The accompanying notes are an integral part of these consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| Fiscal Year Ended |
(in thousands) | December 31, 2019 | | December 28, 2018 | | December 29, 2017 |
Cash flows from operating activities: | | | | | |
Net income | $ | 96,336 |
| | $ | 167,964 |
| | $ | 66,679 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Depreciation and amortization | 77,895 |
| | 88,988 |
| | 102,796 |
|
Debt related charges included in interest expense | 7,772 |
| | 49,110 |
| | 10,911 |
|
Stock-based compensation | 9,294 |
| | 10,470 |
| | 14,680 |
|
Non-cash charges related to customer bankruptcy | 21,695 |
| | — |
| | — |
|
Non-cash lease expense | 7,443 |
| | — |
| | — |
|
Non-cash (gain) loss on equity investments | 475 |
| | (5,623 | ) | | 2,965 |
|
Other non-cash (gains) losses | (162 | ) | | 148 |
| | 7,110 |
|
Deferred income taxes | (10,285 | ) | | 61,126 |
| | (59,212 | ) |
Gain on sale of discontinued operations | (4,974 | ) | | (194,965 | ) | | — |
|
Changes in operating assets and liabilities, net of acquisition: | | | | | |
Accounts receivable | (6,976 | ) | | 9,289 |
| | (34,597 | ) |
Inventories | 3,724 |
| | (16,094 | ) | | (986 | ) |
Prepaid expenses and other assets | (31,060 | ) | | 8,527 |
| | 4,854 |
|
Accounts payable | 1,887 |
| | (94 | ) | | 4,887 |
|
Accrued expenses | (2,744 | ) | | (11,756 | ) | | 14,977 |
|
Income taxes payable | (4,962 | ) | | 209 |
| | 14,293 |
|
Net cash provided by operating activities | 165,358 |
| | 167,299 |
| | 149,357 |
|
Cash flows from investing activities: | | | | | |
Acquisition of property, plant and equipment | (48,198 | ) | | (44,908 | ) | | (47,301 | ) |
Proceeds from sale of property, plant and equipment | 28 |
| | 1,379 |
| | 472 |
|
Purchase of equity investments | (417 | ) | | (1,230 | ) | | (1,316 | ) |
Proceeds from sale of discontinued operations | 4,734 |
| | 581,429 |
| | — |
|
Acquisition | (15,009 | ) | | — |
| | — |
|
Other investing activities | — |
| | — |
| | 209 |
|
Net cash (used in) provided by investing activities | (58,862 | ) | | 536,670 |
| | (47,936 | ) |
Cash flows from financing activities: | | | | | |
Principal payments of long-term debt | (111,500 | ) | | (631,469 | ) | | (162,558 | ) |
Proceeds from senior secured revolving line of credit | 34,000 |
| | 5,000 |
| | 50,000 |
|
Payments of senior secured revolving line of credit | (39,000 | ) | | (74,000 | ) | | (16,000 | ) |
Proceeds from the exercise of stock options | 3,242 |
| | 12,409 |
| | 19,324 |
|
Payment of debt issuance and redemption costs | (1,385 | ) | | (31,991 | ) | | (2,360 | ) |
Tax withholdings related to net share settlements of restricted stock awards | (3,283 | ) | | (5,029 | ) | | (75 | ) |
Net cash used in financing activities | (117,926 | ) | | (725,080 | ) | | (111,669 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | (604 | ) | | 2,584 |
| | 2,228 |
|
Net decrease in cash and cash equivalents | (12,034 | ) | | (18,527 | ) | | (8,020 | ) |
Cash and cash equivalents, beginning of year | 25,569 |
| | 44,096 |
| | 52,116 |
|
Cash and cash equivalents, end of year | $ | 13,535 |
| | $ | 25,569 |
| | $ | 44,096 |
|
The accompanying notes are an integral part of these consolidated financial statements.
INTEGER HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
| | | | | | | | | | | |
| Fiscal Year Ended |
(in thousands) | December 31, 2019 | | December 28, 2018 | | December 29, 2017 |
Total equity, beginning balance | $ | 1,060,493 |
| | $ | 893,381 |
| | $ | 725,239 |
|
| | | | | |
Common stock and additional paid-in capital | | | | | |
Balance, beginning of period | 691,116 |
| | 669,788 |
| | 637,986 |
|
Cumulative effect adjustment of the adoption of ASU 2016-09 | — |
| | — |
| | (812 | ) |
Stock awards exercised or vested | 641 |
| | 10,858 |
| | 17,934 |
|
Stock-based compensation | 9,294 |
| | 10,470 |
| | 14,680 |
|
Balance, end of period | 701,051 |
| | 691,116 |
| | 669,788 |
|
Treasury stock | | | | | |
Balance, beginning of period | (8,125 | ) | | (4,654 | ) | | (5,834 | ) |
Treasury shares purchased | (2,961 | ) | | (5,025 | ) | | — |
|
Treasury shares reissued | 2,277 |
| | 1,554 |
| | 1,180 |
|
Balance, end of period | (8,809 | ) | | (8,125 | ) | | (4,654 | ) |
Retained earnings | | | | | |
Balance, beginning of period | 344,498 |
| | 176,068 |
| | 109,087 |
|
Cumulative effect adjustment of the adoption of ASU 2016-09 | — |
| | — |
| | 302 |
|
Reclassification of certain tax effects related to the adoption of ASU 2018-02 | — |
| | 466 |
| | — |
|
Adoption of ASC 842 (Note 1) | (576 | ) | | — |
| | — |
|
Net income | 96,336 |
| | 167,964 |
| | 66,679 |
|
Balance, end of period | 440,258 |
| | 344,498 |
| | 176,068 |
|
Accumulated other comprehensive income | | | | | |
Balance, beginning of period | 33,004 |
| | 52,179 |
| | (16,000 | ) |
Other comprehensive income (loss) | (13,016 | ) | | (19,607 | ) | | 68,179 |
|
Reclassification of certain tax effects related to the adoption of ASU 2018-02 | — |
| | (466 | ) | | — |
|
Reclassified to earnings, net (Note 16) | — |
| | 898 |
| | — |
|
Balance, end of period | 19,988 |
| | 33,004 |
| | 52,179 |
|
Total equity, ending balance | $ | 1,152,488 |
| | $ | 1,060,493 |
| | $ | 893,381 |
|
The accompanying notes are an integral part of these consolidated financial statements.
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 itto 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 October 27, 2015,May 3, 2018, the Company acquired all ofentered into a definitive agreement to sell the outstanding common stock of Lake RegionAdvanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical Holdings, Inc. (“Lake Region Medical”). On March 14, 2016, the Companysegment to Viant (formerly MedPlast, LLC), and on July 2, 2018 completed the spin-off of a portion of its former QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Integer on a pro rata basis (the “Spin-off”).sale. Refer to Note 2 “Divestiture“Acquisition, Divestiture and Acquisitions”Discontinued Operations” for further details of these transactions.
Effective June 30, 2016, the Company changed its name from Greatbatch, Inc. (“Greatbatch”) to Integer Holdings Corporation. The new name represents the union of the Greatbatch Medical, Lake Region Medical and Electrochem brands. Integer, as in whole or complete, signifies the Company’s more comprehensive products and service offerings, and a new dimension in its combined capabilities.
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.
SubsequentThe 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 Lake Region Medical acquisitiondiscontinued operations due to Integer’s (parent) centralized treasury and Spin-off,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 operated as threeorganizes its business into 2 reportable segments: Greatbatch(1) Medical QiG Group (“QiG”), and Lake Region Medical.(2) Non-Medical. The determinationdiscontinued operations of three reportable segments was deemedthe AS&O Product Line were reported in the Medical segment. Refer to be temporary whileNote 18 “Segment and Geographic Information,” for additional information on the Company reorganized its operations including its internal management and financial reporting structure. As a result of this reorganization, the Company reevaluated and revised its reportable business segments during the fourth quarter of 2016. The Company’s reportable segments are: (1) Medical, which includes the previously reported Lake Region Medical segment, the remaining operations of QiG, and the portion of the previously reported Greatbatch Medical segment not included in the new Non-Medical segment; and (2) Non-Medical, which includes the Company’s Electrochem business, which was previously included in the Company’s Greatbatch Medical segment.segments.
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 Accounting Standards Codification (“ASC”) 280, Segment Reporting. As a result of the new segment reporting structure,Fiscal Year
Historically, the Company has reclassified prior year amounts to conform them to the current year presentation. The revised segment structure and the related presentation changes did not impact consolidated net income (loss), earnings (loss) per share, total current assets, total assets or total stockholders’ equity. Refer to Note 19, “Business Segment, Geographic and Concentration Risk Information,” for further discussion regarding the Company’s reportable segments.
The Company’s results include the financial and operating results of QiG until the Spin-off on March 14, 2016. The Company’s results include the financial and operating results of Lake Region Medical since the date of acquisition on October 27, 2015. Results for periods prior to October 27, 2015 do not include the financial and operating results of Lake Region Medical.
Fiscal Year – The Company utilizesutilized a fifty-two, fifty-three week52/53-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 2016, 2015subsequent to 2019 will begin on January 1 and 2014end 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 30, 2016, January 1, 201628, 2018 and January 2, 2015,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 periodyear amounts have been reclassified to conform to the current segment structure. Referyear's presentation, which management does not consider to Note 19 “Business Segment, Geographic and Concentration Risk Information,” for a description of the changes made to reflect the current year segment presentation.be material.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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/orand accounts receivable are to four3 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 19 “Business Segment,18 “Segment and Geographic and Concentration Risk 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 market.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, as well ashistorical 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.
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, if less.whichever is shorter. The costcosts 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 65 “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. ASCAccounting 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.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the valuation. To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 18 “Fair17 “Financial Instruments and Fair Value Measurements” contains additional information on assets and liabilities recorded at fair value in the consolidated financial statements.
Business Combinations –Acquisitions
Results of operations of acquired companies are included in the Company’s results of operations as of the respective acquisition dates. The Company records its business combinations under the acquisition method of accounting. Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition is allocated to the tangible and identifiable intangiblenet assets acquired and liabilities assumed based on estimates of their respective fair values at the date of the acquisition. The fair valueAny purchase price in excess of identifiable intangiblethese net assets is based upon detailed valuations that use various assumptions made by management using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depends on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows are discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considers multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, technology life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Any excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired is allocated torecorded as goodwill. All direct acquisition-related costs are expensed as incurred.
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, Net.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.
AmortizingAll 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.
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 – Amortizing
Other intangible assets consists primarilyconsist of purchased technology and patents, customer lists and customer lists. The Company amortizes its definite-livedtrademarks. Definite-lived intangible assets over their estimated useful lives utilizingare amortized on an accelerated or straight-line method of amortization,basis, which approximates the projected cash flows used to determine the fair value of those definite-lived intangible assets at the time of acquisition. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure that recognition of amortization expense corresponds with the expected cash flows. The amortization period for the Company’s amortizing intangible assets areacquisition, as follows: purchased technology and patents 5-15 years; customer lists 7-20 years and other intangible assets 1-10 years. Refer to Note 7 “Intangible Assets” for additional information on the Company’s amortizingCertain trademark assets are considered indefinite-lived intangible assets.
Impairment of Long-Lived Assets –assets and are not amortized. The Company assessesexpenses 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 long-livedintangible assets or asset groups when events or changes in circumstances indicate thatexceeds the related undiscounted future cash flows. In cases where the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: a significant decrease inexceeds the market price of the asset or asset group; a significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of a long-lived asset or 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; a current-period operating orundiscounted future 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 or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. Ifflows, the carrying value is not recoverable, the asset or asset group is consideredwritten down to be impaired. Impairment is measured by comparing the asset or asset group’s carrying amount to its fair value. When itFair value is generally determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.using a discounted cash flow analysis.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for impairment. The Company assesses goodwillits indefinite-lived intangible assets for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above. Goodwill is evaluated for impairment through the comparison of the fair value of the reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factorsperiodically to determine if the fair value of the reporting unit is more-likely-than-not greater thanany adverse conditions exist that would indicate impairment or when impairment indicators exist. The Company assesses its carrying amount. This qualitative assessment is referred to as a “step zero” approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a step zero assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, the Company must perform a two-step impairment test, and calculate the estimated fair value of the reporting unit. If, based upon the two-step impairment test, it is determined that the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Under the two-step approach, fair values for reporting units are determined based on a combination of discounted cash flows and market multiples.
Other indefinite livedindefinite-lived intangible assets are assessed for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above,at least annually by comparing the fair value of the indefinite-lived intangible asset to its carrying value. The fair value is determined by using the income approach.relief from royalty method.
Refer to Note 7 “Intangible Assets” contains additional information on6 “Goodwill and Other Intangible Assets, Net” for further details of the Company’s long-livedgoodwill and other intangible assets.
Cost and Equity Method Investments – Certain of the Company’s investments in equity and other securities are
The Company holds long-term, strategic investments in companies that are in varied stages of development.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:
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• | Non-marketable equity securitiesare 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. |
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• | 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 Company accounts for investments in these entities under the cost or equity method depending on the type of ownership interest, as well as the Company’s ability to exercise influence over these entities. Investments accounted for under the cost method are initially recorded at the amountcarrying value of the Company’s investment and carried at that cost untilnon-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 is deemed impaired or is sold. Equity securities accounted for underwithin the equity method are initially recorded atCompany’s portfolio requires judgment based on the amountrights and preferences of the Company’s investmentsecurities. Recording upward and are adjusted each period for the Company’s share of the investee’s income or loss and dividends paid.
Equity securities accounted for under both the cost and equity methods are reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. Examples of such impairment indicators include, but are not limited to: a recent sale or offering of similar shares of the investment at a price below the Company’s cost basis; a significant deterioration in earnings performance; a significant change in the regulatory, economic or technological environment of the investee; or a significant doubt about an investee’s ability to continue as a going concern. If an impairment indicator is identified, management will estimate the fair value of the investment and compare it to its carrying value. The estimation of fair value considers all available financial information related to the investee, including, but not limited to, valuations based on recent third-party equity investments in the investee. Impairment is deemed to be other-than-temporary unless the Company has the ability and intent to hold the investment for a period sufficient for a market recovery updownward adjustments to the carrying value of the investment. Further, evidence must indicateCompany’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 carryinginvestee'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 investment is recoverable within a reasonable period. For other-than-temporary impairments, an impairment loss is recognized equalCompany’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 difference between the investment’s carrying valueinvestees, including financial statements, market participant valuations from recent and its fair valueproposed equity offerings, and is recognized in Other Income, Net in the Consolidated Statements of Operations and Comprehensive Income (Loss) in the period the determination is made.other third-party data.
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• | 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. |
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• | 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 theseits 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 18 “Fair17 “Financial Instruments and Fair Value Measurements” for further discussion ofadditional information on the Company’s Cost and Equity Method Investments.equity investments.
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 an appropriatea proportionate amount of the costs as refinancing or extinguishment of debt. Note 98 “Debt” contains additional information on the Company’s debt issuance costs and discounts.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes –
The consolidated financial statements of the Company have been prepared using the asset and liability approach in accountingto 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 (Refer to Note 9 “Debt”) and foreign currency forward contracts (Refer to Note 15 “Commitments and Contingencies”) entered into as cash flow hedges. The effective portion of the changes in fair value of thesehedges (refer to Note 17 “Financial Instruments and Fair Value Measurements”). Gains and losses on cash flow hedges isare recorded each period, net of tax, in Accumulated Other Comprehensive Income (Loss)in the Consolidated Balance Sheets until the related hedgedunderlying transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges 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 hedged cash flow for forecasted transactions doesdo not occur, or it becomes probable that they will not occur, the Company reclassifies the amount of any gain or loss on the related cash flow hedge to income (expense) at that time.earnings in the respective period. Cash flows related to these derivative financial instruments are included in cash flows from operating activities. The resulting cash flowsflow from the termination of interest rate swap agreements areis reported as operating activitiesin cash flows from operations in the consolidated statementsConsolidated Statements of cash flows.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.
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 it is realizedwe pay or realizablepromise to pay the consideration. Volume discounts and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, therebates and other pricing concessions earned by customers are offset against their receivable balances.
The transaction price is fixed or determinable (including any price concessions under long-term agreements), the buyer is obligatedallocated to pay us (i.e., not contingenteach performance obligation on a future event),relative standalone selling price basis. As the riskmajority of loss is transferred, there is no obligationproducts sold to customers are manufactured to meet the specific requirements and technical specifications of future performance, collectability is reasonably assuredthat 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 future returnsthe 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 reasonably be estimated. With regardsinclude a change in scope, price, or both, most often occur related to the Company’s customers (including distributors), those criteria are met when title passes, generally at the point of shipment. Currently, the revenue recognition policy is the same for the Company’s Medical and Non-Medical segments. In general, for customers with long-term contracts we have negotiated fixed pricing arrangements. During new contract negotiations, price level decreases (concessions) for future sales may be offered to customers in exchange for volume and/or long-term commitments. Once the new contracts are signed, these prices are fixed and determinable for all future sales. The Company includes shipping and handling fees billed to customers in Sales. Shipping and handling costs associated with inbound and outbound freight are recorded in Cost of Sales. In certain instances the Company obtains component parts from its customers that are included in the final product sold backgoverned by a long-term arrangement. Contract modifications typically relate to the same customer. These amounts are excluded from Sales and Cost of Sales recognizedproducts already governed by the Company. The costlong-term arrangement, and therefore, are accounted for as part of these customer supplied component parts amounted to $35.8 million, $44.3 million and $48.1 million in fiscal years 2016, 2015 and 2014, respectively.the existing contract. If a contract modification is for additional products, it is accounted for as a separate contract.
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 an ongoing monitoringa process in place to monitor, identify, and identification process to assess how the current activities with respect tofor known exposures are progressing against the recorded liabilities, as well asliabilities. The process is also designed to identify other potential remediation sites that are not presently unknown.known.
Restructuring Expenses
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restructuring –The Company continually evaluates alternatives to align the business with the changing needs of its customers and to lower operating costs. This includes the realignment of its 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 employees receiving voluntary or involuntary employee termination benefits, which may be pursuant to contractual agreements.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 1311 “Other Operating Expenses, Net”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 recent historical 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 1513 “Commitments and Contingencies” contains additional information on the Company’s product warranties.
Research, Development and Engineering Costs Net (“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. Cost reimbursements for certain engineering services from customers for whom the Company designs products are recorded as an offset to engineering costs upon achieving development milestones specified in the contracts. These reimbursements do not cover the complete cost of the development projects. Additionally, the technology developed under these cost reimbursement projects is owned by the Company and is utilized for future products developed for other customers. Note 12 “Research, Development and Engineering Costs, Net” contains additional information on the Company’s RD&E activities.
Stock-Based Compensation–
The Company recognizes stock-based compensation expense for its related compensation plans. These plans which include stock options, restricted stock units andawards (“RSAs”), restricted stock awards. 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.
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 costexpense for service-based awards with market conditions is recognized ratably over the applicable vesting period.service period and is not reversed if the market condition is not met. Compensation costexpense for nonmarket-basedawards with performance awardsconditions is reassessed each reporting period and recognized based upon the probability that the performance targets will be achieved. Compensation cost for market-based performance awards is expensed ratably over the applicable vesting period and is recognized each period whether the performance metrics are achieved or not. The amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest, excluding market and nonmarket performance award considerations.
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. The Company uses the Black-Scholes standard option pricing model (“Black-Scholes model”) to determine the fair value of stock options. In addition to the closing stock price on the date of grant, the determination of the fair value of the awards using the Black-Scholes model is also affected by other assumptions, including projected employee stock option exercise behaviors, risk-free interest rates, expected volatility of the Company's stock price in future periods and expected dividend yield, discussed in further detail:
Expected Term - The Company analyzes historical employee exercise and termination data to estimate the expected term assumption.
Risk-free Interest Rate - The rate is based on the U.S. Treasury yield curve in effect on the grant date for a maturity equal to or approximating the expected term of the options.
Expected Volatility - The Company calculates expected volatility using historical volatility based on the daily closing prices of the Company's common stock over a period equal to the expected term of the option.
Dividend Yield - The Company's dividend yield assumption is based on the Company’s history and the expected annual dividend yield on the grant date.
Restricted stock unit awards granted under the Company’s plansRSUs typically vest in equal annual installments over a three or four year period. Restricted stock awards are typicallyRSUs issued to members of the Company’s Board of Directors as a portion of their annual retainer and vest quarterly over a one-year vesting term. For service-based and nonmarket-based performance restricted stock and restricted stock unit awards,Earned PRSUs typically vest two or three years from the fair market valuedate of the award is determined based upon the closing value of the Company’s stock price on the grant date. For market-based performance restricted stock unit awards, the fair market value of the award is determined utilizing a Monte Carlo simulation model, which projects the value of the Company’s stock under numerous scenarios and determines the value of the award based upon the present value of those projected outcomes.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)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 in additional paid-in capital (if the tax deduction exceeds the deferred tax asset) oras a component of Provision (Benefit) for Income Taxes in the Consolidated Statements of Operations and Comprehensive Income (Loss) (if the deferred tax asset exceeds the tax deduction and no additional paid-in capital exists from previous awards).Operations. Note 1110 “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 (Loss).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, Germany, France,Israel, Malaysia, Mexico, Switzerland, Mexico,and Uruguay, and Malaysia, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Israeli shekel, Malaysian ringgits, Mexican pesos, Swiss francs, Mexican pesos,and Uruguayan pesos, and Malaysian ringgits.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,(Income) Loss, Net in the Consolidated Statements of Operations and Comprehensive Income (Loss).Operations. Net foreign currency transaction gainslosses included in Other Income,(Income) Loss, Net amounted to $4.9$0.1 million, $1.6 million and $10.9 million for 2016,2019, 2018 and $1.3 million for 2015 and 20142017, respectively, and primarily related to the remeasurement of intercompany loans and the strengtheningfluctuation 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 Switzerland, France and Germany.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 (Loss). DefinedIncome. The Company records the service cost component of net benefit expenses are charged tocosts in Cost of Sales and SG&A Expenses. The interest cost component of net benefit costs is recorded in Interest Expense and RD&E expenses as applicable. Note 10 “Benefit Plans” contains additional informationthe remaining components of net benefit costs, amortization of net losses and expected return on these costs.plan assets, are recorded in Other (Income) Loss, Net.
Earnings (Loss) 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 and consist of stock options, unvested restricted stock and restricted stock units and, if applicable, contingently convertible instruments such as convertible debt.calculation. Note 1615 “Earnings (Loss) Per Share” contains additional information on the computation of the Company’s EPS.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income (Loss) –
The Company’s comprehensive income (loss) as reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) includes net income, (loss), foreign currency translation adjustments, the net change in cash flow hedges, net of tax, and defined benefit plan liability adjustments.adjustments, net of tax. The Consolidated Statements of Operations and Comprehensive Income (Loss) and Note 17 “Accumulated Other Comprehensive Income (Loss)” contains16 “Stockholders’ Equity” contain additional information on the computation of the Company’s comprehensive income (loss).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. Based upon this review, exceptExcept 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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Adopted
In August 2014, the FASB issuedRecent Accounting Standards Update (“ASU”) 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40) - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which requires the Company to assess their ability to continue as a going concern each interim and annual reporting period. Certain disclosures are required if there is substantial doubt about the Company’s ability to continue as a going concern, including management’s plan to alleviate any such substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. The Company adopted this ASU in the fourth quarter of 2016, which did not impact the Consolidated Financial Statements or the disclosures therein.
Pronouncements Not Yet AdoptedEffective
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment (Topic 350)” to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test. A goodwill impairment will now be measured as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the amount of goodwill allocated to that reporting unit. ASU 2017-04 is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for any impairment tests performed after January 1, 2017. The Company adopted the new guidance on a prospective basis during the first quarter of 2017. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” which outlines new minimum requirements for a set of assets to be considered a business. The intent of this ASU is to sharpen the distinction between the purchase or disposal of a business versus the purchase or disposal of assets. ASU 2017-01 is effective for the Company in the first quarter of 2018, with early adoption permitted, and prospective application required. The Company does not believe the adoption of this guidance will have a material impact on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory,” which requires entities to recognize the income tax consequences of intra-entity transfers of assets other than inventory when the transfers occur. This ASU is effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact the adoption of this ASU will have on its Consolidated Financial Statements.
In August 2016, the FASB issued ASU 2016-15 “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments: A Consensus of the FASB Emerging Issues Task Force.” ASU 2016-15 makes targeted changes to how cash receipts and cash payments are presented in the statement of cash flows. The areas specifically addressed include debt prepayment and debt extinguishment costs, the settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, cash premiums paid for and proceeds from corporate-owned life insurance policies, distributions received from equity method investees and cash receipts from payments on transferor’s beneficial interest on securitized trade receivables. Additionally, the amendment states that, in the absence of other prevailing guidance, cash receipts and payments that have characteristics of more than one class of cash flows should have each separately identifiable source or use of cash presented within the most predominant class of cash flows based on the nature of the underlying cash flows. These amendments are effective for the Company in annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating this ASU, but does not believe the adoption of this guidance will have a material impact on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, which amendsreplaces the guidance on reportingcurrent 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 for assets heldexpected to occur over the life of the financial asset at amortized cost and available-for-sale debt securities. For assets held at amortized cost, the ASU eliminates the probable initial recognition threshold and requires an entity to reflect a current estimate of all expectedtime financial asset is originated or acquired. Estimated credit losses such thatare determined by taking into consideration historical loss conditions, current conditions and reasonable and supportable forecasts. Changes to the net amount expected lifetime credit losses are required to be collected is presented. For available-for-sale debt securities, the ASU requires credit losses to be presented as an allowance versus a write-down. These amendments arerecognized each period. The standard was effective for the Company in annualon January 1, 2020 and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018.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 currently evaluatingbeing amortized over a useful life of 8 years. The fair value of the impact thatcontingent consideration was estimated using the adoptionMonte 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 ASUacquisition 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 its Consolidated Financial Statements.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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.(2.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESACQUISITION, DIVESTITURE AND DISCONTINUED OPERATIONS (Continued)
In March 2016,As the FASB issued ASU 2016-09, “Compensation-Stock Compensation (Topic 718): ImprovementsAS&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 Employee Share-Based Payment Accounting.” ASU 2016-09 changes how companies accountthe 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 | $ | — |
| | $ | 178,020 |
| | $ | 325,841 |
|
Cost of sales | — |
| | 148,357 |
| | 286,300 |
|
Gross profit | — |
| | 29,663 |
| | 39,541 |
|
SG&A expenses | — |
| | 8,905 |
| | 18,500 |
|
Research, development and engineering costs | — |
| | 2,352 |
| | 6,397 |
|
Other operating expenses | — |
| | 1,805 |
| | 854 |
|
Interest expense | — |
| | 22,833 |
| | 42,488 |
|
Gain on sale of discontinued operations | (4,974 | ) | | (194,965 | ) | | — |
|
Other (income) loss, net | (322 | ) | | 420 |
| | (1,266 | ) |
Income (loss) from discontinued operations before taxes | 5,296 |
| | 188,313 |
| | (27,432 | ) |
Provision (benefit) for income taxes | 178 |
| | 67,382 |
| | (7,024 | ) |
Income (loss) from discontinued operations | $ | 5,118 |
| | $ | 120,931 |
| | $ | (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):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Cash provided by (used in) operating activities | $ | (78 | ) | | $ | (12,498 | ) | | $ | 3,167 |
|
Cash provided by (used in) investing activities | 4,734 |
| | 577,833 |
| | (16,771 | ) |
Depreciation and amortization | $ | — |
| | $ | 7,450 |
| | $ | 21,613 |
|
Capital expenditures | — |
| | 3,610 |
| | 16,844 |
|
Acquisition of Assets from InoMec Ltd.
On February 19, 2020, the Company acquired certain aspectsassets of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classificationInoMec Ltd., a privately held company based in Israel that specializes in the statementresearch, development and manufacturing of cash flows.medical devices, including minimally invasive tools, delivery systems, tubing and catheters, surgery tools, drug-device combination, laser combined devices, and tooling and production. The new standard is effective for annual reporting periods beginning after December 15, 2016,acquisition enables the Company to create a research and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax benefit or expensedevelopment center in the income statement as discrete items in the reporting period in which they occur,region, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirementadds catheter assembly capabilities to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented. its portfolio.
The Company intendspaid $5 million in cash and may pay up to adopt this guidance inan 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 fiscal year 2017. The new standard will result in the recognition of excess tax benefits in the Provision (Benefit) for Income Taxes rather than Additional Paid-In Capital, prospectively, which is expected to increase volatility in the Company’s results of operations. The Company intends to apply the presentation requirements for cash flows related to excess tax benefits on a prospective basis. ASU 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. The Company intends to account for forfeitures as they occur. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.2020.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires companies to recognize a lease liability that represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and are required to be applied on a modified retrospective basis. Earlier application is permitted. The Company expects the adoption of ASU 2016-02 will result in a material increase in the assets and liabilities on its Consolidated Balance Sheets. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Statements of Operations and Other Comprehensive Income (Loss).
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and requires entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option. The new ASU is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption of the own credit provision is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1.(3.)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)SUPPLEMENTAL CASH FLOW INFORMATION
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entitiesThe following represents supplemental cash flow information for fiscal years beginning after December 15, 2016,2019, 2018 and interim periods within those fiscal years. The Company intends to adopt this guidance in the first quarter of fiscal year 2017 on a prospective basis and is currently assessing the impact of adopting this ASU on its Consolidated Financial Statements.(in thousands):
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.” The core principle behind ASU 2014-09 is that an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies the performance obligations. This ASU allows two methods of adoption; (1) a full retrospective approach where historical financial information is presented in accordance with the new standard, and (2) a modified retrospective approach where this ASU is applied to the most current period presented in the financial statements. Additionally, the guidance requires enhanced disclosures, including revenue recognition policies to identify performance obligations to customers and significant judgments in measurement and recognition. In August 2015, the FASB issued ASU No 2015-14 which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March, April and May of 2016, respectively, the FASB issued ASU 2016-08, which clarifies the implementation guidance on principal versus agent considerations, ASU 2016-10, which clarifies the implementation guidance on identifying performance obligations and licensing and ASU 2016-12, which provides improvements to the guidance on collectability, non-cash consideration, and completed contracts at transition, a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. These amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The Company plans to adopt the requirements of these standards in the first quarter of fiscal year 2018 on a modified retrospective basis. The Company is currently evaluating the requirements of these new standards and has not yet determined the impact of adoption on its Consolidated Financial Statements. The method of adoption is subject to change as the Company progresses through its assessment. |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Non-cash investing and financing activities: | | | | | |
Property, plant and equipment purchases included in accounts payable | $ | 8,646 |
| | $ | 2,303 |
| | $ | 3,474 |
|
Cash paid (refunded) during the year for: | | | | | |
Interest | 44,784 |
| | 79,661 |
| | 93,839 |
|
Income taxes | 30,034 |
| | 23,155 |
| | (8,185 | ) |
(2.(4.) DIVESTITUREINVENTORIES
Inventories comprise the following (in thousands): |
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Raw materials | $ | 79,742 |
| | $ | 80,213 |
|
Work-in-process | 60,042 |
| | 75,711 |
|
Finished goods | 27,472 |
| | 34,152 |
|
Total | $ | 167,256 |
| | $ | 190,076 |
|
(5.)PROPERTY, PLANT AND ACQUISITIONSEQUIPMENT, NET
Spin-off of Nuvectra CorporationPP&E comprises the following (in thousands): |
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Manufacturing machinery and equipment | $ | 285,793 |
| | $ | 261,912 |
|
Buildings and building improvements | 96,539 |
| | 95,886 |
|
Information technology hardware and software | 64,328 |
| | 60,901 |
|
Leasehold improvements | 69,012 |
| | 61,418 |
|
Furniture and fixtures | 15,517 |
| | 15,082 |
|
Land and land improvements | 11,541 |
| | 11,544 |
|
Construction work in process | 37,470 |
| | 23,886 |
|
Other | 1,181 |
| | 1,048 |
|
| 581,381 |
| | 531,677 |
|
Accumulated depreciation | (335,196 | ) | | (300,408 | ) |
Total | $ | 246,185 |
| | $ | 231,269 |
|
On March 14, 2016, Integer completed the spin-off of a portion of its former QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Integer on a pro rata basis. Immediately prior to completion of the Spin-off, QiG Group, LLCDepreciation expense for PP&E was converted into a corporation organized under the laws of Delawareas follows for fiscal years 2019, 2018 and changed its name to Nuvectra Corporation (“Nuvectra”). On March 14, 2016, each of the Company’s stockholders of record as of the close of business on March 7, 2016 (the “Record Date”) received one share of Nuvectra common stock for every three shares of Integer common stock held as of the Record Date. Upon completion of the Spin-off, Nuvectra became an independent publicly traded company whose common stock is listed on the NASDAQ stock exchange under the symbol “NVTR.”2017 (in thousands): |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Depreciation expense | $ | 37,819 |
| | $ | 40,078 |
| | $ | 38,077 |
|
The portion of the former QiG segment spun-off consisted of QiG Group, LLC and its subsidiaries: (i) Algostim, LLC (“Algostim”), (ii) PelviStim LLC (“PelviStim”), and (iii) the Company’s NeuroNexus Technologies (“NeuroNexus”) subsidiary. The operations of Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”) and certain other existing QiG research and development capabilities were retained by the Company and not included as part of the Spin-off. As the Company continues to focus on the design and development of complete medical device systems and components, and more specifically on medical device systems and components in the neuromodulation market, the Spin-off was not considered a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the Spin-off is not presented as a discontinued operation in the Company’s Consolidated Financial Statements. The results of Nuvectra are included in the Consolidated Statements of Operations and Comprehensive Income (Loss) through the date of the Spin-off.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2.(6.)DIVESTITUREGOODWILL AND ACQUISITIONS (Continued)OTHER INTANGIBLE ASSETS, NET
In connection withGoodwill
The change in the Spin-off,carrying amount of goodwill by reportable segment during the first quarter of 2016, the Company made a cash capital contribution of $75 million to Nuvectra and divested the following assets and liabilities (in thousands):
|
| | | |
Assets divested | |
Cash and cash equivalents | $ | 76,256 |
|
Other current assets | 977 |
|
Property, plant and equipment, net | 4,407 |
|
Amortizing intangible assets, net | 1,931 |
|
Goodwill | 40,830 |
|
Deferred income taxes | 6,446 |
|
Total assets divested | 130,847 |
|
Liabilities transferred | |
Current liabilities | 2,119 |
|
Net assets divested | $ | 128,728 |
|
For fiscal year 2016, Nuvectra contributed a pre-tax loss of $5.2 million to the Company’s results of operations. Nuvectra contributed a pre-tax loss of $24.4 million and $21.4 million to the Company’s results of operations for the fiscal years ended January 1, 20162019 and January 2, 2015, respectively.
In connection with the Spin-off, on March 14, 2016, Integer entered into several agreements with Nuvectra that govern its post Spin-off relationship with Nuvectra, including a Separation and Distribution Agreement, Tax Matters Agreement, Employee Matters Agreement and Transition Services Agreement. These agreements contain customary mutual indemnification provisions. Amounts earned by Integer under the Transition Services Agreement were immaterial for the year ended December 30, 2016. Accounts Receivable, Net within the Consolidated Balance Sheet at December 30, 2016 includes $9.9 million due from Nuvectra for payments made by the Company on Nuvectra’s behalf.
Acquisition of Lake Region Medical Holdings, Inc.
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. for a total purchase price including debt assumed of approximately $1.77 billion. Lake Region Medical specializes in the design, development, and manufacturing of products across the medical component and device spectrum primarily serving the cardio, vascular and advanced surgical markets.
Fair Value of Consideration Transferred
The aggregate consideration paid by the Company to the stockholders of Lake Region Medical consisted of the following (in thousands):
|
| | | |
Cash | $ | 478,490 |
|
Fair value of Integer common stock | 245,368 |
|
Replacement stock options attributable to pre-acquisition service | 4,508 |
|
Total purchase consideration | $ | 728,366 |
|
The fair value of the Integer common stock issued as part of the consideration2018 was determined based upon the closing stock price of Integer’s shares as of the acquisition date. The fair value of the Integer stock options issued as part of the consideration was determined utilizing a Black-Scholes option pricing model as of the acquisition date. Concurrent with the closing of the acquisition, the Company repaid all of the outstanding debt of Lake Region Medical of approximately $1.0 billion. The cash portion of the purchase price and the repayment of Lake Region Medical’s debt was primarily funded through a new senior secured credit facility and the issuance of senior notes. Refer to Note 9 “Debt” for additional information regarding the Company’s debt.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2.)DIVESTITURE AND ACQUISITIONS (Continued)
Fair Value of Assets Acquired and Liabilities Assumed
This transaction was accounted for under the acquisition method of accounting. Accordingly, the cost of the acquisition was allocated to the Lake Region Medical assets acquired and liabilities assumed based on their fair values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill. The fair value of assets acquired and liabilities assumed was finalized during the third quarter of fiscal year 2016. Measurement-period adjustments made during 2016 were an increase to current liabilities of $1.5 million, and reductions to goodwill of $1.1 million and deferred tax liabilities of $2.6 million These adjustments did not impact the Company’s Consolidated Statements of Operations and Comprehensive Income (Loss). The measurement period for this acquisition is closed and no further purchase price adjustments will be made.
The fair values of the assets acquired and liabilities assumed are as follows (in thousands):
|
| | | | | | | | | | | |
| Medical | | Non-Medical | | Total |
December 29, 2017 | $ | 822,870 |
| | $ | 17,000 |
| | $ | 839,870 |
|
Foreign currency translation | (7,532 | ) | | — |
| | (7,532 | ) |
December 28, 2018 | 815,338 |
| | 17,000 |
| | 832,338 |
|
Goodwill related to acquisition (Note 2) | 10,527 |
| | — |
| | 10,527 |
|
Foreign currency translation | (3,248 | ) | | — |
| | (3,248 | ) |
December 31, 2019 | $ | 822,617 |
| | $ | 17,000 |
| | $ | 839,617 |
|
|
| | | |
Assets acquired | |
Current assets | $ | 269,815 |
|
Property, plant and equipment | 216,473 |
|
Amortizing intangible assets | 849,000 |
|
Indefinite-lived intangible assets | 70,000 |
|
Goodwill | 660,670 |
|
Other non-current assets | 1,629 |
|
Total assets acquired | 2,067,587 |
|
Liabilities assumed | |
Current liabilities | 103,986 |
|
Debt assumed | 1,044,675 |
|
Other long-term liabilities | 190,560 |
|
Total liabilities assumed | 1,339,221 |
|
Net assets acquired | $ | 728,366 |
|
The goodwill acquired in connection with the acquisition was allocated to the Medical segment and is not deductible for tax purposes. Various factors contributed to the establishment of goodwill, including the value of Lake Region Medical’s highly trained assembled work force and management team, the incremental value resulting from Lake Region Medical’s industry leading capabilities and services to OEMs, enhanced synergies, and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. In connection with the acquisition, the Company recognized a $70 million trademarks and tradenames indefinite-lived intangible asset, $160 million of purchased technology definite-lived intangible assets that have an estimated weighted average amortization period of 7 years and $689 million of customer lists definite-lived intangible assets that have an estimated weighted average amortization period of 14 years. In connection with the acquisition, the Company also recorded the inventory acquired at fair value resulting in an increase in inventory of$23.0 million. This step-up in the fair value of inventory was amortized as the inventory to which the step-up relates was sold and was fully amortized as of January 1, 2016.
The operating results of Lake Region Medical have been included in the Company’s consolidated results since the date of acquisition. For the fiscal year ended December 30, 2016, Lake Region Medical had $802.4 million of revenue and $32.8 million of net income. For the fiscal year ended January 1, 2016, Lake Region Medical had $138.6 million of revenue and a net loss of $17.4 million.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2.)DIVESTITURE AND ACQUISITIONS (Continued)
Acquisition of Centro de Construcción de Cardioestimuladores del Uruguay
On August 12, 2014, the Company purchased all of the outstanding common stock of Centro de Construcción de Cardioestimuladores del Uruguay, headquartered in Montevideo, Uruguay. CCC is an active implantable neuromodulation medical device systems developer and manufacturer that produces a range of medical devices including implantable pulse generators, programmer systems, battery chargers, patient wands and leads. This acquisition allows the Company to more broadly partner with medical device companies, complements the Company’s core discrete technology offerings and enhances the Company’s medical device innovation efforts.
Fair Value of Assets Acquired and Liabilities Assumed
This transaction was accounted for under the acquisition method of accounting. The cost of the acquisition was allocated to the assets acquired and liabilities assumed from CCC based on their fair values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill. The valuation of the assets acquired and liabilities assumed from CCC was finalized during 2015 and did not result in a material adjustment to the original valuation of net assets acquired, including goodwill and therefore was not reflected as a retrospective adjustment to the historical financial statements.
The fair values of the assets acquired and liabilities assumed are as follows (in thousands): |
| | | |
Assets acquired | |
Current assets | $ | 10,670 |
|
Property, plant and equipment | 1,131 |
|
Amortizing intangible assets | 6,100 |
|
Goodwill | 8,296 |
|
Total assets acquired | 26,197 |
|
Liabilities assumed | |
Current liabilities | 4,842 |
|
Deferred income taxes | 1,590 |
|
Total liabilities assumed | 6,432 |
|
Net assets acquired | $ | 19,765 |
|
The goodwill acquired in connection with the CCC acquisition was allocated to the Medical segment and is not deductible for tax purposes. Various factors contributed to the establishment of goodwill, including: the value of CCC’s highly trained assembled work force and management team; the incremental value that CCC’s technology will bring to the Company’s medical devices; and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. In connection with the acquisition, the Company recognized definite-lived intangible assets of $0.1 million for trademarks and tradenames, $1.4 million for purchased technology and $4.6 million for customer lists, which had estimated weighted average amortization periods of 2, 10 and 10 years, respectively.
The operating results of CCC have been included in the Company’s consolidated results since the date of acquisition. For the fiscal year ended January 2, 2015, CCC had $5.8 million of revenue and net income of $1.2 million. The aggregate purchase price of $19.8 million was funded with cash on hand.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2.)DIVESTITURE AND ACQUISITIONS (Continued)
Unaudited Pro Forma Financial Information
The following unaudited pro forma information summarizes the consolidated results of operations of the Company, Lake Region Medical, and CCC for fiscal years 2015 and 2014 as if those acquisitions occurred as of the beginning of fiscal years 2014 (Lake Region Medical) and 2013 (CCC) (in thousands, except per share amounts):
|
| | | | | | | |
| 2015 | | 2014 |
Sales | $ | 1,445,689 |
| | $ | 1,441,782 |
|
Net income (loss) | 2,405 |
| | (25,865 | ) |
Earnings (loss) per share: | | | |
Basic | $ | 0.08 |
| | $ | (0.87 | ) |
Diluted | $ | 0.08 |
| | $ | (0.87 | ) |
The unaudited pro forma information presents the combined operating results of Integer, Lake Region Medical, and CCC, with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisitions at Integer’s interest rate, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate. Fiscal year 2015 pro forma earnings were adjusted to exclude $32.3 million of acquisition-related costs (change-in-control payments, investment banking fees, professional fees), $9.5 million of debt related charges (commitment fees, swap termination fees, debt extinguishment fees) and $23.0 million of nonrecurring amortization expense related to the fair value step-up of inventory incurred in 2015 as a result of the acquisition of Lake Region Medical. Fiscal year 2014 supplemental pro forma earnings were adjusted to include these charges. The unaudited pro forma consolidated basic and diluted earnings (loss) per share calculations are based on the consolidated basic and diluted weighted average shares of Integer. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have been obtained by the combined company, or to be a projection of results that may be obtained in the future by the combined company.
(3.)SUPPLEMENTAL CASH FLOW INFORMATION
The following represents supplemental cash flow information (in thousands) for fiscal years 2016, 2015 and 2014:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Noncash investing and financing activities: | | | | | |
Common stock contributed to 401(k) Plan | $ | — |
| | $ | 3,920 |
| | $ | 4,341 |
|
Property, plant and equipment purchases included in accounts payable | 3,499 |
| | 7,401 |
| | 2,926 |
|
Common stock issued in connection with Lake Region Medical acquisition | — |
| | 245,368 |
| | — |
|
Replacement stock options issued in connection with Lake Region Medical acquisition | — |
| | 4,508 |
| | — |
|
Purchase of non-controlling interests in subsidiaries included in accrued expenses | — |
| | 6,818 |
| | — |
|
Cash paid during the year for: | | | | | |
Interest | 106,475 |
| | 13,057 |
| | 3,521 |
|
Income taxes | 7,263 |
| | 6,312 |
| | 13,565 |
|
Acquisition of noncash assets | — |
| | 2,013,604 |
| | 22,434 |
|
Liabilities assumed | — |
| | 1,340,339 |
| | 6,432 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4.)INVENTORIES
Inventories are comprised of the following (in thousands): |
| | | | | | | |
| December 30, 2016 | | January 1, 2016 |
Raw materials | $ | 100,738 |
| | $ | 107,296 |
|
Work-in-process | 89,224 |
| | 93,729 |
|
Finished goods | 35,189 |
| | 51,141 |
|
Total | $ | 225,151 |
| | $ | 252,166 |
|
(5.)ASSETS HELD FOR SALE
Assets held for sale included in Prepaid Expenses and Other Current Assets, is comprised of the following (in thousands): |
| | | | | | | | | | |
Asset | | Business Segment | | December 30, 2016 | | January 1, 2016 |
Building and building improvements | | Medical | | $ | 794 |
| | $ | 996 |
|
During 2014, the Company transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to assets held for sale. During 2016 and 2014 the Company recognized impairment charges, recorded in Other Operating Expenses, Net, of $0.2 million and $0.4 million, respectively, related to its assets held for sale. During 2015, the Company sold $0.6 million of these assets held for sale with no additional gain or loss recognized.
(6.)PROPERTY, PLANT AND EQUIPMENT, NET
PP&E is comprised of the following (in thousands): |
| | | | | | | |
| December 30, 2016 | | January 1, 2016 |
Manufacturing machinery and equipment | $ | 332,886 |
| | $ | 285,068 |
|
Buildings and building improvements | 132,277 |
| | 130,184 |
|
Information technology hardware and software | 52,467 |
| | 43,947 |
|
Leasehold improvements | 59,292 |
| | 36,745 |
|
Furniture and fixtures | 18,989 |
| | 16,243 |
|
Land and land improvements | 20,046 |
| | 21,774 |
|
Construction work in process | 32,252 |
| | 76,835 |
|
Other | 1,062 |
| | 852 |
|
| 649,271 |
| | 611,648 |
|
Accumulated depreciation | (277,229 | ) | | (232,156 | ) |
Total | $ | 372,042 |
| | $ | 379,492 |
|
Depreciation expense for property, plant and equipment was as follows for fiscal years 2016, 2015 and 2014 (in thousands): |
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Depreciation expense | $ | 52,662 |
| | $ | 27,136 |
| | $ | 23,320 |
|
Construction work in process at December 30, 2016 and January 1, 2016 includes asset purchases related to the Company’s 2014 investment in capacity and capabilities initiatives. Additionally, construction work in process also relates to routine purchases of machinery, equipment, and information technology assets to support normal recurring operations. Refer to Note 13 “Other Operating Expenses, Net” for a description of the Company’s significant capital investment projects.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7.) INTANGIBLE ASSETS
Amortizing intangible assets, net are comprised of the following (in thousands): |
| | | | | | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Foreign Currency Translation | | Net Carrying Amount |
December 30, 2016 | | | | | | | |
Purchased technology and patents | $ | 256,719 |
| | $ | (100,719 | ) | | $ | 333 |
| | $ | 156,333 |
|
Customer lists | 759,987 |
| | (60,474 | ) | | (6,269 | ) | | 693,244 |
|
Other | 4,534 |
| | (5,142 | ) | | 803 |
| | 195 |
|
Total amortizing intangible assets | $ | 1,021,240 |
| | $ | (166,335 | ) | | $ | (5,133 | ) | | $ | 849,772 |
|
| | | | | | | |
January 1, 2016 | | | | | | | |
Purchased technology and patents | $ | 255,776 |
| | $ | (83,708 | ) | | $ | 1,444 |
| | $ | 173,512 |
|
Customer lists | 761,857 |
| | (40,815 | ) | | (986 | ) | | 720,056 |
|
Other | 4,534 |
| | (4,946 | ) | | 821 |
| | 409 |
|
Total amortizing intangible assets | $ | 1,022,167 |
| | $ | (129,469 | ) | | $ | 1,279 |
| | $ | 893,977 |
|
Aggregate intangible asset amortization expense is comprised of the following for fiscal years 2016, 2015 and 2014 (in thousands): |
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Cost of sales | $ | 16,769 |
| | $ | 7,403 |
| | $ | 6,201 |
|
SG&A | 20,581 |
| | 9,681 |
| | 7,009 |
|
RD&E | 512 |
| | 412 |
| | 667 |
|
Total intangible asset amortization expense | $ | 37,862 |
| | $ | 17,496 |
| | $ | 13,877 |
|
Estimated future intangible asset amortization expense based upon the carrying value as of December 30, 2016 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After 2021 |
Amortization Expense | $ | 43,562 |
| | 44,426 |
| | 44,483 |
| | 45,066 |
| | 43,957 |
| | 628,278 |
|
Indefinite-lived intangible assets were comprised of the following as of December 30, 2016 and January 1, 2016 (in thousands):
|
| | | |
| Trademarks and Tradenames |
January 1, 2016 | $ | 90,288 |
|
December 30, 2016 | $ | 90,288 |
|
As discussed further in Note 1 “Summary of Significant Accounting Policies” and Note 19 “Business Segment, Geographic and Concentration Risk Information,” as a result of the Lake Region Medical acquisition and the Spin-off, during 2016 the Company restructured its operations including its internal management and financial reporting structure. In connection with this realignment, the Company reevaluated its operating and reporting segments and determined that it has two operating segments: Medical and Non-Medical. As required, the Company reassigned goodwill to its reporting units based upon their relative fair values and reclassified prior year amounts to conform them to the current year presentation. Additionally, the Company evaluated the goodwill of all of its reporting units utilizing the step-zero approach immediately prior to the change in segments and immediately after the Spin-off for its former QiG reporting unit and concluded in both cases that it was more likely than not that there was no impairment present. The Company also performed its annual goodwill impairment test utilizing the two-step method as of December 30, 2016 and concluded there was no impairment present.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7.) INTANGIBLE ASSETS (Continued)
The change in goodwill during fiscal year 2016 is as follows (in thousands):
|
| | | | | | | | | | | |
| Medical | | Non- Medical | | Total |
January 1, 2016 | $ | 996,570 |
| | $ | 17,000 |
| | $ | 1,013,570 |
|
Goodwill divested (Note 2) | (40,830 | ) | | — |
| | (40,830 | ) |
Purchase accounting adjustments (Note 2) | (1,118 | ) | | — |
| | (1,118 | ) |
Foreign currency translation | (4,296 | ) | | — |
| | (4,296 | ) |
December 30, 2016 | $ | 950,326 |
| | $ | 17,000 |
| | $ | 967,326 |
|
As of December 30, 2016, no31, 2019, 0 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): |
| | | | | | | | | | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
December 31, 2019 | | | | | |
Definite-lived: | | | | | |
Purchased technology and patents | $ | 248,264 |
| | $ | (138,435 | ) | | $ | 109,829 |
|
Customer lists | 706,852 |
| | (131,185 | ) | | 575,667 |
|
Other | 3,503 |
| | (3,503 | ) | | — |
|
Total amortizing intangible assets | $ | 958,619 |
| | $ | (273,123 | ) | | $ | 685,496 |
|
Indefinite-lived: | | | | | |
Trademarks and tradenames | | | | | $ | 90,288 |
|
| | | | | |
December 28, 2018 | | | | | |
Definite-lived: | | | | | |
Purchased technology and patents | $ | 241,726 |
| | $ | (125,540 | ) | | $ | 116,186 |
|
Customer lists | 710,406 |
| | (104,556 | ) | | 605,850 |
|
Other | 3,503 |
| | (3,489 | ) | | 14 |
|
Total amortizing intangible assets | $ | 955,635 |
| | $ | (233,585 | ) | | $ | 722,050 |
|
Indefinite-lived: | | | | | |
Trademarks and tradenames | | | | | $ | 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.
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): |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Cost of Sales | $ | 13,111 |
| | $ | 14,134 |
| | $ | 15,183 |
|
SG&A | 26,965 |
| | 26,658 |
| | 24,840 |
|
RD&E | — |
| | 154 |
| | 545 |
|
Other Operating Expenses (“OOE”) | — |
| | 514 |
| | 2,538 |
|
Total intangible asset amortization expense | $ | 40,076 |
| | $ | 41,460 |
| | $ | 43,106 |
|
Estimated future intangible asset amortization expense based upon the carrying value as of December 31, 2019 is as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | After 2024 |
Amortization Expense | $ | 40,438 |
| | $ | 39,898 |
| | $ | 39,161 |
| | $ | 37,755 |
| | $ | 36,798 |
| | $ | 491,446 |
|
(8.7.) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the following (in thousands): |
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Profit sharing and bonuses | $ | 26,060 |
| | $ | 22,912 |
|
Salaries and benefits | 20,997 |
| | 21,830 |
|
Deferred revenue | 1,975 |
| | 2,482 |
|
Product warranties | 1,933 |
| | 2,600 |
|
Accrued interest | 1,885 |
| | 1,944 |
|
Other | 13,223 |
| | 8,722 |
|
Total | $ | 66,073 |
| | $ | 60,490 |
|
|
| | | | | | | |
| December 30, 2016 | | January 1, 2016 |
Salaries and benefits | $ | 30,199 |
| | $ | 37,579 |
|
Profit sharing and bonuses | 3,054 |
| | 6,781 |
|
Accrued interest | 6,838 |
| | 9,378 |
|
Purchase of non-controlling interest in subsidiaries | — |
| | 6,818 |
|
Severance, retention and change in control payments | 6,296 |
| | 11,969 |
|
Warranty and customer rebates | 8,146 |
| | 7,205 |
|
Other | 17,748 |
| | 17,527 |
|
Total | $ | 72,281 |
| | $ | 97,257 |
|
(9.(8.)DEBT
Long-term debt is comprised of the following (in thousands): |
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Senior secured term loan A | $ | 267,188 |
| | $ | 304,687 |
|
Senior secured term loan B | 558,286 |
| | 632,286 |
|
Revolving line of credit | — |
| | 5,000 |
|
Unamortized discount on term loan B and debt issuance costs | (10,702 | ) | | (16,466 | ) |
Total debt | 814,772 |
| | 925,507 |
|
Current portion of long-term debt | (37,500 | ) | | (37,500 | ) |
Total long-term debt | $ | 777,272 |
| | $ | 888,007 |
|
|
| | | | | | | |
| December 30, 2016 | | January 1, 2016 |
Senior secured term loan A | $ | 356,250 |
| | $ | 375,000 |
|
Senior secured term loan B | 1,014,750 |
| | 1,025,000 |
|
9.125% senior notes due 2023 | 360,000 |
| | 360,000 |
|
Revolving line of credit | 40,000 |
| | — |
|
Less unamortized discount on term loan B and debt issuance costs | (40,837 | ) | | (45,947 | ) |
Total debt | 1,730,163 |
| | 1,714,053 |
|
Less current portion of long-term debt | 31,344 |
| | 29,000 |
|
Total long-term debt | $ | 1,698,819 |
| | $ | 1,685,053 |
|
Senior Secured Credit Facilities
In connection with the Lake Region Medical acquisition, on October 27, 2015, theThe Company replaced its existing credit facility with newhas senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), (ii) a $375$267 million term loan A facility (the “TLA Facility”), and (iii) a $1,025$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 facilityFacility was issued at a 1% discount.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9.(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, 2020 and2022. 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 between0.175% and 0.25%, depending on the Company’s total net leverage ratio, asTotal Net Leverage Ratio (as defined in the Senior Secured Credit Facilities agreement. 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 30, 2016,31, 2019, the Company had $40 million of0 outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $151.1$193.2 million after giving effect to$8.9to $6.8 million of outstanding standby letters of credit. As of December 30, 2016, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 3.95%.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00. The outstanding amount of the Revolving Credit Facility approximated its fair value as of December 30, 2016 based upon the debt being variable rate and short-term in nature.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLA Facility, as well as the Revolving Credit Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s total net leverage ratio, as defined in the Senior Secured Credit Facilities agreement or (ii) the applicable LIBOR rate plus the applicable margin, which will range between 1.75% and 3.25%, based on the Company’s total net leverage ratio.2022. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 3.25%1.50% or (ii) the applicable LIBOR rate plus 4.25%2.50%, with LIBOR subject to a 1.00% floor. As of December 30, 2016,31, 2019, the interest raterates on the TLA Facility and TLB Facility were 4.01%3.80% and 5.25%4.22%, respectively.
Subject to certain conditions, one1 or more incremental term loan facilities may be added to the Term Loan Facilities so long as, on apro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.
As of December 30, 2016, the estimated fair value of TLA and TLB were approximately $349 million and $1,022 million, respectively, based on quoted market prices for the debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
Covenants
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum total net leverage ratio of 6.25:4.50:1.0, 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 2.50:1.0, subject to step ups.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. During the fourth quarter of 2016, the Company amended the Senior Secured Credit Facilities. The amendment modified certain covenants covering the Revolving Credit Facility and the TLA Facility. Pursuant to the amendment, the maximum total net leverage ratio stepped down to 6.25:1.0 beginning in the fourth fiscal quarter of 2016 until and including the fourth fiscal quarter for 2017, and will gradually decline to 4.0:1.0 by the second fiscal quarter of 2020. Additionally, pursuant to the amendment, the minimum interest coverage ratio dropped to 2.50:1.0 beginning in the fourth fiscal quarter of 2016 until and including the fourth fiscal quarter of 2017. For fiscal quarters in 2018 and 2019, the interest coverage ratio will rise to 2.75:1.0 and 3.0:1.0, respectively.
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 30, 2016,31, 2019, the Company was in compliance with all financial and negative covenants under the Senior Secured Credit Facilities.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9.)DEBT (Continued)
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. The Senior Secured Credit Facilities are guaranteed by Integer Holdings Corporation, as a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries (other than Greatbatch Ltd. (which is the borrower under the Senior Secured Credit Facilities), non-wholly owned joint ventures, and certain other excluded subsidiaries). The Senior Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; i) the present and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except Integer Holdings Corporation); ii) sixty-six percent (66%
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8.)of all present and future shares of voting capital stock of each specified first-tier foreign subsidiary; iii) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal property; and iv) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other guarantors.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”). AllOn July 10, 2018, the Company completed the redemption in full of the Senior Notes are outstanding as of December 30, 2016.
Interest on the Senior Notes is payable on May 1 and November 1 of each year. The Company may redeem the Senior Notes, in whole or in part, prior to November 1, 2018 at a redemption price equal toof 100% of the principal amount thereof plus a “make-whole” premium. Prior to November 1, 2018, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes usingplus the proceeds from certain equity offerings at aapplicable “make-whole” premium of $31.3 million and accrued and unpaid interest through the redemption price equal to 109.125%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 aggregate principal amountredemption of the Senior Notes. On or after November 1, 2018, the Company may redeem the Senior Notes, in whole or in part, pursuant to a customary schedule of declining redemption prices. As of December 30, 2016, the estimated fair value of the Senior Notes was approximately $359 million, based on quoted market prices of these notes, recent sales prices for the notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
The Senior Notes are senior unsecured obligations of the Company. The Senior Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) incur or guarantee additional indebtedness or issue certain disqualified stock or preferred stock; (ii) create certain liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) make certain other restricted payments; (v) enter into agreements that restrict certain dividends or other payments; (vi) enter into sale-leaseback agreements; (vii) engage in certain transactions with affiliates; and (viii) consolidate or merge with, or sell substantially all of their assets to, another person. These covenants are subject to a number of limitations and exceptions that are described in the indenture for the Senior Notes. The Senior Notes provide for customary events of default, subject in certain cases to customary cure periods, in which the Senior Notes and any unpaid interest would become due and payable. As of December 30, 2016, the Company was in compliance with all restrictive covenants under the indenture governing the Senior Notes.Notes was satisfied and discharged.
As of December 30, 2016,31, 2019, the weighted average interest rate on all outstanding borrowings is 5.76%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 30, 201631, 2019 are as follows (in thousands):
|
| | | | | | | | | | | |
| 2020 | | 2021 | | 2022 |
Future minimum principal payments | $ | 37,500 |
| | $ | 37,500 |
| | $ | 750,474 |
|
|
| | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After 2021 |
Future minimum principal payments | $ | 31,344 |
| | 40,719 |
| | 47,750 |
| | 87,750 |
| | 239,937 |
| | 1,323,500 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9.)DEBT (Continued)
Debt Issuance Costs and Discounts
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):
|
| | | |
January 2, 2015 | $ | 2,200 |
|
Financing costs deferred | 4,152 |
|
Write-off during the period | (907 | ) |
Amortization during the period | (654 | ) |
January 1, 2016 | 4,791 |
|
Amortization during the period | (991 | ) |
December 30, 2016 | $ | 3,800 |
|
|
| | | |
December 29, 2017 | $ | 2,808 |
|
Amortization during the period | (991 | ) |
December 28, 2018 | 1,817 |
|
Financing costs incurred | 302 |
|
Write-off of debt issuance costs(1) | (150 | ) |
Amortization during the period | (939 | ) |
December 31, 2019 | $ | 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):
|
| | | | | | | | | | | |
| Debt Issuance Costs | | Unamortized Discount on TLB Facility | | Total |
December 29, 2017 | $ | 26,889 |
| | $ | 6,389 |
| | $ | 33,278 |
|
Write-off of debt issuance costs and unamortized discount(1) | (9,757 | ) | | (1,610 | ) | | (11,367 | ) |
Amortization during the period | (4,419 | ) | | (1,026 | ) | | (5,445 | ) |
December 28, 2018 | 12,713 |
| | 3,753 |
| | 16,466 |
|
Financing costs incurred | 919 |
| | — |
| | 919 |
|
Write-off of debt issuance costs and unamortized discount(1) | (1,913 | ) | | (482 | ) | | (2,395 | ) |
Amortization during the period | (3,440 | ) | | (848 | ) | | (4,288 | ) |
December 31, 2019 | $ | 8,279 |
| | $ | 2,423 |
| | $ | 10,702 |
|
|
| | | | | | | | | | | |
| Debt Issuance Costs | | Unamortized Discount on TLB Facility | | Total |
January 2, 2015 | $ | 887 |
| | $ | — |
| | $ | 887 |
|
Financing costs incurred | 41,781 |
| | 10,250 |
| | 52,031 |
|
Write-off during the period | (732 | ) | | — |
| | (732 | ) |
Amortization during the period | (6,028 | ) | | (211 | ) | | (6,239 | ) |
January 1, 2016 | 35,908 |
| | 10,039 |
| | 45,947 |
|
Financing costs incurred | 1,177 |
| | — |
| | 1,177 |
|
Amortization during the period | (4,989 | ) | | (1,298 | ) | | (6,287 | ) |
December 30, 2016 | $ | 32,096 |
| | $ | 8,741 |
| | $ | 40,837 |
|
__________ | |
(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. |
During fiscal year 2015, the Company wrote off $1.6 million of debt issuance costs in connection with the extinguishment and modification of its term loan and revolving line of credit, respectively, which is included in Interest Expense on the Consolidated Statements of Operations and Comprehensive Income (Loss).
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9.)DEBT (Continued)
Interest Rate Swaps
From time to time, the Company enters into interest rate swap agreements in order to hedge against potential changes in cash flows on its outstanding variable rate debt. During 2016, the Company entered into a one year $250 million interest rate swap and a three year $200 million interest rate swap to hedge against potential changes in cash flows on its outstanding variable rate debt, which are indexed to the one-month LIBOR rate. The variable rate received on the interest rate swaps and the variable rate paid on the variable rate debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same day. The swaps are being accounted for as cash flow hedges.
In connection with the Lake Region Medical acquisition, the Company terminated its then outstanding interest rate swap agreements as the forecasted cash flows that the interest rate swaps were hedging were no longer expected to occur. As a result, during the fourth quarter of 2015, the Company made a $2.8 million payment to the interest rate swap counterparty and recognized a $2.8 million charge to Interest Expense.
Information regarding the Company’s outstanding interest rate swaps designated as cash flow hedges as of December 30, 2016 is as follows (dollars in thousands): |
| | | | | | | | | | | | | | | | | | |
Notional Amount | | Start Date | | End Date | | Pay Fixed Rate | | Receive Current Floating Rate | | Fair Value | | Balance Sheet Location |
$ | 250,000 |
| | Jul-16 | | Jun-17 | | 0.615 | % | | 0.7561 | % | | $ | 267 |
| | Prepaid Expenses and Other Current Assets |
$ | 200,000 |
| | Jun-17 | | Jun-20 | | 1.1325 | % | | N/A | | $ | 3,215 |
| | Other Assets |
The estimated fair value of the interest rate swap agreements represents the amount the Company expects to receive (pay) to terminate the contract. No portion of the change in fair value of the Company’s interest rate swaps during 2016, 2015, or 2014 were considered ineffective. The amount recorded as Interest Expense during 2016, 2015, and 2014 related to the Company’s interest rate swaps was $0.1 million, $3.5 million $0.5 million, respectively.
(10.9.) BENEFIT PLANS
Savings Plan
The Company sponsors a defined contribution 401(k) plan (the “Company plan”“Plan”), for its U.S. based employees. The planPlan provides for the deferral of employee compensation under Section 401(k)Internal Revenue Code §401(k) and a discretionary Company match. In 2016, 2015, and 2014, this match was 35% per dollar of participant deferral, up to 6% of the total compensation for legacy Greatbatch associates. Net costs related to this defined contribution plan were $2.0 million in 2016, $2.3 million in 2015, and $2.2 million in 2014.
In addition to the above, under the terms of the 401(k) plan document there is an annual discretionary defined contribution of up to 4% of each legacy Greatbatch employee’s eligible compensation based upon the achievement of certain performance targets. This amount is contributed to the 401(k) plan in the form of Company stock. The Company did not make a discretionary stock contribution in 2016 or 2015. Compensation cost recognized related to the defined contribution plan was $4.2 million in 2014. As of December 30, 2016, certain participants in the 401(k) Plan held, on an aggregate basis, approximately 334,000 shares of Company stock.
Subsequent to the Lake Region Medical acquisition, the Company continued the 401(k) plan previously provided to legacy Lake Region Medical employees. This plan is available to most Lake Region employees whereby employees are allowed to contribute up to, subject to compliance with federal 401(k) plan contribution limits, 50% of gross salary. The Company matches 50% of an employee’s contributions for the first 6% of the employee’s gross salary at a maximum contribution rate per employee of 3% of the employee’s gross salary. The employee’s contributions vest immediately, while the Company’s contributions vest over a five-year period. Net costs related to this defined contribution plan were $4.4 million in 2016 and $0.8 million from the date of acquisition through the fiscal year end in 2015.
In January 2017, the Lake Region Medical plan was merged into the Company plan. Beginning in fiscal year 2017, the Company will match $0.50 per dollar of participant deferral, up to 6% of the base salary forcompensation of each participant.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10.) BENEFIT PLANS (Continued) 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 Mexico, France, and GermanyMexico certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan provided to the Company’s employees located in Switzerland is a funded contributory plan, while the plans that provide benefits to the Company’s employees located in Mexico France, and Germany are unfunded and noncontributory. The liability and corresponding expense related to these benefit plans is based on actuarial computationsassets of current and future benefits for employees.
During 2012, the Company transferred most major functions performedSwitzerland plan are held at its facilities in Switzerland into other existing facilities and curtailed its defined benefit plan provided to employees at those Swiss facilities. During 2013, the plan assets that remained after settlement payments were made were transferred to 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 Company’s fiscal year end dates are the measurement dates for its defined benefit plans. Information relatingliability and corresponding expense related to the funding position of the Company’s definedthese benefit plans is based on actuarial computations of current and future benefits for fiscal years 2016employees.
The aggregated projected benefit obligation for these plans was $3.0 million and
2015 were$2.2 million as
follows (in thousands): |
| | | | | | | |
| 2016 | | 2015 |
Change in projected benefit obligation: | | | |
Projected benefit obligation at beginning of year | $ | 7,992 |
| | $ | 2,843 |
|
Projected benefit obligation acquired | — |
| | 4,316 |
|
Service cost | 431 |
| | 439 |
|
Interest cost | 174 |
| | 165 |
|
Plan participants’ contribution | 75 |
| | 61 |
|
Actuarial loss | 341 |
| | 235 |
|
Benefits transferred in, net | 84 |
| | 258 |
|
Foreign currency translation | (369 | ) | | (325 | ) |
Projected benefit obligation at end of year | 8,728 |
| | 7,992 |
|
Change in fair value of plan assets: | | | |
Fair value of plan assets at beginning of year | 871 |
| | 437 |
|
Employer contributions | 36 |
| | 69 |
|
Plan participants’ contributions | 75 |
| | 61 |
|
Actual loss on plan assets | (9 | ) | | (39 | ) |
Benefits transferred in, net | 224 |
| | 362 |
|
Foreign currency translation | (25 | ) | | (19 | ) |
Fair value of plan assets at end of year | 1,172 |
| | 871 |
|
Projected benefit obligation in excess of plan assets at end of year | $ | 7,556 |
| | $ | 7,121 |
|
Defined benefit liability classified as other current liabilities | $ | 109 |
| | $ | 46 |
|
Defined benefit liability classified as long-term liabilities | $ | 7,447 |
| | $ | 7,075 |
|
Accumulated benefit obligation at end of year | $ | 7,115 |
| | $ | 6,299 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10.) BENEFIT PLANS (Continued)
Amounts recognized in Accumulated Other Comprehensive Income (Loss) for fiscal years 2016of December 31, 2019 and 2015 are as follows (in thousands): |
| | | | | | | |
| 2016 | | 2015 |
Net loss occurring during the year | $ | 368 |
| | $ | 164 |
|
Amortization of losses | (62 | ) | | (156 | ) |
Prior service cost | 1 |
| | (1 | ) |
Amortization of prior service cost | (11 | ) | | (9 | ) |
Pre-tax adjustment (gain) loss | 296 |
| | (2 | ) |
Taxes | 283 |
| | 22 |
|
Net loss | $ | 579 |
| | $ | 20 |
|
The amortization of amounts in Accumulated Other Comprehensive Income (Loss) expected to be recognized as components of netDecember 28, 2018, respectively. Net periodic benefit expense during fiscal year 2017 are as follows (in thousands): |
| | | |
Amortization of net prior service cost | $ | 9 |
|
Amortization of net loss | 61 |
|
Net pension cost for fiscal years 20162019, 2018 and 2015 is comprised of the following (in thousands): |
| | | | | | | |
| 2016 | | 2015 |
Service cost | $ | 431 |
| | $ | 439 |
|
Interest cost | 174 |
| | 165 |
|
Expected return on assets | (18 | ) | | (11 | ) |
Recognized net actuarial loss | 72 |
| | 164 |
|
Net pension cost | $ | 659 |
| | $ | 757 |
|
The weighted-average rates used in the actuarial valuations to determine the net pension cost for fiscal years 2016, 20152017 was $0.3 million, $0.3 million and 2014 were as follows: |
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Discount rate | 2.2 | % | | 2.3 | % | | 3.4 | % |
Salary growth | 2.9 | % | | 3.0 | % | | 3.1 | % |
Expected rate of return on assets | 2.0 | % | | 2.3 | % | | 2.5 | % |
The weighted-average rates used in the actuarial valuations to determine the projected benefit obligation for fiscal years 2016, 2015 and 2014 were as follows: |
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Discount rate | 1.9 | % | | 2.2 | % | | 2.3 | % |
Salary growth | 2.9 | % | | 2.9 | % | | 3.0 | % |
Expected rate of return on assets | 1.5 | % | | 2.0 | % | | 2.3 | % |
The discount rate used is based on the yields of AA bonds with a duration matching the duration of the liabilities plus approximately 50 basis points to reflect the risk of investing in corporate bonds. The expected rate of return on plan assets reflects earnings expectations on existing plan assets.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10.) BENEFIT PLANS (Continued)
The following table provides information by level for the defined benefit plan assets that are measured at fair value as of December 30, 2016 and January 1, 2016 (in thousands). |
| | | | | | | | | | | | | | | |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
December 30, 2016 | | | | | | | |
Insurance contract | $ | 1,172 |
| | $ | — |
| | $ | 1,172 |
| | $ | — |
|
January 1, 2016 | | | | | | | |
Insurance contract | $ | 871 |
| | $ | — |
| | $ | 871 |
| | $ | — |
|
The fair value of Level 2 plan assets are obtained from 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. Refer to Note 1 “Summary of Significant Accounting Policies” for discussion of the fair value measurement terms of Levels 1, 2, and 3.
Estimated benefit payments over for$0.3 million, respectively. Over the next ten years, as of December 30, 2016 are as follows (in thousands): |
| | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022-2026 |
Estimated benefit payments | $ | 261 |
| | 191 |
| | 266 |
| | 216 |
| | 251 |
| | 1,888 |
|
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.(11.(10.)STOCK-BASED COMPENSATION
Stock-based Compensation Plans
At the 2016 Annual Meeting of Stockholders held on May 24, 2016,The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders approvedand are administered by the Company’s 2016 Stock Incentive Plan (the “2016 Plan”).Board of Directors, or the Compensation and Organization Committee of the Board. The 2016 Plan providesstock-based compensation plans provide for the granting of stock options, shares of restricted stock, restricted stock units,RSAs, RSUs, stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.
The 2016 Plan supplements the Company’s existing 2009 Stock Incentive Plan (“2009 Plan”), as amended, and 2011 Stock Incentive Plan (“2011(the “2011 Plan”), as amended.
Stock options remain outstanding under the 2005 Stock Incentive Plan, but the plan has been frozen to any new award issuances.
The 2009 Planamended, authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject to the terms of the 2009 Plan. The 20092016 Stock Incentive Plan limits the amount of restricted stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 200,000 shares of the 1,350,000 shares authorized.
The 2011 Plan authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2011 Plan. The 2011 Plan does not limit the amount of restricted stock, restricted stock units or stock bonuses that may be awarded.
The 2016 Plan(the “2016 Plan”) authorizes the issuance of up to 1,450,000 shares of equity incentive awards including nonqualifiedawards. Awards remain outstanding under the 2005 Stock Incentive Plan and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subjectthe 2009 Stock Incentive Plan, as amended, but the plans have been frozen to the terms of the 2016 Plan.
any new award issuances. As of December 30, 2016,31, 2019, there were 1,316,690, 120,676662,736 and 65,91079,316 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 2009 Plan, respectively. Due to plan sub-limits, of the shares available for grant, only 10,261 shares may be awarded under the 2009 Plan in the formvesting of restricted stock and restricted stock units or stock bonuses.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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11.(10.)STOCK-BASED COMPENSATION (Continued)
In connection with the Spin-off, under the provisions of the 2009 Plan and 2011 Plan, employee stock options, restricted stock awards, and restricted stock unit awards were adjusted to preserve the fair value of the awards immediately before and after the Spin-off. As such, the Company did not record any modification expense related to the conversion of the awards. Certain awards granted to employees who transferred to Nuvectra in connection with the Spin-off were canceled. As required, the Company accelerated the remaining expense related to these canceled awards of $0.5 million during the first quarter of 2016, which was classified as Other Operating Expenses, Net. The stock awards held as of March 14, 2016 were modified as follows:
Stock options: Holders of the Company’s stock option awards continued to hold stock options to purchase the same number of shares of Integer common stock at an adjusted exercise price and one new Nuvectra stock option for every three Integer stock options held as of the Record Date, which, in the aggregate, preserved the fair value of the overall awards granted. The adjusted exercise price for Integer stock options was equal to approximately 93% of the original exercise price. The stock option awards will continue to vest over their original vesting period.
Restricted stock and restricted stock units: Holders of the Company’s restricted stock and restricted stock unit awards received one new share of Nuvectra restricted stock and restricted stock unit awards for every three Integer restricted stock and restricted stock unit awards held as of the Record Date. Integer restricted stock and restricted stock unit awards will continue to vest in accordance with their original performance metrics and over their original vesting period.
During 2014, the Company recorded stock modification expense related to employee separation costs incurred during 2014 in connection with realignment initiatives. This modification expense was included within Other Operating Expenses, Net. Refer to Note 13 “Other Operating Expenses, Net” for further discussion of these initiatives.Stock-based Compensation Expense
The components and classification of stock-based compensation expense for fiscal years 2016, 20152019, 2018 and 20142017 were as follows (in thousands):
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Stock options | $ | 410 |
| | $ | 873 |
| | $ | 1,633 |
|
RSAs and RSUs | 8,884 |
| | 9,183 |
| | 11,819 |
|
Stock-based compensation expense - continuing operations | 9,294 |
| | 10,056 |
| | 13,452 |
|
Discontinued operations | — |
| | 414 |
| | 1,228 |
|
Total stock-based compensation expense | $ | 9,294 |
| | $ | 10,470 |
| | $ | 14,680 |
|
| | | | | |
Cost of sales | $ | 1,011 |
| | $ | 849 |
| | $ | 748 |
|
SG&A | 7,827 |
| | 9,090 |
| | 9,893 |
|
RD&E | 269 |
| | 112 |
| | 642 |
|
OOE | 187 |
| | 5 |
| | 2,169 |
|
Discontinued operations | — |
| | 414 |
| | 1,228 |
|
Total stock-based compensation expense | $ | 9,294 |
| | $ | 10,470 |
| | $ | 14,680 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Stock options | $ | 2,499 |
| | $ | 2,708 |
| | $ | 2,523 |
|
Restricted stock and units | 5,909 |
| | 6,668 |
| | 6,417 |
|
401(k) stock contribution | — |
| | — |
| | 4,246 |
|
Total stock-based compensation expense | $ | 8,408 |
| | $ | 9,376 |
| | $ | 13,186 |
|
| | | | | |
Cost of sales | $ | 332 |
| | $ | 795 |
| | $ | 3,530 |
|
Selling, general and administrative expenses | 6,246 |
| | 7,510 |
| | 7,923 |
|
Research, development and engineering costs, net | 355 |
| | 982 |
| | 1,440 |
|
Other operating expenses, net (Note 13) | 1,475 |
| | 89 |
| | 293 |
|
Total stock-based compensation expense | $ | 8,408 |
| | $ | 9,376 |
| | $ | 13,186 |
|
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.Weighted Average Fair Values and Black-Scholes Valuation AssumptionsStock Options
The following table provides the weighted average grant date fair values of the Company's restrictedThere were no stock awards, restricted stock units and performance-based restricted stock units duringoptions granted in fiscal years 2016, 2015 and 2014:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Weighted average grant date fair values: | | | | | |
Restricted stock and restricted stock units | $ | 47.95 |
| | $ | 49.84 |
| | $ | 44.78 |
|
Performance-based restricted stock units | 30.83 |
| | 32.92 |
| | 31.33 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11.)STOCK-BASED COMPENSATION (Continued)
year 2019. The following table includes the weighted average grant date fair value of stock options granted to employees during fiscal years 2016, 20152018 and 20142017 and the related weighted average assumptions used in the Black-Scholes model:
|
| | | | | | | | | |
| | | 2018 | | 2017 |
Weighted average fair value of options granted |
| | $ | 14.89 |
| | $ | 12.86 |
|
Assumptions: | | | | | |
Expected term (in years) |
| | 4.0 |
| | 4.5 |
|
Risk-free interest rate |
| | 2.21 | % | | 1.77 | % |
Expected volatility |
| | 39 | % | | 37 | % |
Expected dividend yield |
| | 0 | % | | 0 | % |
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Fair value of options granted: | $ | 8.52 |
| | $ | 12.18 |
| | $ | 16.43 |
|
Assumptions: | | | | | |
Expected life of option from grant date (in years) | 4.7 |
| | 4.7 |
| | 5.3 |
|
Risk-free interest rate | 1.49 | % | | 1.55 | % | | 1.73 | % |
Expected volatility | 27 | % | | 26 | % | | 39 | % |
Expected dividend yield | 0 | % | | 0 | % | | 0 | % |
Stock-Based Compensation Activity
The following table summarizes stock option activity under all stock-based compensation plans during the fiscal year ended December 30, 2016:31, 2019:
|
| | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at January 1, 2016 | 1,678,900 |
| | $ | 28.32 |
| | | | |
Granted | 316,678 |
| | 42.82 |
| | | | |
Exercised | (130,459 | ) | | 21.61 |
| | | | |
Forfeited or expired | (125,147 | ) | | 44.76 |
| | | | |
Adjustment due to Spin-off | — |
| | (2.02 | ) | | | | |
Outstanding at December 30, 2016 | 1,739,972 |
| | $ | 28.26 |
| | 5.7 | | $ | 11.0 |
|
Vested and expected to vest at December 30, 2016 | 1,723,137 |
| | $ | 28.07 |
| | 5.7 | | $ | 11.0 |
|
Exercisable at December 30, 2016 | 1,484,481 |
| | $ | 26.26 |
| | 5.7 | | $ | 10.3 |
|
|
| | | | | | | | | | | | |
| Number of Stock Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in millions) |
Outstanding at December 28, 2018 | 522,783 |
| | $ | 31.88 |
| | | | |
Exercised | (138,770 | ) | | 23.36 |
| | | | |
Outstanding at December 31, 2019 | 384,013 |
| | $ | 34.96 |
| | 5.1 | | $ | 17.5 |
|
Vested and expected to vest at December 31, 2019 | 384,013 |
| | $ | 34.96 |
| | 5.1 | | $ | 17.5 |
|
Exercisable at December 31, 2019 | 349,698 |
| | $ | 34.55 |
| | 4.9 | | $ | 21.8 |
|
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 30, 201631, 2019 ($29.45)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 30, 2016, $1.431, 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 1.40.9 years. Shares are distributed from the Company’s authorized but unissued reserve and treasury stock upon the exercise of stock options or treasury stock if available. The Company does not intend to purchase treasury shares to fund the future exercises of stock options.
The following table provides certain information relating to the exercise of stock options during fiscal years 2016, 20152019, 2018 and 20142017 (in thousands): |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Intrinsic value | $ | 7,998 |
| | $ | 17,722 |
| | $ | 13,928 |
|
Cash received | 3,242 |
| | 12,409 |
| | 19,324 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Intrinsic value | $ | 690 |
| | $ | 8,231 |
| | $ | 7,997 |
|
Cash received | 2,821 |
| | 6,583 |
| | 8,278 |
|
Tax benefit realized | — |
| | 1,954 |
| | 1,704 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(11.)STOCK-BASED COMPENSATION (Continued)
Restricted Stock Awards and Restricted Stock Units
The following table summarizes time-vested restricted stockRSA and restricted stock unitRSU activity under all stock-based compensation plans during the fiscal year ended December 30, 2016:31, 2019: |
| | | | | | |
| Time-Vested Activity | | Weighted Average Grant Date Fair Value |
Nonvested at December 28, 2018 | 142,236 |
| | $ | 49.78 |
|
Granted | 116,387 |
| | 82.31 |
|
Vested | (31,386 | ) | | 65.62 |
|
Forfeited | (22,014 | ) | | 59.64 |
|
Nonvested at December 31, 2019 | 205,223 |
| | $ | 64.75 |
|
|
| | | | | | |
| Time-Vested Restricted Stock Units and Awards | | Weighted Average Grant Date Fair Value |
Nonvested at January 1, 2016 | 39,235 |
| | $ | 47.40 |
|
Granted | 52,697 |
| | 47.95 |
|
Vested | (40,304 | ) | | 49.64 |
|
Forfeited | (12,234 | ) | | 48.46 |
|
Nonvested at December 30, 2016 | 39,394 |
| | $ | 45.51 |
|
The following table summarizes performance-vested restricted stock and restricted stock unit activity under all stock-based compensation plans during the fiscal year ended December 30, 2016:
|
| | | | | | |
| Performance- Vested Restricted Stock Units and Awards | | Weighted Average Grant Date Fair Value |
Nonvested at January 1, 2016 | 577,825 |
| | $ | 25.11 |
|
Granted | 163,651 |
| | 30.83 |
|
Vested | (254,340 | ) | | 16.19 |
|
Forfeited | (130,550 | ) | | 31.16 |
|
Nonvested at December 30, 2016 | 356,586 |
| | $ | 31.87 |
|
Performance-based restricted stock units granted only vest if certain market-based performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 356,586 shares based upon the total shareholder return of the Company relative to the Company’s compensation peer group over a three-year performance period beginning in the year of grant. The fair value of the restricted stock units were determined by utilizing a Monte Carlo simulation model, which projects the value of the Company’s stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes.
The realized tax benefit from the vesting of restricted stock and restricted stock units was $2.3 million, $3.4 million and $2.3 million for 2016, 2015 and 2014, respectively. As of December 30, 2016,31, 2019, there was $4.6$8.2 million of total unrecognized compensation cost related to the restricted stocktime-based RSAs and restricted stock unit awards. That costRSUs, which is expected to be recognized over a weighted-average period of approximately 1.42.4 years. The fair value of RSA and RSU shares vested in 2016, 20152019, 2018 and 20142017 was $11.8$2.4 million, $16.1$9.7 million and $12.5$6.4 million, respectively.
(12.)RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET
RD&E costs for The weighted average grant date fair value of RSAs and RSUs granted during fiscal years 2016, 20152019, 2018 and 20142017 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:
|
| | | | | | |
| Performance- Vested Activity | | Weighted Average Grant Date Fair Value |
Nonvested at December 28, 2018 | 287,134 |
| | $ | 36.15 |
|
Granted | 50,492 |
| | 101.17 |
|
Vested | (75,008 | ) | | 28.41 |
|
Forfeited | (71,026 | ) | | 36.17 |
|
Nonvested at December 31, 2019 | 191,592 |
| | $ | 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 comprisedbased on the Company’s achievement of the following (in thousands):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.
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Research, development and engineering costs | $ | 61,175 |
| | $ | 59,767 |
| | $ | 58,974 |
|
Less: cost reimbursements | (6,174 | ) | | (6,772 | ) | | (9,129 | ) |
Total research, development and engineering costs, net | $ | 55,001 |
| | $ | 52,995 |
| | $ | 49,845 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13.(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 0 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: |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Weighted average fair value | $ | 117.03 |
| | $ | 37.46 |
| | $ | 25.41 |
|
Risk-free interest rate | 2.46 | % | | 2.28 | % | | 1.14 | % |
Expected volatility | 40 | % | | 40 | % | | 48 | % |
Expected life (in years) | 2.8 |
| | 2.9 |
| | 1.8 |
|
Expected dividend yield | — | % | | — | % | | — | % |
(11.)OTHER OPERATING EXPENSES NET
Other Operating Expenses, NetOOE for fiscal years 2016, 20152019, 2018 and 20142017 is comprised of the following (in thousands): |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Strategic reorganization and alignment | $ | 5,812 |
| | $ | 10,624 |
| | $ | 5,891 |
|
Manufacturing alignment to support growth | 2,145 |
| | 3,089 |
| | — |
|
Consolidation and optimization initiatives | — |
| | 844 |
| | 12,803 |
|
Acquisition and integration costs | 377 |
| | — |
| | 10,870 |
|
Other general expenses | 3,817 |
| | 1,508 |
| | 6,874 |
|
Total other operating expenses | $ | 12,151 |
| | $ | 16,065 |
| | $ | 36,438 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
2014 investments in capacity and capabilities | $ | 17,159 |
| | $ | 23,037 |
| | $ | 8,925 |
|
Orthopedic facilities optimization | 747 |
| | 1,395 |
| | 1,317 |
|
Lake Region Medical consolidations | 8,584 |
| | 1,961 |
| | — |
|
Acquisition and integration costs | 28,316 |
| | 33,449 |
| | 3 |
|
Asset dispositions, severance and other | 6,931 |
| | 6,622 |
| | 4,106 |
|
2013 operating unit realignment | — |
| | — |
| | 1,017 |
|
Other consolidation and optimization income | — |
| | — |
| | (71 | ) |
Total other operating expenses, net | $ | 61,737 |
| | $ | 66,464 |
| | $ | 15,297 |
|
Strategic reorganization and alignment2014 Investments in CapacityAs a result of the strategic review of its customers, competitors and Capabilities
In 2014,markets, the Company announced several initiatives to investbegan taking steps in capacity and capabilities and2017 to better align its resources in order to meetenhance the profitability of its customers’ needsportfolio of products. These initiatives include improving its business processes and drive organic growthredirecting investments away from projects where the market does not justify the investment, as well as aligning resources with market conditions and profitability. These included the following:
Functions performed at the Company’s facilityfuture strategic direction. The Company estimates that it will incur aggregate pre-tax charges in Plymouth, MNconnection with the strategic reorganization and alignment plan, including projects reported in discontinued operations, of between approximately $22 million to manufacture catheters and introducers will transfer into$23 million, the Company’s existing facility in Tijuana, Mexico. This initiative ismajority 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 byat the first halfend 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 is dependent uponimprove operating efficiencies. The plan involves the Company’s customers’ validationrelocation of certain manufacturing operations and qualificationexpansion of certain of the transferred products as well as regulatory approvals worldwide.
Functions performed atCompany's facilities. The Company estimates that it will incur aggregate pre-tax restructuring related charges in connection with the Company’s facilities in Beaverton, OR and Raynham, MArealignment plan of between approximately $6 million to manufacture products for$7 million, the portable medical market transferredmajority of which are expected to a new facility in Tijuana, Mexico. Products manufactured at the Beaverton facility, which do not serve the portable medical market, were transferredbe cash expenditures. Costs related to the Company’s Raynham facility. This initiative was substantially completed during the first half of 2016. The final closure of the Beaverton, OR site occurred in the fourth quarter of 2016.
The design engineering responsibilities previously performed at the Company’s Cleveland, OH facility were transferredmanufacturing alignment to the Company’s facilities in Minnesota in 2015.
The realignment of the Company’s commercial sales operations was completed in 2015.
The total capital investment expected for these initiatives is between $24.0 million and $25.0 million, of which $23.3 million has been expended through December 30, 2016. Total restructuring charges expected to be incurred in connection with this realignment are between $50.0 million and $55.0 million, of which $49.1 million has been incurred through December 30, 2016. Expenses related to thissupport growth initiative were primarily recorded within the Medical segment and includesegment. As of December 31, 2019, total expense incurred for this initiative since inception was $5.2 million. These actions were substantially completed at the following:end of 2019.
Severance and retention: $6.0 million - $7.0 million;
Accelerated depreciation and asset write-offs: $3.0 million - $3.0 million; and
Other: $41.0 million - $45.0 million72 -
Other expenses primarily consist of costs to relocate certain equipment and personnel, duplicate personnel costs, excess overhead, disposal, and travel expenditures. All expenses are cash expenditures except accelerated depreciation and asset write-offs. The change in accrued liabilities related to the 2014 investments in capacity and capabilities is as follows (in thousands): |
| | | | | | | | | | | | | | | |
| Severance and Retention | | Accelerated Depreciation/ Asset Write-offs | | Other | | Total |
January 1, 2016 | $ | 1,429 |
| | $ | — |
| | $ | 1,595 |
| | $ | 3,024 |
|
Restructuring charges | 397 |
| | 2,451 |
| | 14,311 |
| | 17,159 |
|
Write-offs | — |
| | (2,451 | ) | | — |
| | (2,451 | ) |
Cash payments | (1,760 | ) | | — |
| | (15,906 | ) | | (17,666 | ) |
December 30, 2016 | $ | 66 |
| | $ | — |
| | $ | — |
| | $ | 66 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13.(11.)OTHER OPERATING EXPENSES NET (Continued)
Orthopedic Facilities OptimizationConsolidation and optimization initiatives
In 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate two buildings, increase capacity, further expand capabilities and reduce dependence on outside suppliers. This initiative was completed in 2011.
In 2011, the Company began construction of an orthopedic manufacturing facility in Fort Wayne, IN and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was completed in 2012.
During 2012, the Company transferred manufacturing and development operations performed at its facilities in Orvin and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. This initiative was completed in 2013.
In connection with this consolidation, in 2013, the Company sold assetsCosts related to certain non-core Swiss orthopedic product lines to an independent third party. The purchase agreement provided the Company with an earn out payment based upon the amount of inventory consumed by the purchaser within one year after the close of the transaction. As a result of this earn out, a gain of $2.7 million was recorded in Other Operating Expenses, Net and the cash was received during 2014. During 2014, the Company transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to held for saleconsolidation and recognized a $0.4 million impairment charge. During 2015, the Company sold $0.6 million of these assets held for sale with no additional gain or loss recognized. Refer to Note 5 “Assets Held For Sale” for additional information.
During 2013, the Company began a project to expand its Chaumont, France facility in order to enhance its capabilities and fulfill larger volume customer supply agreements. This initiative is expected to be completed in 2017.
The total capital investment expected to be incurred for theseoptimization initiatives is between $31.0 million and $35.0 million, of which $30.0 million has been expended through December 30, 2016. Total expense expected to be incurred for these initiatives is between $45.0 million and $48.0 million, of which $44.6 million has been incurred through December 30, 2016. All expenses have been and will bewere primarily recorded within the Medical segment and are expectedsegment. The Company does not expect to include the following:
Severance and retention: approximately $11.0 million;
Accelerated depreciation and asset write-offs: approximately $13.0 million; and
Other: $21.0 million - $24.0 million
Other expenses include production inefficiencies, moving, revalidation, personnel, training, consulting, and travelincur any material additional costs associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and asset write-offs. activities.
The
following table summarizes the change in accrued liabilities related to the
orthopedic facilities optimizations is as followsinitiatives described above (in thousands):
|
| | | | | | | | | | | | | | | |
| Severance and Retention | | Accelerated Depreciation/ Asset Write-offs | | Other | | Total |
January 1, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring charges | — |
| | 202 |
| | 545 |
| | 747 |
|
Write-offs | — |
| | (202 | ) | | — |
| | (202 | ) |
Cash payments | — |
| | — |
| | (545 | ) | | (545 | ) |
December 30, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| Severance and Retention | | Other | | Total |
December 28, 2018 | $ | 1,668 |
| | $ | 202 |
| | $ | 1,870 |
|
Restructuring charges | 2,095 |
| | 5,862 |
| | 7,957 |
|
Cash payments | (2,374 | ) | | (5,468 | ) | | (7,842 | ) |
December 31, 2019 | $ | 1,389 |
| | $ | 596 |
| | $ | 1,985 |
|
Lake Region Medical Consolidations
In 2014, Lake Region Medical initiated plans to close its Arvada, CO site, consolidate its two Galway, Ireland sites into one facility,Acquisition and other restructuring actions that will result in a reduction in staff across manufacturing and administrative functions at certain locations. This initiative was substantially completed by the end of 2016.Integration Expenses
During the third quarter of 2016,2019, the Company announced the planned closure of its Clarence, NY facility. The machined component product lines manufactured in this facility will be transferred to other Integer locations in the U.S. This project is expected to be completed by the first quarter of 2018.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13.)OTHER OPERATING EXPENSES, NET (Continued)
The total capital investment expected for this initiative since the acquisition date is between $5.0 million and $6.0 million, of which $2.2 million has been expended through December 30, 2016. Total expense expected to be incurred for these initiatives are between $20.0 million and $25.0 million, of which $10.5 million has been incurred through December 30, 2016. Expenses related to this initiative were primarily recorded within the Medical segment and include the following:
Severance and retention: $8.0 million - $10.0 million;
Accelerated depreciation and asset write offs: approximately $1.0 million - $2.0 million; and
Other: $11.0 million - $13.0 million
Other expenses primarily consist of production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and asset write-offs. The change in accrued liabilities related to the Lake Region Medical consolidation initiatives is as follows (in thousands: |
| | | | | | | | | | | | | | | |
| Severance and Retention | | Accelerated Depreciation/ Asset Write-offs | | Other | | Total |
January 1, 2016 | $ | 3,667 |
| | $ | — |
| | $ | 596 |
| | $ | 4,263 |
|
Restructuring charges | 740 |
| | 1,398 |
| | 6,446 |
| | 8,584 |
|
Write-offs | — |
| | (1,398 | ) | | — |
| | (1,398 | ) |
Cash payments | (3,678 | ) | | — |
| | (6,640 | ) | | (10,318 | ) |
December 30, 2016 | $ | 729 |
| | $ | — |
| | $ | 402 |
| | $ | 1,131 |
|
acquisition of USB, and primarily include legal expenses. Acquisition and integration costs
During 2016 and 2015, the Company incurred $28.3 million and $33.1 million, respectively, in acquisition and integration costsduring 2017 were predominantly related to the acquisition of Lake Region Medical consisting(“LRM”) and primarily of transaction costsinclude professional, consulting, severance, retention, relocation, and integrationtravel costs. Transaction costs primarily relate to change-in-control payments to former Lake Region Medical executives, as well as professional and consulting fees. Integration costs primarily include professional, consulting, severance, retention, relocation, and travel costs. As of December 30, 2016 and January 1, 2016, $4.5 million and $6.2 million, respectively, of acquisition and integration costs related to the Lake Region Medical acquisition were accrued.
Total integration expense expected to be incurred in connection with the Lake Region Medical acquisition is between $40.0 million and $50.0 million of which $32.5 million was incurred through December 30, 2016. Total capital expenditures for this initiative are expected to be between $20.0 million and $25.0 million of which $8.2 million was incurred through December 30, 2016.
Asset dispositions, severance and otherOther General Expenses
During 2016, 20152019, 2018 and 2014,2017, the Company recorded losses in connection with various asset disposals and/or write-downs. In addition, during 2016write-downs and 2015, the Companyexpenses 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 legal and professional costs in connection with the Spin-off of $4.4 milliona customer filing Chapter 11 bankruptcy, and $6.0 million, respectively. Total transaction related costs incurred for the Spin-off since inception were $10.4 million. Expensesexpenses related to the Spin-offrestructuring 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 primarily 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 Medical segment. ReferInternal Revenue Code. Changes include, but are not limited to, Note 2 “Divestiturea 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 Acquisitions” for additional informationa one-time transition tax on the Spin-off.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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14.(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 international componentsits timely filed 2017 U.S. corporate income tax return. Further, the Company records the consequences of income (loss)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 provision for income taxes for fiscal years 2016, 20152019, 2018 and 2014 were as follows2017 consisted of the following (in thousands): |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
U.S. | $ | 40,203 |
| | $ | (4,273 | ) | | $ | 306 |
|
International | 64,990 |
| | 65,389 |
| | 48,953 |
|
Total income from continuing operations before taxes | $ | 105,193 |
| | $ | 61,116 |
| | $ | 49,259 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
U.S. | $ | (52,446 | ) | | $ | (42,166 | ) | | $ | 56,801 |
|
International | 53,631 |
| | 26,466 |
| | 19,778 |
|
Total income (loss) before provision (benefit) for income taxes | $ | 1,185 |
| | $ | (15,700 | ) | | $ | 76,579 |
|
The provision (benefit) for income taxes from continuing operations for fiscal years 2016, 20152019, 2018 and 20142017 was comprised of the following (in thousands): |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Current: | | | | | |
Federal | $ | 14,090 |
| | $ | 80 |
| | $ | (1,558 | ) |
State | 87 |
| | 166 |
| | (29 | ) |
International | 10,083 |
| | 9,490 |
| | 8,539 |
|
| 24,260 |
| | 9,736 |
| | 6,952 |
|
Deferred: | | | | | |
Federal | (8,813 | ) | | 6,610 |
| | (45,114 | ) |
State | 332 |
| | 103 |
| | (295 | ) |
International | (1,804 | ) | | (2,366 | ) | | 629 |
|
| (10,285 | ) | | 4,347 |
| | (44,780 | ) |
Total provision (benefit) for income taxes | $ | 13,975 |
| | $ | 14,083 |
| | $ | (37,828 | ) |
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Current: | | | | | |
Federal | $ | (8,327 | ) | | $ | (3,753 | ) | | $ | 16,293 |
|
State | 149 |
| | (367 | ) | | 1,299 |
|
International | 10,752 |
| | 6,312 |
| | 2,998 |
|
| 2,574 |
| | 2,192 |
| | 20,590 |
|
Deferred: | | | | | |
Federal | (4,952 | ) | | (8,144 | ) | | 1,211 |
|
State | (638 | ) | | (880 | ) | | (310 | ) |
International | (1,760 | ) | | (1,274 | ) | | (370 | ) |
| (7,350 | ) | | (10,298 | ) | | 531 |
|
Total provision (benefit) for income taxes | $ | (4,776 | ) | | $ | (8,106 | ) | | $ | 21,121 |
|
The provision (benefit) for income taxes differs from the U.S. statutory rate for fiscal years 2016, 2015 and 2014 due to the following:
|
| | | | | | | | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Statutory rate | $ | 415 |
| 35.0 | % | | $ | (5,495 | ) | 35.0 | % | | $ | 26,803 |
| 35.0 | % |
Federal tax credits | (1,792 | ) | (151.2 | ) | | (1,850 | ) | 11.8 |
| | (1,600 | ) | (2.1 | ) |
Foreign rate differential | (7,086 | ) | (598.0 | ) | | (3,180 | ) | 20.2 |
| | (3,276 | ) | (4.3 | ) |
Uncertain tax positions | 1,724 |
| 145.5 |
| | (531 | ) | 3.4 |
| | 412 |
| 0.6 |
|
State taxes, net of federal benefit | (1,068 | ) | (90.1 | ) | | (1,490 | ) | 9.5 |
| | 507 |
| 0.7 |
|
Change in foreign tax rates | (270 | ) | (22.8 | ) | | (91 | ) | 0.6 |
| | (446 | ) | (0.6 | ) |
Non-deductible transaction costs | 1,012 |
| 85.4 |
| | 4,867 |
| (31.0 | ) | | — |
| — |
|
Valuation allowance | 1,340 |
| 113.1 |
| | 626 |
| (4.0 | ) | | (299 | ) | (0.4 | ) |
Change in tax law (Internal Revenue Code §987) | 2,630 |
| 221.9 |
| | — |
| — |
| | — |
| — |
|
Other | (1,681 | ) | (141.8 | ) | | (962 | ) | 6.1 |
| | (980 | ) | (1.3 | ) |
Effective tax rate | $ | (4,776 | ) | 403.0 | % | | $ | (8,106 | ) | 51.6 | % | | $ | 21,121 |
| 27.6 | % |
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14.(12.)INCOME TAXES (Continued)
DeferredThe 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 | $ | 22,091 |
| 21.0 | % | | $ | 12,834 |
| 21.0 | % | | $ | 17,240 |
| 35.0 | % |
Federal tax credits (including R&D) | (4,797 | ) | (4.6 | ) | | (1,700 | ) | (2.8 | ) | | (1,674 | ) | (3.4 | ) |
Foreign rate differential | (5,479 | ) | (5.2 | ) | | (6,040 | ) | (9.9 | ) | | (12,934 | ) | (26.3 | ) |
Stock-based compensation | (2,422 | ) | (2.3 | ) | | (2,821 | ) | (4.6 | ) | | (3,232 | ) | (6.6 | ) |
Uncertain tax positions | (920 | ) | (0.9 | ) | | 147 |
| 0.2 |
| | 34 |
| 0.1 |
|
State taxes, net of federal benefit | 1,106 |
| 1.1 |
| | 975 |
| 1.6 |
| | (543 | ) | (1.1 | ) |
U.S. tax on foreign earnings, net of §250 deduction | 5,201 |
| 4.9 |
| | 10,473 |
| 17.1 |
| | 1,471 |
| 3.0 |
|
Valuation allowance | (1,606 | ) | (1.5 | ) | | (567 | ) | (0.9 | ) | | 1,030 |
| 2.1 |
|
Tax Reform Act | — |
| — |
| | 11 |
| — |
| | (39,394 | ) | (80.0 | ) |
Other | 801 |
| 0.8 |
| | 771 |
| 1.3 |
| | 174 |
| 0.4 |
|
Effective tax rate | $ | 13,975 |
| 13.3 | % | | $ | 14,083 |
| 23.0 | % | | $ | (37,828 | ) | (76.8 | )% |
The difference between the Company’s effective tax assets (liabilities) consistrate 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.
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 | $ | 14,921 |
| | $ | 24,593 |
|
Inventories | 11,333 |
| | 3,408 |
|
Net operating loss carryforwards | 8,254 |
| | 18,088 |
|
Operating lease liabilities | 5,544 |
| | — |
|
Stock-based compensation | 4,844 |
| | 2,340 |
|
Accrued expenses | 4,625 |
| | 39 |
|
Gross deferred tax assets | 49,521 |
| | 48,468 |
|
Less valuation allowance | (22,229 | ) | | (34,339 | ) |
Net deferred tax assets | 27,292 |
| | 14,129 |
|
Property, plant and equipment | (6,017 | ) | | (9,445 | ) |
Intangible assets | (192,091 | ) | | (198,648 | ) |
Operating lease assets | (5,161 | ) | | — |
|
Other | (7,563 | ) | | (6,009 | ) |
Gross deferred tax liabilities | (210,832 | ) | | (214,102 | ) |
Net deferred tax liability | $ | (183,540 | ) | | $ | (199,973 | ) |
Presented as follows: | | | |
Noncurrent deferred tax asset | $ | 4,438 |
| | $ | 3,937 |
|
Noncurrent deferred tax liability | (187,978 | ) | | (203,910 | ) |
Net deferred tax liability | $ | (183,540 | ) | | $ | (199,973 | ) |
|
| | | | | | | |
| December 30, 2016 | | January 1, 2016 |
Net operating loss carryforwards | $ | 154,706 |
| | $ | 153,949 |
|
Tax credit carryforwards | 24,646 |
| | 22,196 |
|
Inventories | 7,524 |
| | 6,543 |
|
Accrued expenses | 5,724 |
| | 13,138 |
|
Stock-based compensation | 10,614 |
| | 9,512 |
|
Other | 936 |
| | 38 |
|
Gross deferred tax assets | 204,150 |
| | 205,376 |
|
Less valuation allowance | (35,391 | ) | | (39,171 | ) |
Net deferred tax assets | 168,759 |
| | 166,205 |
|
Property, plant and equipment | (33,069 | ) | | (32,772 | ) |
Intangible assets | (337,722 | ) | | (347,896 | ) |
Convertible subordinated notes | (2,577 | ) | | (3,754 | ) |
Gross deferred tax liabilities | (373,368 | ) | | (384,422 | ) |
Net deferred tax liability | $ | (204,609 | ) | | $ | (218,217 | ) |
Presented as follows: | | | |
Noncurrent deferred tax asset | $ | 3,970 |
| | $ | 3,587 |
|
Noncurrent deferred tax liability | (208,579 | ) | | (221,804 | ) |
Net deferred tax liability | $ | (204,609 | ) | | $ | (218,217 | ) |
As of December 30, 2016,31, 2019, the Company has the following carryforwards available: |
| | | | | | | | |
Jurisdiction | | Tax Attribute | | Amount (in millions) | | Begin to Expire |
U.S. State | | Net operating losses(1) | | $ | 111.2 |
| | 2020 |
International | | Net operating losses(1) | | 2.6 |
| | 2023 |
U.S. Federal | | Foreign tax credits | | 9.0 |
| | 2020 |
U.S. Federal and State | | R&D tax credits | | 2.3 |
| | 2020 |
U.S. State | | Investment tax credits | | 5.1 |
| | 2020 |
|
| | | | | | | | |
Jurisdiction | | Tax Attribute | | Amount (in millions) | | Begin to Expire |
Federal | | Net Operating Loss | | $ | 388.6 |
| | 2019 |
International | | Net Operating Loss | | 43.0 |
| | 2017 |
State | | Net Operating Loss | | 276.4 |
| | 2017 |
Federal | | Foreign Tax Credit | | 17.0 |
| | 2019 |
U.S. and State | | R&D Tax Credit | | 4.9 |
| | 2018 |
State | | Investment Tax Credit | | 6.0 |
| | 2016 |
__________Certain U.S. tax attributes are subject to limitations of Internal Revenue Code §382, which in general provides that utilization is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain shareholders or public groups in stock of a corporation by more than 50 percentage points over a three- year period. Such an ownership change occurred upon the consummation of the acquisition of Lake Region Medical. The Company does not anticipate that these limitations will affect utilization of these carryforwards prior to their expiration.
The Company’s federal net operating loss carryforward and certain other federal tax credits reported on its income tax returns included uncertain tax positions taken in prior years. Due to the application of the accounting for uncertain tax positions, the actual tax attributes are larger than the tax amounts for which a deferred tax asset is recognized for financial statement purposes. | |
(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. |
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 30, 201631, 2019 and January 1, 2016December 28, 2018 related to certain foreign tax credits, state investment tax credits, and foreign and state net operating losses will not be realized.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14.(12.)INCOME TAXES (Continued)
On December 7, 2016, the U.S. Treasury and the Internal Revenue Service (“IRS”) issued final and temporary regulations under Internal Revenue Code §987 (the “Regulations”). These Regulations address the taxation of foreign currency translation gains or losses arising from qualified business units (“QBUs”) (such as branches and certain other flow-through entities) that operate in a currency other than the currency of their owner. The Company has measured the impact of the regulations by applying the “Fresh Start Transition Method” as prescribed by the Regulations, and adjusted the carrying value of its deferred tax accounts accordingly. The adjustment to the carrying value of the deferred tax accounts was recorded as a component of Provision (Benefit) for Income Taxes attributable to continuing operations in the current year.
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 2016, 20152019, 2018 and 20142017 (in thousands): |
| | | | | | | | | | | |
| 2019 | | 2018(1) | | 2017(2) |
Balance, beginning of year | $ | 5,369 |
| | $ | 12,088 |
| | $ | 10,561 |
|
Additions based upon tax positions related to the current year | 300 |
| | 300 |
| | 3,833 |
|
Reductions related to prior period tax returns | (1,223 | ) | | (75 | ) | | (14 | ) |
Reductions relating to settlements with tax authorities | — |
| | (98 | ) | | — |
|
Reductions relating to divestiture | — |
| | (6,846 | ) | | — |
|
Reductions as a result of a lapse of applicable statute of limitations | — |
| | — |
| | (510 | ) |
Revaluation due to change in tax rate (Tax Reform Act) | — |
| | — |
| | (1,782 | ) |
Balance, end of year | $ | 4,446 |
| | $ | 5,369 |
| | $ | 12,088 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Balance, beginning of year | $ | 9,271 |
| | $ | 2,411 |
| | $ | 1,858 |
|
Reductions (additions) relating to business combinations | (400 | ) | | 7,443 |
| | — |
|
Additions based upon tax positions related to the current year | 1,450 |
| | 274 |
| | 268 |
|
Additions related to prior period tax positions | 240 |
| | 163 |
| | 510 |
|
Reductions relating to settlements with tax authorities | — |
| | (550 | ) | | (225 | ) |
Reductions as a result of a lapse of applicable statute of limitations | — |
| | (470 | ) | | — |
|
Balance, end of year | $ | 10,561 |
| | $ | 9,271 |
| | $ | 2,411 |
|
__________ | |
(1) | The amounts for 2018 reflect discontinued operations through the date of divestiture of the AS&O Product Line, which is reflected in the table as a reduction relating to divestiture. |
| |
(2) | The amounts for 2017 include discontinued operations. |
Integer and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The tax years that remain open and subject to tax audits variesvary depending on the tax jurisdiction. The Internal Revenue Service finalized an audit of(“IRS”) is currently examining the 2012 and 2013 U.S. Federal income tax returnssubsidiaries of the Company infor the first quarter of 2015. The impacttaxable years 2014 - 2018 and the 2019 taxable year remains subject to examination by the income tax expense was not material.IRS. The U.S. subsidiaries of the former Lake Region Medical GroupLRM 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 30, 2016,31, 2019, approximately $9.8$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 OperationsOperations. During 2019, 2018 and Comprehensive Income (Loss). During 2016, 2015 and 2014,2017, the recorded amounts for interest and penalties, respectively, were not significant.
As of December 30, 2016, no taxes have been provided on the undistributed earnings of certain foreign subsidiaries amounting to $102.3 million. The Company intends to permanently reinvest these earnings. Quantification of the deferred tax liability associated with these undistributed earnings is not practicable.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15.(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. On January 26, 2016, a juryTwo juries in the U.S. District Court for the District of Delaware have returned a verdictverdicts finding that AVX infringed on two3 of the Company’s patents and awarded the Company $37.5 million in damages. The finding is subjectIn 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 post-trial proceedings currently scheduled to be heldoverturn the jury verdict in favor of the Company. On August 2017, as well as a possible23, 2019, AVX filed its notice of appeal by AVX. Thewith 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 no0 gains in connection with this litigation as no cash has been received.litigation.
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
The Company’s Collegeville, PA facility,In January 2015, LRM, which was acquired as part of the Lake Region Medical acquisition, is subject to one administrative consent order entered into with the U.S. Environmental Protection Agency (the “EPA”), which require ongoing groundwater treatment and monitoring at the site as a result of leaks from underground storage tanks. Upon approval by the EPA of the Company’s proposed post remediation care plan, which requires a continuation of the groundwater treatment and monitoring process at the site, the Company expects that the consent orders will be terminated. The Company expects a decision from the EPA on whether the Company’s post remediation care plan has been approved in early 2017. The groundwater treatment process at the Collegeville facility consists of a groundwater extraction and treatment system and the performance of annual sampling of a defined set of groundwater wells as a means to monitor containment within approved boundaries. The Company does not expect this environmental matter will have a material effect on its consolidated results of operations, financial position or cash flows.
In JanuaryOctober 2015, Lake Region Medical was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of the NJDEP’s intent to revoke a no further action determination made by the NJDEP in favor of Lake Region MedicalLRM in 2002 pertaining to a property on which a subsidiary of Lake Region MedicalLRM operated a manufacturing facility in South Plainfield, New Jersey beginning in 1971. Lake Region MedicalLRM sold the property in 2004 and vacated the facility in 2007. In response to the NJDEP’s notice, the Company further investigated the matter and submitted a technical report to the NJDEP in August of 2015 that concluded that the NJDEP’s notice of intent to revoke was unwarranted. After reviewing the Company’s technical report, the NJDEP issued a draft response in May 2016 stating that the 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 the NJDEP and has met with NJDEP representatives to discuss the appropriate scope of the requested additional investigation.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.
As of December 30, 2016 and January 1, 2016, there was $1.0 million and $1.1 million, respectively, recorded in Other Long-Term Liabilities in the Consolidated Balance Sheets in connection with these environmental matters.
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 $2.0$1.4 million, $2.4$1.6 million, and $3.3$1.1 million, for 2016, 20152019, 2018 and 2014,2017, respectively, and are primarily included in Cost of Sales.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15.)COMMITMENTS AND CONTINGENCIES (Continued)
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The change in product warranty liability for fiscal years 20162019 and 20152018 was comprised of the following (in thousands):
|
| | | | | | | |
| 2019 | | 2018 |
Beginning balance | $ | 2,600 |
| | $ | 2,820 |
|
Additions to warranty reserve, net of reversals | 2,605 |
| | 620 |
|
Adjustments to pre-existing warranties | (1,039 | ) | | — |
|
Warranty claims settled | (2,233 | ) | | (840 | ) |
Ending balance | $ | 1,933 |
| | $ | 2,600 |
|
|
| | | | | | | |
| 2016 | | 2015 |
Beginning balance | $ | 3,316 |
| | $ | 660 |
|
Provision for warranty reserve | 3,238 |
| | 1,274 |
|
Liabilities assumed from acquisition | — |
| | 2,521 |
|
Warranty claims paid | (2,643 | ) | | (1,139 | ) |
Ending balance | $ | 3,911 |
| | $ | 3,316 |
|
Operating Leases
The Company is a party to various operating lease agreements for buildings, machinery, equipment and software. The Company primarily leases buildings, which accounts for the majority of the future lease payments. Lease expense includes the effect of escalation clauses and leasehold improvement incentives which are accounted for ratably over the lease term. Operating lease expense for fiscal years 2016, 2015 and 2014 was as follows (in thousands): |
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Operating lease expense | $ | 15,357 |
| | $ | 6,516 |
| | $ | 4,281 |
|
At December 30, 2016, the Company had the following future minimum lease payments under non-cancelable operating leases (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After 2021 |
Future minimum lease payments | $ | 13,486 |
| | 12,235 |
| | 11,105 |
| | 8,810 |
| | 7,826 |
| | 23,838 |
|
Self-Insurance Liabilities
As of December 30, 2016,31, 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 $7.7$4.5 million and $7.9$4.2 million as of December 30, 201631, 2019 and January 1, 2016,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.
Foreign Currency Contracts
Historically, the Company has entered into forward contracts to purchase Mexican pesos in order to hedge the risk of peso-denominated payments associated with its operations in Mexico. In connection with the Lake Region Medical acquisition, the Company terminated its outstanding forward contracts resulting in a $2.4 million payment to the foreign currency contract counterparty during 2015. As of the date the contracts were terminated, the Company had $1.6 million recorded in Accumulated Other Comprehensive Income (Loss) related to these contracts. This amount was fully amortized to Cost of Sales during 2016 as the inventory, which the contracts were hedging the cash flows to produce, was sold.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15.(14.)COMMITMENTS AND CONTINGENCIES (Continued)LEASES
The impact toCompany 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 Company’s resultsweighted average remaining lease term and discount rate as of operations from its forward contracts for fiscal years 2016, 2015December 31, 2019:
|
| | |
Weighted-average remaining lease term of operating leases (in years) | 7.4 |
|
Weighted-average discount rate of operating leases | 5.5 | % |
The components and 2014 wasclassification of lease cost as of December 31, 2019 are as follows (in thousands): |
| | | |
Operating lease cost | $ | 9,870 |
|
Short-term lease cost (leases with initial term of 12 months or less) | 57 |
|
Variable lease cost | 2,419 |
|
Sublease income | (1,894 | ) |
Total lease cost | $ | 10,452 |
|
| |
Cost of sales | $ | 8,772 |
|
SG&A expenses | 1,107 |
|
Research, development and engineering costs | 556 |
|
Other operating expenses | 17 |
|
Total lease cost | $ | 10,452 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Increase (reduction) in Cost of Sales | $ | 3,516 |
| | $ | 1,948 |
| | $ | (168 | ) |
Ineffective portion of change in fair value | — |
| | — |
| | — |
|
The Company’s sublease income is derived primarily from certain real estate leases to several non-affiliated tenants under operating sublease arrangements.Information regarding outstanding foreign currency contracts designatedOperating lease expense for fiscal years 2018 and 2017, under ASC 840, the predecessor to ASC 842, were as cash flow hedgesfollows (in thousands): |
| | | | | | | | | |
| | | 2018 | | 2017 |
Operating lease expense | | | $ | 10,753 |
| | $ | 14,320 |
|
At December 31, 2019, the maturities of operating lease liabilities were as follows (in thousands): |
| | | |
2020 | 9,793 |
|
2021 | 9,284 |
|
2022 | 7,136 |
|
2023 | 6,279 |
|
2024 | 5,755 |
|
Thereafter | 16,624 |
|
Total lease payments | 54,871 |
|
Less imputed interest | (10,250 | ) |
Total | $ | 44,621 |
|
The Company’s future minimum lease commitments, net of sublease income, as of December 30, 201628, 2018, under ASC 840 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | After 2023 |
Future minimum lease payments | $ | 8,562 |
| | 7,290 |
| | 7,348 |
| | 5,269 |
| | 5,112 |
| | 14,589 |
|
As of December 31, 2019, the Company did not have any leases that have not yet commenced.
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 (dollars in(in thousands): |
| | | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 10,235 |
|
ROU assets obtained in exchange for new operating lease liabilities | 8,778 |
|
|
| | | | | | | | | | | | | | | |
Aggregate Notional Amount | | Start Date | | End Date | | $/Peso | | Fair Value | | Balance Sheet Location |
$ | 24,654 |
| | Jan 2017 | | Dec 2017 | | 0.0514 |
| | $ | (2,063 | ) | | Accrued Expenses |
During thefiscal year ended December 31, 2019, the Company extended the lease terms for 5 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.(16.(15.)EARNINGS (LOSS) PER SHARE
The following table illustratessets forth a reconciliation of the calculation of Basicinformation used in computing basic and Diluteddiluted EPS for fiscal years 2016, 20152019, 2018 and 20142017 (in thousands, except per share amounts): | | | 2016 | | 2015 | | 2014 | 2019 | | 2018 | | 2017 |
Numerator: | | | | | | |
Net income (loss) | $ | 5,961 |
| | $ | (7,594 | ) | | $ | 55,458 |
| |
Numerator for basic and diluted EPS: | | | | | | |
Income from continuing operations | | $ | 91,218 |
| | $ | 47,033 |
| | $ | 87,087 |
|
Income (loss) from discontinued operations | | 5,118 |
| | 120,931 |
| | (20,408 | ) |
Net income | | $ | 96,336 |
| | $ | 167,964 |
| | $ | 66,679 |
|
Denominator for basic EPS: | | | | | | | | | | |
Weighted average shares outstanding | 30,778 |
| | 26,363 |
| | 24,825 |
| 32,627 |
| | 32,136 |
| | 31,402 |
|
Effect of dilutive securities: | | | | | | | | | | |
Stock options, restricted stock and restricted stock units | 195 |
| | — |
| | 1,150 |
| 410 |
| | 460 |
| | 654 |
|
Denominator for diluted EPS | 30,973 |
| | 26,363 |
| | 25,975 |
| 33,037 |
| | 32,596 |
| | 32,056 |
|
Basic EPS | $ | 0.19 |
| | $ | (0.29 | ) | | $ | 2.23 |
| |
Diluted EPS | $ | 0.19 |
| | $ | (0.29 | ) | | $ | 2.14 |
| |
| | | | | | |
Basic earnings (loss) per share: | | | | | | |
Income from continuing operations | | $ | 2.80 |
| | $ | 1.46 |
| | $ | 2.77 |
|
Income (loss) from discontinued operations | | 0.16 |
| | 3.76 |
| | (0.65 | ) |
Basic earnings per share | | 2.95 |
| | 5.23 |
| | 2.12 |
|
| | | | | | |
Diluted earnings (loss) per share: | | | | | | |
Income from continuing operations | | $ | 2.76 |
| | $ | 1.44 |
| | $ | 2.72 |
|
Income (loss) from discontinued operations | | 0.15 |
| | 3.71 |
| | (0.64 | ) |
Diluted earnings per share | | 2.92 |
| | 5.15 |
| | 2.08 |
|
The diluted weighted average share calculations do not include the following securities for fiscal years 2016, 20152019, 2018 and 2014,2017, which are not dilutive to the EPS calculations or the performance criteria have not been met (in thousands): |
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Time-vested stock options, restricted stock and restricted stock units | 30 |
| | 237 |
| | 676 |
|
Performance-vested restricted stock units | 47 |
| | 144 |
| | 285 |
|
|
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
Time-vested stock options, restricted stock and restricted stock units | 657 |
| | 1,718 |
| | 176 |
|
Performance-vested stock options and restricted stock units | 357 |
| | 578 |
| | — |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17.(16.)ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)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:
|
| | | | | | | | |
| Issued | | Treasury Stock | | Outstanding |
2019 | | | | | |
Shares outstanding at beginning of year | 32,624,494 |
| | (151,327 | ) | | 32,473,167 |
|
Stock options exercised | 116,904 |
| | 21,866 |
| | 138,770 |
|
RSAs issued, net of forfeitures, and vesting of RSUs | 105,619 |
| | (17,085 | ) | | 88,534 |
|
Shares outstanding at end of year | 32,847,017 |
| | (146,546 | ) | | 32,700,471 |
|
| | | | | |
2018 | | | | | |
Shares outstanding at beginning of year | 31,977,953 |
| | (106,526 | ) | | 31,871,427 |
|
Stock options exercised | 413,317 |
| | — |
| | 413,317 |
|
RSAs issued, net of forfeitures, and vesting of RSUs | 233,224 |
| | (44,801 | ) | | 188,423 |
|
Shares outstanding at end of year | 32,624,494 |
| | (151,327 | ) | | 32,473,167 |
|
Accumulated Other Comprehensive Income
Accumulated Other Comprehensive Income (Loss)(“AOCI”) is comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount |
December 29, 2017 | $ | (1,422 | ) | | $ | 3,418 |
| | $ | 50,200 |
| | $ | 52,196 |
| | $ | (17 | ) | | $ | 52,179 |
|
Unrealized gain on cash flow hedges | — |
| | 1,904 |
| | — |
| | 1,904 |
| | (400 | ) | | 1,504 |
|
Realized gain on foreign currency hedges | — |
| | (186 | ) | | — |
| | (186 | ) | | 39 |
| | (147 | ) |
Realized gain on interest rate swap hedges | — |
| | (1,697 | ) | | — |
| | (1,697 | ) | | 356 |
| | (1,341 | ) |
Net defined benefit plan adjustments | 232 |
| | — |
| | — |
| | 232 |
| | 70 |
| | 302 |
|
Foreign currency translation loss | — |
| | — |
| | (19,925 | ) | | (19,925 | ) | | — |
| | (19,925 | ) |
Reclassifications to earnings(1) | 895 |
| | — |
| | 264 |
| | 1,159 |
| | $ | (261 | ) | | 898 |
|
Reclassification to retained earnings(2) | — |
| | — |
| | — |
| | — |
| | (466 | ) | | (466 | ) |
December 28, 2018 | $ | (295 | ) | | $ | 3,439 |
| | $ | 30,539 |
| | $ | 33,683 |
| | $ | (679 | ) | | $ | 33,004 |
|
Unrealized loss on cash flow hedges | — |
| | (4,028 | ) | | — |
| | (4,028 | ) | | 846 |
| | (3,182 | ) |
Realized gain on foreign currency hedges | — |
| | (148 | ) | | — |
| | (148 | ) | | 31 |
| | (117 | ) |
Realized gain on interest rate swap hedges | — |
| | (1,621 | ) | | — |
| | (1,621 | ) | | 340 |
| | (1,281 | ) |
Net defined benefit plan adjustments | (617 | ) | | — |
| | — |
| | (617 | ) | | 81 |
| | (536 | ) |
Foreign currency translation loss | — |
| | — |
| | (7,900 | ) | | (7,900 | ) | | — |
| | (7,900 | ) |
December 31, 2019 | $ | (912 | ) | | $ | (2,358 | ) | | $ | 22,639 |
| | $ | 19,369 |
| | $ | 619 |
| | $ | 19,988 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount |
January 1, 2016 | $ | (1,179 | ) | | $ | (2,392 | ) | | $ | 3,609 |
| | $ | 38 |
| | $ | 1,332 |
| | $ | 1,370 |
|
Unrealized gain on cash flow hedges | — |
| | 210 |
| | — |
| | 210 |
| | (73 | ) | | 137 |
|
Realized loss on foreign currency hedges | — |
| | 3,516 |
| | — |
| | 3,516 |
| | (1,231 | ) | | 2,285 |
|
Realized loss on interest rate swap hedges | — |
| | 86 |
| | — |
| | 86 |
| | (30 | ) | | 56 |
|
Net defined benefit plan liability adjustments | (296 | ) | | — |
| | — |
| | (296 | ) | | (283 | ) | | (579 | ) |
Foreign currency translation loss | — |
| | — |
| | (19,269 | ) | | (19,269 | ) | | — |
| | (19,269 | ) |
December 30, 2016 | $ | (1,475 | ) | | $ | 1,420 |
| | $ | (15,660 | ) | | $ | (15,715 | ) | | $ | (285 | ) | | $ | (16,000 | ) |
__________ | |
(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. |
| |
(2) | Represents the stranded tax effects reclassified from AOCI to retained earnings resulting from the adoption of ASU 2018-02 during 2018. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Defined Benefit Plan Liability | | Cash Flow Hedges | | Foreign Currency Translation Adjustment | | Total Pre-Tax Amount | | Tax | | Net-of-Tax Amount |
January 2, 2015 | $ | (1,181 | ) | | $ | (2,558 | ) | | $ | 11,450 |
| | $ | 7,711 |
| | $ | 1,412 |
| | $ | 9,123 |
|
Unrealized loss on cash flow hedges | — |
| | (4,413 | ) | | — |
| | (4,413 | ) | | 1,545 |
| | (2,868 | ) |
Realized loss on foreign currency hedges | — |
| | 1,948 |
| | — |
| | 1,948 |
| | (682 | ) | | 1,266 |
|
Realized loss on interest rate swap hedges | — |
| | 2,631 |
| | — |
| | 2,631 |
| | (921 | ) | | 1,710 |
|
Net defined benefit plan liability adjustments | 2 |
| | — |
| | — |
| | 2 |
| | (22 | ) | | (20 | ) |
Foreign currency translation loss | — |
| | — |
| | (7,841 | ) | | (7,841 | ) | | — |
| | (7,841 | ) |
January 1, 2016 | $ | (1,179 | ) | | $ | (2,392 | ) | | $ | 3,609 |
| | $ | 38 |
| | $ | 1,332 |
| | $ | 1,370 |
|
The realized loss relating to the Company’s foreign currency and interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income (Loss) and included in Cost of Sales and Interest Expense, respectively, in the Consolidated Statements of Operations and Comprehensive Income (Loss). Refer to Note 10 “Benefit Plans” for details on the change in net defined benefit plan liability adjustments.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18.(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.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): |
| | | | | | | | | | | | | | | |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
December 31, 2019 | | | | | | | |
Assets: Foreign currency contracts | $ | 710 |
| | $ | — |
| | $ | 710 |
| | $ | — |
|
Liabilities: Interest rate swaps | 3,068 |
| | — |
| | 3,068 |
| | — |
|
Liabilities: Contingent consideration | 4,200 |
| | — |
| | — |
| | 4,200 |
|
| | | | | | | |
December 28, 2018 | | | | | | | |
Assets: Interest rate swaps | $ | 4,171 |
| | $ | — |
| | $ | 4,171 |
| | $ | — |
|
Liabilities: Foreign currency contracts | 732 |
| | — |
| | 732 |
| | — |
|
Interest Rate Swaps
The Company periodically enters into interest rate swap agreements in order to reduce the cash flow risk caused by interest rate changes on its outstanding floating rate borrowings. Under these swap agreements, the Company pays a fixed rate of interest and receives a floating rate equal to one-month 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 | % | | $ | 543 |
| | Accrued expenses and other current liabilities |
65,000 |
| | Jul 2019 | | Jul 2020 | | 1.8900 |
| | 1.7920 |
| | (72 | ) | | Accrued expenses and other current liabilities |
400,000 |
| | Apr 2019 | | Apr 2020 | | 2.4150 |
| | 1.7101 |
| | (730 | ) | | Accrued expenses and other current liabilities |
200,000 |
| | Jun 2020 | | Jun 2023 | | 2.1785 |
| | (1) | | (2,809 | ) | | Other long-term liabilities |
__________
(1) The interest rate swap is not in effect until June 2020.
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, to the above, the Company receivedreceives fair value estimates from the foreign currency contract counterpartycounterparties 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, the cash flows to produce, is sold. Approximately $2.1
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 | | 1.1686 |
| Euro | | $ | (149 | ) | | Accrued expenses and other current liabilities |
10,991 |
| | Jan 2019 | | Jun 2019 | | 0.0523 |
| Peso | | (494 | ) | | Accrued expenses and other current liabilities |
10,535 |
| | Jan 2019 | | Jun 2019 | | 1.1705 |
| Euro | | (141 | ) | | Accrued expenses and other current liabilities |
11,019 |
| | Jan 2019 | | Jun 2019 | | 0.0483 |
| Peso | | (316 | ) | | Accrued expenses and other current liabilities |
10,499 |
| | Jul 2019 | | Dec 2019 | | 0.0500 |
| Peso | | 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 | | 2019 | | 2018 | | 2017 | | Location in Statement of Operations | | 2019 | | 2018 | | 2017 |
Interest rate swaps | | $ | (5,618 | ) | | $ | 1,589 |
| | $ | 1,263 |
| | Interest expense | | $ | 1,621 |
| | $ | 1,697 |
| | $ | 466 |
|
Foreign exchange contracts | | (1,044 | ) | | (1,193 | ) | | 1,472 |
| | Sales | | (1,334 | ) | | (758 | ) | | 1,327 |
|
Foreign exchange contracts | | 2,634 |
| | 1,508 |
| | 972 |
| | Cost of sales | | 1,482 |
| | 944 |
| | (84 | ) |
The Company expects to reclassify net losses totaling $0.2 million is expectedrelated to be realized as additional Cost of Sales overits cash flow hedges from AOCI into earnings during the next twelve months.
Interest Rate SwapsContingent Consideration
TheContingent 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 the Company’s interest rate swaps outstanding at December 30, 2016 was determined through the use of a cash flow model that utilized observable market data inputs. These observable market data inputs included LIBOR, swap rates,payment and credit spread curves. In addition to the above, the Company received aprojected payment dates.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(17.)FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The contingent consideration fair value
estimate frommeasurement is based on significant inputs not observable in the
interest rate swap counterparty to verify the reasonableness of the Company’s estimate. This fair value calculation was categorized inmarket and therefore constitute Level
2 of3 inputs within the fair value hierarchy. The
Company determines the fair value of the
Company’s interest rate swaps will be realized ascontingent consideration liabilities using a
componentMonte Carlo simulation (which involves a simulation of
Interest Expense as interest onfuture revenues during the
corresponding borrowings is accrued. The following tables provide information regarding assetsearn out-period using management's best estimates) or a probability-weighted discounted cash flow analysis. Increases in projected revenues, estimated cash flows and
liabilities recorded atprobabilities of payment may result in significantly higher fair value
on a recurring basis (in thousands): |
| | | | | | | | | | | | | | | |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
December 30, 2016 | | | | | | | |
Assets | | | | | | | |
Interest rate swaps (Note 9) | $ | 3,482 |
| | $ | — |
| | $ | 3,482 |
| | $ | — |
|
Liabilities | | | | | | | |
Foreign currency contracts (Note 15) | $ | 2,063 |
| | $ | — |
| | $ | 2,063 |
| | $ | — |
|
| | | | | | | |
January 1, 2016 | | | | | | | |
Liabilities | | | | | | | |
Foreign currency contracts | $ | 307 |
| | $ | — |
| | $ | 307 |
| | $ | — |
|
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. Refer
Borrowings under the Company’s Revolving Credit Facility, TLA Facility and TLB Facility accrue interest at a floating rate tied to Note 9 “Debt”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):
|
| | | | | | | | | | | |
| | | | | December 31, 2019 | | December 28, 2018 |
Equity method investment | | | | | $ | 16,167 |
| | $ | 15,148 |
|
Non-marketable equity securities | | | | | 6,092 |
| | 7,667 |
|
Total equity investments | | | | | $ | 22,259 |
| | $ | 22,815 |
|
The components of (Gain) Loss on Equity Investments, Net for further discussion regardingeach period were as follows (in thousands):
|
| | | | | | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
Equity method investment income | | | $ | (1,100 | ) | | $ | (5,623 | ) | | $ | (3,685 | ) |
Impairment charges | | | 1,575 |
| | — |
| | 5,250 |
|
Total (gain) loss on equity investments, net | | | $ | 475 |
| | $ | (5,623 | ) | | $ | 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 Company’s Senior Secured Credit Facilitiesimpairment loss included the equity security’s investee’s financial condition, priority claims to the equity security, distributions rights and Senior Notes.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18.)FAIR VALUE MEASUREMENTS (Continued)
The following table provides information regarding assets recorded at fair value on a nonrecurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
December 30, 2016 | | | | | | | |
Assets | | | | | | | |
Cost method investment | $ | 430 |
| | $ | — |
| | $ | 430 |
| | $ | — |
|
Assets Held for Sale (Note 5) | 794 |
| | — |
| | 794 |
| | — |
|
| | | | | | | |
January 1, 2016 | | | | | | | |
Assets | | | | | | | |
Cost method investment | $ | 1,100 |
| | $ | — |
| | $ | 1,100 |
| | $ | — |
|
A summarypreferences, and status of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:
Cost and Equity Method Investments
Theregulatory approval required to bring its product to market. Prior to the adoption of ASU 2016-01, the Company holds investments in equity and other securities that are accounted for as eitherits 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 equity method investments. The aggregate recorded amount of cost2019 and equity method investments at December 30, 2016 and January 1, 2016 was $22.8 million and $20.6 million, respectively. 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 30, 2016 and January 1, 2016,31, 2019, the Company’s recorded amountCompany owned6.7% of this equity method investment was $10.7 million and $9.8 million, respectively. This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change. As of December 30, 2016, the Company owned 7.0% of this fund.
During 2016, 2015 and 2014, the Company recognized impairment charges related to its cost method investments of $1.6 million, $1.4 million and $0.0 million, respectively. The fair value of these investments were determined by reference to recent sales data of similar shares to independent parties in an inactive market. This fair value calculation is categorized in Level 2 of the fair value hierarchy. During 2016, 2015 and 2014, the Company recognized net gains on equity method investments of $0.1 million, $4.7 million, and $1.2 million, respectively. During 2015, the Company recorded a gain and received a $3.6 million cash distribution from its equity method investment, which was classified as a cash flow from operating activities in the Consolidated Statements of Cash Flows as it represented a return on investment. During 2014, the Company sold one of its cost method investments, which resulted in pre-tax gains of $0.7 million in 2016 and $3.2 million in 2014.
Long-Lived Assets
The Company reviews the carrying amount of its long-lived assets to be held and used for potential impairment whenever certain indicators are present as described in Note 1 “Summary of Significant Accounting Policies.” During 2016 and 2014, the Company recorded in Other Operating Expenses, Net impairment charges of $1.0 million and $0.4 million related to its long-lived assets. There were no impairment charges recorded during 2015 related to the Company’s long-lived assets. The fair value of these assets were determined based upon recent sales data of similar assets and discussions with potential buyers, and was categorized in Level 2 of the fair value hierarchy. Refer to Note 5 “Assets Held for Sale” and Note 13 “Other Operating Expenses, Net” for further discussion.
Fair Value of Other Financial Instruments
Pension Plan Assets
The fair value of the Company’s pension plan assets disclosed in Note 10 “Benefit Plans” 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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19.(18.)BUSINESS SEGMENT AND GEOGRAPHIC AND CONCENTRATION RISK INFORMATION
As a result of the Lake Region Medical acquisition and Spin-off, during 2016 theThe Company reorganizedorganizes its operations including its internal management and financial reporting structure. As a result of this reorganization, the Company reevaluated and revised its reportable business segments during the fourth quarter of 2016 and began to disclose twointo 2 reportable segments: (1) Medical and (2) Non-Medical. The two reportable segments, alongThis 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 their related product lines, are described below:
Medical - includes the (i) Cardio & Vascular product line, which includes introducers, steerable sheaths, guidewires, catheters, and stimulation therapy components, subassemblies and finished devices that deliver therapies for various markets such as coronary and neurovascular disease, peripheral vascular disease, interventional radiology, vascular access, atrial fibrillation, and interventional cardiology, plus products for medical imaging and pharmaceutical delivery; (ii) Cardiac & Neuromodulation product line, which includes batteries, capacitors, filtered and unfiltered feed-throughs, engineered components, implantable stimulation leads, and enclosures used in implantable medical devices; and (iii) Advanced Surgical, Orthopedics & Portable Medical product line, which includes components, sub-assemblies, finished devices, implants, instruments and delivery systems for a range of surgical technologies to the advanced surgical market, including laparoscopy, orthopedics and general surgery, biopsy and drug delivery, joint preservation and reconstruction, arthroscopy, and engineered tubing solutions. Products also include life-saving and life-enhancing applications comprising of automated external defibrillators, portable oxygen concentrators, ventilators, and powered surgical tools.
Non-Medical - includes primary (lithium) cells, and primary and secondary battery packs for applications in the energy, military and environmental markets.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. Segment income also includes a portion of non-segment specific selling, general, and administrative expenses based on allocations appropriate to the expense categories. 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.
An analysis and reconciliation of the Company’s business segments,The following table presents sales by product lines and geographic information to the respective information in the Consolidated Financial Statements follows. Prior period amounts have been reclassified to conform to the new segment reporting presentation. Sales by geographic arealine for fiscal years 2016, 20152019, 2018 and 20142017 (in thousands).
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Segment sales by product line: | | | | | |
Medical | | | | | |
Cardio & Vascular | $ | 610,056 |
| | $ | 585,464 |
| | $ | 530,831 |
|
Cardiac & Neuromodulation | 457,194 |
| | 443,347 |
| | 428,275 |
|
Advanced Surgical, Orthopedics & Portable Medical | 132,429 |
| | 133,225 |
| | 120,006 |
|
Total Medical | 1,199,679 |
| | 1,162,036 |
| | 1,079,112 |
|
Non-Medical | 58,415 |
| | 52,976 |
| | 56,968 |
|
Total sales | $ | 1,258,094 |
| | $ | 1,215,012 |
| | $ | 1,136,080 |
|
Geographic Area Information
The following table presents sales by significant country for fiscal years 2019, 2018 and 2017. In these tables, sales are presented by allocating sales from external customersallocated based on where the products are shipped (in thousands):.
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Sales by geographic area: | | | | | |
United States | $ | 698,474 |
| | $ | 687,259 |
| | $ | 662,133 |
|
Non-Domestic locations: | | | | | |
Puerto Rico | 154,644 |
| | 146,500 |
| | 140,184 |
|
Costa Rica | 63,634 |
| | 62,044 |
| | 55,364 |
|
Rest of world | 341,342 |
| | 319,209 |
| | 278,399 |
|
Total sales | $ | 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.
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Segment sales by product line: | | | | | |
Medical | | | | | |
Cardio & Vascular | $ | 568,510 |
| | $ | 143,260 |
| | $ | 58,770 |
|
Cardiac & Neuromodulation | 389,403 |
| | 356,064 |
| | 330,921 |
|
Advanced Surgical, Orthopedics & Portable Medical | 392,778 |
| | 243,385 |
| | 216,339 |
|
Elimination of interproduct line sales | (5,592 | ) | | (1,744 | ) | | — |
|
Total Medical | 1,345,099 |
| | 740,965 |
| | 606,030 |
|
Non-Medical | 41,679 |
| | 59,449 |
| | 81,757 |
|
Total sales | $ | 1,386,778 |
| | $ | 800,414 |
| | $ | 687,787 |
|
|
| | | | | | | | | | | | |
| | 2019 | | 2018 |
Customer | | Medical | | Non-Medical | | Medical | | Non-Medical |
Customer A | | 22 | % | | * |
| | 22 | % | | * |
|
Customer B | | 18 | % | | * |
| | 19 | % | | * |
|
Customer C | | 12 | % | | * |
| | 12 | % | | * |
|
Customer D | | * |
| | 22 | % | | * |
| | 28 | % |
All other customers | | 48 | % | | 78 | % | | 47 | % | | 72 | % |
__________
* Less than 10% of segment’s total revenues for the period.
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Segment income from operations: | | | | | |
Medical | $ | 185,448 |
| | $ | 83,784 |
| | $ | 91,677 |
|
Non-Medical | 1,513 |
| | 7,289 |
| | 20,799 |
|
Total segment income from operations | 186,961 |
| | 91,073 |
| | 112,476 |
|
Unallocated operating expenses | (78,691 | ) | | (77,927 | ) | | (36,822 | ) |
Operating income | 108,270 |
| | 13,146 |
| | 75,654 |
|
Unallocated expenses, net | (107,085 | ) | | (28,846 | ) | | 925 |
|
Income (loss) before provision (benefit) for income taxes | $ | 1,185 |
| | $ | (15,700 | ) | | $ | 76,579 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19.(18.)BUSINESS SEGMENT GEOGRAPHIC AND CONCENTRATION RISKGEOGRAPHIC 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.
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Segment depreciation and amortization: | | | | | |
Medical | $ | 83,184 |
| | $ | 61,618 |
| | $ | 31,346 |
|
Non-Medical | 2,346 |
| | 2,503 |
| | 2,661 |
|
Total depreciation and amortization included in segment income from operations | 85,530 |
| | 64,121 |
| | 34,007 |
|
Unallocated depreciation and amortization | 4,994 |
| | 3,497 |
| | 3,450 |
|
Total depreciation and amortization | $ | 90,524 |
| | $ | 67,618 |
| | $ | 37,457 |
|
|
| | | | | | | | |
| | 2019 | | 2018 |
Ship to Location | | Medical | | Non-Medical | | Medical | | Non-Medical |
United States | | 55% | | 58% | | 56% | | 66% |
Puerto Rico | | 13% | | * | | 13% | | * |
Canada | | * | | 13% | | * | | 11% |
Rest of world | | 32% | | 29% | | 31% | | 23% |
__________
* 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).
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Segment income from continuing operations: | | | | | |
Medical | $ | 223,873 |
| | $ | 224,893 |
| | $ | 197,212 |
|
Non-Medical | 16,289 |
| | 14,697 |
| | 11,335 |
|
Total segment income from continuing operations | 240,162 |
| | 239,590 |
| | 208,547 |
|
Unallocated operating expenses | (82,527 | ) | | (84,035 | ) | | (82,898 | ) |
Operating income | 157,635 |
| | 155,555 |
| | 125,649 |
|
Unallocated expenses, net | (52,442 | ) | | (94,439 | ) | | (76,390 | ) |
Income from continuing operations before taxes | $ | 105,193 |
| | $ | 61,116 |
| | $ | 49,259 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Expenditures for tangible long-lived assets, excluding acquisitions: | | | | | |
Medical | $ | 44,670 |
| | $ | 40,931 |
| | $ | 19,838 |
|
Non-Medical | 1,451 |
| | 600 |
| | 621 |
|
Total reportable segments | 46,121 |
| | 41,531 |
| | 20,459 |
|
Unallocated long-lived tangible assets | 8,251 |
| | 6,523 |
| | 5,187 |
|
Total expenditures | $ | 54,372 |
| | $ | 48,054 |
| | $ | 25,646 |
|
The following table presents depreciation and amortization expense for the Company’s reportable segments for fiscal years 2019, 2018 and 2017 (in thousands). |
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Segment depreciation and amortization: | | | | | |
Medical | $ | 68,867 |
| | $ | 71,922 |
| | $ | 72,314 |
|
Non-Medical | 1,039 |
| | 1,364 |
| | 2,675 |
|
Total depreciation and amortization included in segment income from continuing operations | 69,906 |
| | 73,286 |
| | 74,989 |
|
Unallocated depreciation and amortization | 7,989 |
| | 8,252 |
| | 6,194 |
|
Total depreciation and amortization | $ | 77,895 |
| | $ | 81,538 |
| | $ | 81,183 |
|
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
Sales by geographic area: | | | | | |
United States | $ | 805,742 |
| | $ | 401,380 |
| | $ | 312,539 |
|
Non-Domestic locations: | | | | | |
Puerto Rico | 159,243 |
| | 136,898 |
| | 127,702 |
|
Belgium | 69,149 |
| | 62,546 |
| | 65,308 |
|
Rest of world | 352,644 |
| | 199,590 |
| | 182,238 |
|
Total sales | $ | 1,386,778 |
| | $ | 800,414 |
| | $ | 687,787 |
|
The following table presents total assets for the Company’s reportable segments as of December 31, 2019 and December 28, 2018 (in thousands). |
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Identifiable assets: | | | |
Medical | $ | 2,233,534 |
| | $ | 2,186,565 |
|
Non-Medical | 51,031 |
| | 53,812 |
|
Total reportable segments | 2,284,565 |
| | 2,240,377 |
|
Unallocated assets | 68,528 |
| | 86,304 |
|
Total assets | $ | 2,353,093 |
| | $ | 2,326,681 |
|
|
| | | | | | | | | | | |
| December 30, 2016 | | January 1, 2016 | | January 2, 2015 |
Identifiable assets: | | | | | |
Medical | $ | 2,638,180 |
| | $ | 2,766,421 |
| | $ | 763,905 |
|
Non-Medical | 60,988 |
| | 66,492 |
| | 73,849 |
|
Total reportable segments | 2,699,168 |
| | 2,832,913 |
| | 837,754 |
|
Unallocated assets | 133,375 |
| | 149,223 |
| | 117,368 |
|
Total assets | $ | 2,832,543 |
| | $ | 2,982,136 |
| | $ | 955,122 |
|
|
| | | | | | | | | | | |
| December 30, 2016 | | January 1, 2016 | | January 2, 2015 |
Long-lived tangible assets by geographic area: | | | | | |
United States | $ | 258,899 |
| | $ | 264,556 |
| | $ | 113,851 |
|
Rest of world | 113,143 |
| | 114,936 |
| | 31,074 |
|
Total | $ | 372,042 |
| | $ | 379,492 |
| | $ | 144,925 |
|
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(19.(18.)BUSINESS SEGMENT GEOGRAPHIC AND CONCENTRATION RISKGEOGRAPHIC INFORMATION (Continued)
The following table presents capital expenditures for the Company’s reportable segments for fiscal years 2019, 2018 and 2017 (in thousands).
|
| | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
Expenditures for tangible long-lived assets: | | | | | |
Medical | $ | 44,026 |
| | $ | 34,615 |
| | $ | 20,896 |
|
Non-Medical | 397 |
| | 573 |
| | 661 |
|
Total reportable segments | 44,423 |
| | 35,188 |
| | 21,557 |
|
Unallocated long-lived tangible assets | 3,775 |
| | 6,110 |
| | 8,783 |
|
Total expenditures | $ | 48,198 |
| | $ | 41,298 |
| | $ | 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).
|
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Long-lived tangible assets by geographic area: | | | |
United States | $ | 163,350 |
| | $ | 151,851 |
|
Mexico | 36,238 |
| | 34,606 |
|
Ireland | 33,126 |
| | 32,190 |
|
Rest of world | 13,471 |
| | 12,622 |
|
Total | $ | 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 2016, 20152019, 2018 and 20142017 and accounts receivable at December 30, 201631, 2019 and January 1, 2016December 28, 2018 were to fourthree customers as follows:
|
| | | | | | | | | |
| Sales | | Accounts Receivable |
| 2019 | | 2018 | | 2017 | | December 31, 2019 | | December 28, 2018 |
Customer A | 21% | | 21% | | 22% | | 13% | | 11% |
Customer B | 17% | | 19% | | 20% | | 19% | | 18% |
Customer C | 12% | | 12% | | 11% | | 20% | | 20% |
| 50% | | 52% | | 53% | | 52% | | 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.
INTEGER HOLDINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | |
| Sales | | Accounts Receivable |
| 2016 | | 2015 | | 2014 | | December 30, 2016 | | January 1, 2016 |
Customer A | 18 | % | | 17 | % | | 18 | % | | 7 | % | | 8 | % |
Customer B | 17 | % | | 18 | % | | 18 | % | | 20 | % | | 23 | % |
Customer C | 12 | % | | 12 | % | | 12 | % | | 4 | % | | 6 | % |
Customer D | 9 | % | | 5 | % | | 5 | % | | 14 | % | | 7 | % |
| 56 | % | | 52 | % | | 53 | % | | 45 | % | | 44 | % |
(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):
|
| | | | | | | |
| December 31, 2019 | | December 28, 2018 |
Contract assets | $ | 24,767 |
| | $ | — |
|
Contract liabilities | 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) | Fourth Quarter | | | Third Quarter | | | Second Quarter | | | First Quarter | |
Fiscal Year 2019 | | | | | | | | | | | |
Sales | $ | 325,637 |
| | | $ | 303,587 |
| | | $ | 314,194 |
| | | $ | 314,676 |
| |
Gross profit | 76,030 |
| (1) | | 93,386 |
| | | 96,984 |
| | | 88,610 |
| |
Income from continuing operations | 11,044 |
| (1) | | 30,586 |
| | | 28,222 |
| | | 21,366 |
| |
EPS—basic | 0.34 |
| | | 0.94 |
| | | 0.87 |
| | | 0.66 |
| |
EPS—diluted | 0.33 |
| | | 0.92 |
| | | 0.85 |
| | | 0.65 |
| |
| | | | | | | | | | | |
Fiscal Year 2018 | | | | | | | | | | | |
Sales | $ | 303,034 |
| | | $ | 305,088 |
| | | $ | 314,464 |
| | | $ | 292,426 |
| |
Gross profit | 88,445 |
| | | 91,923 |
| | | 98,765 |
| | | 83,532 |
| |
Income (loss) from continuing operations | 19,196 |
| | | (8,303 | ) | | | 23,056 |
| | | 13,084 |
| |
EPS—basic | 0.59 |
| | | (0.26 | ) | | | 0.72 |
| | | 0.41 |
| |
EPS—diluted | 0.58 |
| | | (0.26 | ) | | | 0.70 |
| | | 0.40 |
| |
|
| | | | | | | | | | | | | | | |
(in thousands, except per share data) | Fourth Quarter | | Third Quarter | | Second Quarter | | First Quarter |
Fiscal Year 2016 | | | | | | | |
Sales | $ | 359,591 |
| | $ | 346,567 |
| | $ | 348,382 |
| | $ | 332,238 |
|
Gross profit | 92,891 |
| | 97,909 |
| | 96,031 |
| | 91,468 |
|
Net income (loss) | 7,933 |
| | 11,458 |
| | (770 | ) | | (12,660 | ) |
EPS—basic | 0.26 |
| | 0.37 |
| | (0.03 | ) | | (0.41 | ) |
EPS—diluted | 0.25 |
| | 0.37 |
| | (0.03 | ) | | (0.41 | ) |
| | | | | | | |
Fiscal Year 2015 | | | | | | | |
Sales | $ | 317,567 |
| | $ | 146,637 |
| | $ | 174,890 |
| | $ | 161,320 |
|
Gross profit | 73,140 |
| | 51,646 |
| | 57,951 |
| | 52,398 |
|
Net income (loss) | (24,907 | ) | | 22 |
| | 9,283 |
| | 8,008 |
|
EPS—basic | (0.85 | ) | | — |
| | 0.36 |
| | 0.32 |
|
EPS—diluted | (0.85 | ) | | — |
| | 0.35 |
| | 0.31 |
|
__________ | |
(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). |
Net income (loss) in the first, second, third, and fourth quarters of 2016 and the third and fourth quarters of 2015 include $14.2 million, $7.9 million, $5.4 million, $5.1 million, $13.0 million and $57.1 million, respectively, of charges incurred in connection with the Lake Region Medical acquisition (transaction and integration, inventory step-up amortization, debt related charges) and the Spin-off (professional and consulting fees). Sales for the fourth quarter of 2015 include $138.6 million from the acquisition of Lake Region Medical. Refer to Note 2 “Divestiture and Acquisitions.”
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 Securities and Exchange CommissionSEC as of December 30, 2016.31, 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 Securities and Exchange Commission’sSEC’s rules and forms. Based on their evaluation, as of December 30, 2016,31, 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
ThereWith the exception of integration activities in connection with the Company's acquisition of certain assets from USB, there were no changes in ourthe 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 our last fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to materially affect,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.
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.
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 20172020 Annual Meeting of Stockholders is incorporated herein by reference.
Information regarding the Company’s executive officers is presented under the caption “Executive Officers of the Company”“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 20172020 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 20172020 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 20172020 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 20172020 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING 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 20172020 Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
| |
1.(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.(2) | The following financial statement schedule is included in this Annual Report on Form 10-K (in thousands): |
Schedule II—Valuation and Qualifying Accounts
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | Col. C—Additions | | | | |
Column A Description | | 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 |
December 30, 2016 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 954 |
| | $ | 140 |
| | $ | 245 |
| (4) | $ | (597 | ) | (2) | $ | 742 |
|
Valuation allowance for deferred income tax assets | | $ | 39,171 |
| | $ | 641 |
| (1) | $ | (5,135 | ) | (3)(4) | $ | 714 |
| (5) | $ | 35,391 |
|
January 1, 2016 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,411 |
| | $ | (70 | ) | | $ | 459 |
| (3)(4) | $ | (846 | ) | (2) | $ | 954 |
|
Valuation allowance for deferred income tax assets | | $ | 10,709 |
| | $ | 788 |
| (1) | $ | 27,836 |
| (3)(4) | $ | (162 | ) | (5) | $ | 39,171 |
|
January 2, 2015 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,001 |
| | $ | 98 |
| | $ | 14 |
| (3)(4) | $ | (702 | ) | (2) | $ | 1,411 |
|
Valuation allowance for deferred income tax assets | | $ | 11,661 |
| | $ | (729 | ) | (1) | $ | — |
| | $ | (223 | ) | (1)(5) | $ | 10,709 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Col. C—Additions | | | | |
Column A Description | | 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 |
December 31, 2019 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 592 |
| | $ | 1,884 |
| (1) | $ | 2 |
| (3) | $ | (35 | ) | (4) | $ | 2,443 |
|
Valuation allowance for deferred tax assets | | $ | 34,339 |
| | $ | 736 |
| (2) | $ | — |
| | $ | (12,846 | ) | (2)(4)(5) | $ | 22,229 |
|
December 28, 2018 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 536 |
| | $ | 169 |
| | $ | (2 | ) | (3) | $ | (111 | ) | (4) | $ | 592 |
|
Valuation allowance for deferred tax assets | | $ | 36,480 |
| | $ | — |
| | $ | (170 | ) | (3) | $ | (1,971 | ) | (2)(4)(5) | $ | 34,339 |
|
December 29, 2017 | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 475 |
| | $ | 194 |
| | $ | — |
| | $ | (133 | ) | (4) | $ | 536 |
|
Valuation allowance for deferred tax assets | | $ | 35,391 |
| | $ | 3,284 |
| (2) | $ | — |
| | $ | (2,195 | ) | (4)(5) | $ | 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 in 2014 primarily relates to the use of net operating loss carryforwards.was recorded. |
| |
(3) | Balance recorded as a part of our 2015 acquisition of Lake Region Medical and our 2014 acquisition of Centro de Construcción de Cardioestimuladores del Uruguay. 2016 amount represents measurement-period adjustments related to the acquisition of Lake Region Medical. |
| |
(4)
| Includes foreign currency translation effect. |
| |
(5) | Primarily relates toIncludes 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.(3) | Exhibits required by Item 601 of Regulation S-K. TheSee exhibits listed under Part (b) below. |
(b) EXHIBITS:
|
| | |
EXHIBIT NUMBER | | DESCRIPTION |
| | |
2.1 | | |
| | |
2.2 | | |
| | |
|
| | |
EXHIBIT NUMBER | | DESCRIPTION |
| | |
2.3 | | |
3.1 | | |
| | |
3.2 | | |
| | |
4.1* | | |
| | |
10.1 | | 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). |
| | |
10.2 | | 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 have been previously filed, are filed herewith or are incorporated hereinfor the year ended December 30, 2016). |
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10.3 | | 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 other filings.Exhibit 10.1 to our Current Report on Form 8-K filed on March 20, 2017). |
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10.4 | | 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). |
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10.5 | | 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). |
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10.6 | | 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). |
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10.7 | | 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). |
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EXHIBIT NUMBER | | DESCRIPTION |
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10.36# | | |
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10.39#* | | |
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23.1* | | |
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31.1* | | |
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31.2* | | |
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32.1** | | |
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101.INS* | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* | | XRBL Taxonomy Extension Schema Document |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
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104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101) |
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* - | 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.
SIGNATURES
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.
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| | | |
| | INTEGER HOLDINGS CORPORATION |
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Dated: | February 28, 201720, 2020 | By | /s/ Thomas J. HookJoseph W. Dziedzic |
| | | Thomas J. HookJoseph 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 |
| | | | |
/s/ Thomas J. HookJoseph W. Dziedzic | | President, Chief Executive Officer and Director | | February 28, 201720, 2020 |
Thomas J. HookJoseph W. Dziedzic | | (Principal Executive Officer) | | |
/s/ Michael DinkinsJason K. Garland | | Executive Vice President and Chief Financial Officer | | February 28, 201720, 2020 |
Michael DinkinsJason K. Garland | | (Principal Financial Officer) | | |
/s/ Tom P. Thomas J. Mazza | | Vice President, Corporate Controller and Treasurer | | February 28, 201720, 2020 |
Tom P. Thomas J. Mazza | | (Principal Accounting Officer) | | |
/s/ Bill R. Sanford | | Chairman | | February 28, 201720, 2020 |
Bill R. Sanford | | | | |
/s/ Pamela G. Bailey | | Director | | February 28, 201720, 2020 |
Pamela G. Bailey | | | | |
/s/ Joseph W. DziedzicJames F. Hinrichs | | Director | | February 28, 201720, 2020 |
Joseph W. DziedzicJames F. Hinrichs | | | | |
/s/ Jean M. Hobby | | Director | | February 28, 201720, 2020 |
Jean M. Hobby | | | | |
/s/ M. Craig Maxwell | | Director | | February 28, 201720, 2020 |
M. Craig Maxwell | | | | |
/s/ Filippo Passerini | | Director | | February 28, 201720, 2020 |
Filippo Passerini | | | | |
/s/ Peter H. Soderberg | | Director | | February 28, 201720, 2020 |
Peter H. Soderberg | | | | |
/s/ Donald J. Spence | | Director | | February 28, 201720, 2020 |
Donald J. Spence | | | | |
/s/ William B. Summers, Jr. | | Director | | February 28, 201720, 2020 |
William B. Summers, Jr. | | | | |
EXHIBIT INDEX
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EXHIBIT
NUMBER
| | DESCRIPTION |
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2.1 | | 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). |
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2.2 | | Separation and Distribution Agreement, dated March 14, 2016, between Greatbatch, Inc. and QiG Group, LLC (incorporated by reference to Exhibit 2.2 to our Current Report on Form 8-K filed on March 18, 2016). |
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3.1 | | 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). |
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3.2 | | 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). |
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4.1 | | Indenture (including form of Note), dated as of October 27, 2015, by and among Greatbatch Ltd., the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 28, 2015). |
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4.2 | | Stockholders Agreement, dated as of October 27, 2015, by and among Greatbatch, Inc., Kohlberg Kravis Roberts & Co. L.P., Bain Capital Investors, LLC and each other stockholder party thereto (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on October 28, 2015). |
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10.1# | | 1998 Stock Option Plan (including form of “standard” option agreement, form of “special” option agreement and form of “non-standard” option agreement) (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1 filed on May 22, 2000 (File No. 333-37554)). |
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10.2# | | Amendment to Greatbatch, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for the period ended January 3, 2014). |
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10.3# | | Greatbatch, Inc. Executive Short Term Incentive Compensation Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule 14A filed on April 20, 2012). |
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10.4# | | Form of Change of Control Agreement between Greatbatch, Inc. and Timothy G. McEvoy (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended July 1, 2011 (File No. 001-16137)). |
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10.5# | | Amended and Restated Change of Control Agreement, dated August 5, 2016, between Integer Holdings
Corporation and Thomas J. Hook (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the period ended July 1, 2016).
|
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10.6# | | Form of Change of Control Agreement between Greatbatch, Inc. and its executive officers (Michael Dinkins, Jennifer M. Bolt, Jeremy Friedman, Antonio Gonzalez, Declan Smyth, and Kristin Trecker) (incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 28, 2012). |
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10.7 | | 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). |
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10.8* | | Amendment No. 1 to Credit Agreement, dated as of November 29, 2016, between Greatbatch Ltd., as the borrower, and Manufacturers and Traders Trust Company, as administrative agent, and the Lenders party thereto. |
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10.9# | | Employment Agreement, dated August 5, 2016, between Integer Holdings Corporation and Thomas J. Hook
(incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the period ended July 1, 2016).
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10.10# | | 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)). |
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10.11# | | 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)). |
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10.12# | | 2011 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule 14A filed on April 14, 2014). |
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10.13# | | 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). |
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|
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EXHIBIT
NUMBER
| | DESCRIPTION |
| | |
10.14# | | 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). |
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10.15#* | | Second Amendment to Greatbatch, Inc. 2011 Stock Incentive Plan and Greatbatch, Inc. 2009 Stock Incentive Plan. |
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10.16#* | | Amendment to Greatbatch, Inc. 2016 Stock Incentive Plan. |
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10.17# | | 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). |
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10.18# | | Form of Performance-Based Restricted Stock Units Award Agreement (incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K for the year ended January 3, 2014). |
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10.19# | | Form of Nonqualified Option Award Letter (incorporated by reference to Exhibit 10.17 to our Annual Report on Form 10-K for the year ended January 3, 2014). |
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10.20# | | Form of Time-Based Restricted Stock Units Award Letter (incorporated by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended January 3, 2014). |
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10.21 | | Transition Services Agreement, dated March 14, 2016, between Greatbatch, Inc. and QiG Group, LLC (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on March 18, 2016). |
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10.22 | | Amendment No. 1 to the Transition Services Agreement between Greatbatch, Inc. and Nuvectra Corporation (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended July 1, 2016). |
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10.23 | | Tax Matters Agreement, dated March 14, 2016, between Greatbatch, Inc. and QiG Group, LLC (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on March 18, 2016). |
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10.24 | | Employee Matters Agreement, dated March 14, 2016, between Greatbatch, Inc. and QiG Group, LLC (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on March 18, 2016). |
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10.25# | | Employment Offer Letter, dated October 7, 2016, between Integer Holdings Corporation and Jeremy Friedman (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the period ended September 30, 2016). |
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12.1* | | Ratio of Earnings to Fixed Charges (Unaudited) |
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21.1* | | Subsidiaries of Integer Holdings Corporation |
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23.1* | | Consent of Independent Registered Public Accounting Firm |
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31.1* | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. |
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31.2* | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. |
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32.1** | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101.INS* | | XBRL Instance Document |
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101.SCH* | | XRBL Taxonomy Extension Schema Document |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.LAB* | | XBRL Taxonomy Extension Labels Linkbase Document |
| | |
101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document |
| | |
101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document |
|
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* - | 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. |