company’s debt facilities for the next five years and thereafter, excluding any discounts or
premiums, as of December 31, 2019 are as follows (in thousands):
Future minimum principal payments
Debt Issuance Costs and Discounts
2020
2021
2022
$
37,500
$
37,500
$
750,474
The Company incurred debt issuance costs in conjunction with the issuance of the Senior Secured Credit Facilities and the
Senior Notes. The change in deferred debt issuance costs related to the Company’s Revolving Credit Facility is as follows (in
thousands):
December 29, 2017
Amortization during the period
December 28, 2018
Financing costs incurred
Write-off of debt issuance costs(1)
Amortization during the period
December 31, 2019
$
$
2,808
(991)
1,817
302
(150)
(939)
1,030
The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows
(in thousands):
December 29, 2017
Write-off of debt issuance costs and unamortized discount(1)
Amortization during the period
December 28, 2018
Financing costs incurred
Write-off of debt issuance costs and unamortized discount(1)
Amortization during the period
December 31, 2019
Debt
Issuance
Costs
Unamortized
Discount on
TLB Facility
Total
$
$
26,889
(9,757)
(4,419)
12,713
919
(1,913)
(3,440)
8,279
$
$
6,389
(1,610)
(1,026)
3,753
—
(482)
(848)
2,423
$
$
33,278
(11,367)
(5,445)
16,466
919
(2,395)
(4,288)
10,702
__________
(1) The Company recognized losses from extinguishment of debt in connection with prepaying portions of its TLB Facility
during 2019 and 2018, amending the Senior Secured Credit Facilities during 2019, and redeeming its Senior Notes during
2018. The losses from extinguishment of debt are included in Interest Expense in the accompanying Consolidated
Statements of Operations.
- 68 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9.) BENEFIT PLANS
Savings Plan
The Company sponsors a defined contribution 401(k) plan (the “Plan”), for its U.S. based employees. The Plan provides for
the deferral of employee compensation under Internal Revenue Code §401(k) and a Company match.
The Company matches $0.50 per dollar of participant deferral, up to 6% of the compensation of each participant. Contributions
from employees, as well as those matched by the Company, vest immediately. Net costs related to defined contribution plans
were $7.2 million in 2019, $6.8 million in 2018 and $6.0 million in 2017.
Defined Benefit Plans
The Company is required to provide its employees located in Switzerland and Mexico certain statutorily mandated defined
benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The
defined benefit pension plan provided to the Company’s employees located in Switzerland is a funded contributory plan, while
the plans that provide benefits to the Company’s employees located in Mexico are unfunded and noncontributory. The assets of
the Switzerland plan are held at an AA- rated insurance carrier who bears the pension risk and longevity risk, and will be used
to cover the pension liability for the remaining retirees of the Swiss plan, as well as the remaining employees at that location.
The liability and corresponding expense related to these benefit plans is based on actuarial computations of current and future
benefits for employees.
The aggregated projected benefit obligation for these plans was $3.0 million and $2.2 million as of December 31, 2019 and
December 28, 2018, respectively. Net periodic pension cost for fiscal years 2019, 2018 and 2017 was $0.3 million, $0.3
million and $0.3 million, respectively. Over the next ten years, we expect gross benefit payments to be $0.7 million in total for
the years 2020 through 2024, and $1.1 million in total for the years 2025 through 2029.
(10.) STOCK-BASED COMPENSATION
Stock-based Compensation Plans
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, RSAs, RSUs, stock appreciation rights and stock bonuses to
employees, non-employee directors, consultants, and service providers.
The 2011 Stock Incentive Plan (the “2011 Plan”), as amended, authorizes the issuance of up to 1,350,000 shares of equity
incentive awards and the 2016 Stock Incentive Plan (the “2016 Plan”) authorizes the issuance of up to 1,450,000 shares of
equity incentive awards. Awards remain outstanding under the 2005 Stock Incentive Plan and the 2009 Stock Incentive Plan, as
amended, but the plans have been frozen to any new award issuances. As of December 31, 2019, there were 662,736 and
79,316 shares available for future grants under the 2016 Plan and 2011 Plan, respectively.
The Company recognized a net tax benefit from the exercise of stock options and vesting of restricted stock and restricted stock
units of $2.8 million, $3.8 million and $1.9 million for 2019, 2018 and 2017, respectively. These amounts are recorded as a
component of Provision (Benefit) for Income Taxes.
- 69 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10.) STOCK-BASED COMPENSATION (Continued)
Stock-based Compensation Expense
The components and classification of stock-based compensation expense for fiscal years 2019, 2018 and 2017 were as follows
(in thousands):
Stock options
RSAs and RSUs
Stock-based compensation expense - continuing operations
Discontinued operations
Total stock-based compensation expense
Cost of sales
SG&A
RD&E
OOE
Discontinued operations
$
$
$
2019
2018
2017
410
$
873
$
$
$
8,884
9,294
—
9,294
1,011
7,827
269
187
—
$
$
9,183
10,056
414
10,470
849
9,090
112
5
414
1,633
11,819
13,452
1,228
14,680
748
9,893
642
2,169
1,228
Total stock-based compensation expense
$
9,294
$
10,470
$
14,680
During 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 OOE.
Stock Options
There were no stock options granted in fiscal year 2019. The following table includes the weighted average grant date fair
value of stock options granted to employees during fiscal years 2018 and 2017 and the related weighted average assumptions
used in the Black-Scholes model:
Weighted average fair value of options granted
Assumptions:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend yield
2018
2017
$
14.89
$
12.86
4.0
2.21%
39%
0%
4.5
1.77%
37%
0%
The following table summarizes stock option activity during the fiscal year ended December 31, 2019:
Outstanding at December 28, 2018
Exercised
Outstanding at December 31, 2019
Vested and expected to vest at December 31, 2019
Exercisable at December 31, 2019
Number of
Stock
Options
Weighted
Average
Exercise
Price
522,783
(138,770)
384,013
384,013
349,698
$
$
$
$
31.88
23.36
34.96
34.96
34.55
Weighted
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
(in millions)
5.1
5.1
4.9
$
$
$
17.5
17.5
21.8
- 70 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10.) STOCK-BASED COMPENSATION (Continued)
Intrinsic value is calculated for in-the-money options (exercise price less than market price) as the difference between the
market price of the Company’s common shares as of December 31, 2019 ($80.43) and the weighted average exercise price of
the underlying stock options, multiplied by the number of options outstanding and/or exercisable. As of December 31, 2019,
$0.1 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a
weighted-average period of 0.9 years. Shares are distributed from the Company’s authorized but unissued reserve and treasury
stock upon the exercise of stock options.
The following table provides certain information relating to the exercise of stock options during fiscal years 2019, 2018 and
2017 (in thousands):
Intrinsic value
Cash received
2019
2018
2017
$
7,998
$
17,722
$
3,242
12,409
13,928
19,324
Restricted Stock Awards and Restricted Stock Units
The following table summarizes time-vested RSA and RSU activity during the fiscal year ended December 31, 2019:
Nonvested at December 28, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
Time-Vested
Activity
Weighted
Average
Grant Date
Fair Value
142,236
$
116,387
(31,386)
(22,014)
205,223
$
49.78
82.31
65.62
59.64
64.75
As of December 31, 2019, there was $8.2 million of total unrecognized compensation cost related to time-based RSAs and
RSUs, which is expected to be recognized over a weighted-average period of approximately 2.4 years. The fair value of RSA
and RSU shares vested in 2019, 2018 and 2017 was $2.4 million, $9.7 million and $6.4 million, respectively. The weighted
average grant date fair value of RSAs and RSUs granted during fiscal years 2019, 2018 and 2017 was $82.31, $52.14 and
$34.18, respectively.
Performance-Based Shares
The following table summarizes PRSU activity during the fiscal year ended December 31, 2019:
Nonvested at December 28, 2018
Granted
Vested
Forfeited
Nonvested at December 31, 2019
Performance-
Vested
Activity
Weighted
Average
Grant Date
Fair Value
287,134
$
50,492
(75,008)
(71,026)
191,592
$
36.15
101.17
28.41
36.17
56.30
For the Company's PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the
achievement of financial performance or market-based conditions. The financial performance condition is based on the
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 two and three
year performance periods.
- 71 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10.) STOCK-BASED COMPENSATION (Continued)
Compensation expense for the PRSUs is initially estimated based on target performance and adjusted as appropriate throughout
the performance period. At December 31, 2019, there was $4.7 million of total unrecognized compensation cost related to
unvested PRSUs, which is expected to be recognized over a weighted-average period of approximately 1.7 years. The fair
value of PRSU shares vested in 2019 and 2018 was $6.7 million and $9.1 million, respectively. There were no PRSU shares
vested in 2017. The weighted average grant date fair value of PRSUs granted during fiscal years 2019, 2018 and 2017 was
$101.17, $45.37 and $31.62, respectively.
The grant-date fair value of the market-based portion of the PRSUs granted during fiscal year 2019, 2018 and 2017 was
determined using the Monte Carlo simulation model 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:
Weighted average fair value
Risk-free interest rate
Expected volatility
Expected life (in years)
Expected dividend yield
2019
2018
2017
$
117.03
$
37.46
$
25.41
2.46%
40%
2.8
—%
2.28%
40%
2.9
—%
1.14%
48%
1.8
—%
(11.) OTHER OPERATING EXPENSES
OOE for fiscal years 2019, 2018 and 2017 is comprised of the following (in thousands):
Strategic reorganization and alignment
Manufacturing alignment to support growth
Consolidation and optimization initiatives
Acquisition and integration costs
Other general expenses
Total other operating expenses
Strategic reorganization and alignment
2019
2018
2017
$
5,812
$
10,624
$
2,145
—
377
3,817
3,089
844
—
1,508
$
12,151
$
16,065
$
5,891
—
12,803
10,870
6,874
36,438
As a result of the strategic review of its customers, competitors and markets, the Company began taking steps in 2017 to better
align its resources in order to enhance the profitability of its portfolio of products. 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 $22 million to $23 million, the majority of which are expected to be cash
expenditures. During the 2019, the Company incurred charges relating to this initiative, which primarily included severance
and fees for professional services recorded within the Medical segment. As of December 31, 2019, total expense incurred for
this initiative since inception, including amounts reported in discontinued operations, was $22.3 million. These actions were
substantially completed at the end of 2019.
Manufacturing alignment to support growth
In 2017, the Company initiated several initiatives designed to reduce costs, increase manufacturing capacity to accommodate
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 $6 million to $7 million, the majority of which are expected
to be cash expenditures. Costs related to the Company’s manufacturing alignment to support growth initiative were primarily
recorded within the Medical segment. As of December 31, 2019, total expense incurred for this initiative since inception was
$5.2 million. These actions were substantially completed at the end of 2019.
- 72 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11.) OTHER OPERATING EXPENSES (Continued)
Consolidation and optimization initiatives
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.
The following table summarizes the change in accrued liabilities related to the initiatives described above (in thousands):
December 28, 2018
Restructuring charges
Cash payments
December 31, 2019
Severance
and
Retention
Other
Total
$
$
1,668
$
202
$
2,095
(2,374)
1,389
$
5,862
(5,468)
596
$
1,870
7,957
(7,842)
1,985
Acquisition and Integration Expenses
During 2019, the Company incurred expenses related to the acquisition of USB, and primarily include legal expenses.
Acquisition and integration costs incurred during 2017 were predominantly related to the acquisition of Lake Region Medical
(“LRM”) and primarily include professional, consulting, severance, retention, relocation, and travel costs. Integration costs
primarily include professional, consulting, severance, retention, relocation, and travel costs.
Other General Expenses
During 2019, 2018 and 2017, the Company recorded losses in connection with various asset disposals and/or write-downs and
expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to
reduce future operating costs and improve operational efficiencies. The 2019 amount primarily includes systems conversion
expenses, expenses incurred in connection with a customer filing Chapter 11 bankruptcy, and expenses related to the
restructuring of certain legal entities of the Company. The 2017 amount also includes approximately $5.3 million in expense
related to the Company’s leadership transitions, which were recorded within the corporate unallocated segment.
(12.) INCOME TAXES
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Reform Act”) was signed into law making significant
changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21%
effective for tax years beginning after December 31, 2017, the transition of U.S international taxation from a worldwide tax
system to a territorial system, and a one-time transition tax on the mandatory deemed repatriation of cumulative foreign
earnings as of December 31, 2017.
Under GAAP, the effect of a change in tax laws or rates is to be recognized in income from continuing operations in the period
that includes the enactment date. As such, the Company recognized an estimate of the impact of the Tax Reform Act in the year
ended December 29, 2017. The Company had an estimated $147.5 million of undistributed foreign earnings and profit subject
to the deemed mandatory repatriation as of December 29, 2017 and recognized a provisional $14.7 million in 2017 for the one-
time transition tax. The Company had 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.
- 73 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12.) INCOME TAXES (Continued)
On December 22, 2017, the SEC 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. As stated
above, the Company had 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.
In 2018, the Company completed its determination of the accounting implications of the Tax Reform Act. The impact of these
adjustments was reflected in the Company’s financial results for the year ended December 28, 2018 and its timely filed 2017
U.S. corporate income tax return. Further, the Company records the consequences of the new Global Intangible Low-Taxed
Income (“GILTI”) provision of the Tax Reform Act as a period cost when incurred.
Income from continuing operations before taxes for fiscal years 2019, 2018 and 2017 consisted of the following (in thousands):
U.S.
International
Total income from continuing operations before taxes
2019
2018
2017
$
$
40,203
64,990
105,193
$
$
(4,273) $
65,389
61,116
$
306
48,953
49,259
The provision (benefit) for income taxes from continuing operations for fiscal years 2019, 2018 and 2017 was comprised of the
following (in thousands):
2019
2018
2017
$
14,090
$
80
$
87
10,083
24,260
(8,813)
332
(1,804)
(10,285)
13,975
166
9,490
9,736
6,610
103
(2,366)
4,347
$
14,083
$
(1,558)
(29)
8,539
6,952
(45,114)
(295)
629
(44,780)
(37,828)
Current:
Federal
State
International
Deferred:
Federal
State
International
Total provision (benefit) for income taxes
$
- 74 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12.) INCOME TAXES (Continued)
The provision (benefit) for income taxes from continuing operations differs from the U.S. statutory rate for fiscal years 2019,
2018 and 2017 due to the following:
2019
2018
2017
Statutory rate
Federal tax credits (including R&D)
Foreign rate differential
Stock-based compensation
Uncertain tax positions
State taxes, net of federal benefit
U.S. tax on foreign earnings, net of §250 deduction
Valuation allowance
Tax Reform Act
Other
Effective tax rate
$ 22,091
(4,797)
(5,479)
(2,422)
(920)
1,106
5,201
(1,606)
—
801
21.0% $ 12,834
(1,700)
(4.6)
(6,040)
(5.2)
(2,821)
(2.3)
(0.9)
147
1.1
975
4.9
(1.5)
—
0.8
10,473
(567)
11
771
$ 13,975
13.3% $ 14,083
21.0% $ 17,240
(1,674)
(2.8)
(12,934)
(9.9)
(3,232)
(4.6)
34
0.2
(543)
1,471
1.6
17.1
(0.9)
—
1,030
(39,394)
174
1.3
23.0% $ (37,828)
35.0 %
(3.4)
(26.3)
(6.6)
0.1
(1.1)
3.0
2.1
(80.0)
0.4
(76.8)%
The difference between the Company’s effective tax rate and the U.S. federal statutory income tax rate in the current year is
primarily attributable to the components of the Tax Reform Act, including a provision for GILTI and a provision for the Foreign
Derived Intangible Income (“FDII”) deduction. In 2018, the FDII deduction, as well as the statutory deduction of 50% of the
GILTI inclusion, were subject to limitations based on U.S. taxable income. In addition to the components of the Tax Reform
Act, differences in the effective tax rate are attributable to the availability of Foreign Tax Credits, R&D Credits and the impact
of the Company’s earnings realized in foreign jurisdictions with statutory rates that are different than the U.S. federal statutory
rate. The Company’s foreign earnings are primarily derived from Switzerland, Mexico, Uruguay, and Ireland. The Company
currently has a tax holiday in Malaysia through April 2023 provided certain conditions are met.
Difference Attributable to Foreign Investment: Certain foreign subsidiary earnings are subject to U.S. taxation under the Tax
Reform Act. The Company intends to permanently reinvest substantially all of our foreign subsidiary earnings, as well as our
capital in our foreign subsidiaries, with the exception of distributions made out of current year earnings and profits (“E&P”)
and E&P previously taxed as of and for the year ended December 29, 2017, including E&P subject to the toll charge under the
Tax Reform Act. The Company accrues for withholding taxes on distributions in the year that distributions are made.
- 75 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12.) INCOME TAXES (Continued)
The net deferred tax liability consists of the following (in thousands):
December 31,
2019
December 28,
2018
Tax credit carryforwards
Inventories
Net operating loss carryforwards
Operating lease liabilities
Stock-based compensation
Accrued expenses
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Property, plant and equipment
Intangible assets
Operating lease assets
Other
Gross deferred tax liabilities
Net deferred tax liability
Presented as follows:
Noncurrent deferred tax asset
Noncurrent deferred tax liability
Net deferred tax liability
As of December 31, 2019, the Company has the following carryforwards available:
Jurisdiction
U.S. State
International
U.S. Federal
Tax
Attribute
Net operating losses(1)
Net operating losses(1)
Foreign tax credits
U.S. Federal and State
R&D tax credits
Amount
(in millions)
$
111.2
2.6
9.0
2.3
Begin to
Expire
2020
2023
2020
2020
$
14,921
$
11,333
8,254
5,544
4,844
4,625
49,521
(22,229)
27,292
(6,017)
(192,091)
(5,161)
(7,563)
(210,832)
(183,540) $
24,593
3,408
18,088
—
2,340
39
48,468
(34,339)
14,129
(9,445)
(198,648)
—
(6,009)
(214,102)
(199,973)
$
$
$
$
4,438
(187,978)
(183,540) $
3,937
(203,910)
(199,973)
U.S. State
__________
(1) Net operating losses (“NOLs”) are presented as pre-tax amounts. As of December 31, 2018, the Company had $39.1
million of federal NOL carryforwards available. The Company utilized the remainder of the federal NOLs in 2019.
Investment tax credits
2020
5.1
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based
on the consideration of the weight of both positive and negative evidence, management has determined it is more likely than not
that a portion of the deferred tax assets as of December 31, 2019 and December 28, 2018 related to certain foreign tax credits,
state investment tax credits, and foreign and state net operating losses will not be realized.
- 76 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12.) INCOME TAXES (Continued)
The Company files annual income tax returns in the U.S., various state and local jurisdictions, and in various foreign
jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax
benefits, is examined and finally settled. While it is often difficult to predict the final outcome or the timing of resolution of any
particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most probable outcome.
The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and
circumstances. The resolution of an uncertain tax position, if recognized, would be recorded as an adjustment to the Provision
(Benefit) for Income Taxes and the effective tax rate in the period of resolution.
Below is a summary of changes to the unrecognized tax benefit for fiscal years 2019, 2018 and 2017 (in thousands):
Balance, beginning of year
Additions based upon tax positions related to the current year
Reductions related to prior period tax returns
Reductions relating to settlements with tax authorities
Reductions relating to divestiture
Reductions as a result of a lapse of applicable statute of limitations
Revaluation due to change in tax rate (Tax Reform Act)
2019
2018(1)
2017(2)
$
5,369
$
12,088
$
10,561
300
(1,223)
—
—
—
—
300
(75)
(98)
(6,846)
—
—
3,833
(14)
—
—
(510)
(1,782)
12,088
Balance, end of year
__________
(1) The amounts for 2018 reflect discontinued operations through the date of divestiture of the AS&O Product Line, which is
4,446
5,369
$
$
$
reflected in the table as a reduction relating to divestiture.
(2) The amounts for 2017 include discontinued operations.
The tax years that remain open and subject to tax audits vary depending on the tax jurisdiction. The Internal Revenue Service
(“IRS”) is currently examining the U.S. subsidiaries of the Company for the taxable years 2014 - 2018 and the 2019 taxable
year remains subject to examination by the IRS. The U.S. subsidiaries of the former LRM are still subject to U.S. federal, state,
and local examinations for the taxable years 2006 to 2014.
It is reasonably possible that a reduction of approximately $0.6 million of the balance of unrecognized tax benefits may occur
within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of December 31,
2019, approximately $4.4 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal
impact on state issues), if recognized.
The Company recognizes interest related to unrecognized tax benefits as a component of Provision (Benefit) for Income Taxes
on the Consolidated Statements of Operations. During 2019, 2018 and 2017, the recorded amounts for interest and penalties,
respectively, were not significant.
(13.) COMMITMENTS AND CONTINGENCIES
Litigation
In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”)
alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in
implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. Two juries in the
U.S. District Court for the District of Delaware have returned verdicts finding that AVX infringed on three of the Company’s
patents and awarded the Company $37.5 million in damages. In March 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, the jury
awarded the Company $22.2 million in damages. On July 31, 2019, the U.S. District Court for the District of Delaware entered
an order denying AVX’s post-trial motion to overturn the jury verdict in favor of the Company. On August 23, 2019, AVX filed
its notice of appeal with the United States Court of Appeals for the Federal Circuit and on September 5, 2019, the Company
filed its notice of cross-appeal with the United States Court of Appeals for the Federal Circuit. To date, the Company has
recorded no gains in connection with this litigation.
- 77 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13.) COMMITMENTS AND CONTINGENCIES (Continued)
The Company is a party to various other legal actions arising in the normal course of business. The Company does not expect
that the ultimate resolution of any other pending legal actions will have a material effect on its consolidated results of
operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no
assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in
the future.
Environmental Matters
In January 2015, LRM, which was acquired by the Company in October 2015, was notified by the New Jersey Department of
Environmental Protection (“NJDEP”) of NJDEP’s intent to revoke a no further action determination made by NJDEP in favor
of LRM in 2002 pertaining to a property on which a subsidiary of LRM operated a manufacturing facility in South Plainfield,
New Jersey beginning in 1971. LRM sold the property in 2004 and vacated the facility in 2007. In response to NJDEP’s notice,
the Company further investigated the matter and submitted a technical report to NJDEP in August of 2015 that concluded that
NJDEP’s notice of intent to revoke was unwarranted. After reviewing the Company’s technical report, NJDEP issued a draft
response in May 2016 stating that NJDEP would not revoke the no further action determination at that time, but would require
some additional site investigation to support the Company’s conclusion. The Company met with NJDEP representatives to
discuss the appropriate scope of the requested additional investigation, and the requested additional investigation is ongoing. In
late 2019, NJDEP informed LRM that NJDEP was considering taking over the investigation of the property in light of LRM’s
difficulty in securing access to the property from the current owner. Separately, in April 2019, NJDEP indicated it believes the
property to be a contributing source to local groundwater contamination. The Company disagrees with NJDEP’s assertion;
however, the Company is cooperating with NJDEP on this matter. The Company does not expect this environmental matter will
have a material effect on its consolidated results of operations, financial position or cash flows.
License Agreements
The Company is a party to various license agreements for technology that is utilized in certain of its products. The most
significant of these agreements are the licenses for basic technology used in the production of wet tantalum capacitors, filtered
feedthroughs and MRI compatible lead systems. Expenses related to license agreements were $1.4 million, $1.6 million, and
$1.1 million, for 2019, 2018 and 2017, respectively, and are primarily included in Cost of Sales.
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials
and workmanship. The change in product warranty liability for fiscal years 2019 and 2018 was comprised of the following (in
thousands):
Beginning balance
Additions to warranty reserve, net of reversals
Adjustments to pre-existing warranties
Warranty claims settled
Ending balance
Self-Insurance Liabilities
2019
2018
$
$
2,600
2,605
(1,039)
(2,233)
1,933
$
$
2,820
620
—
(840)
2,600
As of December 31, 2019, and at various times in the past, the Company self-funded its workers' compensation and employee
medical and dental expenses. The Company has established reserves to cover these self-insured liabilities and also maintains
stop-loss insurance to limit its exposures under these programs. Claims reserves represent accruals for the estimated uninsured
portion of reported claims, including adverse development of reported claims, as well as estimates of incurred but not reported
claims. Claims incurred but not reported are estimated based on the Company’s historical experience, which is continually
monitored, and accruals are adjusted when warranted by changes in facts and circumstances. The Company’s actual experience
may be different than its estimates, sometimes significantly. Changes in assumptions, as well as changes in actual experience
could cause these estimates to change. Insurance and claims expense will vary from period to period based on the severity and
frequency of claims incurred in a given period. The Company’s self-insurance reserves totaled $4.5 million and $4.2 million as
of December 31, 2019 and December 28, 2018, respectively. These accruals are recorded in Accrued Expenses and Other
Current Liabilities and Other Long-Term Liabilities in the Consolidated Balance Sheets.
- 78 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14.) LEASES
The Company primarily leases certain office and manufacturing facilities under operating leases, with additional operating
leases for machinery, office equipment and vehicles.
The following table presents the weighted average remaining lease term and discount rate as of December 31, 2019:
Weighted-average remaining lease term of operating leases (in years)
Weighted-average discount rate of operating leases
The components and classification of lease cost as of December 31, 2019 are as follows (in thousands):
Operating lease cost
Short-term lease cost (leases with initial term of 12 months or less)
Variable lease cost
Sublease income
Total lease cost
Cost of sales
SG&A expenses
Research, development and engineering costs
Other operating expenses
Total lease cost
7.4
5.5%
9,870
57
2,419
(1,894)
10,452
8,772
1,107
556
17
10,452
$
$
$
$
The Company’s sublease income is derived primarily from certain real estate leases to several non-affiliated tenants under
operating sublease arrangements.
Operating lease expense for fiscal years 2018 and 2017, under ASC 840, the predecessor to ASC 842, were as follows (in
thousands):
Operating lease expense
2018
2017
$
10,753
$
14,320
At December 31, 2019, the maturities of operating lease liabilities were as follows (in thousands):
2020
2021
2022
2023
2024
Thereafter
Total lease payments
Less imputed interest
Total
9,793
9,284
7,136
6,279
5,755
16,624
54,871
(10,250)
44,621
$
The Company’s future minimum lease commitments, net of sublease income, as of December 28, 2018, under ASC 840 were as
follows (in thousands):
Future minimum lease payments
$
8,562
7,290
7,348
5,269
5,112
14,589
2019
2020
2021
2022
2023
After 2023
As of December 31, 2019, the Company did not have any leases that have not yet commenced.
- 79 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14.) LEASES (Continued)
Supplemental cash flow information related to leases for the fiscal year ended December 31, 2019 is as follows (in thousands):
Cash paid for amounts included in the measurement of operating lease liabilities
ROU assets obtained in exchange for new operating lease liabilities
$
10,235
8,778
During the fiscal year ended December 31, 2019, the Company extended the lease terms for five 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.
(15.) EARNINGS PER SHARE
The following table sets forth a reconciliation of the information used in computing basic and diluted EPS for fiscal years 2019,
2018 and 2017 (in thousands, except per share amounts):
Numerator for basic and diluted EPS:
Income from continuing operations
Income (loss) from discontinued operations
Net income
Denominator for basic EPS:
Weighted average shares outstanding
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units
Denominator for diluted EPS
Basic earnings (loss) per share:
Income from continuing operations
Income (loss) from discontinued operations
Basic earnings per share
Diluted earnings (loss) per share:
Income from continuing operations
Income (loss) from discontinued operations
Diluted earnings per share
$
$
$
$
2019
2018
2017
91,218
5,118
96,336
$
$
47,033
120,931
167,964
$
$
87,087
(20,408)
66,679
32,627
32,136
31,402
410
33,037
460
32,596
654
32,056
$
$
2.80
0.16
2.95
2.76
0.15
2.92
$
$
1.46
3.76
5.23
1.44
3.71
5.15
2.77
(0.65)
2.12
2.72
(0.64)
2.08
The diluted weighted average share calculations do not include the following securities for fiscal years 2019, 2018 and 2017,
which are not dilutive to the EPS calculations or the performance criteria have not been met (in thousands):
Time-vested stock options, restricted stock and restricted stock units
Performance-vested restricted stock units
2019
2018
2017
30
47
237
144
676
285
- 80 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16.) STOCKHOLDERS’ EQUITY
Common Stock
The following table sets forth the changes in the number of shares of common stock for fiscal years 2019 and 2018:
2019
Shares outstanding at beginning of year
Stock options exercised
RSAs issued, net of forfeitures, and vesting of RSUs
Shares outstanding at end of year
2018
Shares outstanding at beginning of year
Stock options exercised
RSAs issued, net of forfeitures, and vesting of RSUs
Shares outstanding at end of year
Issued
Treasury
Stock
Outstanding
32,624,494
116,904
105,619
32,847,017
31,977,953
413,317
233,224
32,624,494
(151,327)
21,866
(17,085)
(146,546)
32,473,167
138,770
88,534
32,700,471
(106,526)
—
(44,801)
(151,327)
31,871,427
413,317
188,423
32,473,167
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income (“AOCI”) is comprised of the following (in thousands):
Defined
Benefit
Plan
Liability
Cash
Flow
Hedges
Foreign
Currency
Translation
Adjustment
Total
Pre-Tax
Amount
Net-of-
Tax
Amount
Tax
December 29, 2017
$
(1,422) $
3,418
$
50,200
$
52,196
$
Unrealized gain on cash flow hedges
Realized gain on foreign currency hedges
Realized gain on interest rate swap hedges
Net defined benefit plan adjustments
Foreign currency translation loss
Reclassifications to earnings(1)
Reclassification to retained earnings(2)
—
—
—
232
—
895
—
December 28, 2018
$
(295) $
Unrealized loss on cash flow hedges
Realized gain on foreign currency hedges
Realized gain on interest rate swap hedges
Net defined benefit plan adjustments
Foreign currency translation loss
—
—
—
(617)
—
1,904
(186)
(1,697)
—
—
—
—
3,439
(4,028)
(148)
(1,621)
—
—
—
—
—
(19,925)
264
—
1,904
(186)
(1,697)
232
(19,925)
1,159
—
$
30,539
$
—
—
—
—
(2,358) $
—
(7,900)
22,639
$
$
33,683
(4,028)
(148)
(1,621)
(617)
(7,900)
19,369
(17) $
(400)
39
356
70
—
(261)
(466)
(679) $
846
31
340
81
—
52,179
1,504
(147)
(1,341)
302
(19,925)
898
(466)
33,004
(3,182)
(117)
(1,281)
(536)
(7,900)
19,988
December 31, 2019
__________
(1) Accumulated foreign currency translation losses of $0.3 million and defined benefit plan liabilities of $0.6 million (net of
income taxes of $0.3 million) were reclassified to earnings during 2018 as a result of the divestiture of the AS&O Product
Line.
(912) $
619
$
$
$
$
(2) Represents the stranded tax effects reclassified from AOCI to retained earnings resulting from the adoption of ASU
2018-02 during 2018.
- 81 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17.) 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 and
contingent consideration. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a
recurring basis.
The Company is exposed to global market risks, including the effect of changes in interest rates and 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 recorded at fair value on the balance sheet.
The following tables provide information regarding assets and liabilities recorded at fair value on a recurring basis (in
thousands):
December 31, 2019
Assets: Foreign currency contracts
Liabilities: Interest rate swaps
Liabilities: Contingent consideration
December 28, 2018
Assets: Interest rate swaps
Liabilities: Foreign currency contracts
Interest Rate Swaps
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$
710
$
— $
710
$
3,068
4,200
—
—
3,068
—
—
—
4,200
$
4,171
$
732
— $
—
4,171
$
732
—
—
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 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 fair value of the Company’s swap 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 receives fair value estimates from the swap agreement counterparties to verify the reasonableness of the Company’s
estimates. 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 swaps designated as cash flow hedges as of December 31, 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%
1.7920% $
65,000
Jul 2019
Jul 2020
400,000 Apr 2019 Apr 2020
200,000
Jun 2020
Jun 2023
1.8900
2.4150
2.1785
1.7920
1.7101
(1)
__________
(1) The interest rate swap is not in effect until June 2020.
543 Accrued expenses and other current liabilities
(72) Accrued expenses and other current liabilities
(730) Accrued expenses and other current liabilities
(2,809) Other long-term liabilities
- 82 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
As of December 28, 2018, the Company had outstanding an interest rate swap with a notional amount of $200 million. The fair
value as of December 28, 2018 was $4.2 million and was included in Other assets in the Consolidated Balance Sheets.
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 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 rate 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. The Company’s foreign currency contracts are categorized in Level 2 of the fair
value hierarchy. The fair value of the Company’s foreign currency contracts will be realized as Sales or Cost of Sales as the
inventory, which the contracts are hedging, is sold.
Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of December 31, 2019
is as follows (dollars in thousands):
Notional
Amount
Start
Date
End
Date
$/Foreign Currency
Fair
Value
Balance Sheet Location
$ 11,166
Jan 2020
Jun 2020
0.0490
Peso
$
710 Prepaid expenses and other current assets
Information regarding outstanding foreign currency contracts designated as cash flow hedges as of December 28, 2018 is as
follows (dollars in thousands):
Aggregate
Notional
Amount
Start
Date
End
Date
$/Foreign
Currency
Fair
Value
Balance Sheet Location
$
12,621
Jan 2019
Jun 2019
10,991
Jan 2019
Jun 2019
10,535
Jan 2019
Jun 2019
11,019
Jan 2019
Jun 2019
10,499
Jul 2019 Dec 2019
$
1.1686
0.0523
1.1705
0.0483
0.0500
Euro
Peso
Euro
Peso
Peso
(149) Accrued expenses and other current liabilities
(494) Accrued expenses and other current liabilities
(141) Accrued expenses and other current liabilities
(316) Accrued expenses and other current liabilities
368 Accrued expenses and other current liabilities
Derivative Instruments with Hedge Accounting Designation
The following table presents the impact of cash flow hedge derivative instruments on other comprehensive income (“OCI”),
AOCI and the Company’s Consolidated Statement of Operations for fiscal years 2019, 2018 and 2017 (in thousands):
Gain (Loss) Recognized in OCI
Gain (Loss) Reclassified from AOCI
Derivative
Interest rate swaps
2019
2018
2017
Location in Statement
of Operations
$ (5,618) $
1,589
$
1,263
Interest expense
Foreign exchange contracts
(1,044)
(1,193)
1,472
Sales
Foreign exchange contracts
2,634
1,508
972 Cost of sales
2019
2018
2017
$
$
1,621
(1,334)
1,482
1,697
(758)
944
$
466
1,327
(84)
The Company expects to reclassify net losses totaling $0.2 million related to its cash flow hedges from AOCI into earnings
during the next twelve months.
Contingent Consideration
Contingent consideration liabilities are remeasured to fair value each reporting period using assumptions including estimated
revenues (based on internal operational budgets and long-range strategic plans), discount rates, probability of payment and
projected payment dates.
- 83 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The contingent consideration fair value measurement is based on significant inputs not observable in the market and therefore
constitute Level 3 inputs within the fair value hierarchy. The Company determines the fair value of the contingent consideration
liabilities using a Monte Carlo simulation (which involves a simulation of future revenues during the earn out-period using
management's best estimates) or a probability-weighted discounted cash flow analysis. Increases in projected revenues,
estimated cash flows and probabilities of payment may result in significantly higher fair value measurements; decreases in these
items may have the opposite effect. Increases in the discount rates in periods prior to payment may result in significantly lower
fair value measurements and decreases in the discount rates may have the opposite effect.
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 due to the short-
term nature of these items.
Borrowings under the Company’s Revolving Credit Facility, TLA Facility and TLB Facility accrue interest at a floating rate
tied to 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 based upon the respective interest rates adjusting with market rate
adjustments.
Equity Investments
Equity investments are comprised of the following (in thousands):
Equity method investment
Non-marketable equity securities
Total equity investments
December 31,
2019
December 28,
2018
$
$
16,167
6,092
22,259
$
$
15,148
7,667
22,815
The components of (Gain) Loss on Equity Investments, Net for each period were as follows (in thousands):
Equity method investment income
Impairment charges
Total (gain) loss on equity investments, net
2019
2018
2017
$
$
(1,100) $
1,575
475
$
(5,623) $
—
(5,623) $
(3,685)
5,250
1,565
During 2019, the Company determined that an investment in one of its non-marketable equity securities was impaired and
determined the fair value to be zero based upon available market information. This assessment was based on qualitative
indications of impairment. Factors that significantly influenced the determination of the impairment loss included the equity
security’s investee’s financial condition, priority claims to the equity security, distributions rights and preferences, and status of
the regulatory approval required to bring its product to market. Prior to the adoption of ASU 2016-01, the Company accounted
for its non-marketable equity securities under the cost method of accounting. The other than temporary impairment charges
during 2017 relate to non-marketable equity securities under the cost method of accounting.
There were no observable price adjustments on non-marketable equity securities related to the adoption of ASU 2016-01 during
2018 or 2019 and this is not applicable in prior periods.
The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies.
As of December 31, 2019, the Company owned 6.7% of this fund.
Pension Plan Assets
The fair value of the Company’s pension plan assets are determined based upon quoted market prices in inactive markets or
valuation models with observable market data inputs to estimate fair value. These observable market data inputs include
benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.
The Company’s pension plan assets are categorized Level 2 of the fair value hierarchy.
- 84 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18.) SEGMENT AND GEOGRAPHIC 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.
The Company defines segment income from operations as sales less cost of sales including amortization and expenses
attributable to segment-specific selling, general, administrative, research, development, engineering and other operating
activities. The remaining unallocated operating and other expenses are primarily administrative corporate headquarter expenses
and capital costs that are not allocated to reportable segments. Transactions between the two segments are not significant.
The following table presents sales by product line for fiscal years 2019, 2018 and 2017 (in thousands).
Segment sales by product line:
Medical
Cardio & Vascular
Cardiac & Neuromodulation
Advanced Surgical, Orthopedics & Portable Medical
Total Medical
Non-Medical
Total sales
Geographic Area Information
2019
2018
2017
$
610,056
$
585,464
$
457,194
132,429
443,347
133,225
530,831
428,275
120,006
1,199,679
1,162,036
1,079,112
58,415
52,976
56,968
$
1,258,094
$
1,215,012
$
1,136,080
The following table presents sales by significant country for fiscal years 2019, 2018 and 2017. In these tables, sales are
allocated based on where the products are shipped (in thousands).
Sales by geographic area:
United States
Non-Domestic locations:
Puerto Rico
Costa Rica
Rest of world
Total sales
2019
2018
2017
$
698,474
$
687,259
$
662,133
154,644
63,634
341,342
146,500
62,044
319,209
140,184
55,364
278,399
$
1,258,094
$
1,215,012
$
1,136,080
The following table presents revenues by significant customers, which are defined as any customer who individually represents
10% or more of a segment’s total revenues for fiscal years 2019 and 2018.
Customer
Customer A
Customer B
Customer C
Customer D
All other customers
__________
2019
2018
Medical
Non-Medical
Medical
Non-Medical
22%
18%
12%
*
48%
*
*
*
22%
78%
22%
19%
12%
*
47%
*
*
*
28%
72%
* Less than 10% of segment’s total revenues for the period.
- 85 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18.) SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
The following table presents revenues by significant ship to location, which is defined as any country where 10% or more of a
segment’s total revenues are shipped for fiscal years 2019 and 2018.
Ship to Location
United States
Puerto Rico
Canada
Rest of world
__________
2019
Non-Medical
58%
*
13%
29%
Medical
56%
13%
*
31%
2018
Non-Medical
66%
*
11%
23%
Medical
55%
13%
*
32%
* Less than 10% of segment’s total revenues for the period.
The following table presents income from continuing operations for the Company’s reportable segments for fiscal years 2019,
2018 and 2017 (in thousands).
Segment income from continuing operations:
Medical
Non-Medical
Total segment income from continuing operations
Unallocated operating expenses
Operating income
Unallocated expenses, net
2019
2018
2017
$
223,873
$
224,893
$
197,212
16,289
240,162
(82,527)
157,635
(52,442)
105,193
$
14,697
239,590
(84,035)
155,555
(94,439)
61,116
$
11,335
208,547
(82,898)
125,649
(76,390)
49,259
Income from continuing operations before taxes
$
The following table presents depreciation and amortization expense for the Company’s reportable segments for fiscal years
2019, 2018 and 2017 (in thousands).
Segment depreciation and amortization:
Medical
Non-Medical
Total depreciation and amortization included in segment
income from continuing operations
Unallocated depreciation and amortization
Total depreciation and amortization
2019
2018
2017
$
68,867
$
71,922
$
1,039
69,906
7,989
1,364
73,286
8,252
$
77,895
$
81,538
$
72,314
2,675
74,989
6,194
81,183
The following table presents total assets for the Company’s reportable segments as of December 31, 2019 and December 28,
2018 (in thousands).
Identifiable assets:
Medical
Non-Medical
Total reportable segments
Unallocated assets
Total assets
- 86 -
December 31,
2019
December 28,
2018
$
2,233,534
$
2,186,565
51,031
53,812
2,284,565
2,240,377
68,528
86,304
$
2,353,093
$
2,326,681
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18.) SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
The following table presents capital expenditures for the Company’s reportable segments for fiscal years 2019, 2018 and 2017
(in thousands).
Expenditures for tangible long-lived assets:
Medical
Non-Medical
Total reportable segments
Unallocated long-lived tangible assets
Total expenditures
2019
2018
2017
$
$
44,026
$
34,615
$
20,896
397
44,423
3,775
573
35,188
6,110
48,198
$
41,298
$
661
21,557
8,783
30,340
The following table presents PP&E by geographic area as of December 31, 2019 and December 28, 2018. In these tables,
PP&E is aggregated based on the physical location of the tangible long-lived assets (in thousands).
Long-lived tangible assets by geographic area:
United States
Mexico
Ireland
Rest of world
Total
December 31,
2019
December 28,
2018
$
163,350
$
151,851
36,238
33,126
13,471
34,606
32,190
12,622
$
246,185
$
231,269
(19.) REVENUE FROM CONTRACTS WITH CUSTOMERS
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 18, “Segment and Geographic Information.”
A significant portion of the Company’s sales for fiscal years 2019, 2018 and 2017 and accounts receivable at December 31,
2019 and December 28, 2018 were to three customers as follows:
Customer A
Customer B
Customer C
Sales
2018
21%
19%
12%
52%
2019
21%
17%
12%
50%
2017
22%
20%
11%
53%
Accounts Receivable
December 31,
2019
December 28,
2018
13%
19%
20%
52%
11%
18%
20%
49%
Revenue recognized from products and services transferred to customers over time represented 12% of total revenue for fiscal
year 2019, substantially all of which was within the Medical segment. The Company did not have any significant revenue
related to contracts recognized over time for fiscal year 2018.
- 87 -
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19.) REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
Contract Balances
The opening and closing balances of the Company's contract assets and contract liabilities are as follows (in thousands):
Contract assets
Contract liabilities
December 31,
2019
December 28,
2018
$
24,767
$
1,975
—
2,264
During the fiscal year ended December 31, 2019, the Company recognized $1.4 million of revenue that was included in the
contract liability balance as of December 28, 2018. During the fiscal year ended December 28, 2018, the Company recognized
$0.6 million of revenue that was included in the contract liability balance as of December 29, 2017.
(20.) QUARTERLY SALES AND EARNINGS DATA—UNAUDITED
(in thousands, except per share data)
Fiscal Year 2019
Sales
Gross profit
Income from continuing operations
EPS—basic
EPS—diluted
Fiscal Year 2018
Sales
Gross profit
Income (loss) from continuing operations
EPS—basic
EPS—diluted
__________
Fourth
Quarter
Third
Quarter
Second
Quarter
First
Quarter
$
325,637
76,030 (1)
11,044 (1)
0.34
0.33
$
303,587
$
314,194
$
314,676
93,386
30,586
0.94
0.92
96,984
28,222
0.87
0.85
88,610
21,366
0.66
0.65
$
303,034
$
305,088
$
314,464
$
292,426
88,445
19,196
0.59
0.58
91,923
(8,303)
(0.26)
(0.26)
98,765
23,056
0.72
0.70
83,532
13,084
0.41
0.40
(1)
In the fourth quarter of 2019, the Company recorded pre-tax charges and other expenses of $24 million related to the
bankruptcy filing of a customer. These charges were included included in cost of sales ($21 million) and operating
expenses ($3 million).
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
- 88 -
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Report on Internal Control Over Financial Reporting appears in Part II, Item 8, “Financial Statements and
Supplementary Data” of this report and is incorporated into this Item 9A by reference.
a. Evaluation of Disclosure Controls and Procedures
Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording,
processing, summarization and reporting of information in our reports that we file with the SEC as of December 31, 2019. These
disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us,
including our subsidiaries, is made known to our management, including these officers, by our employees, and that this
information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the
SEC’s rules and forms. Based on their evaluation, as of December 31, 2019, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures are effective.
b. Changes in Internal Control Over Financial Reporting
With the exception of integration activities in connection with the Company's acquisition of certain assets from USB, there were
no changes in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter
ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
On October 7, 2019, the Company completed its acquisition of certain assets from USB. Prior to this acquisition, USB was a privately-
held company not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance
requirements to which public companies may be subject. As of and for the fiscal year ended December 31, 2019, the operations
associated with the assets acquired from USB constituted 1% of net assets, less than 1% of total assets, less than 1% of sales, and
less than 1% of net income of the consolidated financial statement amounts as of and for the year ended December 31, 2019.
As part of the Company's ongoing integration activities, the Company is in the process of incorporating internal controls specific to
the operations associated with the assets acquired from USB that the Company believes are appropriate and necessary to account
for the acquisition and to consolidate and report these operations as part of Company's financial results. In accordance with guidance
issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial
reporting during the year of acquisition. Accordingly, the Company has excluded the operations associated with the assets acquired
from USB from the Company's assessment of internal control over financial reporting as of December 31, 2019 as the Company's
integration activities are ongoing and incomplete. Refer to the Company's management report on internal control over financial
reporting included in Part II, Item 8, “Financial Statements and Supplementary Data” of this report for additional information.
ITEM 9B. OTHER INFORMATION
None.
- 89 -
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the Company’s directors appearing under the caption “Election of Directors” in the Company’s Proxy
Statement for its 2020 Annual Meeting of Stockholders is incorporated herein by reference.
Information regarding the Company’s executive officers is presented under the caption “Information About our Executive
Officers” in Part I of this Annual Report on Form 10-K.
The other information required by Item 10 is incorporated herein by reference from the Company’s Proxy Statement for its
2020 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation appearing under the captions “Compensation Discussion and Analysis”,
“Executive Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy
Statement for the 2020 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners and management and related stockholder matters, including
the table titled “Equity Compensation Plan Information” and under the caption “Stock Ownership by Directors and Executive
Officers” in the Company’s Proxy Statement for the 2020 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence under the captions “Related
Person Transactions” and “Board Independence” in the Company’s Proxy Statement for the 2020 Annual Meeting of Stockholders
is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding the fees paid to and services provided by Deloitte & Touche LLP, the Company’s independent registered
public accounting firm under the caption “Ratification of the Appointment of Independent Registered Public Accounting Firm” in
the Company’s Proxy Statement for the 2020 Annual Meeting of Stockholders is incorporated herein by reference.
- 90 -
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Financial statements and financial statement schedules filed as part of this Annual Report on Form 10-K. Refer to Part II,
Item 8. “Financial Statements and Supplementary Data.”
(2) The following financial statement schedule is included in this Annual Report on Form 10-K (in thousands):
Schedule II—Valuation and Qualifying Accounts
Column A
Description
December 31, 2019
Allowance for doubtful accounts
Valuation allowance for deferred tax assets
December 28, 2018
Allowance for doubtful accounts
Valuation allowance for deferred tax assets
December 29, 2017
Allowance for doubtful accounts
$
475
Valuation allowance for deferred tax assets
$ 35,391
Col. C—Additions
Col. B
Balance at
Beginning
of Period
Charged
to Costs
&
Expenses
Charged
to Other
Accounts-
Describe
Col. D
Deductions
- Describe
Col. E
Balance at
End of
Period
592
$
$ 34,339
$
536
$ 36,480
$
$
$
$
$
$
1,884 (1) $
736 (2) $
2 (3)
—
169
—
$
$
(2) (3)
(170) (3)
194
$
3,284 (2) $
—
—
(35) (4)
2,443
$
$ (12,846) (2)(4)(5) $ 22,229
$
$
$
$
$
(111) (4)
592
(1,971) (2)(4)(5) $ 34,339
$
(133) (4)
(2,195) (4)(5)
$
536
$ 36,480
(1) Valuation allowance recorded in the provision for doubtful accounts. The 2019 amount includes a $2.3 million reserve
recorded in connection with a customer bankruptcy, net of adjustments to the Company’s general reserve.
(2) Valuation allowance recorded in the provision for income taxes for certain net operating losses and tax credits. The 2019
deductions includes a release of the allowance for net operating losses utilized during 2019, the expiration of certain net
operating losses, and the expiration of certain foreign and state tax credits. The decrease in 2018 includes the impact of
the divestiture of the AS&O Product Line. The increase in 2017 includes the impact of the adoption of the Tax Reform
Act, which increased the value of our state deferred tax assets to which a corresponding valuation allowance was
recorded.
(3)
Includes foreign currency translation effect.
(4) Accounts written off.
(5)
Includes return to provision adjustments for prior years.
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is
shown in the financial statements or notes thereto.
(3) See exhibits listed under Part (b) below.
(b) EXHIBITS:
EXHIBIT
NUMBER
2.1
2.2
DESCRIPTION
Agreement and Plan of Merger, dated as of August 27, 2015, by and among Lake Region Medical Holdings, Inc.,
Greatbatch, Inc. and Provenance Merger Sub Inc. (incorporated by reference to Exhibit 2.1 to our Current Report
on Form 8-K filed on August 31, 2015).
Separation and Distribution Agreement, dated March 14, 2016, between Greatbatch, Inc. and QiG Group, LLC
(incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on March 18, 2016).
- 91 -
EXHIBIT
NUMBER
DESCRIPTION
2.3
3.1
3.2
4.1*
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8#
10.9#
10.10#
10.11#
10.12#
10.13#
10.14#
Master Purchase and Sale Agreement, dated as of May 3, 2018, by and among Greatbatch Ltd., Bandera
Acquisition, LLC and, solely for purposes of being bound by Section 10.1(f), Section 10.3 and Section 11.13,
Integer Holdings Corporation (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on
July 9, 2018).
Restated Certificate of Incorporation of Integer Holdings Corporation (incorporated by reference to Exhibit 3.1 to
our Quarterly Report on Form 10-Q for the period ended July 1, 2016).
By-laws of Integer Holdings Corporation (Amended as of August 3, 2016) (incorporated by reference to Exhibit
3.2 to our Quarterly Report on Form 10-Q for the period ended July 1, 2016).
Description of Securities of Integer Holdings Corporation registered under Section 12 of the Exchange Act.
Credit Agreement, dated as of October 27, 2015, by among Greatbatch Ltd., as the borrower, Greatbatch, Inc., as
parent, the financial institutions party thereto and Manufacturers and Traders Trust Company, as administrative
agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on October 28, 2015).
Amendment No. 1 to Credit Agreement, dated as of November 29, 2016, between Greatbatch Ltd., as the borrower,
Integer Holdings Corporation, as parent, and Manufacturers and Traders Trust Company, as administrative agent,
and the Lenders party thereto. (incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for
the year ended December 30, 2016).
Amendment No. 2 to Credit Agreement, dated as of March 17, 2017, by and among the lenders party thereto,
Greatbatch Ltd., as the borrower, Integer Holdings Corporation, as parent, Manufacturers and Traders Trust
Company, as administrative agent, and Credit Suisse Securities (USA) LLC, as arranger (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on March 20, 2017).
Amendment No. 3 to Credit Agreement, dated as of November 7, 2017, by and among the lenders party thereto,
Greatbatch Ltd., as the borrower, Integer Holdings Corporation, as parent, Manufacturers and Traders Trust
Company, as administrative agent, and Credit Suisse Securities (USA) LLC, as arranger (incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed on November 7, 2017).
Amendment No. 4 to Credit Agreement, dated as of June 8, 2018, among Greatbatch Ltd., as the borrower, Integer
Holdings Corporation, as parent, Manufacturers and Traders Trust Company, as administrative agent, and the
Lenders party thereto (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June
8, 2018).
Amendment No. 5 to Credit Agreement, dated as of November 21, 2019, among Greatbatch Ltd., as the borrower,
Integer Holdings Corporation, as parent, Manufacturers and Traders Trust Company, as administrative agent and as
arranger, and the Lenders party thereto. (incorporated by reference to Exhibit 10.1 to our Current Report on Form
8-K filed on November 21, 2019).
Amendment No. 6 to Credit Agreement, dated as of November 21, 2019, by and among Greatbatch Ltd., as the
borrower, Integer Holdings Corporation, as the parent, Manufacturers and Traders Trust Company, as
administrative agent, Credit Suisse Loan Funding LLC, as arranger, and the lenders party thereto (incorporated by
reference to Exhibit 10.2 to our Current Report on Form 8-K filed on November 21, 2019).
Integer Holdings Corporation Executive Short Term Incentive Compensation Plan (incorporated by reference to
Exhibit A to our Definitive Proxy Statement on Schedule 14A filed on April 17, 2017).
2005 Stock Incentive Plan (incorporated by reference to Exhibit B to our Definitive Proxy Statement on Schedule
14A filed on April 20, 2007 (File No. 001-16137)).
2009 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule
14A filed on April 13, 2009 (File No. 001-16137)).
2011 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule
14A filed on April 14, 2014).
Greatbatch, Inc. 2016 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy
Statement on Schedule 14A filed on April 18, 2016).
Amendment to Greatbatch, Inc. 2011 Stock Incentive Plan, Greatbatch, Inc. 2009 Stock Incentive Plan, Greatbatch,
Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for
the year ended January 3, 2014).
Second Amendment to Greatbatch, Inc. 2011 Stock Incentive Plan and Greatbatch, Inc. 2009 Stock Incentive Plan
(incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the year ended December 30,
2016).
- 92 -
EXHIBIT
NUMBER
10.15#
10.16#
10.17#
10.18#
10.19#
10.20#
10.21#
10.22#
10.23#
10.24#
10.25#
10.26#
10.27#
10.28#
10.29#*
10.30#*
10.31#*
10.32#*
10.33#*
10.34#*
10.35#
DESCRIPTION
First Amendment to Greatbatch, Inc. 2016 Stock Incentive Plan (incorporated by reference to Exhibit 10.16 to our
Annual Report on Form 10-K for the year ended December 30, 2016).
Amendment to Integer Holdings Corporation 2016 Stock Incentive Plan, Integer Holdings Corporation 2011 Stock
Incentive Plan, Integer Holdings Corporation 2009 Stock Incentive Plan (incorporated by reference to Exhibit
10.31 to our Annual Report on Form 10-K for the year ended December 28, 2018).
Amendment to Integer Holdings Corporation 2016 Stock Incentive Plan and Integer Holdings Corporation 2011
Stock Incentive Plan.
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.15 to our Annual Report on
Form 10-K for the year ended January 3, 2014).
Form of Performance-Based Restricted Stock Units Award Agreement (incorporated by reference to Exhibit 10.3 to
our Quarterly Report on Form 10-Q for the period ended March 31, 2017).
Form of Nonqualified Stock Option Award Letter (incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the period ended March 31, 2017).
Form of Restricted Stock Units Award Letter (incorporated by reference to Exhibit 10.2 to our Quarterly Report on
Form 10-Q for the period ended March 31, 2017).
Form of Time-Based Restricted Stock Units Award Agreement (for awards granted on or after February 28, 2019)
(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended March 29,
2019).
Form of Financial Performance Restricted Stock Units Award Agreement (for awards granted on or after February
28, 2019) (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended
March 29, 2019).
Form of Market-based Performance Restricted Stock Units Award Agreement (for awards granted on or after
February 28, 2019) (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period
ended March 29, 2019).
Form of Time-Based Restricted Stock Units Award Agreement for Joseph Dziedzic (for awards granted on or after
February 28, 2019) (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the period
ended March 29, 2019).
Form of Financial Performance Restricted Stock Units Award Agreement for Joseph Dziedzic (for awards granted
on or after February 28, 2019) (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for
the period ended March 29, 2019).
Form of Market-based Performance Restricted Stock Units Award Agreement for Joseph Dziedzic (for awards
granted on or after February 28, 2019) (incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form
10-Q for the period ended March 29, 2019).
Form of Restricted Stock Unit Agreement for Non-Employee Directors (incorporated by reference to Exhibit 10.7
to our Quarterly Report on Form 10-Q for the period ended March 29, 2019).
Form of Time-Based Restricted Stock Units Award Agreement (for awards granted on or after January 1, 2020).
Form of Financial Performance Restricted Stock Units Award Agreement (for awards granted on or after January 1,
2020).
Form of Market-Based Performance Restricted Stock Units Award Agreement (for awards granted on or after
January 1, 2020).
Form of Time-Based Restricted Stock Units Award Agreement for Joseph Dziedzic (for awards granted on or after
January 1, 2020).
Form of Financial Performance Restricted Stock Units Award Agreement for Joseph Dziedzic (for awards granted
on or after January 1, 2020).
Form of Market-Based Performance Restricted Stock Units Award Agreement for Joseph Dziedzic (for awards
granted on or after January 1, 2020).
Form of Change of Control Agreement between Integer Holdings Corporation and its executive officers
(incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 28,
2012).
- 93 -
EXHIBIT
NUMBER
10.36#
10.37#
10.38#
DESCRIPTION
Employment Agreement, dated July 16, 2017, between Integer Holdings Corporation and Joseph W. Dziedzic
(incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on July 17, 2017).
Employment Offer Letter, dated September 14, 2018, between Integer Holdings Corporation and Jason Garland
(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended September
28, 2018).
Employment Offer Letter, dated November 30, 2017, between Integer Holdings Corporation and Kirk Thor
(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended June 28,
2019).
10.39#*
Employment Offer Letter, dated December 14, 2015, between Integer Holdings Corporation and Joseph Flanagan.
10.40#*
Separation Agreement and Release, effective as of January 13, 2020, between Antonio Gonzalez and Integer
Holdings Corporation.
21.1*
23.1*
31.1*
31.2*
32.1**
Subsidiaries of Integer Holdings Corporation
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
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* XRBL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
104
* -
** -
# -
Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101)
Filed herewith.
Furnished herewith.
Indicates exhibits that are management contracts or compensation plans or arrangements required to be filed pursuant to
Item 15(b) of Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
- 94 -
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTEGER HOLDINGS CORPORATION
SIGNATURES
Dated: February 20, 2020
By /s/ Joseph W. Dziedzic
Joseph W. Dziedzic (Principal Executive Officer)
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
President, Chief Executive Officer and Director
February 20, 2020
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
February 20, 2020
(Principal Financial Officer)
Vice President, Corporate Controller
(Principal Accounting Officer)
February 20, 2020
Chairman
February 20, 2020
/s/ Joseph W. Dziedzic
Joseph W. Dziedzic
/s/ Jason K. Garland
Jason K. Garland
/s/ Tom P. Thomas
Tom P. Thomas
/s/ Bill R. Sanford
Bill R. Sanford
/s/ Pamela G. Bailey
Pamela G. Bailey
/s/ James F. Hinrichs
James F. Hinrichs
/s/ Jean M. Hobby
Jean M. Hobby
/s/ M. Craig Maxwell
M. Craig Maxwell
/s/ Filippo Passerini
Filippo Passerini
/s/ Peter H. Soderberg
Peter H. Soderberg
/s/ Donald J. Spence
Donald J. Spence
Director
Director
Director
Director
Director
Director
Director
/s/ William B. Summers, Jr.
Director
William B. Summers, Jr.
- 95 -
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
February 20, 2020
SUBSIDIARIES OF INTEGER HOLDINGS CORPORATION
EXHIBIT 21.1
Subsidiary
Accellent LLC
Brivant Limited, d/b/a Lake Region Medical
Jurisdiction of
Colorado
Ireland
Centro de Construcción de Cardioestimuladores del Uruguay SA
Uruguay
Electrochem Solutions, Inc.
Massachusetts
Integer EBDO SA
Greatbatch Ltd., d/b/a Greatbatch Medical
Greatbatch Medical, S. de R.L. de C.V.
Greatbatch Medical SA
Greatbatch MCSO, S. de R.L. de C.V
Greatbatch Netherlands B.V.
Integer Europe GmbH
Integer Finance GmbH
Integer Ireland Medical Limited
Switzerland
New York
Mexico
Switzerland
Mexico
Netherlands
Switzerland
Switzerland
Ireland
Lake Region Manufacturing, Inc., d/b/a Lake Region Medical
Minnesota
Lake Region Medical Limited
Ireland
Lake Region Medical, Inc., d/b/a Lake Region Medical
Maryland
Lake Region Medical Holdings Limited
Lake Region Medical Sdn. Bhd.
Lake (Shanghai) Medical Device Trading Co., Ltd.
Venusa de Mexico, S. de R.L. de C.V.
Venusa, Ltd
Ireland
Malaysia
China
Mexico
New York
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-61476, 333-97209, 333-129002,
333-143519, 333-161159, 333-174559, 333-184604, 333-196320, and 333-211609 on Form S-8 and Registration
Statement No. 333-210967 on Form S-3 of our reports dated February 20, 2020, relating to the financial statements
of Integer Holdings Corporation (the “Company”), and the effectiveness of the Company’s internal control over
financial reporting appearing in this Annual Report on Form 10-K for the year ended December 31, 2019.
/s/ Deloitte & Touche LLP
Williamsville, New York
February 20, 2020
CERTIFICATION
EXHIBIT 31.1
I, Joseph W. Dziedzic, certify that:
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2019 of Integer Holdings
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditor and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Dated: February 20, 2020
/s/ Joseph W. Dziedzic
Joseph W. Dziedzic
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION
EXHIBIT 31.2
I, Jason K. Garland, certify that:
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended December 31, 2019 of Integer Holdings
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by the report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered
by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditor and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in
the registrant’s internal control over financial reporting.
Dated: February 20, 2020
/s/ Jason K. Garland
Jason K. Garland
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned officers of Integer Holdings Corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “Form 10-K”) of the Company fully
complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained
in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: February 20, 2020
Dated: February 20, 2020
/s/ Joseph W. Dziedzic
Joseph W. Dziedzic
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Jason K. Garland
Jason K. Garland
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Leadership Team
Joseph W. Dziedzic
President and Chief Executive Officer
Jason K. Garland
Executive Vice President and
Chief Financial Officer
Joel Becker
President, CRM & Neuromodulation
Anthony Borowicz
Senior Vice President,
Strategy, Business Development
and Investor Relations
Joseph Flanagan
Executive Vice President,
Quality and Regulatory Affairs
Elizabeth Giddens
Senior Vice President, General
Counsel, Chief Ethics and Compliance
Officer and Corporate Secretary
Carter Houghton
President, Electrochem and
Power Solutions
Payman Khales
President,Cardio & Vascular
Kirk Thor
Executive Vice President,
Chief Human Resources Officer
Jennifer M. Bolt
Senior Vice President,
Global Operations
Board of Directors
Pamela G. Bailey
Retired President and Chief Executive
Officer, The Grocery Manufacturers
Association
Joseph W. Dziedzic
President and Chief Executive Officer,
Integer Holdings Corporation
James F. Hinrichs
Former Chief Financial Officer,
Alere and CareFusion
Investor Information
Stock Exchange Listing
NYSE: ITGR
Global Headquarters
5830 Granite Parkway, Suite 1150
Plano, TX 75024
Independent Registered
Public Accounting Firm
Deloitte & Touche LLP
Williamsville, NY
Jean Hobby
Retired Partner,
PricewaterhouseCoopers, LLP
Bill R. Sanford,
Chairman Founder and Chairman,
Symark LLC
M. Craig Maxwell
Vice President and Chief
Technology and Innovation Officer,
Parker Hannifin Corporation
Peter H. Soderberg
Managing Partner,
Worthy Ventures Resources, LLC
Donald J. Spence
Retired President and Chief Executive
Officer, Ebb Therapeutics
William B. Summers, Jr.
Retired Chairman and Chief Executive
Officer, McDonald Investments, Inc.
Transfer Agent
Computershare Shareholder Services
P.O. Box 505000
Louisville, KY 40233-5000
(877) 832-7265
(201) 680-6578
www.computershare.com/investor
For Overnight Delivery:
462 South 4th Street, Suite 1600
Louisville, KY 40202
Filippo Passerini
Retired Group President and
Chief Information Officer,
Procter & Gamble Company
Investor Relations
Anthony Borowicz
Senior Vice President,
Strategy, Business Development
and Investor Relations
(716) 759-5809
You may also contact us by sending
an email to IR@integer.net or by
visiting the Investor Relations section
of the Company’s website at
investor.integer.net. The
Company’s publicly filed reports,
including financial statements, are
available on the Securities and
Exchange Commission’s EDGAR
system (www.sec.gov).
Integer Holdings Corporation
5830 Granite Parkway, Suite 1150
Plano, TX 75024
(214) 618-5243 | Integer.net