Integer 10Q 2023 Q3 Quarterly report

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 September 29, 2023


☐			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 20, 2023 was: 33,326,647 shares.

INTEGER HOLDINGS CORPORATION

Form 10-Q

For the Quarterly Period Ended September 29, 2023

TABLE OF CONTENTS

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

INTEGER HOLDINGS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


(in thousands except share and per share data)	September 29, 2023		December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	32,142	$	24,272
Accounts receivable, net of provision for credit losses of $0.4 million and $0.3 million, respectively	226,327		224,325
Inventories	232,158		208,766
Refundable income taxes	4,832		2,003
Contract assets	86,637		71,927


Prepaid expenses and other current assets	27,248		27,005

Total current assets	609,344		558,298
Property, plant and equipment, net	364,283		317,243
Goodwill	979,886		982,192
Other intangible assets, net	779,115		819,889
Deferred income taxes	6,398		6,247
Operating lease assets	67,418		74,809
Financing lease assets	8,352		8,852
Other long-term assets	24,553		26,856

Total assets	$	2,839,349	$	2,794,386
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	—	$	18,188
Accounts payable	108,351		110,780
Income taxes payable	2,282		10,923

Operating lease liabilities	9,977		10,362
Accrued expenses and other current liabilities	82,491		73,499

Total current liabilities	203,101		223,752
Long-term debt	941,383		907,073
Deferred income taxes	151,386		160,671
Operating lease liabilities	57,325		64,049
Financing lease liabilities	7,488		8,006
Other long-term liabilities	15,317		13,379

Total liabilities	1,376,000		1,376,930
Commitments and contingencies (Note 10)
Stockholders’ equity:

Common stock, $0.001 par value; 100,000,000 shares authorized; 33,326,647 and 33,169,778 shares issued and outstanding, respectively	33		33
Additional paid-in capital	721,283		731,393

Retained earnings	744,994		680,701
Accumulated other comprehensive income (loss)	(2,961)		5,329
Total stockholders’ equity	1,463,349		1,417,456
Total liabilities and stockholders’ equity	$	2,839,349	$	2,794,386

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 (LOSS) (Unaudited)


	Three Months Ended				Nine Months Ended
(in thousands except per share data)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Sales	$	404,693	$	342,680	$	1,183,522	$	1,003,673
Cost of sales	299,137		255,962		875,489		742,583
Gross profit	105,556		86,718		308,033		261,090
Operating expenses:
Selling, general and administrative	42,102		38,195		129,815		119,541
Research, development and engineering	14,539		16,123		50,514		47,077
Restructuring and other charges	840		3,142		3,887		10,010
Total operating expenses	57,481		57,460		184,216		176,628
Operating income	48,075		29,258		123,817		84,462
Interest expense	11,967		10,676		40,680		24,417
Loss on equity investments	3,451		2,887		3,472		5,611
Other (gain) loss, net	580		(1,300)		1,699		(932)
Income before taxes	32,077		16,995		77,966		55,366
Provision for income taxes	4,820		938		13,673		7,106







Net income	$	27,257	$	16,057	$	64,293	$	48,260

Earnings per share:
Basic	$	0.82	$	0.48	$	1.93	$	1.46
Diluted	$	0.81	$	0.48	$	1.91	$	1.45











Weighted average shares outstanding:
Basic	33,346		33,145		33,305		33,116
Diluted	33,774		33,336		33,679		33,329

Comprehensive Income (Loss)
Net income	$	27,257	$	16,057	$	64,293	$	48,260
Other comprehensive loss:
Foreign currency translation loss	(12,370)		(29,364)		(7,346)		(64,525)
Change in fair value of cash flow hedges, net of tax	(2,761)		45		(944)		2,732

Other comprehensive loss, net	(15,131)		(29,319)		(8,290)		(61,793)
Comprehensive income (loss), net	$	12,126	$	(13,262)	$	56,003	$	(13,533)

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)	September 29, 2023		September 30, 2022
Cash flows from operating activities:
Net income	$	64,293	$	48,260
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	73,116		68,645
Debt related charges included in interest expense	7,126		1,445
Inventory step-up amortization	—		798
Stock-based compensation	17,099		15,973

Non-cash lease expense	8,124		8,179
Non-cash loss on equity investments	3,472		5,611
Contingent consideration fair value adjustment	(526)		—
Other non-cash (gains) losses	(734)		3,373
Deferred income taxes	(5)		(969)

Changes in operating assets and liabilities, net of acquisition:
Accounts receivable	(58)		(33,496)
Inventories	(25,785)		(59,036)
Prepaid expenses and other assets	(1,473)		(1,255)
Contract assets	(14,863)		(7,698)
Accounts payable	(869)		25,524
Accrued expenses and other liabilities	7,401		(6,012)
Income taxes	(11,692)		(4,563)
Net cash provided by operating activities	124,626		64,779
Cash flows from investing activities:
Acquisition of property, plant and equipment	(82,885)		(43,098)

Proceeds from sale of property, plant and equipment	100		636

Acquisitions, net of cash acquired	—		(126,636)


Net cash used in investing activities	(82,785)		(169,098)
Cash flows from financing activities:
Principal payments of term loans	(415,938)		(11,437)
Proceeds from issuance of convertible notes, net of discount	486,250		—
Proceeds from revolving credit facility	294,603		160,000
Payments of revolving credit facility	(353,993)		(39,000)
Purchase of capped calls	(35,000)		—
Payment of debt issuance costs	(2,181)		—

Proceeds from the exercise of stock options	2,303		—
Tax withholdings related to net share settlements of restricted stock unit awards	(3,067)		(2,073)


Contingent consideration payments	(7,660)		(493)
Principal payments on finance leases	(854)		(585)

Net cash (used in) provided by financing activities	(35,537)		106,412
Effect of foreign currency exchange rates on cash and cash equivalents	1,566		209
Net increase in cash and cash equivalents	7,870		2,302
Cash and cash equivalents, beginning of period	24,272		17,885
Cash and cash equivalents, end of period	$	32,142	$	20,187

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)	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Total stockholders’ equity, beginning balance	$	1,445,655	$	1,363,451	$	1,417,456	$	1,354,697

Common stock and additional paid-in capital
Balance, beginning of period	715,748		722,208		731,426		713,183
Stock awards exercised or vested	72		(147)		(959)		(2,073)
Stock-based compensation	5,496		5,022		17,099		15,973
Capped calls related to the issuance of convertible notes, net of tax	—		—		(26,250)		—
Balance, end of period	721,316		727,083		721,316		727,083





Retained earnings
Balance, beginning of period	717,737		646,527		680,701		614,324

Net income	27,257		16,057		64,293		48,260
Balance, end of period	744,994		662,584		744,994		662,584
Accumulated other comprehensive income (loss)
Balance, beginning of period	12,170		(5,284)		5,329		27,190
Other comprehensive loss	(15,131)		(29,319)		(8,290)		(61,793)

Balance, end of period	(2,961)		(34,603)		(2,961)		(34,603)

Total stockholders’ equity, ending balance	$	1,463,349	$	1,355,064	$	1,463,349	$	1,355,064

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 a medical device outsource manufacturer serving the cardiac rhythm management, neuromodulation, orthopedics, vascular, advanced surgical and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition to medical technologies, the Company develops batteries for high-end niche applications in the energy, military, and environmental markets. The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.

The accompanying condensed consolidated financial statements are presented in accordance with the rules and regulations of the United States ("U.S.") Securities and Exchange Commission ("SEC") and do not include all of the disclosures normally required by U.S. generally accepted accounting principles (“U.S. GAAP”) as contained in the Company’s Annual Report on Form 10-K. Accordingly, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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. The results for interim periods are not necessarily indicative of results or trends that may be expected for the fiscal year as a whole. The condensed consolidated financial statements were prepared using U.S. GAAP, which require 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.

The third quarter and first nine months of 2023 ended on September 29 and consisted of 91 days and 272 days, respectively. The third quarter and first nine months of 2022 ended on September 30 and consisted of 91 days and 273 days, respectively.

Trade Accounts Receivable - Factoring Arrangements

During the first nine months of 2023, the Company entered into receivable factoring arrangements, pursuant to which certain receivables may be sold to financial institutions without recourse in exchange for cash. Transactions under the receivables factoring arrangements are accounted for as sales under ASC 860, Transfers and Servicing of Financial Assets, with the sold receivables removed from the Company’s balance sheet. Under these arrangements, the Company does not maintain any beneficial interest in the receivables sold. Once sold, the receivables are no longer available to satisfy creditors in the event of bankruptcy. Sale proceeds are reflected in Cash flows from operating activities on the Condensed Consolidated Statements of Cash Flows. Factoring fees are recorded in Selling, general, and administrative expenses in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). During the three and nine months ended September 29, 2023, the Company sold, without recourse, accounts receivable of $47.1 million and $97.4 million, respectively. Factoring fees were $0.3 million and $0.7 million for the three and nine months ended September 29, 2023, respectively.

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, 2022, 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 ACQUISITIONS

On April 6, 2022, the Company acquired 100% of the equity interests of Connemara Biomedical Holdings Teoranta, including its operating subsidiaries Aran Biomedical and Proxy Biomedical (collectively “Aran”), a recognized leader in proprietary medical textiles, high precision biomaterial coverings and coatings as well as advanced metal and polymer braiding. Aran delivers development and manufacturing solutions for implantable medical devices. Consistent with the Company’s strategy, the combination with Aran further increases Integer’s ability to offer complete solutions for complex delivery and therapeutic devices in high growth cardiovascular markets such as structural heart, neurovascular, peripheral vascular, and endovascular as well as general surgery. The Company funded the purchase price with borrowings under its Revolving Credit Facility. Aran is included in the Company’s Medical segment.

The total consideration transferred was $141.3 million, which includes an initial cash payment of $133.9 million ($129.3 million net of cash acquired) and $7.4 million in estimated fair value of contingent consideration. The contingent consideration represents the estimated fair value of the Company’s obligation, under the purchase agreement, to make additional payments of up to €10 million ($10.9 million at the exchange rate as of April 6, 2022) based on Aran’s achievement of 2022 revenue growth milestones. The earn-out period ended on December 31, 2022 and, in accordance with the terms of the share purchase agreement, full payment was made in April 2023. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration.

The cost of the acquisition was allocated to the assets acquired and liabilities assumed based upon their estimated fair value at the date of the acquisition. The following table summarizes the final fair values of the assets acquired and liabilities assumed (in thousands):








Fair value of net assets acquired

Current assets	$	9,319
Property, plant and equipment	4,151
Goodwill	68,460
Definite-lived intangible assets	71,485
Operating lease assets	3,505
Other noncurrent assets	1,354
Current liabilities	(4,370)
Operating lease liabilities	(3,258)
Other noncurrent liabilities	(9,377)
Fair value of net assets acquired	$	141,269

Pro Forma (unaudited) disclosures

The following table presents (in thousands) unaudited pro forma results of operations for the three and nine months ended September 30, 2022 as if Aran had been included in the Company’s financial results as of the beginning of fiscal year 2021, through the date of acquisition. The pro forma results include the historical results of operations of the Company and Aran, as well as adjustments for additional amortization of the assets acquired, additional interest expense related to the financing of the transactions and other transactional adjustments. The pro forma results do not include efficiencies, cost reductions or synergies expected to result from the acquisition. These pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future.


	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Sales	$	342,680	$	1,009,036
Net income	16,057		50,285

Acquisition costs

Direct costs of this acquisition were not material for the three and nine months ended September 29, 2023. During the three and nine months ended September 30, 2022, direct costs of the Aran acquisition of $0.1 million and $2.4 million were expensed as incurred and included in Restructuring and other charges in the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(3.) SUPPLEMENTAL CASH FLOW INFORMATION

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


	Nine Months Ended
	September 29, 2023		September 30, 2022
Noncash investing and financing activities:
Property, plant and equipment purchases included in accounts payable	$	11,806	$	4,992


Supplemental lease disclosures:
Assets acquired under operating leases	912		11,817

(4.) INVENTORIES

Inventories comprise the following (in thousands):


	September 29, 2023		December 31, 2022
Raw materials	$	102,866	$	98,640
Work-in-process	110,080		98,188
Finished goods	19,212		11,938
Total	$	232,158	$	208,766

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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 September 29, 2023 were as follows (in thousands):


	Medical		Non- Medical		Total
December 31, 2022	$	965,192	$	17,000	$	982,192


Foreign currency translation	(2,306)		—		(2,306)

September 29, 2023	$	962,886	$	17,000	$	979,886

Intangible Assets

Intangible assets comprise the following (in thousands):


	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
September 29, 2023
Definite-lived:
Purchased technology and patents	$	283,384	$	(190,583)	$	92,801
Customer lists	823,690		(241,879)		581,811
Amortizing tradenames and other	20,974		(6,759)		14,215
Total amortizing intangible assets	$	1,128,048	$	(439,221)	$	688,827
Indefinite-lived:
Trademarks and tradenames					$	90,288

December 31, 2022
Definite-lived:
Purchased technology and patents	$	283,929	$	(178,844)	$	105,085
Customer lists	825,634		(216,546)		609,088
Amortizing tradenames and other	21,028		(5,600)		15,428
Total amortizing intangible assets	$	1,130,591	$	(400,990)	$	729,601
Indefinite-lived:
Trademarks and tradenames					$	90,288

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


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Cost of sales	$	4,037	$	3,980	$	12,051	$	11,662
Selling, general and administrative expenses	9,068		8,146		27,085		24,353



Total intangible asset amortization expense	$	13,105	$	12,126	$	39,136	$	36,015

Estimated future intangible asset amortization expense based on the carrying value as of September 29, 2023 is as follows (in thousands):


	Remainder of 2023		2024		2025		2026		2027		After 2027
Amortization Expense	$	13,179	$	51,436	$	50,631	$	48,800	$	45,860	$	478,921

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) DEBT

Long-term debt comprises the following (in thousands):


	September 29, 2023						December 31, 2022
	Principal Amount		UnamortizedDiscounts and Issuance Costs		Net Carrying Amount		Principal Amount		UnamortizedDiscounts and Issuance Costs		Net Carrying Amount
Senior Secured Credit Facilities:
Revolving credit facilities	$	81,247	$	—	$	81,247	$	140,300	$	—	$	140,300
Term loan A	375,000		(1,776)		373,224		455,313		(2,172)		453,141
Term loan B	—		—		—		335,625		(3,805)		331,820
Convertible Senior Notes due 2028	500,000		(13,088)		486,912		—		—		—
Total	$	956,247	$	(14,864)	$	941,383	$	931,238	$	(5,977)	$	925,261
Current portion of long-term debt					—						(18,188)
Long-term debt					$	941,383					$	907,073

Senior Secured Credit Facilities

On September 2, 2021, the Company entered into a credit agreement (the “2021 Credit Agreement”), governing the Company’s senior secured credit facilities (the “Senior Secured Credit Facilities”). As of December 31, 2022, the Senior Secured Credit Facilities consisted 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.

Amendments to the 2021 Credit Agreement

On January 30, 2023, the Company entered into a first amendment (the “First Amendment”) to the 2021 Credit Agreement to, among other things: (i) permit the Company to issue the notes (described below under 2028 Convertible Notes and Related Capped Call Transactions) and incur indebtedness thereunder in an aggregate principal amount of up to $600 million at any time outstanding; (ii) permit the Company to enter into bond hedge and capped call transactions; (iii) permit the Company to issue call options, warrants or purchase rights relating to the Company’s common stock; provided, in each case, that the terms of any such transaction are customary for transactions of such type.

On February 15, 2023, the Company entered into a second amendment (the “Second Amendment”) to the 2021 Credit Agreement to, among other things: (i) increase the maximum borrowing capacity under the Revolving Credit Facility by $100 million from $400 million to $500 million, (ii) extend the maturity date for both the Revolving Credit Facility and the TLA Facility to February 15, 2028, (iii) allow for borrowings by the Company under the Revolving Credit Facility denominated in Euros, subject to a sublimit equal to 50% of the maximum borrowing capacity under the Revolving Credit Facility, (iv) replace the London Interbank Offered Rate (“LIBOR”) based reference interest rate option with a forward-looking term rate based on the secured overnight financing rate (“SOFR”) for the applicable interest period plus an adjustment of 0.10% per annum (“Adjusted Term SOFR”), and (v) add carveouts to certain negative covenants included within the 2021 Credit Agreement to permit the expansion of capacity in Ireland by the Company and incur indebtedness related thereto.

The information provided below reflects the First Amendment and Second Amendment (collectively the “2023 Amendments”) described above. Details of our Long-term debt as of December 31, 2022 can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Revolving Credit Facility

The Revolving Credit Facility matures on February 15, 2028. As of September 29, 2023, the Company had available borrowing capacity on the Revolving Credit Facility of $415.3 million after giving effect to $81.2 million of outstanding borrowings and $3.5 million of outstanding standby letters of credit. Borrowings under the Revolving Credit Facility will bear interest at a rate of Adjusted Term SOFR, in relation to any loan in U.S. dollars, and the Euro Interbank Offered Rate (“EURIBOR”), in relation to any loan in Euros, plus a margin based on the Company’s Secured Net Leverage Ratio (as defined in the Senior Secured Credit Facilities agreement). In addition, 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 Secured Net Leverage Ratio. As of September 29, 2023, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 6.47% and the commitment fee on the unused portion of the Revolving Credit Facility was 0.18%.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) DEBT (Continued)

Term Loan Facilities

The TLA Facility matures on February 15, 2028, and requires quarterly installments. The quarterly principal installments under the TLA Facility increase over the term of the loan. The interest rate terms for the TLA Facility are the same as those above for the Revolving Credit Facility borrowings in U.S. dollars. As of September 29, 2023, the interest rate on the TLA Facility was 6.92%.

In February 2023, the Company used a portion of the proceeds from its notes offering (see 2028 Convertible Senior Notes and Related Capped Call Transactions) to settle in full principal and interest due under the TLB Facility.

Deferred Debt Issuance Costs and Discounts

Debt issuance costs are either deferred and amortized over the term of the associated debt or expensed as incurred. In connection with the 2023 Amendments, the Company incurred and capitalized an aggregate of $1.0 million of debt issuance costs.

In connection with the 2023 Amendments, 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.

Based on this assessment, $3.8 million of unamortized deferred debt issuance costs related to the Revolving Credit Facility and TLA Facility 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 $0.6 million of unamortized deferred debt issuance costs related to the Revolving Credit Facility and TLA Facility were deemed to be related to the extinguishment of debt and were expensed and included in Interest expense during the nine months ended September 29, 2023. Additionally, in connection with the full repayment of the TLB Facility and prepayments of portions of the TLA Facility, the Company incurred a $3.9 million loss on extinguishment of debt from the write-off of the remaining deferred debt issuance costs and original issue discount, which were expensed and included in Interest expense during the nine months ended September 29, 2023.

Covenants

The Senior Secured Credit Facilities 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 5.00:1.00, subject to increase in certain circumstances following qualified acquisitions, but shall not exceed 5.50:1.00 and (ii) the Company maintain an interest coverage ratio of at least 2.50:1.00. As of September 29, 2023, the Company was in compliance with these financial covenants.

Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2023 and through maturity, excluding any discounts or premiums, as of September 29, 2023 are as follows (in thousands):


	Remainder of 2023		2024		2025		2026		2027		After 2027
Future minimum principal payments	$	—	$	—	$	10,000	$	27,500	$	30,000	$	888,747

2028 Convertible Senior Notes and Related Capped Call Transactions

In February of 2023, the Company issued $500 million aggregate principal amount of Convertible Senior Notes due in 2028 (“2028 Notes”) in a private offering, which aggregate principal amount included the exercise in full of the initial purchasers’ option to purchase up to an additional $65 million principal amount of the 2028 Notes. The 2028 Notes mature on February 15, 2028 and bear interest at a fixed rate of 2.125% per annum, payable semiannually in arrears on February 15 and August 15 of each year, beginning on August 15, 2023. The total net proceeds from the issuance of the 2028 Notes (which includes the additional proceeds from the purchasers’ option), after deducting initial purchasers' discounts and commissions and debt issuance costs, were approximately $485 million.

Conversion and Redemption Terms of the 2028 Notes

Each $1,000 principal amount of the 2028 Notes is initially convertible into 11.4681 shares of the Company’s common stock (the “2028 Conversion Option”), which is equivalent to an initial conversion price of approximately $87.20 per share of common stock, subject to standard anti-dilutive adjustments and adjustments upon the occurrence of specified events. The initial conversion price represents a premium of approximately 32.5% to the $65.81 per share closing price of the Company’s common stock on January 31, 2023.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) DEBT (Continued)

The 2028 Notes are convertible, in multiples of $1,000 principal amount, at the option of the holders prior to the close of business on the business day immediately preceding November 15, 2027, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2023 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period (the “Measurement Period”) in which the trading price (as defined in the Indenture governing the 2028 Notes) per $1,000 principal amount of the 2028 Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate in effect on each such trading day; (3) if the Company calls any or all of the 2028 Notes for redemption, at any time prior to the close of business on the second scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after November 15, 2027 until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert all or any portion of their 2028 Notes, in multiples of $1,000 principal amount, at the option of the holder regardless of the foregoing circumstances.

Upon conversion, the 2028 Notes will be settled in cash up to the aggregate principal amount of the 2028 Notes to be converted, and in cash, shares of the Company’s common stock or a combination thereof, at the Company’s option, in respect of the remainder, if any, of the Company’s conversion obligation in excess of the aggregate principal amount of the 2028 Notes being converted. If the Company undergoes a fundamental change (as defined in the indenture governing the 2028 Notes), subject to certain conditions, holders may require the Company to repurchase for cash all or any portion of their 2028 Notes, in principal amounts of $1,000 or a multiple thereof, at a fundamental change repurchase price equal to 100% of the principal amount of the 2028 Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, following certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their notes in connection with such corporate event or during the relevant redemption period.

As of September 29, 2023, the conditions allowing holders of the Convertible Notes to convert had not been met and, therefore, the Convertible Notes are classified as a long-term liability on the Condensed Consolidated Balance Sheets at September 29, 2023.

The Company may not redeem the 2028 Notes prior to February 20, 2026. The Company may redeem for cash all or any portion of the 2028 Notes, at its option, on or after February 20, 2026 and prior to February 15, 2028, if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending not more than two trading days immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the 2028 Notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. No sinking fund is provided for the 2028 Notes.

Seniority of the 2028 Notes

The 2028 Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any of the Company’s indebtedness that is expressly subordinated in right of payment to the 2028 Notes; equal in right of payment to any of the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities (including trade payables) of the Company’s subsidiaries.

Indenture

The Company issued the Notes pursuant to an indenture dated as of February 3, 2023 (the “Indenture”) by and between the Company and Wilmington Trust, National Association, as trustee. The Indenture provides for customary events of default, which include (subject in certain cases to grace and cure periods), among others: nonpayment of principal or interest; failure by the Company to comply with its conversion obligations upon exercise of a holder’s conversion right under the Indenture; breach of covenants or other agreements in the Indenture; defaults by the Company or any significant subsidiary (as defined in the Indenture) with respect to other indebtedness in excess of a threshold amount; failure by the Company or any significant subsidiary to pay final judgments in excess of a threshold amount; and the occurrence of certain events of bankruptcy, insolvency or reorganization with respect to the Company or any significant subsidiary. Generally, if an event of default occurs and is continuing under the Indenture, either the Indenture trustee or the holders of at least 25% in aggregate principal amount of the

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(6.) DEBT (Continued)

2028 Notes then outstanding may declare the principal amount plus accrued and unpaid interest on the Notes to be immediately due and payable.

Covenants

The 2028 Notes do not contain financial maintenance covenants.

Deferred Debt Issuance Costs and Discounts

The 2028 Notes are accounted for as a single liability measured at amortized cost. The discount and issuance costs related to the 2028 Notes are being amortized to interest expense over the contractual term of the 2028 Notes at an effective interest rate of 2.76%.

Fair Value of the 2028 Notes

The estimated fair value of the 2028 Notes was approximately $545 million as of September 29, 2023. The estimated fair value of the 2028 Notes was determined through consideration of quoted market prices. The fair value of the 2028 Notes are categorized in Level 2 of the fair value hierarchy.

Capped Call Transactions

In connection with the issuance of the 2028 Notes, the Company entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institutions. The Capped Calls are expected generally to reduce the potential dilution to the Company’s common stock in connection with any conversion of the 2028 Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted 2028 Notes, as the case may be, with such reduction and/or offset subject to a cap based on strike price of written warrants. The initial upper strike price of the Capped Calls is $108.59 per share and is subject to certain adjustments under the terms of the Capped Calls. The Capped Calls cover, subject to anti-dilution adjustments, approximately 5.7 million shares of the Company’s common stock, the same number of shares initially underlying the 2028 Notes. For accounting purposes, the Capped Calls are separate transactions, and not integrated with the issuance of the 2028 Notes. As these transactions meet certain accounting criteria, the Capped Calls are recorded in stockholders’ equity and are not accounted for as derivatives. The 2028 Notes and the Capped Calls will be integrated for tax purposes. The accounting impact of this tax treatment results in the Capped Calls being deductible as original issue discount for tax purposes over the term of the 2028 Notes, which generates an $8.8 million deferred tax asset recognized through equity. The cost to the Company of the Capped Calls was $35 million, which was recorded, net of tax, as a reduction to additional paid-in capital.

Deferred Debt Issuance Costs and Discounts

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


December 31, 2022	$	2,387
Financing costs incurred	579
Write-off of deferred debt issuance costs	(260)
Amortization during the period	(401)
September 29, 2023	$	2,305

The change in unamortized discount and deferred debt issuance costs related to the Term Loan Facilities and 2028 Convertible Senior Notes is as follows (in thousands):


	Deferred Debt Issuance Costs		Unamortized Discount		Total
December 31, 2022	$	4,569	$	1,408	$	5,977
Financing costs incurred	1,602		13,750		15,352
Write-off of deferred debt issuance costs and unamortized discount	(2,867)		(1,391)		(4,258)
Amortization during the period	(492)		(1,715)		(2,207)
September 29, 2023	$	2,812	$	12,052	$	14,864

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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, performance awards, time-based restricted stock units (“RSUs”), performance-based RSUs (“PRSUs”), stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.

Stock-based Compensation Expense

The classification of stock-based compensation expense was as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022








Cost of sales	$	865	$	749	$	3,127	$	2,355
Selling, general and administrative	4,367		3,710		12,917		11,563
Research, development and engineering	250		209		978		872
Restructuring and other charges	14		354		77		1,183

Total stock-based compensation expense	$	5,496	$	5,022	$	17,099	$	15,973

Stock Options

The following table summarizes the Company’s stock option activity for the nine month period ended September 29, 2023:


	Number of Stock Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (In Years)	Aggregate Intrinsic Value (In Millions)
Outstanding at December 31, 2022	240,622	$	38.51

Exercised	(82,533)	35.00

Outstanding and exercisable at September 29, 2023	158,089	$	40.35	3.2	$	6.0

Time-Based Restricted Stock Units

Most RSUs granted to employees during the nine months ended September 29, 2023 vest over a period of three years from the grant date, subject to the recipient’s continuous service to the Company. RSUs are issued to members of the Board as a portion of their annual retainer and vest quarterly over a period of one year. The grant-date fair value of all RSUs is equal to the closing market price of Integer common stock on the date of grant.

The following table summarizes RSU activity for the nine month period ended September 29, 2023:


	Time-Vested Activity	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2022	291,929	$	77.58
Granted	231,604	75.77
Vested	(110,674)	79.00
Forfeited	(45,748)	72.12
Nonvested at September 29, 2023	367,111	$	76.69

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(7.) STOCK-BASED COMPENSATION (Continued)

Performance-Based Restricted Stock Units

For the Company’s PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of financial and market-based performance conditions over three year performance periods. The financial performance conditions are based on the Company’s sales targets. The market-based performance conditions are based on the Company’s achievement of a relative total shareholder return performance requirement, on a percentile basis, compared to a defined group of peer companies, or contingent upon achieving specified stock price milestones over a five year performance period.

The following table summarizes PRSU activity for the nine month period ended September 29, 2023:


	Performance- Vested Activity	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2022	263,906	$	90.29
Granted	105,757	74.32
Vested	(24,427)	107.26
Forfeited	(62,396)	83.39
Nonvested at September 29, 2023	282,840	$	84.38

The Company uses a Monte Carlo simulation model to determine the grant-date fair value of awards with market-based performance conditions. The grant-date fair value of all other PRSUs 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 PRSU awards granted with market-based performance conditions are as follows:


	Nine Months Ended
	September 29, 2023			September 30, 2022
Weighted average fair value	$	74.29		$	97.58
Risk-free interest rate	3.79		%	1.58		%
Expected volatility	46		%	42		%
Expected life (in years)	3.0			3.9
Expected dividend yield	—		%	—		%

The valuation of the market-based PRSUs granted during 2023 and 2022 also reflects a weighted average illiquidity discount of 11.23% and 9.25%, 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.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(8.) RESTRUCTURING AND OTHER CHARGES

The Company continuously evaluates the business and identifies opportunities to realign its resources to better serve its customers and markets, improve operational efficiency and capabilities, and lower its operating costs or improve profitability. To realize the benefits associated with these opportunities, the Company undertakes restructuring-type activities to transform its business. The Company incurs costs associated with these activities, which primarily include exit and disposal costs and other costs directly related to the restructuring initiative. Exit and disposal costs (“restructuring charges”) are expensed as incurred in accordance with ASC 420, Exit or Disposal Cost Obligations, and are classified within Restructuring and other charges, while other costs directly related to the restructuring initiatives (“restructuring-related charges”) are classified within Cost of sales, Selling, general and administrative, and Research, development and engineering expenses in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

In addition, from time to time, the Company incurs costs associated with acquiring and integrating businesses, and certain other general expenses, including asset impairments. The Company classifies costs associated with these items within Restructuring and other charges in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).

Restructuring and other charges comprise the following (in thousands):


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Restructuring charges	$	35	$	1,919	$	2,035	$	3,017
Acquisition and integration costs	777		597		1,715		5,866
Other general expenses	28		626		137		1,127
Total restructuring and other charges	$	840	$	3,142	$	3,887	$	10,010

The following table comprises restructuring and restructuring-related charges by classification in the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (in thousands):


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Restructuring charges:
Restructuring and other charges	$	35	$	1,919	$	2,035	$	3,017
Restructuring-related expenses(a):
Cost of sales	404		455		1,097		789
Selling, general and administrative	243		563		1,830		1,265
Research, development and engineering	21		321		662		824
Total restructuring and restructuring-related charges	$	703	$	3,258	$	5,624	$	5,895

__________

(a) Restructuring-related expenses primarily include retention bonuses and consulting expenses.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(8.) RESTRUCTURING AND OTHER CHARGES (Continued)

Restructuring programs

Operational excellence

The Company’s operational excellence 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.

Strategic reorganization and alignment

The Company’s strategic reorganization and alignment initiatives primarily include those that align resources with market conditions and the Company’s strategic direction in order to enhance the profitability of its portfolio of products.

Manufacturing alignment to support growth

The Company’s manufacturing alignment to support growth initiatives are designed to reduce costs and improve operating efficiencies by relocating certain manufacturing operations.

The following table summarizes the activity for restructuring reserves (in thousands):


	Operational excellence		Strategic reorganization and alignment		Manufacturing alignment to support growth		Total
December 31, 2022	$	232	$	2,134	$	—	$	2,366
Charges incurred, net of reversals	735		989		311		2,035
Cash payments	(869)		(2,610)		—		(3,479)

September 29, 2023	$	98	$	513	$	311	$	922

Acquisition and integration

Acquisition and integration costs primarily consist of professional fees and other costs related to business acquisitions. During the nine months ended September 29, 2023, acquisition and integration costs of $1.7 million included expenses primarily related to the integration of Oscor and Aran. During the nine months ended September 30, 2022, acquisition and integration costs of $5.9 million included expenses primarily related to the acquisitions of Oscor and Aran. Acquisition and integration costs for the nine months ended September 29, 2023 and September 30, 2022, included a benefit of $0.5 million and $0.3 million, respectively, to adjust the fair value of acquisition-related contingent consideration liabilities. 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 September 29, 2023 and September 30, 2022, 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.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(9.) INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations. In addition, 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 2023 was 15.0% on $32.1 million of income before taxes compared to 5.5% on $17.0 million of income before taxes for the same period in 2022. The Company’s effective tax rate for the nine months ended September 29, 2023 was 17.5% on $78.0 million of income before taxes compared to 12.8% on $55.4 million of income before taxes for the same period of 2022. 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 2023 and 2022 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 Foreign Derived Intangible Income (“FDII”) deduction, the availability of tax credits, and the recognition of certain discrete tax items. For the third quarter and first nine months of 2023, the Company recorded discrete tax benefits of $0.8 million and $0.4 million, respectively. For the third quarter and first nine months of 2022, the Company recorded discrete tax benefits of $0.7 million and $0.2 million, respectively. The discrete tax benefits for the third quarter and first nine months of 2023 is predominately related to favorable return to provision adjustments attributable to the 2022 U.S. tax return. The remainder of the discrete tax amounts relate predominately to excess tax benefits recognized upon vesting of RSUs during those periods partially offset by tax expense from shortfalls recorded for the forfeiture of certain PRSUs, as well as unfavorable return to provision adjustments attributable to certain foreign tax returns for the 2022 tax year. The discrete tax benefits for the third quarter and first nine months of 2022 are predominately related to favorable return to provision adjustments attributable to the 2021 tax year. The remainder of the discrete tax benefits predominately relate to excess tax benefits recognized upon vesting of RSUs during those periods and/or tax shortfalls recorded for the forfeiture of certain PRSUs.

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 September 29, 2023, the Company had unrecognized tax benefits of approximately $8.1 million, of which approximately $8.0 million would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized. As of September 29, 2023, the Company believes it is reasonably possible that a reduction of approximately $1.9 million of the balance of unrecognized tax benefits may occur within the next 12 months as a result of various statute expirations, audit closures, and/or tax settlements.

(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.

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, 2022	$	77
Additions to warranty reserve, net of reversals	(2)


September 29, 2023	$	75

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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
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Numerator for basic and diluted EPS:


Net income	$	27,257	$	16,057	$	64,293	$	48,260

Denominator for basic and diluted EPS:
Weighted average shares outstanding - Basic	33,346		33,145		33,305		33,116
Dilutive effect of share-based awards	428		191		374		213
Weighted average shares outstanding - Diluted	33,774		33,336		33,679		33,329




Basic EPS	$	0.82	$	0.48	$	1.93	$	1.46




Diluted EPS	$	0.81	$	0.48	$	1.91	$	1.45

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
	September 29, 2023	September 30, 2022	September 29, 2023	September 30, 2022
RSUs	—	30	1	13
PRSUs	83	162	100	164

The dilutive effect for the Company's 2028 Notes is calculated using the if-converted method. The Company is required, pursuant to the Indenture governing the 2028 Notes, to settle the principal amount of the 2028 Notes in cash and may elect to settle the remaining conversion obligation (i.e., the stock price in excess of the conversion price) in cash, shares of the Company's common stock, or a combination thereof. Under the if-converted method, the Company includes the number of shares required to satisfy the conversion obligation, assuming all the 2028 Notes are converted. Because the average closing price of the Company's common stock for the three months ended September 29, 2023, which is used as the basis for determining the dilutive effect on earnings per share, was less than the conversion price of $87.20, all associated shares were antidilutive.

In connection with the issuance of the 2028 Notes, the Company entered into privately negotiated capped call transactions with certain financial institutions. The Capped Calls cover, subject to anti-dilution adjustments substantially similar to those in the 2028 Notes, approximately 5.7 million shares of the Company's common stock, the same number of shares initially underlying the 2028 Notes, at a strike price of approximately $108.59, subject to certain adjustments under the terms of the Capped Calls. The Capped Calls will expire upon the maturity of the 2028 Notes, subject to earlier exercise or termination. Exercise of the Capped Calls would reduce the number of shares of the Company's common stock outstanding, and therefore would be antidilutive.

See Note 6 “Debt” for additional information related to 2028 Notes and Capped Calls.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(12.) STOCKHOLDERS’ EQUITY

Common Stock

The following is a summary of the number of shares of common stock issued and outstanding for the nine month periods ended September 29, 2023 and September 30, 2022:


	Nine Months Ended
	September 29, 2023	September 30, 2022
Shares outstanding at beginning of period	33,169,778	33,063,336
Stock options exercised	72,125	—
Vesting of RSUs, net of shares withheld to cover taxes	84,744	67,657
Shares outstanding at end of period	33,326,647	33,130,993

Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) (“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
June 30, 2023	$	(346)	$	4,060	$	9,174	$	12,888	$	(718)	$	12,170
Unrealized loss on cash flow hedges	—		(1,534)		—		(1,534)		321		(1,213)
Realized gain on foreign currency hedges	—		(1,960)		—		(1,960)		412		(1,548)

Foreign currency translation loss	—		—		(12,370)		(12,370)		—		(12,370)

September 29, 2023	$	(346)	$	566	$	(3,196)	$	(2,976)	$	15	$	(2,961)

December 31, 2022	$	(346)	$	1,760	$	4,150	$	5,564	$	(235)	$	5,329
Unrealized gain on cash flow hedges	—		4,038		—		4,038		(849)		3,189
Realized gain on foreign currency hedges	—		(3,970)		—		(3,970)		834		(3,136)
Realized gain on interest rate swap hedge	—		(1,262)		—		(1,262)		265		(997)
Foreign currency translation loss	—		—		(7,346)		(7,346)		—		(7,346)

September 29, 2023	$	(346)	$	566	$	(3,196)	$	(2,976)	$	15	$	(2,961)



July 1, 2022	$	(890)	$	1,110	$	(5,441)	$	(5,221)	$	(63)	$	(5,284)
Unrealized loss on cash flow hedges	—		(150)		—		(150)		32		(118)
Realized loss on foreign currency hedges	—		211		—		211		(44)		167
Realized gain on interest rate swap hedge	—		(4)		—		(4)		—		(4)
Foreign currency translation loss	—		—		(29,364)		(29,364)		—		(29,364)

September 30, 2022	$	(890)	$	1,167	$	(34,805)	$	(34,528)	$	(75)	$	(34,603)

December 31, 2021	$	(890)	$	(2,291)	$	29,720	$	26,539	$	651	$	27,190
Unrealized gain on cash flow hedges	—		2,415		—		2,415		(507)		1,908
Realized gain on foreign currency hedges	—		(246)		—		(246)		52		(194)
Realized loss on interest rate swap hedge	—		1,289		—		1,289		(271)		1,018
Foreign currency translation loss	—		—		(64,525)		(64,525)		—		(64,525)

September 30, 2022	$	(890)	$	1,167	$	(34,805)	$	(34,528)	$	(75)	$	(34,603)

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(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 may use 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)
September 29, 2023

Assets: Foreign currency hedging contracts	$	1,738	$	—	$	1,738	$	—
Liabilities: Foreign currency hedging contracts	1,172		—		1,172		—

Liabilities: Contingent consideration	294		—		—		294

December 31, 2022
Assets: Interest rate swap	$	1,262	$	—	$	1,262	$	—
Assets: Foreign currency hedging contracts	521		—		521		—

Liabilities: Foreign currency hedging contracts	23				23
Liabilities: Contingent consideration	11,756		—		—		11,756

Derivatives Designated as Hedging Instruments

Interest Rate Swaps

The Company may periodically enter 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.

The Company had no outstanding interest rate swaps as of September 29, 2023. Information regarding the Company’s outstanding interest rate swap, designated as a cash flow hedge, as of December 31, 2022 is as follows (dollars in thousands):


Notional Amount		Maturity Date	Pay Fixed Rate		Receive Current Floating Rate		Fair Value		Balance Sheet Location
$	100,000	Jun 2023	2.1785	%	4.3869	%	$	1,262	Prepaid expenses and other current assets

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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 September 29, 2023 is as follows (dollars in thousands):


Notional Amount		Maturity Date	$/Foreign Currency		Fair Value		Balance Sheet Location
$	9,076	Dec 2023	0.0478	MXN Peso	$	1,738	Prepaid expenses and other current assets
54,223		Sep 2024	1.0865	Euro	(1,054)		Accrued expenses and other current liabilities
4,733		Dec 2023	0.0263	UYU Peso	(53)		Accrued expenses and other current liabilities
3,672		Dec 2024	1.0994	Euro	(65)		Other long-term liabilities

Information regarding outstanding foreign currency forward contracts designated as cash flow hedges as of December 31, 2022 is as follows (dollars in thousands):


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


$	37,175	Dec 2023	0.0489	MXN Peso	$	504	Prepaid expenses and other current assets
2,685		Mar 2023	0.0249	UYU Peso	17		Prepaid expenses and other current assets
17,309		Mar 2023	1.0751	Euro	(23)		Accrued expenses and other current liabilities

The following tables present the effect of cash flow hedge derivative instruments on the Company’s Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 29, 2023 and September 30, 2022 (in thousands):


	Three Months Ended
	September 29, 2023				September 30, 2022
	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity		Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Sales	$	404,693	$	53	$	342,680	$	(876)
Cost of sales	299,137		1,916		255,962		563
Operating expenses	57,481		(9)		57,460		102
Interest expense	11,967		—		10,676		4



	Nine Months Ended
	September 29, 2023				September 30, 2022
	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity		Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Sales	$	1,183,522	$	(81)	$	1,003,673	$	(1,301)
Cost of sales	875,489		4,008		742,583		1,309
Operating expenses	184,216		43		176,628		238
Interest expense	40,680		1,262		24,417		(1,289)

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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 (Loss)	Three Months Ended
	September 29, 2023		September 30, 2022			September 29, 2023		September 30, 2022
Interest rate swap	$	—	$	678	Interest expense	$	—	$	4
Foreign exchange contracts	(1,690)		(847)		Sales	53		(876)
Foreign exchange contracts	218		91		Cost of sales	1,916		563
Foreign exchange contracts	(62)		(72)		Operating expenses	(9)		102

	Nine Months Ended				Location in Statements of Operations and Comprehensive Income (Loss)	Nine Months Ended
	September 29, 2023		September 30, 2022			September 29, 2023		September 30, 2022
Interest rate swap	$	—	$	3,204	Interest expense	$	1,262	$	(1,289)
Foreign exchange contracts	(1,177)		(2,528)		Sales	(81)		(1,301)
Foreign exchange contracts	5,232		1,456		Cost of sales	4,008		1,309
Foreign exchange contracts	(17)		283		Operating expenses	43		238

The Company expects to reclassify net gains totaling $0.6 million related to its cash flow hedges from AOCI into earnings during the next twelve months.

Net Investment Hedges

The Company has foreign-denominated long-term debt balances that qualify as net investment hedges. Changes in the value of these net investment hedges due to foreign currency gains or losses are deferred as foreign currency translation adjustments in Other comprehensive income (loss) on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), and will remain in Accumulated other comprehensive income (loss) until the hedged investment is sold or substantially liquidated. We evaluate the effectiveness of the net investment hedges each quarter.

As of September 29, 2023, the Company had a €22 million borrowing on the Revolving Credit Facility that was designated as a net investment hedge on a portion of the Company’s net investments in certain of its entities with functional currencies denominated in the Euro. There were no net investment hedges outstanding at December 31, 2022.

Derivatives Not Designated as Hedging Instruments

The Company also has foreign currency exposure on balances, primarily intercompany, that are denominated in a foreign currency and are adjusted to current values using period-end exchange rates. To minimize foreign currency exposure, the Company enters into foreign currency contracts with a one month maturity. At September 29, 2023 and December 31, 2022, the Company had total gross notional amounts of $20.0 million and $12.0 million, respectively, of foreign currency contracts outstanding that were not designated as hedges. The fair value of derivatives not designated as hedges was not material for any period presented. Net gains/losses on foreign currency contracts not designated as hedging instruments are included in Other (gain) loss, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The Company recorded net losses of $0.6 million and $0.7 million, respectively, for the three and nine months ended September 29, 2023, compared to gains of $0.9 million and $1.6 million, respectively, for the three and nine months ended September 30, 2022, respectively. Each of the foreign currency contracts not designated as hedging instruments will have approximately offsetting effects from the underlying intercompany loans subject to foreign exchange remeasurement.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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 September 29, 2023 and September 30, 2022 (in thousands):


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Fair value measurement at beginning of period	$	555	$	9,072	$	11,756	$	2,415
Amount recorded for current year acquisitions	—		—		—		7,375
Fair value measurement adjustment	(261)		(347)		(526)		(293)
Payments	—		—		(11,177)		(493)
Foreign currency translation	—		(453)		241		(732)
Fair value measurement at end of period	$	294	$	8,272	$	294	$	8,272

On October 7, 2019, the Company acquired certain assets and liabilities of US BioDesign, LLC (“USB”), a privately-held developer and manufacturer of complex braided biomedical structures for disposable and implantable medical devices. As of September 29, 2023 and December 31, 2022, the Company assessed the probability of meeting the required revenue threshold as unlikely and determined the fair value of the contingent consideration liability relating to the acquisition of USB was zero. The final earnout period under the asset purchase agreement for USB ends on December 31, 2023. During the nine months ended September 30, 2022, the Company made a $0.5 million payment associated with the USB acquisition, resulting from achievement of revenue-based goals for the period from January 1, 2021 to December 31, 2021.

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. As of September 29, 2023 and December 31, 2022, the fair value of the contingent consideration liability relating to the acquisition of InoMec was $0.3 million and $1.1 million, respectively. During the nine months ended September 29, 2023, the Company made a $0.3 million payment associated with the InoMec acquisition, resulting from achievement of revenue-based goals for the period from March 1, 2022 to February 28, 2023. The final earnout period under the asset purchase agreement for InoMec ends on February 29, 2024. The remaining maximum potential undiscounted payout for the contingent consideration liability relating to the acquisition of InoMec is $0.9 million.

On April 6, 2022, the Company acquired Aran. See Note 2 “Business Acquisitions” for additional information about the Aran acquisition and related contingent consideration. During the nine months ended September 29, 2023, the Company made a $10.9 million payment associated with the final earnout period under the asset purchase agreement for Aran, resulting from achievement of the maximum revenue-based goals for the year ended December 31, 2022. As of December 31, 2022, the fair value of the contingent consideration liability relating to the acquisition of Aran was $10.9 million.

The contingent consideration at September 29, 2023 is the estimated fair value of the Company’s remaining obligations under the asset purchase agreements for InoMec and USB. As of September 29, 2023, contingent consideration liabilities of $0.3 million are included in Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets. As of December 31, 2022, the current portion of contingent consideration liabilities included in Accrued expenses and other current liabilities was $11.2 million and the non-current portion included in Other long-term liabilities was $0.6 million.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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 and TLA 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.

Equity investments comprise the following (in thousands):


	September 29, 2023		December 31, 2022
Equity method investment	$	8,032	$	8,252
Non-marketable equity securities	2,385		5,637
Total equity investments	$	10,417	$	13,889

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


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Equity method investment loss	$	199	$	2,887	$	220	$	5,611
Impairment charges	3,252		—		3,252		—

Total loss on equity investments, net	$	3,451	$	2,887	$	3,472	$	5,611

During the third quarter of 2023, the Company determined that an investment in one of its non-marketable equity securities was impaired and determined the fair value to be zero based upon available information. An impairment charge of $3.3 million was recognized during the third quarter of 2023. This assessment was based on qualitative indications of impairment which are considered to be a Level 3 fair value measurement, as the fair value was determined based on significant inputs not observable in the market. Factors that significantly influenced the determination of the impairment loss included the investee’s financial condition, operational and financing cash flow activities, and priority claims to the equity security, distributions rights and preferences.

The Company’s equity method investment is in a venture capital fund focused on investing in life sciences companies. As of September 29, 2023, the Company owned 7.5% of this fund.

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(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
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Segment sales by product line:
Medical
Cardio & Vascular	$	214,003	$	174,131	$	613,700	$	513,772
Cardiac Rhythm Management & Neuromodulation	159,221		130,631		457,771		389,900
Advanced Surgical, Orthopedics & Portable Medical	22,678		26,150		77,808		69,101

Total Medical	395,902		330,912		1,149,279		972,773
Non-Medical	8,791		11,768		34,243		30,900
Total sales	$	404,693	$	342,680	$	1,183,522	$	1,003,673

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


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Segment income:
Medical	$	73,687	$	49,176	$	196,990	$	147,904
Non-Medical	(905)		1,818		3,399		4,108
Total segment income	72,782		50,994		200,389		152,012
Unallocated operating expenses	(24,707)		(21,736)		(76,572)		(67,550)
Operating income	48,075		29,258		123,817		84,462
Unallocated expenses, net	(15,998)		(12,263)		(45,851)		(29,096)
Income before taxes	$	32,077	$	16,995	$	77,966	$	55,366

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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 31% and 28% of total revenue for the three and nine months ended September 29, 2023, compared to 28% and 30%, respectively, for the three and nine months ended September 30, 2022. Substantially all of the 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

September 29, 2023

September 30, 2022

Customer

Medical

Non-Medical

Medical

Non-Medical

Customer A

18%

Customer B

15%

16%

Customer C

14%

13%

Customer D

17%

25%

Customer E

14%

Customer F

15%

All other customers

53%

69%

53%

60%

Nine Months Ended

September 29, 2023

September 30, 2022

Customer

Medical

Non-Medical

Medical

Non-Medical

Customer A

18%

Customer B

16%

17%

Customer C

14%

13%

Customer D

20%

33%

All other customers

52%

80%

52%

67%

__________

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

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INTEGER HOLDINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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

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

September 29, 2023

September 30, 2022

Ship to Location

Medical

Non-Medical

Medical

Non-Medical

United States

56%

61%

54%

74%

Canada

13%

All other countries

44%

26%

46%

26%

Nine Months Ended

September 29, 2023

September 30, 2022

Ship to Location

Medical

Non-Medical

Medical

Non-Medical

United States

56%

62%

54%

70%

Canada

11%

All other countries

44%

27%

46%

30%

__________

* 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):


	September 29, 2023		December 31, 2022

Contract assets	$	86,637	$	71,927
Contract liabilities	5,818		5,616

During the three and nine months ended September 29, 2023, the Company recognized $0.4 million and $3.1 million, respectively, of revenue that was included in the contract liability balance as of December 31, 2022. During the three and nine months ended September 30, 2022, the Company recognized $0.5 million and $2.2 million, respectively, of revenue that was included in the contract liability balance as of December 31, 2021.

(16.) SUBSEQUENT EVENT

On October 1, 2023, the Company acquired certain assets of InNeuroCo, Inc. (“ InNeuroCo”) in an all cash transaction for $42 million, subject to customary working capital adjustments, with up to $13.5 million of contingent consideration payable based on specified revenue growth milestones being met through 2027, and a one-time contingent payment to be made based on cumulative revenue amounts through 2027 exceeding a specified revenue target. The Company funded the purchase price with borrowings under its Revolving Credit Facility during the fourth quarter of 2023.

InNeuroCo, a privately-held company based in Florida, is a recognized leader in neurovascular catheter innovation with strong development and manufacturing capabilities. InNeuroCo’s expertise and highly differentiated neurovascular catheter innovation complements the Company’s existing capabilities and market focus. Consistent with the Company’s strategy, the addition of InNeuroCo further increases Integer’s ability to provide enhanced solutions to its customers in the neurovascular catheter space.

For segment reporting purposes, the results of operations and assets from this acquisition will be included in the Company’s Medical segment. In addition to assets acquired and liabilities assumed, the Company expects to allocate the purchase price to identifiable intangible assets such as developed technology and customer relationships. The Company expects to determine the preliminary purchase price allocation prior to the end of the fourth quarter of 2023. Goodwill arising from the acquisition is tax deductible.

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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, 2022. 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 Form 10-Q and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations, and these statements are subject to known and unknown risks, uncertainties and assumptions. Forward-looking statements include statements relating to:

•future sales, expenses, and profitability; customer demand; supplier performance (including delivery delays); costs (including wages, staffing levels and freight); 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 “outlook,” “projected,” “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 Form 10-Q.

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 our other periodic filings with the SEC and include the following:

•operational risks, such as the duration, scope and impact of global supply chain issues and the military conflicts between Russia and Ukraine and between Israel and Hamas, including the evolving economic, social and governmental environments and their effect on our suppliers and customers as well as the global economy; 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; our ability to attract, train and retain a sufficient number of qualified associates; 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 dependence upon our senior management team and technical personnel; and global climate change and the emphasis on ESG matters by various stakeholders;

•strategic risks, such as 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; and our ability to successfully identify, make and integrate acquisitions to expand and develop our business in accordance with expectations;

•financial risks, such as 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; financial and market risks related to our international operations and sales; our complex international tax profile; and our ability to realize the full value of our intangible assets; and

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

•legal and compliance risks, such as regulatory issues resulting from product 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; our ability to obtain necessary licenses for new technologies; legal and regulatory risks from our international operations, including trade regulation; and the fact that the healthcare industry is highly regulated and subject to various regulatory changes; and

•other risks and uncertainties that arise from time to time.

Except as may be required by applicable law, the Company assumes no obligation to update forward-looking statements in this Form 10-Q 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 Rhythm Management & 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 Global Events

Global economic challenges, including the impact of the military conflicts between Russia and Ukraine and between Israel and Hamas, severe and sustained inflation, a rising interest rate environment, fluctuations in global currencies, and supply chain disruptions may continue to cause economic uncertainty and volatility. The impact of these issues on our business will vary by geographic market and product line, but specific impacts to our business include increased borrowing costs, labor shortages, disruptions in the supply chain, delayed or reduced customer orders and sales, and delays in shipments to and from certain countries. We monitor economic conditions closely. In response to potential reductions in revenue, we can take actions to align our cost structure with changes in demand and manage our working capital. However, there can be no assurance as to the effectiveness of our efforts to mitigate any impact of the current and future adverse economic conditions and other developments.

Business Acquisitions

On April 6, 2022, we acquired 100% of the equity interests of Connemara Biomedical Holdings Teoranta, including its operating subsidiaries Aran Biomedical and Proxy Biomedical (collectively “Aran”). A recognized leader in proprietary medical textiles, high precision biomaterial coverings and coatings as well as advanced metal and polymer braiding, Aran delivers development and manufacturing solutions for implantable medical devices. Consistent with our strategy, the combination with Aran further increases our ability to offer complete solutions for complex delivery and therapeutic devices in high growth cardiovascular markets such as structural heart, neurovascular, peripheral vascular, and endovascular as well as general surgery. Refer to Note 2 “Business Acquisitions” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information about this acquisition.

Subsequent to the end of the third quarter, on October 1, 2023, we acquired certain assets of InNeuroCo, Inc. (“ InNeuroCo”). InNeuroCo is a recognized leader in neurovascular catheter innovation with strong development and manufacturing capabilities. InNeuroCo’s expertise and highly differentiated neurovascular catheter innovation complements our existing capabilities and market focus. Consistent with our strategy, the addition of InNeuroCo further increases our ability to provide enhanced solutions to our customers in the neurovascular catheter space. As the InNeuroCo acquisition occurred subsequent to the end of the third quarter, the assets acquired and results of operations are not included below in management's discussion and analysis.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

See Note 16 “Subsequent Event” of the Notes to Condensed Consolidated Financial Statements contained in Item 1 of this report for additional information related to the acquisition of InNeuroCo, Inc.

Financial Overview

Net income for the third quarter and first nine months of 2023 was $27.3 million, or $0.81 per diluted share, and $64.3 million, or $1.91 per diluted share, respectively, compared to $16.1 million, or $0.48 per diluted share, and $48.3 million, or $1.45 per diluted share for the third quarter and first nine months of 2022, respectively. These variances are primarily the result of the following:

•Sales for the third quarter and first nine months of 2023 increased $62.0 million and $179.8 million, respectively, when compared to the same periods in 2022, driven by our Medical product lines with strong demand, new product ramps, growth from emerging customers with PMA (premarket approval) products and supply chain improvements.

•Gross profit for the third quarter and first nine months of 2023 increased $18.8 million and $46.9 million, respectively, primarily from higher sales volume leverage and efficiency improvements from an improving supply chain environment.

•Operating expenses for the third quarter of 2023 were flat compared to the third quarter last year and increased $7.6 million when comparing the first nine months of 2023 to the same period in 2022, primarily due to higher labor costs, amortization expense and bank fees, partially offset by lower restructuring and other charges.

•Interest expense for the third quarter and first nine months of 2023 increased $1.3 million and $16.3 million, respectively, compared to the same periods in 2022, due to higher interest rates, higher average debt outstanding and higher losses from extinguishment of debt.

•During the third quarter and first nine months of 2023, we recognized a loss on equity investments of $3.5 million, compared to losses of $2.9 million and $5.6 million, respectively, for the third quarter and first nine months of 2022. Gains and losses on equity investments are generally unpredictable in nature.

•Other (gain) loss, net for the third quarter and first nine months of 2023 were losses of $0.6 million and $1.7 million, respectively, compared to gains of $1.3 million and $0.9 million, respectively, for the third quarter and first nine months of 2022, 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 2023 of $4.8 million and $13.7 million, respectively, compared with provisions for income taxes of $0.9 million and $7.1 million, respectively, for the third quarter and first nine months of 2022. The change in income tax expense was primarily due to relative changes in pre-tax income and the impact of discrete tax items.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Our Financial Results

The following table presents 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
	September 29,			September 30,			Change
	2023			2022			$		%
Medical Sales:
Cardio & Vascular	$	214,003		$	174,131		$	39,872	22.9	%
Cardiac Rhythm Management & Neuromodulation	159,221			130,631			28,590		21.9	%
Advanced Surgical, Orthopedics & Portable Medical	22,678			26,150			(3,472)		(13.3)	%
Total Medical Sales	395,902			330,912			64,990		19.6	%
Non-Medical	8,791			11,768			(2,977)		(25.3)	%
Total sales	404,693			342,680			62,013		18.1	%
Cost of sales	299,137			255,962			43,175		16.9	%
Gross profit	105,556			86,718			18,838		21.7	%
Gross profit as a % of sales	26.1		%	25.3		%
Operating expenses:
Selling, general and administrative (“SG&A”)	42,102			38,195			3,907		10.2	%
SG&A as a % of sales	10.4		%	11.1		%
Research, development and engineering (“RD&E”)	14,539			16,123			(1,584)		(9.8)	%
RD&E as a % of sales	3.6		%	4.7		%
Restructuring and other charges	840			3,142			(2,302)		(73.3)	%
Total operating expenses	57,481			57,460			21		—	%
Operating income	48,075			29,258			18,817		64.3	%
Operating expense as a % of sales	14.2		%	16.8		%
Operating income as a % of sales	11.9		%	8.5		%
Interest expense	11,967			10,676			1,291		12.1	%
Loss on equity investments	3,451			2,887			564		19.5	%
Other (gain) loss, net	580			(1,300)			1,880		(144.6)	%
Income before taxes	32,077			16,995			15,082		88.7	%
Provision for income taxes	4,820			938			3,882		413.9	%
Effective tax rate	15.0		%	5.5		%
Net income	$	27,257		$	16,057		$	11,200	69.8	%
Net income as a % of sales	6.7		%	4.7		%
Diluted earnings per share	$	0.81		$	0.48		$	0.33	68.8	%

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS



	Nine Months Ended
	September 29,			September 30,			Change
	2023			2022			$		%
Medical Sales:
Cardio & Vascular	$	613,700		$	513,772		$	99,928	19.4	%
Cardiac Rhythm Management & Neuromodulation	457,771			389,900			67,871		17.4	%
Advanced Surgical, Orthopedics & Portable Medical	77,808			69,101			8,707		12.6	%
Total Medical Sales	1,149,279			972,773			176,506		18.1	%
Non-Medical	34,243			30,900			3,343		10.8	%
Total Sales	1,183,522			1,003,673			179,849		17.9	%
Cost of sales	875,489			742,583			132,906		17.9	%
Gross profit	308,033			261,090			46,943		18.0	%
Gross profit as a % of sales	26.0		%	26.0		%
Operating expenses:
SG&A	129,815			119,541			10,274		8.6	%
SG&A as a % of sales	11.0		%	11.9		%
RD&E	50,514			47,077			3,437		7.3	%
RD&E as a % of sales	4.3		%	4.7		%
Restructuring and other charges	3,887			10,010			(6,123)		(61.2)	%
Total operating expenses	184,216			176,628			7,588		4.3	%
Operating income	123,817			84,462			39,355		46.6	%
Operating expense as a % of sales	15.6		%	17.6		%
Operating income as a % of sales	10.5		%	8.4		%
Interest expense	40,680			24,417			16,263		66.6	%
Loss on equity investments	3,472			5,611			(2,139)		(38.1)	%
Other (gain) loss, net	1,699			(932)			2,631		(282.3)	%
Income before taxes	77,966			55,366			22,600		40.8	%
Provision for income taxes	13,673			7,106			6,567		92.4	%
Effective tax rate	17.5		%	12.8		%
Net income	$	64,293		$	48,260		$	16,033	33.2	%
Net income as a % of sales	5.4		%	4.8		%
Diluted earnings per share	$	1.91		$	1.45		$	0.46	31.7	%

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Product Line Sales

For the third quarter and first nine months of 2023, Cardio & Vascular (“C&V”) sales increased $39.9 million, or 23%, and $99.9 million, or 19%, respectively, versus the comparable 2022 periods. The increase in C&V sales for the third quarter and first nine months of 2023 was driven by continued strong demand across all markets, growth in key products such as guidewires, new product ramps in electrophysiology and structural heart, and supply chain improvements. Foreign currency exchange rate fluctuations increased C&V sales for the third quarter and first nine months of 2023 by $1.1 million and $0.8 million, in comparison to the 2022 periods, primarily due to U.S. dollar fluctuations relative to the Euro.

For the third quarter and first nine months of 2023, Cardiac Rhythm Management & Neuromodulation (“CRM&N”) sales increased $28.6 million, or 22%, and $67.9 million, or 17%, respectively, versus the comparable 2022 periods, with double-digit growth in both CRM and Neuromodulation, driven by strong demand, including double-digit growth from emerging customers with PMA products, and supply chain improvements. Foreign currency exchange rate fluctuations did not have a material impact on CRM&N sales during the third quarter and first nine months of 2023 in comparison to 2022.

Advanced Surgical, Orthopedic & Portable Medical (“AS&O”) sales for the third quarter and first nine months of 2023 decreased $3.5 million, or 13%, and increased $8.7 million or 13%, respectively, versus the comparable 2022 periods, driven by execution of the planned multi-year Portable Medical exit announced in 2022 and a decline in Advanced Surgical and Orthopedics. Foreign currency exchange rate fluctuations did not have a material impact on AS&O sales during the third quarter and first nine months of 2023 in comparison to the 2022 periods.

For the third quarter and first nine months of 2023, Non-Medical sales decreased $3.0 million, or 25%, and increased $3.3 million, or 11%, respectively, versus the comparable 2022 periods. The third quarter of 2023 sales reflect a return to the normal run-rate after higher sales in previous quarters from the supply chain recovery. Foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during the third quarter and first nine months of 2023 in comparison to the 2022 periods.

Gross Profit


	Three Months Ended						Nine Months Ended
	September 29, 2023			September 30, 2022			September 29, 2023		September 30, 2022
Gross profit (in thousands)	$	105,556		$	86,718		308,033		261,090
Gross margin	26.1		%	25.3		%	26.0	%	26.0	%

Gross profit as a percent of sales (“Gross margin”) for the third quarter of 2023 increased 80 basis points compared to the third quarter last year and was flat when comparing the first nine months of 2023 to the comparable 2022 period. The improved quarter over quarter gross margin was primarily due to higher sales volume leverage and efficiency improvements from an improving supply chain environment.

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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):


	Three Months Ended
	September 29, 2023		September 30, 2022		Change
Compensation and benefits(a)	$	21,178	$	19,766	$	1,412
Amortization expense(b)	9,275		8,299		976
Professional fees(c)	3,746		3,385		361
Contract services(d)	2,923		2,686		237��
Bank fees and charges(e)	976		249		727
All other SG&A	4,004		3,810		194
Net increase in SG&A expenses	$	42,102	$	38,195	$	3,907


	Nine Months Ended
	September 29, 2023		September 30, 2022		Change
Compensation and benefits(a)	$	67,825	$	64,936	$	2,889
Amortization expense(b)	27,680		24,699		2,981
Professional fees(c)	11,075		9,652		1,423
Contract services(d)	8,607		7,285		1,322
Bank fees and charges(e)	2,167		652		1,515
All other SG&A	12,461		12,317		144
Net increase in SG&A expenses	$	129,815	$	119,541	$	10,274

__________

(a)Compensation and benefits expense increased during the third quarter and first nine months of 2023. The increases were primarily due to annual merit increases and higher incentive compensation, partially offset by lower headcount.

(b)Amortization expense increased during the third quarter and first nine months of 2023 compared to the same periods of 2022 primarily due to increased amortization relating to our Aran and Oscor customer list intangible assets.

(c)Professional fees increased during the third quarter and first nine months of 2023 primarily due to increased costs associated with third-party information technology services.

(d)Contract services expense increased during the third quarter and first nine months of 2023 compared to the same periods of 2022 primarily due to higher software costs from information technology enhancements.

(e)The increase in bank fees and charges during the third quarter and first nine months of 2023 was driven by increased factoring and supplier financing fees primarily due to the launch of accounts receivable factoring arrangements during the first nine months of of 2023.

RD&E

RD&E expense for the third quarter and first nine months of 2023 was $14.5 million and $50.5 million, respectively, compared to $16.1 million and $47.1 million, respectively, for the third quarter and first nine months of 2022. The decrease in RD&E expense during the third quarter of 2023 compared to the same period in 2022, was primarily due to the timing of RD&E associates supporting product development contracts with customers. The increase in RD&E expense during first nine months of 2023 compared to the same period in 2022, was primarily due to higher labor costs attributed to annual merit increases and higher incentive compensation. 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

Restructuring and Other Charges

We continuously evaluate our business and identify opportunities to realign resources to better serve our customers and markets, improve operational efficiency and capabilities, and lower operating costs. To realize the benefits associated with these opportunities, we undertake restructuring-type activities to transform our business. We incur costs associated with these activities, which primarily include exit and disposal costs and other costs directly related to the restructuring initiative. In addition, from time to time, we incur costs associated with acquiring and integrating businesses, and certain other general expenses, including asset impairments.

Restructuring and other charges comprise the following (in thousands):


	Three Months Ended				Nine Months Ended
	September 29, 2023		September 30, 2022		September 29, 2023		September 30, 2022
Restructuring charges(a)	$	35	$	1,919	$	2,035	$	3,017
Acquisition and integration costs(b)	777		597		1,715		5,866
Other general expenses(c)	28		626		137		1,127
Total restructuring and other charges	$	840	$	3,142	$	3,887	$	10,010

__________

(a)Restructuring charges for the first nine months of 2023 and 2022 primarily consist of termination benefits associated with our operational excellence and strategic reorganization and alignment initiatives.

(b)Amounts include expenses related to the purchase of certain assets and liabilities from business acquisitions. Acquisition and integration costs for the first nine months of 2023 and 2022 include a benefit of $0.5 million and $0.3 million, respectively, to adjust the fair value of acquisition-related contingent consideration liabilities. See Note 13 “Financial Instruments and Fair Value Measurements” for additional information related to the fair value measurement of the contingent consideration. Amounts for 2022 primarily include expenses related to the Aran and Oscor acquisitions.

(c)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.

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

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Interest Expense

Information relating to our interest expense is as follows (dollars in thousands):


	Three Months Ended
	September 29, 2023				September 30, 2022				Change
	Amount		Rate		Amount		Rate		Amount		Rate (bp)
Contractual interest expense	$	10,939	4.42	%	$	10,102	4.24	%	$	837	18
Gain on interest rate swap	—		—		(4)		—		4		—
Amortization of deferred debt issuance costs and original issue discount	921		0.45		482		0.23		439		22
Losses from extinguishment of debt	87		0.04		—		—		87		4
Interest expense on borrowings	11,947		4.91	%	10,580		4.47	%	1,367		44
Other interest expense	20				96				(76)
Total interest expense	$	11,967			$	10,676			$	1,291



	Nine Months Ended
	September 29, 2023				September 30, 2022				Change
	Amount		Rate		Amount		Rate		Amount		Rate (bp)
Contractual interest expense	$	34,560	4.60	%	$	21,428	3.09	%	$	13,132	151
(Gain) loss on interest rate swap	(1,262)		(0.16)		1,289		0.19		(2,551)		(35)
Amortization of deferred debt issuance costs and original issue discount	2,608		0.41		1,445		0.23		1,163		18
Losses from extinguishment of debt	4,518		0.62		—		—		4,518		62
Interest expense on borrowings	40,424		5.47	%	24,162		3.51	%	16,262		196
Other interest expense	256				255				1
Total interest expense	$	40,680			$	24,417			$	16,263

During 2023, contractual interest expense has increased due to higher average debt outstanding combined with increasing applicable interest rates. The higher average debt balance outstanding is the result of incremental borrowings related to the strategic change to replace some of our variable rate debt to fixed rate through issuance of the 2028 Notes. Interest rates have continued to climb due to increases in overall market rates, partially offset by a 25 basis point decrease in the interest rate margin on our Senior Secured Credit Facilities. The decrease in the interest rate margin was effective during the second quarter of 2023 based on our Secured Net Leverage Ratio.

Other components of interest expense on borrowings include gains and losses on interest rate swaps and non-cash amortization and write-off (losses from extinguishment of debt) of deferred debt issuance costs and original issue discount. Interest rate swap includes realized (gains) losses on our interest rate swap contract which fluctuate depending on the spread between the rate swap contract fixed rate and senior secured credit facility floating rate. Our outstanding interest rate swap matured as of June 30, 2023. Amortization of deferred debt issuance costs and original issue discount increased during 2023 compared to the same periods in 2022 as a result of higher unamortized balances related to new debt. The losses from extinguishment of debt during the first nine months of 2023 were related to prepayments of portions of the Term Loan A facility and full repayment of our Term Loan B facility in connection with issuance of the convertible notes. We had no losses from extinguishment of debt during the first nine months of 2022.

As of September 29, 2023 and December 31, 2022, approximately 52% and 11%, respectively, of our principal amount of debt are fixed rate borrowings or have been converted to fixed-rate borrowings with an interest rate swap. During February 2023, we strategically replaced about half of our variable rate debt with fixed rate debt through the issuance of the 2028 Notes at a fixed rate of 2.125% and paying down our highest rate variable debt, the Term Loan B facility, and a portion of our Revolving Credit Facility. These transactions are expected to mitigate increased borrowing costs and result in a more balanced mix of fixed and floating rates to help protect against interest rate exposure. We may enter into interest rate swap agreements in order to reduce our exposure to fluctuations in floating rates.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

See Note 6 “Debt” and 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 debt and interest rate swap agreement.

Loss on Equity Investments

During the third quarter and first nine months of 2023, we recognized a loss on equity investments of $3.5 million. During the third quarter and first nine months of 2022, we recognized losses of $2.9 million and $5.6 million, respectively. During the third quarter of 2023, we recognized an impairment charge of $3.3 million related to an investment in one of our non-marketable equity securities. The residual amounts for 2023 and 2022 relate to our share of equity method investee losses including unrealized appreciation/depreciation of the underlying interests of the investee. As of September 29, 2023 and December 31, 2022, the carrying value of our equity investments was $10.4 million and $13.9 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 (Gain) Loss, Net

Other (gain) loss, net for the third quarter and first nine months of 2023 were losses of $0.6 million and $1.7 million, respectively, compared to gains of $1.3 million and $0.9 million, respectively, for the third quarter and first nine months of 2022. Other (gain) 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, Dominican peso, or Israeli shekel.

The impact of exchange rates on transactions denominated in foreign currencies included in Other (gain) loss, net for the third quarter and first nine months of 2023 were net losses of $0.5 million and $1.7 million, respectively, compared to gains of $1.6 million and $1.1 million for the third quarter and first nine months of 2022, 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 $4.8 million for the third quarter of 2023 on $32.1 million of income before taxes (effective tax rate of 15.0%), compared to an income tax expense of $0.9 million on $17.0 million of income before taxes (effective tax rate of 5.5%) for the same period of 2022. The income tax expense for the first nine months of 2023 was $13.7 million on $78.0 million of income before taxes (effective tax rate of 17.5%), compared to income tax expense of $7.1 million on income before taxes of $55.4 million (effective tax rate of 12.8%) for the same period of 2022. Income tax expense for the third quarter and first nine months of 2023 included discrete tax benefits of $0.8 million and $0.4 million, respectively. The discrete tax benefits for the third quarter and first nine months of 2023 are predominately related to favorable return to provision adjustments attributable to the 2022 U.S. tax return. The remainder of the discrete tax amounts relate predominately to excess tax benefits recognized upon vesting of RSUs during those periods partially offset by tax expense from shortfalls recorded for the forfeiture of certain PRSUs, as well as unfavorable return to provision adjustments attributable to certain foreign tax returns for the 2022 tax year. Income tax expense for the third quarter and first nine months of 2022 included $0.7 million and $0.2 million, respectively, of discrete tax benefits. The discrete tax benefit for the third quarter and the first nine months of 2022 predominately relates to favorable return to provision adjustments attributable to the 2021 tax year.

Our effective tax rate for 2023 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of Federal Tax Credits (including R&D credits and Foreign tax credits), stock-based compensation windfalls or shortfalls, and the impact of U.S taxes on foreign earnings, including the GILTI provision which requires us to include foreign subsidiary earnings in excess of a deemed return on a foreign subsidiary’s tangible assets in our U.S. income tax return. The U.S. tax on foreign earnings is reflected net of a statutory deduction of 50% of the GILTI inclusion (subject to limitations based on U.S. taxable income, if any) and net of FDII that provides a 37.5% deduction to domestic companies for certain foreign sales and services income. In addition, our rate is impacted by earnings realized in foreign jurisdictions with statutory rates that are different than the U.S. federal statutory rate. The primary foreign jurisdictions in which we operate and the statutory tax rate for each respective jurisdiction include Switzerland (22%), Mexico (30%), Uruguay (25%), Ireland (12.5%) and Malaysia (24%). We had been operating under a tax holiday in Malaysia, however this expired in April 2023. We acquired manufacturing operations in the Dominican Republic as part of the acquisition of Oscor, and are operating under a free trade zone agreement in the Dominican Republic through March 2034.

There is a potential for volatility of our effective tax rate due to several factors, including changes in the mix of pre-tax income and the jurisdictions to which it relates, business acquisitions, settlements with taxing authorities, changes in tax rates, and foreign currency exchange rate fluctuations. We continue to closely monitor developments related to proposed changes in tax laws and tax rates. We are currently assessing the potential impact of The Pillar II Model Rules and the corresponding 15% Global Minimum Tax in anticipation of the January 1, 2024 effective date for jurisdictions that have already enacted laws complying with the Pillar II framework. In addition, we continue to explore planning opportunities that may have a material impact on our effective tax rate.

Liquidity and Capital Resources

Sources of Liquidity


(dollars in thousands)	September 29, 2023		December 31, 2022
Cash and cash equivalents	$	32,142	$	24,272
Working capital	$	406,243	$	334,546
Current ratio	3.00		2.50

Cash and cash equivalents at September 29, 2023 increased by $7.9 million from December 31, 2022, primarily as a result of cash generated by operating activities, which includes the benefit of accelerated customer collections from new factoring arrangements, partially offset by purchases of property, plant and equipment and net payments on long-term debt and contingent consideration.

Working capital increased by $71.7 million from December 31, 2022, or $63.8 million excluding the increase in cash and cash equivalents. The increase in working capital, exclusive of cash and cash equivalents, primarily relates to positive working capital fluctuations in inventory, contract assets and current portion of long-term debt. Inventory increased to support higher product demand and sales volume and current portion of long-term debt decreased from accelerated payments under our Senior Secured Credit Facility.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

At September 29, 2023, $26.8 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.

As of September 29, 2023, our capital structure consisted of $941.4 million of debt, net of deferred debt issuance costs and unamortized discounts and 33 million shares of common stock outstanding. As of September 29, 2023, we had access to $415.3 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 September 29, 2023, our contractual debt service obligations for the remainder of 2023, consisting of interest on our outstanding debt, are estimated to be approximately $8 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. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all.

Credit Facilities and Convertible Notes

As of September 29, 2023, we had Senior Secured Credit Facilities that consist of a $500 million Revolving Credit Facility, with an outstanding principal balance of $81 million, and a TLA Facility with an outstanding principal balance of $375 million. The Revolving Credit Facility and TLA Facility mature on February 15, 2028. The Senior Secured Credit Facilities include a mandatory prepayment provision customary for credit facilities of its nature.

During the first quarter of 2023, we issued $500 million aggregate principal amount of notes. The 2028 Notes mature on February 15, 2028 and bear interest at a fixed rate of 2.125% per annum. The total net proceeds from the issuance of the 2028 Notes, after deducting initial purchasers' discounts and commissions and debt issuance costs, were approximately $485 million. We used the net proceeds from the issuance of the 2028 Notes to settle in full principal and interest due of $336.1 million under the TLB Facility, pay down principal and interest due of $113.9 million under the Revolving Credit Facility, to pay related fees and expenses, and to pay the cost of the capped calls related to the issuance of our 2028 Notes.

The Revolving Credit Facility and TLA Facility contain covenants requiring that we maintain (i) a Total Net Leverage Ratio not to exceed 5.00:1.00, 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 September 29, 2023, we were in compliance with these financial covenants. As of September 29, 2023, our Total Net Leverage Ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.7:1.0. For the twelve month period ended September 29, 2023, our interest coverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 7.7:1.0.

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.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Summary of Cash Flow


	Nine Months Ended
(in thousands)	September 29, 2023		September 30, 2022
Cash provided by (used in):
Operating activities	$	124,626	$	64,779
Investing activities	(82,785)		(169,098)
Financing activities	(35,537)		106,412
Effect of foreign currency exchange rates on cash and cash equivalents	1,566		209
Net change in cash and cash equivalents	$	7,870	$	2,302

Operating Activities – During the first nine months of 2023, we generated cash from operations of $124.6 million, compared to $64.8 million for the first nine months of 2022. The increase of $59.8 million was the result of a $39.2 million increase in cash flow provided by changes in operating assets and liabilities and a $20.6 million increase in net income adjusted for non-cash items such as depreciation and amortization.

The increase in net income adjusted for non-cash items such as depreciation and amortization is primarily from higher sales volume partially offset by higher interest expense. The increase associated with changes in operating assets and liabilities is primarily related to less accounts receivable, inventory and accounts payable growth. Accounts receivable benefited from new factoring arrangements entered into during the first nine months of 2023 that accelerated accounts receivable collections. Factoring activity on accounts receivable provided an increase of approximately $30 million in cash generated from operating activities during the first nine months of 2023. Inventory growth was high in the first nine months of 2022 from investments to support growth and protect against supply chain risk, while accounts payable yielded less benefit to cash flow in the first nine months of 2023 from the timing of supplier payments and lower inventory growth.

Investing Activities – The $86.3 million decrease in net cash used in investing activities was primarily attributable to lower cash paid for acquisitions, partially offset by increased purchases of property, plant and equipment of $82.9 million in the first nine months of 2023, compared to $43.1 million in the same period last year. Investing activities for the second quarter of 2022 included net cash paid of $126.6 million for the Aran acquisition and settlement of working capital and other closing adjustments with Oscor.

Financing Activities – Net cash used in financing activities for the first nine months of 2023, was $35.5 million compared to net cash provided by financing activities of $106.4 million for the first nine months of 2022. The cash used in financing activities for the first nine months of 2023 was primarily related to the $335.6 million full repayment of our term loan B facility, $80.3 million in repayments of our term loan A facility, $59.4 million of net payments on our Revolving Credit Facility, $35.0 million of capped call purchases related to the issuance of our 2028 Notes, and $7.7 million paid to settle certain contingent consideration liabilities related to the Aran and Inomec acquisitions, which was partially offset by the issuance of our 2028 Notes of $486.3 million. The net cash inflow for 2022 included $160.0 million in borrowings on the revolving line of credit primarily to fund the Aran acquisition.

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 FASB, SEC, 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.

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INTEGER HOLDINGS CORPORATION

MANAGEMENT'S DISCUSSION AND ANALYSIS

Critical Accounting Policies and Estimates

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

There have been no significant changes to the critical accounting policies and estimates as compared to those disclosed in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2022.

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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, 2022.

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 September 29, 2023. 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 September 29, 2023, 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.

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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 September 29, 2023, 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, 2022.

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, 2022.

ITEM 5.OTHER INFORMATION

During the fiscal quarter ended September 29, 2023, none of the Company’s directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”

ITEM 6.EXHIBITS


Exhibit Number						Description

10.1#*						Employment Offer Letter, dated October 4, 2023, between Integer Holdings Corporation and Diron Smith.











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.

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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 26, 2023

INTEGER HOLDINGS CORPORATION

By:

/s/ Joseph W. Dziedzic

Joseph W. Dziedzic

President and Chief Executive Officer

(Principal Executive Officer)

By:

/s/ Diron Smith

Diron Smith

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)

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. junior Avg

Integer (ITGR) 10-Q2023 Q3 Quarterly report

Content analysis