Integer Holdings Corp - Quarter Report: 2021 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________________________________________________

FORM 10-Q

_____________________________________________________________


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

For the quarterly period ended October 1, 2021


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

For the transition period from ____ to ____

Commission File Number 1-16137

_____________________________________________________________

INTEGER HOLDINGS CORPORATION

(Exact name of Registrant as specified in its charter)

_____________________________________________________________


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

5830 Granite Parkway,

Suite 1150

Plano,

Texas

75024

(Address of principal executive offices)

(Zip Code)

(214) 618-5243

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.001 par value per share

ITGR

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the Company’s common stock, $0.001 par value per share, as of October 22, 2021 was: 33,018,867 shares.

INTEGER HOLDINGS CORPORATION

Form 10-Q

For the Quarterly Period Ended October 1, 2021

TABLE OF CONTENTS


		Page
PART I—FINANCIAL INFORMATION

ITEM 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets (Unaudited)	3

	Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)	4



	Condensed Consolidated Statements of Cash Flows (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	41

ITEM 4.	Controls and Procedures	41

PART II—OTHER INFORMATION

ITEM 1.	Legal Proceedings	42

ITEM 1A.	Risk Factors	42

ITEM 6.	Exhibits	42

SIGNATURES		43

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


(in thousands except share and per share data)	October 1, 2021		December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	25,472	$	49,206
Accounts receivable, net of provision for credit losses of $0.1 million and $0.2 million, respectively	177,488		156,207
Inventories	149,235		149,323
Refundable income taxes	12,580		2,087
Contract assets	59,440		40,218


Prepaid expenses and other current assets	18,352		15,896

Total current assets	442,567		412,937
Property, plant and equipment, net	250,450		253,964
Goodwill	849,686		859,442
Other intangible assets, net	716,060		757,224
Deferred income taxes	4,364		4,398
Operating lease assets	46,871		45,153
Other long-term assets	38,132		38,739

Total assets	$	2,348,130	$	2,371,857
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	20,250	$	37,500
Accounts payable	68,418		51,570
Income taxes payable	36		1,847

Operating lease liabilities	7,926		8,431
Accrued expenses and other current liabilities	59,780		56,843

Total current liabilities	156,410		156,191
Long-term debt	610,405		693,758
Deferred income taxes	180,597		182,304
Operating lease liabilities	41,382		37,861
Other long-term liabilities	27,083		30,688

Total liabilities	1,015,877		1,100,802
Commitments and contingencies (Note 10)
Stockholders’ equity:

Common stock, $0.001 par value; 100,000,000 shares authorized; 33,016,984 and 32,908,178 shares issued and outstanding, respectively	33		33
Additional paid-in capital	710,513		700,814

Retained earnings	590,535		517,516
Accumulated other comprehensive income	31,172		52,692
Total stockholders’ equity	1,332,253		1,271,055
Total liabilities and stockholders’ equity	$	2,348,130	$	2,371,857

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

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INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (Unaudited)


	Three Months Ended				Nine Months Ended
(in thousands except per share data)	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Sales	$	305,574	$	235,942	$	908,064	$	804,483
Cost of sales	223,702		178,009		652,960		591,985
Gross profit	81,872		57,933		255,104		212,498
Operating expenses:
Selling, general and administrative (Note 10)	34,269		3,609		105,150		73,969
Research, development and engineering	12,050		11,892		39,249		37,879
Other operating expenses	2,463		2,674		3,657		7,631
Total operating expenses	48,782		18,175		148,056		119,479
Operating income	33,090		39,758		107,048		93,019
Interest expense	10,053		9,368		26,117		29,002
(Gain) loss on equity investments	(152)		(2,234)		1,867		(3,954)
Other (income) loss, net	10		1,224		129		(233)
Income before taxes	23,179		31,400		78,935		68,204
Provision for income taxes	1,113		1,058		5,916		6,373







Net income	$	22,066	$	30,342	$	73,019	$	61,831

Earnings per share:
Basic	$	0.67	$	0.92	$	2.21	$	1.88
Diluted	$	0.66	$	0.92	$	2.20	$	1.87











Weighted average shares outstanding:
Basic	33,008		32,859		32,982		32,833
Diluted	33,309		33,076		33,250		33,107

Comprehensive Income
Net income	$	22,066	$	30,342	$	73,019	$	61,831
Other comprehensive income (loss):
Foreign currency translation gain (loss)	(7,836)		16,387		(21,716)		17,303
Change in fair value of cash flow hedges, net of tax	57		1,355		196		(5,070)

Other comprehensive income (loss), net of tax	(7,779)		17,742		(21,520)		12,233
Comprehensive income, net of tax	$	14,287	$	48,084	$	51,499	$	74,064

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

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INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended
(in thousands)	October 1, 2021		October 2, 2020
Cash flows from operating activities:
Net income	$	73,019	$	61,831
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	60,479		59,005
Debt related charges included in interest expense	6,526		3,145
Stock-based compensation	12,235		6,229
Non-cash (gains) charges related to customer bankruptcy	(23)		562
Non-cash lease expense	5,918		5,824
Non-cash (gain) loss on equity investments	1,867		(3,954)
Contingent consideration fair value adjustment	—		(500)
Other non-cash losses	893		316
Deferred income taxes	(242)		42

Changes in operating assets and liabilities, net of acquisition:
Accounts receivable	(21,638)		42,096
Inventories	(838)		10,272
Prepaid expenses and other assets	(599)		(32,736)
Contract assets	(19,528)		(14,614)
Accounts payable	16,044		(5,152)
Accrued expenses and other liabilities	(4,292)		(13,780)
Income taxes	(12,411)		(8,347)
Net cash provided by operating activities	117,410		110,239
Cash flows from investing activities:
Acquisition of property, plant and equipment	(29,711)		(35,182)
Purchase of intangible asset	—		(4,607)
Proceeds from sale of property, plant and equipment	81		76

Acquisitions, net	—		(5,219)


Net cash used in investing activities	(29,630)		(44,932)
Cash flows from financing activities:
Principal payments of term loans	(737,973)		(28,125)
Proceeds from issuance of term loans	598,250		—
Proceeds from revolving credit facility	82,300		185,000
Payments of revolving credit facility	(45,000)		(135,000)

Proceeds from the exercise of stock options	594		3,123
Payment of debt issuance costs	(5,436)		(431)
Tax withholdings related to net share settlements of restricted stock unit awards	(3,130)		(2,869)


Contingent consideration payments	(1,621)		—
Principal payments on finance leases	(51)		—

Net cash (used in) provided by financing activities	(112,067)		21,698
Effect of foreign currency exchange rates on cash and cash equivalents	553		(597)
Net increase (decrease) in cash and cash equivalents	(23,734)		86,408
Cash and cash equivalents, beginning of period	49,206		13,535
Cash and cash equivalents, end of period	$	25,472	$	99,943

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

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INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)


	Three Months Ended				Nine Months Ended
(in thousands)	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Total stockholders’ equity, beginning balance	$	1,314,572	$	1,181,401	$	1,271,055	$	1,152,488

Common stock and additional paid-in capital
Balance, beginning of period	707,152		695,684		700,847		701,051
Stock awards exercised or vested	112		16		(2,536)		(8,593)
Stock-based compensation	3,282		2,987		12,235		6,229
Balance, end of period	710,546		698,687		710,546		698,687
Treasury stock
Balance, beginning of period	—		(509)		—		(8,809)

Treasury shares reissued	—		509		—		8,809
Balance, end of period	—		—		—		—
Retained earnings
Balance, beginning of period	568,469		471,747		517,516		440,258

Net income	22,066		30,342		73,019		61,831
Balance, end of period	590,535		502,089		590,535		502,089
Accumulated other comprehensive income
Balance, beginning of period	38,951		14,479		52,692		19,988
Other comprehensive income (loss)	(7,779)		17,742		(21,520)		12,233

Balance, end of period	31,172		32,221		31,172		32,221

Total stockholders’ equity, ending balance	$	1,332,253	$	1,232,997	$	1,332,253	$	1,232,997

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

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1.) BASIS OF PRESENTATION

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with GAAP. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. Intercompany transactions and balances have been fully eliminated in consolidation.

Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The third quarter and first nine months of 2021 ended on October 1 and consisted of 91 days and 274 days, respectively. The third quarter and first nine months of 2020 ended on October 2 and consisted of 91 days and 276 days, respectively.

Risks and Uncertainties

Beginning in early March 2020, the global spread of the novel coronavirus (“COVID-19”) created significant uncertainty and worldwide economic disruption. Specific impacts to the Company’s business include labor shortages, disruptions in the supply chain, delayed or reduced customer orders and sales, restrictions on associates’ ability to travel or work, and delays in shipments to and from certain countries. The extent to which COVID-19 will continue to impact the Company’s operations depends on future developments, which remain highly uncertain and difficult to predict, including, among others, the duration of the outbreak, the effectiveness and utilization of vaccines for COVID-19 and its variants, new information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities to contain the pandemic or treat its impact. As pandemic-related events continue to evolve, additional impacts may arise that the Company is not aware of currently. Any prolonged material disruption of the Company’s labor force, suppliers, manufacturing, or customers could materially impact its consolidated financial position, results of operations or cash flows.

Recent Accounting Pronouncements

The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”). The Company evaluated all recent accounting pronouncements issued, including those that are currently effective, and determined that the adoption of these pronouncements would not have a material effect on the financial position, results of operations or cash flows of the Company. There have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, that are of significance, or potential significance, to the Company.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(2.) BUSINESS ACQUISITION

On February 19, 2020, the Company acquired certain assets and liabilities of InoMec Ltd. (“InoMec”), a privately-held company based in Israel that specializes in the research, development and manufacturing of medical devices, including minimally invasive tools, delivery systems, tubing and catheters, surgery tools, drug-device combination, laser combined devices, and tooling and production. The acquisition enables the Company to create a research and development center in Israel, closer to the customer base in the region. The fair value of the consideration transferred was $7.0 million, which included an initial cash payment of $5.3 million and $1.7 million in estimated fair value of contingent consideration.

The contingent consideration represents the estimated fair value of the Company’s obligation, under the asset purchase agreement, to make additional payments of up to $3.5 million over the four years following the acquisition based on specified conditions being met. Based on the final purchase price allocation, the assets acquired principally comprise $2.0 million of intangible assets, $4.8 million of goodwill, $0.3 million of acquired property, plant and equipment, and a net liability for other working capital items of $0.1 million. Intangible assets included developed technology, customer relationships and non-compete provisions, which are being amortized over a weighted average period of 5.9 years from the date of acquisition.

The amount allocated to goodwill for this acquisition is deductible for income tax purposes. The fair value of the contingent consideration was estimated using the Monte Carlo valuation approach. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.

For segment reporting purposes, the results of operations and assets from this acquisition have been included in the Company’s Medical segment since the acquisition date. Sales and earnings related to the operations consisting of the assets and liabilities acquired from InoMec for the three and nine months ended October 1, 2021 and October 2, 2020 were not material. There were no direct costs incurred for this acquisition during 2021. During the three and nine months ended October 2, 2020, direct costs of this acquisition of $0.1 million and $0.9 million, respectively, were expensed as incurred and included in Other operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive Income.

Pro forma financial information has not been presented for this acquisition as the net effects were not significant or material to the Company’s results of operations or financial position.

(3.) SUPPLEMENTAL CASH FLOW INFORMATION

The following is supplemental information relating to the Condensed Consolidated Statements of Cash Flows (in thousands):


	Nine Months Ended
	October 1, 2021		October 2, 2020
Noncash investing and financing activities:
Property, plant and equipment purchases included in accounts payable	$	4,311	$	3,756

Debt issuance costs incurred but not yet paid	1,713		—
Supplemental lease disclosures:
Operating lease assets obtained in exchange for new or remeasured operating lease liabilities	7,772		8,139

(4.) INVENTORIES

Inventories comprise the following (in thousands):


	October 1, 2021		December 31, 2020
Raw materials	$	65,108	$	72,477
Work-in-process	73,556		58,806
Finished goods	10,571		18,040
Total	$	149,235	$	149,323

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(5.) GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Goodwill

The changes in the carrying amount of goodwill by reportable segment for the nine months ended October 1, 2021 were as follows (in thousands):


	Medical		Non- Medical		Total
December 31, 2020	$	842,442	$	17,000	$	859,442


Foreign currency translation	(9,756)		—		(9,756)


October 1, 2021	$	832,686	$	17,000	$	849,686

Intangible Assets

Intangible assets comprise the following (in thousands):


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
October 1, 2021
Definite-lived:
Purchased technology and patents	$	254,924	$	(161,375)	$	93,549
Customer lists	713,126		(181,009)		532,117
Other	4,140		(4,034)		106
Total amortizing intangible assets	$	972,190	$	(346,418)	$	625,772
Indefinite-lived:
Trademarks and tradenames					$	90,288

December 31, 2020
Definite-lived:
Purchased technology and patents	$	257,453	$	(152,798)	$	104,655
Customer lists	723,791		(161,856)		561,935
Other	4,142		(3,796)		346
Total amortizing intangible assets	$	985,386	$	(318,450)	$	666,936
Indefinite-lived:
Trademarks and tradenames					$	90,288

Aggregate intangible asset amortization expense comprises the following (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Cost of sales	$	3,216	$	3,219	$	9,717	$	9,660
Selling, general and administrative expenses	7,068		7,080		21,356		21,234



Total intangible asset amortization expense	$	10,284	$	10,299	$	31,073	$	30,894

Estimated future intangible asset amortization expense based on the carrying value as of October 1, 2021 is as follows (in thousands):


	Remainder of 2021		2022	2023	2024	2025	After 2025
Amortization Expense	$	10,240	40,010	38,595	37,646	36,336	462,945

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) DEBT

Long-term debt related to the 2021 Credit Agreement and 2015 Credit Agreement (each as defined below) as of October 1, 2021 and December 31, 2020, respectively, comprises the following (in thousands):


	October 1, 2021		December 31, 2020
Senior secured term loan A	$	250,000	$	229,687
Senior secured term loan B	350,000		508,286
Senior secured revolving credit facility	37,300		—
Unamortized discount on term loan B and debt issuance costs	(6,645)		(6,715)
Total debt	630,655		731,258
Current portion of long-term debt	(20,250)		(37,500)
Total long-term debt	$	610,405	$	693,758

On September 2, 2021, the Company entered into a new credit agreement (the “2021 Credit Agreement”) which permits borrowings and other extensions of credit in an initial aggregate principal amount of up to $1 billion (as may be increased from time to time in accordance with the terms). The 2021 Credit Agreement governs the Company’s senior secured credit facilities (the “Senior Secured Credit Facilities”), which consist of a five-year $400 million revolving credit facility (the “Revolving Credit Facility”), a five-year “term A” loan (the “TLA Facility”) and a seven-year “term B” loan (the “TLB Facility” and, together with the TLA Facility, the “Term Loan Facilities”). The TLB Facility was issued at a 0.50% discount. The 2021 Credit Agreement also includes an alternative benchmark rate as a replacement to the London Interbank Offered Rate (“LIBOR”) in the event LIBOR is no longer available.

The obligations under the 2021 Credit Agreement are guaranteed by certain specified subsidiaries of the Company. Among other things, the 2021 Credit Agreement contains covenants that restrict the Company’s and certain of its subsidiaries’ ability to incur liens on certain assets, incur indebtedness, make material changes in corporate structure or materially alter the nature of its business, dispose of material assets, engage in mergers, consolidations and certain other fundamental changes, or engage in certain transactions with affiliates. The 2021 Credit Agreement contains customary default provisions, including, but not limited to, failure to pay interest or principal when due and failure to comply with covenants.

Prior to September 2, 2021, the Company was party to an amended and restated credit agreement (the “2015 Credit Agreement”), dated as of October 27, 2015. The 2015 Credit Agreement provided for certain credit facilities to the Company in an aggregate principal amount not to initially exceed $1.6 billion. The 2015 Credit Agreement was terminated concurrently with entering into the 2021 Credit Agreement.

Revolving Credit Facility

The Revolving Credit Facility matures on September 2, 2026 and includes $40 million sublimits for swingline loans and for standby letters of credit. As of October 1, 2021, the Company had available borrowing capacity on the Revolving Credit Facility of $357.0 million after giving effect to $37.3 million of outstanding borrowings and $5.7 million of outstanding standby letters of credit.

Interest rates on the Revolving Credit Facility, as well as the TLA Facility, are at the Company’s option, either at: (i) the applicable LIBOR (or an applicable benchmark replacement) plus the applicable margin, which will range between 1.25% and 2.25%, based on the Company’s Total Net Leverage Ratio, or (ii) the Base Rate (as defined below) plus the applicable margin, which will range between 0.25% and 1.25%, based on the Company’s Total Net Leverage Ratio. The Base Rate is defined, for any day, as the per annum rate equal to the highest of (i) the prime rate (as defined in the 2021 Credit Agreement), (ii) the Federal Funds Rate, as published by the Federal Reserve Bank of New York, plus 0.50%, and (iii) one-month LIBOR plus 1.00%. As of October 1, 2021, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 1.83%.

The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.15% and 0.25%, depending on the Company’s Total Net Leverage Ratio (as defined in the 2021 Credit Agreement). As of October 1, 2021, the commitment fee on the unused portion of the Revolving Credit Facility was 0.20%.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) DEBT (Continued)

Term Loan Facilities

The TLA Facility and TLB Facility mature on September 2, 2026 and September 2, 2028, respectively, and require quarterly installments which increase over the term of the loans. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the applicable LIBOR rate plus 2.50%, with LIBOR subject to a 0.50% floor, or (ii) the Base Rate plus 1.50%. As of October 1, 2021, the interest rates on the TLA Facility and TLB Facility were 1.83% and 3.00%, respectively.

Covenants

The 2021 Credit Agreement contains customary terms and conditions, including representations and warranties and affirmative and negative covenants, as well as financial covenants for the benefit of the lenders under the Revolving Credit Facility and the TLA Facility, which require that (i) the Company maintain a Total Net Leverage Ratio not to exceed 5.50:1.00 (stepping down to 5.00:1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following qualified acquisitions, but at no time shall exceed 5.50:1.00) and (ii) the Company maintain an interest coverage ratio of at least 2.50:1.00. The TLB Facility does not contain any financial maintenance covenants. As of October 1, 2021, the Company was in compliance with these financial covenants.

Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2021 and through maturity, excluding any discounts or premiums, as of October 1, 2021 are as follows (in thousands):


	2021		2022	2023	2024	2025	After 2025
Future minimum principal payments	$	5,063	20,250	21,812	28,063	32,750	529,362

Debt Issuance Costs and Discounts

In connection with terminating the 2015 Credit Agreement and entering into the 2021 Credit Agreement, for each separate debt instrument on a lender by lender basis, in accordance with ASC 470-50, Debt Modifications and Extinguishment, the Company performed an assessment of whether the transaction was deemed to be new debt, a modification of existing debt, or an extinguishment of existing debt. Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred.

Based on this assessment, $1.2 million of unamortized debt issuance costs and discount related to the 2015 Credit Agreement were deemed to be related to the issuance of new debt, or the modification of existing debt, and therefore will continue to be deferred and amortized over the term of the associated debt. The remaining $3.3 million of unamortized debt issuance costs and discount related to the 2015 Credit Agreement were deemed to be related to the extinguishment of debt and were expensed and included in Interest Expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Additionally, during the nine month period ended October 1, 2021, in connection with prepayments on TLB Facility under the 2015 Credit Agreement, $0.5 million of unamortized debt issuance costs and discount were treated as extinguishment of debt and were expensed and included in Interest Expense in the accompanying Consolidated Statements of Operations and Comprehensive Income.

In connection with the 2021 Credit Agreement, the Company incurred and capitalized $8.8 million of issuance costs, including an original issue discount on the TLB Facility of $1.8 million. An aggregate of $6.0 million of original issue discount and debt issuance costs have been recorded as a reduction of the carrying value of the related debt and $2.8 million of debt issuance costs attributable to the Revolving Credit Facility have been recorded as a component of Other assets on the Condensed Consolidated Balance Sheets as of October 1, 2021.

- 11 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7.) STOCK-BASED COMPENSATION

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

On March 25, 2021, the Company’s Board adopted, subject to stockholder approval, the Integer Holdings Corporation 2021 Omnibus Incentive Plan (the “2021 Plan”). The Company’s stockholders approved the 2021 Plan at the Company’s 2021 annual meeting of stockholders on May 19, 2021, at which time the 2021 Plan replaced the Company’s 2016 Stock Incentive Plan (the “2016 Plan”) and the Company ceased granting any new awards under the 2016 Plan. The number of shares initially reserved for issuance under the 2021 Plan is (i) 1,450,000 plus (ii) the total number of shares of common stock available for issuance under the 2016 Plan, plus (iii) any shares of common stock that are subject to awards forfeited, cancelled, expired, terminated or otherwise lapsed or settled in cash, in whole or in part, without the delivery of shares under the 2016 Plan. Each of the Company’s 2011 Stock Incentive Plan, the 2009 Stock Incentive Plan and the 2005 Stock Incentive Plan have expired, and no awards are available for issuance under these expired plans.

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


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Stock options	$	—	$	10	$	—	$	33


RSUs	3,282		2,977		12,235		6,196


Total stock-based compensation expense	$	3,282	$	2,987	$	12,235	$	6,229

Cost of sales	$	649	$	530	$	2,586	$	1,214
Selling, general and administrative	2,177		2,319		8,747		4,608
Research, development and engineering	302		138		748		407
Other operating expenses	154		—		154		—

Total stock-based compensation expense	$	3,282	$	2,987	$	12,235	$	6,229

Stock Options

The following table summarizes the Company’s stock option activity for the nine month period ended October 1, 2021:


	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (In Millions)
Outstanding at December 31, 2020	281,873	$	36.05

Exercised	(27,002)	22.01

Outstanding and exercisable at October 1, 2021	254,871	$	37.53	4.3	$	13.9

- 12 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7.) STOCK-BASED COMPENSATION (Continued)

Restricted Stock Units

During the nine months ended October 1, 2021, the Company awarded grants of either time-based RSUs or a mix of time-based RSUs and performance-based RSUs (“PRSUs”) to certain members of its Board and management. New Board members appointed during the first quarter of 2021 received a pro-rated portion of the their annual equity retainer in the form of time-based RSUs that vest in accordance with the regularly scheduled vesting schedule applicable to existing members of the Board. All other time-based RSUs granted during the nine months ended October 1, 2021 vest over a period of three years from the grant date, subject to the recipient’s continuous service to the Company. For the Company’s PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of market-based conditions. The market-based conditions are based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over three year performance periods.

The Company uses a Monte Carlo simulation model to determine the grant-date fair value of awards with TSR-based performance conditions. The grant-date fair value of all other RSUs is equal to the closing market price of Integer common stock on the date of grant.

The weighted average fair value and assumptions used to value the TSR portion of the PRSUs granted are as follows:


	Nine Months Ended
	October 1, 2021			October 2, 2020
Weighted average fair value	$	85.16		$	107.42
Risk-free interest rate	0.19		%	1.53		%
Expected volatility	41		%	30		%
Expected life (in years)	3.0			2.9
Expected dividend yield	—		%	—		%

The valuation of the TSR portion of the PRSUs granted during 2021 and 2020 also reflects a weighted average illiquidity discount of 8.19% and 8.00%, respectively, related to the six-month period that recipients are restricted from selling, transferring, pledging or assigning the underlying shares, in the event of vesting.

The following table summarizes time-vested RSU activity for the nine month period ended October 1, 2021:


	Time-Vested Activity	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2020	207,923	$	75.38
Granted	190,143	82.20
Vested	(90,740)	66.97
Forfeited	(15,912)	79.59
Nonvested at October 1, 2021	291,414	$	82.22

The following table summarizes PRSU activity for the nine month period ended October 1, 2021:


	Performance- Vested Activity	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2020	219,391	$	72.33
Granted	92,345	85.16
Vested	(38,882)	37.75
Forfeited	(69,333)	51.16
Nonvested at October 1, 2021	203,521	$	91.97

- 13 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(8.) OTHER OPERATING EXPENSES

Other operating expenses comprise the following (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Operational excellence initiatives	$	1,727	$	858	$	2,572	$	2,275
Strategic reorganization and alignment	—		—		—		686
Manufacturing alignment to support growth	—		36		—		224

Acquisition and integration	182		107		292		510
Other general expenses	554		1,673		793		3,936


Total other operating expenses	$	2,463	$	2,674	$	3,657	$	7,631

Operational excellence initiatives

The Company’s operational excellence (“OE”) initiatives mainly consist of costs associated with executing on its sales force, manufacturing, business process and performance excellence operational strategic imperatives. These projects focus on changing the Company’s organizational structure to match product line growth strategies and customer needs, transitioning its manufacturing process into a competitive advantage and standardizing and optimizing its business processes.

2021 OE Initiatives - Costs related to the Company’s 2021 OE initiatives are primarily recorded within the Medical segment or unallocated operating expenses and mainly include termination benefits. The Company estimates that it will incur aggregate pre-tax charges in connection with the 2021 OE initiatives of between approximately $3 million to $4 million, the majority of which are expected to be cash expenditures. As of October 1, 2021, total restructuring and related charges incurred since inception was $2.3 million. These actions are expected to be substantially complete by the end of 2021.

2020 OE Initiatives - Costs related to the Company’s 2020 OE initiatives are primarily recorded within the Medical segment and mainly include termination benefits. As of October 1, 2021, total restructuring and related charges incurred since inception was $3.1 million. These actions were substantially complete at the end of 2020.

Strategic reorganization and alignment

These initiatives primarily included aligning resources with the Company’s strategic direction, improving profitability to invest in accelerated growth and the expansion of a facility. These actions began in 2017 and were completed during the second quarter of 2020. The Company recorded, primarily within the Medical segment, $23.0 million of restructuring and related charges since inception.

Manufacturing alignment to support growth

These initiatives were designed to reduce costs, increase manufacturing capacity to accommodate growth and improve operating efficiencies by relocating certain manufacturing operations and expanding certain facilities. These actions began in 2017 and were completed during the fourth quarter of 2020. The Company recorded, primarily within the Medical segment, $5.8 million of restructuring and related charges since inception.

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


	Operational excellence initiatives
December 31, 2020	$	291
Charges incurred, net of reversals	1,927
Cash payments	(928)

October 1, 2021	$	1,290

- 14 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(8.) OTHER OPERATING EXPENSES (Continued)

Acquisition and integration

Acquisition and integration costs primarily consist of professional fees and other costs related to business acquisitions. During the nine months ended October 1, 2021 and October 2, 2020, acquisition and integration costs included $0.1 million and $1.0 million, respectively, of expenses related to the acquisition of certain assets and liabilities of InoMec, which was acquired in February 2020, and US BioDesign, LLC (“USB”), which was acquired in October 2019. Acquisition and integration costs for the nine months ended October 2, 2020, also includes a $0.5 million adjustment to reduce the fair value of acquisition-related contingent consideration liability associated with the Company’s acquisition of USB. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.

Other general expenses

During the nine months ended October 1, 2021 and October 2, 2020, the Company recorded expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to reduce future costs and improve efficiencies. The 2021 and 2020 amounts primarily include termination benefits, information technology systems conversion expenses, and expenses related to the restructuring of certain legal entities of the Company.

(9.) INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations. In addition, the Company continues to explore tax planning opportunities that may have a material impact on its effective tax rate.

The Company’s effective tax rate for the third quarter of 2021 was 4.8% on $23.2 million of income before taxes compared to 3.4% on $31.4 million of income before taxes for the same period in 2020. The Company’s effective tax rate for the first nine months of 2021 was 7.5% on $78.9 million of income before taxes compared to 9.3% on $68.2 million of income before taxes for the same period in 2020. The difference between the Company’s effective tax rates and the U.S. federal statutory income tax rate of 21% for the third quarter and first nine months of 2021 and 2020 is due principally to the net impact of the Company’s earnings outside the U.S., which are generally taxed at rates that differ from the U.S federal rate, the Global Intangible Low-Taxed Income (“GILTI”) tax, the availability of tax credits, and the recognition of certain discrete tax benefits. The Company recorded discrete tax benefits of $1.6 million and $6.1 million, respectively, for the third quarter and first nine months of 2021, compared to discrete tax benefits of $4.9 million and $5.9 million, respectively, for the third quarter and first nine months of 2020. Approximately $3.5 million of the discrete tax benefits recognized for the first nine months of 2021 relate to the reversal of unrecognized tax benefits resulting from the effective settlement of tax audits during the second quarter of 2021. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs or exercise of stock options during those quarters and favorable return to provision adjustments related to the 2020 tax year.

Unrecognized tax benefits reflect the difference between positions taken or expected to be taken on income tax returns and the amounts reflected in the financial statements. As of October 1, 2021, the Company had unrecognized tax benefits of approximately $4.4 million, of which approximately $4.4 million would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized. As of October 1, 2021, the Company believes the reasonably possible total amount of unrecognized tax benefits that could increase or decrease in the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements would not be material to its consolidated financial statements.

In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to their income and non-income-based tax laws. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income- based tax laws. The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred amount due January 3, 2022 and the remaining 50% due January 3, 2023. As of October 1, 2021 and December 31, 2020, the Company had deferred a total of $9.7 million of payroll taxes. The deferred payroll taxes are included within Accrued expenses and other current liabilities and Other long-term liabilities on the Condensed Consolidated Balance Sheets.

- 15 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(10.) COMMITMENTS AND CONTINGENCIES

Contingent Consideration Arrangements

The Company records contingent consideration liabilities related to the earn-out provisions for certain acquisitions. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information.

Litigation

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

In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. Following four trials and an appeal, the United States Court of Appeals for the Federal Circuit affirmed, in all respects, a judgment in favor of the Company. The Company received the payment of $28.9 million in October 2020, and after recognizing certain related expenses, recognized a net gain of $28.2 million.

Selling, general and administrative expenses

The net gain on patent litigation of $28.2 million is recorded in Selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended October 2, 2020.

Product Warranties

The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The product warranty liability is presented within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. The change in product warranty liability comprised the following (in thousands):


December 31, 2020	$	163
Additions to warranty reserve, net of reversals	(10)
Adjustments to pre-existing warranties	(71)

October 1, 2021	$	82

- 16 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(11.) EARNINGS PER SHARE (“EPS”)

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


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Numerator for basic and diluted EPS:


Net income	$	22,066	$	30,342	$	73,019	$	61,831

Denominator for basic and diluted EPS:
Weighted average shares outstanding - Basic	33,008		32,859		32,982		32,833
Dilutive effect of share-based awards	301		217		268		274
Weighted average shares outstanding - Diluted	33,309		33,076		33,250		33,107




Basic EPS	$	0.67	$	0.92	$	2.21	$	1.88




Diluted EPS	$	0.66	$	0.92	$	2.20	$	1.87

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


	Three Months Ended		Nine Months Ended
	October 1, 2021	October 2, 2020	October 1, 2021	October 2, 2020
Time-vested RSUs	1	145	4	134
PRSUs	83	167	70	93

- 17 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(12.) STOCKHOLDERS’ EQUITY

The following is a summary of the number of shares of common stock issued, treasury stock and common stock outstanding for the nine month periods ended October 1, 2021 and October 2, 2020:


	Issued	Treasury Stock	Outstanding
Shares outstanding at December 31, 2020	32,908,178	—	32,908,178
Stock options exercised	27,002	—	27,002
Vesting of RSUs, net of shares withheld to cover taxes	81,804	—	81,804
Shares outstanding at October 1, 2021	33,016,984	—	33,016,984

Shares outstanding at December 31, 2019	32,847,017	(146,546)	32,700,471
Stock options exercised	21,327	74,596	95,923
Vesting of RSUs, net of shares withheld to cover taxes	6,822	71,950	78,772
Shares outstanding at October 2, 2020	32,875,166	—	32,875,166

Accumulated Other Comprehensive Income (“AOCI”) comprises the following (in thousands):


	Defined Benefit Plan Liability		Cash Flow Hedges		Foreign Currency Translation Adjustment		Total Pre-Tax Amount		Tax		Net-of-Tax Amount
July 2, 2021	$	(1,095)	$	(4,780)	$	43,666	$	37,791	$	1,160	$	38,951
Unrealized loss on cash flow hedges	—		(306)		—		(306)		64		(242)
Realized gain on foreign currency hedges	—		(206)		—		(206)		44		(162)
Realized loss on interest rate swap hedge	—		584		—		584		(123)		461
Foreign currency translation loss	—		—		(7,836)		(7,836)		—		(7,836)

October 1, 2021	$	(1,095)	$	(4,708)	$	35,830	$	30,027	$	1,145	$	31,172

December 31, 2020	$	(1,095)	$	(4,956)	$	57,546	$	51,495	$	1,197	$	52,692
Unrealized loss on cash flow hedges	—		(1,010)		—		(1,010)		212		(798)
Realized gain on foreign currency hedges	—		(1,355)		—		(1,355)		285		(1,070)
Realized loss on interest rate swap hedges	—		2,613		—		2,613		(549)		2,064
Foreign currency translation loss	—		—		(21,716)		(21,716)		—		(21,716)

October 1, 2021	$	(1,095)	$	(4,708)	$	35,830	$	30,027	$	1,145	$	31,172

- 18 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(12.) STOCKHOLDERS’ EQUITY (Continued)


	Defined Benefit Plan Liability		Cash Flow Hedges		Foreign Currency Translation Adjustment		Total Pre-Tax Amount		Tax		Net-of-Tax Amount
July 3, 2020	$	(912)	$	(10,491)	$	23,555	$	12,152	$	2,327	$	14,479
Unrealized gain on cash flow hedges	—		565		—		565		(118)		447
Realized loss on foreign currency hedges	—		84		—		84		(18)		66
Realized loss on interest rate swap hedges	—		1,066		—		1,066		(224)		842
Foreign currency translation gain	—		—		16,387		16,387		—		16,387

October 2, 2020	$	(912)	$	(8,776)	$	39,942	$	30,254	$	1,967	$	32,221

December 31, 2019	$	(912)	$	(2,358)	$	22,639	$	19,369	$	619	$	19,988
Unrealized loss on cash flow hedges	—		(9,416)		—		(9,416)		1,978		(7,438)
Realized loss on foreign currency hedges	—		567		—		567		(119)		448
Realized loss on interest rate swap hedges	—		2,431		—		2,431		(511)		1,920
Foreign currency translation gain	—		—		17,303		17,303		—		17,303

October 2, 2020	$	(912)	$	(8,776)	$	39,942	$	30,254	$	1,967	$	32,221

(13.) FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments and contingent consideration. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.

The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates, and uses derivatives to manage these exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. All derivatives are recorded at fair value on the Condensed Consolidated Balance Sheets.

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)
October 1, 2021

Assets: Foreign currency contracts	$	115	$	—	$	115	$	—
Liabilities: Foreign currency contracts	420		—		420		—
Liabilities: Interest rate swap	4,403		—		4,403		—
Liabilities: Contingent consideration	2,282		—		—		2,282

December 31, 2020
Assets: Foreign currency contracts	$	2,070	$	—	$	2,070	$	—
Liabilities: Interest rate swap	7,026		—		7,026		—
Liabilities: Contingent consideration	3,900		—		—		3,900

- 19 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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.

Information regarding the Company’s outstanding interest rate swap designated as cash flow hedges as of October 1, 2021 is as follows (dollars in thousands):


Notional Amount		Start Date	End Date	Pay Fixed Rate		Receive Current Floating Rate		Fair Value		Balance Sheet Location



$	150,000	Jun 2020	Jun 2023	2.1785	%	0.0860	%	$	(4,403)	Other long-term liabilities

Information regarding the Company’s outstanding interest rate swap designated as cash flow hedges as of December 31, 2020 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 2020	Jun 2023	2.1785	%	0.1480	%	$	(7,026)	Other long-term liabilities

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. Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of October 1, 2021 is as follows (dollars in thousands):


Notional Amount		Start Date	End Date	$/Foreign Currency		Fair Value		Balance Sheet Location



$	665	Oct 2021	Nov 2021	0.0222	UYU Peso	$	34	Prepaid expenses and other current assets
1,015		Oct 2021	Dec 2021	0.0226	UYU Peso	32		Prepaid expenses and other current assets
999		Oct 2021	Dec 2021	0.0222	UYU Peso	49		Prepaid expenses and other current assets
2,155		Oct 2021	Dec 2021	0.0479	MXN Peso	31		Accrued expenses and other current liabilities
3,669		Oct 2021	Dec 2021	1.2230	Euro	(185)		Accrued expenses and other current liabilities
3,648		Oct 2021	Dec 2021	0.0486	MXN Peso	(5)		Accrued expenses and other current liabilities
3,674		Oct 2021	Dec 2021	1.2245	Euro	(190)		Accrued expenses and other current liabilities
4,444		Oct 2021	Dec 2021	0.0494	MXN Peso	(71)		Accrued expenses and other current liabilities

- 20 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of December 31, 2020 is as follows (dollars in thousands):


Notional Amount		Start Date	End Date	$/Foreign Currency		Fair Value		Balance Sheet Location


$	16,132	Nov 2020	Sep 2021	1.1949	Euro	$	399	Prepaid expenses and other current assets
10,224		Jan 2021	Sep 2021	0.0454	MXN Peso	922		Prepaid expenses and other current assets
2,656		Jan 2021	Mar 2021	0.0443	MXN Peso	341		Prepaid expenses and other current assets
7,269		Apr 2021	Dec 2021	0.0485	MXN Peso	77		Prepaid expenses and other current assets
3,252		Jan 2021	Aug 2021	0.0232	UYU Peso	165		Prepaid expenses and other current assets
3,966		Jan 2021	Nov 2021	0.0227	UYU Peso	166		Prepaid expenses and other current assets

Derivative Instruments with Hedge Accounting Designation

The following tables present the effect of cash flow hedge derivative instruments on other comprehensive income (loss) (“OCI”),

AOCI and the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income for the nine months ended October 1, 2021 and October 2, 2020 (in thousands):


	Three Months Ended
	October 1, 2021				October 2, 2020
	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity		Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Sales	$	305,574	$	(240)	$	235,942	$	590
Cost of sales	223,702		434		178,009		(651)
Operating expenses	48,782		12		18,175		(23)
Interest expense	10,053		(584)		9,368		(1,066)



	Nine Months Ended
	October 1, 2021				October 2, 2020
	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity		Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Sales	$	908,064	$	(203)	$	804,483	$	549
Cost of sales	652,960		1,508		591,985		(1,059)
Operating expenses	148,056		50		119,479		(57)
Interest expense	26,117		(2,613)		29,002		(2,431)

- 21 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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


	Unrealized Gain (Loss) Recognized in OCI				Realized Gain (Loss) Reclassified from AOCI
	Three Months Ended				Location in Statements of Operations and Comprehensive Income	Three Months Ended
	October 1, 2021		October 2, 2020			October 1, 2021		October 2, 2020
Interest rate swap	$	119	$	(11)	Interest expense	$	(584)	$	(1,066)
Foreign exchange contracts	(239)		68		Sales	(240)		590
Foreign exchange contracts	(235)		451		Cost of sales	434		(651)
Foreign exchange contracts	49		57		Operating expenses	12		(23)

	Nine Months Ended				Location in Statements of Operations and Comprehensive Income	Nine Months Ended
	October 1, 2021		October 2, 2020			October 1, 2021		October 2, 2020
Interest rate swaps	$	10	$	(7,401)	Interest expense	$	(2,613)	$	(2,431)
Foreign exchange contracts	(977)		277		Sales	(203)		549
Foreign exchange contracts	(69)		(2,277)		Cost of sales	1,508		(1,059)
Foreign exchange contracts	26		(15)		Operating expenses	50		(57)

The Company expects to reclassify net losses totaling $3.4 million related to its cash flow hedges from AOCI into earnings during the next twelve months.

Contingent Consideration

The following table presents the changes in the estimated fair values of the Company’s liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for the three and nine months ended October 1, 2021 and October 2, 2020 (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Fair value measurement at beginning of period	$	2,281	$	5,887	$	3,900	$	4,200
Amount recorded for acquisitions	—		—		—		2,700
Fair value measurement adjustment	—		—		—		(500)
Payments(1)	—		(500)		(1,621)		(1,000)
Foreign currency translation	1		14		3		1
Fair value measurement at end of period	$	2,282	$	5,401	$	2,282	$	5,401

__________

(1)Amounts for 2021 periods consist of payments associated with the Company’s acquisitions of InoMec and USB, resulting from achievement of revenue-based goals for the period from March 1, 2020 to February 28, 2021 for InoMec and January 1, 2020 to December 31, 2020 for USB. Amounts for 2020 periods consist of a payment made to settle a portion of a contingent consideration arrangement relating to a license to use technology.

On February 19, 2020, the Company acquired certain assets and liabilities of InoMec. See Note 2 “Business Acquisition” for additional information about the InoMec acquisition. On October 7, 2019, the Company acquired certain assets and liabilities of USB, a privately-held developer and manufacturer of complex braided biomedical structures for disposable and implantable medical devices. The contingent consideration at October 1, 2021 is the estimated fair value of the Company’s obligations, under the asset purchase agreements for InoMec and USB, to make additional payments if certain revenue goals are met.

- 22 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

As of October 1, 2021, the current portion of contingent consideration liabilities is $1.0 million and included in Accrued expenses and other current liabilities, and the non-current portion is $1.3 million and included in Other long-term liabilities on the Condensed Consolidated Balance Sheets. As of December 31, 2020, the current portion of contingent consideration liabilities was $1.7 million and included in Accrued expenses and other current liabilities, and the non-current portion was $2.2 million and included in Other long-term liabilities on the Condensed Consolidated Balance Sheets.

The following table provides quantitative information associated with the fair value measurement of the Company’s liabilities for contingent consideration:


	October 1, 2021
Contingency Type	Maximum Payout (undiscounted)		Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average or Range
Revenue-based payments	$	6,750	$	2,282	Monte Carlo	Revenue volatility	35.0	%
						Discount rate	4.0	%
						Projected year(s) of payment	2022-2024


	December 31, 2020
Contingency Type	Maximum Payout (undiscounted)		Fair Value		Valuation Technique	Unobservable Inputs	Weighted Average or Range
Revenue-based payments	$	9,000	$	3,900	Monte Carlo	Revenue volatility	35.0	%
						Discount rate	4.0	%
						Projected year(s) of payment	2021-2024

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items.

Borrowings under the Company’s Revolving Credit Facility, TLA Facility and TLB Facility accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. The carrying amount of this floating rate debt approximates fair value based upon the respective interest rates adjusting with market rate adjustments.

Equity Investments

The Company holds long-term, strategic investments in companies to promote business and strategic objectives. These investments are included in Other long-term assets on the Condensed Consolidated Balance Sheets. Non-marketable equity securities are equity securities without readily determinable fair value. The Company has elected the practicability exception to use an alternative approach that measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. If an impairment is recognized on the Company’s non-marketable equity securities during the period, these assets are classified as Level 3 within the fair value hierarchy based on the nature of the fair value inputs.

Equity investments comprise the following (in thousands):


	October 1, 2021		December 31, 2020
Equity method investment	$	17,627	$	21,470
Non-marketable equity securities	5,723		5,723
Total equity investments	$	23,350	$	27,193

- 23 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

The components of (Gain) loss on equity investments for each period were as follows (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Equity method investment (gain) loss	$	(152)	$	(2,234)	$	1,867	$	(3,954)

The Company’s equity method investment is in a venture capital fund focused on investing in life sciences companies. As of October 1, 2021, the Company owned 6.6% of this fund.

(14.) SEGMENT INFORMATION

The Company organizes its business into two reportable segments: (1) Medical and (2) Non-Medical. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker, to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting. For purposes of segment reporting, intercompany sales between segments are not material.

The following table presents sales by product line (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Segment sales by product line:
Medical
Cardio & Vascular	$	160,858	$	124,596	$	462,632	$	432,885
Cardiac & Neuromodulation	106,543		72,909		334,700		252,404
Advanced Surgical, Orthopedics & Portable Medical	28,720		30,179		83,380		92,041

Total Medical	296,121		227,684		880,712		777,330
Non-Medical	9,453		8,258		27,352		27,153
Total sales	$	305,574	$	235,942	$	908,064	$	804,483

The following table presents income for the Company’s reportable segments (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Segment income:
Medical	$	52,347	$	28,777	$	164,311	$	120,903
Non-Medical	2,016		1,214		5,374		4,894
Total segment income	54,363		29,991		169,685		125,797
Unallocated operating income (expenses)(a)	(21,273)		9,767		(62,637)		(32,778)
Operating income	33,090		39,758		107,048		93,019
Unallocated expenses, net	(9,911)		(8,358)		(28,113)		(24,815)
Income before taxes	$	23,179	$	31,400	$	78,935	$	68,204

__________

(a) Unallocated operating income (expenses) for the three and nine months ended October 2, 2020 includes a net gain of $28.2 million related to a patent litigation judgment.

- 24 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(15.) 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 14, “Segment Information.”

Revenue recognized from products and services transferred to customers over time represented 33% and 34%, respectively, of total revenue for the three and nine months ended October 1, 2021, compared to 30% and 29%, respectively, for the three and nine months ended October 2, 2020. All revenue recognized from products and services transferred to customers over time during the periods presented was within the Medical segment.

The following tables present revenues by significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues.

Three Months Ended

October 1, 2021

October 2, 2020

Customer

Medical

Non-Medical

Medical

Non-Medical

Customer A

17%

16%

Customer B

17%

Customer C

14%

17%

Customer D

38%

25%

Customer F

11%

All other customers

52%

62%

50%

64%

Nine Months Ended

October 1, 2021

October 2, 2020

Customer

Medical

Non-Medical

Medical

Non-Medical

Customer A

20%

Customer B

17%

16%

Customer C

14%

15%

Customer D

34%

22%

Customer E

11%

All other customers

49%

66%

49%

67%

__________

* Less than 10% of segment’s total revenues for the period.

The following tables present revenues by significant ship to location, which is defined as any country where 10% or more of a segment’s total revenues are shipped.

Three Months Ended

October 1, 2021

October 2, 2020

Ship to Location

Medical

Non-Medical

Medical

Non-Medical

United States

56%

68%

58%

66%

South Korea

11%

All other countries

44%

32%

42%

23%

- 25 -

INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

Nine Months Ended

October 1, 2021

October 2, 2020

Ship to Location

Medical

Non-Medical

Medical

Non-Medical

United States

54%

69%

56%

54%

Canada

11%

United Kingdom

10%

All other countries

46%

31%

44%

25%

__________

* Less than 10% of segment’s total revenues for the period.

Contract Balances

The opening and closing balances of the Company’s contract assets and contract liabilities are as follows (in thousands):


	October 1, 2021		December 31, 2020

Contract assets	$	59,440	$	40,218
Contract liabilities	2,865		2,498

Contract assets at October 1, 2021, increased $19.2 million from December 31, 2020, primarily due to a contract modification to add existing products and extend the contractual term. During the three and nine months ended October 1, 2021, the Company recognized $0.3 million and $1.4 million, respectively, of revenue that was included in the contract liability balance as of December 31, 2020. During the three and nine months ended October 2, 2020, the Company recognized $0.2 million and $1.3 million respectively, of revenue that was included in the contract liability balance as of December 31, 2019.

(16.) SUBSEQUENT EVENT

On October 27, 2021, the Company entered into a definitive securities purchase agreement to acquire Oscor, Inc., Oscor Caribe, LLC and Oscor Europe GmbH (collectively, “Oscor”) for a cash purchase price of $220.0 million. The Company will fund the purchase price with debt. Oscor is a privately held company with operations in Florida, the Dominican Republic and Germany that designs, develops, manufactures and markets a variety of highly specialized implantable cardiac pacing leads, venous access systems and diagnostic catheters, and will become part of the Company’s Medical segment. Upon closing, the acquisition will broaden the Company’s product portfolio, expand its R&D capabilities, and add low-cost manufacturing capacity. The Company anticipates the acquisition will be completed during the fourth quarter of 2021, subject to the satisfaction of certain customary closing conditions.

- 26 -

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

This Quarterly Report on Form 10-Q should be read in conjunction with the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2020. In addition, please read this section in conjunction with our Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements contained herein.

Forward-Looking Statements

Some of the statements contained in this report and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations, and these statements are subject to known and unknown risks, uncertainties and assumptions. Forward-looking statements include statements relating to:

•recovery from the COVID-19 global pandemic;

•future development and expected growth of our business and industry, including expansion of our manufacturing capacity;

•our ability to execute our business model and our business strategy, including completion and integration of current or future acquisition targets;

•having available sufficient cash and borrowing capacity to meet working capital, debt service and capital expenditure requirements for the next twelve months; and

•projected capital spending.

You can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “projects” or “continue” or variations or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those stated or implied by these forward-looking statements. In evaluating these statements and our prospects, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this report.

Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors and other risks and uncertainties that arise from time to time are described in Item 1A “Risk Factors” of our Annual Report on Form 10-K and in other periodic filings with the Securities and Exchange Commission and include the following:

•the impact of the COVID-19 global pandemic;

•our dependence upon a limited number of customers;

•pricing pressures that we face from customers;

•our reliance on third party suppliers for raw materials, key products and subcomponents;

•the potential for harm to our reputation caused by quality problems related to our products;

•the dependence of our energy market-related revenues on the conditions in the oil and natural gas industry;

•interruptions in our manufacturing operations;

•our dependence upon our information technology systems and our ability to prevent cyber-attacks and other failures;

•our ability to attract, train and retain a sufficient number of qualified associates;

•our dependence upon our senior management team and technical personnel;

•the intense competition we face and our ability to successfully market our products;

•our ability to respond to changes in technology;

•our ability to develop new products and expand into new geographic and product markets;

•our ability to successfully identify, make and integrate acquisitions to expand and develop our businesses in accordance with expectations;

•our significant amount of outstanding indebtedness and our ability to remain in compliance with financial and other covenants under our senior secured credit facilities;

•economic and credit market uncertainties that could interrupt our access to capital markets, borrowings or financial transactions;

•market and financial risks related to our international operations and sales;

•our complex international tax profile;

•our ability to realize the full value of our intangible assets;

•regulatory issues resulting from products complaints, recalls or regulatory audits;

•the potential of becoming subject to product liability or intellectual property claims;

•our ability to protect our intellectual property and proprietary rights;

•our ability and the cost to comply with environmental regulations;

•our ability to comply with customer-driven policies and third-party standards or certification requirements;

- 27 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

•our ability to obtain necessary licenses for new technologies;

•legal and regulatory risks from our international operations; and

•the fact that the healthcare industry is highly regulated and subject to various regulatory changes.

Except as required by applicable law, the Company assumes no obligation to update forward-looking statements in this report whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial conditions or prospects, or otherwise.

In this Form 10-Q, references to “Integer,” “we,” “us,” “our” and the “Company” mean Integer Holdings Corporation and its subsidiaries, unless the context indicates otherwise.

Our Business

Integer Holdings Corporation is one of the largest medical device outsource (“MDO”) manufacturers in the world serving the cardiac, neuromodulation, vascular, orthopedics, advanced surgical and portable medical markets. We also develop batteries for high-end niche applications in the non-medical energy, military, and environmental markets. Our vision is to enhance the lives of patients worldwide by being our customers’ partner of choice for innovative technologies and services.

We organize our business into two reportable segments, Medical and Non-Medical, and derive our revenues from four principal product lines. The Medical segment includes the Cardio & Vascular, Cardiac & Neuromodulation and Advanced Surgical, Orthopedics & Portable Medical product lines and the Non-Medical segment comprises the Electrochem product line. For more information on our segments, please refer to Note 14 “Segment Information” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report.

Impact of COVID-19

Beginning in early March 2020, the global spread of the novel coronavirus (“COVID-19”) created significant uncertainty and worldwide economic disruption. Specific impacts to our business include labor shortages, disruptions in the supply chain, delayed or reduced customer orders and sales, restrictions on associates’ ability to travel or work, and delays in shipments to and from certain countries. The extent to which COVID-19 will continue to impact our operations will depend on future developments, which remain highly uncertain and difficult to predict, including, among others, the duration of the outbreak, the effectiveness and utilization of vaccines for COVID-19 and its variants, new information that may emerge concerning the severity of COVID-19 and the actions, especially those taken by governmental authorities to contain the pandemic or treat its impact. As pandemic-related events continue to evolve, additional impacts may arise that we are not aware of currently. Any prolonged material disruption of our labor force, suppliers, manufacturing, or customers could materially impact our consolidated financial position, results of operations or cash flows.

Business Acquisition

On February 19, 2020, we acquired certain assets and liabilities of InoMec Ltd. (“InoMec”), a privately-held company based in Israel that specializes in the research, development and manufacturing of medical devices, including minimally invasive tools, delivery systems, tubing and catheters, surgery tools, drug-device combination, laser combined devices, and tooling and production. The acquisition enables us to create a research and development center in Israel, closer to the customer base in the region.

Refer to Note 2 “Business Acquisition” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about this acquisition.

- 28 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Strategic Overview

We continue to take steps to better align our resources in order to invest to grow and protect, and preserve our portfolio of products. In addition to our portfolio strategy, we continue to execute our six key operational strategic imperatives designed to drive excellence in everything we do:

•Sales Force Excellence: We are focusing our efforts within the commercial organization to further improve our efficiency and effectiveness and to align with product line growth strategies and customer needs. These activities are about getting more out of the capabilities we already have, and increasing individual accountability and clarity of ownership, while serving customers more effectively.

•Market Focused Innovation: We are ensuring we get the most return on our research and development investments. We are focused on having a clear picture of how we spend our money so we can increase investments to drive future growth.

•Manufacturing Excellence: The goal is to deliver world-class operational performance in the areas of safety, quality, delivery and overall efficiency. We want to transition our manufacturing into a competitive advantage through a single, enterprise-wide manufacturing structure known as the Integer Production System. This system will provide standardized systems and processes by leveraging best practices and applying them across all of our global sites.

•Business Process Excellence: We are taking a systematic approach to driving excellence in everything we do by standardizing, optimizing and ultimately sustaining all of our processes.

•Leadership Capability: We have a robust plan to make leadership a competitive advantage for us, and as the success rate is higher with internal hires, we are focusing on finding and developing leaders from within the Company to build critical capabilities for future success.

•Performance Excellence: We are raising the bar on associate performance to maximize our impact. This includes aligning key roles with critical capabilities, positioning the best talent against the biggest work, and putting tools and processes in place to provide higher financial rewards for top performers, so our top performers can see increased results in pay for increased results in their performance.

We believe we are well-positioned within the medical technology and MDO manufacturing market and that there is a robust pipeline of opportunities to pursue. We have expanded our medical device capabilities and are excited about opportunities to partner with customers to drive innovation. We believe we have the scale and global presence, supported by world-class manufacturing and quality capabilities, to capture these opportunities. We are confident in our capabilities as one of the largest MDO manufacturers, with a long history of successfully integrating companies, driving down costs and growing revenues over the long-term. Ultimately, our strategic vision is to drive shareholder value by enhancing the lives of patients worldwide by being our customers’ partner of choice for innovative technologies and services.

- 29 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Financial Overview

Net income for the third quarter and first nine months of 2021 was $22.1 million, or $0.66 per diluted share, and $73.0 million, or $2.20 per diluted share, respectively, compared to $30.3 million, or $0.92 per diluted share, and $61.8 million, or $1.87 per diluted share for the third quarter and first nine months of 2020, respectively. These variances are primarily the result of the following:

•Sales for the third quarter and first nine months of 2021 increased $69.6 million and $103.6 million, respectively, when compared to the same periods in 2020. During the third quarter of 2021 we continued to see the demand for many of our products recover from the impacts of the COVID-19 pandemic.

•Gross profit for the third quarter and first nine months of 2021 increased $23.9 million and $42.6 million, respectively, primarily from higher sales volume and production efficiencies.

•Operating expenses for the third quarter and first nine months of 2021 increased $30.6 million and $28.6 million, respectively, when compared to the same periods in 2020, primarily because of a $28.2 million gain recognized in connection with a patent litigation judgment offsetting third quarter of 2020 Selling, general and administrative expenses. See “Patent Litigation” below for additional information.

•Interest expense for the third quarter of 2021 increased $0.7 million compared to the same period in 2020, primarily due to higher losses from extinguishment of debt, partially offset by lower outstanding debt balances. Interest expense for the first nine months of 2021 decreased $2.9 million compared to the same period in 2020, primarily due to lower outstanding debt balances, partially offset by higher losses from extinguishment of debt.

•During the third quarter and first nine months of 2021, we recognized a gain on equity investments of $0.2 million and a net loss of $1.9 million, respectively, compared to a gain of $2.2 million and net gains of $4.0 million, respectively, for the third quarter and first nine months of 2020. Gains and losses on equity investments are generally unpredictable in nature.

•Other (income) loss, net for the third quarter and first nine months of 2021 were losses of approximately $0.1 million, compared to a loss of $1.2 million and income of $0.2 million, respectively, for the third quarter and first nine months of 2020, primarily due to fluctuations in foreign currency gains and losses in the respective periods.

•We recorded provisions for income taxes for the third quarter and first nine months of 2021 of $1.1 million and $5.9 million, respectively, compared with provisions for income taxes of $1.1 million and $6.4 million, respectively, for the third quarter and first nine months of 2020. The changes in income tax were primarily due to relative changes in pre-tax income and the impact of discrete tax items.

Patent Litigation

In April 2013, we commenced an action against a competitor alleging they had infringed on the our patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate our patented technology.

Following four trials and an appeal, the United States Court of Appeals for the Federal Circuit affirmed, in all respects, a judgment in our favor. We received proceeds related to the judgment of $28.9 million in October 2020, and after recognizing certain related expenses, recognized a net gain of $28.2 million, which is recorded in Selling, general and administrative expenses. The proceeds were used to pay down a portion of our Revolving Credit Facility.

- 30 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Our Financial Results

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


	Three Months Ended
	October 1,			October 2,			Change
	2021			2020			$		%
Medical Sales:
Cardio & Vascular	160,858			$	124,596		$	36,262	29.1	%
Cardiac & Neuromodulation	106,543			72,909			33,634		46.1	%
Advanced Surgical, Orthopedics & Portable Medical	28,720			30,179			(1,459)		(4.8)	%

Total Medical Sales	296,121			227,684			68,437		30.1	%
Non-Medical	9,453			8,258			1,195		14.5	%
Total sales	305,574			235,942			69,632		29.5	%
Cost of sales	223,702			178,009			45,693		25.7	%
Gross profit	81,872			57,933			23,939		41.3	%
Gross profit as a % of sales	26.8		%	24.6		%
Operating expenses:
Selling, general and administrative (“SG&A”)(a)	34,269			3,609			30,660		NM
SG&A as a % of sales	11.2		%	1.5		%
Research, development and engineering (“RD&E”)	12,050			11,892			158		1.3	%
RD&E as a % of sales	3.9		%	5.0		%
Other operating expenses	2,463			2,674			(211)		(7.9)	%
Total operating expenses	48,782			18,175			30,607		168.4	%
Operating income	33,090			39,758			(6,668)		(16.8)	%
Operating income as a % of sales	10.8		%	16.9		%
Interest expense	10,053			9,368			685		7.3	%
Gain on equity investments	(152)			(2,234)			2,082		(93.2)	%
Other loss, net	10			1,224			(1,214)		(99.2)	%
Income before taxes	23,179			31,400			(8,221)		(26.2)	%
Provision for income taxes	1,113			1,058			55		5.2	%
Effective tax rate	4.8		%	3.4		%
Net income	$	22,066		$	30,342		$	(8,276)	(27.3)	%
Net income as a % of sales	7.2		%	12.9		%
Diluted earnings per share	$	0.66		$	0.92		$	(0.26)	(28.3)	%

__________

(a)Selling, general and administrative expenses for the third quarter of 2020 includes a gain of $28.2 million recognized in connection with a patent litigation judgment. See “Patent Litigation” in the Financial Overview section for additional information.

NM Calculated amount not meaningful

- 31 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS



	Nine Months Ended
	October 1,			October 2,			Change
	2021			2020			$		%
Medical Sales:
Cardio & Vascular	$	462,632		$	432,885		$	29,747	6.9	%
Cardiac & Neuromodulation	334,700			252,404			82,296		32.6	%
Advanced Surgical, Orthopedics & Portable Medical	83,380			92,041			(8,661)		(9.4)	%
Total Medical Sales	880,712			777,330			103,382		13.3	%
Non-Medical	27,352			27,153			199		0.7	%
Total Sales	908,064			804,483			103,581		12.9	%
Cost of sales	652,960			591,985			60,975		10.3	%
Gross profit	255,104			212,498			42,606		20.1	%
Gross profit as a % of sales	28.1		%	26.4		%
Operating expenses:
SG&A(a)	105,150			73,969			31,181		42.2	%
SG&A as a % of sales	11.6		%	9.2		%
RD&E	39,249			37,879			1,370		3.6	%
RD&E, Net as a % of sales	4.3		%	4.7		%
Other operating expenses	3,657			7,631			(3,974)		(52.1)	%
Total operating expenses	148,056			119,479			28,577		23.9	%
Operating income	107,048			93,019			14,029		15.1	%
Operating margin	11.8		%	11.6		%
Interest expense	26,117			29,002			(2,885)		(9.9)	%
(Gain) loss on equity investments, net	1,867			(3,954)			5,821		(147.2)	%
Other (income) loss, net	129			(233)			362		(155.4)	%
Income before taxes	78,935			68,204			10,731		15.7	%
Provision for income taxes	5,916			6,373			(457)		(7.2)	%
Effective tax rate	7.5		%	9.3		%
Net income	$	73,019		$	61,831		$	11,188	18.1	%
Net income as a % of sales	8.0		%	7.7		%
Diluted earnings per share	$	2.20		$	1.87		$	0.33	17.6	%

__________

(a)Selling, general and administrative expenses for the nine months ended October 2, 2020 includes a gain of $28.2 million recognized in connection with a patent litigation judgment. See “Patent Litigation” in the Financial Overview section for additional information.

- 32 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Product Line Sales

For the third quarter and first nine months of 2021, Cardio & Vascular sales increased $36.3 million, or 29%, and $29.7 million, or 7%, respectively, versus the comparable 2020 periods. Cardio & Vascular sales for the third quarter and first nine months of 2021 reflect the continued recovery from the negative impact of COVID-19, with strong increases across all Cardio & Vascular markets driven by market demand, particularly in the peripheral vascular and electrophysiology markets. During the third quarter and first nine months of 2021, price changes increased Cardio & Vascular sales by $0.3 million and lowered sales by $0.6 million, respectively, in comparison to the 2020 periods. Foreign currency exchange rate fluctuations increased Cardio & Vascular sales for the third quarter and first nine months of 2021 by $0.1 million and $2.1 million, respectively, in comparison to the 2020 periods, primarily due to U.S. dollar fluctuations relative to the Euro.

For the third quarter and first nine months of 2021, Cardiac & Neuromodulation sales increased $33.6 million, or 46%, and $82.3 million or 33%, respectively, versus the comparable 2020 periods. Cardiac & Neuromodulation sales for the third quarter and first nine months of 2021 reflect the continued recovery from the negative impact of COVID-19. Sales in the cardiac rhythm management market and neuromodulation market saw double-digit increases when comparing the three and nine month periods of 2021 to the same periods last year. During the third quarter and first nine months of 2021, price reductions lowered Cardiac & Neuromodulation sales by $3.0 million and $8.5 million, respectively, in comparison to the 2020 periods. Foreign currency exchange rate fluctuations did not have a material impact on Cardiac & Neuromodulation sales during the third quarter and first nine months of 2021 in comparison to 2020.

In addition to Portable Medical sales, Advanced Surgical, Orthopedic & Portable Medical includes sales to the acquirer of our former AS&O Product Line, under supply agreements entered into as part of the divestiture. For the third quarter and first nine months of 2021, Advanced Surgical, Orthopedic & Portable Medical sales decreased $1.5 million, or 5%, and $8.7 million or 9%, respectively, versus the comparable 2020 periods as Portable Medical ventilator and patient monitoring components sales declined. During the third quarter and first nine months of 2021, price reductions lowered Advanced Surgical, Orthopedic & Portable Medical sales by $0.5 million and $0.4 million, respectively, in comparison to the 2020 periods. Foreign currency exchange rate fluctuations did not have a material impact on Advanced Surgical, Orthopedic & Portable Medical sales during the third quarter and first nine months of 2021 in comparison to the 2020 periods.

For the third quarter and first nine months of 2021, Non-Medical sales increased $1.2 million, or 14%, and $0.2 million or 1%, respectively, versus the comparable 2020 periods. The sales increases were driven by the recovery of the energy market, which offset the negative impact of COVID-19 that continued into the beginning of 2021. Price reductions and foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during the third quarter and first nine months of 2021 in comparison to the 2020 periods.

Gross Profit

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


	Change From Prior Year
	Three Months		Nine Months
Price(a)	(0.7)	%	(0.7)	%
Mix(b)	0.9		0.9
Production efficiencies and volume(c)	2.0		1.4

Customer Bankruptcy(d)	—		0.1

Total percentage point change to gross profit as a percentage of sales	2.2	%	1.7	%

__________

(a)Our Gross Margin for the third quarter and first nine months of 2021 was negatively impacted by price reductions given to our larger OEM customers in return for long-term volume commitments.

(b)Amounts represent the impact to our Gross Margin attributable to changes in the mix of product sales during the periods.

(c)Our Gross Margin for the third quarter and first nine months of 2021 was positively impacted by higher sales volume and production efficiencies, mainly due to our Manufacturing Excellence imperative.

(d)In November 2019, one of our customers, Nuvectra Corporation, filed a voluntary Chapter 11 bankruptcy petition (the “Customer Bankruptcy”). During the first quarter of 2020, we incurred costs and recorded charges associated with the Customer Bankruptcy, primarily consisting of charges related to inventory recorded in cost of sales in our Condensed Consolidated Statements of Operations and Comprehensive Income.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

SG&A Expenses

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


	Change From Prior Year
	Three Months		Nine Months
Professional fees(a)	$	721	$	(1,074)
Compensation and benefits(b)	1,844		4,961
Travel and entertainment(c)	147		(855)
Patent litigation gain(d)	28,167		28,167
All other SG&A(e)	(219)		(18)
Net increase in SG&A expenses	$	30,660	$	31,181

__________

(a)Professional fees increased during the third quarter and decreased during the first nine months of 2021 compared to the prior year periods, primarily due to the timing of legal costs.

(b)Compensation and benefits increased during the third quarter and first nine months of 2021 compared to the prior year periods, primarily due to higher incentive compensation expense.

(c)The increase in travel and entertainment expense during the third quarter of 2021 compared to the prior year period was a result of the resumption of limited travel during the the third quarter of 2021 as compared to a period of little to no travel during the the third quarter of 2020. Travel and entertainment expense decreased during the first nine months of 2021 compared to the prior year as a result of company travel being limited for the last 15 months due to COVID-19 travel restrictions.

(d)We recognized a net gain of $28.2 million during the third quarter of 2020 related to a patent litigation judgment. See “Patent Litigation” in the Financial Overview section for additional information.

(e)The net decrease in all other SG&A for the third quarter and first nine months of 2021 compared to the same periods of 2020 is primarily attributable to lower deprecation expense.

RD&E

RD&E expense for the third quarter and first nine months of 2021 were $12.1 million and $39.2 million, respectively, compared to $11.9 million and $37.9 million, respectively, for the third quarter and first nine months of 2020. RD&E expenses are influenced by the number and timing of in-process projects and labor hours and other costs associated with these projects. Our research and development initiatives continue to emphasize new product development, product improvements, and the development of new technological platform innovations.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Other Operating Expenses

Other operating expenses (“OOE”) comprise the following (in thousands):


	Three Months Ended				Nine Months Ended
	October 1, 2021		October 2, 2020		October 1, 2021		October 2, 2020
Operational excellence(a)	$	1,727	$	858	$	2,572	$	2,275
Strategic reorganization and alignment(b)	—		—		—		686
Manufacturing alignment to support growth(c)	—		36		—		224

Acquisition and integration expenses(d)	182		107		292		510
Other general expenses(e)	554		1,673		793		3,936
Total other operating expenses	$	2,463	$	2,674	$	3,657	$	7,631

__________

(a)These projects focus on changing our organizational structure to match product line growth strategies and customer needs, transitioning our manufacturing process into a competitive advantage and standardizing and optimizing our business processes. Expenses for the third quarter and first nine months of 2021 and 2020 primarily consist of termination benefits.

(b)These initiatives primarily included aligning resources with our strategic direction, improving profitability to invest in accelerated growth and the expansion of a facility. These actions began in 2017 and were completed during the second quarter of 2020.

(c)These initiatives were designed to reduce costs, increase manufacturing capacity to accommodate growth and improve operating efficiencies by relocating certain manufacturing operations and expanding certain facilities. These actions began in 2017 and were completed during the fourth quarter of 2020.

(d)Amounts include expenses related to the purchase of certain assets and liabilities from business acquisitions. The 2020 amounts also includes a $0.5 million adjustment to reduce the fair value of acquisition-related contingent consideration liabilities. See Note 13 “Financial Instruments and Fair Value Measurements” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information related to the fair value measurement of the contingent consideration.

(e)Amounts include expenses related to other initiatives not described above, which relate primarily to integration and operational initiatives to reduce future costs and improve efficiencies. The 2020 amounts primarily include severance, information technology systems conversion expenses, expenses incurred in connection with the Customer Bankruptcy, and expenses related to the restructuring of certain legal entities of the Company.

Refer to Note 8 “Other Operating Expenses” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information regarding these initiatives.

Interest Expense, Net

Interest expense consists primarily of cash interest and debt related charges, such as amortization of debt issuance costs and original issue discount. Interest expense for the third quarter of 2021 increased $0.7 million compared to the same period in 2020, primarily due to higher losses from extinguishment of debt, partially offset by lower outstanding debt balances. Interest expense for the first nine months of 2021 decreased $2.9 million compared to the same period in 2020, primarily due to lower outstanding debt balances, partially offset by higher losses from extinguishment of debt. During the second quarter of 2020 we borrowed an additional $160 million of our Revolving Credit Facility to protect against a prolonged pandemic coupled with the risk of financial market illiquidity. The additional borrowing on the Revolving Credit Facility was repaid during the third and fourth quarters of 2020. The weighted average interest rates on outstanding borrowings for the three months and nine months ended October 1, 2021 were 3.58% and 3.75%, respectively, compared to 3.60% and 3.83%, respectively, for the comparable periods in 2020.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Debt related charges included in interest expense were $4.1 million and $6.5 million, respectively, during the third quarter and first nine months of 2021 compared to $1.1 million and $3.1 million, respectively, during the same periods in 2020. The increases in debt related charges are primarily attributable to accelerated write-offs of deferred issuance costs and unamortized discount (losses from extinguishment of debt) related to prepayments of portions of our Term Loan B facility made during the first nine months of 2021 and a write off of $3.3 million of deferred issuance costs and unamortized discount in connection with the refinancing of our credit facilities in September 2021. We had $3.3 million and $3.8 million, respectively, of losses from extinguishment of debt during the third quarter and first nine months of 2021 compared to no losses in the third quarter and first nine months of 2020. See Note 6 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our debt.

As of October 1, 2021, approximately 24% of our principal amount of debt has been converted to fixed-rate borrowings with interest rate swaps, in comparison to approximately 27% as of December 31, 2020. We enter into interest rate swap agreements in order to reduce our exposure to fluctuations in the LIBOR rate. See Note 13 “Financial Instruments and Fair Value Measurements” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information pertaining to our interest rate swap agreements.

(Gain) Loss on Equity Investments

During the third quarter and first nine months of 2021, we recognized a gain on equity investments of $0.2 million and a net loss of $1.9 million, respectively. During the third quarter and first nine months of 2020, we recognized a gain of $2.2 million and net gains of $4.0 million, respectively. Gains and losses on equity investments are generally unpredictable in nature. The amounts for both 2021 and 2020 relate to our share of equity method investee gains/losses including unrealized appreciation and depreciation of the underlying interests of the investee. As of October 1, 2021 and December 31, 2020, the carrying value of our equity investments was $23.4 million and $27.2 million, respectively. See Note 13 “Financial Instruments and Fair Value Measurements” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for further details regarding these investments.

Other (Income) Loss, Net

Other (income) loss, net for the third quarter and first nine months of 2021 were losses of approximately $0.1 million, compared to a loss of $1.2 million and income of $0.2 million, respectively, for the third quarter and first nine months of 2020. Other (income) loss, net primarily includes gains/losses from the impact of exchange rates on transactions denominated in foreign currencies. Our foreign currency transaction gains/losses are based primarily on fluctuations of the U.S. dollar relative to the Euro, Mexican peso, Uruguayan peso, Malaysian ringgits, or Israeli shekel.

The impact of exchange rates on transactions denominated in foreign currencies included in Other income, net for the third quarter and first nine months of 2021 were net losses of approximately $0.1 million, compared to net losses of $1.2 million and net gains of $0.3 million for the third quarter and first nine months of 2020, respectively. We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. However, fluctuations in exchange rates could have a significant impact, positive or negative, on our financial results in the future.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Provision for Income Taxes

We recognized income tax expense of $1.1 million for the third quarter of 2021 on $23.2 million of income before taxes (effective tax rate of 4.8%), compared to an income tax expense of $1.1 million on $31.4 million of income before taxes (effective tax rate of 3.4%) for the same period of 2020. The income tax expense for the first nine months of 2021 was $5.9 million on $78.9 million of income before taxes (effective tax rate of 7.5%), compared to $6.4 million on income before taxes of $68.2 million (effective tax rate of 9.3%) for the same period of 2020. Income tax expense for the third quarter and first nine months of 2021 included $1.6 million and $6.1 million, respectively, of discrete tax benefits. Approximately $3.5 million of the discrete tax benefits recognized for first nine months of 2021 relate to the reversal of unrecognized tax benefits resulting from the effective settlement of tax audits during the second quarter of 2021.

There is a potential for volatility in our effective tax rate due to several factors including changes in the mix of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, and settlements with taxing authorities and foreign currency fluctuations. We continue to closely monitor developments related to proposed changes in tax laws and tax rates, including current proposals for U.S. Tax Reform and a proposed 15% Minimum Global Tax Rate recently announced by the Organization for Economic Cooperation and Development (OECD). We currently have various tax planning initiatives in place and continuously evaluate planning strategies aimed at reducing our effective tax rate over the long term. This includes strategies to realize deferred tax assets that would otherwise expire unutilized.

Our effective tax rates for 2021 differ from the U.S. federal statutory tax rate of 21% due principally to the net impact of the Company’s earnings outside the U.S., which are generally taxed at rates that differ from the U.S federal rate, the Global Intangible Low-Taxed Income (“GILTI”) tax, the availability of tax credits, and the recognition of discrete tax benefits. The discrete tax benefits recognized for 2021 relate predominately to the reversal of unrecognized tax benefits resulting from the effective settlement of tax audits during the second quarter of 2021. The remainder of the discrete tax benefits relate predominately to excess tax benefits recognized upon vesting of RSUs or exercise of stock options during those quarters and favorable return to provision adjustments related to the 2020 tax year.

Our earnings outside the U.S. are generally taxed at blended rates that are marginally lower than the U.S. federal rate. The GILTI provisions require us to include foreign subsidiary earnings in excess of a deemed return on the foreign subsidiary’s tangible assets in our U.S. income tax return. The foreign jurisdictions in which we operate and where our foreign earnings are primarily derived, include Switzerland, Mexico, Uruguay, Malaysia and Ireland. While we are not currently aware of any material trends in these jurisdictions that are likely to impact our current or future tax expense, our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower effective tax rates and higher than anticipated in countries where we have higher effective tax rates, or by changes in tax laws or regulations. We regularly assess any significant exposure associated with increases in tax rates in international jurisdictions and adjustments are made as events occur that warrant adjustment to our tax provisions.

- 37 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Liquidity and Capital Resources


(dollars in thousands)	October 1, 2021		December 31, 2020
Cash and cash equivalents	$	25,472	$	49,206
Working capital	$	286,157	$	256,746
Current ratio	2.83		2.64

Cash and cash equivalents at October 1, 2021 decreased by $23.7 million from December 31, 2020, primarily as a result of net debt payments totaling $102.4 million, net purchases of property, plant and equipment of $29.6 million, mostly offset by cash generated by operating activities of $117.4 million.

Working capital increased by $29.4 million from December 31, 2020, primarily from positive working capital fluctuations associated with accounts receivable, contract assets and current long-term debt aggregating to $57.8 million, which were partially offset by fluctuations in cash and cash equivalents and accounts payable aggregating to $40.6 million. During the first nine months of 2021, accounts receivable increased mainly from higher sequential sales, and contract assets increased mainly due to a contract modification to add existing products and extend the contractual term, while current long-term debt decreased due to the refinancing of our term loan facilities during the third quarter of 2021. Cash and cash equivalents decreased primarily from net debt payments in the first nine months of 2021, while accounts payable increased mainly from the timing of supplier payments and higher sequential inventory purchases.

At October 1, 2021, $17.0 million of our cash and cash equivalents were held by foreign subsidiaries. We intend to limit our distributions from foreign subsidiaries to previously taxed income or current period earnings. If distributions are made utilizing current period earnings, we will record foreign withholding taxes in the period of the distribution.

Summary of Cash Flow


	Nine Months Ended
(in thousands)	October 1, 2021		October 2, 2020
Cash provided by (used in):
Operating activities	$	117,410	$	110,239
Investing activities	(29,630)		(44,932)
Financing activities	(112,067)		21,698
Effect of foreign currency exchange rates on cash and cash equivalents	553		(597)
Net change in cash and cash equivalents	$	(23,734)	$	86,408

Operating Activities – During the first nine months of 2021, we generated cash from operations of $117.4 million, compared to $110.2 million for the first nine months of 2020. The increase of $7.2 million was due to an increase of $28.2 million in net income adjusted for non-cash items such as depreciation and amortization, partially offset by a decrease of $21.0 million in cash flow provided by changes in operating assets and liabilities.

The increase in net income adjusted for non-cash items such as depreciation and amortization is primarily from higher gross profit from sales growth and margin expansion in the current period. The decrease in cash flow provided by changes in operating assets and liabilities is primarily the result of fluctuations in accounts receivable and accounts payable caused by declining sales in the prior year versus sales growth in the current period. This dynamic caused a significant prior year benefit to operating cash flow from the collection of accounts receivable in a period of declining sales, which resulted from the COVID-19 pandemic.

Investing Activities – The $15.3 million decrease in net cash used in investing activities was primarily attributable to decreased purchases of property, plant and equipment of $5.5 million, intangible assets of $4.6 million, and $5.2 million of cash paid for the acquisition of certain assets and liabilities from InoMec Ltd. in the first quarter of 2020.

Financing Activities – Net cash used in financing activities for the first nine months of 2021, was $112.1 million compared to $21.7 million provided by financing activities for the first nine months of 2020. Financing activities during the first nine months of 2021 primarily included debt payments of $102.4 million, compared to net borrowings of $21.9 million for the comparable 2020 period.

- 38 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

During the second quarter of 2020, we borrowed an additional $160 million of our Revolving Credit Facility to protect against a prolonged pandemic coupled with the risk of financial market illiquidity. We subsequently paid down $135 million of the additional borrowing during the third quarter of 2020 and the remainder in the fourth quarter of 2020.

Capital Structure – As of October 1, 2021, our capital structure consists of $631 million of debt, net of deferred debt issuance costs and unamortized discounts, outstanding under our Senior Secured Credit Facilities and 33 million shares of common stock outstanding. As of October 1, 2021, we have access to $357.0 million of borrowing capacity under our Revolving Credit Facility, available for normal course of business and letters of credit, and are authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of October 1, 2021, our contractual debt service obligations for the remainder of 2021, consisting of principal and interest on our outstanding debt, are estimated to be $9.2 million. Actual principal and interest payments may be higher if, for instance, the applicable interest rates on our Senior Secured Credit Facilities increase, we borrow additional amounts on our Revolving Credit Facility, or we pay principal amounts in excess of the required minimums reflected in the contractual debt service obligations above.

Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents and borrowings under our Revolving Credit Facility are sufficient to meet our working capital, debt service and capital expenditure requirements for the next twelve months. If our future financing needs increase, we may need to arrange additional debt or equity financing. We continually evaluate and consider various financing alternatives to enhance or supplement our existing financial resources, including our Senior Secured Credit Facilities. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all.

Credit Facilities - On September 2, 2021, we refinanced our existing debt by entering into a new credit agreement. See Note 6 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for details regarding our debt refinancing during the quarter ended October 1, 2021.

As of October 1, 2021, we had Senior Secured Credit Facilities that consist of (i) a $400 million revolving credit facility (the “Revolving Credit Facility”), which had available borrowing capacity of $357.0 million, (ii) a term loan A facility (the “TLA Facility”) with outstanding principal balance of $250 million, and (iii) a term loan B facility (the “TLB Facility”) with outstanding principal balance of $350 million. The Revolving Credit Facility and TLA Facility mature on September 2, 2026. The TLB Facility matures on September 2, 2028. The Senior Secured Credit Facilities include a mandatory prepayment provision customary for credit facilities of its nature.

The Revolving Credit Facility and TLA Facility contain covenants requiring that we maintain (i) a total net leverage ratio not to exceed 5.50:1.00 (stepping down to 5.00:1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following certain qualified acquisitions) and (ii) an interest coverage ratio of at least 2.50:1.00. As of October 1, 2021, we were in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants. As of October 1, 2021, our total net leverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.1 to 1.0. For the twelve month period ended October 1, 2021, our interest coverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 10.7 to 1.0.

Failure to comply with these financial covenants would result in an event of default as defined under the Revolving Credit Facility and TLA Facility unless waived by the lenders. An event of default may result in the acceleration of our indebtedness. As a result, management believes that compliance with these covenants is material to us.

See Note 6 “Debt” of the Notes to the Condensed Consolidated Financial Statements contained in Item 1 of this report for a further information on the Company’s outstanding debt.

Off-Balance Sheet Arrangements

We do not currently have off balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our Condensed Consolidated Financial Statements.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board, Securities and Exchange Commission, or other authoritative accounting bodies to determine the potential impact they may have on our Condensed Consolidated Financial Statements. See Note 1 “Basis of Presentation” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

- 39 -

INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Contractual Obligations

There have been no significant changes to our contractual obligations during the quarter ended October 1, 2021 as compared to those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Critical Accounting Policies and Estimates

The preparation of our Condensed Consolidated Financial Statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. Our estimates, assumptions and judgments are based on historical experience and various other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amount of assets and liabilities that are not readily apparent from other sources. Making estimates, assumptions and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond our control. Management believes the estimates, assumptions and judgments employed and resulting balances reported in the Condensed Consolidated Financial Statements are reasonable; however, actual results could differ materially.

There have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020.

- 40 -

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to information appearing under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q. Furthermore, a discussion of market risk exposures is included in Part II, Item 7A, Quantitative and Qualitative Disclosure about Market Risk, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Other than the uncertainties resulting from the global pandemic, there have been no material changes in reported market risk since the inclusion of this discussion in the Company’s Annual Report on Form 10-K referenced above.

ITEM 4. CONTROLS AND PROCEDURES

a. Evaluation of Disclosure Controls and Procedures

Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the Securities and Exchange Commission as of October 1, 2021. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their evaluation, as of October 1, 2021, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective.

b. Changes in Internal Control Over Financial Reporting

During the Company’s most recent fiscal quarter, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 41 -

PART II—OTHER INFORMATION

ITEM 1.LEGAL PROCEEDINGS

There were no new material legal proceedings that are required to be reported in the quarter ended October 1, 2021, and no material developments during the quarter in the Company’s legal proceedings as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 1A.RISK FACTORS

There have been no material changes to the Company’s risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 6.EXHIBITS


Exhibit Number						Description













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

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

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

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

101.SCH*						XBRL Extension Schema Document

101.CAL*						XBRL Extension Calculation Linkbase Document

101.LAB*						XBRL Extension Label Linkbase Document

101.PRE*						XBRL Extension Presentation Linkbase Document

101.DEF*						XBRL Extension Definition Linkbase Document

104						Cover Page Interactive Data File (embedded within the Inline XBRL document and included in Exhibit 101).


*			Filed herewith.
**			Furnished herewith.
#			Indicates exhibits that are management contracts or compensation plans or arrangements.

- 42 -

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated:

October 28, 2021

INTEGER HOLDINGS CORPORATION

By:

/s/ Joseph W. Dziedzic

Joseph W. Dziedzic

President and Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Jason K. Garland

Jason K. Garland

Executive Vice President and
Chief Financial Officer

(Principal Financial Officer)

By:

/s/ Tom P. Thomas

Tom P. Thomas

Vice President, Corporate Controller

(Principal Accounting Officer)

- 43 -