A Year of Action A Future of Possibilities
2008 Annual Report
Financial Highlights
(in thousands, except per share data)
Sales
2008
2007
2006
2005
2004
Operations
$318,746
$271,142
$241,097
$200,119
$546,644
2004
2005
2006
2007
2008
Sales
$ 200,119
$ 241,097
$ 271,142
$ 318,746
$ 546,644
Operating income
Net income
Diluted net earnings
26,940
14,218
16,886
10,107
22,376
16,126
20,020
15,050
34,894
18,559
per common share
0.66
0.46
0.73
0.67
0.81
Diluted weighted average
shares outstanding
21,540
21,810
26,334
22,422
24,128
Cash Flow and Balance Sheet
2004
2005
2006
2007
2008
Cash fl ow from operations
$ 43,460
$ 43,335
$ 39,205
$ 42,965
$
57,101
Working capital
Total assets
Total debt
Total liabilities
132,360
476,166
171,652
151,958
512,911
170,464
222,028
244,306
199,051
116,816
142,219
547,827
663,851
848,931
170,000
248,134
241,198
352,920
341,180
498,179
Total stockholders’ equity
254,138
268,605
299,693
322,671
350,752
Greatbatch is a leading supplier of enabling
technology to the medical device and commercial
industries. For nearly 40 years, Greatbatch has
maintained a reputation for exceptional innovation,
performance and reliability by providing top
quality technologies to industries that depend
on consistent, long-lasting performance.
We are working diligently on the integration of our acquired businesses so we
can optimize performance and continue to deliver value to our customers and
shareholders. Throughout this annual report, we are proud to introduce to you
the new Greatbatch family of companies and the identity system that will drive
brand awareness, preference and loyalty.
The new Greatbatch family of companies is strategically aligned to deliver
unprecedented performance, reliability and critical technologies to allow our
customers the opportunity to bring their solutions to market. The family extends
beyond cardiac rhythm management (CRM) into the neuromodulation, vascular
access and orthopaedics markets. The commercial side of our business has
expanded into the portable medical and process markets and also serves the
energy, security, mobile data and environmental markets. We now have a global
customer base for whom we continually deliver on our reputation of excellence
and reliability.
1
Dear Fellow Shareholders,
2008 was a year of transformation, execution and momentum building for
Greatbatch. It was a year in which we achieved our goals and made signifi cant
progress executing on our strategic initiatives. We have worked hard to ensure
that we established the foundation that will carry the success of Greatbatch
forward into 2009 and beyond.
Over the past year, we focused a considerable amount of our energy and resources
towards implementing our strategic initiatives. In such uncertain economic times,
we felt that remaining dedicated to our strategy of diversifi cation, streamlining
our operations and driving growth through innovation would not only help
Greatbatch emerge from this recession as a stronger company, but as a
company better suited to meet the unique demands of our customers.
One of the achievements in 2008 that I am most proud of is the success of our
diversifi cation strategy. At the beginning of 2007, we set out to enhance the
overall diversifi cation of our business and create additional opportunities to
leverage our core strengths. Through the completion of seven acquisitions
in less than a year, we did just that. This expansion has created additional
opportunities to sell a broader portfolio of products across multiple divisions
within our key accounts. Additionally, it reduced our reliance on the CRM market
from a concentration of approximately 80% of revenues in 2007 to approximately
50% in 2008. Given the normalized growth level currently being experienced
by the CRM market and achieving record sales of $546.6 million during 2008,
including 7% organic growth, I think it is safe to say that we have validated our
strategic vision.
Although diversifying the business was an important part of 2008, continuing to
streamline our operations and optimize our production was another key step in
reaching our desired milestones. At Greatbatch, we have a reputation of successfully
optimizing and consolidating our operations and we continued this performance
over this past year. During 2008, IndustryWeek recognized our Alden, New York
facility as being one of the top 10 best plants in North America. Additionally, the
State of Massachusetts recognized our Raynham facility with an Economic Impact
Award. In 2008, we also implemented six and initiated another four consolidation
projects to enhance the operating performance of our new businesses and to
2
“In such uncertain economic times, we felt that remaining dedicated to our
strategy of diversifi cation, streamlining our operations and driving growth
through innovation would not only help Greatbatch emerge from this recession
as a stronger company, but as a company better suited to meet the unique
demands of our customers.”
Thomas J. Hook — President & Chief Executive Offi cer
move them closer to the Greatbatch operating model. As evidenced by the
improvement in our operating margin during 2008, we have already begun to
realize several of the benefi ts, which will defi ne our success within this initiative.
Our fi nal strategic initiative is to drive growth through developing innovative
new technologies. During 2008, we spent over $40 million on research and
development. On an annualized basis, Greatbatch intends to spend approximately
8% of sales revenue on R&D as we continue to develop new off erings and
solutions for our customers. This investment in R&D is important in that it enables
us to maintain our leadership position in our core markets, drive new growth
opportunities and potentially provide additional cost savings across our growing
portfolio. The growing demand for our innovative new product solutions such as
MRI compatible components and wireless sensing devices has helped us identify
future growth opportunities across our family of businesses. We are continuously
evaluating opportunities to facilitate the introduction of new or improved
technologies in order to provide our customers and partners the ability to bring
those solutions to market.
Ultimately, the true driver behind all of our achievements to date has been the
phenomenal talent and dedication of our 3,300 Greatbatch employees. It is through
this group of people that we have been able to spread the Greatbatch culture and
establish the quality and recognition that accompanies our products today.
As you read through this annual report, you’ll see why 2008 was indeed a year
of action. As a company that is holistic and forward looking in its vision, the
momentum we have gained through 2008 cannot be ignored, and I couldn’t
be more excited for our future of possibilities.
Sincerely,
Thomas J. Hook
3
Our Businesses
The last two years have represented signifi cant change at Greatbatch. Our
diversifi cation strategy continues to progress, as we have acquired seven
companies, streamlined operations and built a diverse off ering of products
and unique technologies to better serve an expanded customer base. The
results of this are made evident by our record diversifi ed sales in 2008.
2007 SALES
(PRE-ACQUISITIONS)
2008 SALES
15%
85%
15%
14%
9%
51%
85%
26%
CRM & Neurology
Orthopaedics
Vascular Access
Commercial
Greatbatch Medical is committed to the design and manufacture of critical
technologies that enhance the reliability and performance of medical devices
and procedures. We do this to ensure that our customers can continuously
provide clinicians with better treatment options to improve patient outcomes.
Electrochem invests in delivering highly customized and reliable technology
solutions in battery power and wireless sensing systems to enable our customers’
products in critical industrial markets for their mission success.
We are very proud of what the new Greatbatch family has become – a coalition
of companies strategically aligned to deliver unprecedented performance and
reliability in critical technologies to serve some of today’s most vital applications.
4
5
6
Our implantable medical business has grown signifi cantly over the past two
years through a combination of acquisitions and organic growth. Over the
course of 2008, we successfully integrated our core and acquired businesses
into Greatbatch Medical, a cohesive unit which now serves the cardiac rhythm
management, neuromodulation, vascular access and orthopaedics markets.
With a broader product off ering in place, we can continue to strengthen our
performance by ensuring that our customers can focus on what matters most
to them—the advancement of medical technologies that contribute to the best
outcomes possible for patients around the world. We are following through on
our commitment to their success by providing supporting technologies and doing
our part to facilitate new developments.
In our core markets of CRM and neuromodulation, our revenue growth and
positioning as a key strategic partner to our customers remains strong. In 2008,
we continued to see further adoption of our Q series battery platform. With
momentum behind us, we expect to see our QHR® and QMR® technology further
implemented into our customers’ product off erings in 2009. Our technology
enables each customer’s specifi c strategy, while improving patient care and safety.
We are also excited about our MRI compatible lead systems and components. In
2008, we were granted a key foundation patent to our MRI intellectual property,
and signed a collaborative agreement with an OEM customer who will leverage
our eM-able™ technology in future CRM systems. We are ready to further engage
in development agreements with our other customers in 2009.
“We see a signifi cant opportunity for growth for our expanded product lines. Our
plan is to leverage our new technologies, broader product off erings and strong
customer relationships to capitalize on signifi cant cross-selling opportunities.”
Mauricio Arellano — Senior Vice President, Cardiac & Neurology
7
Turning to vascular access, during 2008 we continued to commercialize the
products and technologies acquired in 2007. Although these revenue lines are
smaller, we now have various product lines, including advanced introducer and
catheter delivery systems, which give us opportunities where we historically had
little to no revenue. Our vascular access products provide us with signifi cant
growth opportunities for the future.
GREATBATCH MEDICAL SALES (IN THOUSANDS)
5-YEAR CAGR: 20%
2008
2007
2006
2005
2004
$269,822
$227,407
$207,914
$172,655
$468,410
We entered the fast growing and global orthopaedics market in early 2008.
Throughout the year, we began to put in place various lean manufacturing tools,
which will drive best-in-class leadtimes and fl awless execution for our customers.
Further leveraging our history of innovation and reliability will be key areas
of focus for 2009 and will drive investment for this business. We believe the
opportunities within this market are endless and that 2009 will be an exciting
year of integration, improvement and growth.
What sets us apart from our competitors is our history of innovation, reliability
and operational excellence. An example of our operational excellence lies in the
recognition our Alden facility received when it was named among IndustryWeek’s
2008 Top 10 Best Plants. These characteristics, which are evident across our
business, will prove to be the biggest assets we have to grow our revenues
profi tably in the future.
“What excites me in particular about our diversifi cation into the orthopaedics
space is the opportunity to leverage our core strengths of innovation and
operating discipline to become an ideal partner for our customers.”
Susan H. Campbell — Senior Vice President, Orthopaedics
8
Through Electrochem, we provide unique and innovative technology solutions for
critical applications, leveraging our heritage and technical expertise in customized
battery solutions and expanding into wireless sensing solutions. Our technologies
are used to ensure reliable power for soldier communications, to improve operations
for oil and gas companies, to detect and warn of developing tsunamis, and to
ensure automated external defi brillators perform when needed. These are just
a few of the critical applications that Electrochem’s technologies enable.
ELECTROCHEM SALES (IN THOUSANDS)
5-YEAR CAGR: 25%
2008
2007
2006
2005
2004
$48,924
$43,735
$33,183
$27,464
$78,504
Our Electrochem business has gone through changes over the past year that
have improved our comprehensive off erings and brought us closer to our end
customers. During 2008, we began to integrate our IntelliSensing and Engineered
Assemblies Corporation (EAC) acquisitions, and made signifi cant investments
in capacity, technology and automation. Investing in capacity was a priority
for us, and the successful construction of our new state-of-the-art facility in
Raynham, Massachusetts was a major part of our strategic plan. Our business
is highly customized to meet our customers’ complex needs, and operations that
enable fl exibility and agility are essential to our future growth and success. This
integration of our technologies and the expansion of our capacity have given us
a competitive advantage over the rest of the marketplace, where no one else has
the breadth of off erings that Electrochem can provide.
“Our expanded technology portfolio provides us the ability to customize solutions
for our customers, which has opened up new market penetration opportunities.”
Susan M. Bratton — Senior Vice President, Commercial
9
A Year of Action
2008 was a year of action for Greatbatch. On top of outstanding fi nancial
performance, we made a great deal of progress in our diversifi cation strategy,
continuing a strong tradition of streamlining operations and driving growth
through innovation. Having completed and integrated seven acquisitions,
successfully consolidated and re-aligned many of our facilities and innovated
a number of new products and technologies, we believe our pursuit
of Greatbatch’s transformation was evident this year more than ever.
JANUARY
FEBRUARY
Acquisition of Precimed
Acquisition of DePuy Orthopaedics’ facility
MAY
completed, giving
in Chaumont, France completed, enhancing
Sorin Group and Greatbatch
Greatbatch both new
Greatbatch’s strategic relationship with one
announce agreement to
technology and an ideal
of the largest orthopaedic companies in the
leverage Greatbatch’s MRI
entry into the fast-growing
world and extending its product off ering to
technology for Sorin Group
orthopaedics market.
a full range of orthopaedic implants.
CRM Devices.
Creating tomorrow.
MARCH
APRIL
JUNE
In eff orts to fully encompass
Greatbatch announces the
Greatbatch
the scope and diversity of our
launch of the new Electrochem
was granted a
medical business segment,
brand which incorporates
key foundation
Greatbatch initiates a global
its acquisition-enhanced
patent for its
branding campaign in an eff ort
product line, its heritage
MRI technology.
to unify the brands acquired.
and technical expertise in
MRI compatible
delivering customized battery
components are
solutions and its expansion
just one example
into comprehensive wireless
of Greatbatch’s
sensing systems to off er
strategy to deliver
a broader solution set for
innovative solutions
its commercial markets.
to its customers.
10
JULY
SEPTEMBER
NOVEMBER
Electrochem Raynham, MA facility
is recognized by the Massachusetts
Alliance for Economic Development
Completed consolidation of
Completed consolidation of
as a Gold Award Winner. Recognizes
Greatbatch Medical Columbia,
Electrochem Orchard Park, NY
Electrochem for continuing to make an
MD facility into Tijuana, Mexico
location into existing Clarence,
impact in Massachusetts through facility
facility while continuing to meet
NY facility, eff ectively reducing
expansion, job creation and commitment
all customer demands.
excess manufacturing capacity.
to the community.
AUGUST
OCTOBER
DECEMBER
Construction of Electrochem
Announced plans to consolidate 1) Greatbatch
Greatbatch Medical
Raynham, MA facility completed
Medical Blaine, MN facility into existing Plymouth,
Alden, NY facility
and consolidation of Canton,
MN facility; 2) Electrochem Teterboro, NJ facility
is recognized for
MA facility into Raynham
into Raynham, MA facility; and 3) Greatbatch
its continuous
begins. Raynham triples the
Medical Exton, PA administrative offi ces into
improvements in lean
capacity of Electrochem’s
other facilities that have excess capacity, further
manufacturing and
operations to support its
streamlining operations.
growing business and allows
for greater semi-automation
and optimized manufacturing
processes.
Six Sigma practices
with IndustryWeek’s
top 10 best plants in
North America award.
11
A Future of Possibilities
At Greatbatch, we leverage our strength in the development and manufacturing of
critical technologies to provide our customers and partners the opportunity to bring
those solutions to market while retaining their focus on the clinical relationships
that are paramount to their successful growth. We believe that many of the
technologies we are developing today will provide us with a signifi cant platform
for growth in the future. Additionally, through a combination of patents, licenses,
trade secrets and know-how, which establishes and protects our proprietary
rights, our technologies will continue to lead our industries for years to come.
RICH FARRELL — VICE PRESIDENT, QIG
“Greatbatch has and will continue to
GREATBATCH MEDICAL
support the development of ideas
Within Greatbatch Medical, we continue to work with our customers
and technologies that can be used to
to develop technologies that diff erentiate their products. These
better serve our customers. One of our
include our Q series medium- and high-rate batteries, our new
main objectives for the future will be to
platform of premium rechargeable batteries, MRI compatible lead
provide our customers with cost eff ective
systems and components, EMI fi ltering, and high energy/high
technological advantages and innovative
density capacitors. We have high expectations for development
ideas that they need to be successful.”
and commercialization of these projects going forward.
RESEARCH AND DEVELOPMENT SPEND
ELECTROCHEM
During 2008, Greatbatch spent approximately
Electrochem’s acquired
8% of sales revenue on research and development.
rechargeable battery
We intend to maintain our investment at these
and wireless sensing
levels as we continue to develop new off erings
technologies have
for our customers in both the Greatbatch Medical
produced a number of
and Electrochem segments.
2009 PROJECTED
$ 48.0 MILLION
2008
2007
$ 41.2 MILLION
$ 35.1 MILLION
opportunities in which
we could see horizontal
and vertical penetration,
especially within the
energy, portable medical
and process markets.
12
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended January 2, 2009
Commission File Number 1-16137
GREATBATCH, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of Incorporation)
16-1531026
(I.R.S. Employer Identification No.)
10000 Wehrle Drive
Clarence, New York 14031
(Address of principal executive offices)
(716) 759-5600
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class:
Common Stock, Par Value $.001 Per Share
Preferred Stock Purchase Rights
Name of Each Exchange on Which Registered:
New York Stock Exchange
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Non- accelerated filer [ ]
Accelerated filer [X]
Smaller reporting company [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
The aggregate market value of common stock of Greatbatch, Inc. held by nonaffiliates as of June 27,
2008, based on the last sale price of $17.20, as reported on the New York Stock Exchange: $382.3 million.
Solely for the purpose of this calculation, shares held by directors and officers and 10 percent shareholders of
the Registrant have been excluded. Such exclusion should not be deemed a determination by or an admission
by the Registrant that these individuals are, in fact, affiliates of the Registrant.
Shares of common stock outstanding on March 2, 2009: 23,039,217
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, in whole or in part, are specifically incorporated by reference in the indicated
part of the Company’s Proxy Statement:
Document
Proxy Statement for the 2009 Annual
Meeting of Stockholders
Part III, Item 10
Part
“Directors, Executive Officers and Corporate Governance”
Part III, Item 11
“Executive Compensation”
Part III, Item 12
“Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters”
Part III, Item 13
“Certain Relationships and Related Transactions, and
Director Independence”
Part III, Item 14
“Principal Accounting Fees and Services”
ITEM
NUMBER
TABLE OF CONTENTS
PART I
PAGE
NUMBER
1
Business ...................................................................................................................................................
1A
Risk Factors .............................................................................................................................................
1B
Unresolved Staff Comments ....................................................................................................................
2
3
4
5
6
7
Properties .................................................................................................................................................
Legal Proceedings ....................................................................................................................................
Submission of Matters to a Vote of Security Holders .............................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities. ................................................................................................................................................
Selected Financial Data ...........................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operation ...................
7A
Quantitative and Qualitative Disclosures About Market Risk .................................................................
8
9
Financial Statements and Supplementary Data .......................................................................................
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure .................
9A
Controls and Procedures ..........................................................................................................................
9B
Other Information ....................................................................................................................................
PART III
10
11
12
13
14
Directors, Executive Officers and Corporate Governance ......................................................................
Executive Compensation .........................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence ........................................
Principal Accounting Fees and Services ..................................................................................................
15
Exhibits, Financial Statement Schedules .................................................................................................
Signatures ...............................................................................................................................................
PART IV
4
17
27
27
28
28
28
30
31
58
60
111
112
112
113
113
113
113
113
113
115
3
ITEM 1.
BUSINESS
OVERVIEW
PART I
Greatbatch, Inc. is a leading developer and manufacturer of critical products used in medical
devices for the cardiac rhythm management, neuromodulation, vascular, orthopedic and
interventional radiology markets. Additionally, Greatbatch, Inc. is a world leader in the design,
manufacture and distribution of electrochemical cells, battery packs and wireless sensors for
demanding applications in markets such as energy, security, portable medical, environmental
monitoring and more. When used in this report, the terms “we,” “us,” “our” and the “Company”
mean Greatbatch, Inc. and its subsidiaries.
We believe that our proprietary technology, close customer relationships, multiple product
offerings, market leadership and dedication to quality provide us with competitive advantages
and create a barrier to entry for potential market entrants.
The Company is a Delaware corporation that was incorporated in 1997 and since that time has
completed the following acquisitions:
Acquisition date
Acquired company
Business at time of acquisition
July 1997
Wilson Greatbatch Ltd.
(“WGL”)
Founded in 1970, the company designed and
manufactured batteries for implantable
medical devices (“IMD”) and commercial
applications including oil and gas,
aerospace, and oceanographic.
August 1998
Hittman Materials and
Medical Components,
Inc. (“Hittman”)
Founded in 1962, the company designed and
manufactured ceramic and glass
feedthroughs and specialized porous
coatings for electrodes used in IMDs.
August 2000
Battery Engineering, Inc.
(“BEI”)
June 2001
Sierra-KD Components
division of Maxwell
Technologies, Inc.
(“Sierra”)
Founded in 1983, the company designed and
manufactured high-energy density batteries
for industrial, commercial, military and
medical applications.
Founded in 1986, the company designed and
manufactured ceramic electromagnetic
filtering capacitors and integrated them with
wire feedthroughs for use in IMDs. Sierra
also designed and manufactured ceramic
capacitors for military, aerospace and
commercial applications.
4
Acquisition date
Acquired company
Business at time of acquisition
July 2002
Globe Tool and
Manufacturing Company,
Inc. (“Globe”)
Founded in 1954, the company designed and
manufactured precision enclosures used in
IMDs and commercial products used in the
aerospace, electronic, and automotive
sectors.
March 2004
NanoGram Devices
Corporation
(“NanoGram”)
Founded in 1996, the company developed
nanoscale materials for battery and medical
device applications.
April 2007
BIOMEC, Inc.
(“BIOMEC”)
June 2007
Enpath Medical, Inc.
(“Enpath”)
October 2007
IntelliSensing LLC
(“IntelliSensing”)
November 2007
Quan Emerteq LLC
(“Quan”)
November 2007
Engineered Assemblies
Corporation (“EAC”)
January 2008
P Medical Holding SA
(“Precimed”)
February 2008
DePuy Orthopaedics’
Chaumont, France
manufacturing facility
(“DePuy”)
5
Established in 1998, the company provided
medical device design and component
integration to early-stage and established
customers.
Founded in 1981, the company designed,
developed, and manufactured venous
introducers and dilators, implantable
leadwires, steerable sheaths and steerable
catheters.
Established in 2005, the company designed
and manufactured battery-powered wireless
sensing solutions for demanding commercial
applications.
Founded in 1998, the company designed,
developed, and manufactured single use
medical device products and components
including delivery systems, catheters,
stimulation leadwires and microcomponents
and assemblies.
Founded in 1984, the company designed and
integrated custom battery solutions and
electronics focused on rechargeable systems.
Founded in 1994, the company designed,
manufactured and supplied trays,
instruments and implants for orthopedic
original equipment manufacturers (“OEM”).
The facility manufactured hip, shoulder
trauma and knee implants for DePuy.
FINANCIAL STATEMENT YEAR END
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st.
Fiscal years 2008, 2007 and 2006 ended on January 2, 2009, December 28, 2007 and December
29, 2006, respectively. Fiscal year 2008 contained fifty-three weeks while fiscal years 2007 and
2006 contained fifty-two weeks.
SEGMENT INFORMATION
We operate our business in two reportable segments – Implantable Medical Components
(“IMC”) and Electrochem Solutions (“Electrochem”). Segment information including sales from
external customers, profit or loss, and assets by segment as well as sales from external customers
and long-lived assets by geographic area are set forth at Note 15 – “Business Segment
Information” of the Notes to the Consolidated Financial Statements contained at Item 8 of this
report.
IMPLANTABLE MEDICAL DEVICE INDUSTRY
An IMD is an instrument that is surgically inserted into the body to provide diagnosis or therapy.
One sector of the IMD market is cardiac rhythm management (“CRM”), which is comprised of
devices such as implantable pacemakers, implantable cardioverter defibrillators (“ICDs”),
cardiac resynchronization therapy (“CRT”) devices, and cardiac resynchronization therapy with
backup defibrillation devices (“CRT-D”).
A new emerging opportunity sector of the IMD market is the neuromodulation market, which is
comprised of pacemaker-type devices that stimulate nerves for the treatment of various
conditions. Beyond approved therapies of pain control, incontinence, Parkinson’s disease and
epilepsy, nerve stimulation for the treatment of other disabilities such as migraines, obesity and
depression has shown promising results.
The following table sets forth the main categories of battery-powered IMDs and the principal
illness or symptom treated by each device:
Device
Pacemakers ...................................................... Abnormally slow heartbeat (Bradycardia)
ICDs ................................................................. Rapid and irregular heartbeat (Tachycardia)
CRT/CRT-Ds ................................................... Congestive heart failure
Neurostimulators .............................................. Chronic pain, movement disorders, epilepsy,
Principal Illness or Symptom
Left ventricular assist devices (LVADs) .......... Heart failure
Drug pumps ...................................................... Diabetes or chronic pain
obesity or depression
We believe that the CRM and Neuromodulation markets continue to exhibit strong underlying
growth fundamentals and that we are well positioned to continue to participate in this market
growth. Increased demand is being driven by the following factors:
• Advances in medical technology – new therapies will allow physicians to use IMDs to
treat a wider range of heart diseases.
6
• New, more sophisticated implantable devices – device manufacturers are developing new
CRM devices and adding new features to existing products.
• New indications for CRM devices – the patient groups that are eligible for CRM devices
have increased. Insurance guidelines may allow device reimbursements for these
expanding patient populations.
• Growth within neuromodulation – approved segments growing at 17% CAGR with
additional new indications and therapies targeted to complete clinical activities within
two years.
• Expansion of neuromodulation applications – therapies expected to expand as new
therapeutic applications for pulse generators are identified.
• An aging population – the number of people in the U.S. that are over age 65 is expected
to double in the next 30 years.
• New performance requirements – government regulators are increasingly requiring that
IMDs be protected from electromagnetic interference (“EMI”).
• Global markets – increased market penetration worldwide.
With the acquisition of Enpath and Quan during 2007, we obtained new product offerings for
vascular access. These offerings include products that deliver therapies for
coronary/neurovascular disease, peripheral vascular disease, neuromodulation, CRM, as well as
products for medical imaging and drug and pharmaceutical delivery. These products seek to
capitalize on the growth in the Neuromodulation and CRM markets, specifically with new
indications for neuromodulation devices. In addition, we continue to see strong growth in the
vascular markets because of stent delivery procedures, peripheral-vascular disease therapies, and
new indications for tissue extraction or ablation.
• Continued focus on minimally invasive procedures – Patients and health care providers
looking for minimally invasive technologies to treat disease expanding both catheter
based procedures and associated vascular access.
In early 2008, with the acquisition of Precimed and the Chaumont manufacturing facility, we
entered the orthopedic sector of the IMD market. Many of the factors affecting the orthopedic
market segment are similar to the CRM market. These factors include aging population, new
implant and surgical technology, rising rates of obesity, a growing replacements market and
emerging affluence in developing nations. As a result, we believe that the orthopedic market
will also continue to exhibit strong growth fundamentals.
ELECTROCHEM SOLUTIONS INDUSTRY
Our customized rechargeable and non-rechargeable battery solutions are used in a number of
demanding industrial markets such as energy, security, portable medical, environmental
monitoring and more. Applications in these segments cover a number of battery-powered
systems including downhole drilling tools, hand-held military communications, automated
external defibrillators, and more.
Electrochem’s primary power systems are used in these core markets because of extreme
operating conditions and long life requirements. Our primary batteries operate reliably and
safely at extremely high and low temperatures and with high shock and vibration.
7
Our rechargeable power systems include a number of chemistries including lithium, nickel and
lead acid. We provide value-added solutions to complement our secondary power systems such
as charging and battery management.
Our unique wireless sensing system is a complete solution, incorporating advanced, ruggedized
sensors, gateways and software. Electrochem’s patented system is a complete solution, utilizing
our own battery power and offering control and monitoring for applications in existing markets
such as energy and new markets such as process control.
We expect the demand for reliable portable power and integrated wireless sensing solutions to
continue to rise with demand in energy, security and portable medical segments.
PRODUCTS
The following table provides information about our principal products:
IMPLANTABLE MEDICAL COMPONENTS:
PRODUCT
DESCRIPTION
PRINCIPAL PRODUCT ATTRIBUTES
Batteries
Power sources include:
♦ Lithium iodine (“Li Iodine”)
♦ Lithium silver vanadium oxide (“Li SVO”)
♦ Lithium carbon monoflouride (“Li CFx”)
♦ Lithium ion rechargeable (“Li Ion”)
♦ Lithium SVO/CFx (“QHR” & “QMR”)
High reliability and predictability
Long service life
Customized configuration
Light weight
Compact and less intrusive
Storage for energy generated by a battery
before delivery to the heart. Used in ICDs and
CRT-Ds.
Stores more energy per unit volume (energy
density) than other existing technologies
Customized configuration
Filters electromagnetic interference to limit
undesirable response, malfunctioning or
degradation in the performance of electronic
equipment
High reliability attenuation of EMI RF over wide
frequency ranges
Customized design
Capacitors
EMI filters
Feedthroughs
Allow electrical signals to be brought from
inside hermetically sealed IMD to an electrode
Ceramic to metal seal is substantially more durable
than traditional seals
Multifunctional
Coated electrodes
Deliver electric signal from the feedthrough to a
body part undergoing stimulation
Precision components
♦ Machined
♦ Molded and over molded products
Enclosures and related
components
♦ Titanium
♦ Stainless steel
Value-added
assemblies
Combination of multiple components in a single
package/unit
High quality coated surface
Flexible in utilizing any combination of
biocompatible coating surfaces
Customized offering of surfaces and tips
High level of manufacturing precision
Broad manufacturing flexibility
Precision manufacturing, flexibility in
configurations and materials
Leveraging products and capabilities to provide
subassemblies and assemblies
Provides synergies in component technology and
procurement systems
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PRODUCT
DESCRIPTION
PRINCIPAL PRODUCT ATTRIBUTES
Leads
Cardiac, neuro and hearing restoration
stimulation leads
Introducers
Creates a conduit to insert infusion catheters,
guidewires, implantable ports, pacemaker leads
and other therapeutic devices into a blood vessel
Catheters
Delivers therapeutic devices to specific sites in the
body
Implants
Orthopedic implants for reconstructive hip,
shoulder, knee, trauma and spine procedures
Instruments
Orthopedic instruments for reconstructive and
trauma procedures
Custom and unique configurations that increase
therapy effectiveness, provide finished device
design and manufacturing
Variety of sizes and materials that facilitate
problem-free access in a variety of clinical
applications
Enable safe, simple delivery of therapeutic and
diagnostic devices, soft tip and steerability.
Provide regulatory clearance and finished device
Precision manufacturing, leveraging capabilities
and products, complete processes including sterile
packaging and coatings
Designed to improve surgical techniques, reduce
surgery time, increase surgical precision and
decrease risk of contamination
Trays
Delivery systems for cleaning and sterilizing
Deliver turn-key full service kits
orthopedic instruments and implants
ELECTROCHEM SOLUTIONS:
Cells
♦ Moderate-rate
♦ Spiral (high rate)
Optimized rate capability, shock and vibration
resistant
High energy density
Primary and rechargeable
battery packs
Bundling of commercial batteries in a customer
specific configuration
Increased power and recharging capabilities and
ease of integration into customer applications
Wireless sensors
Operates where wired sensors are undesirable or
impractical
Measures pressure and temperature at the same
time, withstands harsh environments
RESEARCH AND DEVELOPMENT
Our position as a leading developer and manufacturer of components for IMDs and commercial
batteries is largely the result of our long history of technological innovation. We invest
substantial resources in research, development and engineering. Our scientists, engineers and
technicians focus on improving existing products, expanding the use of our products and
developing new products. In addition to our internal technology and product development
efforts, we also engage outside research institutions for unique technology projects.
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patents, licenses, trade secrets and know-how to establish and
protect our proprietary rights to our technologies and products. We have 372 active U.S. patents
and 264 active foreign patents. We also have 272 U.S. and 373 foreign pending patent
applications at various stages of approval. During the past three years, we have been granted 87
new U.S. patents, of which 13 were granted in 2008. Corresponding foreign patents have been
issued or are expected to be issued in the near future. Often, several patents covering various
aspects of the design protect a single product. We believe this provides broad protection of the
inventions employed.
9
We are also a party to several license agreements with third parties under which we have
obtained, on varying terms, the exclusive or non-exclusive rights to patents held by them. One
of these agreements is for the basic technology used in our wet tantalum capacitors. We have
also granted rights in our patents to others under license agreements.
It is our policy to require our management and technical employees, consultants and other parties
having access to our confidential information to execute confidentiality agreements. These
agreements prohibit disclosure of confidential information to third parties except in specified
circumstances. In the case of employees and consultants, the agreements generally provide that
all confidential information relating to our business is the exclusive property of the Company.
MANUFACTURING AND QUALITY CONTROL
While we have adequate capacity we primarily manufacture small lot sizes, as most customer
orders range from a few hundred to a few thousand units. As a result, our ability to remain
flexible is an important factor in maintaining high levels of productivity. Each of our production
teams receives assistance from a manufacturing support team, which typically consists of
representatives from our quality control, engineering, manufacturing, materials and procurement
departments. Our quality systems are compliant with and certified to various recognized
international standards.
Our commercial battery facilities in Raynham, MA and Teterboro, NJ, and our facilities in
Alden, NY and Minneapolis, MN (enclosure manufacturing and engineering) are ISO 9001-2000
registered, which requires compliance with regulations regarding quality systems of product
design (where applicable), supplier control, manufacturing processes and management review.
This certification can only be achieved after completion of an audit conducted by an independent
authority.
The Quality Systems of our facilities in Tijuana, Mexico, Minneapolis, MN, Clarence, NY
(machining and assembly of components), and the Orvin, Switzerland (Precimed) sites are
certified to the requirements of ISO 13485 for the design (where applicable) and manufacture of
components and finished device assemblies. This level of certification allows for the
manufacture and distribution (via CE mark) of finished medical devices as well as device
components in Europe and finished medical devices in Canada. This certification gives us the
ability to serve as a manufacturing partner to medical device manufacturers, which we believe
will improve our competitive position in the vascular access, CRM and emerging
neuromodulation and orthopedic markets. Our Vascular Access facility (Minneapolis, MN) and
several of our Orthopedics facilities (Switzerland and France) are also registered with the FDA,
thus enabling the manufacture and distribution of FDA cleared registered medical devices inside
the U.S.
We are currently working with several neuromodulation companies that can benefit from our
expanded capabilities. Providing device level manufacturing capability allows us to move up our
customers’ supply-chain and helps to drive both component and sub-assembly growth.
Our existing manufacturing plants are audited by several notified bodies (TUV, G-Med, QMI,
BSI, and the National Standards Authority of Ireland). To maintain certification, all facilities
must be reexamined routinely by their respective notified body.
10
SALES AND MARKETING
Products from our IMC business are sold directly to our customers. In our Electrochem
business, we utilize a combination of direct and indirect sales methods, depending on the
particular product. In 2008, approximately 49% of our products were sold in the U.S. Sales to
countries outside of the U.S. are primarily to customers whose corporate offices are located and
headquartered in the U.S. Information regarding our sales by geographic area is set forth at Note
15 – “Business Segment Information” of the Notes to the Consolidated Financial Statements
contained at Item 8 of this report.
The majority of our medical customers contract with us to develop custom components and
assemblies to fit their product specifications. As a result, we have established close working
relationships between our internal program managers and our customers. We market our
products and technologies at industry meetings and trade shows domestically and internationally.
Internal sales managers support all activity and involve engineers and technology professionals
in the sales process to address customer requests appropriately.
We sell our commercial cells and battery packs directly to the end user, directly to manufacturers
that incorporate our products into other devices for resale, or to distributors who sell our products to
manufacturers and end users. Our sales managers are trained to assist our customers in selecting
appropriate chemistries and configurations. We market our Electrochem products at various
technical trade meetings. We also place print advertisements in relevant trade publications.
Firm backlog orders at January 2, 2009 and December 28, 2007 were approximately $190.4
million and $107.2 million, respectively. Most of these orders are expected to be shipped within
one year. See Customers section below for further discussion.
CUSTOMERS
Our IMC customers include leading OEMs, in alphabetical order here and throughout this report,
such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew,
Sorin Group, St. Jude Medical, Stryker and Zimmer. During 2007 and 2008, we completed
seven acquisitions consistent with our strategic objective to diversify our customer base and
market concentration. As a result, in 2008, Boston Scientific, Medtronic and St. Jude Medical,
collectively accounted for 44% of our total sales, compared to 67% in 2007 and 2006.
The nature and extent of our selling relationships with each IMC customer are different in terms
of breadth of component products purchased, purchased product volumes, length of contractual
commitment, ordering patterns, inventory management and selling prices. We have pricing
arrangements with our customers that at times do not specify minimum order quantities. Our
visibility to customer ordering patterns is over a relatively short period of time. Our customers
may have inventory management programs and alternate supply arrangements of which we are
unaware. Additionally, the relative market share among OEM device manufacturers changes
periodically. These and other factors can significantly impact our sales.
Our Electrochem customers are primarily companies involved in demanding applications in
markets such as energy, security, portable medical and environmental monitoring including
Halliburton Company, Weatherford International, General Electric, Thales, Zoll Medical Corp.
and Scripps Institution of Oceanography.
11
SUPPLIERS AND RAW MATERIALS
We purchase certain critical raw materials from a limited number of suppliers due to the
technically challenging requirements of the supplied product and/or the lengthy process required
to qualify these materials with our customers. We cannot quickly establish additional or
replacement suppliers for these materials because of these requirements. In the past, we have not
experienced any significant interruptions or delays in obtaining these raw materials. We
maintain minimum safety stock levels of critical raw materials.
For other raw material purchases, we utilize competitive pricing methods such as bulk purchases,
precious metal pool buys, blanket orders, and long-term contracts to secure supply. We believe
that there are alternative suppliers or substitute products available at competitive prices for all of
the materials we purchase.
COMPETITION
Existing and potential competitors in our IMC business includes leading IMD manufacturers
such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic, Smith & Nephew,
Sorin Group, St. Jude Medical, Stryker and Zimmer that currently have vertically integrated
operations and may expand their vertical integration capability in the future. Competitors also
include independent suppliers who typically specialize in one type of component.
Our known non-vertically integrated competitors include the following:
Product Line
Competitors
Medical batteries
Capacitors
Feedthroughs
EMI filtering
Enclosures
Commercial
batteries/battery packs
Litronik (a subsidiary of Biotronik)
Eagle-Picher
Critical Medical Components
Alberox (subsidiary of The Morgan Crucible Co. PLC)
AVX (subsidiary of Kyocera)
Eurofarad
Heraeus
Hudson
Engineered Power
Saft
Tadiran
Tracer Technologies
Ultralife
Nexergy
Micro-power
Accutech
vMonitor
Machined and molded
components
Numerous
12
Product Line
Competitors
Value added assembly
Numerous
Orthopedic trays,
instruments and
implants
Catheters
Leads
Symmetry
Paragon
Accelent
Teleflex
Viasys
Orchid
Teleflex
Oscor
GOVERNMENT REGULATION
Except as described below, our business is not subject to direct governmental regulation other
than the laws and regulations generally applicable to businesses in the jurisdictions in which we
operate. We are subject to federal, state and local environmental laws and regulations governing
the emission, discharge, use, storage and disposal of hazardous materials and the remediation of
contamination associated with the release of these materials at our facilities and at off-site
disposal locations. Our manufacturing and research, development and engineering activities may
involve the controlled use of small amounts of hazardous materials. Liabilities associated with
hazardous material releases arise principally under the federal Comprehensive Environmental
Response, Compensation and Liability Act and analogous state laws that impose strict, joint and
several liability on owners and operators of contaminated facilities and parties that arrange for
the off-site disposal of hazardous materials. We are not aware of any material noncompliance
with the environmental laws currently applicable to our business and we are not subject to any
material claim for liability with respect to contamination at any Company facility or any off-site
location. We cannot assure you that we will not become subject to such environmental liabilities
in the future as a result of historic or current operations.
To varying degrees, our products are subject to regulation by numerous government agencies,
including the U.S. Food and Drug Administration (“FDA”) and comparable foreign agencies.
The medical product components we manufacture are not subject to regulation by the FDA.
However, the FDA and related state and foreign governmental agencies regulate the completed
devices we manufacture as well as our customers’ products as finished medical devices.
We have “master files” on record with the FDA. Master files may be used to provide
confidential detailed information about facilities, processes, or articles used in the
manufacturing, processing, packaging and storing of one or more medical device components.
These submissions may be used by device manufacturers to support the premarket notification
process required by Section 510(k) of the Federal Food Drug & Cosmetic Act. This notification
process is necessary to obtain clearance from the FDA to market a device for human use in the
U.S.
13
The medical devices we manufacture and market are subject to regulation by the FDA and, in some
instances, by state and foreign authorities. Pursuant to the Medical Device Amendments of 1976 to
the Federal Food, Drug and Cosmetic Act and related regulations, medical devices intended for
human use are classified into three categories (Classes I, II and III), depending upon the degree of
regulatory control to which they will be subject. In the U.S., our introducer and delivery catheter
products are considered Class II devices.
If a Class II device is substantially equivalent to an existing (predicate) device that has been
continuously marketed since the effective date of the 1976 Amendments, FDA requirements may be
satisfied through a Pre-market Notification Submission or 510(k) under which the applicant
provides product information supporting its claim of substantial equivalence. In a 510(k)
Submission, the FDA may also require that we provide clinical test results demonstrating the safety
and efficacy of the device. Generally, Class III devices are typically life-sustaining, life supporting,
or implantable devices that must receive Pre-Market Approval (“PMA”) by the FDA to ensure their
safety and effectiveness. A PMA is a more rigorous approval process typically requiring human
clinical studies. Certain leads that we manufacture and market are Class III devices, but any
required PMA is submitted and received by our customers.
As a manufacturer of medical devices, we are also subject to certain other FDA regulations and our
device manufacturing processes and facilities are subject to on-going review by the FDA in order to
ensure compliance with the current Good Manufacturing Practices Regulation (21CFR820). We
believe that our manufacturing and quality and regulatory systems conform to the requirements of
all pertinent FDA regulations. Our sales and marketing practices are subject to regulation by the
U.S. Department of Health and Human Services pursuant to federal anti-kickback laws, and are also
subject to similar state laws.
We are also subject to various other environmental, transportation and labor laws as well as
various other directives and regulations both in the U.S. and abroad. We believe that compliance
with these laws will not have a material impact on our capital expenditures, earnings or
competitive position. Given the scope and nature of these laws, however, there can be no
assurance that they will not have a material impact on our results of operations. We assess
potential contingent liabilities on a quarterly basis. At present, we are not aware of any such
liabilities that would have a material impact on our business.
RECRUITING AND TRAINING
We invest substantial resources in our recruiting efforts that focus on supplying quality personnel
to support our business objectives. We have established a number of programs that are designed
to challenge and motivate our employees. All staff are encouraged to be proactive in
contributing ideas. Feedback surveys are used to collect suggestions on ways that our business
and operations can be improved. We further meet our hiring needs through outside sources as
required.
We provide a training program for our new employees that is designed to educate them on
safety, quality, business strategy, corporate culture, and the methodologies and technical
competencies that are required for our business. Our safety training programs focus on such
areas as basic industrial safety practices and emergency response procedures to deal with any
potential fires or chemical spills. All of our employees are required to participate in a
specialized training program that is designed to provide an understanding of our quality
14
objectives. Supporting our lifelong learning environment, we offer our employees a tuition
reimbursement program and encourage them to continue their education at accredited colleges
and universities. Many of our professionals attend seminars on topics that are related to our
corporate objectives and strategies. We believe that comprehensive training is necessary to
ensure that our employees have state of the art skills, utilize best practices, and have a common
understanding of work practices.
EMPLOYEES
The following table provides a breakdown of employees as of January 2, 2009:
Manufacturing
General and administrative
Sales and marketing
Research, development and engineering
Chaumont, France facility
Switzerland facilities
Tijuana, Mexico facility
Total
1,580
139
36
199
214
233
882
3,283
We also employ a number of temporary employees to assist us with various projects and service
functions and address peaks in staff requirements. Our employees are not represented by any
union. Approximately 170 and 180 positions at our Switzerland and France locations,
respectively, are manufacturing in nature. The positions at our Tijuana, Mexico facility are
primarily manufacturing. We believe that we have a good relationship with our employees.
EXECUTIVE OFFICERS OF THE COMPANY
Information concerning our executive officers is presented below as of March 2, 2009. The
officers’ terms of office run until the first meeting of the Board of Directors after our Annual
Meeting, which takes place immediately following our Annual Meeting of Stockholders and
until their successors are elected and qualified, except in the case of earlier death, retirement,
resignation or removal.
Mauricio Arellano, age 42, is Senior Vice President and the Business Leader for our Cardiac
and Neurology Group. He served as the Senior Vice President and Business Leader of our CRM
and Neuromodulation Group from January 2008 to October 2008, our Medical Solutions Group
from November 2006 to January 2008 and as Vice President of Greatbatch Mexico from January
2005 to November 2006. Mr. Arellano joined our Company in October 2003 as the Plant
Manager of our former Carson City, NV facility. Prior to joining our Company, he served in a
variety of human resources and operational roles with Tyco Healthcare – Especialidades Medicas
Kenmex and with Sony de Tijuana Este.
Susan M. Bratton, age 52, is Senior Vice President and Business Leader for our Commercial
Group. She served as Vice President of Corporate Quality from March 2001 to January 2005, as
General Manager of our Electrochem Division from July 1998 to March 2001 and as Director of
Procurement from June 1991 to July 1998. Ms. Bratton has held various other positions with our
Company since joining us in 1976.
15
Susan H. Campbell, age 44, is Senior Vice President and the Business Leader for our
Orthopedics Group. Ms. Campbell had served as Senior Vice President for Global
Manufacturing and Supply Chain from January 2008 until October 2008 and the Business Leader
for our Medical Power Group from January 2005 until January 2008. She joined our Company
in April 2003 as the Plant Manager for our medical battery facility. Prior to that time, Ms.
Campbell was a plant manager for Delphi Corporation and General Motors Corporation.
Barbara M. Davis, age 58, is Vice President for Human Resources, a position she has held since
April 2004. She joined our Company in October 1998 as Director of Human Resources and
Organization Development.
Richard M. Farrell, age 46, is Vice President of our QIG Group. Mr. Farrell joined the
Company with our acquisition of Quan in November 2007 as Vice President for Business
Development. He was a founder of and had been employed by Quan in a variety of roles, since
1998, most recently as its Vice President of Business Development.
Thomas J. Hook, age 46, is our President & Chief Executive Officer. Prior to August 2006, he
was our Chief Operating Officer, a position he assumed upon joining our Company in September
2004. From August 2002 until September 2004, Mr. Hook was employed by CTI Molecular
Imaging where he had served as President, CTI Solutions Group.
Thomas J. Mazza, age 55, is Senior Vice President & Chief Financial Officer, a position he has
held since August 2005. He joined our Company in November 2003 as Vice President and
Corporate Controller. Prior to that, Mr. Mazza served in a variety of financial roles with Foster
Wheeler Ltd., including Vice President and Corporate Controller.
Timothy G. McEvoy, age 51, is Vice President, General Counsel & Secretary, a position he has
held since joining our Company in February 2007. From 1992 until January 2007, he was
employed in a variety of legal roles by Manufacturers and Traders Trust Company, most recently
as Administrative Vice President and Deputy General Counsel.
AVAILABLE INFORMATION
We make available free of charge through our internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as
soon as reasonably practicable after we electronically file those reports with, or furnish them to,
the Securities and Exchange Commission. Our Internet address is www.greatbatch.com. The
information contained on our website is not incorporated by reference in this annual report on
Form 10-K and should not be considered a part of this report. These items may also be obtained
free of charge by written request made to Christopher J. Thome, Manager of External Reporting
and Investor Relations, Greatbatch, Inc., 10000 Wehrle Drive, Clarence, New York 14031.
16
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements contained in this annual report on Form 10-K and other written and oral
statements made from time to time by us and our representatives, are not statements of historical
or current fact. As such, they are “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. We have based these forward-looking statements on our current
expectations, which are subject to known and unknown risks, uncertainties and assumptions.
They include statements relating to:
future sales, expenses and profitability;
the future development and expected growth of our business and industry;
•
•
• our ability to execute our business model and our business strategy;
• our ability to identify trends within our industries and to offer products and services
that meet the changing needs of those markets; and
• projected capital expenditures.
You can identify forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,”
“potential” or “continue” or the negative of these terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially from those
suggested by these forward-looking statements. In evaluating these statements and our prospects
generally, you should carefully consider the factors set forth below. All forward-looking
statements attributable to us or persons acting on our behalf are expressly qualified in their
entirety by these cautionary factors and to others contained throughout this report. We are under
no duty to update any of the forward-looking statements after the date of this report or to
conform these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that may cause actual
results to differ from the results expressed or implied by our forward-looking statements or that
may affect our future results, some of these factors include the following: dependence upon a
limited number of customers; customer ordering patterns; product obsolescence; our inability to
market current or future products; pricing pressure from customers; our ability to timely and
successfully implement our cost reduction and plant consolidation initiatives; our reliance on
third party suppliers for raw materials, products and subcomponents; fluctuating operating
results; our inability to maintain high quality standards for our products; challenges to our
intellectual property rights; product liability claims; our inability to successfully consummate
and integrate acquisitions and to realize synergies and to operate these acquired businesses in
accordance with expectations; our unsuccessful expansion into new markets; our inability to
obtain licenses to key technology; regulatory changes or consolidation in the healthcare industry;
global economic factors including currency exchange rates and interest rates; and other risks and
uncertainties that arise from time to time and are described in Item 1A of this report.
ITEM 1A. RISK FACTORS
Our business faces many risks. Any of the risks discussed below, or elsewhere in this report or
in our other SEC filings, could have a material impact on our business, financial condition or
results of operations. Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial may also impair our business operations.
17
Risks Related To Our Business
We depend heavily on a limited number of customers, and if we lose any of them or they
reduce their business with us, we would lose a substantial portion of our revenues.
In 2008, Boston Scientific, Medtronic and St. Jude Medical, collectively accounted for
approximately 44% of our revenues. Our supply agreements with these customers might not be
renewed. Furthermore, many of our supply agreements do not contain minimum purchase level
requirements and therefore there is no guaranteed source of revenue that we can depend upon
under these agreements. The loss of any large customer or a reduction of business with that
customer for any reason would harm our business, financial condition and results of operations.
If we do not respond to changes in technology, our products may become obsolete and we
may experience a loss of customers and lower revenues.
We sell our products to customers in several industries that are characterized by rapid
technological changes, frequent new product introductions and evolving industry standards.
Without the timely introduction of new products and enhancements, our products and services
will likely become technologically obsolete over time and we may lose a significant number of
our customers. In addition, other new products introduced by our customers may require fewer
of our batteries or components. We dedicate a significant amount of resources to the
development of our products and technologies and we would be harmed if we did not meet
customer requirements and expectations. Our inability, for technological or other reasons, to
successfully develop and introduce new and innovative products could result in a loss of
customers and lower revenues.
If we are unable to successfully market our current or future products, our business will be
harmed and our revenues and operating results will be reduced.
The market for our medical and commercial products has been growing in recent years. If the
market for our products does not grow as rapidly as forecasted by industry experts, our revenues
could be less than expected. In addition, it is difficult to predict the rate at which the market for
our products will grow or at which new and increased competition will result in market
saturation. Slower growth in the CRM, Orthopedic, Vascular Access or Energy markets in
particular would negatively impact our revenues. In addition, we face the risk that our products
will lose widespread market acceptance. Our customers may not continue to utilize the products
we offer and a market may not develop for our future products.
We may at times determine that it is not technically or economically feasible for us to continue
to manufacture certain products and we may not be successful in developing or marketing them.
Additionally, new technologies that we develop may not be rapidly accepted because of
industry-specific factors, including the need for regulatory clearance, entrenched patterns of
clinical practice and uncertainty over third party reimbursement. If this occurs, our business will
be harmed and our operating results will be negatively affected.
18
We are subject to pricing pressures from customers, which could harm operating results.
We have made price reductions to some of our large customers in recent years and we expect
customer pressure for price reductions will continue. Price concessions or reductions may cause
our operating results to suffer. In addition, any delay or failure by a large customer to make
payments due to us would harm our operating results and financial condition.
We rely on third party suppliers for raw materials, key products and subcomponents and if
we are unable to obtain these materials, products and subcomponents on a timely basis or
on terms acceptable to us, our ability to manufacture products will suffer.
Our business depends on a continuous supply of raw materials. The principal raw materials used
in our business include lithium, iodine, tantalum, platinum, ruthenium, gallium trichloride,
tantalum pellets, vanadium pentoxide, iridium, and titanium. Raw materials needed for our
business are susceptible to fluctuations due to transportation, government regulations, price
controls, economic climate or other unforeseen circumstances. Increasing global demand for
some of the raw materials we need for our business, including platinum, iridium, gallium
trichloride, tantalum and titanium, has caused the prices of these materials to increase
significantly. In addition, there are a limited number of worldwide suppliers of several raw
materials needed to manufacture our products, including lithium, gallium trichloride, carbon
monofluoride, and tantalum. We may not be able to continue to procure raw materials critical to
our business or to procure them at acceptable price levels.
We rely on third party manufacturers to supply many of our products and subcomponents.
Manufacturing problems may occur with these and other outside sources, as a supplier may fail
to develop and supply products and subcomponents to us on a timely basis, or may supply us
with products and subcomponents that do not meet our quality, quantity and cost requirements.
If any of these problems occur, we may be unable to obtain substitute sources for these products
and subcomponents on a timely basis or on terms acceptable to us, which could harm our ability
to manufacture our own products and components profitably or on time. In addition, to the
extent the processes that our suppliers use to manufacture products and subcomponents are
proprietary, we may be unable to obtain comparable subcomponents from alternative suppliers.
We may never realize the full value of our intangible assets, which represent a significant
portion of our total assets.
At January 2, 2009, we had $428.6 million of intangible assets, representing 50% of our total
assets. These intangible assets consist primarily of goodwill, trademarks, tradenames, customer
lists and patented technology arising from our acquisitions. Goodwill and other intangible assets
with indefinite lives are not amortized, but are tested annually or upon the occurrence of certain
events that indicate that the assets may be impaired. We may not receive the recorded value for
our intangible assets if we sell or liquidate our business or assets. In addition, the material
concentration of intangible assets increases the risk of a large charge to earnings in the event that
the recoverability of these intangible assets is impaired, and in the event of such a charge to
earnings, the market price of our common stock could be adversely affected. In addition,
intangible assets with definite lives, which represent $90.3 million of our net intangible assets at
January 2, 2009, will continue to be amortized. We incurred total amortization expenses relating
to these intangible assets of $10.7 million in 2008. These expenses will reduce our future
earnings or increase our future losses.
19
Quality problems with our products could harm our reputation for producing high quality
products, erode our competitive advantage.
Our products are held to high quality and performance standards. In the event that our products
fail to meet these standards, our reputation for producing high quality products could be harmed,
which would damage our competitive advantage and could result in lower revenues.
Quality problems with our products could result in warranty claims and additional costs.
We generally allow customers to return defective or damaged products for credit, replacement,
or exchange. We generally warrant that our products will meet customer specifications and will
be free from defects in materials and workmanship. Additionally, we carry a safety stock of
inventory for our customers which may be impacted by warranty claims. We accrue for our
exposure to warranty claims based upon recent historical experience and other specific
information as it becomes available. However, such reserves may not be adequate to cover
future warranty claims and additional warranty costs and/or inventory write-offs may be incurred
which could harm our operating results or financial condition.
Regulatory issues resulting from product complaints/recalls or regulatory body audits
could harm our ability to produce and supply products or bring new products to market.
Our products are designed, manufactured and distributed globally in compliance with all
pertinent regulations and standards. However, a product complaint recall or negative regulatory
body audit may cause products to be removed from the market. In addition, during the corrective
phase, regulatory bodies may not allow new products to be cleared for marketing and sale.
If we become subject to product liability claims, our operating results and financial
condition could suffer.
The manufacturing and sale of our products expose us to potential product liability claims and
product recalls, including those that may arise from failure to meet product specifications,
misuse or malfunction of, or design flaws in our products, or use of our products with
components or systems not manufactured or sold by us. Many of our products are components
and function in interaction with our customers’ medical devices. For example, our batteries are
produced to meet various electrical performance, longevity and other specifications, but the
actual performance of those products is dependent on how they are in fact utilized as part of the
customers’ devices over the lifetime of the products. Product performance and device interaction
from time to time have been, and may in the future be, different than expected for a number of
reasons. Consequently, it is possible that customers may experience problems with their medical
devices that could require device recall or other corrective action, where our batteries met the
specification at delivery, and for reasons that are not related primarily or at all to any failure by
our product to perform in accordance with specifications. It is possible that our customers (or
end-users) may in the future assert that our products caused or contributed to device failure
where our product was not the primary cause of the device performance issue. Even if these
assertions do not lead to product liability or contract claims, they could harm our reputation and
our customer relationships.
20
Provisions contained in our agreements with key customers attempting to limit our damages,
including provisions to limit damages to liability for gross negligence, may not be enforceable in
all instances or may otherwise fail to protect us from liability for damages. Product liability
claims or product recalls, regardless of their ultimate outcome, could require us to spend
significant time and money in litigation or require us to pay significant damages. The occurrence
of product liability claims or product recalls could adversely affect our operating results and
financial condition.
We carry liability insurance coverage that is limited in scope and amount. We may not be able
to maintain this insurance at a reasonable cost or on reasonable terms, or at all. This insurance
may not be adequate to protect us against a product liability claim that arises in the future.
Our operating results may fluctuate, which may make it difficult to forecast our future
performance and may result in volatility in our stock price.
Our operating results have fluctuated in the past and are likely to fluctuate significantly from
quarter to quarter due to a variety of factors, including but not limited to the following:
• the fixed nature of a substantial percentage of our costs, which results in our operations being
particularly sensitive to fluctuations in revenue;
• changes in the relative portion of our revenue represented by our various products and
customers, which could result in reductions in our profits if the relative portion of our revenue
represented by lower margin products increases;
• timing of orders placed by our principal customers who account for a significant portion of
our revenues; and
• increased costs of raw materials or supplies.
If we are unable to protect our intellectual property and proprietary rights, our business
could be adversely affected.
We rely on a combination of patents, licenses, trade secrets and know-how to establish and
protect our proprietary rights to our technologies and products. As of January 2, 2009, we held
372 active U.S. patents and 264 active foreign patents. However, the steps we have taken or will
take to protect our proprietary rights may not be adequate to deter misappropriation of our
intellectual property. In addition to seeking formal patent protection whenever possible, we
attempt to protect our proprietary rights and trade secrets by entering into confidentiality and
non-compete agreements with employees, consultants and third parties with which we do
business. However, these agreements can be breached and, if they are, there may not be an
adequate remedy available to us and we may be unable to prevent the unauthorized disclosure or
use of our technical knowledge, practices or procedures. If our trade secrets become known, we
may lose our competitive advantages.
If third parties infringe or misappropriate our patents or other proprietary rights, our business
could be seriously harmed. We may be required to spend significant resources to monitor our
intellectual property rights, we may not be able to detect infringement of these rights and may
lose our competitive advantages associated with our intellectual property rights before we do so.
In addition, competitors may design around our technology or develop competing technologies
that do not infringe on our proprietary rights.
21
We may be subject to intellectual property claims, which could be costly and time
consuming and could divert our management from our business operations.
In producing our products, third parties may claim that we are infringing on their intellectual
property rights, and we may be found to have infringed those intellectual property rights. We
may be unaware of intellectual property rights of others that may be used in our technology and
products. In addition, third parties may claim that our patents have been improperly granted and
may seek to invalidate our existing or future patents. If any claim for invalidation prevailed, the
result could be greatly expanded opportunities for third parties to manufacture and sell products
that compete with our products and our revenues from any related license agreements would
decrease accordingly. We also typically do not receive significant indemnification from parties
which license technology to us against third party claims of intellectual property infringement.
Any litigation or other challenges regarding our patents or other intellectual property could be
costly and time consuming and could divert our management and key personnel from our
business operations. The complexity of the technology involved in producing our products, and
the uncertainty of intellectual property litigation increases these risks. Claims of intellectual
property infringement might also require us to enter into costly royalty or license agreements.
However, we may not be able to obtain royalty or license agreements on terms acceptable to us,
or at all. We also may be subject to significant damages or injunctions against development and
sale of our products. See “Litigation” of Item 7 Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
We are dependent upon our senior management team and key personnel and the loss of
any of them could significantly harm us.
Our future performance depends to a significant degree upon the continued contributions of our
senior management team and key technical personnel. Our products are highly technical in
nature. In general, only highly qualified and trained scientists have the necessary skills to
develop our products. The loss or unavailability to us of any member of our senior management
team or a key technical employee could significantly harm us. We face intense competition for
these professionals from our competitors, customers and companies operating in our industry.
To the extent that the services of members of our senior management team and key technical
personnel would be unavailable to us for any reason, we would be required to hire other
personnel to manage and operate our company and to develop our products and technology. We
may not be able to locate or employ such qualified personnel on acceptable terms.
We may not be able to attract, train and retain a sufficient number of qualified employees
to maintain and grow our business.
Our success will depend in large part upon our ability to attract, train, retain and motivate highly
skilled employees and management. There is currently aggressive competition for employees
who have experience in technology and engineering. We compete intensely with other
companies to recruit and hire from this limited pool. The industries in which we compete for
employees are characterized by high levels of employee attrition. Although we believe we offer
competitive salaries and benefits, we may have to increase spending in order to attract, train and
retain personnel.
22
We may make acquisitions that could subject us to a number of operational risks and we
may not be successful in integrating companies we acquire into our existing operations.
We have made and expect to make in the future acquisitions that complement our core
competencies in technology and manufacturing to enable us to manufacture and sell additional
products to our existing customers and to expand our business into related markets.
Implementation of our acquisition strategy entails a number of risks, including:
• inaccurate assessments of potential liabilities associated with the acquired businesses;
• the existence of unknown and/or undisclosed liabilities associated with the acquired
businesses;
• diversion of our management’s attention from our core businesses;
• potential loss of key employees or customers of the acquired businesses;
• difficulties in integrating the operations and products of an acquired business or in realizing
projected revenue growth, efficiencies and cost savings; and
• increases in indebtedness and limitation in our ability to access capital if needed.
Since the end of 2006, we have made seven acquisitions: BIOMEC in April 2007; Enpath in
June 2007; IntelliSensing in October 2007; Quan in November 2007; EAC in November 2007;
and most recently Precimed in January 2008 and the Chaumont Facility in February 2008. These
acquisitions have increased the size and scope of our operations, and may place a strain on our
managerial, operational and financial resources and systems. Any failure by us to manage this
growth and successfully integrate these acquisitions could harm our business and our financial
condition and results.
If we are not successful in making acquisitions to expand and develop our business, our
operating results may suffer.
A component of our strategy is to make acquisitions that complement our core competencies in
technology and manufacturing to enable us to manufacture and sell additional products to our
existing customers and to expand our business into related markets. Our continued growth may
depend on our ability to identify and acquire companies that complement or enhance our
business on acceptable terms. We may not be able to identify or complete future acquisitions.
Some of the risks that we may encounter include expenses associated with and difficulties in
identifying potential targets, the costs associated with unsuccessful acquisitions, and higher
prices for acquired companies because of competition for attractive acquisition targets. Our
failure to acquire additional companies could cause our operating results to suffer.
We may face competition from our principal medical customers that could harm our
business and we may be unable to compete successfully against new entrants and
established companies with greater resources.
Competition in connection with the manufacturing of our products may intensify in the future.
One or more of our customers may undertake additional vertical integration initiatives and begin
to manufacture some or all of their components that we currently supply them which could cause
our operating results to suffer. The market for commercial power sources is competitive,
fragmented and subject to rapid technological change. Many other commercial power source
suppliers are larger and have greater financial, operational, personnel, sales, technical and
marketing resources than our company. These and other companies may develop products that
are superior to ours, which could result in lower revenues and operating results.
23
Accidents at one of our facilities could delay production and adversely affect our operations.
Our business involves complex manufacturing processes and hazardous materials that can be
dangerous to our employees. Although we employ safety procedures in the design and operation
of our facilities, there is a risk that an accident or death could occur in one of our facilities. Any
accident, such as a chemical spill, could result in significant manufacturing delays or claims for
damages resulting from injuries, which would harm our operations and financial condition. The
potential liability resulting from any such accident or death, to the extent not covered by
insurance, could harm our financial condition and/or operating results. Any disruption of
operations at any of our facilities could harm our business.
We intend to expand into new markets and our proposed expansion plans may not be
successful, which could harm our operating results.
We intend to expand into new markets through the development of new product applications
based on our existing component technologies. These efforts have required and will continue to
require us to make substantial investments, including significant research, development and
engineering expenditures and capital expenditures for new, expanded or improved manufacturing
facilities. Specific risks in connection with expanding into new markets include the inability to
transfer our quality standards into new products, the failure of customers in new markets to
accept our products, and competition. We may not be able to successfully manage expansion
into new markets and products and these unsuccessful efforts may harm our operating results.
Our failure to obtain licenses from third parties for new technologies or the loss of these licenses
could impair our ability to design and manufacture new products and reduce our revenues.
We occasionally license technologies from third parties rather than depending exclusively on our
own proprietary technology and developments. For example, we license a capacitor patent from
another company. Our ability to license new technologies from third parties is and will continue
to be critical to our ability to offer new and improved products. We may not be able to continue
to identify new technologies developed by others and even if we are able to identify new
technologies, we may not be able to negotiate licenses on favorable terms, or at all.
Additionally, we could lose rights granted under licenses for reasons beyond our control.
Our international operations and sales are subject to a variety of risks and costs that could
adversely affect our profitability and operating results.
Our sales to countries outside the U.S., which accounted for 51% of net sales for 2008, our
Mexico, Switzerland and France locations are subject to certain foreign country risks. Our
international operations are, and will continue to be, subject to a number of risks and potential
costs, including:
• changes in foreign regulatory requirements;
• local product preferences and product requirements;
• longer-term receivables than are typical in the U.S.;
• difficulties in enforcing agreements through certain foreign legal systems;
• less protection of intellectual property in some countries outside of the U.S.;
• trade protection measures and import and export licensing requirements;
• work force instability;
• political and economic instability; and
• complex tax and cash management issues.
24
We incur certain expenses related to our foreign operations that are denominated in a foreign
currency. Historically, foreign currency fluctuations have not had a material effect on our
consolidated financial statements. However, fluctuations in foreign currency exchange rates
could have a significant negative impact on our profitability and operating results.
The current economic environment and credit market uncertainty could interrupt our
access to capital markets, borrowings, or financial transactions to hedge certain risks,
which could adversely affect our financial condition.
As of January 2, 2009, we had $352.9 million of long-term debt with varying maturities,
including our convertible subordinated notes and revolving line of credit. These arrangements
have allowed us to make investments in growth opportunities and fund working capital
requirements. In addition, we enter into financial transactions to hedge certain risks, including
foreign exchange and interest rate risk. Our continued access to capital markets, the stability of
our lenders and their willingness to support our needs, and the stability of the parties to our
financial transactions that hedge risks are essential for us to meet our current obligations, fund
operations, and fund our strategic initiatives. An interruption in our access to external financing
or financial transactions to hedge risk could adversely affect our business prospects and financial
condition. See further information regarding our liquidity in “Liquidity and Capital Resources”
under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Risks Related To Our Industries
The healthcare industry is subject to various political, economic and regulatory changes
that could force us to modify how we develop and price our products.
The healthcare industry is highly regulated and is influenced by changing political, economic and
regulatory factors. Several of our product lines are subject to international, federal, state and
local health and safety, packaging and product content regulations. In addition, IMDs produced
by our medical customers are subject to regulation by the U.S. Food and Drug Administration
and similar governmental agencies. These regulations govern a wide variety of product activities
from design and development to labeling, manufacturing, promotion, sales and distribution.
Compliance with these regulations may be time consuming, burdensome and expensive and
could negatively affect our customers’ abilities to sell their products, which in turn would
adversely affect our ability to sell our products. This may result in higher than anticipated costs
or lower than anticipated revenues.
These regulations are also complex, change frequently and have tended to become more stringent
over time. Federal and state legislatures have periodically considered programs to reform or
amend the U.S. healthcare system at both the federal and state levels. In addition, these
regulations may contain proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare industry
participants operate. We may be required to incur significant expenses to comply with these
regulations or remedy past violations of these regulations. Any failure by our company to
comply with applicable government regulations could also result in cessation of portions or all of
our operations, impositions of fines and restrictions on our ability to carry on or expand our
operations. In addition, because many of our products are sold into regulated industries, we must
comply with additional regulations in marketing our products.
25
Our business is subject to environmental regulations that could be costly to comply with.
Federal, state and local regulations impose various environmental controls on the manufacturing,
transportation, storage, use and disposal of batteries and hazardous chemicals and other materials
used in, and hazardous waste produced by, the manufacturing of power sources and components.
Conditions relating to our historical operations may require expenditures for clean-up in the
future and changes in environmental laws and regulations may impose costly compliance
requirements on us or otherwise subject us to future liabilities. Additional or modified
regulations relating to the manufacture, transportation, storage, use and disposal of materials
used to manufacture our batteries and components or restricting disposal of batteries may be
imposed. In addition, we cannot predict the effect that additional or modified regulations may
have on us or our customers.
Consolidation in the healthcare industry could result in greater competition and reduce our
IMC revenues and harm our business.
Many healthcare industry companies are consolidating to create new companies with greater
market power. As the healthcare industry consolidates, competition to provide products and
services to industry participants will become more intense. These industry participants may try
to use their market power to negotiate price concessions or reductions for our products. If we are
forced to reduce our prices because of consolidation in the healthcare industry, our revenues
would decrease and our operating results would suffer.
Our IMC business is indirectly subject to healthcare industry cost containment measures
that could result in reduced sales of our products.
Several of our customers rely on third party payors, such as government programs and private
health insurance plans, to reimburse some or all of the cost of the procedures in which our
products are used. The continuing efforts of government, insurance companies and other payors
of healthcare costs to contain or reduce those costs could lead to patients being unable to obtain
approval for payment from these third party payors. If that occurred, sales of IMDs may decline
significantly, and our customers may reduce or eliminate purchases of our products. The cost
containment measures that healthcare payors are instituting, both in the U.S. and internationally,
could reduce our revenues and harm our operating results.
Our Electrochem revenues are dependent on conditions in the oil and natural gas industry,
which historically have been volatile.
Sales of our commercial products depend to a great extent upon the condition of the oil and gas
industry. In the past, oil and natural gas prices have been volatile and the oil and gas exploration
and production industry has been cyclical, and it is likely that oil and natural gas prices will
continue to fluctuate in the future. The current and anticipated prices of oil and natural gas
influence the oil and gas exploration and production business and are affected by a variety of
political and economic factors beyond our control, including worldwide demand for oil and
natural gas, worldwide and domestic supplies of oil and natural gas, the ability of the
Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels
and pricing, the level of production of non-OPEC countries, the price and availability of
alternative fuels, political stability in oil producing regions and the policies of the various
governments regarding exploration and development of their oil and natural gas reserves. An
adverse change in the oil and gas exploration and production industry or a reduction in the
exploration and production expenditures of oil and gas companies could cause our revenues from
Electrochem product sales to decline.
26
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our executive offices are located in Clarence, New York. The following table sets forth
information about all of our significant facilities as of January 2, 2009:
Location
Sq. Ft. Own/Lease
Principal Use
Alden, NY ........................... 125,000
32,400
Blaine, MN ..........................
Own
Own
Canton, MA.........................
32,000
Own
Chaumont, France ...............
59,200
Own
Clarence, NY ....................... 117,800
20,800
Clarence, NY .......................
18,600
Clarence, NY .......................
16,900
Cleveland, OH.....................
Own
Own
Lease
Lease
Columbia City, IN ...............
40,000
Lease
Corgemont, Switzerland .....
34,400
Lease
Indianapolis, IN...................
82,600
Own
Minneapolis, MN ................
Orvin, Switzerland ..............
72,000
34,400
Own
Own
Plymouth, MN.....................
95,700
Lease
Raynham, MA .....................
Teterboro, NJ ......................
81,000
23,500
Own
Lease
Tijuana, Mexico .................. 144,000
Lease
Medical battery and capacitor manufacturing
Medical device manufacturing and engineering
(formerly Quan)
Commercial battery manufacturing and research,
development and engineering (“RD&E”)
Manufacturing of orthopedic and surgical goods
(formerly DePuy)
Corporate offices and RD&E
Machining and assembly of components
Machining and assembly of components
Office and lab space for strategic design and
innovation (formerly BIOMEC)
Manufacturing of orthopedic and surgical goods
(formerly Precimed)
Manufacturing of orthopedic and surgical goods
(formerly Precimed)
Manufacturing of orthopedic and surgical goods
(formerly Precimed)
Enclosure manufacturing and engineering
Manufacturing of orthopedic and surgical goods
(formerly Precimed)
Introducers, catheters and leads manufacturing and
engineering (formerly Enpath)
Commercial battery manufacturing and RD&E
Office, warehousing and manufacturing (formerly
EAC)
Value-added assembly, and feedthrough, electrode
and EMI filtering manufacturing
We believe these facilities are suitable and adequate for our current business. During 2008,
construction of our new 81,000 square foot manufacturing facility in Raynham, MA was
completed. Additionally, the expansion of our research and development location in Clarence,
NY was completed in mid-2008. This provided an additional 35,000 square feet of space for our
corporate headquarters and replaced the 45,000 square feet of leased space previously utilized.
Finally, in 2008 we ceased operations at our Orchard Park, NY, Suzhou, China, and
Saignelegier, Switzerland facilities.
27
ITEM 3.
LEGAL PROCEEDINGS
We are involved in various legal actions arising in the normal course of business. While we do
not believe that the ultimate resolution of any such pending activities will have a material
adverse effect on our consolidated results of operations, financial position, or cash flows,
litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists
the possibility of a material adverse impact in the period in which the ruling occurs.
As previously reported, on June 12, 2006, Enpath was named as defendant in a patent
infringement action filed by Pressure Products Medical Supplies, Inc. (“Pressure Products”) in
which Pressure Products alleged that Enpath’s FlowGuard™ valved introducer, which has been
on the market for more than three years, and Enpath’s ViaSeal™ prototype introducer, which has
not been sold, infringes claims in Pressure Products patents. After trial, a jury found that Enpath
infringed the Pressure Products patents, but not willfully, and awarded damages in the amount of
$1.1 million. Enpath has appealed the final judgment to the U.S. Court of Appeals for the Federal
Circuit. As a result of a post-trial motion and pending the appeal, Enpath is permitted to
continue to sell FlowGuard™ provided that Enpath pays into an escrow fund a royalty of
between $1.50 and $2.25 for each sale of a FlowGuard™ valved introducer. The amount
accrued as escrow during 2008 was $0.5 million. During 2008, the Company incurred $4.5
million of costs related to this litigation.
During 2002, a former non-medical customer commenced an action alleging that the Company
had used proprietary information of the customer to develop certain products. The Company
believes that it has meritorious defenses and is vigorously defending the matter. The potential
risk of loss is between $0.0 and $1.7 million.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2008.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
The Company’s common stock trades on the New York Stock Exchange (“NYSE”) under the
symbol “GB.” The following table sets forth for the periods indicated the high, low and closing
sales prices per share for the common stock as reported by the NYSE:
2007
First Quarter 2007
Second Quarter 2007
Third Quarter 2007
Fourth Quarter 2007
2008
First Quarter 2008
Second Quarter 2008
Third Quarter 2008
Fourth Quarter 2008
Low
$25.04
25.31
26.00
18.52
Close
$25.50
32.40
26.59
19.91
$17.18
15.49
16.86
17.72
$18.79
17.20
25.78
26.72
High
$30.05
33.17
34.96
27.50
$23.48
19.79
27.08
27.41
28
As of March 2, 2009 there were 250 record holders of the Company’s common stock. The
Company stock account included in our 401(k) plan is considered one record holder for the
purposes of this calculation. There are approximately 1,700 holders of Company stock in the
401(k) including active and former employees. We have not paid cash dividends and currently
intend to retain any earnings to further develop and grow our business.
To satisfy minimum tax withholding requirements on vested restricted stock awards as allowed
under the Company’s 2002 and 2005 stock incentive plans, the Company repurchased 56,755
shares from employees of the Company at an average cost of $24.57 per share in 2008. The
price of these repurchases was based upon the closing market price of the Company’s stock on
the date of vesting.
PERFORMANCE GRAPH
The following graph compares for the five year period ended January 2, 2009, the cumulative
total stockholder return for Greatbatch, Inc., the S&P SmallCap 600 Index, and the Hemscott
Peer Group Index. The Hemscott Peer Group Index includes approximately 200 comparable
companies included in the Hemscott Industry Group 520 Medical Instruments & Supplies and
521 Medical Appliances & Equipment. The graph assumes that $100 was invested on January 2,
2004 and assumes reinvestment of dividends. The stock price performance shown on the
following graph is not necessarily indicative of future price performance:
175.00
150.00
125.00
100.00
75.00
50.00
25.00
0.00
s
r
a
l
l
o
D
1/02/04
12/31/04
12/30/05
12/29/06
12/28/07
1/02/09
GREATBATCH, INC.
S&P SMALLCAP 600 INDEX
HEMSCOTT PEER GROUP INDEX
29
ITEM 6.
SELECTED FINANCIAL DATA
The following table provides selected financial data of our Company for the periods indicated.
You should read this data along with Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and Item 8, “Financial Statements and
Supplementary Data” appearing elsewhere in this report. The consolidated statement of
operations data and the consolidated balance sheet data for the fiscal years indicated have been
derived from our consolidated financial statements and related notes.
Years ended
Consolidated Statement of Operations Data:
Jan. 2,
2009 (3)
Dec. 28,
2007 (3)
Dec. 29,
Dec. 30,
2006
2005
Dec. 31,
2004
(in thousands, except per share data)
Sales
$
546,644
$
318,746
$
271,142
$
241,097
$
200,119
Income before income taxes
27,303
(1)
28,688
(1)
23,534
(1)
15,464
(1)(2)
23,732
(2)
Income per share
Basic
Diluted
Consolidated Balance Sheet Data:
Working capital
Total assets
Long-term obligations
$
0.82
$
0.68
$
0.74
$
0.47
$
0.67
0.81
0.67
0.73
(2)
0.46
(2)
0.66
$
142,219
$
116,816
$
199,051
$
151,958
$
132,360
848,931
404,827
663,851
276,772
547,827
205,859
512,911
200,261
476,166
193,948
(1)
From 2005 to 2008, we recorded charges in other operating expenses, net related to our ongoing
cost savings and consolidation efforts. Additional information is set forth at Note 11 – “Other
Operating Expenses” of the Notes to the Consolidated Financial Statements contained in Item 8
of this report.
(2) Beginning in fiscal year 2006, we adopted Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No.
123(R)”), and related Securities and Exchange Commission rules included in Staff Accounting
Bulletin No. 107. Under SFAS No. 123(R) we are now required to record compensation costs
related to all stock-based awards. Income before income taxes and diluted earnings per share
would have been lower by $3.4 million or $0.10 per share for 2005, respectively, and $3.2
million or $0.10 per share for 2004, respectively. Additional information is set forth at Note 10 –
“Stock-Based Compensation” of the Notes to the Consolidated Financial Statements contained in
Item 8 of this report.
(3) During 2008, we acquired P Medical Holding, SA (January 2008) and DePuy Orthopaedics
Chaumont, France facility (February 2008). During 2007, we acquired BIOMEC, Inc. (April
2007), Enpath Medical, Inc. (June 2007), IntelliSensing, LLC (October 2007), Quan Emerteq,
LLC (November 2007), and Engineered Assemblies Corporation (November 2007). These
amounts include the results of operations of these companies subsequent to their acquisitions. As
a result of these acquisitions, the Company recorded charges in 2008 and 2007 of $8.7 million
and $17.8 million, respectively related to inventory step up amortization and in process research
and development. Additional information is set forth at Note 2 – “Acquisitions” of the Notes to
the Consolidated Financial Statements contained in Item 8 of this report.
30
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.
Overview
Our Business
• Our business
• CEO message
• Our acquisitions
• Our customers
• Financial overview
• Product development
Cost Savings and Consolidation Efforts
• 2005 & 2006 facility shutdowns and consolidations
• 2007 & 2008 facility shutdowns and consolidations
Our Critical Accounting Estimates
• Valuation of goodwill, other identifiable intangible assets and IPR&D
• Stock-based compensation
•
• Tangible long-lived assets
• Provision for income taxes
Inventories
Our Financial Results
• Results of operations table
• Fiscal 2008 compared with fiscal 2007
• Fiscal 2007 compared with fiscal 2006
• Liquidity and capital resources
• Off-balance sheet arrangements
• Litigation
• Contractual obligations
•
•
Inflation
Impact of recently issued accounting standards
Our Business
We operate our business in two reportable segments – Implantable Medical Components (“IMC”) and
Electrochem Solutions (“Electrochem”). Our IMC business designs and manufactures components and
devices for the Cardiac Rhythm Management (“CRM”), Neuromodulation, Vascular Access and
Orthopedic markets. Additionally, our IMC business offers value-added assembly and design
engineering services for products that incorporate Implantable Medical Device (“IMD”) components.
31
Our IMC customers include leading original equipment manufacturers (“OEM”), in alphabetical order
here and throughout this report, such as Biotronik, Boston Scientific, DePuy Orthopaedics, Johnson &
Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. We
entered the Vascular Access and Orthopedic markets through our acquisitions in 2008 and 2007.
Electrochem is a world leader in the design, manufacture and distribution of electrochemical cells,
battery packs and wireless sensors for demanding applications in markets such as energy, security,
portable medical, environmental monitoring and more. Electrochem broadened its product portfolio
through its acquisitions of Engineered Assemblies Corporation (“EAC”) and IntelliSensing, LLC in
2007, and can now design and provide its customers rechargeable battery and wireless sensor systems.
CEO Message
The last two years have represented significant change at Greatbatch. As our diversification strategy
continues to progress, we have acquired seven companies, streamlined operations, and have built a
diverse offering of products and unique technologies to better serve an expanded customer base. The
results of this are made evident by our record sales in 2008.
Our 2008 results reflect the continued successful execution of our strategic plan. Despite the turmoil in the
broader economy, our diversification strategy and focus on delivering innovative solutions for our
customers enabled us to drive improved operating performance. Additionally, to support our growth
strategies, we are working diligently on the integration of our family of companies so we can optimize
performance and deliver innovative value to our customers and our shareholders. We are extremely
satisfied with the progress we have made on the integration of our acquisitions. In addition, we remain
committed to ongoing improvements in our operating performance through further leveraging our
diversified revenue base, continued facility consolidation, and product development activities which are
focused on high value-added products across all of our business segments. We will continue to evaluate
opportunities to leverage our cutting edge technology, operational capabilities, and unmatched dedication
to driving innovation for our customers. We believe we have set a solid foundation to further strengthen
and expand our position in the marketplace and we remain confident in Greatbatch’s future growth
opportunities.
Our Acquisitions
On April 3, 2007, we acquired substantially all of the assets of BIOMEC, Inc. (“BIOMEC”).
BIOMEC is a biomedical device company based in Cleveland, OH. The results of BIOMEC’s
operations were included in our IMC business from the date of acquisition. The purchase price and
other direct costs of BIOMEC totaled $11.4 million, which we paid in cash. Total assets acquired from
BIOMEC were $12.0 million, of which $7.4 million were intangible assets, including $2.3 million of
in-process research and development (“IPR&D”), which we immediately expensed, and $5.1 million
of goodwill.
On June 15, 2007, we completed our acquisition of Enpath Medical, Inc. (“Enpath”). Enpath designs,
develops, manufactures and markets single use medical device products for the cardiac rhythm
management, neuromodulation and interventional radiology markets. The results of Enpath’s
operations were included in our IMC business from the date of acquisition. The purchase price and
other direct costs of Enpath totaled $98.4 million, which we paid in cash. Total assets acquired from
Enpath were $113.8 million, of which $91.3 million were intangible assets, including $13.8 million of
IPR&D which we immediately expensed, and $48.9 million of goodwill.
32
On October 26, 2007 we acquired substantially all of the assets of IntelliSensing, LLC
(“IntelliSensing”). IntelliSensing designs and manufactures wireless sensor solutions that measure
temperature, pressure, flow and other critical data. The results of IntelliSensing’s operations were
included in our Electrochem business from the date of acquisition. The purchase price and other direct
costs of IntelliSensing totaled $3.9 million, which we paid in cash. Total assets acquired from
IntelliSensing were $4.0 million, of which $3.8 million were intangible assets, including $1.9 million
of goodwill.
On November 16, 2007, we acquired substantially all of the assets of Quan Emerteq, LLC (“Quan”).
Quan designs, develops and manufactures single use medical device products for the vascular, CRM
and neuromodulation markets. The results of Quan’s operations were included in our IMC business
from the date of acquisition. The purchase price and other direct costs of Quan totaled $60.0 million,
which we primarily paid in cash. Total assets acquired from Quan were $62.8 million, of which $52.4
million were intangible assets, including $32.2 million of goodwill.
On November 16, 2007, we acquired substantially all of the assets of Engineered Assemblies
Corporation (“EAC”). EAC is a leading provider of custom battery solutions and electronics
integration focused on rechargeable battery systems. The results of EAC’s operations were included in
our Electrochem business from the date of acquisition. The purchase price and other direct costs of
EAC totaled $15.1 million, which we paid in cash. Total assets acquired from EAC were $16.7
million, of which $7.9 million were intangible assets, including $5.5 million of goodwill.
On January 7, 2008, we acquired P Medical Holding SA (“Precimed”) which has administrative offices
in Orvin, Switzerland and Exton, PA, manufacturing operations in Switzerland and Indiana and sales
offices in Japan, China and the United Kingdom. Precimed is a leading technology-driven supplier to
the orthopedic industry. The results of Precimed’s operations were included in our IMC business from
the date of acquisition. The purchase price and other direct costs of Precimed totaled $85.0 million,
which we paid in cash. Total assets acquired from Precimed were $143.0 million, of which $82.3
million were intangible assets, including $2.2 million of IPR&D which we immediately expensed, and
$47.2 million of goodwill.
On February 11, 2008, Precimed completed its previously announced acquisition of DePuy
Orthopaedics (“DePuy”) Chaumont, France manufacturing facility (the “Chaumont Facility”). The
Chaumont Facility produces hip and shoulder implants for DePuy Ireland who distributes them
worldwide through various DePuy selling entities. This transaction included a new four year supply
agreement with DePuy. The results of DePuy’s operations were included in our IMC business from
the date of acquisition. The purchase price and other direct costs of the Chaumont Facility totaled
$28.7 million, which was paid in cash. Total assets acquired from the Chaumont Facility were $29.3
million, of which $6.6 million was goodwill.
Going forward, we expect the pace of acquisitions to be less than the 2008 & 2007 level. However, we
will continue to pursue strategically targeted and opportunistic acquisitions.
33
Our Customers
Our products are designed to provide reliable, long lasting solutions that meet the evolving
requirements and needs of our customers and the end users of their products. The nature and extent of
our selling relationships with each customer are different in terms of breadth of products purchased,
purchased product volumes, length of contractual commitment, ordering patterns, inventory
management and selling prices.
Our IMC customers include leading OEMs, such as Biotronik, Boston Scientific, DePuy, Johnson &
Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. During
2007 and in the first quarter of 2008, we completed seven acquisitions in order to diversify our
customer base and market concentration. As a result, in 2008 Boston Scientific, Medtronic and St.
Jude Medical collectively accounted for 44% of our total sales, compared to 67% in 2007 and 2006.
Our Electrochem customers are primarily companies involved in energy, security, portable medical,
environmental monitoring and more. We have entered into long-term supply agreements with some of
those customers. Some of these customers include, General Electric, Halliburton Company,
PathFinder Energy Services and Weatherford International.
Financial Overview
We achieved sales of $546.6 million for 2008, an increase of 71% over the previous year. 2008
benefitted from our acquisitions in 2007 and 2008 which added approximately $208.2 million of
incremental revenue as well as organic growth of 7%. This included approximately $10 million of
revenue due to the additional week of sales in 2008 resulting from our fiscal year-end falling in 2009
(closest Friday to December 31st).
During 2008, we were extremely focused on the integration of our seven acquisitions from 2007 and
2008. This included the initiation and implementation of numerous cost savings and consolidation
initiatives, as well as leveraging the diversified revenue base that we acquired to drive improved
operating performance.
Our diluted earnings per share for 2008 totaled $0.81 compared to $0.67 for 2007. 2008 results were
reduced by $0.59 per share of net charges and gains such as IPR&D charges, non-recurring acquisition
related charges (inventory step-up amortization) and charges related to our cost savings and
consolidation initiatives partially offset by a debt extinguishment gain. 2007 results were reduced by
$0.60 per share of similar charges, net of gains.
We completed five acquisitions in 2007 and two in the first two months of 2008. These acquisitions
were enabled by our strong cash position and the financing we put in place during the first half of
2007. As of January 2, 2009, we had $22.1 million in cash and cash equivalents and $352.9 million of
long-term debt. Payment on $30.5 million of this debt is due in June 2010 with the remaining debt due
in 2012 and 2013. For 2008, we generated $57.1 million of cash flow from operations compared to
$43.0 million in 2007, an increase of 33%.
34
Product Development
Currently, we are developing a series of new products for customer applications in the CRM,
neuromodulation, vascular access, orthopedics and commercial markets. Some of the key
development initiatives include:
1. Continue the evolution of our Q series high rate ICD batteries;
2. Continue development of MRI compatible product lines;
3. Integrate Biomimetic coating technology with vascular access devices;
4. Complete design of next generation steerable catheters;
5. Advance minimally invasive surgical techniques for orthopedics industry;
6. Develop disposable instrumentation;
7. Provide wireless sensing solutions to commercial customers; and
8. Develop a charging platform for commercial secondary offering.
In May 2008, we announced the execution of a letter of intent in which the Sorin Group will leverage
our MRI technology in their future CRM devices. At the same time we continue to explore and
develop similar relationships with other customers in both the CRM and neuromodulation space. MRI
compatible components are just one example of our strategy to continue to deliver innovative solutions
for our customers that improve the functionality, safety, and efficiency of their products.
Approximately $2.3 million of the BIOMEC purchase price was allocated to the estimated fair value of
acquired IPR&D projects that had not yet reached technological feasibility and had no alternative
future use as of the acquisition date. The value assigned to IPR&D relates to projects that incorporate
BIOMEC’s novel-polymer coating (biomimetic) technology that mimics the surface of endothelial
cells of blood vessels. An agreement was reached in 2008 with an OEM partner to provide coating
material and services for their catheter products. Testing was conducted to support this application,
and a 510(k) was submitted to the Food and Drug Administration (“FDA”) in December requesting
clearance to market this product. We expect approval of this 510(k) in early 2009, with product sales
to commence following this clearance. There were no significant changes from our original estimates
with regard to these projects during 2008.
Approximately $13.8 million of the Enpath purchase price was allocated to the estimated fair value of
acquired IPR&D projects that had not yet reached technological feasibility and had no alternative
future use. These projects primarily represent the next generation of introducer and catheter products
already being sold by Enpath which incorporate new enhancements and customer modifications. One
introducer project was launched near the end of 2008. We expect to commercially launch the other
introducer products under development in 2009 which will replace existing products. These introducer
projects acquired have been delayed due to timing of customer adoption and transition and technical
difficulties of some of the projects. Additionally, future sales from our ViaSealTM introducer project
have been enjoined due to litigation (See “Litigation”). The catheter IPR&D project, to which a
portion of the Enpath purchase price was allocated, has been put on hold indefinitely in order to
allocate resources to other projects. These delays in introducer and catheter projects are not expected
to have a material impact on our results of operations.
35
Approximately $2.2 million of the Precimed purchase price was allocated to the preliminary estimated fair
value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative
future use. The value assigned to IPR&D related to Reamer, Instrument Kit, Locking Plate and Cutting
Guide projects. These projects primarily represent the next generation of products already being sold by
Precimed which incorporate new enhancements and customer modifications. We commercially launched a
portion of these products in 2008 and expect to launch others in 2009. Several of the other orthopedic
projects acquired have been delayed and two have been cancelled due to the timing of customer adoption,
technical difficulties, inability to meet margin goals and feasibility assessments. These changes are not
expected to have a material impact on our results of operations as these projects were assumed to have
lower margins.
Cost Savings and Consolidation Efforts
From 2005 to 2008, we recorded charges in other operating expenses related to our ongoing cost
savings and consolidation efforts. Additional information is set forth in Note 11 – “Other Operating
Expenses” of the Notes to the Consolidated Financial Statements contained in Item 8 of this report.
2005 & 2006 facility shutdowns and consolidations - Beginning in the first quarter of 2005 and
ending in the second quarter of 2006 we consolidated our medical capacitor manufacturing operations
in Cheektowaga, NY, and our implantable medical battery manufacturing operations in Clarence, NY,
into our advanced power source manufacturing facility in Alden, NY (“Alden Facility”). We also
consolidated our capacitor research, development and engineering operations from our Cheektowaga,
NY facility into our technology center in Clarence, NY.
In the first quarter of 2005, we announced our intent to close our Carson City, NV facility and
consolidate the work performed at that facility into our Tijuana, Mexico facility. This consolidation
project was completed in the third quarter of 2007.
In the fourth quarter of 2005, we announced our intent to close our Columbia, MD facility (“Columbia
Facility”) and Fremont, CA Advanced Research Laboratory (“ARL”). We also announced that the
manufacturing operations at our Columbia Facility will be moved into our Tijuana Facility and that the
research, development and engineering and product development functions at our Columbia Facility
and at ARL will relocate to our technology center in Clarence, NY. The ARL portion of this
consolidation project was completed in the fourth quarter of 2006. The Columbia Facility portion of
this consolidation project was completed in the third quarter of 2008.
During the fourth quarter of 2006, we completed a plan for consolidating our corporate and business
unit organization structure. A significant portion of the annual savings from this initiative was
reinvested into research & development activities and business growth opportunities.
The total cost of these projects was $24.7 million, which was incurred from 2005 to 2008, and included
the following:
• Severance and retention - $7.4 million;
• Production inefficiencies, moving and revalidation - $4.6 million;
• Accelerated depreciation and asset write-offs - $1.1 million;
• Personnel - $8.4 million; and
• Other - $3.2 million.
36
All categories of costs were considered to be cash expenditures, except accelerated depreciation and
asset write-offs. Approximately $23.6 million of these expenses for the facility shutdowns and
consolidations were included in the IMC business segment, $0.1 million in the Electrochem segment
(2006) and $1.0 million was recorded in unallocated operating expenses (2006).
2007 & 2008 facility shutdowns and consolidations - In the first quarter of 2007, we announced that
we will close our current Electrochem manufacturing facility in Canton, MA and construct a new
81,000 square foot replacement facility in Raynham, MA. This initiative is not cost savings driven but
capacity driven for the Electrochem group.
In the second quarter of 2007, we announced that we will consolidate our corporate offices in
Clarence, NY into our existing research and development center also in Clarence, NY after an
expansion of that facility was complete. This expansion and relocation was completed in the third
quarter of 2008.
During the second and third quarters of 2008, we reorganized and consolidated various general &
administrative and research & development functions throughout the organization in order to optimize
those resources with the businesses we acquired in 2007 and 2008.
In the second half of 2008, we ceased manufacturing at our facility in Suzhou, China, which was
acquired from EAC, and closed our leased manufacturing facility in Orchard Park, NY, which was
acquired from IntelliSensing. Additionally, we consolidated our Saignelegier, Switzerland
manufacturing facility, which was acquired from Precimed. The operations of these facilities were
relocated to existing facilities which have excess capacity. The facility in China is expected to be used
as a procurement office in 2009.
In the fourth quarter of 2008, we approved a plan for the closure of our Teterboro, New Jersey
(Electrochem manufacturing), Blaine, Minnesota (Vascular Access manufacturing) and Exton,
Pennsylvania (Orthopedics corporate office) facilities. The operations at these facilities will be moved
to other existing facilities with excess capacity.
The above initiatives are expected to be completed over the next twelve months. The total cost for
these facility shutdowns and consolidations is expected to be approximately $13.5 million to $15.0
million of which $8.9 million has been incurred through January 2, 2009.
The major categories of costs include the following:
• Severance and retention - $4.3 million to $4.6 million;
• Production inefficiencies, moving and revalidation - $2.4 million to $2.7 million;
• Accelerated depreciation and asset write-offs - $4.1 million to $4.4 million;
• Personnel - $1.2 million to $1.5 million; and
• Other - $1.5 million to $1.8 million.
37
As a result of our consolidation initiatives, during 2008 two facilities were determined to be impaired.
Accordingly, these facilities, which had a carrying amount of $5.1 million, were written down to their
fair value of $3.4 million. This resulted in an impairment charge of $1.7 million, which was included
in other operating expense.
All categories of costs are considered to be cash expenditures, except accelerated depreciation and
asset write-offs. For 2008, costs of $5.0 million are included in the IMC business segment. For 2008
and 2007, costs of $3.3 million and $0.5 million, respectively, are included in the Electrochem
business segment. The annual anticipated cost savings from these initiatives is estimated to be
approximately $5 million to $6 million, and will not be fully realized until 2010.
Our Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with generally accepted
accounting principles in the United States of America (“GAAP”) requires us to make estimates and
assumptions that affect reported amounts and related disclosures. The methods, estimates and
judgments we use in applying our accounting policies have a significant impact on the results we
report in our financial statements. Management considers an accounting estimate to be critical if:
It requires assumptions to be made that were uncertain at the time the estimate was made; and
•
• Changes in the estimate or different estimates that could have been selected could have a
material impact on our consolidated results of operations, financial position or cash flows.
Our most critical accounting estimates are described below. We also have other policies that we
consider key accounting policies, such as our policies for revenue recognition; however, these policies
do not meet the definition of critical accounting estimates, because they do not generally require us to
make estimates or judgments that are difficult or subjective.
38
Balance Sheet Caption /
Nature of Critical
Estimate Item
Valuation of goodwill,
other identifiable intangible
assets and IPR&D
When we acquire a
company, we allocate the
purchase price to the assets
we acquire and liabilities we
assume based on their fair
value at the date of
acquisition.
We then allocate the
purchase price in excess of
net tangible assets acquired
to identifiable intangible
assets, including IPR&D.
Other indefinite lived
intangible assets, such as
trademarks and tradenames,
are considered non-
amortizing intangible assets
as they are expected to
generate cash flows
indefinitely.
Goodwill is recorded when
the purchase price paid for
an acquisition exceeds the
estimated fair value of the
net identified tangible and
intangible assets acquired.
Indefinite lived intangibles
and goodwill are required to
be assessed for impairment
on an annual basis or more
frequent if certain indicators
are present.
Definite-lived intangible
assets are amortized over
their estimated useful lives.
Assumptions / Approach Used
Effect of Variations of Key Assumptions Used
We base the fair value of identifiable tangible and
intangible assets (including IPR&D) on detailed
valuations that use information and assumptions
provided by management. The fair values of the
assets acquired and liabilities assumed are
determined using one of three valuation approaches:
market, income and cost. The selection of a
particular method for a given asset depends on the
reliability of available data and the nature of the
asset, among other considerations. The market
approach values the subject asset based on available
market pricing for comparable assets. The income
approach values the subject asset based on the
present value of risk adjusted cash flows projected to
be generated by the asset. The projected cash flows
for each asset considers multiple factors, including
current revenue from existing customers, attrition
trends, reasonable contract renewal assumptions
from the perspective of a marketplace participant,
and expected profit margins giving consideration to
historical and expected margins. The cost approach
values the subject asset by determining the current
cost of replacing that asset with another of equivalent
economic utility. The cost to replace a given asset
reflects the estimated reproduction or replacement
cost for the asset, less an allowance for loss in value
due to depreciation or obsolescence, with specific
consideration given to economic obsolescence if
indicated.
We perform an annual review on the last day of each
fiscal year, or more frequently if indicators of
potential impairment exist, to determine if the
recorded goodwill and other indefinite lived
intangible assets are impaired. We assess goodwill
for impairment by comparing the fair value of our
reporting units to their carrying value to determine if
there is potential impairment. If the fair value of a
reporting unit is less than its carrying value, an
impairment loss is recorded to the extent that the
implied fair value of the goodwill within the
reporting unit is less than its carrying value. Fair
values for reporting units are determined based
primarily on the income approach, however where
appropriate, the market approach or appraised values
are also used. Definite-lived intangible assets such
as purchased technology, patents and customer lists
are reviewed at least quarterly to determine if any
adverse conditions exist or a change in circumstances
has occurred that would indicate impairment or a
change in their remaining useful life. Indefinite lived
intangible assets such as trademarks and tradenames
are evaluated for impairment by using the income
approach.
The use of alternative valuation assumptions,
including estimated cash flows and discount
rates, and alternative estimated useful life
assumptions could result in different purchase
price allocations. In arriving at the value of the
IPR&D, we additionally consider among other
factors: the in-process projects stage of
completion; commercial feasibility of the
project; the complexity of the work completed
as of the acquisition date; the projected costs to
complete; the expected introduction date and the
estimated useful life of the technology.
Significant changes in these estimates and
assumptions could impact the value of the assets
and liabilities recorded which would change the
amount and timing of future intangible asset
amortization expense.
We make certain estimates and assumptions that
affect the determination of the expected future
cash flows from our reporting units for our
goodwill impairment testing. These include
sales growth, cost of capital, and projections of
future cash flows. Significant changes in these
estimates and assumptions could create future
impairment losses to our goodwill.
For indefinite lived assets such as trademarks
and tradenames, we make certain estimates of
revenue streams, royalty rates and other future
benefits. Significant changes in these estimates
could create future impairments of these
indefinite lived intangible assets.
Estimation of the useful lives of definite-lived
intangible assets requires significant
management judgment. Events could occur that
would materially affect our estimates of the
useful lives. Significant changes in these
estimates and assumptions could change the
amount of future amortization expense or could
create future impairments of these definite-lived
intangible assets.
A 1% change in the amortization of our
intangible assets would increase/decrease
current year net income by approximately $0.07
million, or approximately $0.003 per diluted
share. As of January 2, 2009 we have $428.6
million of intangible assets recorded on our
balance sheet representing 50% of total assets.
This includes $90.3 million of amortizing
intangible assets, $36.1 million of indefinite
lived intangible assets and $302.2 million of
goodwill.
39
Balance Sheet Caption /
Nature of Critical
Estimate Item
Stock-based compensation
We record compensation
costs related to our stock-
based awards in accordance
with Financial Accounting
Standards Board (“FASB”)
Statement of Financial
Accounting Standards
(“SFAS”) No. 123 (revised
2004), Share-Based
Payment (“SFAS No.
123(R)”), and related
Securities and Exchange
Commission rules included
in Staff Accounting Bulletin
No. 107. Under the fair
value recognition provisions
of SFAS No. 123(R), we
measure stock-based
compensation cost at the
grant date based on the fair
value of the award.
Compensation cost for
service-based awards is
recognized ratably over the
applicable vesting period.
Compensation cost for
performance-based awards
is reassessed each period
and recognized based upon
the probability that the
performance targets will be
achieved. The amount of
stock-based compensation
expense recognized during a
period is based on the
portion of the awards that
are ultimately expected to
vest. The total expense
recognized over the vesting
period will only be for those
awards that ultimately vest.
Assumptions / Approach Used
Effect of Variations of Key Assumptions Used
We utilize the Black-Scholes Options Pricing Model
to determine the fair value of stock options under
SFAS No. 123(R). We are required to make certain
assumptions with respect to selected Black Scholes
model inputs, including expected volatility, expected
life, expected dividend yield and the risk-free interest
rate. Expected volatility is based on the historical
volatility of our stock over the most recent period
commensurate with the estimated expected life of the
stock options. The expected life of stock options
granted, which represents the period of time that the
stock options are expected to be outstanding, is
based, primarily, on historical data. The expected
dividend yield is based on our history and
expectation of dividend payouts. The risk-free
interest rate is based on the U.S. Treasury yield curve
in effect at the time of grant for a period
commensurate with the estimated expected life.
For restricted stock and restricted stock unit awards,
the fair market value is determined based upon the
closing value of our stock price on the grant date.
Compensation cost for performance-based stock
options and restricted stock units is reassessed each
period and recognized based upon the probability
that the performance targets will be achieved. That
assessment is based upon our actual and expected
future performance as well as that of the individuals
who have been granted performance-based awards.
Stock-based compensation expense is only recorded
for those awards that are expected to vest. Forfeiture
estimates for determining appropriate stock-based
compensation expense are estimated at the time of
grant based on historical experience and
demographic characteristics. Revisions are made to
those estimates in subsequent periods if actual
forfeitures differ from estimated forfeitures.
Option pricing models were developed for use in
estimating the value of traded options that have
no vesting restrictions and are fully transferable.
Because our share-based payments have
characteristics significantly different from those
of freely traded options, and because changes in
the subjective input assumptions can materially
affect our estimates of fair values, existing
valuation models may not provide reliable
measures of the fair values of our share-based
compensation. Consequently, there is a risk that
our estimates of the fair values of our share-
based compensation awards may bear little
resemblance to the actual values realized upon
the exercise, expiration or forfeiture of those
share-based payments in the future. Stock
options may expire worthless or otherwise result
in zero intrinsic value as compared to the fair
values originally estimated on the grant date and
reported in our consolidated financial
statements. Alternatively, value may be realized
from these instruments that is significantly in
excess of the fair values originally estimated on
the grant date and reported in our consolidated
financial statements. There are significant
differences among valuation models. This may
result in a lack of comparability with other
companies that use different models, methods
and assumptions.
There is a high degree of subjectivity involved
in selecting assumptions to be utilized to
determine fair value and forfeiture assumptions.
If factors change and result in different
assumptions in the application of SFAS No.
123(R) in future periods, the expense that we
record for future grants may differ significantly
from what we have recorded in the current
period. Additionally, changes in performance of
the Company or individuals who have been
granted performance-based awards that affect
the likelihood that performance based targets are
achieved could materially impact the amount of
stock-based compensation expense recognized.
A 1% change in our stock based compensation
expense would increase/decrease current year
net income by approximately $0.04 million, or
approximately $0.002 per diluted share.
40
Balance Sheet Caption /
Nature of Critical
Estimate Item
Inventories
Inventories are stated at the
lower of cost, determined
using the first-in, first-out
method, or market.
Assumptions / Approach Used
Effect of Variations of Key Assumptions Used
Inventory standard costing requires complex
calculations that include assumptions for overhead
absorption, scrap, sample calculations,
manufacturing yield estimates and the determination
of which costs are capitalizable. The valuation of
inventory requires us to estimate obsolete or excess
inventory as well as inventory that is not of saleable
quality.
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 reserves,
which would have a negative impact on our net
income.
A 1% write-down of our inventory would
decrease current year net income by
approximately $0.7 million, or approximately
$0.03 per diluted share. As of January 2, 2009
we have $112.3 million of inventory recorded on
our balance sheet representing 13% of total
assets.
Estimation of the useful lives of tangible assets
that are long-lived requires significant
management judgment. Events could occur,
including changes in cash flow that would
materially affect our estimates and assumptions
related to depreciation. Unforeseen changes in
operations or technology could substantially
alter the assumptions regarding the ability to
realize the return of our investment in long-lived
assets. Also, as we make manufacturing process
conversions and other facility consolidation
decisions, we must make subjective judgments
regarding the remaining useful lives of our
assets, primarily manufacturing equipment and
buildings. Significant changes in these
estimates and assumptions could change the
amount of future depreciation expense or could
create future impairments of these long-lived
assets.
A 1% write-down in our tangible long-lived
assets would decrease current year net income
by approximately $1.2 million, or approximately
$0.05 per diluted share. As of January 2, 2009
we have $182.8 million of tangible long-lived
assets recorded on our balance sheet
representing 22% of total assets.
Tangible long-lived assets
Property, plant and
equipment and other
tangible long-lived assets
are carried at cost. This cost
is charged to depreciation or
amortization expense over
the estimated life of the
operating assets primarily
using straight-line rates.
Long-lived assets are
subject to impairment
assessment.
We assess the impairment of tangible long-lived
assets when events or changes in circumstances
indicate that the carrying value of the assets may not
be recoverable. Factors that we consider in deciding
when to perform an impairment review include
significant under-performance of a business or
product line in relation to expectations, significant
negative industry or economic trends, and significant
changes or planned changes in our use of the assets.
Recoverability potential is measured by comparing
the carrying amount of the asset group to the related
total future undiscounted cash flows. The projected
cash flows for each asset group considers multiple
factors, including current revenue from existing
customers, proceeds from the sale of the asset group,
reasonable contract renewal assumptions from the
perspective of a marketplace participant, and
expected profit margins giving consideration to
historical and expected margins. If an asset group’s
carrying value is not recoverable through related
cash flows, the asset group is considered to be
impaired. Impairment is measured by comparing the
asset group’s carrying amount to its fair value.
When it is determined that useful lives of assets are
shorter than originally estimated, and there are
sufficient cash flows to support the carrying value of
the asset group, we accelerate the rate of depreciation
in order to fully depreciate the assets over their new
shorter useful lives.
41
Assumptions / Approach Used
Effect of Variations of Key Assumptions Used
Changes could occur that would materially
affect our estimates and assumptions regarding
deferred taxes. Changes in current tax laws and
tax rates could affect the valuation of deferred
tax assets and liabilities, thereby changing the
income tax provision. Also, significant declines
in taxable income could materially impact the
realizable value of deferred tax assets. At
January 2, 2009, we had $23.1 million of
deferred tax assets on our balance sheet and a
valuation allowance of $4.5 million has been
established for certain deferred tax assets as it is
more likely than not that they will not be
realized .
A 1% increase in the effective tax rate would
increase the current year provision by $0.3
million, reducing diluted earnings per share by
$0.01 based on shares outstanding at January 2,
2009.
In relation to recording the provision for income
taxes, management must estimate the future tax rates
applicable to the reversal of temporary differences,
make certain assumptions regarding whether
book/tax differences are permanent or temporary and
if temporary, the related timing of expected reversal.
Also, estimates are made as to whether taxable
operating income in future periods will be sufficient
to fully recognize any gross deferred tax assets. If
recovery is not likely, we must increase our
provision for taxes by recording a valuation
allowance against the deferred tax assets that we
estimate will not ultimately be recoverable.
Alternatively, we may make estimates about the
potential usage of deferred tax assets that decrease
our valuation allowances.
The calculation of our tax liabilities involves dealing
with uncertainties in the application of complex tax
regulations. Significant judgment is required in
evaluating our tax positions and determining our
provision for income taxes. During the ordinary
course of business, there are many transactions and
calculations for which the ultimate tax determination
is uncertain. We establish reserves for uncertain tax
positions when we believe that certain tax positions
do not meet the more likely than not threshold. We
adjust these reserves in light of changing facts and
circumstances, such as the outcome of a tax audit or
the lapse of the statute of limitations. The provision
for income taxes includes the impact of reserve
provisions and changes to the reserves that are
considered appropriate. We follow FIN No. 48 for
accounting for our uncertain tax positions.
Balance Sheet Caption /
Nature of Critical
Estimate Item
Provision for income taxes
In accordance with the
liability method of
accounting for income taxes
specified in SFAS No. 109,
Accounting for Income
Taxes, the provision for
income taxes is the sum of
income taxes both currently
payable and deferred. The
changes in deferred tax
assets and liabilities are
determined based upon the
changes in differences
between the bases of assets
and liabilities for financial
reporting purposes and the
tax bases of assets and
liabilities as measured by
the enacted tax rates that
management estimates will
be in effect when the
differences reverse.
Beginning in 2007, we
adopted FASB
Interpretation No. 48,
Accounting for Uncertainty
in Income Taxes—an
interpretation of FASB
Statement No. 109(“FIN
No. 48”), to assess and
record income tax
uncertainties. FIN No. 48
prescribes a recognition
threshold and measurement
attribute for financial
statement recognition and
measurement of a tax
position taken or expected
to be taken in a tax return
and also provides guidance
on various related matters
such as derecognition,
interest and penalties, and
disclosure.
42
Our Financial Results
The commentary that follows should be read in conjunction with our consolidated financial statements
and related notes. We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest
December 31st. Fiscal years 2008, 2007, and 2006 ended on January 2, 2009, December 28, and
December 29, respectively. Fiscal year 2008 contained fifty-three weeks while fiscal years 2007 and
2006 contained fifty-two weeks.
Results of Operations Table
Dollars in thousands, except per share data
IMC
CRM/Neuromodulation
Vascular Access
Orthopedics
Total IMC
Electrochem
Total sales
Cost of sales - excluding amortization of
intangible assets
Cost of sales - amortization of intangible assets
Total cost of sales
Cost of sales as a % of sales
Jan. 2,
2009
Year ended
Dec. 28,
2007
Dec. 29,
2006
2008-2007
2007-2006
$ Change % Change
$ Change % Change
$ 278,279
47,415
142,446
468,140
78,504
546,644
$ 251,426
18,396
-
269,822
48,924
318,746
$ 227,407
-
-
227,407
43,735
271,142
$ 26,853
29,019
142,446
198,318
29,580
227,898
384,014
6,841
390,855
71.5%
198,184
4,537
202,721
63.6%
164,885
3,813
168,698
62.2%
185,830
2,304
188,134
11% $ 24,019
158% 18,396
NA
-
73% 42,415
60% 5,189
71% 47,604
94% 33,299
51% 724
93% 34,023
7.9%
Selling, general, and administrative expenses
SG&A as a % of sales
72,633
13.3%
44,674
14.0%
38,785
14.3%
27,959
63% 5,889
-0.7%
Research, development and engineering costs, net
RD&E as a % of sales
31,444
5.8%
29,914
9.4%
24,225
8.9%
1,530
5% 5,689
-3.6%
Other operating expense
Operating income
Operating margin
Interest expense
Interest income
Gain on sale of investment security
Gain on extinguishment of debt
Other (income) expense, net
Provision for income taxes
Effective tax rate
Net income
Net margin
16,818
34,894
6.4%
21,417
20,020
6.3%
17,058
22,376
8.3%
(4,599)
14,874
13,168
(711)
7,303
(7,050)
- (4,001)
(4,473)
(447)
13,638
47.5%
$ 15,050
(3,242)
(1,624)
8,744
32.0%
$ 18,559
4,605
(5,775)
-
-
12
7,408
31.5%
$ 16,126
5,865
6,339
4,001
1,231
(1,177)
(4,894)
-21% 4,359
74% (2,356)
0.1%
80% 2,698
-90% (1,275)
NA (4,001)
-28% (4,473)
263% (459)
-36% 6,230
3.4%
4.7%
5.9%
-1.3%
-15.5%
$ 3,509
23% $ (1,076)
Diluted earnings per share
$ 0.81
$ 0.67
$ 0.73
$ 0.14
21% $ (0.06)
43
11%
NA
NA
19%
12%
18%
20%
19%
20%
1.4%
15%
-0.3%
23%
0.5%
26%
-11%
-2.0%
59%
22%
NA
NA
NA
84%
16.0%
-7%
-1.2%
-8%
Fiscal 2008 Compared with Fiscal 2007
Sales
Sales were a record $546.6 million in 2008, an increase of 71% compared to 2007. This growth
was achieved through acquisitions and organic growth of 7%. Our acquisitions, which expanded
our product lines and diversified our customer base, contributed $208.2 million incremental
revenue in 2008. Revenue for 2008 also included approximately $10 million of additional sales as
a result of 2008 being a 53 week fiscal year versus 2007 which had 52 weeks.
IMC - The nature and extent of our selling relationship with our customers is different in terms of
products purchased, selling prices, product volumes, ordering patterns and inventory management.
We have pricing arrangements with our customers that at times do not specify minimum order
quantities. Our visibility to customer ordering patterns is over a relatively short period of time.
Our customers may have inventory management programs and alternate supply arrangements of
which we are unaware. Additionally, the relative market share among the OEM device
manufacturers changes periodically. Consequently, these and other factors can significantly
impact our sales in any given period.
Our 2008 revenue from our IMC business increased $198.3 million or 73% over 2007. Our
acquisitions in 2007 and 2008 contributed $183.2 million to this increase. Included in our IMC
segment is our CRM/Neuromodulation product line which saw year over year growth of $26.9
million, $11.8 million of which was attributable to our acquisitions in 2007. 2008 revenue from
our IMC segment also includes sales from our Vascular Access and Orthopedic product lines
which increased $29.0 million and $142.4 million, respectively over the prior year and were
acquired near the end of 2007 and beginning of 2008. The additional week of sales added
approximately $9 million to our IMC revenue in 2008. Additionally, Vascular Access revenue
benefited from the timing of customer inventory stocking for introducers in the fourth quarter of
2008, which may impact first quarter of 2009 revenues. Orthopedic sales during the first three
quarters of 2008 benefited from the release of excess backlog that was on hand at the time of the
Precimed acquisitions, which has since been fulfilled.
The non-acquisition related increase in CRM/Neuromodulation revenue in 2008 was primarily due
to higher feedthrough, and assembly revenue partially offset by lower ICD battery, coated
components and ICD capacitor sales. The increase in feedthrough revenue can be attributed to
market growth as well as the timing of customer product launches. The increase in assembly sales
reflected an increase in price during 2008 due to contractual agreements related to material price
increases. The decrease in ICD battery revenue is primarily due to customer vertical integration
partially offset by increased adoption of our Q Series high rate ICD batteries. The decline in
coated component sales is primarily the result of a customer changing product mix near the end of
2007 due to marketplace field actions. Revenues in 2007 included an increased level of capacitor
sales due to a customer supply issue in the first half of 2007.
Electrochem - Similar to IMC customers, we have pricing arrangements with our customers that
many times do not specify minimum quantities. Our visibility to customer ordering patterns is
over a relatively short period of time as most customers utilize short term purchase orders as
opposed to long-term contracts.
44
Electrochem sales grew $29.6 million or 60% in 2008 to $78.5 million. This included $25.0
million of incremental revenue from our acquisitions in 2007. On an organic basis Electrochem
revenue increased 11%, which includes approximately $1 million of additional revenue as a result
of 2008 being a 53 week fiscal year versus 2007 which had 52 weeks. The core growth in
Electrochem sales primarily came from our energy markets. Oil and gas drilling activity was
strong during 2008, but is expected to be more tempered in 2009 due to the economic slow down.
Additionally, we continue to gain market share across our markets.
2009 Sales Outlook - We expect our full year 2009 sales will be in the range of $550 million to
$600 million. This revenue projection assumes that we will continue to grow faster than our
underlying market by leveraging our diversified revenue base and our strength in the development
and manufacturing of custom technologies for our customers. These growth projections may be
impacted by a variety of factors including a softening in the orthopedic and commercial energy
markets, potential delays in elective surgeries, the current financial market unrest, changes in
exchange rates and changes in the health care reimbursement policies. Within the IMD markets
we serve, the orthopedics market represents the least predictable market due to the elective nature
of many of the surgeries.
Cost of Sales
Changes from the prior year to cost of sales as a percentage of sales were primarily due to the
following:
Impact of 2008 and 2007 acquisitions (a)
Inventory step-up amortization (b)
Mix change (c)
Volume change (d)
Price change (e)
Impact of annualized consolidation savings (f)
Total percentage point change to cost of sales as a
percentage of sales
2008-2007
% Increase
8.5%
1.5%
1.2%
-1.0%
-0.8%
-1.5%
7.9%
a. We completed seven acquisitions from the second quarter of 2007 to the first quarter of 2008.
The acquired companies are currently operating with a higher cost of sales percentage than our
legacy businesses due to less efficient operations and products/contracts that generally carry
lower margins. We are currently in the process of applying our lean manufacturing processes
to their operations and implementing plans for plant consolidation in order to lower cost of
sales as percentage of sales (See “Cost Savings and Consolidation Efforts”). These initiatives,
as well as increased sales volumes, are expected to help improve our cost of sales percentage
over the next two years.
b. In connection with our acquisitions in 2008 and 2007, the value of inventory on hand was
stepped-up to reflect the fair value at the time of acquisition. This stepped-up value is
amortized to cost of sales – excluding intangible amortization as the inventory to which the
adjustment relates is sold. The inventory step-up amortization was $6.4 million and $1.7
million for 2008 and 2007, respectively. As of January 2, 2009 there was no remaining
inventory step-up to be amortized.
45
c. The revenue increase in 2008, excluding acquisitions, included a higher mix of low-rate
medical batteries and assembly sales, which generally have lower margins. Additionally,
revenue from coated components, ICD capacitors and high-rate medical batteries, which are
generally higher margin products, were lower.
d. This decrease is primarily due to higher feedthrough production which absorbed a higher
amount of fixed costs such as plant overhead and depreciation. In addition, higher overhead
efficiencies were driven by greater inventory build for moves and replenishment of safety
stock.
e. This decrease was primarily driven by contractual price increases for our high rate medical
batteries and price increases contingent upon raw material costs.
f. This decrease was a result of a reduction in excess capacity in connection with our facility
consolidations completed in 2008 (See “Cost Savings and Consolidation Efforts”).
We expect cost of sales as a percentage of sales to benefit in future years from our consolidation
efforts and the elimination of excess capacity.
SG&A Expenses
Changes from the prior year to SG&A expenses were primarily due to the following (in millions):
Headcount increases associated with acquisitions (a)
Amortization (b)
Enpath legal expense (c)
Other (d)
Net increase in SG&A
2008-2007
$ Increase
18.9
$
2.8
4.0
2.3
28.0
$
a. Personnel acquired in functional areas such as Finance, Human Resources and Information
Technology were the primary drivers of this increase. The remaining increase was for
consulting, travel and other administrative expenses to operate those areas.
b. In connection with our acquisitions in 2008 and 2007, the value of customer relationships and
non-compete agreements were recorded at fair value at the time of acquisition. These
intangible assets are amortized to SG&A over their estimated useful lives.
c. Amount represents increased costs incurred in connection with a patent infringement action
which went to trial in 2008 – see “Litigation.”
d. Increase is primarily a result of 2008 being a 53 week fiscal year versus 2007 which had 52
weeks, including additional payroll taxes that resulted from fiscal year 2008 ending in 2009.
SG&A expenses as a percentage of sales are expected to decline in the near term as synergies from
our acquisitions are realized.
46
RD&E Expenses
Net research, development and engineering costs were as follows (in millions):
Year ended
January 2,
2009
December 28,
2007
Research and development costs
$
18.8
$
16.1
Engineering costs
Less cost reimbursements
Engineering costs, net
Total RD&E
22.4
(9.8)
12.6
18.9
(5.1)
13.8
$
31.4
$
29.9
The increase in RD&E expenses for 2008 was primarily due to our acquisitions in 2007 and 2008
which added $5.3 million of incremental research and development costs, $4.1 million of
incremental engineering costs and $2.7 million of incremental cost reimbursements. These
increases were offset by our efforts to streamline these functions in 2008 to better align resources
as well as the timing of cost reimbursements. RD&E expenses are expected to increase in 2009,
reflecting our continued development of and investment in core product technologies.
Other Operating Expenses
Acquired In-Process Research and Development - Approximately $2.2 million and $16.1 million
of the purchase price related to the 2008 and 2007 acquisitions, respectively, was allocated to
IPR&D projects acquired. These projects had not yet reached technological feasibility and had no
alternative future use as of the acquisition date, thus were immediately expensed on the date of
acquisition. Additional information regarding these projects is set forth in Note 2 – “Acquisitions”
of the Notes to the Consolidated Financial Statements contained in Item 8 of this report and
“Product Development” section of this Item.
The remaining other operating expenses are as follows (in millions):
Year ended
(a) 2005 & 2006 facility shutdowns and consolidations
(a) 2007 & 2008 facility shutdowns and consolidations
(b) Integration costs
(c) Asset dispositions and other
January 2,
2009
$
December 28,
2007
$
0.7
8.3
5.4
0.2
14.6
4.7
0.5
-
0.1
5.3
$
$
a. Refer to the “Cost Savings and Consolidation Efforts” section of this Item for disclosures
related to the timing and level of remaining expenditures for these items as of January 2, 2009.
b. For 2008, we incurred costs related to the integration of the companies acquired in 2007 and
2008. The integration initiatives include the implementation of the Oracle ERP system,
training and compliance with policies as well as the implementation of lean manufacturing and
six sigma initiatives. The expenses are primarily for consultants, relocation and travel costs
that will not be required after the integrations are completed.
c. During 2008 and 2007, we had various asset disposals which were partially offset by insurance
proceeds received on previously disposed assets.
47
In 2009 consolidation and integration expenses are expected to be approximately $10 million to
$13 million.
Interest Expense and Interest Income
Interest expense for 2008 is $5.9 million higher than 2007 primarily due to the additional $80
million of 2.25% convertible notes issued at the beginning of 2007 as well as the additional interest
expense associated with line of credit draws used to fund our acquisitions and debt extinguishment
in 2008. See Note 8 – “Debt” of the Notes to the Consolidated Financial Statements in this Form
10-K for additional information about our long-term debt obligations.
We expect non-cash interest expense to increase materially in 2009 as a result of the changes in
accounting for convertible debt effective in 2009. See “Impact of Recently Issued Accounting
Standards” section of this Item for a further description of these changes. Cash interest costs for
2009 should remain relatively consistent with 2008 as we have fixed a significant portion of our
interest costs utilizing interest rate swaps.
Interest income for 2008 decreased by $6.3 million in comparison to the prior year primarily due to
the cash deployed in connection with our acquisitions in 2007 and 2008. We expect interest
income to remain comparable to the current year level for the foreseeable future.
Gain on sale of investment security
In the second quarter of 2007, we sold an investment security which resulted in a pre-tax gain of
$4.0 million.
Gain on extinguishment of debt
In December 2008 we entered into privately negotiated agreements under which we repurchased
$21.8 million in aggregate principal amount of our original $170.0 million of 2.25% convertible
subordinated notes due 2013 (“CSN I”) at $845.38 per $1,000 of principal. The primary purpose
of this transaction was to retire the debentures, which contained a put option exercisable on June
15, 2010, at a discount. This transaction was funded with availability under our existing line of
credit. This transaction was accounted for as an extinguishment of debt and resulted in a pre-tax
gain of $3.2 million.
In the first quarter of 2007, we exchanged $117.8 million of our original $170.0 million of CSN I
for an equivalent principal amount of a new series of 2.25% convertible subordinated notes due
2013. The primary purpose of this transaction was to eliminate the June 15, 2010 call and put
option that is included in the terms of the exchanged CSN I. We accounted for this exchange as an
extinguishment of debt, which resulted in a net pre-tax gain of $4.5 million.
Other (income) expense, net
In December 2007, we entered into a forward contract to purchase 80,000,000 Swiss Francs
(“CHF”), at an exchange rate of 1.1389 CHF per one U.S. dollar, in order to partially fund our
acquisition of Precimed, which closed in January 2008 and was payable in Swiss Francs. In
January 2008, we entered into an additional forward contract to purchase 20,000,000 CHF at an
exchange rate of 1.1156 per one U.S. dollar. We entered into a similar foreign exchange contract
in January 2008 in order to fund our acquisition of the Chaumont Facility, which closed in
February 2008 and was payable in Euros. The net result of the above transactions was a gain of
$2.4 million, $1.6 million of which was recorded in 2008 and $0.8 million in 2007.
48
Provision for Income Taxes
Our effective tax rate for fiscal year 2008 of 32.0% is lower than the U.S. statutory rate primarily
as a result of the Swiss Tax Holiday tax benefit, offset in part by the IPR&D charge from the
acquisition of Precimed, which was not deductible for income tax purposes. Our effective tax rate
for fiscal year 2007 of 47.5% was higher than the U.S. statutory rate primarily as a result of the
IPR&D charge from the acquisition of Enpath, which was not deductible for income tax purposes.
We expect our effective tax rate in 2009 to be more in line with the 35% U.S. statutory rate.
Fiscal 2007 Compared with Fiscal 2006
Sales
We achieved sales growth of 18% in 2007 compared to 2006. This growth was achieved through
acquisitions and organic growth of 8%. This growth came during a period in which the CRM
industry continued to recover from a difficult 2006. Our acquisitions which expanded our product
lines and diversified our customer base represented a 10% increase in revenue.
IMC - We achieved year-over-year growth of 19% in our IMC business despite our underlying
markets growing at a low-single digit pace and an approximate 1% net reduction in selling prices.
Our acquisitions represented a 10% increase in IMC revenue. ICD capacitors, ICD batteries,
assembly products and coated electrodes were the primary growth drivers. ICD capacitor sales
increased due to a non-recurring customer supply issue in the first half of the year. Growth in ICD
batteries was primarily due to increased sales of our “Q” technology battery which was introduced
near the end of 2006, partially offset by lower prices. This growth represents increased adoption
of our high rate battery technology.
Consistent with our strategy to increase the integration of our component products (including
enclosures) into our assembly business, assembly revenues, which are included in Other IMC
revenue, increased by 48% in 2007. Correspondingly, revenues from enclosures decreased by
13% over the same period. In addition to the above, the increase in assembly sales reflected an
increase in price due to contractual agreements related to material price increases.
Electrochem - Electrochem sales grew by 12% in 2007 through a combination of increased market
penetration, new product introductions, greater value-added pack assembly and acquisitions. Our
acquisitions represented a 7% increase in Electrochem revenue. The core growth rate slowed from
the prior year partially due to the favorable benefit of approximately $1.5 million to $2.5 million in
customer inventory stocking in 2006 as they consolidated operations.
Cost of Sales
Changes from the prior year to cost of sales as a percentage of sales were primarily due to the
following:
Price reduction (a)
Inventory step-up (b)
Excess capacity at Columbia Facility (c)
Total percentage point change to cost of sales as a
percentage of sales
49
2007-2006
% Increase
0.5%
0.5%
0.4%
1.4%
a. This increase was primarily due to contractual price concessions negotiated with our larger
customers. Price reductions were negotiated in exchange for longer term commitments,
primarily in the IMC segment.
b. In connection with our acquisitions, the value of inventory on hand was stepped-up to reflect
the fair value at the time of acquisition. The inventory step-up amortization, which is recorded
as cost of sales – excluding intangible amortization, was $1.7 million.
c. The Columbia Facility was operating with excess capacity during 2007 as its production
transitioned to our Tijuana, Mexico Facility. The excess capacity cost is approximately $1.2
million. In accordance with our inventory accounting policy, excess capacity costs are
expensed.
SG&A Expenses
Changes from the prior year to SG&A expenses were primarily due to the following (in millions):
Headcount increases associated with acquisitions (a)
Amortization (b)
Increased sales and marketing workforce (c)
Increased legal expense (d)
Other
Net increase in SG&A
2007-2006
$ Increase
$
3.8
1.0
0.9
0.5
(0.3)
5.9
$
a. Personnel working for the acquired companies in functional areas such as Finance, Human
Resources and Information Technology were the primary drivers of this increase. The
remaining increase was for consulting, travel and other administrative expenses to operate
these areas.
b. Relates to the amortization of customer relationships and non-compete agreements recorded as
a result of our acquisitions in 2007.
c. The increase in sales and marketing workforce was primarily a result of our planned efforts to
increase the marketing and sales of our products.
d. The increase in legal expense is primarily due to increased staffing levels and activity related to
customer contract renewals during the year.
RD&E Expenses
Net research, development and engineering costs were as follows (in millions):
Year ended
December 28,
2007
December 29,
2006
Research and development costs
$
16.1
$
16.1
Engineering costs
Less cost reimbursements
Engineering costs, net
Total RD&E
18.9
(5.1)
13.8
9.9
(1.8)
8.1
$
29.9
$
24.2
50
The increase in RD&E expenses for 2007 was primarily due to a planned headcount increase in
engineering personnel as we continue to invest substantial resources in product technologies.
Additionally, $1.9 million of research and development costs, $4.9 million of engineering costs
and $2.6 million of cost reimbursements were a result of the acquisitions in 2007. Reimbursement
on product development projects increased compared to last year primarily due to the timing of the
achievement of milestones, as well as the Enpath and BIOMEC acquisitions, which added $2.6
million of cost reimbursements.
Other Operating Expenses
Acquired In-Process Research and Development - Approximately $2.3 million and $13.8 million
of the BIOMEC and Enpath purchase prices, respectively, represent the estimated fair value of
IPR&D projects acquired from those companies. These projects had not yet reached technological
feasibility and had no alternative future use as of the acquisition date, thus were immediately
expensed on the date of acquisition.
The remaining other operating expenses are as follows (in millions):
Year Ended
December 28, December 29,
(a) 2005 & 2006 facility shutdowns and consolidations
(a) 2007 & 2008 facility shutdowns and consolidations
(b) Asset dispositions and other
2007
$
2006
$
4.7
0.5
0.1
5.3
11.0
-
6.1
17.1
$
$
a. Refer to “Cost Savings and Consolidation Efforts” section of this Item for additional disclosures.
b. During 2007, we had various asset disposals which were offset by $0.5 million of insurance
proceeds on previously disposed assets. During 2006, we recorded a loss of $4.4 million
related to the write-off of a battery test system that was under development. Upon completion
of our engineering and technical evaluation, it was determined that the system could not meet
the required specifications in a cost effective manner. This charge was included in the IMC
business segment. The remaining expense for 2006 includes charges for various asset
dispositions and $0.8 million for professional fees related to a potential acquisition that was no
longer considered probable.
Interest Expense and Interest Income
Interest expense for 2007 is higher than the prior year period primarily due to the additional $80
million of 2.25% convertible notes issued at the end of the first quarter of 2007 and additional
amortization of deferred fees and discounts associated with these notes and the notes exchanged at
that time. See Note 8 – “Debt” of the Notes to the Consolidated Financial Statements in this Form
10-K for additional information about our long-term debt obligations. Interest income for 2007
increased in comparison to 2006 primarily due to increased cash, cash equivalents and short-term
investment balances, as well as higher rates earned.
Gain on sale of investment security
In the second quarter of 2007, we sold an investment security which resulted in a pre-tax gain of
$4.0 million.
51
Gain on extinguishment of debt
In the first quarter of 2007, we exchanged $117.8 million of our original $170.0 million of CSN I
for an equivalent principal amount of a new series of 2.25% convertible subordinated notes due
2013. The primary purpose of this transaction was to eliminate the June 15, 2010 call and put
option that is included in the terms of the exchanged CSN I. We accounted for this exchange as an
extinguishment of debt, which resulted in a net pre-tax gain of $4.5 million ($2.9 million net of
tax) or $0.13 per diluted share.
Other (income) expense, net
In December 2007, we entered into a forward contract to purchase 80,000,000 CHF, at an
exchange rate of 1.1389 CHF per one U.S. dollar, in order to partially fund our acquisition of
Precimed, which closed in January 2008 and was payable in Swiss Francs. The net result of the
above transaction was a gain of $0.8 million which was recorded in 2007 as Other Income
(Expense), Net.
Provision for Income Taxes
Our effective tax rate is higher than the U.S. statutory rate primarily as a result of the IPR&D
charge from the acquisition of Enpath, which is non-deductible for income tax purposes. As a
result, our effective tax rate was 47.5% in 2007. Excluding this IPR&D charge, our effective tax
rate was consistent with 2006.
Liquidity and Capital Resources
(Dollars in millions)
As of
January 2,
2009
December 28,
2007
Cash and cash equivalents and short-term investments (a)(b)
Working capital(b)
Current ratio(b)
$
22.1
$
40.5
$
142.2
$
116.8
2.5:1.0
2.8:1.0
a. We did not hold any short-term investments as of January 2, 2009. Short-term investments in
2007 consisted of municipal, U.S. Government Agency and corporate notes and bonds acquired
with maturities that exceed three months.
b. Cash and cash equivalents and short-term investments decreased primarily due to the cash used
to acquire Precimed and the Chaumont Facility and capital expenditures which were funded by
$79.9 million of net cash received from borrowings and $57.1 million of cash flow generated
from operations. Our increase in working capital was primarily due to the growth of the
Company. As a percentage of assets, working capital remained consistent with the prior year
at approximately 17%. Our current ratio remained relatively consistent with 2007 year-end
amounts. We expect cash generated from operations to be sufficient to fund our consolidation
and integration initiatives, future capital expenditures, contractual obligations and debt service
payments.
52
Revolving line of credit - We have a senior credit facility (the “Credit Facility”) consisting of a
$235 million revolving line of credit, which can be increased to $335 million upon our request.
The Credit Facility also contains a $15 million letter of credit subfacility and a $15 million
swingline subfacility. The Credit Facility is secured by our non-realty assets including cash,
accounts and notes receivable, and inventories, and has an expiration date of May 22, 2012 with a
one-time option to extend to April 1, 2013 if no default has occurred. Interest rates under the
Credit Facility are, at our option, based upon the current prime rate or the LIBOR rate plus a
margin that varies with our leverage ratio. If interest is paid based upon the prime rate, the
applicable margin is between minus 1.25% and 0.00%. If interest is paid based upon the LIBOR
rate, the applicable margin is between 1.00% and 2.00%. We are required to pay a commitment
fee between 0.125% and 0.250% per annum on the unused portion of the Credit Facility based on
our leverage ratio.
The Credit Facility contains limitations on the incurrence of indebtedness, limitations on the
incurrence of liens and licensing of intellectual property, limitations on investments and restrictions
on certain payments. Except to the extent paid for by common equity of Greatbatch or paid for out
of cash on hand, the Credit Facility limits the amount paid for acquisitions in total to $100 million.
The restrictions on payments, among other things, limit repurchases of our stock to $60 million and
our ability to make cash payments upon conversion of our convertible subordinated notes, and
dividends. These limitations can be waived upon approval of a simple majority of the lenders.
Such waiver was obtained in order to fund the Precimed acquisition and repurchase our convertible
subordinated notes in 2008.
The Credit Facility also requires us to maintain a ratio of adjusted EBITDA, as defined in the credit
agreement, to interest expense of at least 3.00 to 1.00, and a total leverage ratio, as defined in the
credit agreement, of not greater than 5.00 to 1.00 from May 22, 2007 through September 29, 2009
and not greater than 4.50 to 1.00 from September 30, 2009 and thereafter. As of January 2, 2009,
we are in compliance with the required covenants.
The Credit Facility contains customary events of default. Upon the occurrence and during the
continuance of an event of default, a majority of the lenders may declare the outstanding advances
and all other obligations under the Credit Facility immediately due and payable.
In connection with our acquisition of Precimed and the Chaumont Facility, we borrowed $117
million under this revolving line of credit in 2008. We borrowed an additional net $15.0 million
under the revolving line of credit since that time in order to fund the repurchase of convertible
subordinated notes. The weighted average interest rate on these borrowings as of January 2, 2009,
which does not include the impact of our interest rate swaps, was 3.8%. Interest rates reset based
upon the six-month ($105 million), three-month ($8 million), two-month ($13 million) and one-
month ($6 million) LIBOR rate. Based upon current capital needs, we do not anticipate making
significant principal payments on the revolving line of credit within the next twelve months. As of
January 2, 2009, we had $103 million available under our revolving line of credit.
Extinguishment of Debt - In December 2008 we entered into privately negotiated agreements
under which we repurchased $21.8 million in aggregate principal amount of our 2.25% convertible
subordinated notes due 2013 at $845.38 per $1,000 of principal. The primary purpose of this
transaction was to retire the debentures, which contained a put option exercisable on June 15,
2010, at a discount. This transaction was funded with availability under our existing line of credit.
This transaction was accounted for as an extinguishment of debt and resulted in a pre-tax gain of
$3.2 million.
53
As of January 2, 2009 we have outstanding $30.5 million of 2.25% convertible subordinated notes
due 2013, which contain a put option exercisable on June 15, 2010. We believe that our cash flow
from operations, as well as availability under our existing line of credit will be sufficient to fund
the repayment of these notes if put to us. The remaining $197.8 million of convertible
subordinated notes are not due until 2013 and do not have a put option.
Operating Activities - Net cash flows from operating activities for 2008 increased $14.1 million
over 2007. This increase was primarily driven by higher net income excluding non-cash items
(consisting of depreciation, amortization, stock-based compensation, non-cash gains/losses) of
$20.4 million. This increase was partially offset by cash flow used by our operating accounts,
primarily inventory, due to the timing of inventory purchases and inventory safety stock build-up.
The extinguishment of debt in 2008 resulted in a reclassification of approximately $3.2 million of
current income tax liability, which will be paid in 2009. This amount was previously recorded as a
non-current deferred tax liability on the balance sheet. The remaining variances can be attributed
to the timing of cash receipts and payments, including those related to the companies acquired in
2007 and 2008.
We anticipate that cash flow from operations will be sufficient to meet our operating, capital
expenditure and debt service needs, other than for acquisitions. Included in accounts receivable as
of January 2, 2009 is an $11.6 million value added tax receivable with the French government
related to inventory purchases for the Chaumont Facility. We have made claims with the proper
French authorities and fully expect to collect this amount in the first half of 2009, however
collection is not guaranteed.
Investing Activities - Net cash used in investing activities was $148.7 million for 2008. This was
primarily the result of the acquisition of Precimed and the Chaumont Facility in 2008. The
increase in property, plant and equipment purchases over 2007 of $24.2 million primarily relates to
the construction of our new Electrochem manufacturing facility in Raynham, MA and the
expansion of our corporate offices in 2008.
Our current expectation for 2009 is that capital spending will be in the range of $30.0 million to
$40.0 million of which approximately half are discretionary in nature. These purchases relate to
routine investments to support our internal growth and to maintain our technology leadership. We
anticipate cash flow from operations will be sufficient to fund these capital expenditures.
We regularly engage in discussions relating to potential acquisitions. We continually assess our
financing facilities and capital structure to ensure liquidity and capital levels are sufficient to meet
our strategic objectives. Going forward, we will continue to pursue strategically targeted and
opportunistic acquisitions.
Financing Activities - Cash flow provided by financing activities for 2008 primarily related to
$117.0 million of borrowings on our revolving line of credit taken in connection with the
acquisition of Precimed and the Chaumont Facility and an additional net $15.0 million of
borrowings under our revolving line of credit in order to fund our repurchase of $22 million par
value of our convertible subordinated notes. We repaid $33.6 million of the debt assumed from
Precimed during 2008. In 2007, we repaid $7.1 million of debt assumed from Enpath. During
2007, we received net proceeds of $76.0 million in connection with our issuance of 2.25%
convertible subordinated notes and paid $6.6 million of financing fees related to that transaction
and the new revolving credit agreement discussed above.
54
Capital Structure - At January 2, 2009, our capital structure consisted of $220.9 million of
convertible subordinated notes, $132.0 million of debt under our revolving line of credit and 22.9
million shares of common stock outstanding. Additionally, we have $22.1 million in cash and
cash equivalents which is sufficient to meet our short-term operating cash needs. If necessary, we
have access to $103 million under our available line of credit and are authorized to issue 100
million shares of common stock and 100 million shares of preferred stock. The market value of
our outstanding common stock since our initial public offering has exceeded our book value;
accordingly, we believe that if needed we can access public markets to raise additional capital.
Our capital structure allows us to support our internal growth and provides liquidity for corporate
development initiatives.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Litigation
We are a party to various legal actions arising in the normal course of business. While we do not
believe that the ultimate resolution of any such pending activities will have a material adverse
effect on our consolidated results of operations, financial position, or cash flows, litigation is
subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility
of a material adverse impact in the period in which the ruling occurs.
As previously reported, on June 12, 2006, Enpath was named as defendant in a patent infringement
action filed by Pressure Products Medical Supplies, Inc. (“Pressure Products”) in which Pressure
Products alleged that Enpath’s FlowGuard™ valved introducer, which has been on the market for
more than three years, and Enpath’s ViaSeal™ prototype introducer, which has not been sold,
infringes claims in Pressure Products patents. After trial, a jury found that Enpath infringed the
Pressure Products patents, but not willfully, and awarded damages in the amount of $1.1 million.
Enpath has appealed the final judgment to the U.S. Court of Appeals for the Federal Circuit. As a
result of a post-trial motion and pending the appeal, Enpath is permitted to continue to sell
FlowGuard™ provided that Enpath pays into an escrow fund a royalty of between $1.50 and $2.25
for each sale of a FlowGuard™ valved introducer. The amount accrued as escrow during 2008
was $0.5 million. During 2008, we incurred $4.5 million of costs related to this litigation.
During 2002, a former non-medical customer commenced an action alleging that Greatbatch had
used proprietary information of the customer to develop certain products. We have meritorious
defenses and are vigorously defending the matter. The potential risk of loss is up to $1.7 million.
Contractual Obligations
The following table summarizes our significant contractual obligations at January 2, 2009:
CONTRACTUAL OBLIGATIONS
Long-Term Debt Obligations (a)
Operating Lease Obligations (b)
Purchase Obligations (c)
Pension Obligations (d)
Total
Payments due by period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$
397,972
$
10,019
$
49,461
$
338,492
$
-
11,068
18,062
2,910
18,062
3,370
2,803
-
-
1,985
-
9,852
436,954
$
703
31,694
$
1,590
54,421
$
2,010
343,305
$
5,549
7,534
$
55
a. Includes the annual interest expense on our convertible debentures of 2.25%, which is paid
semi-annually. These amounts assume the June 2010 put option is exercised on the $30.5
million of 2.25% convertible subordinated notes outstanding issued in May 2003. Also includes
the expected interest expense on the $132 million outstanding on our line of credit based upon
the period end weighted average interest rate of 3.7%, which includes the impact of our interest
rate swaps outstanding. See Note 8 – “Debt” of the Notes to the Consolidated Financial
Statements in this Form 10-K for additional information about our long-term debt obligations.
b. See Note 13 – “Commitments and Contingencies” of the Notes to the Consolidated Financial
Statements in this Form 10-K for additional information about our operating lease obligations.
c. For the purposes of this table, contractual obligations for purchases of goods or services are
defined as agreements that are enforceable and legally binding and that specify all significant
terms, including: fixed or minimum quantities; fixed, minimum or variable price provisions; and
the approximate timing of the transaction. Our purchase orders are normally based on our
current manufacturing needs and are fulfilled by our vendors within short time horizons. We
enter into blanket orders with vendors that have preferred pricing and terms, however these
orders are normally cancelable by us without penalty.
d. See Note 9 – “Employee Benefit Plans” of the Notes to the Consolidated Financial Statements
in this Form 10-K for additional information about our pension plan obligations. These
amounts do not include any potential future contributions to our pension plan that may be
necessary if the rate of return earned on pension plan assets is not sufficient to fund the rate of
increase of our pension liability. Future cash contributions may be required. As of January 2,
2009 our actuarially determined pension liability exceeded the plans assets by $6.0 million.
This table does not include the forward contract entered into in February 2009 to purchase 10
million Mexican pesos per month from March 2009 to December 2009 at an exchange rate of
14.85 pesos per one U.S. dollar. This contract was entered into in order to hedge the risk of peso
denominated payments associated with the operations at our Tijuana, Mexico facility. This
contract will be accounted for as a cash flow hedge.
Inflation
We utilize certain critical raw materials (including precious metals) in our products that we obtain
from a limited number of suppliers due to the technically challenging requirements of the supplied
product and/or the lengthy process required to qualify these materials with our customers. We
cannot quickly establish additional or replacement suppliers for these materials because of these
requirements. Our results may be negatively impacted by an increase in the price of these critical
raw materials. This risk is partially mitigated as many of the supply agreements with our
customers allow us to partially adjust prices for the impact of any raw material price increases and
the supply agreements with our vendors have final one-time buy clauses to meet a long-term need.
Historically, raw material price increases have not materially impacted our results of operations.
Impact of Recently Issued Accounting Standards
In June 2008, the Emerging Issues Task Force (“EITF”) issued EITF 07-5, Determining Whether
an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock. This Issue prescribes a
two step process for determining whether an instrument (or an embedded feature), such as our
convertible subordinated notes, is indexed to our stock as follows: Step 1: if the instrument is not
based on (a) an observable market, other than the market for our stock, or (b) an observable index,
other than an index calculated or measured solely by reference to our own operations then the
instrument is considered indexed to our own stock. Step 2: if the instrument settlement amount is
56
fixed then the instrument is considered indexed to our own stock. If we determine that our
convertible subordinated notes are not indexed to our own stock, they would not meet the scope
exception in paragraph 11(a) of SFAS No. 133 and thus would be accounted for under SFAS No.
133. We are still evaluating the impact of EITF 07-5 on our consolidated financial statements,
which is effective beginning in fiscal year 2009.
In June 2008, the FASB issued Staff Position (“FSP”) EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This
FSP concluded that all outstanding unvested share-based payment awards (restricted stock) that
contain rights to nonforfeitable dividends are considered participating securities. Accordingly, the
two-class method of computing basic and diluted EPS is required for these securities. FSP 03-6-1,
which was effective beginning in fiscal year 2009, did not have a material impact on our
consolidated financial statements and will be applied retrospectively to all periods presented in
future financial statements.
In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments that
May be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This FSP requires
issuers of convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) separately account for the liability and equity components of those
instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This statement is effective beginning in fiscal
year 2009 and will be applied retrospectively to all periods presented in future financial statements.
This FSP is only applicable prospectively if we determine that our convertible subordinated notes
are indexed to our own stock under the guidance of EITF 07-5. We estimate that this FSP, if
applicable, will increase 2009 non-cash interest expense by approximately $7 million to $8 million
and reduce 2009 diluted EPS by approximately $0.19 per share to $0.22 per share.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. SFAS No. 161 amends and expands the disclosure requirements of SFAS No.
133, and requires entities to provide enhanced qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and
losses on derivative contracts, and disclosures about credit-risk-related contingent features in
derivative agreements. We will make the required disclosures beginning in 2009.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This Statement
replaces FASB Statement No. 141, Business Combinations but retains the guidance in SFAS No.
141 for identifying and recognizing intangible assets separately from goodwill. However, SFAS
No. 141(R) significantly changed the accounting for business combinations with regards to the
number of assets and liabilities assumed that are to be measured at fair value, the accounting for
contingent consideration and acquired contingencies as well as the accounting for direct
acquisition costs and IPR&D. SFAS No. 141(R) is effective for acquisitions consummated
beginning in fiscal year 2009 and will materially impact our consolidated financial statements if
we consummate an acquisition after the date of adoption. SFAS No. 141(R) provides that any
changes to an entity’s acquired uncertain tax positions and valuation allowances associated with
acquired deferred tax assets will no longer be applied to goodwill, regardless of the acquisition
date of the associated business combination. As such, any changes to the acquired uncertain tax
positions and valuation allowances will be recognized as an adjustment to income tax expense.
57
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement amends Accounting
Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 did not have a
material impact on our consolidated financial statements, which was effective beginning in fiscal
year 2009.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value while applying U.S. GAAP,
and expands disclosures about fair value measurements. SFAS No. 157 establishes a fair value
hierarchy that distinguishes between (1) market participant assumptions based on market data
obtained from independent sources and (2) the reporting entity’s own assumptions developed
based on unobservable inputs. In February 2008, the FASB issued FSP FAS 157-b—Effective
Date of FASB Statement No. 157. This FSP (1) partially deferred the effective date of SFAS No.
157 for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain
leasing transactions from the scope of SFAS No. 157. Effective in fiscal year 2008, we adopted
the provisions of SFAS No. 157 for all financial assets and financial liabilities and nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair value on a recurring basis.
The provisions of SFAS No. 157 that were effective in 2009, did not materially impact our
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Foreign Currency
With our acquisition of Precimed and the Chaumont Facility, we significantly increased our
exposure to foreign currency exchange rate fluctuations due to transactions denominated in Swiss
Francs and Euros. We continually evaluate our exposure to foreign currency risk and develop
hedging strategy’s to best mitigate these risks, which include the use of various derivative
instruments. We believe that a hypothetical 10% change in the value of the U.S. dollar in relation
to our most significant foreign currency exposures would not have a material impact on our net
earnings as the impact of foreign currency rates on revenue is almost entirely offset by the inverse
impact on our cost of sales and operating expenses.
In December 2007, we entered into a forward contract to purchase 80,000,000 CHF, at an
exchange rate of 1.1389 CHF per one U.S. dollar, in order to partially fund the acquisition of
Precimed, which closed in January 2008 and was payable in Swiss Francs. In January 2008, we
entered into an additional forward contract to purchase 20,000,000 CHF at an exchange rate of
1.1156 per one U.S. dollar. We entered into a similar foreign exchange contract in January 2008 in
order to fund the acquisition of the Chaumont Facility, which closed in February 2008 and was
payable in Euros. The net result of the above transactions was a gain of $2.4 million, $1.6 million
of which was recorded in 2008 as other (income) expense, net.
In February 2009, we entered into a forward contract to purchase 10 million Mexican pesos per
month from March 2009 to December 2009 at an exchange rate of 14.85 pesos per one U.S. dollar.
This contract was entered into in order to hedge the risk of peso denominated payments associated
with the operations at our Tijuana, Mexico facility. This contract will be accounted for as a cash
flow hedge.
58
We translate all assets and liabilities of our foreign operations of Precimed and the Chaumont
Facility acquired in 2008 at the period-end exchange rate and translate sales and expenses at the
average exchange rates in effect during the period. The net effect of these translation adjustments
is recorded in the consolidated financial statements as comprehensive income (loss). The
aggregate translation adjustment for 2008 was a loss of $0.2 million. Translation adjustments are
not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries.
Net foreign currency transaction gains and losses included in other income amounted to a gain of
$0.1 million for 2008. A hypothetical 10% change in the value of the U.S. Dollar in relation to our
most significant foreign currency subsidiary (P Medical Holding SA - Swiss Francs) would have
had an impact of approximately $10 million on these foreign net assets as of January 2, 2009.
Included in accounts receivable as of January 2, 2009 is an $11.6 million value added tax
receivable with the French government related to inventory purchases for the Chaumont Facility.
We have made claims with the proper French authorities and fully expect to collect this amount in
the first half of 2009, however collection is not guaranteed. This receivable is denominated in
Euros and is subject to foreign currency risk, which could be material.
Interest Rate Swaps
As of January 2, 2009, we had $132 million outstanding on our revolving line of credit. Interest
rates reset on this debt based upon the six-month ($105 million), three-month ($8 million), two-
month ($13 million) and one-month ($6 million) LIBOR rate, thus subjecting us to interest rate
risk. During 2008, we entered into three receive floating-pay fixed interest rate swaps indexed to
the six-month LIBOR rate. The objective of these swaps is to hedge against potential changes in
cash flows on our outstanding revolving line of credit. No credit risk was hedged. The receive
variable leg of the swaps and the variable rate paid on the revolving line of credit bear the same
rate of interest, excluding the credit spread, and reset and pay interest on the same dates.
Information regarding our outstanding interest rate swaps is as follow:
Instrument
Type of
hedge
Notional
amount
Start
date
End
date
Current
receive
floating
rate
Fair
value
January 2,
2009
Pay
fixed
rate
Interest rate swap Cash flow
Interest rate swap Cash flow
Interest rate swap Cash flow
(In thousands)
80,000
$
18,000
50,000
148,000
$
3/5/2008
7/7/2010 3.09%
12/18/2008 12/18/2010 2.00%
3.14%
2.17%
7/7/2011 2.16% 6M LIBOR
7/7/2010
2.64%
(In thousands)
(1,484)
$
-
90
(1,394)
$
The estimated fair value of the interest rate swap agreement represents the amount we expect to
receive (pay) to terminate the contracts. No portion of the change in fair value of the interest rate
swaps during 2008 was considered ineffective. The amount recorded as an offset to interest
expense in 2008 related to the interest rate swaps was $0.4 million.
A hypothetical one percentage point change in the LIBOR interest rate on the remaining $34
million of floating rate debt would have had an impact of approximately $0.3 million on our
interest expense. This amount is not indicative of the hypothetical net earnings impact due to
partially offsetting impacts on our cash and cash equivalents to interest income.
59
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following are set forth below:
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 2, 2009 and December
28, 2007
Consolidated Statements of Operations and Comprehensive Income
for the years ended January 2, 2009, December 28, 2007 and
December 29, 2006
Consolidated Statements of Cash Flows for the years ended January
2, 2009, December 28, 2007 and December 29, 2006
Consolidated Statements of Stockholders’ Equity for the years ended
January 2, 2009, December 28, 2007 and December 29, 2006
Notes to Consolidated Financial Statements
60
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s certifying officers are responsible for establishing and maintaining adequate
internal control over financial reporting. The Company’s internal control over financial reporting
is designed and maintained under the supervision of its certifying officers to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
As of January 2, 2009, management conducted an assessment of the effectiveness of the
Company’s internal control over financial reporting based on the framework established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this assessment, management has determined that the
Company’s internal control over financial reporting as of January 2, 2009 is effective.
In conducting the evaluation of the effectiveness of internal control over financial reporting as of
January 2, 2009, as permitted by the guidance issued by the Office of the Chief Accountant of the
Securities and Exchange Commission, management excluded the following subsidiaries acquired
in 2008:
• Precimed, Inc.
• P Medical Holding SA and subsidiaries, including the DePuy Orthopaedics Chaumont,
France manufacturing facility
These subsidiaries represented approximately 39% and 21% of net and total assets, respectively,
and 26% of revenues of the consolidated financial statement amounts as of and for the year ended
January 2, 2009. See Note 2 - “Acquisitions” for a discussion of these acquisitions and their
impact on the Company’s Consolidated Financial Statements.
The effectiveness of internal control over financial reporting as of January 2, 2009 has been
audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm.
Dated: March 2, 2009
Thomas J. Hook
President & Chief Executive Officer
Thomas J. Mazza
Senior Vice President & Chief Financial Officer
61
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Greatbatch, Inc.
Clarence, New York
We have audited the internal control over financial reporting of Greatbatch, Inc. and subsidiaries
(the "Company") as of January 2, 2009, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. As described in Management’s Report on Internal Control Over Financial
Reporting, management excluded from its assessment the internal control over financial reporting
at Precimed, Inc. and P Medical Holding SA and subsidiaries, which were acquired in 2008, and
whose financial statements constitute 39% and 21% of net and total assets, respectively, and 26%
of revenues of the consolidated financial statement amounts as of and for the year ended January 2,
2009. Accordingly, our audit did not include the internal control over financial reporting at
Precimed, Inc. and P Medical Holding SA and subsidiaries. The Company's management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the
supervision of, the company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts
and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
62
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due
to error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2009, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and financial statement
schedule as of and for the year ended January 2, 2009, of the Company and our report dated March
3, 2009, expressed an unqualified opinion on those financial statements and financial statement
schedule.
Buffalo, New York
March 3, 2009
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Greatbatch, Inc.
Clarence, New York
We have audited the accompanying consolidated balance sheets of Greatbatch, Inc. and
subsidiaries (the "Company") as of January 2, 2009 and December 28, 2007, and the related
consolidated statements of operations and comprehensive income, stockholders' equity, and cash
flows for each of the three years in the period ended January 2, 2009. Our audits also included the
consolidated financial statement schedule listed in the Index at Item 15(a)(2). These financial
statements and consolidated financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of January 2, 2009 and December 28, 2007, and the results of
its operations and its cash flows for each of the three years in the period ended January 2, 2009, in
conformity with accounting principles generally accepted in the United States of America. Also,
in our opinion, such consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial reporting as of
January 2, 2009, based on the criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 3, 2009, expressed an unqualified opinion on the Company's internal control over
financial reporting.
Buffalo, New York
March 3, 2009
64
GREATBATCH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments available for sale
Accounts receivable, net of allowance for doubtful accounts
Inventories, net
Refundable income taxes
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Amortizing intangible assets, net
Trademarks and tradenames
Goodwill
Deferred income taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Income taxes payable
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares;
no shares issued or outstanding in 2008 or 2007
Common stock, $0.001 par value, authorized 100,000,000
January 2,
2009
December 28,
2007
$
$
22,063
-
86,364
112,304
-
8,086
6,754
235,571
166,668
90,259
36,130
302,221
1,942
16,140
848,931
33,473
7,017
56,962
71,882
377
6,469
5,044
181,224
114,946
71,268
32,582
248,540
-
15,291
663,851
$
$
$
48,727
4,128
40,497
93,352
352,920
44,306
7,601
498,179
$
33,433
-
30,975
64,408
241,198
35,346
228
341,180
-
-
shares; 22,970,916 shares issued and 22,943,176 shares outstanding in 2008
and 22,477,340 shares issued and 22,470,299 shares outstanding in 2007
Additional paid-in capital
Treasury stock, at cost, 27,740 shares in 2008 and 7,041 shares in 2007
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders' equity
23
251,772
(741)
102,774
(3,076)
350,752
848,931
$
22
238,574
(140)
84,215
-
322,671
663,851
$
The accompanying notes are an integral part of these consolidated financial statements
65
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands except per share amounts)
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
Sales
$
546,644
$
318,746
$
271,142
Cost of sales - excluding amortization of
intangible assets
Cost of sales - amortization of intangible assets
Selling, general and administrative expenses
Research, development and engineering costs, net
Acquired in-process research and development
Other operating expenses, net
Operating income
Interest expense
Interest income
Gain on extinguishment of debt
Gain on sale of investment security
Other (income) expense, net
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Comprehensive income:
Net income
Foreign currency translation adjustment
Unrealized loss on interest rate swaps, net of tax
Defined benefit pension plan liability adjustment
Net unrealized gain (loss) on short-term
investments available for sale, net of tax
Less: reclassification adjustment for net realized
gain on short-term investments available for sale,
net of tax
Comprehensive income
384,014
198,184
164,885
6,841
72,633
31,444
2,240
14,578
34,894
13,168
(711)
(3,242)
-
(1,624)
27,303
8,744
18,559
$
4,537
44,674
29,914
16,093
5,324
20,020
7,303
(7,050)
(4,473)
(4,001)
(447)
28,688
13,638
15,050
3,813
38,785
24,225
-
17,058
22,376
4,605
(5,775)
-
-
12
23,534
7,408
16,126
$
$
$
$
0.82
0.81
$
$
0.68
0.67
$
$
0.74
0.73
22,525
24,128
22,152
22,422
21,803
26,334
$
18,559
$
15,050
$
16,126
(228)
(906)
(1,942)
-
-
-
-
-
-
-
(923)
3,594
-
15,483
$
(2,601)
11,526
-
19,720
$
$
The accompanying notes are an integral part of these consolidated financial statements
66
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash from operating activities:
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
18,559
$
15,050
$
16,126
Depreciation and amortization
Stock-based compensation
Gain on extinguishment of debt
Gain on sale of investment security
Acquired in-process research and development
Other non-cash (gains) losses/asset writedowns, net
Deferred income taxes
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other liabilities
Income taxes
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of short-term investments
Proceeds from maturity/disposition of short-term investments
Acquisition of property, plant and equipment
Purchase of cost method investment, net of distributions
Acquisitions, net of cash acquired
Other investing activities
Net cash used in investing activities
Cash flows from financing activities:
Repayments under line of credit, net
Principal payments of long-term debt
Proceeds from issuance of long-term debt
Payment of debt issuance costs
Issuance of common stock
Excess tax benefits from stock-based awards
Repurchase of treasury stock
Net cash provided by financing activities
Effect of foreign currency exchange on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
45,382
11,211
(3,242)
-
2,240
2,994
1,671
(18,640)
(21,077)
(35)
14,285
1,589
2,164
57,101
(2,010)
9,027
(44,172)
(4,300)
(107,577)
306
(148,726)
-
(62,058)
142,000
-
2,210
298
(793)
81,657
(1,442)
(11,410)
33,473
25,842
9,252
(4,473)
(4,001)
16,093
(972)
(4,935)
(14,523)
(1,969)
(238)
11,138
(4,581)
1,282
42,965
(70,058)
133,578
(19,993)
(1,750)
(188,148)
567
(145,804)
(1,000)
(6,093)
76,000
(6,628)
2,699
392
(205)
65,165
-
(37,674)
71,147
19,309
9,717
-
-
-
5,379
4,888
(1,288)
(12,483)
(855)
64
(1,011)
(641)
39,205
(54,800)
53,808
(15,445)
-
-
64
(16,373)
-
(464)
-
-
2,082
294
-
1,912
-
24,744
46,403
Cash and cash equivalents, end of year
$
22,063
$
33,473
$
71,147
The accompanying notes are an integral part of these consolidated financial statements
67
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6
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the accounts of
Greatbatch, Inc. and its wholly owned subsidiary (collectively, the “Company” or “Greatbatch”).
All intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations - The Company operates its business in two reportable segments –
Implantable Medical Components (“IMC”) and Electrochem Solutions (“Electrochem”). The IMC
business designs and manufactures components and devices for the Cardiac Rhythm Management
(“CRM”), Neuromodulation, Vascular Access and Orthopedic markets. Additionally, the IMC
business offers value-added assembly and design engineering services for products that
incorporate Implantable Medical Device (“IMD”) components. IMC customers include leading
original equipment manufacturers (“OEM”), in alphabetical order here and throughout this report,
such as Biotronik, Boston Scientific, DePuy Orthopaedics (“DePuy”), Johnson & Johnson,
Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. IMC entered
the Vascular Access market through its acquisition of Enpath Medical, Inc. (“Enpath”) and Quan
Emerteq, LLC (“Quan”) in 2007 and the Orthopedic market through its acquisition of P Medical
Holding SA (“Precimed”) and the assets of DePuy’s Chaumont, France manufacturing facility
(the “Chaumont Facility”) in early 2008.
Electrochem is a world leader in the design, manufacture and distribution of electrochemical cells,
battery packs and wireless sensors for demanding applications in markets such as energy, security,
portable medical, environmental monitoring and more. Electrochem broadened its product
portfolio through its acquisitions of Engineered Assemblies Corporation (“EAC”) and
IntelliSensing, LLC in 2007, and can now design and provide its customers rechargeable battery
and wireless sensor systems.
Fiscal Year End - The Company utilizes a fifty-two, fifty-three week fiscal year ending on the
Friday nearest December 31st. Fiscal years 2008, 2007 and 2006 ended on January 2, 2009,
December 28, 2007 and December 29, 2006, respectively. Fiscal year 2008 contained fifty-three
weeks while fiscal years 2007 and 2006 contained fifty-two weeks.
Fair Value Measurements – Beginning in fiscal year 2008, the Company adopted the provisions
of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements,
for all financial assets and liabilities and nonfinancial assets and liabilities that are recognized or
disclosed at fair value on a recurring basis (at least annually). Under this standard, fair value is
defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the
“exit price”) in an orderly transaction between market participants at the measurement date. See
Recent Accounting Pronouncements in this note for further information.
SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the
use of observable inputs and minimizes the use of unobservable inputs by requiring that the most
observable inputs be used when available. Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data obtained from sources
independent of the Company. Unobservable inputs are inputs that reflect the Company’s
assumptions about the assumptions market participants would use in pricing the asset or liability
developed based on the best information available in the circumstances. The hierarchy is broken
down into three levels based on the reliability of inputs as follows:
69
Level 1 — Valuations based on quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access. Since valuations are based on quoted prices that are
readily and regularly available in an active market, valuation of these products does not entail a
significant degree of judgment.
Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar instruments in markets that are not active or by
model-based techniques in which all significant inputs are observable in the market.
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair
value measurement. The degree of judgment exercised in determining fair value is greatest for
instruments categorized in Level 3.
The availability of observable inputs can vary and is affected by a wide variety of factors,
including, the type of asset/liability, whether the asset/liability is established in the marketplace,
and other characteristics particular to the transaction. To the extent that valuation is based on
models or inputs that are less observable or unobservable in the market, the determination of fair
value requires more judgment. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the
fair value hierarchy within which the fair value measurement in its entirety falls is determined
based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant
rather than an entity-specific measure. Therefore, even when market assumptions are not readily
available, assumptions are required to reflect those that market participants would use in pricing
the asset or liability at the measurement date.
The carrying amount of financial instruments, including cash and cash equivalents, trade
receivables and accounts payable, approximated their fair value as of January 2, 2009 because of
the short maturity of these instruments.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and highly liquid, short-
term investments with maturities at the time of purchase of three months or less.
Short-Term Investments – The Company did not hold any short-term investments at the end of
2008. Short-term investments at December 28, 2007 are comprised of municipal, U.S.
Government Agency and corporate notes and bonds acquired with maturities that exceed three
months. All short-term investments as of December 28, 2007 are classified as available-for-sale
and have a maturity of less than one year at the time of acquisition. Available-for-sale securities
are carried at fair value with the unrealized gain or loss, net of tax, reported in accumulated other
comprehensive income (loss) as a separate component of stockholders’ equity. Realized gains and
losses and investment income are included in net income. The cost of securities sold is based on
the specific identification method. Unrealized losses considered to be other than temporary are
recognized in net income.
70
Concentration of Credit Risk - Financial instruments that potentially subject the Company to
concentration of credit risk consist principally of accounts receivable. A significant portion of the
Company’s sales are to four customers, all in the medical device industry, and, as such, the
Company is directly affected by the condition of those customers and that industry. However, the
credit risk associated with trade receivables is partially mitigated due to the stability of those
customers. The Company performs on-going credit evaluations of its customers. Note 15 –
“Business Segment Information” contains information on sales and accounts receivable for these
customers. The Company maintains cash deposits with major banks, which from time to time may
exceed federally insured limits. The Company performs on-going credit evaluations of its banks.
Included in accounts receivable as of January 2, 2009 is an $11.6 million value added tax
receivable with the French government related to inventory purchases for the Chaumont Facility.
The Company has made claims with the proper French authorities and fully expects to collect this
amount in the first half of 2009, however collection is not guaranteed. This receivable is
denominated in Euros and is subject to foreign currency risk, which could be material.
Allowance for Doubtful Accounts - The Company provides credit, in the normal course of
business, to its customers in the form of trade receivables. The Company maintains an allowance
for doubtful customer accounts for those receivables that it does not expect to collect. The
Company accrues its estimated losses from uncollectable accounts receivable to the allowance
based upon recent historical experience, the length of time the receivable has been outstanding and
other specific information as it becomes available. Provisions to the allowance for doubtful
accounts are charged to current operating expenses. Actual losses are charged against this
allowance when incurred. The allowance for doubtful accounts was $1.6 million at January 2,
2009 and $0.8 million at December 28, 2007.
Inventories - Inventories are stated at the lower of cost, determined using the first-in first-out
method, or market. Provisions for excess, obsolete or expired inventory are based primarily on
how long the inventory has been held as well as our estimates of forecasted net sales of that
product. A significant change in the timing or level of demand for our products may result in
recording additional provisions for excess, obsolete or expired inventory in the future.
Property, Plant and Equipment - Property, plant and equipment is carried at cost. Depreciation is
computed primarily by the straight-line method over the estimated useful lives of the assets, as
follows: buildings and building improvements 7-40 years; machinery and equipment 3-8 years;
office equipment 3-10 years; and leasehold improvements over the remaining lives of the
improvements or the lease term, if less. The cost of repairs and maintenance is expensed as
incurred; renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost
and related accumulated depreciation or amortization is removed from the accounts and any gain
or loss is recorded in operating income or expense.
Business Combinations – The Company records its business combinations under the purchase
method of accounting. Under the purchase method of accounting, the Company allocates the
purchase price of each acquisition to the tangible and identifiable intangible assets acquired and
liabilities assumed based on their respective fair values at the date of acquisition. The fair value of
identifiable intangible assets is based upon detailed valuations that use various assumptions made
by management. Any excess of the purchase price over the fair value of the net tangible and
intangible assets acquired is allocated to goodwill.
71
Amortizing Intangible Assets – Acquired intangible assets other than goodwill and trademark and
tradenames consist primarily of purchased technology, patents and customer lists. The Company
amortizes its definite-lived intangible assets on a straight-line basis over their estimated useful
lives as follows: purchased technology and patents 5-15 years; customer lists 7-20 years and other
intangible assets 1-10 years.
Purchased In-Process Research and Development (“IPR&D”) – When the Company acquires
another entity, a portion of the purchase price is allocated, as applicable, to IPR&D. The Company
defines IPR&D as the value assigned to those projects for which the related products have not
received regulatory approval and have no alternative future use. Determining the portion of the
purchase price allocated to IPR&D requires the Company to make significant estimates. The
amount of the purchase price allocated to IPR&D is determined by estimating the future cash flows
of each project and discounting the net cash flows back to their present values. The discount rate
used is determined at the time of acquisition in accordance with accepted valuation methods. These
methodologies include consideration of the risk of the project not achieving commercial feasibility.
Impairment of Long-Lived Assets – The Company assesses the impairment of definite lived long-
lived assets when events or changes in circumstances indicate that the carrying value of the assets may
not be recoverable. Factors that are considered in deciding when to perform an impairment review
include significant under-performance of a business or product line in relation to expectations,
significant negative industry or economic trends, and significant changes or planned changes in the
use of the assets.
Recoverability potential is measured by comparing the carrying amount of the asset group to the
related total future undiscounted cash flows. If an asset group’s carrying value is not recoverable
through related cash flows, the asset group is considered to be impaired. Impairment is measured by
comparing the asset group’s carrying amount to its fair value. When it is determined that useful lives
of assets are shorter than originally estimated, and there are sufficient cash flows to support the
carrying value of the assets, the rate of depreciation is accelerated in order to fully depreciate the
assets over their new shorter useful lives.
Goodwill and trademarks and tradenames are not amortized but are periodically tested for
impairment. The Company assesses goodwill for impairment by comparing the fair value of its
reporting units to their carrying amounts on the last day of each fiscal year, or more frequently if
certain events occur or circumstances change, to determine if there is potential impairment. If the
fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the
extent that the implied fair value of the goodwill within the reporting unit is less than its carrying
value. Fair values for reporting units are determined based on discounted cash flows, market
multiples or appraised values as appropriate. Indefinite lived intangible assets such as trademarks
and tradenames are assessed for impairment on the last day of each fiscal year, or more frequently
if certain events occur or circumstances change, by comparing the fair value of the asset to their
carrying value. The fair value is determined by using a relief-from-royalty approach. The
Company has determined that, based on the impairment tests performed, no impairment of
goodwill or trademarks and tradenames have occurred during 2008, 2007 or 2006.
72
Other Assets – Other assets includes deferred costs incurred in connection with the Company’s
issuance of its convertible subordinated notes and revolving line of credit. These costs are being
amortized using the effective yield method over the period from the date of issuance to the put
option date (if applicable) or the contractual maturity date, whichever is earlier. Total net deferred
financing fees amounted to $5.0 million at January 2, 2009 and $6.4 million at December 28,
2007.
Other assets also include long-term investments in equity securities of entities which the Company
does not have the ability to exercise significant influence over and are accounted for using the cost
method. Each reporting period, management evaluates these investments to determine if there are
any events or circumstances that are likely to have a significant adverse effect on the fair value of
the investment. Examples of such impairment indicators include, but are not limited to: a
significant deterioration in earnings performance; a significant adverse change in the regulatory,
economic or technological environment of an investee; or a significant doubt about an investee’s
ability to continue as a going concern. If an impairment indicator is identified, management will
estimate the fair value of the investment and compare it to its carrying value. The estimation of
fair value considers all available financial information related to the investee, including, but not
limited to, valuations based on recent third-party equity investments in the investee. If the fair
value of the investment is less than its carrying value, the investment is impaired and a
determination as to whether the impairment is other-than-temporary is made. Impairment is
deemed to be other-than-temporary unless the Company has the ability and intent to hold the
investment for a period sufficient for a market recovery up to the carrying value of the investment.
Further, evidence must indicate that the carrying value of the investment is recoverable within a
reasonable period. For other-than-temporary impairments, an impairment loss is recognized equal
to the difference between the investment’s carrying value and its fair value.
The aggregate recorded amount of cost method investments at January 2, 2009 and December 28,
2007 was $10.9 million and $6.8 million, respectively. The Company has determined that these
investments are not considered variable interest entities as defined in Financial Accounting
Standards Board (“FASB”) Interpretation (“FIN”) 46(R), Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51. The Company’s exposure related to these entities is
limited to its recorded investment. These investments are in research and development companies
whose fair value is subject to future fluctuations, which could be significant.
Income Taxes - The consolidated financial statements of the Company have been prepared using
the asset and liability approach in accounting for income taxes, which requires the recognition of
deferred income taxes for the expected future tax consequences of net operating losses, credits, and
temporary differences between the financial statement carrying amounts and the tax bases of assets
and liabilities. A valuation allowance is provided on deferred tax assets if it is determined that it is
more likely than not that the asset will not be realized.
The Company and its domestic subsidiaries file a consolidated U.S. federal income tax return.
State tax returns are filed on a combined or separate basis depending on the applicable laws in the
jurisdictions where tax returns are filed. The Company also files foreign tax returns on a separate
company basis in the countries in which it operates.
73
Beginning in fiscal year 2007, the Company adopted the provisions of FIN No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB SFAS No. 109. FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized under SFAS No. 109. FIN No. 48
prescribes a recognition threshold and measurement attribute for financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return and also provides
guidance on various related matters such as derecognition, interest and penalties, and disclosure.
Upon adoption of FIN No. 48, the Company did not recognize any adjustment to its $1.8 million of
unrecognized tax benefits. The Company recognizes interest expense related to uncertain tax
positions as Interest Expense. Penalties, if incurred, are recognized as a component of Selling,
General and Administrative Expenses.
Derivative Financial Instruments – The Company recognizes all derivative financial instruments
in its consolidated financial statements at fair value in accordance with FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. Changes in the fair value of
derivative instruments are recorded in earnings unless hedge accounting criteria are met. All of the
Company’s derivative financial instruments as of January 2, 2009 are designated as cash flow
hedges. There were no derivative financial instruments outstanding as of December 28, 2007. The
effective portion of changes in fair value of these cash flow hedges is recorded each period, net of
tax, in accumulated other comprehensive income (loss) until the related hedged transaction occurs.
Any ineffective portion of changes in fair value of these cash flow hedges is recorded in earnings.
Foreign Currency Translation - The Company translates all assets and liabilities of its foreign
subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate
and translates income and expenses at the average exchange rates in effect during the period. The
net effect of this translation is recorded in the consolidated financial statements as accumulated
other comprehensive income (loss). Translation adjustments are not adjusted for income taxes as
they relate to permanent investments in the Company’s foreign subsidiaries. Net foreign currency
transaction gains and losses included in other income/expense amounted to a gain of $0.1 million
for 2008 and were not material for 2007 and 2006.
Revenue Recognition - Revenue from the sale of products is recognized at the time the product is
shipped and title passes to our customers. The Company includes shipping and handling fees
billed to customers in sales. Shipping and handling costs associated with inbound and outbound
freight are generally recorded in cost of sales. In certain instances the Company obtains
component parts for sub-assemblies from its customers that are included in the final product.
These amounts were excluded from sales and cost of sales recognized by the Company. The cost
of these customer supplied component parts amounted to $35.1 million, $35.1 million and $18.8
million in 2008, 2007 and 2006, respectively.
Product Warranties – The Company allows customers to return defective or damaged products for
credit, replacement, or exchange. The Company generally warrants that its products will meet
customer specifications and will be free from defects in materials and workmanship. The
Company accrues its estimated exposure to warranty claims based upon recent historical
experience and other specific information as it becomes available.
74
Research and Development and Engineering Costs – Research and development costs are
expensed as incurred. The primary costs are salary and benefits for personnel. Engineering costs
are expensed as incurred. Cost reimbursements for engineering services from customers for whom
the Company designs products are recorded as an offset to engineering costs upon achieving
development milestones specified in the contracts.
Net research, development and engineering costs are comprised of the following (in thousands):
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
Research and development costs
$
18,750
$
16,141
$
16,096
Engineering costs
Less: cost reimbursements
Engineering costs, net
Total research, development and
engineering costs, net
22,447
(9,753)
12,694
18,929
(5,156)
13,773
9,888
(1,759)
8,129
$
31,444
$
29,914
$
24,225
Stock-Based Compensation - The Company records compensation costs related to stock-based
awards in accordance with SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No.
123(R)”), and related Securities and Exchange Commission (“SEC”) rules included in Staff
Accounting Bulletin (“SAB”) No. 107. Under the fair value recognition provisions of SFAS No.
123(R), the Company measures stock-based compensation cost at the grant date based on the
estimated fair value of the award. Compensation cost for service-based awards is recognized
ratably over the applicable vesting period. Compensation cost for performance-based awards is
reassessed each period and recognized based upon the probability that the performance targets will
be achieved. The Company utilizes the Black-Scholes option pricing model to estimate the fair
value of stock options granted. For restricted stock and restricted stock unit awards, the fair
market value of the award is determined based upon the closing value of the Company’s stock
price on the grant date. The amount of stock-based compensation expense recognized during a
period is based on the portion of the awards that are ultimately expected to vest. The Company
estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those
estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense
recognized over the vesting period will only be for those awards that ultimately vest.
Defined Benefit Pension Plans - In connection with the Precimed and Chaumont Facility
acquisitions, the Company recorded a pension liability related to defined benefit pension plans
provided to non-U.S. employees of those businesses. The Company accounts for these pension
plans in accordance with SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans. This Statement requires an employer to recognize in its balance sheet
as an asset or liability the overfunded or underfunded status of a defined benefit pension plan,
measured as the difference between the fair value of plan assets and the benefit obligation. For a
pension plan, the benefit obligation is the projected benefit obligation which is calculated based on
actuarial computations of current and future benefits for employees. SFAS No. 158 requires that
gains or losses and prior service costs or credits that arise during the period, but are not included as
components of net periodic benefit expense, be recognized as a component of accumulated other
Comprehensive income. Pension expense is charged to current operating expenses.
75
Earnings Per Share - Basic earnings per share is calculated by dividing net income by the
weighted average number of shares outstanding during the period. Diluted earnings per share is
calculated by adjusting for potential common shares, which consist of stock options, unvested
restricted stock and restricted stock units and contingently convertible instruments.
Holders of the Company’s convertible subordinated notes may convert them into shares of the
Company’s common stock under certain circumstances (see Note 8 – “Debt”). The Company
includes the effect of the conversion of these convertible notes in the calculation of diluted
earnings per share using the if-converted method or the treasury method for instruments that may
be settled in cash at the Company’s election and which the Company has the ability and intent to
settle them in cash, as long as the effect is dilutive. For computation of earnings per share under
conversion conditions, the number of diluted shares outstanding increases by the amount of shares
that are potentially convertible during that period. Also, net income is adjusted for the calculation
to add back interest expense on the convertible notes as well as unamortized discount and deferred
financing fees amortization recorded during the period.
The following table reflects the calculation of basic and diluted earnings per share (in thousands,
except per share amounts):
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
18,559
$
15,050
$
16,126
Numerator for basic earnings per share:
Income from continuing operations
Effect of dilutive securities:
Interest expense on convertible notes and
related deferred financing fees, net of tax
Numerator for diluted earnings per share
$
Denominator for basic earnings per share:
Weighted average shares outstanding
Effect of dilutive securities:
Convertible notes
Stock options and unvested restricted stock
Dilutive potential common shares
Denominator for diluted earnings per share
871
19,430
-
15,050
3,064
19,190
$
$
22,525
1,267
336
1,603
24,128
22,152
-
270
270
22,422
21,803
4,219
312
4,531
26,334
Basic earnings per share
Diluted earnings per share
$
0.82
$
0.68
$
0.74
$
0.81
$
0.67
$
0.73
The diluted weighted average share calculations do not include the following as they are not
dilutive to the earnings per share calculations or the respective performance criteria have not been
met as of the reporting date:
Time based stock options and restricted stock
Performance based stock options and
restricted stock units
Convertible subordinated notes
January 2,
2009
1,500,000
Year Ended
December 28,
2007
664,000
December 29,
2006
1,084,000
515,000
-
287,000
2,027,000
215,000
-
76
Comprehensive Income - The Company’s comprehensive income as reported in the Consolidated
Statements of Operations and Comprehensive Income includes net income, foreign currency
translation gains (losses), unrealized gain (loss) on its interest rate swaps, the net unrealized gain
(loss) on short-term investments available for sale, adjusted for any realized gains/losses, and the
overfunded or underfunded status of the Company’s defined benefit pension plans.
Accumulated other comprehensive loss is comprised of the following (in thousands):
Pre-tax
amount
Tax
amount
Ne t-of-tax
amount
Balance at December 28, 2007
Foreign currency translation adjustment
Unrealized loss on interest rate swaps
Defined benefit pension plan liability adjustment
Balance at January 2, 2009
-
(228)
(1,394)
(2,513)
(4,135)
$
-
-
488
571
1,059
$
-
(228)
(906)
(1,942)
(3,076)
$
Supplemental Cash Flow Information (in thousands):
Cash paid during the year for:
Interest
Income taxes
Noncash investing and financing activities:
Net unrealized gain (loss) on available-for-
sale securities
Unrealized loss on interest rate swaps, net
Common stock contributed to 401(k) Plan
Property, plant and equipment purchases
included in accounts payable
Unsettled purchase of treasury stock
Exchange of convertible subordinated notes
Shares issued in connection with business
acquisition
Acquisition of non-cash assets and liabilities:
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
10,021
3,811
$
5,325
17,341
$
3,888
2,867
-
$
(906)
3,472
$
(923)
-
2,956
$
3,594
-
2,780
2,762
741
-
1,473
3,307
140
117,782
-
808
205
-
-
-
-
Assets acquired
Liabilities assumed
$
169,508
58,693
$
209,946
20,395
$
Use of Estimates - The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and reported amounts of
sales and expenses during the reporting period. Actual results could differ materially from those
estimates.
77
Recent Accounting Pronouncements — In June 2008, the Emerging Issues Task Force (“EITF”)
issued EITF 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an
Entity's Own Stock. This Issue prescribes a two step process for determining whether an
instrument (or an embedded feature), such as the Company’s convertible subordinated notes, is
indexed to the Company’s own stock as follows: Step 1: if the instrument is not based on (a) an
observable market, other than the market for the issuer's stock, or (b) an observable index, other
than an index calculated or measured solely by reference to the issuer's own operations then the
instrument is considered indexed to its own stock. Step 2: if the instrument settlement amount is
fixed then the instrument is considered indexed to its own stock. If the Company determines that
its convertible subordinated notes are not indexed to its own stock, they would not meet the scope
exception in paragraph 11(a) of SFAS No. 133 and thus would be accounted for under SFAS No.
133. The Company is still evaluating the impact of EITF 07-5 on its consolidated financial
statements, which is effective beginning in fiscal year 2009.
In June 2008, the FASB issued Staff Position (“FSP”) EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” This
FSP concluded that all outstanding unvested share-based payment awards (restricted stock) that
contain rights to nonforfeitable dividends are considered participating securities. Accordingly, the
two-class method of computing basic and diluted EPS is required for these securities. FSP 03-6-1,
which was effective beginning in fiscal year 2009, did not have a material impact on the
Company’s consolidated financial statements and will be applied retrospectively to all periods
presented in future financial statements.
In May 2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt Instruments that
May be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This FSP requires
issuers of convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) separately account for the liability and equity components of those
instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. This statement is effective beginning in fiscal
year 2009 and will be applied retrospectively to all periods presented in future financial
statements. This FSP is only applicable prospectively if the Company determines that its
convertible subordinated notes are indexed to its own stock under the guidance of EITF 07-5. The
Company estimates that this FSP, if applicable, will increase 2009 non-cash interest expense by
approximately $7 million to $8 million and reduce 2009 diluted EPS by approximately $0.19 per
share to $0.22 per share.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities. SFAS No. 161 amends and expands the disclosure requirements of SFAS No.
133, and requires entities to provide enhanced qualitative disclosures about objectives and
strategies for using derivatives, quantitative disclosures about fair values and amounts of gains and
losses on derivative contracts, and disclosures about credit-risk-related contingent features in
derivative agreements. The Company will make the required disclosures beginning in 2009.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This Statement
replaces FASB Statement No. 141, Business Combinations but retains the guidance in SFAS No.
141 for identifying and recognizing intangible assets separately from goodwill. However, SFAS
No. 141(R) significantly changed the accounting for business combinations with regards to the
number of assets and liabilities assumed that are to be measured at fair value, the accounting for
78
contingent consideration and acquired contingencies as well as the accounting for direct
acquisition costs and IPR&D. SFAS No. 141(R) is effective for acquisitions consummated
beginning in fiscal year 2009 and will materially impact the Company’s consolidated financial
statements if an acquisition is consummated after the date of adoption. SFAS No. 141(R) provides
that any changes to an entity’s acquired uncertain tax positions and valuation allowances
associated with acquired deferred tax assets will no longer be applied to goodwill, regardless of the
acquisition date of the associated business combination. Any changes to the acquired uncertain tax
positions and valuation allowances will be recognized as an adjustment to income tax expense.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51. This Statement amends Accounting
Research Bulletin No. 51 to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 did not have a
material impact on the Company’s consolidated financial statements, which was effective
beginning in fiscal year 2009.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement
defines fair value, establishes a framework for measuring fair value while applying U.S. GAAP,
and expands disclosures about fair value measurements. SFAS No. 157 establishes a fair value
hierarchy that distinguishes between (1) market participant assumptions based on market data
obtained from independent sources and (2) the reporting entity’s own assumptions developed
based on unobservable inputs. In February 2008, the FASB issued FSP FAS 157-b—Effective
Date of FASB Statement No. 157. This FSP (1) partially deferred the effective date of SFAS No.
157 for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain
leasing transactions from the scope of SFAS No. 157. Effective in fiscal year 2008, the Company
adopted the provisions of SFAS No. 157 for all financial assets and financial liabilities and
nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value on a
recurring basis. The provisions of SFAS No. 157 that were effective in 2009, did not materially
impact the Company’s consolidated financial statements.
2. ACQUISITIONS
P Medical Holding SA - On January 7, 2008, the Company acquired P Medical Holding SA
(“Precimed”) with administrative offices in Orvin, Switzerland and Exton, PA, manufacturing
operations in Switzerland and Indiana and sales offices in Japan, China and the United Kingdom.
This transaction diversified the Company’s revenue and established the Company as a leading
supplier to the orthopedics industry.
This transaction was accounted for under the purchase method of accounting. Accordingly, the
results of Precimed’s operations were included in the consolidated financial statements from the
date of acquisition. The aggregate purchase price was $85.0 million, consisting of the cash issued
at closing to Precimed shareholders ($82.4 million), and other direct acquisition-related costs,
including financial advisory, legal and accounting services ($2.6 million). Additionally, the
purchase agreement included a contingent payment which ranged from 0 to 12,000,000 Swiss
Francs (“CHF”) depending on Precimed’s 2008 earnings performance. Based upon the final
contingent earn-out calculation, no contingent payment was made. During 2008, a $2.6 million
contingent payment was made relating to an acquisition consummated by Precimed in 2006. The
purchase price was funded with cash on hand and borrowings under the Company’s revolving
credit agreement. Concurrently with the closing of the transaction, the Company immediately
repaid $31.6 million of Precimed’s long-term debt.
79
The cost of the acquisition was allocated to the assets acquired and liabilities assumed from Precimed
based on their fair values as of the acquisition date, with the amount exceeding the fair value recorded
as goodwill. The fair values of the assets acquired were determined using one of three valuation
approaches: market, income and cost. The selection of a particular method for a given asset depended
on the reliability of available data and the nature of the asset, among other considerations.
The market approach, which estimates the value for a subject asset based on available market pricing
for comparable assets, was utilized for land and in-process and finished inventory. The income
approach, which estimates the value for a subject asset based on the present value of cash flows
projected to be generated by the asset, was used for certain intangible assets such as technology and
patents, customer relationships, trademarks and tradenames, IPR&D and for the noncompete
agreements with employees. The projected cash flows were discounted at a required rate of return that
reflects the relative risk of the Precimed transaction and the time value of money. The projected cash
flows for each asset considered multiple factors, including current revenue from existing customers,
attrition trends, reasonable contract renewal assumptions from the perspective of a marketplace
participant, and expected profit margins giving consideration to historical and expected margins. The
cost approach was used for the majority of real and personal property and raw materials inventory. The
cost to replace a given asset reflects the estimated reproduction or replacement cost for the property,
less an allowance for loss in value due to depreciation or obsolescence, with specific consideration
given to economic obsolescence if indicated.
The following table summarizes the final allocation of the cost of the acquisition to the assets acquired
and liabilities assumed as of the close of the acquisition (in thousands):
(in thousands)
Assets acquired
Current assets
Property, plant and equipment
Acquired IPR&D
Amortizing intangible assets
Trademarks and tradenames
Goodwill
Other assets
Total assets acquired
Liabilities assumed
Current liabilities
Long-term liabilities
Total liabilities assumed
Purchase price
As of
January 7, 2008
$
33,982
25,070
2,240
29,355
3,514
47,160
1,720
143,041
25,421
32,599
58,020
85,021
$
Current assets and current liabilities – The fair value of current assets (except inventory) and
current liabilities was assumed to approximate their carrying value as of the acquisition date due to
the short-term nature of these assets and liabilities.
The fair value of the in-process and finished inventory acquired was estimated by applying a
version of the market approach called the comparable sales method. This approach estimates the
fair value of the asset by calculating the potential sales generated from selling the inventory and
subtracting from it the costs related to the completion and sale of that inventory and a reasonable
80
profit allowance. Based upon this methodology, the Company recorded the inventory acquired at
fair value resulting in an increase in inventory of $5.6 million. During the first quarter of 2008, the
Company expensed the entire step-up value as cost of sales as the acquired Precimed inventory to
which that step-up value was related was sold during that period. Raw materials inventory was
valued at replacement cost.
Property, plant and equipment (“PP&E”) - The fair value of the PP&E acquired was estimated by
applying the cost approach for personal property, buildings and building improvements and the
market approach for land. The cost approach was applied by developing a replacement cost and
adjusting for depreciation and obsolescence. The value of the land acquired was derived from
market prices for comparable properties.
Intangible assets - The purchase price was allocated to specific intangible assets as follows (dollars
in thousands):
Amortizing intangible assets
Customer relationships
Technology and patents
Noncompete agreements
Trademarks and tradenames
Acquired IPR&D
Fair
value
assigned
$ 16,564
11,771
1,020
$ 29,355
$ 3,514
$ 2,240
Weighted
average
amortization
period (years)
Weighted
average
discount
rate
20
15
5
17
indefinite
-
13%
14%
13%
13%
13%
14%
Customer relationships – Customer relationships represent the estimated fair value of both the
contractual and non-contractual customer relationships Precimed has as of the acquisition date.
The primary customers of Precimed include Johnson & Johnson, Smith & Nephew, Stryker,
Medtronic and Zimmer, some of which are also customers of Greatbatch. These relationships
were valued separately from goodwill at the amount which an independent third party would be
willing to pay for these relationships. The fair value of customer relationships was determined
using the multi-period excess-earnings method, a form of the income approach. The Company
determined that the estimated useful life of the intangible assets associated with the existing
customer relationships is approximately 20 years. This life was based upon historical customer
attrition and management’s understanding of the industry and regulatory environment. The
expected cash flows associated with these customer relationships were nominal after 20 years.
Technology and patents - Technology and patents consists of technical processes, patented and
unpatented technology, manufacturing know-how and the understanding with respect to products or
processes that have been developed by Precimed and that will be leveraged in current and future
products. The fair value of technology and patents acquired was determined utilizing the relief from
royalty method. The Company determined that the estimated useful life of the technology and
patents is approximately 15 years. This life is based upon management’s estimate of the product life
cycle associated with technology and patents before they will be replaced by new technologies. The
expected cash flows associated with technology and patents were nominal after 15 years.
81
Trademarks and tradenames – Trademarks and tradenames represent the estimated fair value of
corporate and product names acquired from Precimed, which will be utilized by the Company in
the future. These tradenames were valued separately from goodwill at the amount which an
independent third party would be willing to pay for use of these names. The fair value of the
trademarks and tradenames was determined by applying the relief from royalty method of the
income approach. The tradenames are inherently valuable as the Company believes they convey
favorable perceptions about the products with which they are associated. This in turn generates
consistent and increased demand for the products, which provides the Company with greater
revenues, as well as greater production and operating efficiencies. Thus, the Company will realize
larger profit margins than companies without the tradenames. At this time, the Company intends
to utilize these trademarks and tradenames for an indefinite period of time given that Greatbatch is
new to the orthopedics market and is not well known in that industry. Thus these intangible assets
are not being amortized but are tested for impairment on an annual basis.
Acquired IPR&D - Approximately $2.2 million of the purchase price represents the fair value of
acquired IPR&D projects that had not yet reached technological feasibility and had no alternative
future use. Accordingly, the amount was immediately expensed on the acquisition date and is not
deductible for tax purposes. The value assigned to IPR&D related to Reamer, Instrument Kit,
Locking Plate and Cutting Guide projects. These projects primarily represent the next generation
of products already being sold by Precimed which incorporate new enhancements and customer
modifications. The commercial launch of these products was assumed to be in 2008 and 2009.
For purposes of valuing the IPR&D, the Company estimated total costs to complete the projects to
be approximately $0.2 million. If the Company is not successful in completing these projects,
future sales may be adversely affected resulting in erosion of the Company’s market share.
The fair value of these projects was determined based on the excess earnings method. This model
utilized discount rates that took into consideration the internal rate of return expected from the
Precimed transaction and the risks surrounding the successful development and commercialization
of each of the IPR&D projects. The Company believes that the estimated acquired IPR&D
amounts represent their fair value at the date of acquisition and do not exceed the amount an
independent third party would be willing to pay for the projects.
Goodwill - The excess of the purchase price over the fair value of net tangible and intangible
assets acquired of $47.2 million was allocated to goodwill. Various factors contributed to the
establishment of goodwill, including: the value of Precimed’s highly trained assembled work force
and management team; the expected revenue growth over time that is attributable to increased
market penetration from future products and customers; and the incremental value to the
Company’s IMC business from expanding and diversifying its revenues. The goodwill acquired in
connection with the Precimed acquisition was allocated to the Company’s IMC business segment
and is not deductible for tax purposes.
DePuy Orthopaedics Chaumont, France Facility - On February 11, 2008, Precimed acquired the
assets of DePuy Orthopaedics (“DePuy”) Chaumont, France manufacturing facility (the
“Chaumont Facility”). The Chaumont Facility produces hip and shoulder implants for DePuy
Ireland which distributes them worldwide through various DePuy selling entities. This transaction,
which included a new four year supply agreement with DePuy, enhances Greatbatch’s and
Precimed’s strategic relationship with DePuy, one of the largest orthopedic companies in the
world. The addition of this facility will align Precimed closer to its orthopedic customers and
further extends its offerings to a full range of orthopedic implants.
82
This transaction was accounted for under the purchase method of accounting. Accordingly, the
results of the Chaumont Facility were included in our consolidated financial statements from the
date of acquisition. The aggregate purchase price was $28.7 million, consisting of the cash issued
to DePuy ($27.0 million), and other direct acquisition-related costs, including financial advisory,
transfer tax, legal and accounting fees ($1.7 million). The aggregate purchase price was allocated
to the assets acquired ($6.3 million inventory, $13.4 million PP&E) and pension liability assumed
from the Chaumont Facility based on their fair values as of the close of the acquisition, with the
amount exceeding the fair value recorded as goodwill ($6.6 million).
Various factors contributed to the establishment of goodwill, including: the value of the Chaumont
Facility’s highly trained assembled work force; the expected revenue growth over time and the
incremental value to the Company’s Orthopedics business from having the capability to
manufacture joint implants; and the strategic partnership established with DePuy, one of the largest
orthopedic companies in the world. Goodwill resulting from the Chaumont Facility acquisition
was allocated to the Company’s IMC business segment and is not deductible for tax purposes.
Pro Forma Results (Unaudited) - The following unaudited pro forma information presents the
consolidated results of operations of the Company, Precimed, and the Chaumont Facility as if
those acquisitions had occurred as of the beginning of each of the fiscal years presented.
Additionally, 2007 amounts reflect the Company’s 2007 acquisition of Enpath (June 2007), Quan
(November 2007) and EAC (November 2007) as if those acquisitions had occurred as of the
beginning of 2007 (in thousands, except per share amounts):
(Unaudited)
Sales
Net income
Earnings per share:
Basic
Diluted
Year Ended
January 2,
2009
$ 555,139
24,539
December 28,
2007
$ 502,043
18,713
$1.09
$1.05
$0.84
$0.82
The unaudited pro forma information presents the combined operating results of Greatbatch,
Precimed, the Chaumont Facility, Enpath, Quan and EAC, with the results prior to the acquisition
date adjusted to include the pro forma impact of the amortization of acquired intangible assets and
depreciation of fixed assets based on the purchase price allocation, the elimination of non-
recurring IPR&D charges ($2.2 million in 2008 and $13.8 million in 2007) and inventory step-up
amortization recorded by Greatbatch ($6.4 million in 2008 and $1.7 million in 2007), the
adjustment to interest income/expense reflecting the cash paid in connection with the acquisition,
including acquisition-related expenses, at Greatbatch’s weighted average interest income/expense
rate, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory
tax rate, except for IPR&D which is not deductible for tax purposes. The unaudited pro forma
consolidated basic and diluted earnings per share are based on the consolidated basic and diluted
weighted average shares of Greatbatch.
The unaudited pro forma results are presented for illustrative purposes only and do not reflect the
realization of potential cost savings, and any related integration costs. Certain cost savings may
result from the acquisition; however, there can be no assurance that these cost savings will be
achieved. These pro forma results do not purport to be indicative of the results that would have
been obtained, or to be a projection of results that may be obtained in the future.
83
3. SHORT-TERM INVESTMENTS
Short-term investments available for sale are comprised of the following (in thousands):
December 28, 2007
Commercial Paper
U.S. Government Agencies
Corporate Bonds
Gross
unrealized
gains
Gross
unrealized
losses
Estimated fair
value
Cost
$
1,087
1,469
4,452
$
5
4
4
$
-
-
(4)
$
1,092
1,473
4,452
Total short-term investments
$
7,008
$
13
$
(4)
$
7,017
The Company did not hold any short-term investments as of January 2, 2009. During 2007, the
Company sold an equity security investment which resulted in a pre-tax gain of $4.0 million.
4.
INVENTORIES
Inventories are comprised of the following (in thousands):
Raw material
Work-in-process
Finished goods
Total
January 2,
2009
December 28,
2007
$
58,352
28,851
25,101
$
38,561
19,603
13,718
$
112,304
$
71,882
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are comprised of the following (in thousands):
Manufacturing machinery and equipment
Buildings and building improvements
Information technology hardware and software
Construction work in process
Leasehold improvements
Land and land improvements
Furniture and fixtures
Other
Accumulated depreciation
Total
January 2,
2009
December 28,
2007
$
109,911
68,346
27,558
17,452
17,031
11,671
9,488
662
$
80,447
35,611
21,671
23,115
19,957
6,024
5,345
210
262,119
(95,451)
192,380
(77,434)
$
166,668
$
114,946
Depreciation expense for property, plant and equipment during 2008, 2007 and 2006 was $25.5
million, $16.4 million and $14.8 million, respectively.
84
6.
INTANGIBLE ASSETS
Amortizing intangible assets are comprised of the following (in thousands):
Gross
carrying
amount
Accumulated
amortization
Foreign
currency
translation
Net carrying
amount
January 2, 2009
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
December 28, 2007
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
81,639
46,547
3,508
131,694
69,813
29,983
2,660
102,456
$
$
$
$
(35,881)
(4,056)
(1,964)
(41,901)
184
271
11
466
45,942
42,762
1,555
90,259
$
$
$
$
$
$
$
$
(28,968)
(840)
(1,380)
(31,188)
-
$
-
-
$
-
$
$
40,845
29,143
1,280
71,268
Intangible amortization expense was $10.7 million, $5.6 million and $3.8 million for 2008, 2007
and 2006, respectively. Prior to 2007, all intangible amortization expense was included in Cost of
Sales. Intangible amortization expense included in Selling, General and Administrative Expenses
related to the customer lists and non-compete agreements acquired in 2008 and 2007 was $3.9
million and $1.0 million, respectively. Annual intangible amortization expense is estimated to be
$10.0 million for 2009, $9.5 million for 2010, $9.4 million for 2011, $9.3 million for 2012 and $8.5
million for 2013.
The change in trademarks and tradenames during 2008 is as follows (in thousands):
Balance at December 28, 2007
Acquired in 2008
Foreign currency translation
Balance at January 2, 2009
$
$
32,582
3,514
34
36,130
The Company is currently performing a review of its market strategy to determine the best use of
its “non-Greatbatch” tradenames, including those acquired with its recent acquisitions. The
outcome of this review, which is expected to be completed in 2009, may impact the useful lives of
the Company’s “non-Greatbatch” tradenames which had a value of $20.3 million as of January 2,
2009.
The change in goodwill during 2008 is as follows (in thousands):
IMC
$
$
238,810
(118)
53,760
(174)
292,278
Balance at December 28, 2007
Adjustments to goodwill related to 2007 acquisitions
Goodwill recorded for 2008 acquisitions
Foreign currency translation
Balance at January 2, 2009
85
Electrochem
9,730
$
213
-
-
9,943
$
Total
$
248,540
95
53,760
(174)
302,221
$
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the following (in thousands):
Salaries and benefits
Profit sharing and bonuses
Warranty
Other
Total
8. DEBT
January 2,
2009
$
11,757
14,860
1,395
12,485
December 28,
2007
$
10,655
13,669
1,454
5,197
$
40,497
$
30,975
Long-term debt is comprised of the following (in thousands):
Revolving line of credit
2.25% convertible subordinated notes I, due 2013
2.25% convertible subordinated notes II, due 2013
Unamortized discount
January 2,
2009
$
132,000
30,450
197,782
(7,312)
December 28,
2007
$
-
52,218
197,782
(8,802)
Total long-term debt
$
352,920
$
241,198
Revolving Line of Credit - The Company has a senior credit facility (the “Credit Facility”)
consisting of a $235 million revolving line of credit, which can be increased to $335 million upon
the Company’s request. The Credit Facility also contains a $15 million letter of credit subfacility
and a $15 million swingline subfacility. The Credit Facility is secured by the Company’s non-
realty assets including cash, accounts and notes receivable, and inventories, and has an expiration
date of May 22, 2012 with a one-time option to extend to April 1, 2013 if no default has occurred.
Interest rates under the Credit Facility are, at the Company’s option, based upon the current prime
rate or the LIBOR rate plus a margin that varies with the Company’s leverage ratio. If interest is
paid based upon the prime rate, the applicable margin is between minus 1.25% and 0.00%. If
interest is paid based upon the LIBOR rate, the applicable margin is between 1.00% and 2.00%.
The Company is required to pay a commitment fee between 0.125% and 0.250% per annum on the
unused portion of the Credit Facility based on the Company’s leverage ratio.
The Credit Facility contains limitations on the incurrence of indebtedness, limitations on the
incurrence of liens and licensing of intellectual property, limitations on investments and restrictions
on certain payments. Except to the extent paid for by the common equity of Greatbatch or paid for
out of cash on hand, the Credit Facility limits the amount paid for acquisitions in total to $100
million. The restrictions on payments, among other things, limit repurchases of Greatbatch’s stock
to $60 million and the ability of the Company to make cash payments upon conversion of CSN II
(as defined below) and dividends. These limitations can be waived upon the Company’s request
and approval of a simple majority of the lenders. Such waiver was obtained in order to fund the
Precimed acquisition and repurchase the Company’s convertible subordinated notes in 2008.
86
The Credit Facility also requires the Company to maintain a ratio of adjusted EBITDA, as defined
in the credit agreement, to interest expense of at least 3.00 to 1.00, and a total leverage ratio, as
defined in the credit agreement, of not greater than 5.00 to 1.00 from May 22, 2007 through
September 29, 2009 and not greater than 4.50 to 1.00 from September 30, 2009 and thereafter. As
of January 2, 2009, the Company was in compliance with the required covenants.
The Credit Facility contains customary events of default. Upon the occurrence and during the
continuance of an event of default, a majority of the lenders may declare the outstanding advances
and all other obligations under the Credit Facility immediately due and payable.
In connection with the Company’s acquisition of Precimed and the Chaumont Facility, the
Company borrowed $117 million under its revolving line of credit in the first quarter of 2008. The
Company borrowed an additional net $15.0 million under the revolving line of credit since that
time in order to fund the repurchase of CSN I as discussed below. The weighted average interest
rate on these borrowings as of January 2, 2009, which does not include the impact of the interest
rate swaps described below, was 3.8%. Interest rates reset based upon the six-month ($105
million), three-month ($8 million), two-month ($13 million) and one-month ($6 million) LIBOR
rate. Based upon current capital needs, management does not anticipate making significant
principal payments on the revolving line of credit within the next twelve months. As of January 2,
2009, the Company had $103 million available under its revolving line of credit. The carrying
amount of credit facility borrowings approximates their fair values at January 2, 2009 given their
variable interest rates.
Interest Rate Swaps – During 2008, the Company entered into three receive floating-pay fixed
interest rate swaps indexed to the six-month LIBOR rate. The objective of these swaps is to hedge
against potential changes in cash flows on the Company’s outstanding revolving line of credit,
which is also indexed to the six-month LIBOR rate. No credit risk was hedged. The receive
variable leg of the swaps and the variable rate paid on the revolving line of credit bear the same
rate of interest, excluding the credit spread, and reset and pay interest on the same dates. The
Company intends to continue electing the six-month LIBOR as the benchmark interest rate on the
debt being hedged. If the Company repays the debt it intends to replace the hedged item with
similarly indexed forecast cash flows. Information regarding the Company’s outstanding interest
rate swaps is as follow:
Instrument
Type of
he dge
Notional
amount
Start
date
End
date
Curre nt
re ce ive
floating
rate
Fair
value
January 2,
2009
Pay
fixe d
rate
Interest rate swap Cash flow
Interest rate swap Cash flow
Interest rate swap Cash flow
(In thousands)
80,000
$
18,000
50,000
148,000
$
3/5/2008
7/7/2010 3.09%
12/18/2008 12/18/2010 2.00%
3.14%
2.17%
7/7/2011 2.16% 6M LIBOR
7/7/2010
2.64%
(In thousands)
(1,484)
$
-
90
(1,394)
$
The estimated fair value of the interest rate swap agreement represents the amount the Company
expects to receive (pay) to terminate the contracts. No portion of the change in fair value of the
interest rate swaps during 2008 was considered ineffective. The amount recorded as an offset to
interest expense in 2008 related to the interest rate swaps was $0.4 million.
87
Convertible Subordinated Notes - In May 2003, the Company completed a private placement of
$170 million of 2.25% convertible subordinated notes, due 2013 (“CSN I”). In November 2003,
the Company had a registration statement with the SEC declared effective with respect to these
notes and the underlying common stock.
In March 2007, the Company entered into separate, privately negotiated agreements to exchange
$117.8 million of CSN I for an equivalent principal amount of a new series of 2.25% convertible
subordinated notes due 2013 (“CSN II”) (collectively the “Exchange”) at a 5% discount. The
primary purpose of the Exchange was to eliminate the June 15, 2010 call and put option that is
included in the terms of CSN I. In connection with the Exchange, the Company issued an
additional $80 million aggregate principal amount of CSN II at a price of $950 per $1,000 of
principal. In June 2007, the Company had a registration statement with the SEC declared effective
with respect to these notes and the underlying common stock. The Exchange was accounted for as
an extinguishment of debt and resulted in a pre-tax gain of $4.5 million. As a result of the
extinguishment, the Company had to recapture the tax interest expense that was previously
deducted on the extinguished notes. This resulted in an additional current income tax liability of
approximately $11.3 million, which was paid in 2007. This amount was previously recorded as a
non-current deferred tax liability on the balance sheet.
In December 2008 the Company entered into privately negotiated agreements under which it
repurchased $21.8 million in aggregate principal amount of its outstanding CSN I at $845.38 per
$1,000 of principal. The primary purpose of this transaction was to retire the debentures, which
contained a put option exercisable on June 15, 2010, at a discount. This transaction was funded
with availability under the Company’s existing line of credit. This transaction was accounted for
as an extinguishment of debt and resulted in a pre-tax gain of $3.2 million. As a result of the
extinguishment, the Company had to recapture the tax interest expense that was previously
deducted on the extinguished notes. This resulted in an additional current income tax liability of
approximately $3.2 million, which will be paid in the first quarter of 2009. This amount was
previously recorded as a non-current deferred tax liability on the balance sheet.
The following is a summary of the significant terms of CSN I and CSN II:
CSN I - The notes bear interest at 2.25% per annum, payable semi-annually. Holders may convert
the notes into shares of the Company’s common stock at a conversion rate of 24.8219 shares per
$1,000 of principal, subject to adjustment, before the close of business on June 15, 2013 only
under the following circumstances: (1) during any fiscal quarter commencing after July 4, 2003, if
the closing sale price of the Company’s common stock exceeds 120% of the $40.29 conversion
price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading
day of the preceding fiscal quarter; (2) subject to certain exceptions, during the five business days
after any five consecutive trading day period in which the trading price per $1,000 of principal for
each day of such period was less than 98% of the product of the closing sale price of the
Company’s common stock and the number of shares issuable upon conversion of $1,000 of
principal; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain
corporate events.
88
Beginning June 20, 2010, the Company may redeem any of the notes at a redemption price of
100% of their principal amount, plus accrued interest. Note holders may require the Company to
repurchase their notes on June 15, 2010 or at any time prior to their maturity following a
fundamental change, as defined in the indenture agreement, at a repurchase price of 100% of their
principal amount, plus accrued interest. The notes are subordinated in right of payment to all of
our senior indebtedness and effectively subordinated to all debts and other liabilities of the
Company’s subsidiaries.
Beginning with the six-month interest period commencing June 15, 2010, the Company will pay
additional contingent interest during any six-month interest period if the trading price of the notes
for each of the five trading days immediately preceding the first day of the interest period equals or
exceeds 120% of the principal amount of the notes.
CSN II - The notes bear interest at 2.25% per annum, payable semi-annually. The holders may
convert the notes into shares of the Company’s common stock at a conversion price of $34.70 per
share, which is equivalent to a conversion ratio of 28.8219 shares per $1,000 of principal. The
conversion price and the conversion ratio will adjust automatically upon certain changes to the
Company’s capitalization. CSN II notes were issued at a price of $950 per $1,000 of principal.
The effective interest rate of CSN II notes, which takes into consideration the amortization of the
discount and deferred fees related to the issuance of those notes, was 3.55%.
The notes are convertible at the option of the holders at such time as: (i) the closing price of the
Company’s common stock exceeds 150% of the conversion price of the notes for 20 out of 30
consecutive trading days; (ii) the trading price per $1,000 of principal is less than 98% of the
product of the closing sale price of common stock for each day during any five consecutive trading
day period and the conversion rate per $1,000 of principal; (iii) the notes have been called for
redemption; (iv) the Company distributes to all holders of common stock rights or warrants
entitling them to purchase additional shares of common stock at less than the average closing price
of common stock for the ten trading days immediately preceding the announcement of the
distribution; (v) the Company distributes to all holders of common stock any form of dividend
which has a per share value exceeding 5% of the price of the common stock on the day prior to
such date of distribution; (vi) the Company affects a consolidation, merger, share exchange or sale
of assets pursuant to which its common stock is converted to cash or other property; (vii) the period
beginning 60 days prior to but excluding June 15, 2013; and (viii) certain fundamental changes, as
defined in the indenture agreement, occur or are approved by the Board of Directors.
Conversions in connection with corporate transactions that constitute a fundamental change require
the Company to pay a premium make-whole amount whereby the conversion ratio on the notes
may be increased by up to 8.2 shares per $1,000 of principal. The premium make-whole amount
will be paid in shares of common stock upon any such conversion, subject to the net share
settlement feature of the notes described below.
The notes contain a net share settlement feature that requires the Company to pay cash for each
$1,000 of principal. Any amounts in excess of $1,000 will be settled in shares of the Company’s
common stock, or at the Company’s option, cash. The Company has a one-time irrevocable
election to pay the principal amount in shares of its common stock, which it currently does not plan
to exercise.
89
The notes are redeemable by the Company at any time on or after June 20, 2012, or at the option of
a holder upon the occurrence of certain fundamental changes, as defined in the agreement. The
notes are subordinated in right of payment to all of our senior indebtedness and effectively
subordinated to all debts and other liabilities of the Company’s subsidiaries.
The fair-value of the convertible subordinated notes based on recent sales prices as of January 2,
2009 and December 28, 2007 was approximately $188 million and $220 million, respectively.
Acquired Debt - Concurrently with the close of the Precimed acquisition, the Company assumed
and repaid $31.6 million of long-term debt acquired. Additionally, the Company assumed a
mortgage note of $2.0 million with a former owner that carried an interest rate of 3%. The
Company repaid this note in full in 2008.
Deferred Financing Fees - The following is a reconciliation of deferred financing fees for 2008
and 2007, which are included in other assets (in thousands):
Balance at December 29, 2006
Financing costs deferred
Written-off during the year
Amortization during the year
Balance at December 28, 2007
Financing costs deferred
Written-off during the year
Amortization during the year
Balance at January 2, 2009
9. EMPLOYEE BENEFIT PLANS
$
2,305
6,632
(1,416)
(1,110)
6,411
14
(124)
(1,307)
4,994
$
Savings Plan - The Company sponsors a defined contribution 401(k) plan, which covers
substantially all of its U.S. based employees. The plan provides for the deferral of employee
compensation under Section 401(k) and a discretionary Company match. In 2008, 2007 and 2006,
this match was $0.35 per dollar of participant deferral, up to 6% of the total compensation for each
participant. Net costs related to this defined contribution plan were $1.5 million in 2008, $1.0
million in 2007 and $0.9 million in 2006.
In addition to the above, under the terms of the 401(k) plan document there is an annual
discretionary defined contribution for substantially all U.S. based employees equal to five percent
of each employee’s eligible compensation. This amount is contributed to the 401(k) plan in the
form of Company stock. Compensation cost recognized related to the defined contribution was
approximately $4.4 million in 2008, $3.6 million in 2007 and $3.3 million in 2006. As of January
2, 2009, the 401(k) Plan held 534,116 shares of Company stock and there were approximately
150,500 committed-to-be released shares for the plan, which equals the estimated number of
shares to settle the liability based on the closing market price of the Company’s stock at January 2,
2009 of $26.72.
Pension Plans - In connection with the Precimed and Chaumont Facility acquisitions, the
Company recorded a pension liability related to defined benefit pension plans provided to non-
U.S. based employees of those businesses. Under these plans, benefits accrue to employees based
upon years of service, position, age and compensation.
90
Information relating to the funding position of the Company’s defined benefit pension plans as of
the plans measurement date of January 2, 2009 were as follows (in thousands):
Year Ended
January 2,
2009
$
-
14,017
679
480
873
446
(1,317)
(1,941)
202
13,439
-
10,484
922
873
(2,013)
(1,292)
(1,718)
198
7,454
$
$
5,985
12
$
$
5,973
12,128
$
$
2,886
(373)
2,513
(571)
1,942
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
Projected benefit obligation acquired
Service cost
Interest cost
Plan participants' contributions
Actuarial loss
Benefits paid
Settlements
Foreign currency translation
Projected benefit obligation at end of year
Change in fair value of plan assets:
Fair value of plan assets at beginning of year
Plan assets acquired
Employer contributions
Plan participants' contributions
Actual loss on plan assets
Benefits paid
Settlements
Foreign currency translation
Fair value of plan assets at end of year
Projected benefit obligation in excess of plan
assets at end of year
Current portion of pension liabilty
Noncurrent portion of pension liability
Accumulated benefit obligation at end of year
Amounts recognized in accumulated other comprehensive loss:
Net loss occurring during the year
Net (gain) on settlements
Pre-tax adjustment
Taxes
Net adjustment
91
Net pension cost is comprised of the following (in thousands):
Year Ended
January 2,
2009
Service cost
Interest cost
Expected return on plan assets
Settlements
Recognized net actuarial gain
Net pension cost
The principal actuarial assumptions used were as follows:
Discount rate
Salary growth
Expected rate of return on plan assets
Long-term inflation rate
$
$
679
480
(427)
152
(4)
880
Year Ended
January 2,
2009
3.0%
2.5%
4.0%
1.5%
The discount rate used is based on the yields of foreign government bonds with a duration
matching the duration of the liabilities plus approximately 50 basis points to reflect the risk of
investing in corporate bonds. The expected rate of return on plan assets reflects long-term
earnings expectations on existing plan assets and those contributions expected to be received
during the current plan year. In estimating that rate, appropriate consideration was given to
historical returns earned by plan assets in the fund and the rates of return expected to be available
for reinvestment. Rates of return were adjusted to reflect current capital market assumptions and
changes in investment allocations. Equity securities and fixed income securities were assumed to
earn a return in the range of 6% to 7% and 2% to 3%, respectively. When these overall return
expectations are applied to the pension plan’s target allocation, the expected rate of return is
determined to be 4.0%.
The weighted average asset allocation as of the valuation date was as follows:
Asset Category:
Bonds
Equity
Other
Target
60%
25%
15%
100%
Actual
47%
20%
33%
100%
This allocation is consistent with the Company’s goal of diversifying the pension plans assets in
order to preserve capital while achieving investment results that will contribute to the proper
funding of pension obligations and cash flow requirements.
92
Estimated benefit payments over the next ten years are as follows (in thousands):
2009
2010
2011
2012
2013
2014-2018
$
703
753
837
952
1,058
5,549
Education Assistance Program - The Company reimburses tuition, textbooks and laboratory fees
for college or other job related programs for all of its U.S. based employees. The Company also
reimburses college tuition for the dependent children of its full-time U.S. based employees. For
certain employees, the dependent children benefit vests on a straight-line basis over ten years.
Minimum academic achievement is required in order to receive reimbursement under both
programs. Aggregate expenses under the programs were approximately $1.3 million, $1.5 million
and $1.2 million in 2008, 2007 and 2006, respectively.
10. STOCK-BASED COMPENSATION
Compensation costs related to share-based payments totaled $6.8 million, $5.7 million and $6.4
million for 2008, 2007 and 2006, respectively. These amounts included accelerated vesting
expense for certain retirement-eligible employees of $0.01 million, $0.1 million and $2.4 million,
respectively, and modification expense of $0.05 million, $0.6 million and $0.3 million,
respectively. This modification expense relates to the Company’s adoption of executive retirement
guidelines in 2005 for senior level executives and the extension of the exercise period after
termination for all outstanding stock options of its former Chief Executive Officer in 2006. Stock-
based compensation expense included in the Consolidated Statements of Cash Flows includes
costs recognized for stock options, restricted stock, restricted stock units and the annual share
contribution to the 401(k) Plan. See Note 9 – “Employee Benefit Plans.”
Proceeds from the exercise of stock options under stock option plans are credited to common stock
at par value and the excess is credited to additional paid-in capital. A portion of the Company’s
granted options qualify as incentive stock options (“ISO”) for income tax purposes. As such, a tax
benefit is not recorded at the time the compensation cost related to the options is recorded for book
purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a
disqualifying disposition. Stock option grants of non-qualified options result in the creation of a
deferred tax asset, which is a temporary difference, until the time that the option is exercised. Due
to the treatment of incentive stock options for tax purposes, the Company’s effective tax rate from
year to year is subject to variability.
Stock-based compensation expense is only recorded for those awards that are expected to vest.
Forfeiture estimates for determining appropriate stock-based compensation expense are estimated
at the time of grant based on historical experience and demographic characteristics. Revisions are
made to those estimates in subsequent periods if actual forfeitures differ from estimated
forfeitures. A 9% annual forfeiture rate estimate was used for the stock-based compensation
expense recorded during 2008, 2007 and 2006 unless it was certain that the awards would vest (i.e.
retirement eligible employees, awards that immediately vest). In those instances, a 0% forfeiture
rate was used.
93
Summary of Plans
The Company’s 1997 Stock Option Plan (‘‘1997 Plan’’) authorized the issuance of up to 480,000
shares of nonqualified and incentive stock options to purchase the Company’s common stock,
subject to the terms of the plan. The 1997 Plan has been frozen to any new stock option issuances.
The Company’s 1998 Stock Option Plan (‘‘1998 Plan’’) authorized the issuance of up to 1,220,000
shares of nonqualified and incentive stock options to purchase the Company’s common stock,
subject to the terms of the plan. The 1998 Plan has been frozen to any new stock option issuances.
The Company’s 2002 Restricted Stock Plan (“2002 Plan”) authorized the issuance of stock awards
to employees. The number of shares that were reserved for issuance under the plan could not
exceed 200,000. The 2002 Plan has been frozen to any new stock award issuances.
The Company has a stock option plan that provides for the issuance of nonqualified stock options
to Non-Employee Directors (“Director Plan”). The Director Plan authorized the issuance of up to
100,000 shares of nonqualified stock options to purchase the Company’s common stock. The
Director Plan has been frozen to any new stock option issuances.
The Company’s 2005 Stock Incentive Plan (“2005 Plan”), as amended, authorizes the issuance of
up to 2,450,000 shares of equity incentive awards including nonqualified and incentive stock
options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject
to the terms of the 2005 Plan. The 2005 Plan has a sub-limit that limits the amount of restricted
stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 850,000
shares of the 2,450,000 shares authorized by the 2005 Plan.
As of January 2, 2009, 436,050 shares were available for future grants of stock options, stock
appreciation rights, restricted stock, restricted stock units or stock bonuses under the 2005 Plan.
Stock Options
Stock options granted generally vest over a four to five year period. The stock options expire 10
years from the date of grant. Stock options are granted at exercise prices equal to or greater than
the fair value of the Company’s common stock on the date of grant. Performance-based stock
options only vest if certain performance metrics are achieved. The performance metrics generally
cover a three-year performance period beginning in the year of grant and include the achievement
of revenue, adjusted operating earnings and adjusted operating cash flow targets.
Intrinsic value is calculated for in-the-money options (exercise price less than market price)
outstanding and/or exercisable as the difference between the market price of our common shares as
of January 2, 2009 ($26.72) and the weighted average exercise price of the underlying options,
multiplied by the number of options outstanding and/or exercisable.
94
The following tables summarize stock option activity related to the Company’s time-vested and
performance-vested stock options:
Weighted
average
remaining
contractual
life
(in years)
Aggregate
intrinsic value
(in millions)
6.8
6.8
6.1
Weighted
average
remaining
contractual
life
(in years)
$5.4
$5.3
$3.4
Aggregate
intrinsic value
(in millions)
$
$
$
23.62
23.65
23.60
8.6
9.0
6.4
$2.9
$2.1
$0.5
Outstanding at December 30, 2005
Granted
Exercised
Forfeited or Expired
Outstanding at December 29, 2006
Granted
Exercised
Forfeited or Expired
Outstanding at December 28, 2007
Granted
Exercised
Forfeited or Expired
Outstanding at January 2, 2009
Expected to Vest at January 2, 2009
Exercisable at January 2, 2009
Number of
time-vested
stock options
1,211,350
299,617
(153,339)
(71,970)
Weighted
average
exercise
price
$
23.09
24.86
12.47
25.53
1,285,658
230,477
(138,667)
(76,301)
1,301,167
452,964
(131,100)
(124,737)
1,498,294
1,425,373
1,068,582
24.64
25.11
19.04
29.32
25.04
20.21
16.85
25.21
$
$
$
24.28
24.30
25.09
Weighted
average
exercise
price
$
23.60
22.38
23.60
22.96
22.98
29.65
22.38
24.17
25.08
21.88
-
22.24
Outstanding at December 30, 2005
Granted
Exercised
Forfeited or Expired
Outstanding at December 29, 2006
Granted
Exercised
Forfeited or Expired
Outstanding at December 28, 2007
Granted
Exercised
Forfeited or Expired
Outstanding at January 2, 2009
Expected to Vest at January 2, 2009
Exercisable at January 2, 2009
Number of
performance-
vested stock
options
185,810
183,648
(7,266)
(21,321)
340,871
146,231
(2,635)
(41,612)
442,855
417,888
-
(62,179)
798,564
557,479
145,649
95
The following table provides certain information relating to the exercise of stock options (in
thousands):
January 2,
2009
$
974
2,210
313
Year Ended
December 28,
2007
December 29,
2006
$
1,338
2,699
292
$
2,120
2,082
236
Intrinsic value
Cash received
Tax benefit realized
As of January 2, 2009, $7.8 million of unrecognized compensation cost related to non-vested stock
options is expected to be recognized over a weighted-average period of approximately 3 years.
Shares are distributed from the Company’s authorized but unissued reserve upon the exercise of
stock options or treasury stock if available. The Company does not intend to purchase treasury
shares to fund the future exercises of stock options.
Fair Value
The Company utilizes the Black-Scholes Option Pricing Model to determine the fair value of stock
options under SFAS No. 123(R). Management is required to make certain assumptions with
respect to selected model inputs, including anticipated changes in the underlying stock price (i.e.
expected volatility) and option exercise activity (i.e. expected life). Expected volatility is based on
the historical volatility of the Company’s stock over the most recent period commensurate with the
estimated expected life of the stock options. The expected life of options granted, which
represents the period of time that the options are expected to be outstanding, is based on historical
data. The expected dividend yield is based on the Company’s history and expectation of dividend
payouts. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time
of grant for a period commensurate with the estimated expected life. If factors change and result
in different assumptions in the application of SFAS No. 123(R) in future periods, the stock option
expense that the Company records for future grants may differ significantly from what the
Company has recorded in the current period.
The weighted-average fair value and assumptions used to value options granted are as follows:
Weighted-average fair value
Risk-free interest rate
Expected volatility
Expected life (in years)
Expected dividend yield
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$8.38
2.91%
39%
5
0%
$11.84
4.52%
40%
5
0%
$10.85
4.74%
42%
5
0%
96
Restricted Stock and Restricted Stock Units
Time-vested restricted stock and restricted stock unit awards granted typically vest 50% on the
second fiscal year-end from the date of the award and 25% on the third and fourth fiscal year-ends
from the date of the award. Performance-vested restricted stock vests upon the achievement of
certain annual diluted earnings per share targets by the Company, or the seventh anniversary date
of the award.
The following table summarizes restricted stock and restricted stock unit activity related to the
Company’s plans:
Nonvested at December 30, 2005
Shares granted (1)
Shares vested
Shares forfeited
Nonvested at December 29, 2006
Shares granted
Shares vested
Shares forfeited
Nonvested at December 28, 2007
Shares granted
Shares vested
Shares forfeited
Nonvested at January 2, 2009 (2)
Activity
Weighted average
fair value
93,956
145,126
(25,911)
(9,015)
204,156
122,031
(36,435)
(7,618)
282,134
142,441
(194,269)
(22,541)
207,765
$
22.46
23.25
20.00
22.63
23.32
27.17
23.56
23.30
24.96
20.08
24.04
21.39
22.86
$
(1) Includes 50,879 performance-vested restricted stock units which vested in January 2008.
(2) Includes 24,000 performance-vested restricted stock with a weighted average grant date fair value of $23.07 per
share.
The fair value of restricted stock and restricted stock units is equal to the fair value of the
Company’s stock on the date of grant. The realized tax benefit from the vesting of restricted stock
and restricted stock units was $0.04 million, $0.03 million and $0.05 million for 2008, 2007 and
2006, respectively. As of January 2, 2009, there was $3.6 million of total unrecognized
compensation cost related to the restricted stock and restricted stock unit awards. That cost is
expected to be recognized over a weighted-average period of approximately 2 years.
97
11. OTHER OPERATING EXPENSES
Other operating expenses, net in the Company’s Consolidated Statements of Operations and
Comprehensive Income are comprised of the following (in thousands):
(a) 2005 & 2006 facility shutdowns and consolidations
(b) 2007 & 2008 facility shutdowns and consolidations
(c) Integration costs
(d) Asset dispositions and other
January 2,
2009
$
663
8,347
5,369
199
14,578
Year ended
December 28, December 29,
2007
$
2006
$
4,697
531
-
96
5,324
10,985
-
-
6,073
17,058
$
$
$
(a) 2005 & 2006 facility shutdowns and consolidations - Beginning in the first quarter of 2005
and ending in the second quarter of 2006 the Company consolidated its medical capacitor
manufacturing operations in Cheektowaga, NY, and its implantable medical battery manufacturing
operations in Clarence, NY, into its advanced power source manufacturing facility in Alden, NY
(“Alden Facility”). The Company also consolidated its capacitor research, development and
engineering operations from its Cheektowaga, NY facility into its technology center in Clarence,
NY.
In the first quarter of 2005, the Company announced its intent to close its Carson City, NV facility
and consolidate the work performed at that facility into its Tijuana, Mexico facility. This
consolidation project was completed in the third quarter of 2007.
In the fourth quarter of 2005, the Company announced its intent to close its Columbia, MD facility
(“Columbia Facility”) and Fremont, CA Advanced Research Laboratory (“ARL”). The Company
also announced that the manufacturing operations at its Columbia Facility will be moved into its
Tijuana Facility and that the research, development and engineering and product development
functions at its Columbia Facility and at ARL will relocate to its technology center in Clarence,
NY. The ARL portion of this consolidation project was completed in the fourth quarter of 2006.
The Columbia Facility portion of this consolidation project was completed in the third quarter of
2008.
During the fourth quarter of 2006, the Company completed a plan for consolidating its corporate
and business unit organization structure. A significant portion of the annual savings from this
initiative was reinvested into research & development activities and business growth opportunities.
The total cost of these projects was $24.7 million, which was incurred from 2005 to 2008, and
included the following:
• Severance and retention - $7.4 million;
• Production inefficiencies, moving and revalidation - $4.6 million;
• Accelerated depreciation and asset write-offs - $1.1 million;
• Personnel - $8.4 million; and
• Other - $3.2 million.
98
All categories of costs were considered to be cash expenditures, except accelerated depreciation
and asset write-offs. Approximately $23.6 million of these expenses for the facility shutdowns and
consolidations were included in the IMC business segment, $0.1 million in the Electrochem
segment (2006) and $1.0 million was recorded in unallocated operating expenses (2006). As of
January 2, 2009, $0.08 million of accrued consolidation expenses relate to the IMC business
segment.
Accrued liabilities related to the 2005 & 2006 facility shutdowns and consolidations are comprised
of the following (in thousands):
Severance
and
retention
4,704
$
1,405
(3,959)
Production
inefficiencies,
moving and
revalidation
-
$
1,037
(1,037)
Personnel
-
$
1,678
(1,678)
Other
-
$
577
(577)
$
Total
4,704
4,697
(7,251)
Balance, December 29, 2006
Restructuring charges
Cash payments
Balance, December 28, 2007
$
2,150
$
-
$
-
$
-
$
2,150
Restructuring charges
Cash payments
Balance, January 2, 2009
159
(2,234)
75
$
42
(42)
$
-
184
(184)
$
-
278
(278)
$
-
663
(2,738)
75
$
(b) 2007 & 2008 facility shutdowns and consolidations - In the first quarter of 2007, the Company
announced that it will close its current Electrochem manufacturing facility in Canton, MA and
construct a new 81,000 square foot replacement facility in Raynham, MA. This initiative is not
cost savings driven but capacity driven for the Electrochem group.
In the second quarter of 2007, the Company announced that it will consolidate its corporate offices
in Clarence, NY into its existing research and development center also in Clarence, NY after an
expansion of that facility was complete. This expansion and relocation was completed in the third
quarter of 2008.
During the second and third quarters of 2008, the Company reorganized and consolidated various
general & administrative and research & development functions throughout the organization in
order to optimize those resources with the businesses it acquired in 2007 and 2008.
In the second half of 2008, the Company ceased manufacturing at its facility in Suzhou, China,
which was acquired from EAC, and closed its leased manufacturing facility in Orchard Park, NY,
which was acquired from IntelliSensing, LLC. Additionally, the Company consolidated its
Saignelegier, Switzerland manufacturing facility, which was acquired from Precimed. The
operations of these facilities were relocated to existing facilities which have excess capacity. The
facility in China is expected to be used as a procurement office in 2009.
In the fourth quarter of 2008, management of the Company approved a plan for the closure of its
Teterboro, New Jersey (Electrochem manufacturing), Blaine, Minnesota (Vascular Access
manufacturing) and Exton, Pennsylvania (Orthopedics corporate office) facilities. The operations
at these facilities will be moved to other existing facilities with excess capacity.
99
The above initiatives are expected to be completed over the next twelve months. The total cost for
these facility shutdowns and consolidations is expected to be approximately $13.5 million to $15.0
million of which $8.9 million has been incurred through January 2, 2009.
The major categories of costs include the following:
• Severance and retention - $4.3 million to $4.6 million;
• Production inefficiencies, moving and revalidation - $2.4 million to $2.7 million;
• Accelerated depreciation and asset write-offs - $4.1 million to $4.4 million;
• Personnel - $1.2 million to $1.5 million; and
• Other - $1.5 million to $1.8 million.
All categories of costs are considered to be cash expenditures, except accelerated depreciation and
asset write-offs. For 2008, costs of $5.0 million are included in the IMC business segment. For
2008 and 2007, costs of $3.3 million and $0.5 million, respectively, are included in the
Electrochem business segment. As of January 2, 2009 and December 28, 2007, $0.4 million and
$0.6 million of accrued consolidation expenses relate to the IMC business segment, respectively.
As of January 2, 2009, $0.2 million of accrued consolidation expenses relate to the Electrochem
business segment.
Accrued liabilities related to the 2007 & 2008 facility shutdowns and consolidations are comprised
of the following (in thousands):
Severance
and
retention
570
$
-
-
-
570
$
Production
inefficiencies,
moving and
revalidation
-
$
-
-
-
$
-
Accelerated
depreciation/
asset write-
offs
-
$
531
(531)
-
$
-
Personnel
-
$
-
-
-
$
-
Other
-
$
-
-
-
$
-
Balance, December 29, 2006
Restructuring charges
Write-offs
Cash payments
Balance, December 28, 2007
$
Total
570
531
(531)
-
570
$
Restructuring charges
Write-offs
Cash payments
Balance, January 2, 2009
2,661
-
(2,637)
594
$
2,074
-
(2,074)
$
-
2,978
(2,978)
-
$
-
82
-
(82)
$
-
552
-
(552)
$
-
8,347
(2,978)
(5,345)
594
$
As a result of these consolidation initiatives, during 2008 two facilities classified as held and used
and held for sale in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Asset, were determined to be impaired. Accordingly, these facilities, which had a
carrying amount of $5.1 million, were written down to their fair value of $3.4 million. This
resulted in an impairment charge of $1.7 million, which was included in other operating expense.
(c) Integration costs. For 2008, the Company incurred costs related to the integration of the
companies acquired in 2007 and 2008. The integration initiatives include the implementation of
the Oracle ERP system, training and compliance with Company policies as well as the
implementation of lean manufacturing and six sigma initiatives. The expenses are primarily for
consultants, relocation and travel costs that will not be required after the integrations are
completed.
100
(d) Asset dispositions and other. During 2008 and 2007, the Company had various asset disposals
which were partially offset by insurance proceeds received on previously disposed assets.
During 2006, the Company recorded a loss of $4.4 million related to the write-off of a battery test
system that was under development. Upon completion of the Company’s engineering and technical
evaluation, it was determined that the system could not meet the required specifications in a cost
effective manner. This charge was included in the IMC business segment. The remaining expense for
2006 includes charges for various asset dispositions and $0.8 million for professional fees related to a
potential acquisition that was no longer considered probable.
12. INCOME TAXES
The U.S. and international components of income (loss) before provision for income taxes were as
follows (in thousands):
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
U.S.
International
$
32,732
(5,429)
$
27,773
915
$
22,805
729
Income (loss) before provision for income taxes
$
27,303
$
28,688
$
23,534
The provision (benefit) for income taxes was comprised of the following (in thousands):
Current:
Federal
State
International
Deferred:
Federal
State
International
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
5,860
693
520
$
17,661
592
320
$
2,457
142
(79)
7,073
5,399
(692)
(3,036)
1,671
18,573
(4,738)
(25)
(172)
(4,935)
2,520
5,040
57
(209)
4,888
Provision for income taxes
$
8,744
$
13,638
$
7,408
101
The provision for income taxes differs from the U.S. statutory rate due to the following:
Statutory rate
Swiss tax holiday
Federal tax credits
Foreign rate differential
In-process research and development
State taxes, net of federal benefit
Valuation allowance
Extraterritorial income exclusion
Other
Effective tax rate
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
35.0 %
(5.7)
(3.3)
3.0
2.3
(0.7)
0.7
0.0
0.7
32.0 %
35.0 %
0.0
(4.9)
0.8
16.9
1.9
(0.6)
(0.2)
(1.4)
47.5 %
35.0 %
0.0
(1.8)
(0.7)
0.0
(0.1)
0.7
(3.8)
2.2
31.5 %
During the second quarter of 2008, the Company received a nine year tax holiday (i.e. reduction in
tax rate) from the Canton of Bern, Switzerland, beginning in 2009. This resulted in a one time
reduction of the Swiss deferred tax liabilities of approximately $1.5 million, which is reflected in the
2008 effective tax rate. The tax holiday was granted based upon projections of future capital
investment and employment levels in the Canton of Bern. These projections are subject to periodic
review by the governmental and tax authorities. If these projections are not met, part or all of the tax
holiday may be revoked. If part or all of the tax holiday were revoked, a portion (or all) of the tax
benefit recognized in 2008 would be reversed. The Company also negotiated a tax holiday with the
Swiss federal authorities, although this tax holiday is contingent on certain conditions that have not
yet been met. As such, this tax holiday will not be recorded until the conditions have been satisfied.
In 2008, 2007 and 2006, 131,100, 141,302, and 92,693 shares of common stock, respectively, were
issued through the exercise of non-qualified stock options or through the disqualifying disposition of
ISO’s. The amount of the tax benefit to the Company from these transactions, which is credited to
additional paid-in capital rather than recognized as a reduction of income tax expense, was $0.3
million, $0.3 million, and $0.2 million in 2008, 2007 and 2006, respectively. These tax benefits
have also been recognized in the consolidated balance sheet as a reduction of current income taxes
payable.
102
Deferred tax assets (liabilities) consist of the following (in thousands):
Tax credits
Net operating loss carryforwards
Inventories
Accrued expenses
Stock-based compensation
Other
Gross deferred tax assets
Less valuation allowance
Property, plant and equipment
Intangible assets
Convertible subordinated notes
Other
Gross deferred tax liabilities
Net deferred tax liability
Presented as follows:
Current deferred tax asset
Noncurrent deferred tax asset
Noncurrent deferred tax liability
Total net deferred tax liability
Year Ended
January 2,
2009
December 28,
2007
5,307
3,633
4,904
3,110
4,790
1,374
23,118
(4,485)
18,633
(4,233)
(37,020)
(11,658)
-
(52,911)
$
5,090
1,691
3,634
2,636
3,465
-
16,516
(3,969)
12,547
(3,129)
(28,976)
(9,129)
(190)
(41,424)
$
$
(34,278)
$
(28,877)
$
$
8,086
1,942
(44,306)
(34,278)
6,469
-
(35,346)
(28,877)
$
$
As of January 2, 2009, the Company has the following carryforwards available:
Jurisdiction
U.S.
Switzerland
State
Federal
State
State
Tax
attribute
Net Operating Loss
Net Operating Loss
Net Operating Loss
R&D Credit
R&D Credit
Investment Tax Credit
Amount
$4.6 million
7.6 million
8.0 million
0.8 million
0.3 million
4.3 million
(1)
(1)
Begin to
Expire
2022
2011
(1) Various
(1)
2025
(1) Various
Various
(1) These tax attributes were acquired primarily as part of the Enpath acquisition in 2007 and
the Precimed acquisition in 2008. The utilization of the net operating losses and credits is
subject to an annual limitation under Internal Revenue Code Section 382.
Certain federal and state net operating loss carryforwards and tax credits per the income tax returns
filed included uncertain tax positions taken in prior years. Due to the application of FIN 48, the
actual tax attributes are larger than the net operating losses and tax credits for which a deferred tax
asset is recognized for financial statement purposes.
103
In assessing the realizability of deferred tax assets, management considers, within each taxing
jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. Based on
the consideration of the weight of both positive and negative evidence, management has
determined that a portion of the deferred tax assets as of January 2, 2009 related to certain state
investment tax credits and net operating losses will not be realized.
The Company files annual income tax returns in the U.S., various state and local jurisdictions, and
in various foreign jurisdictions. A number of years may elapse before an uncertain tax position,
for which we have unrecognized tax benefits, is examined and finally settled. While it is often
difficult to predict the final outcome or the timing of resolution of any particular uncertain tax
position, we believe that our unrecognized tax benefits reflect the most probable outcome. The
Company adjusts these unrecognized tax benefits, as well as the related interest, in light of
changing facts and circumstances. The resolution of a matter could be recognized as an
adjustment to the provision for income taxes and the effective tax rate in the period of resolution.
Below is a summary of changes to the unrecognized tax benefit (in thousands):
Balance, beginning of year
Additions based upon tax positions related to the current year
Additions recorded as part of purchase accounting
Reductions related to prior period tax positions
Reductions relating to settlements with tax authorities
Reductions as a result of a lapse of the applicable
statute of limitations
Balance, end of year
Year Ended
January 2,
2009
$
1,678
699
3,979
(373)
(233)
December 28,
2007
$
1,787
110
280
(481)
-
(64)
5,686
$
(18)
1,678
$
The tax years that remain open and subject to tax audits varies depending on the tax jurisdiction.
During 2008, the IRS began their review of the Company’s 2006 and 2007 U.S. income tax returns
and it is still in process. The 2005, 2006 and 2007 tax years remain open for examination. In
addition, the state of Massachusetts began an audit of the 2004-2006 tax years of the Company and
the state of New York completed its examination of the 2002-2005 tax years. Finally, the 2004-
2007 Swiss tax returns were selected for review and this examination was completed in early 2009.
It is reasonably possible that a reduction in the range of $0.8 million to $2.1 million of the balance
of unrecognized tax benefits may occur within the next 12 months as a result of potential
settlements with taxing authorities and the lapse of the statute of limitations. As of the end of
2008, approximately $4.0 million of unrecognized tax benefits would favorably impact the
effective tax rate (net of federal benefit on state issues), if recognized.
104
13. COMMITMENTS AND CONTINGENCIES
Litigation – The Company is a party to various legal actions arising in the normal course of
business. While the Company does not believe, except as indicated below, that the ultimate
resolution of any such pending actions will have a material adverse effect on its results of
operations, financial position or cash flows, litigation is subject to inherent uncertainties. If an
unfavorable ruling were to occur, there exists the possibility of a material adverse impact in the
period in which the ruling occurs.
As previously reported, on June 12, 2006, Enpath was named as defendant in a patent infringement
action filed by Pressure Products Medical Supplies, Inc. (“Pressure Products”) in which Pressure
Products alleged that Enpath’s FlowGuard™ valved introducer, which has been on the market for
more than three years, and Enpath’s ViaSeal™ prototype introducer, which has not been sold,
infringes claims in Pressure Products patents. After trial, a jury found that Enpath infringed the
Pressure Products patents, but not willfully, and awarded damages in the amount of $1.1 million.
Enpath has appealed the final judgment to the U.S. Court of Appeals for the Federal Circuit. As a
result of a post-trial motion and pending the appeal, Enpath is permitted to continue to sell
FlowGuard™ provided that Enpath pays into an escrow fund a royalty of between $1.50 and $2.25
for each sale of a FlowGuard™ valved introducer. The amount accrued as escrow during 2008
was $0.5 million. During 2008, the Company incurred $4.5 million of costs related to this
litigation.
During 2002, a former non-medical customer commenced an action alleging that Greatbatch had
used proprietary information of the customer to develop certain products. We have meritorious
defenses and are vigorously defending the matter. The potential risk of loss is up to $1.7 million.
License agreements - The Company is a party to various license agreements through 2018 for
technology that is utilized in certain of its products. The most significant of these is an agreement
to license the basic technology used for wet tantalum capacitors in the IMC segment. The
Company is required to pay royalties based on agreed upon terms through August 2014. Expenses
related to license agreements were $3.0 million, $2.1 million and $1.5 million, for 2008, 2007 and
2006, respectively.
Product Warranties - The change in the aggregate product warranty liability was comprised of the
following (in thousands):
Year Ended
January 2,
2009
$
December 28,
2007
$
1,454
142
1,185
(1,386)
1,395
1,993
158
945
(1,642)
1,454
$
$
Beginning balance
Warranty reserves acquired
Additions to warranty reserve
Warranty claims paid
Ending balance
105
Operating Leases - The Company is a party to various operating lease agreements for buildings,
equipment and software. The Company incurred operating lease expense of $3.8 million, $2.2
million, and $2.3 million, in 2008, 2007 and 2006, respectively. Minimum future annual operating
lease payments are $2.9 million in 2009; $1.8 million in 2010; $1.5 million in 2011; $1.4 million
in 2012; $1.4 million in 2013 and $2.0 million thereafter. The Company primarily leases
buildings, which accounts for the majority of the future lease payments. Lease expense includes
the effect of escalation clauses and leasehold improvement incentives which are accounted for
ratably over the lease term.
Workers’ Compensation Trust – In Western New York, the Company is a member of a group
self-insurance trust that provides workers’ compensation benefits to eligible employees of the
Company and other group member employers. For locations outside of Western New York, the
Company utilizes traditional insurance relationships to provide workers’ compensation benefits.
Under the terms of the Trust, the Company makes annual contributions to the Trust based on
reported salaries paid to the employees using a rate based formula. Based on actual experience,
the Company could receive a refund or be assessed additional contributions. For financial
statement purposes, no amounts have been recorded for any refund or additional assessment since
the Trust has not informed the Company of any such adjustments. Under the trust agreement, each
participating organization has joint and several liability for trust obligations if the assets of the
trust are not sufficient to cover its obligation. The Company does not believe that it has any
current obligations under the joint and several liability.
Purchase Commitments - Contractual obligations for the purchase of goods or services are
defined as agreements that are enforceable and legally binding on the Company and that specify all
significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or
variable price provisions; and the approximate timing of the transaction. Our purchase orders are
normally based on our current manufacturing needs and are fulfilled by our vendors within short
time horizons. We enter into blanket orders with vendors that have preferred pricing and terms,
however these orders are normally cancelable by us without penalty. As of January 2, 2009, the
total contractual obligation related to such expenditures is $16.4 million and will be financed by
existing cash and cash equivalents or cash generated from operations. We also enter into contracts
for outsourced services; however, the obligations under these contracts were not significant and the
contracts generally contain clauses allowing for cancellation without significant penalty.
Foreign Currency Contract - In December 2007, the Company entered into a forward contract to
purchase 80,000,000 CHF, at an exchange rate of 1.1389 CHF per one U.S. dollar, in order to
partially fund the acquisition of Precimed, which closed in January 2008 and was payable in Swiss
Francs. In January 2008, the Company entered into an additional forward contract to purchase
20,000,000 CHF at an exchange rate of 1.1156 per one U.S. dollar. The Company entered into a
similar foreign exchange contract in January 2008 in order to fund the acquisition of the Chaumont
Facility, which closed in February 2008 and was payable in Euros. The net result of the above
transactions was a gain of $2.4 million, $1.6 million of which was recorded in 2008.
2009 Foreign Currency Contract (Unaudited) - In February 2009, the Company entered into a
forward contract to purchase 10 million Mexican pesos per month from March 2009 to December
2009 at an exchange rate of 14.85 pesos per one U.S. dollar. This contract was entered into in
order to hedge the risk of peso denominated payments associated with the operations at the
Company’s Tijuana, Mexico facility. This contract will be accounted for as a cash flow hedge.
106
Capital Expenditures – During 2007, the Company commenced the construction of a new 81,000
square foot facility in Raynham, MA related to the Electrochem expansion. The facility officially
opened in August 2008. Additionally in 2007, construction began on the expansion of our
corporate headquarters. This project was completed in July 2008. The contractual obligations at
January 2, 2009 for construction of facilities and other miscellaneous capital projects are $1.7
million and will be financed by cash and cash equivalents on hand, or from cash flows from
operations.
14. FAIR VALUE MEASUREMENTS
The following table provides information regarding financial assets and liabilities measured at fair
value in the Company’s Consolidated Balance Sheet as of January 2, 2009 (in thousands):
Fair value measurements using
Quoted
prices in
active
markets
for
identical
assets
(Level 1)
At
January 2,
2009
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
90
$
-
$
90
$
-
$
1,484
$
-
$
1,484
$
-
Description
Assets
Interest rate swaps
Liabilities
Interest rate swap
Interest rate swaps - The fair value of the Company’s interest rate swaps are obtained from an
independent pricing service that utilizes cash flow models with observable market data inputs to
estimate fair value. These observable market data inputs include LIBOR and swap rates, and
credit spread curves. The Company’s interest rate swaps are categorized in Level 2 of the fair
value hierarchy.
Other financial assets and liabilities measured at fair value:
Convertible subordinated notes - The fair value of the Company’s convertible subordinated notes
disclosed in Note 8 – “Debt” were determined based upon recent third-party transactions for the
Company’s notes in an inactive market. The Company’s convertible subordinated notes are
categorized in Level 2 of the fair value hierarchy.
Pension plan assets - The fair value of the Company’s pension plan assets disclosed in Note 9 -
“Employee Benefit Plans” and used to determine our pension liability are obtained from an
independent pricing service that utilizes multidimensional relational models with observable
market data inputs to estimate fair value. These observable market data inputs include benchmark
yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and
reference data. The Company’s pension plan assets are categorized in Level 2 of the fair value
hierarchy.
107
15. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments – Implantable Medical
Components (“IMC”) and Electrochem Solutions (“Electrochem”). The IMC segment designs and
manufactures components and devices for the CRM, Neuromodulation, Vascular Access and
Orthopedic markets. Additionally, the IMC business offers value-added assembly and design
engineering services for products that incorporate IMC components. IMC entered the Vascular
Access market through its acquisition of Enpath and Quan in 2007 and the Orthopedic market
through its acquisition of Precimed and the Chaumont Facility in early 2008.
Electrochem is a world leader in the design, manufacture and distribution of electrochemical cells,
battery packs and wireless sensors for demanding applications in markets such as energy, security,
portable medical, environmental monitoring and more. Electrochem broadened its product
portfolio through its acquisitions of EAC and IntelliSensing, LLC in 2007, and can now design and
provide its customers rechargeable battery and wireless sensor systems.
The Company defines segment income from operations as sales less cost of sales including
amortization and expenses attributable to segment-specific selling, general and administrative,
research, development and engineering expenses, and other operating expenses. Segment income
also includes a portion of non-segment specific selling, general and administrative, and research,
development and engineering expenses based on allocations appropriate to the expense categories.
The remaining unallocated operating expenses are primarily corporate headquarters and
administrative function expenses. The unallocated operating expenses along with other income
and expense are not allocated to reportable segments. Transactions between the two segments are
not significant. Segment assets are intended to correlate with invested capital. The amounts
include accounts receivable, inventories, net property, plant and equipment, amortizing intangible
assets, trademark and tradenames, and goodwill. Corporate assets consist primarily of cash, short-
term investments available for sale, deferred income taxes and net property, plant and equipment
for corporate headquarters. The accounting policies of the segments are the same as those
described and referenced in Note 1 “Summary of Significant Accounting Policies.” Sales by
geographic area are presented by attributing sales from external customers based on where the
products are shipped.
The IMC segment results for 2008 includes $6.2 million and $2.2 million of inventory step-up
amortization and IPR&D expense, respectively, related to the acquisitions in 2007 and 2008. IMC
results for 2007 includes $1.5 million and $16.1 million of inventory step-up amortization and
IPR&D expense, respectively, related to the acquisitions in 2007. Electrochem segment results for
2008 and 2007 include $0.2 million of inventory step-up amortization related to the acquisitions in
2007.
108
An analysis and reconciliation of the Company’s business segment and product line information to
the respective information in the consolidated financial statements is as follows (in thousands):
Sales:
IMC
CRM/Neuromodulation
Vascular Access
Orthopedic
Total IMC sales
Electrochem
Total sales
Segment income from operations:
IMC
Electrochem
Total segment income from operations
Unallocated operating expenses
Operating income as reported
Unallocated other income (expense)
Income before provision for income
taxes as reported
Depreciation and amortization:
IMC
Electrochem
Total depreciation and amortization included
in segment income from operations
Unallocated depreciation and amortization
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
278,279
47,415
142,446
$
251,426
18,396
-
$
227,407
-
-
468,140
78,504
269,822
48,924
227,407
43,735
$
546,644
$
318,746
$
271,142
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
49,760
9,499
$
25,367
9,378
$
27,860
12,359
59,259
(24,365)
34,894
(7,591)
34,745
(14,725)
20,020
8,668
40,219
(17,843)
22,376
1,158
$
27,303
$
28,688
$
23,534
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
36,987
2,748
$
19,166
1,632
$
15,068
833
39,735
5,647
20,798
5,044
15,901
3,408
Total depreciation and amortization
$
45,382
$
25,842
$
19,309
109
Expenditures for tangible long-lived assets,
excluding acquisitions:
IMC
Electrochem
Total reportable segments
Unallocated long-lived tangible assets
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
11,414
19,602
$
12,847
7,558
$
12,154
1,351
31,016
16,562
20,405
2,087
13,505
855
Total expenditures
$
47,578
$
22,492
$
14,360
Identifiable assets, net:
IMC
Electrochem
Total reportable segments
Unallocated assets
Total assets
Sales by geographic area:
United States
Non-domestic countries:
United Kingdom
France
Puerto Rico
All other
Consolidated sales
Long-lived tangible assets:
United States
Foreign countries
As of
January 2,
2009
December 28,
2007
$
678,565
65,631
$
526,699
44,667
744,196
104,735
571,366
92,485
$
848,931
$
663,851
January 2,
2009
Year Ended
December 28,
2007
December 29,
2006
$
266,985
$
153,708
$
137,138
75,917
74,670
56,941
72,131
67,409
13,065
42,132
42,432
57,341
15,388
26,221
35,054
$
546,644
$
318,746
$
271,142
As of
January 2,
2009
December 28,
2007
$
142,631
42,119
$
111,364
18,873
Consolidated long-lived assets
$
184,750
$
130,237
110
Four customers accounted for a significant portion of the Company’s sales and accounts receivable
as follows:
January 2,
2009
17%
14%
13%
12%
56%
Customer A
Customer B
Customer C
Customer D
Total
Sales
Year Ended
December 28,
December 29,
2007
25%
17%
25%
0%
67%
2006
26%
16%
25%
0%
67%
Accounts Receivable
As of
January 2,
2009
11%
12%
9%
5%
37%
December 28,
2007
17%
17%
16%
0%
50%
16. QUARTERLY SALES AND EARNINGS DATA – UNAUDITED
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.
2008
Sales
Gross profit (1)
Net income (loss) (2)
Earnings per share - basic
Earnings per share - diluted
2007
Sales
Gross profit (1)
Net income (loss) (2)
Earnings per share - basic
Earnings per share - diluted
$
146,600
46,742
8,499
0.38
0.36
(in thousands, except per share data)
$
136,242
141,648
$
41,753
7,629
0.34
0.33
40,595
5,805
0.26
0.25
$
122,154
26,699
(3,374)
(0.15)
(0.15)
$
84,415
$
79,009
$
78,462
$
76,860
26,555
2,780
0.13
0.12
29,140
5,000
0.23
0.22
31,706
(3,399)
(0.15)
(0.15)
28,624
10,669
0.48
0.43
(1) Gross profit equals total sales minus cost of sales including amortization of intangibles.
(2) Net loss in the first quarter of 2008 and second quarter of 2007 was a result of inventory step up
amortization and an IPR&D charge. See Note 2 “Acquisitions.”
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
111
ITEM 9A. CONTROLS AND PROCEDURES
Management’s Report on Internal Control Over Financial Reporting - Appears under Part II,
Item 8, “Financial Statements and Supplementary Data.”
a. Evaluation of Disclosure Controls and Procedures.
Our management, including the principal executive officer and principal financial officer, evaluated
our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting
of information in our reports that we file with the SEC. These disclosure controls and procedures
have been designed to provide reasonable assurance that material information relating to us,
including our subsidiaries, is made known to our management, including these officers, by our
employees, and that this information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SEC’s rules and forms.
Based on their evaluation, as of January 2, 2009, our principal executive officer and principal financial
officer have concluded that our disclosure controls and procedures are effective.
b. Changes in Internal Control Over Financial Reporting.
We acquired the following subsidiaries during 2008:
• Precimed, Inc.
• P Medical Holding SA and subsidiaries, including the DePuy Orthopaedics Chaumont,
France manufacturing facility
We believe that the internal controls and procedures of the above mentioned subsidiaries are
reasonably likely to materially affect our internal control over financial reporting. We are
currently in the process of incorporating the internal controls and procedures of these subsidiaries
into our internal controls over financial reporting.
The Company has begun to extend its Section 404 compliance program under the Sarbanes-Oxley
Act of 2002 (the “Act”) and the applicable rules and regulations under such Act to include these
subsidiaries. However, the Company has excluded the subsidiaries listed above from
Management’s assessment of the effectiveness of internal control over financial reporting as of
January 2, 2009, as permitted by the guidance issued by the Office of the Chief Accountant of the
Securities and Exchange Commission. These subsidiaries represented approximately 39% and
21% of net and total assets, respectively, and 26% of revenues of the consolidated financial
statement amounts as of and for the year ended January 2, 2009. The Company will report on its
assessment of the internal controls of its combined operations within the time period provided by
the Act and the applicable SEC rules and regulations concerning business combinations.
There were no other changes in the registrant’s internal control over financial reporting during our
last fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected,
or are reasonably likely to materially affect, internal control over financial reporting, other than the
above mentioned acquisitions.
ITEM 9B. OTHER INFORMATION
None.
112
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The identification of each of the Registrant’s directors is incorporated by reference to the caption
“Election of Directors” contained in the Company’s definitive Proxy Statement for its 2009 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or
about April 13, 2009.
The identification of the Company’s executive officers is presented under the caption “Executive
Officers of the Company” contained in Part I of this Annual Report on Form 10-K.
The other information required by Item 10 is incorporated by reference to the Company’s definitive
Proxy Statement for its 2009 Annual Meeting of Stockholders, which will be filed with the
Securities and Exchange Commission on or about April 13, 2009.
ITEM 11.
EXECUTIVE COMPENSATION
Information regarding executive compensation in the Proxy Statement for the 2009 Annual Meeting
of Stockholders is incorporated herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners in the Proxy Statement for the
2009 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence in the
Proxy Statement for the 2009 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding the fees paid to and services provided by Deloitte & Touche LLP, the
Company’s independent registered public accounting firm, in the Proxy Statement for the 2009
Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1)
Financial statements and financial statement schedules filed as part of this Annual
Report on Form 10-K. See Part II, Item 8. “Financial Statements and Supplementary
Data.”
113
(2)
FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this report on Form
10-K: Schedule II - Valuation and Qualifying Accounts.
Schedule II - Valuation and Qualifying Accounts
Additions
Col. B
Balance at
Beginning
of Period
Charged to
Costs & Expenses
Charged to
Other Accounts-
Describe
(in thousands)
Col. D
Deductions -
Describe
Col. E
Balance at
End of
Period
$
758
$
590
$
374
(5)
$
(119)
(2)
$
1,603
$
3,969
$
-
$
580
(5)
$
(64)
(1)
$
4,485
$
532
$
151
$
173
(4)
$
(98)
(2)
$
758
$
4,342
$
-
$
-
$
(373)
(1)
$
3,969
$
450
$
179
$
-
$
(97)
(2)
$
532
$
4,843
$
40
(1)
$
-
$
(541)
(3)
$
4,342
Col. A
Description
January 2, 2009
Allowance for
doubtful accounts
Valuation allowance
for deferred income
tax assets
December 28, 2007
Allowance for
doubtful accounts
Valuation allowance
for deferred income
tax assets
December 29, 2006
Allowance for
doubtful accounts
Valuation allowance
for deferred income
tax assets
(1) Valuation allowance/reversal recorded in the provision for income taxes for certain net operating
losses and tax credits.
(2) Accounts written off, net of collections on accounts receivable previously written off.
(3) Reversal of valuation allowance related to available for sale investments.
(4) Balances recorded as a part of our 2007 acquisitions of Enpath Medical, Quan Emerteq and EAC.
(5) Balances recorded as a part of our 2008 acquisitions of P Medical Holding SA.
Schedules not listed above have been omitted because the information required to be set forth therein
is not applicable or is shown in the financial statements or notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K. The exhibits listed on the Exhibit Index of this
Annual Report on Form 10-K have been previously filed, are filed herewith or are incorporated
herein by reference to other filings.
114
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SIGNATURES
Dated: March 2, 2009
GREATBATCH, INC.
By /s/ Thomas J. Hook
Thomas J. Hook
President & Chief Executive Officer
(Principal Executive Officer)
By /s/ Thomas J. Mazza
Thomas J. Mazza
Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
By /s/ Marco F. Benedetti
Marco F. Benedetti
Corporate Controller
(Principal Accounting Officer)
115
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in the capacities and on
the date indicated.
Signature
/s/ Thomas J. Hook
Thomas J. Hook
/s/ Bill R. Sanford
Bill R. Sanford
/s/ Pamela G. Bailey
Pamela G. Bailey
/s/ Michael Dinkins
Michael Dinkins
/s/Kevin C. Melia
Kevin C. Melia
Title
President & Chief Executive
Officer & Director
Date
March 2, 2009
Chairman
March 3, 2009
Director
March 3, 2009
Director
March 3, 2009
Director
March 3, 2009
/s/Dr. Joseph A. Miller, Jr.
Dr. Joseph A. Miller, Jr.
Director
March 3, 2009
/s/ Peter H. Soderberg
Peter H. Soderberg
Director
March 3, 2009
/s/ William B. Summers, Jr.
William B. Summers, Jr.
Director
March 3, 2009
/s/ John P. Wareham
John P. Wareham
Director
March 3, 2009
/s/ Dr. Helena S. Wisniewski
Dr. Helena S. Wisniewski
Director
March 3, 2009
116
EXHIBIT
NUMBER
EXHIBIT INDEX
DESCRIPTION
2.1
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1#
10.2#
Share Purchase Agreement dated as of November 21, 2007, by and among the persons
named on the signature page, P Medical Holding SA, Greatbatch, Inc. and Greatbatch
Ltd. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed
on January 8, 2008).
Amended and Restated Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to our quarterly report on Form 10-Q for the period ended June
27, 2008).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our
Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2002).
Indenture for 2¼ % Convertible Subordinated Debentures Due 2013 dated May 28,
2003 (incorporated by reference to Exhibit 4.2 to our Registration Statement on Form S-
3 (File No. 333-107667) filed on August 5, 2003).
Registration Rights Agreement dated May 28, 2003 by among us and the initial
purchasers of the Debentures described above (incorporated by reference to Exhibit 4.2
to our Registration Statement on Form S-3 (File No. 333-107667) filed on August 5,
2003).
Indenture for 2¼% Convertible Subordinated Debentures Due 2013 dated as of March
28, 2007 (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K
filed on March 29, 2007).
First Supplemental Indenture dated April 2, 2007 (incorporated by reference to Exhibit
10.3 to our Current Report on Form 8-K filed on April 4, 2007).
Registration Rights Agreement dated as of March 28, 2007 by and among us and the
initial purchasers of the Debentures described above (incorporated by reference to
Exhibit 10.2 to our Current Report on Form 8-K filed on March 29, 2007).
1997 Stock Option Plan (including form of “standard” option agreement and form of
“special” option agreement) (incorporated by reference to Exhibit 10.1 to our
Registration Statement on Form S-1 (File No. 333-37554)).
1998 Stock Option Plan (including form of “standard” option agreement, form of
“special” option agreement and form of “non-standard” option agreement) (incorporated
by reference to Exhibit 10.2 to our Registration Statement on Form S-1 (File No. 333-
37554)).
10.3#
Greatbatch Ltd. Equity Plus Plan Money Purchase Plan (incorporated by reference to
Exhibit 10.3 to our Registration Statement on Form S-1 (File No. 333-37554)).
117
10.4#
10.5#
10.6#
10.7
10.8*
10.9*
10.10#
10.11
10.12+
10.13+
10.14+
10.15+
Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan (incorporated by reference to
Exhibit 10.4 to our Registration Statement on Form S-1 (File No. 333-37554)).
Non-Employee Director Stock Incentive Plan (incorporated by reference to Exhibit A to
our Definitive Proxy Statement on Schedule 14-A filed on April 22, 2002).
Greatbatch, Inc. Executive Short Term Incentive Compensation Plan (incorporated by
reference to Exhibit B to our Definitive Proxy Statement on Schedule 14A filed on April
20, 2007).
Credit Agreement dated as of May 22, 2007 by and among Greatbatch Ltd., the lenders
party thereto and Manufacturers and Traders Trust Company, as administrative agent
(incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on
May 25, 2007).
Amendment No. 1 to Credit Agreement dated as of December 20, 2007 by and among
Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust
Company, as administrative agent.
Amendment No. 2 to Credit Agreement dated as of November 4, 2008 by and among
Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust
Company, as administrative agent.
2002 Restricted Stock Plan (incorporated by reference to Appendix B to our Definitive
Proxy Statement on Schedule 14A filed on April 9, 2003).
License Agreement dated August 8, 1996, between Greatbatch Ltd. and Evans Capacitor
Company (incorporated by reference to Exhibit 10.23 to our Registration Statement on
Form S-1 (File No. 333-37554)).
Amendment No. 2 dated December 6, 2002, between Greatbatch Technologies, Ltd. and
Evans Capacitor Company (incorporated by reference to Exhibit 10.18 to our Annual
Report on Form 10-K for the year ended January 3, 2003).
Supplier Partnering Agreement dated as of October 23, 2003, between Greatbatch, Inc.
and Pacesetter, Inc., a St. Jude Medical Company (incorporated by reference to Exhibit
10.20 to our Annual Report on Form 10-K for the year ended January 2, 2004).
Amendment No. 1 dated October 8, 2004, to Supplier Partnering Agreement dated as of
October 23, 2003, between Greatbatch, Inc. and Pacesetter, Inc., d/b/a St. Jude Medical
CRMD (incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2004).
License Agreement dated October 25, 2005 between Greatbatch, Inc. and Medtronic,
Inc. (incorporated by reference to Exhibit 10.16 to our Annual Report on Form 10-K for
the fiscal year ended December 30, 2005).
118
10.16#
10.17#
10.18#
10.19#
10.20#
10.21#
10.22#
10.23+
10.24
10.25+
10.26+
10.27+
Form of Change of Control Agreement, dated August 14, 2006, between Greatbatch,
Inc. and our executive officers (Thomas J. Hook, Thomas J. Mazza, Mauricio Arellano,
Susan M. Bratton, Susan H. Campbell, Barbara Davis and Timothy McEvoy).
Employment Agreement dated August 8, 2006 between Greatbatch, Inc. and Thomas J.
Hook (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q
for the quarterly period ended September 29, 2006).
2005 Stock Incentive Plan (incorporated by reference to Exhibit B to our Definitive
Proxy Statement on Schedule 14A filed on April 20, 2007).
Form of Restricted Stock Award Letter (incorporated by reference to Exhibit 10.22 to
our Annual Report on Form 10-K for the fiscal year ended December 30, 2005).
Form of Incentive Stock Option Award Letter (incorporated by reference to Exhibit
10.23 to our Annual Report on Form 10-K for the fiscal year ended December 30,
2005).
Form of Nonqualified Option Award Letter (incorporated by reference to Exhibit 10.24
to our Annual Report on Form 10-K for the fiscal year ended December 30, 2005).
Form of Stock Option Award Letter (incorporated by reference to Exhibit 10.25 to our
Annual Report on Form 10-K for the fiscal year ended December 30, 2005).
Supply Agreement for medical device components dated March 31, 2006, between
Greatbatch, Inc. and SORIN/ELA BIOMEDICA CRM and ELA MEDICAL SAS
(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2006).
Form of Exchange and Purchase Agreement dated March 22, 2007, by and between
Greatbatch, Inc. and certain other parties thereto. (Incorporated by reference to Exhibit
10.1 to our Current Report on Form 8-K filed on March 29, 2007).
Amendment No. 2 to Supplier Partnering Agreement, effective as of July 27, 2005,
between Greatbatch, Inc. and Pacesetter, Inc. d/b/a St. Jude Medical CRMD
(incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the
quarter ended March 30, 2007).
Amendment No. 2 to Supplier Partnering Agreement, effective as of January 1, 2006,
between Greatbatch, Inc. and Pacesetter, Inc. d/b/a St. Jude Medical CRMD
(incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended March 30, 2007).
Amendment No. 4 to Supplier Partnering Agreement, effective as of January 1, 2006,
between Greatbatch, Inc. and Pacesetter, Inc. d/b/a St. Jude Medical CRMD
(incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the
quarter ended March 30, 2007).
119
10.28+
10.29+
10.30+
Amendment No. 5 to Supplier Partnering Agreement, effective as of March 1, 2007,
between Greatbatch, Inc. and Pacesetter, Inc. d/b/a St. Jude Medical CRMD
(incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the
quarter ended March 30, 2007).
Amendment No. 6 to Supplier Partnering Agreement, effective as of March 1, 2007,
between Greatbatch, Inc. and Pacesetter, Inc. d/b/a St. Jude Medical CRMD
(incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the
quarter ended March 30, 2007).
Supply Agreement between Cardiac Pacemakers, Inc. (d/b/a Boston Scientific) and
Greatbatch, Ltd., 2007 - 2010, effective July 1, 2007 (incorporated by reference to
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 29,
2007).
12.1*
Ratio of Earnings to Fixed Charges (Unaudited)
21.1*
Subsidiaries of Greatbatch, Inc.
23.1*
Consent of Independent Registered Public Accounting Firm
31.1*
31.2*
32.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Portions of those exhibits marked “+” have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment.
* - Filed herewith.
# - Indicates exhibits that are management contracts or compensation plans or arrangements required to be
filed pursuant to Item 14(c) of Form 10-K.
120
RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
EXHIBIT 12.1
Jan. 2,
2009
Dec. 28,
2007
Year-ended
Dec. 29,
2006
Dec. 30,
2005
Dec. 31,
2004
$
27,303
(162)
$
28,688
(21)
$
23,534
-
$
15,464
(30)
$
23,732
-
Earnings:
Income before income taxes
Pretax charges (credits)
Fixed Charges:
Interest expense
Capitalized interest
Discounts & deferred financing fees
Interest portion of rental expense
Total earnings and fixed charges
10,435
171
2,797
850
41,394
$
5,427
22
2,198
574
36,888
$
3,966
-
719
584
28,803
$
3,965
32
703
502
20,636
$
3,857
-
678
354
28,621
$
Fixed Charges:
Interest expense
Capitalized interest
Discounts & deferred financing fees
Interest portion of rental expense
Total fixed charges
10,435
171
2,797
850
14,253
$
$
$
$
$
5,427
22
2,198
574
8,221
3,966
-
719
584
5,269
3,965
32
703
502
5,202
3,857
-
678
354
4,889
$
$
$
$
$
Ratio of earnings to fixed charges
2.9
4.5
5.5
4.0
5.9
1
SUBSIDIARIES OF GREATBATCH, INC.
EXHIBIT 21.1
Subsidiary
Greatbatch Ltd.
(direct subsidiary of Greatbatch, Inc.)
Greatbatch LLC
(direct subsidiary of Greatbatch Ltd.)
Greatbatch Tecnologias de Mexico, S. de C.V.
(owned 99% by Greatbatch LLC & 1% by Greatbatch, Inc.)
Greatbatch-Hittman, Inc.
(direct subsidiary of Greatbatch Ltd.)
Electrochem Solutions, Inc.
(direct subsidiary of Greatbatch Ltd.)
Greatbatch-Globe Tool, Inc.
(direct subsidiary of Greatbatch Ltd.)
Electrochem Solutions, Inc.
(direct subsidiary of Electrochem Solutions, Inc.)
Precimed, Inc.
(direct subsidiary of Greatbatch Ltd.)
P Medical Holding SA
(direct subsidiary of Greatbatch Ltd.)
Precimed SA
(direct subsidiary of P Medical Holding SA)
Precimed France SAS
(direct subsidiary of Precimed SA)
Incorporated
New York
Delaware
Mexico
Delaware
Massachusetts
Minnesota
Delaware
Pennsylvania
Switzerland
Switzerland
France
1
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement No’s. 333-61476, 333-
97209, 333-129002, and 333-143519 on Form S-8, Post-Effective Amendment No. 1 to
Registration Statement No. 333-107667 on Form S-3, and Registration Statement No. 333-
142400 on Form S-3 of our reports dated March 3, 2009, relating to the consolidated financial
statements and consolidated financial statement schedule of Greatbatch, Inc. and subsidiaries
(the “Company”), and the effectiveness of the Company’s internal control over financial
reporting, appearing in this Annual Report on Form 10-K of the Company for the year ended
January 2, 2009.
Buffalo, New York
March 3, 2009
1
CERTIFICATION
EXHIBIT 31.1
I, Thomas J. Hook, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the fiscal year ended January 2, 2009 of
Greatbatch, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to
the period covered by the report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation;
d. Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
1
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 2, 2009
Thomas J. Hook
President & Chief Executive Officer
(Principal Executive Officer)
2
CERTIFICATION
EXHIBIT 31.2
I, Thomas J. Mazza, certify that:
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the fiscal year ended January 2, 2009 of
Greatbatch, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to
the period covered by the report;
Based on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented
in this report;
The registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation;
d. Disclosed in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting.
1
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of registrant’s board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or operation
of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: March 2, 2009
_______________________
Thomas J. Mazza
Senior Vice President &
Chief Financial Officer
(Principal Financial Officer)
2
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, each of the undersigned officers of Greatbatch, Inc. (the “Company”), does hereby
certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended January 2, 2009 (the “Form 10-K”)
of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities
Exchange Act of 1934 and the information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations of the Company.
Dated: March 2, 2009
Dated: March 2, 2009
Thomas J. Hook
President & Chief Executive Officer
(Principal Executive Officer)
Thomas J. Mazza
Senior Vice President &
Chief Financial Officer
(Principal Financial Officer)
This certification is being furnished solely to accompany this Form 10-K pursuant to 18 U.S.C.
Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended, or otherwise, and is not to be incorporated by reference into any filing of the
Company unless such incorporation is expressly referenced within.
1
BOARD OF DIRECTORS
CORPORATE LEADERSHIP
TOP ROW:
Dr. Joseph A. Miller, Jr.
Executive Vice President
& Chief Technology
Offi cer, Corning, Inc.
John P. Wareham
Non-Executive Chairman,
STERIS Corporation
William B. Summers, Jr.
Retired Chairman &
Chief Executive Offi cer,
McDonald Investments, Inc.
Kevin C. Melia
Former Non-Executive
Chairman,
IONA Technologies PLC
BOTTOM ROW:
Peter H. Soderberg
President & Chief
Executive Offi cer,
Hill-Rom Holdings, Inc.
Thomas J. Hook
President & Chief
Executive Offi cer
Barbara M. Davis LEFT
Vice President,
Human Resources
Thomas J. Mazza RIGHT
Senior Vice President
& Chief Financial Offi cer
Richard M. Farrell
Vice President,
QIG
Mauricio Arellano
Senior Vice President,
Cardiac & Neurology
Timothy G. McEvoy CENTER
Vice President,
General Counsel
& Secretary
Bill R. Sanford, Chairman
Founder & Chairman,
Symark LLC
Susan M. Bratton
Senior Vice President,
Commercial
Michael Dinkins
Executive Vice President
& Chief Financial Offi cer,
USI Insurance Services
Thomas J. Hook
President & Chief
Executive Offi cer,
Greatbatch, Inc.
Susan H. Campbell
Senior Vice President,
Orthopaedics
Pamela G. Bailey
President & Chief
Executive Offi cer,
The Grocery
Manufacturers
Association
Dr. Helena S. Wisniewski
Member of the Naval
Research Advisory
Committee
SHAREHOLDER INFORMATION
OFFICER CERTIFICATION
INVESTOR
INFORMATION
TRANSFER AGENT
AND REGISTRAR
Shareholders, securities
analysts, and investors
seeking more information
about the company can
access information via
the Internet or from
the Investor Relations
Department:
10000 Wehrle Drive
Clarence, NY 14031
www.greatbatch.com
BNY Mellon
Shareowner Services
480 Washington
Boulevard
Jersey City, NJ 07310
Tel: 800 288-9541
TDD: 800 231-5469
INDEPENDENT
REGISTERED PUBLIC
ACCOUNTING FIRM
Deloitte & Touche LLP,
Buff alo, NY
The company has fi led
as exhibits to its Annual
Report on Form 10-K for
the year ended January
2, 2009, the Chief
Executive Offi cer and
Chief Financial Offi cer
certifi cations required
by Section 302 of the
Sarbanes-Oxley Act.
On May 23, 2008, the
Company submitted
the required annual
Chief Executive Offi cer
certifi cation to the New
York Stock Exchange,
which stated he was not
aware of any violation
by the Company of the
Exchange’s corporate
governance listing
standards.
Greatbatch
10000 Wehrle Drive
Clarence, NY 14031
tel 716-759-5600
www.greatbatch.com
©2009 Greatbatch, Inc. All rights reserved.