Integer Holdings Corp (ITGR) FY 2021 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF

OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes appearing in Item 8 of this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading “Risk Factors” in Item 1A of this report.

Our Business

•Our business

•Impact of COVID-19

•Recent business acquisitions

•Discontinued operations

•Patent litigation

•Financial overview

Our Financial Results

•Fiscal 2021 compared with fiscal 2020

•Liquidity and capital resources

•Cash and other commitments

•Impact of recently issued accounting standards

Critical Accounting Estimates

•Acquisition method of accounting

•Inventories

•Valuation of goodwill and intangible assets

Our Business

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

We organize our business into two reportable segments, Medical and Non-Medical, and derive our revenues from four principle product lines. The Medical segment includes the Cardio & Vascular, Cardiac & Neuromodulation and Advanced Surgical, Orthopedics & Portable Medical product lines and the Non-Medical segment comprises the Electrochem product line. For more information on our segments, please refer to Note 18 “Segment and Geographic Information” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Impact of COVID-19

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

- 29 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Recent Business Acquisitions

On December 1, 2021, we acquired 100% of the outstanding equity interests of Oscor, privately-held companies with operations in Florida, the Dominican Republic and Germany that design, develop, manufacture and market a comprehensive portfolio of highly specialized medical devices, venous access systems and diagnostic catheters and implantable devices. Refer to Note 2 “Business Acquisitions” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about the acquisition.

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

Refer to Note 2 “Business Acquisitions” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about the acquisition of Oscor and InoMec.

Discontinued Operations

In July 2018, we completed the sale of the AS&O Product Line within our Medical segment to Viant (formerly MedPlast, LLC). For all periods presented, financial results reported as discontinued operations relate to the divested AS&O Product Line. All results and information presented exclude the AS&O Product Line unless otherwise noted.

During 2021, we recognized income from discontinued operations of $3.8 million or $0.11 per diluted share. There was no income from discontinued operations during 2020.

Refer to Note 20 “Discontinued Operations” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information.

Patent Litigation

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

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

Refer to Note 13 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information on this matter.

Financial Overview

Fiscal 2021 Compared with Fiscal 2020

Income from continuing operations for 2021 was $93.0 million or $2.80 per diluted share compared to $77.3 million or $2.33 per diluted share for 2020. These variances are primarily the result of the following:

•Sales for 2021 increased 14% to $1.221 billion as we began to see our sales return to pre-pandemic levels as the demand for many of our products continues to recover from the impacts of the COVID-19 pandemic.

•Gross profit for 2021 increased $51.3 million or 18%, primarily from higher sales volume and production efficiencies.

•Operating expenses for 2021 increased by $36.2 million compared to 2020, primarily due to increases of $32.4 million in SG&A expenses and $3.5 million in RD&E expenses. Included in SG&A expenses for 2020 is a net gain of $28.2 million recognized in connection with a previously mentioned patent litigation judgment.

•Interest expense for 2021 decreased by $6.6 million primarily due to lower interest rates and lower average outstanding debt balances.

•We recognized a net loss on equity investments of $3.1 million in 2021, compared to a net gain on equity investments of $5.3 million during 2020. Gains and losses on equity investments are generally unpredictable in nature.

•Other (income) loss, net for 2021 was income of $0.1 million compared to a loss of $1.5 million during 2020, primarily due to fluctuations in foreign currency gains and losses in the respective periods.

•We recorded provisions for income taxes of $8.0 million and $8.9 million for 2021 and 2020, respectively. The changes in income tax were primarily due to relative changes in pre-tax income and the impact of discrete tax items.

- 30 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Fiscal 2020 Compared with Fiscal 2019

Income from continuing operations for 2020 was $77.3 million or $2.33 per diluted share compared to $91.2 million or $2.76 per diluted share for 2019. These variances are primarily the result of the following:

•Sales from continuing operations for 2020 decreased 15% primarily due to the impact of the COVID-19 pandemic.

•Gross profit for 2020 decreased $69.3 million or 20%, primarily from a decrease in sales volume, price reductions to our customers, and a loss in volume leverage, which resulted from our sales decrease, partially offset by 2019 charges associated with a customer bankruptcy. Cost of sales for fiscal years 2020 and 2019 included pre-tax charges of $1.1 million and $21.4 million, respectively, in connection with the customer bankruptcy.

•Operating expenses for 2020 decreased by $32.3 million compared to 2019, due to decreases of $29.7 million in SG&A expenses and $4.5 million in Other operating expenses, partially offset by a $1.9 million increase in RD&E expenses. Included in SG&A expenses for 2020 is a net gain of $28.2 million recognized in connection with a previously mentioned patent litigation judgment.

•Interest expense for 2020 decreased by $14.3 million primarily due to lower interest rates and lower outstanding debt balances.

•We recognized a net gain on equity investments of $5.3 million in 2020, compared to a net loss on equity investments of $0.5 million during 2019. Gains and losses on equity investments are generally unpredictable in nature.

•Other loss, net for 2020 was $1.5 million compared to other income, net of $0.6 million during 2019, primarily due to fluctuations in foreign currency gains and losses in the respective periods.

•We recorded provisions for income taxes of $8.9 million and $14.0 million for 2020 and 2019, respectively. The decrease in provision for income taxes is primarily due to our decrease in pre-tax income and the beneficial impact of the final Treasury Regulations issued in 2020.

- 31 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Our Financial Results

The following table presents selected financial information derived from our Consolidated Financial Statements, contained in Item 8 of this report, for the periods presented (dollars in thousands, except per share amounts):

NM - Calculated change not meaningful.

- 32 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

The following discussion is a comparison between fiscal year 2021 and fiscal year 2020 results. For a discussion of our results of operations for fiscal year 2020 compared to fiscal year 2019, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which was filed with the SEC on February 18, 2021.

Fiscal 2021 Compared with Fiscal 2020

Sales

Sales by product line for 2021 and 2020 were as follows (dollars in thousands):

Total 2021 sales increased 14% to $1.221 billion in comparison to 2020. The most significant drivers of this decrease were as follows:

Cardio & Vascular sales for 2021 increased $56.1 million or 10% in comparison to 2020. Cardio & Vascular sales for 2021 reflect the continued recovery from the negative impact of the COVID-19 pandemic, with strong increases across all Cardio & Vascular markets, particularly in the neurovascular market, despite end market demand fluctuations and supply chain constraints. During 2021, price changes reduced Cardio & Vascular sales by $0.4 million in comparison to 2020. Foreign currency exchange rate fluctuations increased Cardio & Vascular sales for 2021 by $1.5 million. Cardio & Vascular sales for 2021 include Oscor sales since the date of acquisition of $2.9 million.

Cardiac & Neuromodulation sales for 2021 increased $100.3 million or 29% in comparison to 2020. Cardiac & Neuromodulation sales for 2021 reflect the continued recovery from the negative impact of the COVID-19 pandemic and strong sales across all markets, despite end market demand fluctuations and supply chain constraints. Sales in the cardiac rhythm management market and neuromodulation market saw double-digit increases when comparing fiscal year 2021 to fiscal year 2020. During 2021, price changes reduced Cardiac & Neuromodulation sales by approximately $10.8 million in comparison to 2020. Foreign currency exchange rate fluctuations did not have a material impact on Cardiac & Neuromodulation sales during 2021 in comparison to 2020. Cardiac & Neuromodulation sales for 2021 include Oscor sales since the date of acquisition of $1.8 million.

In addition to Portable Medical sales, Advanced Surgical, Orthopedic & Portable Medical includes sales to the acquirer of our former AS&O Product Line, under supply agreements entered into as part of the divestiture in 2018. Advanced Surgical, Orthopedics & Portable Medical sales for 2021 decreased by $11.7 million in comparison to 2020. The decreases in 2021 sales reflects a double-digit decline in Advanced Surgical and Orthopedics, the divested product line currently under supply agreement, and a low single-digit decline in Portable Medical driven by lower demand for COVID-related ventilators and patient monitoring components. Price changes reduced Advanced Surgical, Orthopedic & Portable Medical sales by $0.4 million in comparison to 2020. Foreign currency exchange rate fluctuations did not have a material impact on Advanced Surgical, Orthopedic & Portable Medical sales during 2021 in comparison to 2020.

Non-Medical sales for 2021 increased $3.0 million or 8% in comparison to 2020. The sales increase reflects moving from a period of energy market contraction to recovery beginning in the second quarter of 2021. Price and foreign currency exchange rate fluctuations did not have a material impact on Non-Medical sales during 2021 in comparison to 2020.

- 33 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Gross Profit

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

__________

(a)Our Gross Margin for 2021 was negatively impacted by price reductions given to our larger OEM customers in return for long-term volume commitments.

(b)Amount represents the impact to our Gross Margin attributable to changes in the mix of product sales during the period.

(c)Our Gross Margin for 2021 was positively impacted by higher sales volume and production efficiencies, mainly due to our Manufacturing Excellence imperative.

(d)In November 2019, one of our customers, Nuvectra Corporation, filed a voluntary Chapter 11 bankruptcy petition (the “Customer Bankruptcy”). During fiscal year 2021, we recognized benefits from favorable settlements on supplier purchase order termination clauses and utilization of previously reserved inventory. During fiscal year 2020, we incurred costs and recorded charges associated with the Customer Bankruptcy, primarily consisting of charges related to inventory recorded in cost of sales.

SG&A Expenses

Changes to SG&A expenses were primarily due to the following (in thousands):

__________

(a)Compensation and benefits increased during 2021 compared to 2020, primarily due to higher stock-based compensation expense.

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

(c)The net decrease in all other SG&A expenses for 2021 compared to 2020 is primarily attributable to lower travel related expenses and depreciation expense.

RD&E Expenses

RD&E expenses for 2021 and 2020 were $52.0 million and $48.5 million, respectively. The increase in RD&E expenses for 2021 compared to 2020 is primarily attributable to increased compensation and benefits costs, consistent with our strategy to invest in capabilities for growth. 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.

- 34 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Other Operating Expenses

OOE comprises the following for 2021 and 2020 (in thousands):

__________

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

(b)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. Costs related for 2021 primarily consist of termination benefits. Costs related for 2021 primarily consist of termination benefits and fees for professional services.

(c)In 2017, we commenced several initiatives designed to reduce costs, increase manufacturing capacity to accommodate growth and improve operating efficiencies.  The plan involved the relocation of certain manufacturing operations and expansion of certain of our facilities. These actions were substantially complete at the end of 2020.

(d)Amounts include expenses related to the acquisitions of Oscor in 2021 and InoMec in 2020. The 2020 amount also includes a $2.0 million adjustment to reduce the fair value of acquisition-related contingent consideration liabilities. See Note 17 “Financial Instruments and Fair Value Measurements” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information related to the fair value measurement of the contingent consideration.

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

Refer to Note 11 “Other Operating Expenses” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding these initiatives.

- 35 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Interest Expense

Interest expense consists primarily of cash interest and debt related charges, such as amortization of deferred debt issuance costs and original issue discount. Interest expense decreased $6.6 million to $31.6 million in 2021 from $38.2 million in 2020, primarily due to lower interest rates and lower average outstanding debt balances. The weighted average interest rates on outstanding borrowings during 2021 and 2020 was 3.50% and 3.79%, respectively.

Debt related charges included in interest expense were $7.0 million for 2021 compared to $4.8 million for 2020. The increase in debt related charges during 2021 compared to 2020 is primarily attributable to write-offs of deferred debt issuance costs and unamortized discount (losses from extinguishment of debt) related to prepayments of portions of our Term Loan B facility and a write off of $3.3 million of deferred issuance costs and unamortized discount in connection with the refinancing of our credit facilities in September 2021. We recognized losses from extinguishment of debt during 2021 and 2020 of $3.8 million and $0.5 million, respectively.

As of December 31, 2021, approximately 18% of our principal amount of debt outstanding has been effectively converted to fixed-rate borrowings through the use of interest rate swaps, in comparison to approximately 27% as of December 31, 2020.  We enter into interest rate swap agreements to reduce our exposure to fluctuations in the LIBOR rate. See Note 17 “Financial Instruments and Fair Value Measurements” of the Notes to the Consolidated Financial Statements contained in Item 8 of this report for additional information pertaining to our interest rate swap agreements.

(Gain) Loss on Equity Investments, Net

During 2021, we recognized a net loss of $3.1 million on our equity investments compared to net gains of $5.3 million for 2020. Gains and losses on equity investments are generally unpredictable in nature. During 2021 and 2020, we recognized impairment charges of $0.1 million and $0.4 million, respectively, related to investments in our non-marketable equity securities. The residual amounts for 2021 and 2020 relate to our share of equity method investee gains/losses, including unrealized appreciation and depreciation of the underlying interests of the investee. As of December 31, 2021 and December 31, 2020, the carrying value of our equity investments was $21.8 million and $27.2 million, respectively. See Note 17 “Financial Instruments and Fair Value Measurements” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for further details regarding these investments.

Other (Income) Loss, Net

Other (income) loss, net was income of $0.1 million during 2021 compared to a loss of $1.5 million during 2020. Other (income) loss, net primarily includes gains/losses from the impact of exchange rates on transactions denominated in foreign currencies. Our foreign currency transaction gains/losses are based primarily on fluctuations of the U.S. dollar relative to the Euro, Mexican peso, Uruguayan peso, Malaysian ringgits, Dominican peso, or Israeli shekel.

The impact of foreign currency exchange rates on transactions denominated in foreign currencies included in Other (income) loss, net for 2021 and 2020 were net gains of $0.1 million and net losses of $1.6 million, respectively. We continually monitor our foreign currency exposures and seek to take steps to mitigate these risks. However, fluctuations in foreign currency exchange rates could have a significant impact, positive or negative, on our financial results in the future.

- 36 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for Income Taxes

During 2021 and 2020, our provision for income taxes was $8.0 million on worldwide pre-tax income of $101.1 million

(effective tax rate of 8.0%) and $8.9 million on worldwide pre-tax income of $86.2 million (effective tax rate of 10.4%), respectively. The stand-alone U.S. component of the effective tax rate for 2021 reflected a $2.0 million provision on $48.3 million of pre-tax book income (effective tax rate of 4.2%) versus a $3.1 million provision on $35.3 million of pre-tax book income (effective tax rate of 8.9%) for 2020. The stand-alone International component of the effective tax rate for 2021 reflected a $6.0 million provision on $52.8 million of pre-tax book income (effective tax rate of 11.4%) versus a $5.8 million provision on $50.9 million of pre-tax book income (effective tax rate of 11.4%) for 2020.

The provision for income taxes for 2021 differs from the U.S. statutory rate due to the following (dollars in thousands):

The provision for income taxes for 2020 differs from the U.S. statutory rate due to the following (dollars in thousands):

Our effective tax rate of 8.0% for 2021 is lower than our effective tax rate of 10.4% for 2020, primarily due to the beneficial impact of a year over year increase in R&D tax credits, an increase in Foreign tax credits and Foreign Derived Intangible Income (“FDII”) resulting from an increase in foreign source income in 2021, and the release of Uncertain Tax Positions relating to the tax years 2017 and 2018 as the Internal Revenue Service (“IRS”) effectively concluded its examination of those years during 2021.

- 37 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

The Company’s effective tax rate for 2021 differs from the U.S. federal statutory tax rate of 21% due principally to the estimated impact of Federal Tax Credits (including R&D credits and Foreign tax credits), stock based compensation windfalls, and the impact of the Company’s earnings realized in foreign jurisdictions with statutory rates that are different than the U.S. federal statutory rate. These benefits are partially offset by the impact of U.S taxes on foreign earnings, including the GILTI provision which requires the Company to include foreign subsidiary earnings in excess of a deemed return on a foreign subsidiary’s tangible assets in its U.S. income tax return. The U.S. tax on foreign earnings is reflected net of a statutory deduction of 50% of the GILTI inclusion (subject to limitations based on U.S. taxable income, if any) and net of FDII that provides a 37.5% deduction to domestic companies for certain foreign sales and services income. The primary foreign jurisdictions in which we operate and the statutory tax rate for each respective jurisdiction include Switzerland (22%), Mexico (30%), Uruguay (25%), Ireland (12.5%) and Malaysia (24%). We currently have a tax holiday in Malaysia through April 2023 provided certain conditions continue to be met. In addition, 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. In addition, we continue to explore tax planning opportunities that may have a material impact on our effective tax rate.

The balance of unrecognized tax benefits is not expected to materially change over the course of the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of December 31, 2021, approximately $5.5 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized.

Liquidity and Capital Resources

Cash and cash equivalents at December 31, 2021 decreased by $31.3 million from December 31, 2020. In 2021, we generated $156.7 million of cash from operating activities and borrowed a net amount of $95.8 million under our Senior Secured Credit Facility, which was more than offset by $218.0 million of net cash paid for the Oscor acquisition and net purchases of property, plant and equipment of $53.0 million.

Working capital increased by $36.6 million from December 31, 2020, primarily from positive working capital fluctuations associated with accounts receivable, contract assets, prepaid expenses and other current assets, and the current portion of long-term debt aggregating to $84.6 million, which were partially offset by fluctuations in cash and cash equivalents and accounts payable aggregating to $56.6 million. During 2021, accounts receivable increased mainly from higher sequential sales, and contract assets increased mainly due to a contract modification to add existing products and extend the contractual term, while the current portion of long-term debt decreased due to the refinancing of our term loan facilities during the third quarter of 2021. Cash and cash equivalents decreased primarily from net cash outflow in connection with the Oscor acquisition, while accounts payable increased mainly from the timing of supplier payments and higher sequential inventory purchases.

At December 31, 2021, $13.1 million of our cash and cash equivalents were held by foreign subsidiaries. We intend to limit our distributions from foreign subsidiaries to previously taxed income or current period earnings. If distributions are made utilizing current period earnings, we will record foreign withholding taxes in the period of the distribution.

Summary of Cash Flow

The following cash flow summary information includes cash flows related to discontinued operations (in thousands):

- 38 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Operating Activities - Cash provided by operating activities decreased $24.7 million in 2021 compared to 2020. Net income as adjusted for non-cash items such as depreciation and amortization increased $39.2 million but was more than offset by a decrease from fluctuations in operating assets and liabilities, which totaled $63.9 million.

The increase in net income adjusted for non-cash items such as depreciation and amortization is primarily from higher sales volume, margin expansion and lower interest expense partially offset by higher SG&A from the aforementioned patent litigation judgement in the prior year. The decrease associated with changes in operating assets and liabilities is primarily related to the impact of declining sales volume in the prior year, which caused a significant prior year benefit to operating cash flow from the collection of accounts receivable in a period of declining sales and a lower investment in inventory. In addition, we deferred payment of the employer portion of Social Security taxes during 2020 under the provisions of the CARES Act, which further contributed to the prior year benefit. These unfavorable impacts were partially offset with accounts payable fluctuations based on timing of supplier payments.

Investing Activities – The $214.4 million increase in net cash used in investing activities was primarily attributable to an increase in net cash paid for business acquisitions of $212.8 million and increased purchases of property, plant, and equipment of $6.6 million, partially offset by a decrease from the purchase of an intangible asset of $4.6 million in 2020.

Financing Activities – Net cash provided by financing activities during 2021 was $82.0 million compared to net cash used of $88.6 million in 2020. Financing activities during 2021 included net borrowings of $95.8 million compared to net payments of $87.5 million in 2020. The net cash inflow for 2021 included $220.0 million in borrowings to fund the Oscor acquisition. The payments made during 2020 include the utilization of proceeds received in conjunction with the patent litigation judgment during the fourth quarter of 2020.

Capital Structure - As of December 31, 2021, our capital structure consists of $828.1 million of debt, net of deferred debt issuance costs and unamortized discounts, outstanding under our Senior Secured Credit Facilities and 33 million shares of common stock outstanding. We have access to $375.0 million of borrowing capacity under our Revolving Credit Facility, available for normal course of business and letters of credit. We are also authorized to issue up to 100 million shares of common stock and 100 million shares of preferred stock. As of December 31, 2021, our contractual debt service obligations for 2022, consisting of principal and interest on our outstanding debt, are estimated to be approximately $33 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.

Credit Facilities - On September 2, 2021, we entered into a new credit agreement (the “2021 Credit Agreement”) which permits borrowings and other extensions of credit in an initial aggregate principal amount of up to $1 billion (as may be increased from time to time in accordance with the terms). The 2021 Credit Agreement governs the Company’s senior secured credit facilities (the “Senior Secured Credit Facilities”), which consist of a five-year $400 million revolving credit facility (the “Revolving Credit Facility”), which had available borrowing capacity of $375.0 million as of December 31, 2021, a five-year “term A” loan (the “TLA Facility”) with outstanding principal balance of $467 million, and a seven-year “term B” loan (the “TLB Facility”) with outstanding principal balance of $349 million. The Revolving Credit and TLA Facilities mature on September 2, 2026. The TLB Facility matures on September 2, 2028.

Our off-balance sheet commitments related to our outstanding letters of credit as of December 31, 2021 were $5.7 million.

The 2021 Credit Agreement contains customary terms and conditions, including representations and warranties and affirmative and negative covenants, as well as financial covenants for the benefit of the lenders under the Revolving Credit Facility and the TLA Facility, which require that we maintain (i) a total net leverage ratio not to exceed 5.50:1.00 (stepping down to 5.00:1.00 for the third fiscal quarter of 2023 through maturity and subject to increase in certain circumstances following qualified acquisitions, but not to exceed 5.50:1.00) and (ii) an interest coverage ratio of at least 2.50:1.00. As of December 31, 2021, we were in compliance with these financial covenants. The TLB Facility does not contain any financial maintenance covenants. As of December 31, 2021, our total net leverage ratio, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 2.7 to 1.0. For the twelve month period ended December 31, 2021, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our Senior Secured Credit Facilities agreement, was approximately 12.5 to 1.0.

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

Refer to Note 8 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for further description of our outstanding debt.

- 39 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash and Other Commitments

We have material cash requirements to pay third parties under various contractual obligations discussed below.

Presented below is a summary of contractual obligations and other minimum commitments as of December 31, 2021. Refer to Note 13 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding self-insurance liabilities, which are not reflected in the table below.

(a)Interest payments in the table above reflect the contractual interest payments on our outstanding debt based upon the balance outstanding and applicable interest rates at December 31, 2021, and exclude the impact of the debt issuance cost and discount amortization and the impact of interest rate swap agreements. Refer to Note 8 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information regarding long-term debt.

(b)Refer to Note 14 “Leases” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about our operating and finance lease obligations.

Capital expenditures for 2021 totaled $53.5 million, compared to $46.8 million and $48.2 million in 2020 and 2019, respectively. Capital expenditures in 2021 related primarily to upgrades of manufacturing facilities and information technology. We expect 2022 capital expenditures to approximate $65 million to $75 million, with a significant portion related to additional upgrades of manufacturing facilities and information technology, as well as for manufacturing equipment to support productivity initiatives.

In addition to debt obligations, lease obligations, and capital expenditures, we enter into a variety of contractual obligations in connection with the execution of our business. As of December 31, 2021, we had purchase obligations for raw materials and other parts of approximately $91 million which we will incur during 2022.

We have recorded liabilities for unrecognized tax benefits that, because of their nature, have a high degree of uncertainty regarding the timing of future cash payment and other events that extinguish these liabilities. Refer to Note 12 “Income Taxes” of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information about these unrecognized tax benefits.

Based on current expectations, we believe that our projected cash flows provided by operations, available cash and cash equivalents and availability under our Revolving Credit Facility are sufficient to meet our working capital, debt service and capital expenditure requirements for at least the next twelve months. However, such cash flows are dependent upon our future operating performance which, in turn, is subject to prevailing economic conditions, the effects of the COVID-19 pandemic, and to financial, business and other factors, including the conditions of our markets, some of which are beyond our control. If our future financing needs increase, we may need to arrange additional debt or equity financing. We continually evaluate and consider various financing alternatives to enhance or supplement our existing financial resources, including our Senior Secured Credit Facilities. However, we cannot be assured that we will be able to enter into any such arrangements on acceptable terms or at all.

Impact of Recently Issued Accounting Standards

In the normal course of business, we evaluate all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), SEC, or other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Refer to Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.

- 40 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING ESTIMATES

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates and judgments upon historical experience and other factors that are believed to be reasonable under the circumstances. Changes in estimates or assumptions could result in a material adjustment to the consolidated financial statements.

We have identified several critical accounting estimates. An accounting estimate is considered critical if both: (a) the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment involved, and (b) the impact of changes in the estimates and assumptions have had or are reasonably likely to have a material effect on the consolidated financial statements. This listing is not a comprehensive list of all of our accounting policies. For further information regarding the application of these and other accounting policies, see Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Inventories

Inventories are measured on a first-in, first-out basis at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The valuation of inventory requires us to estimate obsolete or excess inventory, as well as inventory that is not of saleable quality.

Historically, our inventory adjustment has been adequate to cover our losses. However, variations in methods or assumptions could have a material impact on our results. If our demand forecast for specific products is greater than actual demand and we fail to reduce manufacturing output accordingly, we could be required to record additional inventory write-down or expense a greater amount of overhead costs, which would negatively impact our net income.

Acquisition Method of Accounting

The Company accounts for business combinations using the acquisition method of accounting. We recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their estimated fair values on the date of acquisition. Any excess purchase price over the fair value of net assets acquired is recorded to goodwill. Determining the fair value of these items requires management’s judgment and more often than not the utilization of independent valuation specialists. The judgments made in the determination of the estimated fair values assigned to the assets acquired, the liabilities assumed and any noncontrolling interest in the investee, as well as the estimated useful life of each asset and the duration of each liability, can materially impact the financial statements in periods after acquisition, such as through depreciation and amortization expense. For more information on our acquisitions and application of the acquisition method, see Note 2 “Business Acquisitions”of the Notes to Consolidated Financial Statements contained in Item 8 of this report.

Valuation of Goodwill and Intangible Assets

We make assumptions in establishing the carrying value, fair value and, if applicable, the estimated lives of our intangible and other long-lived assets. Goodwill and intangible assets determined to have an indefinite useful life are not amortized. Instead, these assets are evaluated for impairment on an annual basis on the last day of our fiscal year and whenever events or business conditions change that could indicate that the asset is impaired. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset (asset group) may not be recoverable.

Evaluation of goodwill for impairment

We test each reporting unit’s goodwill for impairment on the last day of our fiscal year and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. In conducting this annual impairment testing, we may first perform a qualitative assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value. If not, no further goodwill impairment testing is required. If it is more-likely-than-not that a reporting unit’s fair value is less than its carrying value, or if we elect not to perform a qualitative assessment of a reporting unit, a quantitative analysis is performed, in which the fair value of the reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized equal to the excess, limited to the amount of goodwill allocated to that reporting unit.

- 41 -

Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

We performed a qualitative assessment of our Medical reporting unit as of December 31, 2021. As part of this analysis, we evaluated factors including, but not limited to, our market capitalization and stock price performance, macro-economic conditions, market and industry conditions, cost factors, the competitive environment, and the operational stability and overall financial performance of the reporting unit. The assessment indicated that it was more likely than not that the fair value of the Medical reporting unit exceeded its carrying value.

We elected to bypass the qualitative assessment and performed a quantitative analysis for our Non-Medical reporting unit. Resulting from the quantitative analysis, the fair value exceeded the carrying value of the Non-Medical reporting unit by approximately 184%. We do not believe that any of our reporting units are at risk for impairment. However, changes to the factors considered above could affect the estimated fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. We may be unaware of one or more significant factors that, if we had been aware of, would cause our conclusion to change, which could result in a goodwill impairment charge in a future period.

Evaluation of indefinite-lived intangible assets for impairment

Our indefinite-lived intangible assets include the Greatbatch Medical and Lake Region Medical tradenames. Similar to goodwill, we perform an annual impairment review of our indefinite-lived intangible assets on the last day of our fiscal year, unless events occur that trigger the need for an interim impairment review. We have the option to first assess qualitative factors in determining whether it is more-likely-than-not that an indefinite-lived intangible asset is impaired. If we elect not to use this option, or we determine that it is more-likely-than-not that the asset is impaired, we perform a quantitative assessment that requires us to estimate the fair value of each indefinite-lived intangible asset and compare that amount to its carrying value. Fair value is estimated using the relief-from-royalty method. Significant assumptions inherent in this methodology include estimates of royalty rates and discount rates. The discount rate applied is based on the risk inherent in the respective intangible assets and royalty rates are based on the rates at which comparable tradenames are being licensed in the marketplace. Impairment, if any, is based on the excess of the carrying value over the fair value of these assets.

We performed a quantitative assessment to test our indefinite-lived intangible assets for impairment as of December 31, 2021. For the Greatbatch Medical tradename, the excess of the estimated fair value over carrying value (expressed as a percentage of carrying value) was in excess of its carrying value of $20 million by approximately 386% as of December 31, 2021. The Lake Region Medical tradename had an excess of the estimated fair value over carrying value of approximately 78% and a carrying value of $70 million at December 31, 2021. We do not believe that our indefinite-lived intangible assets are at risk for impairment. However, a significant increase in the discount rate, decrease in the terminal growth rate, increase in tax rates, decrease in the royalty rate or substantial reductions in our end-markets and volume assumptions could have a negative impact on the estimated fair values of either of our tradenames and require us to recognize impairments of these indefinite-lived intangible assets in a future period.

Evaluation of long-lived assets for impairment

When impairment indicators exist, we determine if the carrying value of the long-lived asset(s) or definite-lived intangible asset(s) including, but not limited to, PP&E and right-of-use lease assets, exceeds the related undiscounted future cash flows. In cases where the carrying value exceeds the undiscounted future cash flows, the carrying value is written down to fair value. Fair value is generally determined using a discounted cash flow analysis. When it is determined that the useful life of an asset (asset group) is shorter than the originally estimated life, and there are sufficient cash flows to support the carrying value of the asset (asset group), we accelerate the rate of depreciation/amortization in order to fully depreciate/amortize the asset over its shorter useful life.

Estimation of the cash flows and useful lives of long-lived assets and definite-lived intangible assets requires significant management judgment. Events could occur that would materially affect our estimates and assumptions. Unforeseen changes, such as the loss of one or more significant customers, technology obsolescence, or significant manufacturing disruption, among other factors, could substantially alter the assumptions regarding the ability to realize the return of our investment in long-lived assets, definite-lived intangible assets or their estimated useful lives.

- 42 -

Table of Contents