INTEGER HOLDINGS CORP, 10-Q filed on 5/3/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 29, 2019
Apr. 26, 2019
Document and Entity Information [Abstract]    
Entity Registrant Name INTEGER HOLDINGS CORPORATION  
Entity Central Index Key 0001114483  
Document Type 10-Q  
Document Period End Date Mar. 29, 2019  
Amendment Flag false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Current Fiscal Year End Date --01-03  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   32,621,376
Entity Small Business false  
Entity Emerging Growth Company false  
v3.19.1
Condensed Consolidated Balance Sheets - Unaudited - USD ($)
$ in Thousands
Mar. 29, 2019
Dec. 28, 2018
Current assets:    
Cash and cash equivalents $ 13,538 $ 25,569
Accounts receivable, net of allowance for doubtful accounts of $0.6 million and $0.5 million, respectively 216,756 185,501
Inventories 181,200 190,076
Prepaid expenses and other current assets 25,696 15,104
Total current assets 437,190 416,250
Property, plant and equipment, net 229,938 231,269
Goodwill 829,306 832,338
Other intangible assets, net 798,918 812,338
Deferred income taxes 3,938 3,937
Operating Lease Assets, Current 39,136 0
Other assets 28,765 30,549
Total assets 2,367,191 2,326,681
Current liabilities:    
Current portion of long-term debt 37,500 37,500
Accounts payable 72,172 57,187
Income taxes payable 9,950 9,393
Accrued expenses 51,881 60,490
Total current liabilities 171,503 164,570
Long-term debt 874,158 888,007
Deferred income taxes 203,140 203,910
Operating Lease, Liability, Noncurrent 33,760 0
Other long-term liabilities 8,658 9,701
Total liabilities 1,291,219 1,266,188
Stockholders’ equity:    
Common stock, $0.001 par value; 100,000,000 shares authorized; 32,501,709 and 31,977,953 shares issued, respectively; 32,382,687 and 31,871,427 shares outstanding, respectively 33 33
Additional paid-in capital 694,910 691,083
Treasury stock, at cost, 119,022 and 106,526 shares, respectively (10,026) (8,125)
Retained earnings 365,591 344,498
Accumulated other comprehensive income 25,464 33,004
Total stockholders’ equity 1,075,972 1,060,493
Total liabilities and stockholders’ equity $ 2,367,191 $ 2,326,681
v3.19.1
Condensed Consolidated Balance Sheets - Unaudited (Parenthetical) - USD ($)
$ in Millions
Mar. 29, 2019
Dec. 28, 2018
Current assets:    
Allowance for doubtful accounts $ 0.6 $ 0.6
Stockholders’ equity:    
Common stock, par value $ 0.001 $ 0.001
Common stock, shares authorized 100,000,000 100,000,000
Common stock, shares issued 32,788,062 32,624,494
Common stock, shares outstanding 32,617,241 32,473,167
Treasury stock, shares 170,821 151,327
v3.19.1
Condensed Consolidated Statements of Operations - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Income Statement [Abstract]    
Sales $ 314,676 $ 292,426
Cost of sales 226,066 208,894
Gross profit 88,610 83,532
Operating expenses:    
Selling, general and administrative expenses 34,956 36,429
Research, development and engineering costs 11,595 13,276
Other operating expenses 2,890 3,784
Total operating expenses 49,441 53,489
Operating income 39,169 30,043
Interest expense 13,830 15,595
(Gain) loss on cost and equity method investments, net 41 (4,970)
Other loss, net 166 960
Income (loss) from continuing operations before taxes 25,132 18,458
Provision (benefit) for income taxes 3,766 5,374
Income (loss) from continuing operations 21,366 13,084
Income (loss) from discontinued operations before taxes 386 (6,249)
Discontinued operations:    
Gain on sale of discontinued operations 83 (1,283)
Income (loss) from discontinued operations 303 (4,966)
Net income $ 21,669 $ 8,118
Basic earnings (loss) per share:    
Income from continuing operations (in dollars per share) $ 0.66 $ 0.41
Loss from discontinued operations (in dollars per share) 0.01 (0.16)
Basic (in dollars per share) 0.67 0.25
Diluted earnings (loss) per share:    
Income from continuing operations (in dollars per share) 0.65 0.40
Loss from discontinued operations (in dollars per share) 0.01 (0.15)
Diluted (in dollars per share) $ 0.66 $ 0.25
Weighted average shares outstanding:    
Basic (in shares) 32,536 31,902
Diluted (in shares) 32,980 32,423
v3.19.1
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Thousands
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Statement of Comprehensive Income [Abstract]    
Net income (loss) $ 21,669 $ 8,118
Other comprehensive income (loss):    
Foreign currency translation gain (6,838) 13,441
Net change in cash flow hedges, net of tax (702) 3,409
Other comprehensive income (7,540) 16,850
Comprehensive income $ 14,129 $ 24,968
v3.19.1
Condensed Consolidated Statements of Cash Flows - Unaudited - USD ($)
$ in Thousands
3 Months Ended
Mar. 29, 2019
Mar. 30, 2018
Cash flows from operating activities:    
Net income (loss) $ 21,669 $ 8,118
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 19,658 26,334
Debt related amortization and extinguishment fees included in interest expense 1,774 2,871
Stock-based compensation 2,713 3,222
Non-cash (gain) loss on cost and equity method investments 41 (4,970)
Other non-cash (gains) losses (1,075) 123
Deferred income taxes 96 3,181
Changes in operating assets and liabilities:    
Accounts receivable (30,924) 1,008
Inventories 8,612 (11,442)
Prepaid expenses and other current assets (12,402) 2,810
Accounts payable 15,411 22,466
Accrued expenses (15,894) (6,031)
Income taxes 1,555 (1,568)
Net cash provided by operating activities 11,234 46,122
Cash flows from investing activities:    
Acquisition of property, plant and equipment (7,447) (10,959)
Proceeds from sale of property, plant and equipment 2 898
Purchase of cost and equity method investments (42) 0
Net cash provided by (used in) investing activities (7,487) (10,061)
Cash flows from financing activities:    
Principal payments of long-term debt (30,375) (50,032)
Proceeds from issuance of long-term debt 15,000 0
Proceeds from the exercise of stock options 1,338 1,006
Tax withholdings related to net share settlements of restricted stock unit awards (2,123) (2,188)
Net cash used in financing activities (16,160) (51,214)
Effect of foreign currency exchange rates on cash and cash equivalents 382 545
Net decrease in cash and cash equivalents (12,031) (14,608)
Cash and cash equivalents, beginning of period 25,569 44,096
Cash and cash equivalents, end of period 13,538 29,488
Total cash and cash equivalents, end of period 25,569 44,096
Noncash investing and financing activities:    
Property, plant and equipment purchases included in accounts payable $ 2,146 $ 2,007
v3.19.1
Condensed Consolidated Statement of Stockholders' Equity - Unaudited - USD ($)
shares in Thousands, $ in Thousands
Total
Common Stock [Member]
Additional Paid-in Capital [Member]
Treasury Stock [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Balance, shares at Dec. 29, 2017   (31,978)   (107)    
Balance at Dec. 29, 2017 $ 893,381 $ 32 $ 669,756 $ (4,654) $ 176,068 $ 52,179
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) 8,118       8,118  
Other comprehensive loss, net 16,850         16,850
Stock-based compensation 3,222   3,222      
Net shares issued, shares   160   (20)    
Net shares issued (1,182) $ 0 128 $ (1,310)    
Balance, shares at Mar. 30, 2018   (32,138)   (127)    
Balance at Mar. 30, 2018 920,389 $ 32 673,106 $ (5,964) 184,186 69,029
Balance, shares at Dec. 28, 2018   (32,624)   (151)    
Balance at Dec. 28, 2018 1,060,493 $ 33 691,083 $ (8,125) 344,498 33,004
Increase (Decrease) in Stockholders' Equity [Roll Forward]            
Net income (loss) 21,669       21,669  
Other comprehensive loss, net (7,540)         (7,540)
Stock-based compensation 2,713   2,713      
Net shares issued, shares   164   (20)    
Net shares issued (787) $ 0 1,114 $ (1,901)    
Balance, shares at Mar. 29, 2019   (32,788)   (171)    
Balance at Mar. 29, 2019 1,075,972 $ 33 694,910 $ (10,026) 365,591 $ 25,464
Cumulative Effect of New Accounting Principle in Period of Adoption $ (576)   $ 0   $ (576)  
v3.19.1
Basis of Presentation
3 Months Ended
Mar. 29, 2019
Accounting Policies [Abstract]  
BASIS OF PRESENTATION
BASIS OF PRESENTATION
Integer Holdings Corporation (together with its consolidated subsidiaries, “Integer” or the “Company”) is a publicly traded corporation listed on the New York Stock Exchange under the symbol “ITGR.” Integer is one of the largest medical device outsource manufacturers in the world serving the cardiac, neuromodulation, vascular, orthopedics, advanced surgical and portable medical markets. The Company provides innovative, high-quality medical technologies that enhance the lives of patients worldwide. In addition, it develops batteries for high-end niche applications in the energy, military, and environmental markets. The Company’s reportable segments are: (1) Medical and (2) Non-Medical. The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.
On May 3, 2018, the Company entered into a definitive agreement to sell the Advanced Surgical and Orthopedic product lines (the “AS&O Product Line”) within its Medical segment to Viant (formerly MedPlast, LLC), and on July 2, 2018 completed the sale.  The results of operations of the AS&O Product Line are reported as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The Condensed Consolidated Statements of Cash Flows includes cash flows related to the discontinued operations due to Integer’s (parent) centralized treasury and cash management processes, and, accordingly, cash flow amounts for discontinued operations are disclosed in Note 2 “Discontinued Operations and Divestiture.” All results and information in the condensed consolidated financial statements are presented as continuing operations and exclude the AS&O Product Line unless otherwise noted specifically as discontinued operations. Refer to Note 2 “Discontinued Operations and Divestiture” for additional information.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented. Intercompany transactions and balances have been fully eliminated in consolidation.
Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, certain components of equity, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2018.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The first quarter of 2019 and 2018 each contained 13 weeks and ended on March 29 and March 30, respectively. The Company’s 2019 fiscal year will end on January 3, 2020 and will be a fifty-three week period. Fiscal year 2018 ended on December 28, 2018 and was a fifty-two week period.
Recent Accounting Pronouncements
The Company considers the applicability and impact of all Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board ("FASB"). ASUs not yet adopted that are not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated result of operations, financial position and cash flows. With the exception of the accounting pronouncements adopted as discussed below, there have been no new or material changes to the significant accounting policies discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2018, that are of significance, or potential significance, to the Company.
(1.)     BASIS OF PRESENTATION (Continued)
Recently Adopted Accounting Guidance
Adoption of ASC Topic 842
Effective December 29, 2018, the Company adopted Accounting Standards Codification (“ASC”) 842, Leases, which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The Company elected to transition to ASC 842 using the option to not restate comparative periods and apply the standard as of the date of initial application. In addition, certain practical expedients were elected which permit the Company to not reassess whether existing contracts are or contain leases, to not reassess the lease classification of any existing leases, and to not reassess initial direct costs for any existing leases. The Company also elected the practical expedient to not separate lease and non-lease components for all classes of underlying assets and the practical expedient related to land easements, allowing the Company to carry-forward its accounting treatment for land easements on existing agreements. The Company did not elect the practical expedient pertaining to the use of hindsight. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet for all classes of underlying assets.
As a result of the adoption of ASC 842, the Company recognized operating lease right-of-use assets of $40.9 million and lease liabilities of $43.4 million on December 29, 2018. The difference between the lease assets and lease liabilities primarily represents the existing prepaid rent assets, deferred rent liabilities, and tenant improvement allowances, along with a cumulative-effect adjustment to beginning retained earnings. The adoption of ASC 842 did not have a material impact on our Condensed Consolidated Statement of Operations and Condensed Consolidated Statement of Cash Flows for the three month period ended March 29, 2019.
Refer to Note 11 “Leases” for additional information on the Company’s leases.
Adoption of ASU 2017-12
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 amends the designation and measurement guidance for qualifying hedging transactions and the presentation of hedge results in an entity’s financial statements. The new guidance removes the concept of separately measuring and reporting hedge ineffectiveness and requires a company to present the earnings effect of the hedging instrument, including any ineffectiveness, in the same income statement line item in which the earnings effect of the hedged item is reported.
ASU 2017-12 continues to allow an entity to exclude the time value of options and forward points from the assessment of hedge effectiveness. For excluded components in cash flow hedges, the base recognition model under this ASU is an amortization approach. An entity still may elect to record changes in the fair value of the excluded component currently in earnings; however, such an election will need to be applied consistently to similar hedges. The Company has elected to continue to record changes in the fair value of the excluded components of its derivative instruments currently in earnings given their highly effective nature.
Finally, this ASU continues to require an initial prospective quantitative hedge effectiveness assessment and documentation at hedge inception. However, if certain criteria are met, entities can elect to subsequently perform prospective and retrospective effectiveness assessments qualitatively, unless facts and circumstances change, and the hedge effectiveness assessment generally does not need to be completed until the first quarterly hedge effectiveness assessment date (i.e., up to three months).
The Company adopted ASU 2017-12 on December 29, 2018, the first day of the Company’s 2019 fiscal year, and did not materially affect the Company’s results of operations. The Company adopted the guidance on the modified retrospective basis and did not recognize a cumulative effect adjustment upon adoption as the Company had not recognized ineffectiveness on any of the hedging instruments existing as of the date of adoption. Refer to Note 14 “Financial Instruments and Fair Value Measurements” for additional information and disclosures of the Company’s derivatives and hedging activities.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in ASU 2018-16 permit the use of the OIS rate based on SOFR as a benchmark interest rate for hedge accounting purposes under Topic 815. The amendments in this update were effective for fiscal years beginning after December 15, 2018. The Company adopted this guidance prospectively as of December 29, 2018, concurrent with the adoption of ASU 2017-12, to be applied on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after the date of adoption. Adoption of this guidance had no impact on the Condensed Consolidated Financial Statements.
v3.19.1
Discontinued Operations
3 Months Ended
Mar. 29, 2019
Discontinued Operations and Disposal Groups [Abstract]  
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS AND DIVESTITURE
On May 3, 2018, the Company entered into a definitive agreement to sell its AS&O Product Line to Viant, and on July 2, 2018, completed the sale, collecting cash proceeds of approximately $581 million, which is net of transaction costs and adjustments set forth in the definitive agreement. In connection with the sale, the parties executed a transition services agreement whereby the Company will provide certain corporate services (including accounting, payroll, and information technology services) to Viant for a period of up to one year from the date of the closing to facilitate an orderly transfer of business operations. Viant will pay Integer for these services, with such payments varying in amount and length of time as specified in the transition services agreement. The Company recognized $1.7 million of income under the transition services agreement for the performance of services during the first quarter of fiscal 2019, of which $0.1 million is within Cost of sales and $1.6 million is within Selling, general and administrative expenses. In addition, the parties executed long-term supply agreements under which the Company and Viant have agreed to supply the other with certain products at prices specified in the agreements for a term of three years.
In connection with the closing of the transaction, the Company recognized a pre-tax gain on sale of discontinued operations of $194.7 million during the year ended December 28, 2018. On April 14, 2019, the Company agreed to a net working capital adjustment with Viant, whereby Viant will pay the Company $4.8 million on or before June 14, 2019. The final net working capital adjustment will be recognized as an increase to the gain on sale from discontinued operations, net of the estimated income tax consequences, during the quarter ending June 28, 2019. Additionally, the income taxes associated with the gain on sale will be impacted by the final allocation of the sales price, which must be agreed to with Viant as required in the definitive agreement. The final allocation may be materially different from the Company’s estimates. The impact of any changes in estimated income taxes resulting from the final allocation, which will be reflected in the filed corporate income tax return, will be recorded as an adjustment to discontinued operations during the quarter in which they are concluded.
The operating results of the AS&O Product Line have been classified as discontinued operations in the Condensed Consolidated Statements of Operations for all periods presented. The discontinued operations of the AS&O Product Line are reported in the Medical segment. Income (loss) from discontinued operations, net of taxes, were as follows (in thousands):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Sales
$

 
$
89,319

Cost of sales

 
77,081

Gross profit

 
12,238

Selling, general and administrative expenses

 
4,809

Research, development and engineering costs

 
1,262

Other operating expenses

 
1,493

Interest expense

 
10,850

Other (income) loss, net
(386
)
 
73

Income (loss) from discontinued operations before income taxes
386

 
(6,249
)
Provision (benefit) for income taxes
83

 
(1,283
)
Income (loss) from discontinued operations
$
303

 
$
(4,966
)

Cash flow information from discontinued operations was as follows (in thousands):
 
 
 
 
 
Three Months Ended
 
 
 
 
 
March 29,
2019
 
March 30,
2018
Cash provided by (used in) operating activities
 
 
 
 
$
(58
)
 
$
7,299

Cash used in investing activities
 
 
 
 

 
(2,617
)
 
 
 
 
 
 
 


Depreciation and amortization
 
 
 
 
$

 
$
5,718

Capital expenditures
 
 
 
 

 
2,631

v3.19.1
Inventories
3 Months Ended
Mar. 29, 2019
Inventory Disclosure [Abstract]  
INVENTORIES
INVENTORIES
Inventories are comprised of the following (in thousands):
 
March 29,
2019
 
December 28,
2018
Raw materials
$
78,005

 
$
80,213

Work-in-process
73,299

 
75,711

Finished goods
29,896

 
34,152

Total
$
181,200

 
$
190,076

v3.19.1
Goodwill and Other Intangible Assets, Net
3 Months Ended
Mar. 29, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the three months ended March 29, 2019 were as follows (in thousands):
 
Medical
 
Non- Medical
 
Total
December 28, 2018
$
815,338

 
$
17,000

 
$
832,338

Foreign currency translation
(3,032
)
 

 
(3,032
)
March 29, 2019
$
812,306

 
$
17,000

 
$
829,306


Intangible Assets
Intangible assets at March 29, 2019 and December 28, 2018 were as follows (in thousands):
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
March 29, 2019
 
 
 
 

Definite-lived:
 
 
 
 
 
Purchased technology and patents
$
240,939

 
$
(128,528
)
 
$
112,411

Customer lists
707,088

 
(110,880
)
 
596,208

Other
3,503

 
(3,492
)
 
11

Total
$
951,530

 
$
(242,900
)
 
$
708,630

Indefinite-lived:
 
 
 
 
 
Trademarks and tradenames


 
 
 
$
90,288

 
 
 
 
 
 
December 28, 2018
 
 
 
 

Definite-lived:
 
 
 
 
 
Purchased technology and patents
$
241,726

 
$
(125,540
)
 
$
116,186

Customer lists
710,406

 
(104,556
)
 
605,850

Other
3,503

 
(3,489
)
 
14

Total
$
955,635

 
$
(233,585
)
 
$
722,050

Indefinite-lived:
 
 
 
 
 
Trademarks and tradenames


 
 
 
$
90,288


Aggregate intangible asset amortization expense is comprised of the following (in thousands):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Cost of sales
$
3,262

 
$
3,716

Selling, general and administrative expenses
6,592

 
6,898

Research, development and engineering costs

 
39

Total intangible asset amortization expense
$
9,854

 
$
10,653


Estimated future intangible asset amortization expense based on the carrying value as of March 29, 2019 is as follows (in thousands):
 
2019
 
2020
 
2021
 
2022
 
2023
 
After 2023
Amortization Expense
$
30,186

 
40,318

 
39,468

 
38,438

 
36,598

 
523,622

v3.19.1
Debt
3 Months Ended
Mar. 29, 2019
Debt Disclosure [Abstract]  
DEBT
DEBT
Long-term debt is comprised of the following (in thousands):
 
March 29,
2019
 
December 28,
2018
Senior secured term loan A
$
295,312

 
$
304,687

Senior secured term loan B
611,286

 
632,286

Revolving line of credit
20,000

 
5,000

Unamortized discount on term loan B and debt issuance costs
(14,940
)
 
(16,466
)
Total debt
911,658

 
925,507

Current portion of long-term debt
(37,500
)
 
(37,500
)
Total long-term debt
$
874,158

 
$
888,007


The Company has senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a revolving credit facility (the “Revolving Credit Facility”) with $200 million borrowing capacity as described below, (ii) a $295 million term loan A facility (the “TLA Facility”), and (iii) a $611 million term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB Facility was issued at a 1% discount.
Revolving Credit Facility
The Revolving Credit Facility matures on October 27, 2020. The Revolving Credit Facility also includes a $15 million sublimit for swingline loans and a $25 million sublimit for standby letters of credit. The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.175% and 0.25%, depending on the Company’s Total Net Leverage Ratio (as defined in the Senior Secured Credit Facilities agreement). Interest rates on the Revolving Credit Facility, as well as the TLA Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s Total Net Leverage Ratio, or (ii) the applicable LIBOR rate plus the applicable margin, which will range between 1.75% and 3.25%, based on the Company’s Total Net Leverage Ratio.
As of March 29, 2019, the Company had $20 million of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity of $173.2 million after giving effect to $6.8 million of outstanding standby letters of credit. As of March 29, 2019, the weighted average interest rate on outstanding borrowings under the Revolving Credit Facility was 5.00%.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 2.00% or (ii) the applicable LIBOR rate plus 3.00%, with LIBOR subject to a 1.00% floor. As of March 29, 2019, the interest rates on the TLA Facility and TLB Facility were 5.00% and 5.49%, respectively.
Covenants
The Revolving Credit Facility and TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 5.00:1.00, subject to periodic step downs beginning in the third quarter of 2019 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 3.00:1.00. The TLB Facility does not contain any financial maintenance covenants. As of March 29, 2019, the Company was in compliance with these financial covenants.
Contractual maturities under the Senior Secured Credit Facilities for the remainder of 2019 and the next three years (through maturity), excluding any discounts or premiums, as of March 29, 2019 are as follows (in thousands):
 
 
2019
 
2020
 
2021
 
2022
Future minimum principal payments
 
$
28,125

 
57,500

 
229,687

 
611,286


The Company prepaid portions of its TLB Facility during 2019 and 2018. The Company recognized losses from extinguishment of debt during the three months ended March 29, 2019 and March 30, 2018 of $0.4 million and $1.1 million, respectively. The loss from extinguishment of debt represents the portion of the unamortized discount and debt issuance costs related to the portion of the TLB Facility that was prepaid and is included in Interest Expense in the accompanying Condensed Consolidated Statements of Operations.
v3.19.1
Benefit Plans
3 Months Ended
Mar. 29, 2019
Defined Benefit Plan [Abstract]  
BENEFIT PLANS
BENEFIT PLANS
The Company is required to provide its employees located in Switzerland and Mexico certain statutorily mandated defined benefits. The following tables set forth the components of the Company’s net periodic expense from continuing operations relating to retirement benefit plans (in thousands):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Service cost
$
54

 
$
52

Interest cost
12

 
11

Amortization of net loss
8

 
11

Expected return on plan assets
(4
)
 
(4
)
Net defined benefit cost
$
70

 
$
70

v3.19.1
Stock-Based Compensation
3 Months Ended
Mar. 29, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
STOCK-BASED COMPENSATION
STOCK-BASED COMPENSATION
The Company maintains certain stock-based compensation plans that were approved by the Company’s stockholders and are administered by the Board of Directors, or the Compensation and Organization Committee of the Board. The stock-based compensation plans provide for the granting of stock options, restricted stock awards (“RSAs”), restricted stock units (“RSUs”), stock appreciation rights and stock bonuses to employees, non-employee directors, consultants, and service providers.
The components and classification of stock-based compensation expense were as follows (in thousands):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Stock options
$
101

 
$
314

RSAs and RSUs (time-based)
1,920

 
1,962

Performance-based RSUs (“PRSUs”)
692

 
707

Stock-based compensation expense - continuing operations
2,713

 
2,983

Discontinued operations

 
239

Total stock-based compensation expense
$
2,713

 
$
3,222

 
 
 
 
Cost of sales
$
317

 
$
176

Selling, general and administrative expenses
2,330

 
2,779

Research, development and engineering costs
66

 
24

Other operating expenses

 
4

Discontinued operations

 
239

Total stock-based compensation expense
$
2,713

 
$
3,222


There were no stock options granted during the three months ended March 29, 2019. The weighted average fair value and assumptions used to value options granted during the three months ended March 30, 2018 are as follows:
 
March 30,
2018
Weighted average fair value
$
14.89

Risk-free interest rate
2.21
%
Expected volatility
39
%
Expected life (in years)
4

Expected dividend yield
%

The following table summarizes the Company’s stock option activity:
 
Number of
Stock
Options
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
(In Years)
 
Aggregate
Intrinsic
Value
(In Millions)
Outstanding at December 28, 2018
522,783

 
$
31.88

 
 
 
 
Exercised
(87,424
)
 
15.30

 
 
 
 
Outstanding at March 29, 2019
435,359

 
$
35.21

 
5.8
 
$
17.5

Exercisable at March 29, 2019
401,044

 
$
34.87

 
5.6
 
$
16.3



(7.)     STOCK-BASED COMPENSATION (Continued)
During the three months ended March 29, 2019, the Company awarded grants to members of its Board of Directors and certain members of management. The Board of Directors received grants of RSUs that vest in equal quarterly installments of 25% on the first day of each quarter of the Company’s 2019 fiscal year. The members of management received either RSUs or a mix of RSUs and PRSUs. The RSUs vest ratably, subject to the recipient’s continuous service to the Company over a period of generally three to four years from the grant date. For the Company's PRSUs, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of financial performance or market-based conditions. The financial performance condition is based on the Company's sales targets. The market conditions are based on the Company’s achievement of a relative total shareholder return (“TSR”) performance requirement, on a percentile basis, compared to a defined group of peer companies over three year performance periods.
The Company uses a Monte Carlo simulation model to determine the grant-date fair value of TSR awards. The grant-date fair value of all other restricted stock awards is equal to the closing market price of Integer common stock on the date of grant.
The weighted average fair value and assumptions used to value the TSR portion of the PRSUs granted are as follows:
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Weighted average fair value
$
123.34

 
$
37.46

Risk-free interest rate
2.49
%
 
2.28
%
Expected volatility
40
%
 
40
%
Expected life (in years)
2.8

 
2.9

Expected dividend yield
%
 
%

The following table summarizes RSA and RSU activity:
 
Time-Vested
Activity
 
Weighted Average Fair Value
Nonvested at December 28, 2018
142,236

 
$
49.78

Granted
74,918

 
87.28

Vested
(11,341
)
 
58.95

Forfeited
(1,580
)
 
42.65

Nonvested at March 29, 2019
204,233

 
$
63.08

The following table summarizes PRSU activity:
 
Performance-
Vested
Activity
 
Weighted
Average
Fair Value
Nonvested at December 28, 2018
287,134

 
$
36.15

Granted
44,875

 
104.70

Vested
(70,115
)
 
28.48

Forfeited
(59,443
)
 
31.59

Nonvested at March 29, 2019
202,451

 
$
55.34

v3.19.1
Other Operating Expenses, Net
3 Months Ended
Mar. 29, 2019
Other Income and Expenses [Abstract]  
OTHER OPERATING EXPENSES, NET
OTHER OPERATING EXPENSES
Other Operating Expenses is comprised of the following (in thousands):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Strategic reorganization and alignment
$
1,734

 
$
2,054

Manufacturing alignment to support growth
585

 
513

Consolidation and optimization initiatives

 
575

Asset dispositions, severance and other
571

 
642

Other operating expenses - continuing operations
2,890

 
3,784

Discontinued operations

 
1,493

Total other operating expenses
$
2,890

 
$
5,277


Strategic Reorganization and Alignment
As a result of the strategic review of its customers, competitors and markets, the Company began taking steps in 2017 to better align its resources in order to enhance the profitability of its portfolio of products. These initiatives include improving its business processes and redirecting investments away from projects where the market does not justify the investment, as well as aligning resources with market conditions and the Company’s future strategic direction. The Company estimates that it will incur aggregate pre-tax charges in connection with the strategic reorganization and alignment plan, including projects reported in discontinued operations, of between approximately $20 million to $22 million, of which an estimated $16 million to $20 million are expected to result in cash outlays. During the three months ended March 29, 2019, the Company incurred charges relating to this initiative which primarily included severance and fees for professional services recorded within the Medical segment. As of March 29, 2019, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $18.2 million. These actions are expected to be substantially completed by the end of 2019.
Manufacturing Alignment to Support Growth
In 2017, the Company initiated several initiatives designed to reduce costs, improve operating efficiencies and increase manufacturing capacity to accommodate growth.  The plan involves the relocation of certain manufacturing operations and expansion of certain of the Company's facilities. The Company estimates that it will incur aggregate pre-tax restructuring related charges in connection with the realignment plan of between approximately $7 million to $9 million, the majority of which are expected to be cash expenditures, and additional cash outlays for capital expenditures of between approximately $2 million to $4 million. Costs related to the Company’s manufacturing alignment to support growth initiative were primarily recorded within the Medical segment. As of March 29, 2019, total expense incurred for this initiative since inception, including amounts reported in discontinued operations, was $4.0 million. These actions are expected to be substantially completed by the end of 2019.
Consolidation and Optimization Initiatives
Costs related to the Company’s consolidation and optimization initiatives were primarily recorded within the Medical segment. The Company does not expect to incur any material additional costs associated with these activities.
The following table summarizes the change in accrued liabilities related to the initiatives described above (in thousands):
 
Severance and Retention
 
Other
 
Total
December 28, 2018
$
1,668

 
$
202

 
$
1,870

Restructuring charges
670

 
1,649

 
2,319

Cash payments
(9
)
 
(1,545
)
 
(1,554
)
March 29, 2019
$
2,329

 
$
306

 
$
2,635


Asset Dispositions, Severance and Other
During the three months ended March 29, 2019 and March 28, 2019, the Company recorded expenses related to other initiatives not described above which relate primarily to integration and operational initiatives to reduce costs and improve operational efficiencies.
v3.19.1
Income Taxes
3 Months Ended
Mar. 29, 2019
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including discrete items, changes in the mix and amount of pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations. In addition, we continue to explore tax planning opportunities that may have a material impact on our effective tax rate.
The Company’s income tax expense and effective tax rate for the three months ended March 29, 2019 and March 30, 2018 were impacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”), which was enacted into law on December 22, 2017.  For further discussion of the provisions and impact of the Tax Reform Act, refer to Note 12 of the Company’s consolidated financial statements included in the Company’s 2018 Annual Report on Form 10-K for the year ended December 28, 2018.
The Company’s worldwide effective tax rate for continuing operations for the first quarters of 2019 and 2018 was 15.0% and 29.1%, respectively. The Company recognized a tax provision of $3.8 million on $25.1 million of income from continuing operations before the provision for income taxes for the first quarter of 2019, compared to a tax provision of $5.4 million on $18.5 million of income from continuing operations before the provision for income taxes for the same period in 2018. The difference between the Company’s effective tax rate and the U.S. federal statutory income tax rate for the first quarter of 2019 is primarily attributable to discrete tax benefits of $1.7 million, which are predominately related to excess tax benefits recognized upon vesting of restricted stock units or exercise of stock options. The Company’s effective tax rate for the first quarter of 2018 differed from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of the GILTI tax. The 2019 estimated annual effective tax rate includes the estimated impact of all Tax Reform Act provisions.
As of March 29, 2019, the balance of unrecognized tax benefits from continuing operations is approximately $5.4 million. It is reasonably possible that a reduction of up to $0.9 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately $5.3 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 29, 2019
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
Litigation
The Company is subject to litigation arising from time to time in the ordinary course of its business. The Company does not expect that the ultimate resolution of any pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future.
In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. Two juries in the U.S. District Court for the District of Delaware have returned verdicts finding that AVX infringed on three of the Company’s patents and awarded the Company $37.5 million in damages. In March 2018, the U.S. District Court for the District of Delaware vacated the original damage award and ordered a retrial on damages. In the January 2019 retrial on damages, the jury awarded the Company $22.2 million in damages. That award is subject to post-trial proceedings. To date, the Company has recorded no gains in connection with this litigation.
Product Warranties
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company does not expect future product warranty claims will have a material effect on its condensed consolidated results of operations, financial position, or cash flows. However, there can be no assurance that any future customer complaints or negative regulatory actions regarding the Company’s products, which the Company currently believes to be immaterial, does not become material in the future. The change in product warranty liability was comprised of the following (in thousands):
December 28, 2018
$
2,600

Additions to warranty reserve
92

Warranty claims settled
(293
)
March 29, 2019
$
2,399

v3.19.1
Leases
3 Months Ended
Mar. 29, 2019
Leases [Abstract]  
Leases
LEASES
The Company primarily leases certain office and manufacturing facilities under operating leases, with additional operating leases for machinery, office equipment and vehicles.  An arrangement is considered to contain a lease if it conveys the right to use an identified asset for a period of time in exchange for consideration.  If it is determined that an arrangement contains a lease, classification of a lease as operating or finance is determined by evaluating the five criteria outlined within ASC 842 at inception. The Company does not currently have any finance leases. The Company’s lease agreements do not contain any residual value guarantees or any material restrictive covenants.
Right-of-use (“ROU”) lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make payments in exchange for that right of use.  Operating lease ROU assets are presented as Operating Lease Assets, the current portion of operating lease liabilities are presented within Accrued Expense and Other Current Liabilities, and the non-current portion of operating lease liabilities are presented as Operating Lease Liabilities on the Condensed Consolidated Balance Sheets. The current portion of operating lease liabilities was $7.7 million as of March 29, 2019. Leases with a term of 12 months or less are not recorded on the balance sheet.
The discount rate implicit within our leases is generally not readily determinable, and therefore, the Company uses its estimated incremental borrowing rate in determining the present value of lease payments.  The incremental borrowing rate is determined based on the Company’s recent debt issuances, lease term and the currency in which lease payments are made.
The Company’s real estate leases often contain options to renew, and less frequently, termination options. The exercise of such renewal and termination options are generally at the Company’s sole discretion.  The Company evaluates renewal and termination options at lease commencement to determine if such options are reasonably certain to be exercised based on economic factors.  As of March 29, 2019, the Company did not have any leases that have not yet commenced.
(11.)     LEASES (Continued)
The following table presents the weighted average remaining lease term and discount rate:
 
March 29,
2019
Weighted-average remaining lease term of operating leases (in years)
6.8

Weighted-average discount rate of operating leases
5.4
%

For certain leases where rent escalates based upon a change in a financial index, such as the Consumer Price Index, the difference between the rate at lease inception and the subsequent fluctuations in that rate are included in variable lease costs.  Additionally, because the Company has elected to not separate lease and non-lease components, variable costs also include payments to the landlord for common area maintenance, real estate taxes, insurance and other operating expenses.  Lease expense is recognized on a straight-line basis over the lease term, with variable lease payments recognized in the period those payments are incurred.
The components and classification of lease expense for the three months ended March 29, 2019 are as follows (in thousands):
Operating lease cost
$
2,449

Short-term lease cost
17

Variable lease cost
555

Sublease income
(467
)
Total lease cost
$
2,554

 
 
Cost of sales
$
2,152

Selling, general and administrative expenses
255

Research, development and engineering costs
139

Other operating expenses
8

Total lease cost
$
2,554


At March 29, 2019, the maturities of operating lease liabilities were as follows (in thousands):
Remainder of 2019
$
7,491

2020
8,520

2021
8,048

2022
5,938

2023
5,189

2024
4,653

Thereafter
10,176

Total lease payments
50,015

Less imputed interest
(8,521
)
Total
$
41,494


The Company’s future minimum lease commitments, net of sublease income, as of December 28, 2018, under Accounting Standard Codification Topic 840, the predecessor to Topic 842, are as follows (in thousands):
 
2019
 
2020
 
2021
 
2022
 
2023
 
After 2023
Future minimum lease payments
$
8,562

 
7,290

 
7,348

 
5,269

 
5,112

 
14,589

Supplemental cash flow information related to leases for the three months ended March 29, 2019 is as follows (in thousands):
Cash paid for amounts included in the measurement of operating lease liabilities
$
2,538

Right-of-use assets obtained in exchange for new operating lease liabilities

v3.19.1
Earnings (Loss) Per Share (EPS)
3 Months Ended
Mar. 29, 2019
Earnings Per Share [Abstract]  
EARNINGS (LOSS) PER SHARE (EPS)
EARNINGS (LOSS) PER SHARE (“EPS”)
The following table sets forth a reconciliation of the information used in computing basic and diluted EPS (in thousands, except per share amounts):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Numerator for basic and diluted EPS:
 
 
 
Income from continuing operations
$
21,366

 
$
13,084

Income (loss) from discontinued operations
303

 
(4,966
)
Net income
$
21,669

 
$
8,118

 
 
 
 
Denominator for basic and diluted EPS:
 
 
 
Weighted average shares outstanding - Basic
32,536

 
31,902

Dilutive effect of assumed exercise of stock options, restricted stock and RSUs
444

 
521

Weighted average shares outstanding - Diluted
32,980

 
32,423

 
 
 
 
Basic earnings (loss) per share:
 
 
 
Income from continuing operations
$
0.66

 
$
0.41

Income (loss) from discontinued operations
0.01

 
(0.16
)
Basic earnings per share
0.67

 
0.25

 
 
 
 
Diluted earnings (loss) per share:
 
 
 
Income from continuing operations
$
0.65

 
$
0.40

Income (loss) from discontinued operations
0.01

 
(0.15
)
Diluted earnings per share
0.66

 
0.25


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
 
March 29,
2019
 
March 30,
2018
Time-vested stock options, restricted stock and RSUs
61

 
150

Performance-vested restricted stock and PRSUs
45

 
182

v3.19.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 29, 2019
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]  
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income (“AOCI”) is comprised of the following (in thousands):
 
Defined
Benefit
Plan
Liability
 
Cash
Flow
Hedges
 
Foreign
Currency
Translation
Adjustment
 
Total
Pre-Tax
Amount
 
Tax
 
Net-of-Tax
Amount
December 28, 2018
$
(295
)
 
$
3,439

 
$
30,539

 
$
33,683

 
$
(679
)
 
$
33,004

Unrealized loss on cash flow hedges

 
(154
)
 

 
(154
)
 
32

 
(122
)
Realized gain on foreign currency hedges

 
(45
)
 

 
(45
)
 
9

 
(36
)
Realized gain on interest rate swap hedge

 
(689
)
 

 
(689
)
 
145

 
(544
)
Foreign currency translation loss

 

 
(6,838
)
 
(6,838
)
 

 
(6,838
)
March 29, 2019
$
(295
)
 
$
2,551

 
$
23,701

 
$
25,957

 
$
(493
)
 
$
25,464

December 29, 2017
$
(1,422
)
 
$
3,418

 
$
50,200

 
$
52,196

 
$
(17
)
 
$
52,179

Unrealized gain on cash flow hedges

 
5,124

 

 
5,124

 
(1,076
)
 
4,048

Realized gain on foreign currency hedges

 
(575
)
 

 
(575
)
 
121

 
(454
)
Realized gain on interest rate swap hedge

 
(234
)
 

 
(234
)
 
49

 
(185
)
Foreign currency translation gain

 

 
13,441

 
13,441

 

 
13,441

March 30, 2018
$
(1,422
)
 
$
7,733

 
$
63,641

 
$
69,952

 
$
(923
)
 
$
69,029

v3.19.1
Financial Instruments and Fair Value Measurements
3 Months Ended
Mar. 29, 2019
Fair Value Disclosures [Abstract]  
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
    FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency exchange rates, and uses derivatives to manage these exposures that occur in the normal course of business. The Company does not hold or issue derivatives for trading or speculative purposes. All derivatives are recorded at fair value on the balance sheet.
Interest Rate Swaps
The Company periodically enters into interest rate swap agreements in order to reduce the cash flow risk caused by interest rate changes on our outstanding floating rate borrowings. Under the swap agreements, the Company pays a fixed rate of interest and receives a floating rate equal to one-month London Interbank Offered Rate (“LIBOR”). The variable rate received on the interest rate swaps and the variable rate paid on the outstanding debt will have the same rate of interest, excluding the credit spread, and will reset and pay interest on the same date. The Company has designated these interest rate swap agreements as cash flow hedges. The unrealized gains and losses on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are subsequently reclassified into earnings when interest on the related debt is accrued.
The fair value of the Company’s interest rate swap contracts are determined through the use of a cash flow model that utilizes observable market data inputs. These observable market data inputs include LIBOR, swap rates, and credit spread curves. In addition, the Company receives a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. The estimated fair value of the interest rate swap agreement represents the amount the Company would receive (pay) to terminate the contract.
Foreign Currency Contracts
The Company periodically enters into foreign currency forward contracts to hedge its exposure to foreign currency exchange rate fluctuations in its international operations. The Company has designated these foreign currency forward contracts as cash flow hedges. The unrealized gains and losses on these contracts are reported in Accumulated Other Comprehensive Income in the Condensed Consolidated Balance Sheets and are reclassified to earnings in the same periods during which the hedged transactions affect earnings.
(14.)     FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The fair value of foreign currency contracts are determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs included foreign exchange rate and credit spread curves. In addition, the Company receives fair value estimates from the foreign currency contract counterparties to verify the reasonableness of the Company’s estimates.
Derivative Instruments with Hedge Accounting Designation
The following tables present the fair values of derivative instruments formally designated as hedging instruments as of March 29, 2019 and December 28, 2018 (in thousands).
 
 
 
 
 
 
Fair Value(1)
 
 
Fair Value Hierarchy
 
Gross Notional Amount
 
Assets
 
Liabilities
March 29, 2019
 
 
 
 
 
 
 
 
Interest rate swaps(1)
 
Level 2
 
$
200,000

 
$
3,034

 
$

Foreign currency contracts
 
Level 2
 
44,418

 

 
483

 
 
 
 
 
 
 
 
 
December 28, 2018
 
 
 
 
 
 
 
 
Interest rate swaps
 
Level 2
 
$
200,000

 
$
4,171

 
$

Foreign currency contracts
 
Level 2
 
55,665

 

 
732


__________ 
(1) 
Unless otherwise noted, derivative assets are classified within Other assets on the Condensed Consolidated Balance Sheets and derivative liabilities are classified within Accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheets.
(2) 
On April 1, 2019, the Company entered into an additional interest rate swap agreement with a gross notional amount of $400 million and extended the current $200 million interest rate swap through June 2023.
The following table presents the amounts in the Condensed Consolidated Statements of Operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items for the three months ended March 29, 2019 and March 30, 2018 (in thousands):
 
 
Three Months Ended March 29, 2019
 
Three Months Ended March 30, 2018
 
 
Total
 
Amount of Gain
(Loss) on Cash Flow
Hedge Activity
 
Total
 
Amount of Gain
on Cash Flow
Hedge Activity
Sales
 
$
314,676

 
$
(321
)
 
$
292,426

 
$
139

Cost of sales
 
226,066

 
366

 
208,894

 
436

Interest expense
 
13,830

 
689

 
15,595

 
234


The following table present the amounts affecting the Condensed Consolidated Statements of Operations for the three months ended March 29, 2019 and March 30, 2018 (in thousands):
 
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive Income (Loss)
on Derivatives
 
Amount of Gain (Loss) Reclassified from
AOCI into Earnings
 
 
Three months ended,
 
Location of Gain (Loss)
Reclassified from AOCI into Earnings
 
Three months ended,
 
 
March 29,
2019
 
March 30,
2018
 
 
March 29,
2019
 
March 30,
2018
Interest rate swap
 
$
(448
)
 
$
1,499

 
Interest expense
 
$
689

 
$
234

Foreign exchange forwards
 
(700
)
 
638

 
Sales
 
(321
)
 
139

Foreign exchange forwards
 
994

 
2,987

 
Cost of sales
 
366

 
436


(14.)     FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS (Continued)
The Company expects to reclassify net gains totaling $2.0 million related to its cash flow hedges from accumulated other comprehensive income into earnings during the next twelve months.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items.
Borrowings under the Company’s Revolving Credit Facility, TLA Facility and TLB Facility accrue interest at a floating rate tied to a standard short-term borrowing index, selected at the Company’s option, plus an applicable margin. The carrying amount of this floating rate debt approximates fair value based upon the respective interest rates adjusting with market rate adjustments.
Equity Investments
The Company holds long-term, strategic investments in companies to promote business and strategic objectives. These investments are included in Other Assets on the Condensed Consolidated Balance Sheets. Non-marketable equity securities are equity securities without readily determinable fair value. The Company has elected the practicability exception to use an alternative that measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes. Equity method investments and non-marketable equity securities are included within Level 2 of the fair value hierarchy.
Equity investments are comprised of the following (in thousands):
 
 
 
 
 
March 29,
2019
 
December 28,
2018
Equity method investment
 
 
 
 
$
15,149

 
$
15,148

Non-marketable equity securities
 
 
 
 
7,667

 
7,667

Total equity investments
 
 
 
 
$
22,816

 
$
22,815

The components of (Gain) Loss on Equity Investments, Net for each period were as follows (in thousands):
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Equity method investment (income) loss
$
41

 
$
(4,970
)
Impairment charges

 

Observable price adjustments on non-marketable equity securities

 

Total (gain) loss on equity investments, net
$
41

 
$
(4,970
)

The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. As of March 29, 2019, the Company owned 6.6% of this fund.
v3.19.1
Segment Information
3 Months Ended
Mar. 29, 2019
Segment Reporting [Abstract]  
SEGMENT INFORMATION
SEGMENT INFORMATION
The Company organizes its business into two reportable segments: (1) Medical and (2) Non-Medical. This segment structure reflects the financial information and reports used by the Company’s management, specifically its Chief Operating Decision Maker (“CODM”), to make decisions regarding the Company’s business, including resource allocations and performance assessments. This segment structure reflects the Company’s current operating focus in compliance with ASC 280, Segment Reporting. There were no sales between segments during the three months ended March 29, 2019 and March 30, 2018.
The following table presents sales from continuing operations by product line (in thousands).
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Segment sales from continuing operations by product line:
 
 
Medical
 
 
 
Cardio & Vascular
$
152,574

 
$
136,863

Cardiac & Neuromodulation
116,911

 
108,910

Advanced Surgical, Orthopedics & Portable Medical
31,588

 
33,941

Total Medical
301,073

 
279,714

Non-Medical
13,603

 
12,712

Total sales from continuing operations
$
314,676

 
$
292,426


The following table presents income from continuing operations for the Company’s reportable segments (in thousands).
 
Three Months Ended
 
March 29,
2019
 
March 30,
2018
Segment income from continuing operations:
 
 
 
Medical
$
56,380

 
$
47,515

Non-Medical
4,311

 
3,198

Total segment income from continuing operations
60,691

 
50,713

Unallocated operating expenses
(21,522
)
 
(20,670
)
Operating income from continuing operations
39,169

 
30,043

Unallocated expenses, net
(14,037
)
 
(11,585
)
Income before taxes from continuing operations
$
25,132

 
$
18,458

v3.19.1
Revenue From Contracts With Customers
3 Months Ended
Mar. 29, 2019
Revenue from Contract with Customer [Abstract]  
REVENUE FROM CONTRACTS WITH CUSTOMERS
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue Recognition
The majority of the Company’s revenues consist of sales of various medical devices and products to large, multinational OEMs and their affiliated subsidiaries.  Revenue is recognized when performance obligations are satisfied and the customer has obtained control of the products.  Under the provisions of the majority of the Company’s contracts with customers, revenue is recognized at the point in time when title and risk of ownership transfers to the customer, which is primarily determined based upon the shipping terms.  When contracts with customers for products that do not have an alternative use to the Company contain provisions that provide the Company with an enforceable right to payment for performance completed to date with a recapture of costs incurred plus an applicable margin throughout the duration of the contract, revenue is recognized over time as control is deemed to have transferred to the customer. The Company uses an input measure to determine progress towards completion and total estimated costs at completion. Under this method, sales and gross profit are recognized as work is performed generally based on actual costs incurred. For arrangements recognized over time, the Company records a contract asset for unbilled revenue associated with non-cancellable customer orders. Revenue is recognized net of sales tax, value-added taxes and other taxes.
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 15, “Segment Information.”
Revenue recognized from products and services transferred to customers over time represented 14% of total revenue for the three months ended March 28, 2019, substantially all of which was within the Medical segment. The Company did not have any significant revenue related to contracts recognized over time for the three months ended March 30, 2018.
The following table presents revenues by significant customers, which are defined as any customer who individually represents 10% or more of a segment’s total revenues.
 
 
Three Months Ended
 
 
March 29, 2019
Customer
 
Medical
 
Non-Medical
Customer A
 
25
%
 
%
Customer B
 
19
%
 
%
Customer C
 
12
%
 
%
Customer D
 
%
 
24
%
Customer E
 
%
 
8
%
All other customers
 
44
%
 
68
%
 
 
Three Months Ended
 
 
March 30, 2018
Customer
 
Medical
 
Non-Medical
Customer A
 
22
%
 
%
Customer B
 
21
%
 
%
Customer C
 
12
%
 
%
Customer D
 
%
 
19
%
Customer E
 
%
 
11
%
All other customers
 
45
%
 
70
%
(16.)     REVENUE FROM CONTRACTS WITH CUSTOMERS (Continued)
The following table presents revenues by ship to country, which is defined as any country where 10% or more of a segment’s total revenues are shipped to.
 
 
Three Months Ended
 
 
March 29, 2019
Ship to Location
 
Medical
 
Non-Medical
United States
 
56%
 
57%
Puerto Rico
 
15%
 
—%
Canada
 
—%
 
13%
All other Countries
 
29%
 
30%

 
 
Three Months Ended
 
 
March 30, 2018
Ship to Location
 
Medical
 
Non-Medical
United States
 
56%
 
69%
Puerto Rico
 
13%
 
—%
Canada
 
—%
 
11%
All other Countries
 
31%
 
20%

Contract Balances
The opening and closing balances of the Company's contract assets and contract liabilities are as follows (in thousands):
 
March 29,
2019
 
December 28,
2018
Contract assets included in other current assets
$
11,497

 
$

Contract liabilities included in other current liabilities
1,986

 
2,264


During the three months ended March 29, 2019, the Company recognized $0.3 million of revenue that was included in the contract liability balance as of December 28, 2018. During the three months ended March 30, 2018, the Company recognized $0.1 million of revenue that was included in the contract liability balance as of December 29, 2017.