For 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.
Our strong commitment to discovery has enabled us
to grow into a family of companies united under one
vision. Our strong operational focus made it possible
to evolve, add and integrate our technologies.
Finally, our customer and industry connections allow
us to continue to progress and proactively address
the unmet needs of the medical and industrial markets.
As we celebrate 40 years of scientific advancements,
from the ever-expanding critical CRM, neuromodulation,
vascular access and orthopaedics technologies of
Greatbatch Medical, to the battery and wireless sensor
innovations of Electrochem, we strive to be on the cusp
of the next revolutionary discovery, one that decades
later will be hard to imagine the world without.
1
Letter to Shareholders
Dear Fellow Shareholders,
Although 2009 was a turbulent year for the global
economy, and more specifically the healthcare markets,
we are proud of the progress we made on our strategic
initiatives. A great deal of headway was made by staying
connected, committed and focused on the aspects of our
business that we could control. Despite the ever-increasing
pressure of today’s operating environment, we continued
to make progress towards both our short-term operational
goals as well as our long-term strategic objectives. We are
confident that our dedication to improving our business
and closely following our strategic priorities has placed
us in a position to benefit as the broader economy and
healthcare industry improve.
Effectively connecting all parts of our organization during
this difficult time has been a critical and essential element of our success in managing through
the downturn. Our connectivity begins with the integration and consolidation efforts across our
business. During 2009, we completed the transfer of operations of five facilities into existing
locations with excess capacity, and converted four facilities onto our ERP platform. Although
we have made substantial progress to date, with the majority of our planned initiatives having
been successfully completed, we still see additional opportunities that we intend to tap into.
In addition to our consolidation activities, we continue to work with our OEM customers and
make investments to develop and manufacture more innovative products. A good example
of this is our plan to invest in our orthopaedics operations, including the opening of a rapid
prototyping design center to better meet the needs of our customers. We will continue to
make the necessary investments that more effectively connect us with our customers. This
allows us to deepen our relationships and leverage cross-selling opportunities, while working
together to develop the best possible solutions to ensure the success of our customers in
meeting their goals.
At Greatbatch, we understand that, in addition to working with our customers, our success
stems from our employees. By enabling our global workforce to more effectively connect with
one another, we can gain greater alignment for achieving our corporate objectives. We believe
that greater connection enables us to better leverage the skills of our employees throughout
the organization and further enhance our productivity. Our dedication to remaining extremely
connected will facilitate better business and employee development and enable Greatbatch
to deliver on its promise to our OEMs for innovation and quality.
The rollout of the new Greatbatch brand in 2009 best exemplifies our efforts to connect the
company under one uniform vision. Through working diligently on the integration of our family
of companies, we were proud to introduce the new Greatbatch, which strategically aligned
us to optimize performance and deliver innovative solutions to our customers, ultimately
providing returns for our shareholders.
Although our 2009 results reflect the headwinds created by the global economy and uncertain
healthcare environment, I want to reiterate that we remain committed to the strategic plan
that we set in place just two short years ago, as well as to the customers and markets we serve.
Our commitment has been evident in our investments throughout the downturn. Through our
extensive investment in integration, consolidation, sales teams, quality systems and innovation,
we have created a world-class footprint that we believe creates a significant competitive
advantage going forward. We have an efficient operating system that has available capacity
intact, so as we grow in the future, we can do it both productively and profitably. We are also
committed to going forward into the future as a premier medical technology company.
We are committed to integrating and developing our technologies to offer our customers
more comprehensive solutions and remaining the world leader in each of the technologies
that we have. I strongly believe that by investing now, we will position Greatbatch to accelerate
out of the downturn and leverage all of our competitive advantages once the market rebounds.
I think now, more than ever, we need continued focus on our strategic initiatives. In these
uncertain economic times, we feel that remaining dedicated to our strategy of growth and
diversification, streamlining our operations, and driving growth through innovation will not only
help Greatbatch emerge from this recession as a stronger company, but one better suited to
meet the unique customized demands of our customers.
Growth and diversification is one of our key long-term strategic initiatives. It has and will
continue to create new opportunities, while simultaneously reducing our concentration risk.
We believe this will provide greater stability as we move forward and better serve us during
the various economic and customer cycles. We are confident the long-term benefits of this
strategy far outweigh the near-term impact that we have seen. We began to see some of the
benefits of this strategy in 2009, which saw our CRM and neuromodulation revenue grow by
7% and a 7.5% increase in sales to our four largest OEM customers. We are proud to have taken
great strides in diversifying Greatbatch and will continue to integrate our businesses and look
for cross-selling opportunities that will drive both near-term and long-term revenue growth.
With that said, I was not satisfied with the level of revenue we achieved in 2009. The markets
we operate in provide us with opportunities, and we need to take advantage of them. As a
fellow shareholder, I can reassure you that we are focused on taking measures and actions that
enable us to capitalize on those opportunities.
Driving operating performance is also a critical part of our long-term plan to drive shareholder
value. During 2009, we made significant progress with a number of ongoing consolidation
initiatives as we moved our newly acquired businesses to the Greatbatch operating model.
We are pleased with the progress we have made, which is reflected in the achievement of our
adjusted operating margin target of 12% for 2009, as well as the increase in our cash flow from
operations by 26% to $72 million. This strong operating performance allowed us to strengthen
our financial position and pay down our debt by $34 million. Going forward, we will maintain
our commitment to operational efficiency, which has been a key to our success and a vital
component of our operating model.
2
3
Our last key strategic initiative that we were focused on this year was to drive growth through
developing new technologies and innovation. During the year, we spent approximately 8.5% of
our sales revenue on research and development. We expect these expenditures to increase in
2010, as we continue to invest resources in the development of new technologies and solutions
for our customers. The continued investment in R&D will enable us to maintain our leadership
position in our core markets and drive further margin improvements. Ultimately, we believe
this investment will facilitate a more diverse product portfolio and multiple future growth
platforms. In line with this strategy, we have established our QiG group, which will help guide
these investments to generate new “System” level products for our customers. Based on our
current portfolio and R&D activities, we feel we are in a strong competitive position for future
growth and profitability.
We believe that the strong customer relationships that we have developed, along with our
financial stability, portfolio of intellectual property and effective cost structure, will enable us
to not only meet our goals but also continue to increase shareholder value and successfully
drive Greatbatch through this economic downturn. When there is a lot of turbulence in the
markets, I truly believe that only the connected, committed, and focused companies come
out on top, because they are well-prepared to take on the market dynamics and actively
manage around them.
In closing, I would like to recognize the talent and dedication of our 3,000 Greatbatch
associates. It is through this group of people that we have been able to further our strategic
objectives in 2009 and establish the quality and brand recognition that accompanies our
products today. Thank you for all of your hard work and dedication.
As you read through this annual report, you will see why I believe that 2009 laid the foundation
for what appears to be a promising 2010 and beyond.
Sincerely,
Thomas J. Hook
President & Chief Executive Officer
Greatbatch, Inc.
4
Our Business
The Greatbatch family is a coalition of companies strategically aligned to deliver
unprecedented performance and reliability in critical technologies to serve some of today’s
most vital applications.
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.
Located in Greatbatch’s Global Headquarters,
the word wall describes how the company strives
to be perceived in everything we do.
5
CRM and Neuromodulation
In our CRM and neuromodulation product line, our revenue remained in-line with projections and
above market growth rates for 2009. The 7% increase in sales that we experienced is indicative
of the sustainability of this core product line. This increase was a direct result of becoming
further connected with our customers and taking advantage of cross-selling opportunities.
Our commitment to quality, innovation and customer satisfaction is redefining our role as an
OEM partner. In 2009, we worked side by side with our customers in order to learn more
about their technology roadmaps and determine how Greatbatch Medical’s technologies and
capabilities could enable those customers to bring solutions to market. More specifically,
we remained committed to furthering our Q series battery and MRI compatible platforms.
With momentum behind us, we expect to see our QHR
by our customers in 2010. This technology, along with our other CRM offerings, enables
each customer’s specific strategy while improving patient care and safety. Our technologies
allow for the introduction of new device features such as MRI compatibility, RF telemetry and
rechargeability, while reducing the overall size of these devices and providing a longer shelf-life.
® and QMR technology further adopted
®
During 2009, we also remained focused on our operations to better meet the needs of our
OEM customers. Once again, we are proud of the fact that all of our CRM and neuromodulation
facilities met our internal target of greater than 99% on-time delivery. This is just one example
of our unwavering commitment to operational excellence, flawless execution and high levels
of customer satisfaction, which has allowed us to establish and maintain the quality and brand
recognition that accompanies our products today.
By continuing to deepen our relationships with our OEM customers and providing them with
cost-effective and innovative solutions, we are confident that they will provide us the
opportunity to work on more comprehensive projects further down the road and ensure our
success in 2010 and beyond.
Vascular Access
We remain committed to our vascular access product line. During 2009, we continued to
commercialize the vascular access products and technologies that we acquired in 2007.
Our vascular access products, such as our valved introducers, as well as our steerable
catheters and sheaths, provide us with growth opportunities where we historically had little
to no revenue. More specifically, we see opportunity for growth in areas such as the AF
Ablation market. Additionally, during 2009, we invested in our quality and regulatory systems
infrastructure in order to provide full “Systems” solutions to our vascular access customers. As
a result, we are now able to provide comprehensive products and services, from development
and regulatory submissions through manufacturing, and support worldwide distribution. We
expect to begin seeing the benefit of these projects in the second half of 2010.
Another factor in connecting our vascular access product line was the completion of
the consolidation of our Blaine, Minnesota, facility into our Plymouth, Minnesota, facility in
2009, which was completed six months ahead of schedule with no customer disruptions.
We remain focused on further leveraging this product line to further optimize our performance.
We are proud of our accomplishments over the past year within our Greatbatch Medical
segment. During 2009, we further integrated our acquisitions, which included the unification
of our new businesses under one brand, vision and mission — Greatbatch Medical.
Additionally, we expanded our product pipeline in the cardiac rhythm management (CRM),
neuromodulation, vascular access and orthopaedics markets. Finally, we continued to
strengthen our innovative solutions so 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 remaining connected, committed and focused on providing enabling technologies
and doing our part to facilitate new developments.
“ We are pleased with our strong top- and bottom-line performance over the course of the year,
as well as the robust product pipeline that we continued to develop. We remain very confident
that the investments we are making and relationships we are cultivating today will equate to
our future success.”
MAURICIO ARELLANO | Senior Vice President, Cardiac & Neurology
6
7
Orthopaedics
During 2009, we spent a considerable amount of time talking to customers and improving
our orthopaedics operations. This included upgrading our management team by reallocating
our “Bench Strength” from within the company, as well as bringing in outside expertise with
experience in the orthopaedics industry. Additionally, we made significant strides in improving
our quality systems and moving the businesses that we acquired towards the Greatbatch
operating model, which includes innovation and operational excellence.
As a result of our efforts, we are more connected to our customers and have significantly
improved our orthopaedics scorecard metrics. Since we acquired this business, we have been
able to improve on-time delivery from 20% to better than 90%, improve our average quote
lead-times from 12 days to three days, and reduce customer production lead-time by nearly
50%. While these are great accomplishments, we are not satisfied and remain focused on
continuous improvement. Ultimately, our goal is manufacturing excellence which includes
better than 99% on-time delivery as well as one-day lead-times on quotes and production,
similar to our other product lines.
We remain very committed to our orthopaedics product line and intend to make additional
investments over the next two years in order to further drive improvements and growth.
An example of our commitment is the opening of our Orthopaedics Design Center in Warsaw,
Indiana, in early 2010, which will significantly advance our product development capabilities.
This new facility will be equipped with rapid prototyping capability and staffed with an industry
leading team of orthopaedics development experts. The addition of these capabilities will
expand both our service offerings and our ability to effectively partner with our customers in
developing and delivering effective solutions quickly.
We are proud of the significant strides we have made towards our strategic goals, and we
remain focused on our plan to become the most innovative, reliable and advanced supplier to
the orthopaedics industry. We truly believe that our financial strength, commitment to
innovation and improving operations are critical to our future success in this market and will
give us a significant competitive advantage.
“ This past year was a rebuilding year for orthopaedics, and we made great strides in focusing
on our customers and their needs. Despite the headwinds facing our industry, we have the right
management team, the right systems, the right brand, the financial stability, the customer
relationships and a clear understanding of what the growth drivers will be in this market.
We think we are in the right position for success.”
SUSAN CAMPBELL | Senior Vice President, Orthopaedics
“We have a critical focus on growing our market share within the broader markets we serve,
while maintaining our core business. With the stable foundation we have built through
investment and integration, and the relationships we have fostered, we remain confident that
we can achieve sustainable, long-term growth.”
SUSAN BRATTON | Senior Vice President, Electrochem
Through Electrochem, we provide unique and innovative technology solutions for critical
applications, leveraging our heritage and technical expertise in customized battery solutions
and our expanded product portfolio, which includes rechargeable power and wireless sensing
solutions. Today, our technologies are being used in a wide array of fields, from ensuring
reliable communications for U.S. soldiers, to improving operations for energy companies with
wireless sensing in remote oil fields, to detecting and warning of developing tsunamis from the
middle of the ocean, and ensuring that automated external defibrillators perform on the spot.
These are just a few of the critical applications that Electrochem’s technologies enable.
As a business segment that experienced tough industry headwinds in 2009, we are extremely
proud of the progress and investments we have made. We were able to connect and
further integrate our operations, which included consolidating three locations into our new
manufacturing facility in Raynham, Massachusetts. Throughout this process we ensured
a streamlined transition of production with a continued focus on Lean and Six Sigma.
Additionally, we committed resources to developing new technologies and invested in our
sales and marketing teams. We also remained focused on improving our presence through
expanding our market share in the portable medical and military sectors, which will diversify
our revenue stream and provide growth opportunities in the future.
By remaining flexible and committed to our strategic initiatives, we were able to manage
through the market turmoil much better than the rest of the industry, which has positioned us
to recognize significant advantages when market conditions improve.
8
9
Greatbatch Strategic Initiatives
Grow and Diversify Revenue Base
Growth and diversification is one of our key long-term strategic initiatives. It has and will
continue to create cross-selling opportunities, while simultaneously reducing our concentration
risk. We believe this will provide greater stability as we move forward and better serve us
during the various economic and customer cycles. We are confident the long-term benefits of
this strategy far outweigh the near-term impact that we have seen.
In three short years, we have been able to double our revenue through a series of strategic
acquisitions and organic growth. At the same time, we reduced our reliance on the CRM market
from a concentration of approximately 80% of revenues to approximately 60%. In 2009, we
began to see some of the benefits of this strategy as our CRM and neuromodulation revenue
grew by 7% and sales to our four largest OEM customers increased 7.5%. These increases
are a direct result of the relationships we have built and our ability to leverage our expanded
customer base.
Drive Operating Performance
Driving operating performance is a critical part of our long-term plan to drive shareholder value.
During 2009, we made significant progress with our consolidation and integration initiatives
as we moved our newly acquired businesses toward the Greatbatch operating model. More
specifically, during 2009, we transferred the operations of five facilities into existing locations
with excess capacity, which will be key to driving further operating margin improvements.
What’s more impressive is that all of these consolidation projects were completed on time
and with minimal disruption to our customers or operations. Dedication to this initiative has
allowed us to fully consolidate our CRM and neuromodulation, vascular access, and Electrochem
facilities. We intend to make additional investments over the next two years in our orthopaedics
operations in order to further drive margin improvements and growth.
During 2009, we also completed four Oracle ERP system implementations. Again, all
implementations went very smoothly with minimal business interruption. We now have
integrated all of our North American operations onto one ERP platform and have consolidated
the Finance, IT and Human Resources functions into one shared services group located at
our corporate headquarters. The conversion of our European ERP platform is expected to be
completed by early 2011.
The hundreds of patented Greatbatch inventions
are the lifeblood of the company, and a symbol
of our perpetual quest for the next great idea.
This tribute in the Global Headquarters gives
Greatbatch patents the showcase they deserve.
Deliver Innovative Solutions
During this economic downturn, when other companies were cutting back on research and
development spending, Greatbatch increased its focus on this area. During 2009, we spent
approximately 8.5% of our sales revenue on research and development, compared to 7.5% last
year. This commitment to research and development investment will enable us to maintain our
leadership position in our core markets, further connect us to our customers and drive further
margin improvements once the markets recover.
The outcome of our R&D efforts is that we now have the capability to provide our OEM
customers full “Systems” solutions. This includes providing comprehensive products
and services, from development and regulatory submissions through manufacturing,
and supporting worldwide distribution. These systems are niche product solutions that
complement our OEM customers’ products and fit perfectly into our expertise and capabilities.
This strategy includes partnering with our OEM customers, including sharing technology and
resources, in order to bring these solutions to market. The benefits to our OEM customers
include shortening the time to market for these niche products by accelerating the velocity of
innovation, optimizing their supply chain, and ultimately providing them with cost efficiencies.
To date, this strategy and the Greatbatch brand have been well received by our customers.
Our “Systems” strategy is being coordinated through our QiG group. This group is focused
on facilitating the introduction of new and improved technologies in the medical device
markets for our OEM customers. This includes spending a significant amount of time
connecting with our customers in order to learn more about their technology roadmaps
and determine how Greatbatch’s technology and capabilities can enable those customers
to bring solutions to market.
10
11
Financial Highlights
(in thousands, except per share data)
Operations
Sales
Operating income
Net income (loss)
Diluted net earnings (loss)
2005
2006
20072
2008 2
2009
$ 241,097
$
271,142
$ 318,746
$ 546,644
$ 521,821
16,886
10,107
22,376
16,126
20,020
11,950
34,894
14,148
1,048
(9,001)
per common share
0.46
0.73
0.53
0.62
(0.39)
Diluted weighted average
shares outstanding
21,810
26,334
22,422
22,861
22,926
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 1, 2010
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 $0.001 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
Cash Flow and Balance Sheet
2005
2006
20072
2008 2
2009
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
Cash flow from operations
$
43,335
$
39,205
$
42,965
$
57,101
$
71,766
15(d) of the Act. Yes [ ] No [X]
Working capital
Total assets
Total debt
Total liabilities
Total stockholders’ equity
151,958
512,911
170,464
244,306
268,605
199,051
547,827
170,000
248,134
299,693
116,816
142,219
119,926
662,769
848,033
830,543
195,691
311,647
351,122
314,384
473,242
374,791
289,422
450,819
379,724
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 [ ]
1. Amounts exclude 1) acquisition related charges; 2) facility consolidation, manufacturing transfer and system integration charges; 3) asset
write-down and disposition charges; 4) litigation charge and 5) the income tax (benefit) related to these adjustments. See “Financial
Overview” in item 7 of Form 10-K for a reconciliation of adjusted amounts to GAAP.
2. Amounts have been retroactively adjusted, as required by GAAP, to reflect the change in accounting for convertible debt adopted in 2009.
See Note 1 “Summary of Significant Accounting Policies” in item 8 of Form 10-K.
12
Indicate by checkmark whether the Registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit and post such files). Yes [ ] No [ ]
ITEM
NUMBER
TABLE OF CONTENTS
PART I
PAGE
NUMBER
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of 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.
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 non-affiliates as of July 2,
2009 (last business day of most recently completed second fiscal quarter), based on the last sale price of $22.00,
as reported on the New York Stock Exchange: $501.2 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, 2010: 23,216,407
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 2010 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”
1
Business ...................................................................................................................................................
1A
Risk Factors .............................................................................................................................................
1B
Unresolved Staff Comments ...................................................................................................................
2
3
4
5
6
7
Properties .................................................................................................................................................
Legal Proceedings ...................................................................................................................................
Reserved ..................................................................................................................................................
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 Operations ..................
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
27
28
28
29
30
57
59
107
107
108
108
108
108
109
109
109
110
3
PART I
Acquisition Date
Acquired Company
Business at Time of Acquisition
ITEM 1.
BUSINESS
OVERVIEW
Wilson Greatbatch, co-inventor of the first successful implanted pacemaker, founded the predecessor to
Greatbatch, Inc. in 1970 to develop long-lived primary batteries to fuel pacemakers. His passion for
reliability and innovation is the foundation for Greatbatch’s full portfolio of capabilities and offerings.
Every day, Greatbatch supports and empowers its customers in their pursuit of revolutionary technology
solutions. Greatbatch, Inc. provides these innovative technologies to industries that depend on reliable,
long-lasting performance. 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.
We operate our business in two reportable segments – Greatbatch Medical and Electrochem Solutions
(“Electrochem”). During 2009, we rebranded our Implantable Medical Component (“IMC”) segment as
Greatbatch Medical. The Greatbatch Medical segment designs and manufactures systems, components
and devices for the Cardiac Rhythm Management (“CRM”), Neuromodulation, Vascular Access and
Orthopaedic markets. Our Greatbatch Medical customers include large multi-national original equipment
manufacturers (“OEMs”). Greatbatch Medical products include: 1) batteries, capacitors, filtered and
unfiltered feedthroughs, engineered components and enclosures used in Implantable Medical Devices
(“IMDs”); 2) instruments and delivery systems used in hip and knee replacement, trauma and spine
surgeries as well as hip, knee and shoulder implants; and 3) introducers, catheters, steerable sheaths and
implantable stimulation leads. Additionally, Greatbatch Medical offers value-added assembly and design
engineering services for medical systems and devices within the markets in which it operates.
Electrochem is a leader in technology solutions for critical industrial applications, including customized
battery power and wireless sensing systems. Originating from the lithium cell invented for the
implantable pacemaker by our founder, Wilson Greatbatch, our technology and superior quality and
reliability is utilized in markets world-wide.
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.
Founded in 1970, designed and manufactured
batteries for IMDs and commercial applications.
August 1998
Hittman Materials and
Medical Components, Inc.
Founded in 1962, designed and manufactured
ceramic and glass feedthroughs and specialized
porous coatings for electrodes used in IMDs.
August 2000
Battery Engineering, Inc. Founded in 1983, designed and manufactured
high-energy density batteries for industrial,
commercial, military and medical applications.
June 2001
Sierra-KD Components
division of Maxwell
Technologies, Inc.
Founded in 1986, designed and manufactured
ceramic electromagnetic filtering capacitors and
integrated them with wire feedthroughs for use in
IMDs as well as military, aerospace and
commercial applications.
July 2002
Globe Tool and
Manufacturing Company,
Inc.
Founded in 1954, designed and manufactured
precision enclosures used in IMDs and
commercial products used in the aerospace,
electronic and automotive sectors.
March 2004
NanoGram Devices
Corporation
Founded in 1996, developed nanoscale materials
for battery and medical device applications.
April 2007
BIOMEC, Inc.
June 2007
Enpath Medical, Inc.
October 2007
IntelliSensing LLC
November 2007
Quan Emerteq LLC
Established in 1998, provided medical device
design and component integration to early-stage
and established customers.
Founded in 1981, designed, developed, and
manufactured venous introducers and dilators,
implantable leadwires, steerable sheaths and
steerable catheters.
Founded in 2005, designed and manufactured
battery-powered wireless sensing solutions for
commercial applications.
Founded in 1998, designed, developed, and
manufactured catheters, stimulation leadwires,
microcomponents and assemblies.
November 2007
Engineered Assemblies
Corporation
Founded in 1984, designed and integrated custom
battery solutions and electronics focused on
rechargeable systems.
January 2008
P Medical Holding SA
February 2008
DePuy Orthopaedics’
Chaumont, France
manufacturing facility
Founded in 1994, designed, manufactured and
supplied delivery systems, instruments and
implants for the orthopaedic industry.
Manufactured hip and shoulder 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 2009, 2008 and 2007 ended on January 1, 2010, January 2, 2009 and December 28, 2007,
respectively. Fiscal year 2008 contained fifty-three weeks while fiscal years 2009 and 2007 contained
fifty-two weeks.
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5
SEGMENT INFORMATION
We operate our business in two reportable segments – Greatbatch Medical and 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 13
“Business Segment Information” of the Notes to Consolidated Financial Statements contained at Item 8
of this report.
GREATBATCH MEDICAL
CRM & Neuromodulation - An IMD is an instrument that is surgically inserted into the body to provide
diagnosis and/or therapy. One sector of the IMD market is 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 sector of the IMD market is neuromodulation, 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
Principal Illness or Symptom
Pacemakers ....................................................... Abnormally slow heartbeat (Bradycardia)
ICDs .................................................................. Rapid and irregular heartbeat (Tachycardia)
CRT/CRT-Ds .................................................... Congestive heart failure
Neurostimulators ............................................... Chronic pain, movement disorders, epilepsy, obesity or
Drug pumps ....................................................... Diabetes or chronic pain
depression
We believe that the CRM and Neuromodulation markets continue to exhibit 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:
(cid:2) Advances in medical technology – new therapies will allow physicians to use IMDs to treat a
wider range of patients with various heart diseases.
(cid:2) New, more sophisticated implantable devices – device manufacturers are developing new CRM
devices and adding new features to existing products (such as RF telemetry) which require
increased energy and power. At the same time, device manufacturers are trying to reduce the size
of their devices. We believe that our proprietary batteries and capacitors are well positioned to
meet the needs of these more sophisticated, smaller devices.
(cid:2) Expanding patient population – the patient groups that are eligible for CRM devices have
increased. The number of people in the U.S. that are over age 50 is expected to double in the
next 10 years.
(cid:2) Growth within neuromodulation – neuromodulation applications are growing at a faster pace
than our traditional markets and are expected to expand as new therapeutic applications are
identified.
(cid:2) New performance requirements – government regulators are increasingly requiring that IMDs be
protected from electromagnetic interference (“EMI”).
(cid:2) Global markets – increased market penetration worldwide.
Vascular Access – Includes introducers and catheters that deliver therapies for coronary and
neurovascular disease, peripheral vascular disease, neuromodulation, CRM, as well as products for
medical imaging and drug and pharmaceutical delivery. Introducers enable physicians to create a
conduit through which they can insert infusion catheters, implantable ports, pacemaker leads and other
therapeutic devices into a blood vessel. A catheter is a tube that can be inserted into a blood vessel to
allow drainage, injection of fluids, or access by surgical instruments.
In order to introduce a catheter or pacemaker lead into a vein, a hypodermic needle is first used to access
the vein. A guide wire is then inserted through the hypodermic needle and the needle is removed. An
introducer consists of a hollow sheath and a dilator which is inserted over the guide wire to expand the
opening. The guide wire and dilator are then removed, leaving only the hollow sheath through which
the catheter or pacemaker lead is introduced. Once the catheter or pacemaker lead is in place, the vessel
introducer sheath is removed. We market these introducer and catheter products in kits that contain the
disposable devices necessary to perform procedures and also in bulk for packaging by the customer with
its own devices.
These products seek to capitalize on the growth in the Neuromodulation and CRM markets, specifically
with new indications for neuromodulation devices and procedures. 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. In addition to those factors that are
driving CRM and Neuromodulation markets, increased demand is also being driven by continued focus
on minimally invasive procedures. Patients and health care providers are looking for minimally invasive
technologies to treat disease and are expanding their use of both catheter based procedures and
associated vascular access therapies.
Orthopaedic – Orthopaedic implants are used in reconstructive surgeries to replace or repair hips, knees
and other joints, such as shoulders, ankles and elbows that have deteriorated as a result of disease or
injury. Trauma implant systems are used primarily to reattach or stabilize damaged bone or tissue while
the body heals. Spinal implant systems are used by orthopaedic surgeons and neurosurgeons in the
treatment of degenerative diseases, deformities and injuries in various regions of the spine.
Each implant system typically has an associated instrument set that is used in the surgical procedure to
insert that specific implant system. Instruments included in a set vary by implant system. Usually,
instrument sets are sterilized after each use and then reused, however, recent trends are moving towards
disposable instrumentation, which the Company is positing itself to take advantage of. Cases are used to
store, transport and arrange implant systems and other medical devices and related surgical instruments.
Cases are generally designed to allow for sterilization and re-use after an implant or other surgical
procedure is performed. The majority of cases are tailored for specific implant procedures so that the
instruments, implants and other devices are arranged within the case to match the order of use in the
procedure and are securely held in clearly labeled, custom-formed pockets.
Many of the factors affecting the orthopaedic market segment are similar to the CRM and Vascular
Access markets. 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 orthopaedic market has strong growth fundamentals.
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The following table summarizes information about our Greatbatch Medical products:
Product
Description
Principal Product Attributes
Batteries
Capacitors
EMI filters
Power sources include:
(cid:3) Lithium iodine (“Li Iodine”)
(cid:3) Lithium silver vanadium oxide (“Li SVO”)
(cid:3) Lithium carbon monoflouride (“Li CFx”)
(cid:3) Lithium ion rechargeable (“Li Ion”)
(cid:3) 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
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
(cid:3) Machined
(cid:3) Molded and over molded products
Enclosures and related
components
(cid:3) Titanium
(cid:3) Stainless steel
Value-added
assemblies
Combination of multiple components in a single
package/unit
Leads
Cardiac, neuro and hearing restoration
stimulation leads
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
Custom and unique configurations that increase
therapy effectiveness, provide finished device
design and manufacturing
Introducers
Creates a conduit to insert infusion catheters,
guidewires, implantable ports, pacemaker leads
and other therapeutic devices into a blood vessel
Variety of sizes and materials that facilitate
problem-free access in a variety of clinical
applications
Catheters
Delivers therapeutic devices to specific sites in the
body
Enable safe, simple delivery of therapeutic and
diagnostic devices, soft tip and steerability.
Provide regulatory clearance and finished device
Trays
Delivery systems for cleaning and sterilizing
Deliver turn-key full service kits
orthopaedic instruments and implants
Implants
Orthopaedic implants for reconstructive hip,
knee, shoulder, trauma and spine procedures
Instruments
Orthopaedic instruments for reconstructive and
trauma procedures
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
A majority of the products Greatbatch Medical sells incorporate proprietary technologies. These
proprietary technologies provide an entry barrier for new competitors, and further limit existing
competitors from duplicating our products. In addition to these proprietary technologies, our proprietary
“know-how” in the manufacture of these products provides further barriers to our competition.
ELECTROCHEM
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 and non-rechargeable power and Wireless Sensing solutions 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. The product designs incorporate protective circuitry; glass-to-metal hermetic seals,
fuses and diodes help ensure safe, reliable power as devices are subjected to harsh conditions.
Our secondary, or rechargeable, power solutions include a number of chemistries including lithium,
nickel and lead acid, and incorporate advanced electronics, monitoring and security features and other
capabilities. We provide value-added solutions to complement our secondary power systems such as
charging and battery management.
Electrochem’s unique Wireless Sensing Systems are a complete solution, incorporating advanced,
ruggedized sensors, intelligent gateways and customized software. Electrochem’s patented system
utilizes our own batteries and offers control and monitoring for applications in existing markets such as
energy, and new markets such as food and beverage and water/wastewater process control.
The following table summarizes information about our Electrochem products:
Product
Description
Principal Product Attributes
Cells
(cid:3) Moderate-rate
(cid:3) Spiral (high rate)
Optimized rate capability, shock and vibration
resistant, high and low temperature tolerant
High energy density
Primary and rechargeable
battery packs
Packaging 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, temperature and flow;
withstands harsh environments
RESEARCH AND DEVELOPMENT
Our position as a leading developer and manufacturer of components for IMDs and Electrochem
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.
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9
In 2009, the Company formed the QiG Group LLC (“QiG”). QiG facilitates the introduction of new and
improved technologies in medical device markets by investing in the development of innovations. This
includes passive investments in startup companies as well as long-term systems level projects, which
augment the Company’s Greatbatch Medical business. These investments support the development of
ideas and technologies that can be used to better serve our OEM customers and typically have longer
development times than our core Greatbatch Medical products.
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 396 active U.S. patents and 295 active
foreign patents. We also have 247 U.S. and 455 foreign pending patent applications at various stages of
approval. During the past three years, we have been granted 63 new U.S. patents, of which 29 were
granted in 2009. 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.
We are also a party to several license agreements with third parties under which we have obtained, on
varying terms, exclusive or non-exclusive rights to patents held by them. An example of these
agreements is for the basic technology used in our wet tantalum capacitors, filtered feedthroughs and
MRI compatible lead systems. 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 facilities in Raynham, MA, Alden, NY, Clarence, NY, and Minneapolis, MN are ISO-9001
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 manufacturing facilities in Tijuana, Mexico, Plymouth, MN, Clarence, NY,
Chaumont, France, Orvin, Switzerland, Columbia City, IN and Indianapolis, IN sites are certified to the
requirements of ISO-13485(2003) for the design (where applicable) and manufacture of components,
assemblies and finished medical devices. Along with ISO-13485(2003), the facilities (where applicable)
meet individual country and registration requirements in order to ship product worldwide. 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
Orthopaedic markets. Our Plymouth, MN and all Orthopaedic facilities are also registered with the FDA,
thus enabling the manufacture and distribution of FDA cleared medical devices within the U.S.
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.
SALES AND MARKETING
Products from our Greatbatch Medical 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 2009, approximately 47% of our products were sold in the U.S. Sales outside 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 13 “Business Segment Information” of the
Notes to Consolidated Financial Statements contained at Item 8 of this report.
Although the majority of our medical customers contract with us to develop custom components and
assemblies to fit their product specifications, we also provide system level solutions ready for market
distribution by OEM’s. 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. For system level solutions we partner with our
customers’ Research, Marketing, and Clinical groups to jointly develop technology platforms in
alignment with their product roadmaps and therapy needs.
We sell our Electrochem cells and battery packs directly to the end user, directly to manufacturers that
incorporate our products into other devices for resale, and 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,
conferences and shows. We also place advertisements in relevant trade publications and on the Internet.
Firm backlog orders at January 1, 2010 and January 2, 2009 were approximately $178.2 million and
$190.4 million, respectively. Most of these orders are expected to be shipped within one year. See
Customers section below for further discussion.
CUSTOMERS
Our Greatbatch Medical customers include large multi-national OEMs and their affiliated subsidiaries
such as, in alphabetical order here and throughout this report, Biotronik, Boston Scientific, DePuy,
Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer.
During 2009 and 2008, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical
collectively accounted for 63% and 56% of our total sales, respectively.
The nature and extent of our selling relationship with each OEM customer is different in terms of
products purchased, selling prices, product volumes, ordering patterns and inventory management. For
customers with long-term contracts, we have negotiated fixed pricing arrangements for pre-determined volume
levels with pricing fixed within each level. In general, the higher the volume level, the lower the pricing. We
have pricing arrangements with our customers that at times do not specify minimum order quantities.
We recognize revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable, the buyer is obligated to pay us
(i.e., not contingent on a future event), the risk of loss is transferred, there is no obligation of future
performance, collectability is reasonably assured and the amount of future returns can reasonably be estimated.
Those criteria are met at the time of shipment when title passes.
10
11
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 manufacturers changes periodically.
Consequently, these and other factors can significantly impact our sales in any given period. Our
customers may initiate field actions with respect to market-released products. These actions may include
product recalls or communications with a significant number of physicians about a product or labeling
issue. The scope of such actions can range from very minor issues affecting a small number of units to
more significant actions. There are a number of factors, both short-term and long-term, related to these
field actions that may impact our results. In the short-term, if a product has to be replaced, or customer
inventory levels have to be restored, demand will increase. Also, changing customer order patterns due to
market share shifts or accelerated device replacements may also have a positive or negative impact on our
sales results in the near-term. These same factors may have longer-term implications as well. Customer
inventory levels may ultimately have to be rebalanced to match new demand.
The initial term of our supply agreement with Boston Scientific pursuant to which Boston Scientific
purchases a certain percentage of the batteries, capacitors, filtered feedthroughs and case halves it uses
in its IMDs ends on December 31, 2010. The agreement may be renewed for one or more four-year
renewal terms upon mutual agreement of the parties. We are actively negotiating a follow-on agreement
with targeted completion during 2010.
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.
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 Greatbatch Medical business include 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
Medical batteries
Capacitors
Feedthroughs
EMI filtering
Enclosures
Machined and molded
components
Competitors
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
Numerous
Value added assembly
Numerous
Catheters
Leads
Orthopaedic trays,
instruments and
implants
Teleflex
Oscor
Symmetry
Paragon
Accelent
Teleflex
Viasys
Orchid
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.
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13
To varying degrees, our products are subject to regulation by numerous government agencies, including
the FDA and comparable foreign agencies. The medical product components we manufacture are not
subject to regulation by the FDA. 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.
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) submission 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 by and issued to 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 (21 CFR 820). 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 product related 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. Our goal is to fill any open employment positions internally. We further meet our hiring
needs through outside sources as required. We have a comprehensive succession program in place for
senior management in order to ensure we will be able to implement our strategic plan.
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 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 employees 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 1, 2010:
Manufacturing
General and administrative
Sales and marketing
Research, development and engineering
Chaumont, France facility
Switzerland facilities
Tijuana, Mexico facility
Total
1,442
126
52
197
214
214
816
3,061
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 at our Chaumont, France and Tijuana,
Mexico facilities are represented by a union. Approximately 159 and 196 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, 2010. 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.
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Mauricio Arellano, age 43, is Senior Vice President and the Business Leader for our Cardiac and
Neurology Group and has served in that office since October 2008. 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 53, is Senior Vice President and Business Leader for our Electrochem business
and has served in that office since January 2005. 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.
Susan H. Campbell, age 45, is Senior Vice President and the Business Leader for our Orthopaedics
Group and has served in that office since October 2008. 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 59, is Vice President for Human Resources, and has served in that office since
April 2004. She joined our Company in October 1998 as Director of Human Resources and
Organization Development.
Thomas J. Hook, age 47, has served as our President & Chief Executive Officer since August 2006.
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 56, is Senior Vice President & Chief Financial Officer, and has served in that
office 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 52, is Vice President, General Counsel & Secretary, and has served in that
office 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.
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 stated or implied 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; the
resolution of various legal actions brought against the Company; and other risks and uncertainties that
arise from time to time and are described in Item 1A “Risk Factors” 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.
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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 2009, Boston Scientific, Johnson & Johnson, Medtronic and St. Jude Medical, collectively accounted for
approximately 63% 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 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, Orthopaedic, 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.
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. The supply and price of these raw materials are susceptible
to fluctuations due to transportation, government regulations, price controls, economic climate or other
unforeseen circumstances. Increasing global demand for these raw materials we need for our business
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. 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 1, 2010, we had $406.3 million of intangible assets, representing 49% 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. Definite lived intangible assets are amortized over their estimated useful
lives and are tested for impairment 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 $82.1 million of our net
intangible assets at January 1, 2010, will continue to be amortized. We incurred total amortization
expenses relating to these intangible assets of $10.1 million in 2009. These expenses will reduce our
future earnings or increase our future losses.
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.
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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, or 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 which could harm our operating results or financial
condition. 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. Even if these
assertions do not lead to product liability or contract claims, they could harm our reputation and our
customer relationships.
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:
(cid:2) the fixed nature of a substantial percentage of our costs, which results in our operations being
particularly sensitive to fluctuations in revenue;
(cid:2) 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;
(cid:2) timing of orders placed by our principal customers who account for a significant portion of our
revenues; and
(cid:2) 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 1, 2010, we held 396 active U.S.
patents and 295 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.
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.
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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.
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. 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.
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:
(cid:2) inaccurate assessments of potential liabilities associated with the acquired businesses;
(cid:2) the existence of unknown or undisclosed liabilities associated with the acquired businesses;
(cid:2) diversion of our management’s attention from our core businesses;
(cid:2) potential loss of key employees or customers of the acquired businesses;
(cid:2) difficulties in integrating the operations and products of an acquired business or in realizing projected
revenue growth, efficiencies and cost savings; and
(cid:2) increases in indebtedness and limitation in our ability to access capital if needed.
Our 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.
One facet of our growth 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.
We may face competition 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 medical products may intensify in the future.
One or more of our medical 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.
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 or
operating results. Any disruption of operations at any of our facilities could harm our business.
We intend to develop new products and expand into new markets, which may not be successful
and could harm our operating results.
We intend to expand into new markets and develop new products based on our existing technologies and
engineering capabilities. 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. Additionally, many of the new
products we are working on take longer and more resources to develop and commercialize, including
obtaining regulatory approval. Specific risks in connection with expanding into new markets include the
inability to transfer our quality standards and technology into new products, failure to receive regulatory
approval for our new products, the failure of customers to accept our new products, longer product
development cycles and competition. We may not be able to successfully manage expansion into new
markets and products and these unsuccessful efforts may harm our financial condition and operating
results.
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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 outside the U.S., which accounted for 53% of sales for 2009, and our Mexico, Switzerland and
France locations are subject to certain foreign country risks. Our international sales and operations are,
and will continue to be, subject to a number of risks and potential costs, including:
(cid:2) changes in foreign regulatory requirements;
(cid:2) local product preferences and product requirements;
(cid:2) longer-term receivables than are typical in the U.S.;
(cid:2) difficulties in enforcing agreements through certain foreign legal systems;
(cid:2) less protection of intellectual property in some countries outside of the U.S.;
(cid:2) trade protection measures and import and export licensing requirements;
(cid:2) work force instability;
(cid:2) political and economic instability; and
(cid:2) complex tax and cash management issues.
We earn revenue and incur expenses related to our foreign sales and 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 1, 2010, we had $289.4 million of 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.
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 FDA and similar governmental agencies. This
regulation covers a wide variety of product activities from design and development to labeling,
manufacturing, promotion, sales and distribution. Compliance with this regulation 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.
Regulations issued in the healthcare industry 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.
In response to perceived increases in health care costs in recent years, there have been and continue to
be proposals by the Obama administration, members of Congress, state governments, regulators and
third-party payors to control these costs and, more generally, to reform the U.S. healthcare system.
Certain of these proposals would limit the prices our OEM customers are able to charge for their
products or the amounts of reimbursement available for their products, and could limit the acceptance
and availability of those products. Additionally, legislative proposals currently pending would impose
significant new taxes on medical device makers such as our customers which may then be passed on to
their suppliers such as us.
These taxes, if implemented, would result in a significant increase in the tax burden on our industry,
which could have a material, negative impact on our results of operations and our cash flows. Draft
legislation would also impose new payroll taxes, excise taxes, income taxes and other taxes; implement
changes to Medicare and Medicaid; establish a government health insurance option and allow the
government to mandate minimum levels of coverage and make comparative effectiveness
recommendations. In summary, if legislation is enacted and depending on the form it takes, it could
change the way healthcare is developed and delivered, and may materially impact numerous aspects of our
business, results of operations and financial condition.
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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 products or restricting
disposal of batteries may be imposed. In addition, we cannot predict the effect that additional or
modified environmental regulations may have on us or our customers.
Consolidation in the healthcare industry could result in greater competition and reduce our
Greatbatch Medical 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 Greatbatch Medical 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 medical devices 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The following table sets forth information about our significant facilities as of January 1, 2010:
Location
Sq. Ft. Own/Lease
Alden, NY ........................ 125,000
Chaumont, France ............ 59,200
Clarence, NY.................... 117,800
Clarence, NY.................... 20,800
Clarence, NY.................... 18,600
Cleveland, OH.................. 16,900
Columbia City, IN ............ 40,000
Corgemont, Switzerland .. 34,400
Indianapolis, IN................ 82,600
Minneapolis, MN ............. 72,000
Orvin, Switzerland ........... 34,400
Plymouth, MN.................. 95,700
Raynham, MA .................. 81,000
Tijuana, Mexico ............... 144,000
Own
Own
Own
Own
Lease
Lease
Lease
Lease
Own
Own
Own
Lease
Own
Lease
Principal Use
Medical battery and capacitor manufacturing
Manufacturing of orthopaedic and surgical goods
Corporate offices and RD&E
Machining and assembly of components
Machining and assembly of components
Office and lab space for design engineering team
Manufacturing of orthopaedic and surgical goods
Manufacturing of orthopaedic and surgical goods
Manufacturing of orthopaedic and surgical goods
Enclosure manufacturing and engineering
Manufacturing of orthopaedic and surgical goods
Introducers, catheters and leads manufacturing and
engineering
Commercial battery manufacturing and RD&E
Value-added assembly, and feedthrough, electrode
and EMI filtering manufacturing
In general, we believe these facilities are suitable and adequate for our current business and have
capacity to meet our future growth objectives without the need for additional expansion. In 2010, we
announced the opening of our Orthopaedic design center located in Warsaw, IN. The new facility will
be equipped with the latest rapid prototyping equipment and is being leased. Additionally, further
investment is planned over the next three years to drive improvements and growth in all Orthopaedic
locations. In 2009, we ceased operations at our Blaine, MN, Canton, MA and Teterboro, NJ facilities.
ITEM 3.
LEGAL PROCEEDINGS
We are party to various legal actions arising in the normal course of business. A complete list of all
material pending legal actions against the company are set forth at Note 11 “Commitments and
Contingencies” of the Notes to Consolidated Financial Statements contained at Item 8 of this report.
Except for the items set forth in Note 11, we do not believe that the ultimate resolution of any pending
legal actions will have a material adverse effect on our consolidated results of operations, financial
position or cash flows. However, 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 and beyond.
26
27
ITEM 4.
RESERVED
ITEM 6.
SELECTED FINANCIAL DATA
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:
2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$23.48
19.79
27.08
27.41
Low
$17.18
15.49
16.86
17.72
Close
$18.79
17.20
25.78
26.72
$27.45
23.48
23.20
22.21
$17.27
18.50
20.06
17.99
$19.71
22.00
21.63
19.23
As of March 2, 2010, there were approximately 240 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 accounts holding Company stock in the
401(k) plan including accounts for active and former employees. We have not paid cash dividends and
currently intend to retain any earnings to further develop and grow our business.
PERFORMANCE GRAPH
The following graph compares for the five year period ended January 1, 2010, 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 over 300 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 December 31, 2004 and assumes
reinvestment of dividends. The stock price performance shown on the following graph is not necessarily
indicative of future price performance:
$140
$120
$100
$80
$60
12/31/04
12/30/05
12/29/06
12/28/07
1/02/09
1/01/10
GREATBATCH, INC.
HEMSCOTT PEER GROUP INDEX
S&P SMALLCAP 600 INDEX
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:
Sales
Jan. 1,
2010 (1)(4)(5)
Jan. 2,
2009 (1)(3)(4)
Dec. 28,
2007 (1)(3)(4)
Dec. 29,
2006(1)
Dec. 30,
2005(1)(2)
(in thousands, except per share data)
$
521,821
$
546,644
$
318,746
$
271,142
$
241,097
Income (loss) before income taxes
(18,177)
20,517
23,919
23,534
15,464
Income (loss) per share
Basic
Diluted
Consolidated Balance Sheet Data:
Working capital
$
(0.39)
$
0.63
$
0.54
$
0.74
$
0.47
(0.39)
0.62
0.53
0.73
0.46
$
119,926
$
142,219
$
116,816
$
199,051
$
151,958
Total assets
830,543
848,033
662,769
547,827
512,911
Long-term obligations
(1) From 2005 to 2010, we recorded material charges in other operating expenses, net, primarily related
to our cost savings and consolidation initiatives. Additional information is set forth at Note 9 “Other
Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of
this report.
379,890
247,239
205,859
200,261
317,575
(2) Beginning in 2006, we were required to begin recording compensation costs related to our stock-
based compensation awards. If recorded in 2005, income (loss) before income taxes would have
been lower by $3.4 million. Additional information is set forth at Note 8 “Stock-Based
Compensation” of the Notes to 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. In connection
with these acquisitions, we recorded charges in 2008 and 2007 of $8.7 million and $18.4 million,
respectively, related to inventory step-up amortization and in process research and development.
(4) Beginning in 2009, we were required to begin recording interest expense on our convertible debt
instruments that may be settled in cash upon conversion at our nonconvertible debt borrowing rate.
As required, the 2008 and 2007 Consolidated Financial Statements have been retroactively adjusted
to reflect the adoption of this change in accounting as if it were in effect on the date the convertible
debt was originally issued (March 2007). Additional information is set forth at Note 1 “Summary of
Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item
8 of this report.
In 2009, we recorded a $34.5 million charge related to the Electrochem Litigation and $15.9 million
related to the write-down of trademarks and tradenames. Additional information is set forth at Note
11 “Commitments and Contingencies” and Note 4 “Intangible Assets” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report.
(5)
28
29
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
(cid:2) Our business
(cid:2) Our acquisitions
(cid:2) Our customers
(cid:2) Financial overview
(cid:2) CEO message
(cid:2) Product development
Our Critical Accounting Estimates
(cid:2) Valuation of goodwill, other identifiable intangible assets and IPR&D
(cid:2) Stock-based compensation
(cid:2)
(cid:2) Tangible long-lived assets
(cid:2) Provision for income taxes
Inventories
Cost Savings and Consolidation Efforts
Our Financial Results
(cid:2) Results of operations table
(cid:2) Fiscal 2009 compared with fiscal 2008
(cid:2) Fiscal 2008 compared with fiscal 2007
(cid:2) Liquidity and capital resources
(cid:2) Off-balance sheet arrangements
(cid:2) Litigation
(cid:2) Contractual obligations
(cid:2)
(cid:2)
Inflation
Impact of recently issued accounting standards
Our Business
We operate our business in two reportable segments – Greatbatch Medical and Electrochem Solutions
(“Electrochem”). During 2009, we rebranded our Implantable Medical Component (“IMC”) segment as
Greatbatch Medical. The Greatbatch Medical segment designs and manufactures systems, components
and devices for the Cardiac Rhythm Management (“CRM”), Neuromodulation, Vascular Access and
Orthopaedic markets.
Our Greatbatch Medical customers include large multi-national original equipment manufacturers
(“OEMs”). Our products include: 1) batteries, capacitors, filtered and unfiltered feedthroughs,
engineered components and enclosures used in Implantable Medical Devices (“IMDs”); 2) instruments
and delivery systems used in hip and knee replacement, trauma and spine surgeries as well as hip, knee
and shoulder implants; and 3) introducers, catheters, steerable sheaths and implantable stimulation
leads. Additionally, Greatbatch Medical offers value-added assembly and design engineering services
for medical systems and devices within the markets in which it operates.
Electrochem is a leader in technology solutions for critical industrial applications, including customized
battery power and wireless sensing systems. Originating from the lithium cell invented for the
implantable pacemaker by our founder, Wilson Greatbatch, our technology and superior quality and
reliability is utilized in markets world-wide.
Our Acquisitions
On April 3, 2007, we acquired substantially all of the assets of BIOMEC, Inc. (“BIOMEC”).
BIOMEC was a biomedical device company based in Cleveland, OH. The results of BIOMEC’s
operations were included in our Greatbatch Medical 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 designed,
developed, manufactured and marketed 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 Greatbatch Medical 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.
On October 26, 2007, we acquired substantially all of the assets of IntelliSensing, LLC (“IntelliSensing”).
IntelliSensing designed and manufactured 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 designed, developed and manufactured single use medical device products for the vascular,
CRM and neuromodulation markets. The results of Quan’s operations were included in our Greatbatch
Medical 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 was 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.
30
31
On January 7, 2008, we acquired P Medical Holding SA (“Precimed”) which had 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 was a leading technology-driven
supplier to the orthopaedic industry. The results of Precimed’s operations were included in our
Greatbatch Medical 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 Greatbatch Medical
business from the date of acquisition. The purchase price and other direct costs of the Chaumont
Facility totaled $28.7 million, which we 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 and 2007 levels. However,
we will continue to pursue strategically targeted and opportunistic acquisitions.
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 Greatbatch Medical customers include large multi-national 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. During 2009 and 2008, Boston
Scientific, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for 63% and
56% of our total sales, respectively.
The initial term of our supply agreement with Boston Scientific pursuant to which Boston Scientific
purchases a certain percentage of the batteries, capacitors, filtered feedthroughs and case halves it uses
in its IMDs ends on December 31, 2010. The agreement may be renewed for one or more four-year
renewal terms upon mutual agreement of the parties. We are actively negotiating a follow-on
agreement with targeted completion during 2010.
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.
Financial Overview
For 2009, revenue totaled $521.8 million, a 5% decrease from 2008, which included the benefit of an
additional week of operations due to our fiscal year ending on the closest Friday to December 31. This
additional week added approximately $10 million to 2008 sales. During 2009, 7%
CRM/Neuromodulation revenue growth was offset by decreases in Orthopaedic, Vascular and
Electrochem revenue which were impacted by the uncertain health care and economic environment.
For 2008, sales were $546.6 million, an increase of 71% over 2007. In addition to the extra week of
operations, 2008 revenue benefitted from our acquisitions in 2008 and 2007, which added
approximately $208.2 million of incremental revenue, as well as organic growth of 7%.
Over the last three years, we were extremely focused on the integration of our acquisitions. As a result,
we incurred additional costs related to the implementation of numerous cost savings, consolidation and
integration initiatives. Additionally, during 2009, we accrued $34.5 million in connection with our
Electrochem Litigation (See Note 11 “Commitments and Contingencies” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report) and incurred a $15.9 million tradename write-
down due to the successful rebranding of our Greatbatch Medical segment. During 2008 and 2007, we
incurred IPR&D charges and inventory step-up amortization expense related to our acquisitions of $8.7
million and $18.4 million, respectively. Including these charges, operating income for 2009, 2008 and
2007 was $1.0 million, $34.9 million and $20.0 million, respectively.
We prepare our consolidated financial statements in accordance with generally accepted accounting
principles in the United States of America (“GAAP”). Additionally, we consistently report and discuss
in our quarterly earnings releases and investor presentations adjusted operating income and margin,
adjusted net income and adjusted earnings per diluted share. These adjusted amounts consist of GAAP
amounts excluding (i) acquisition-related charges, (ii) facility consolidation, manufacturing transfer and
system integration charges, (iii) asset write-down and disposition charges, (iv) litigation charges and (v)
the income tax (benefit) related to these adjustments. We believe that reporting these amounts provides
important supplemental information to our investors and creditors seeking to understand the financial
and business trends relating to our financial condition and results of operations. Additionally, the
performance based compensation of our executive management is determined utilizing these adjusted
amounts.
Adjusted operating income for 2009, 2008 and 2007 was $62.6 million, $58.1 million and $43.7
million, respectively. Adjusted operating income expressed as a percentage of sales, or adjusted
operating margin, was 12.0%, 10.6% and 13.7%. The decrease in this percentage from 2007 was a
direct result of our acquisitions. Our goal is to improve adjusted operating margin to approximately
20% over the next three to five years through our initiatives to improve the operating performance of
the acquired companies and through the development of innovative products to drive future revenue
growth. Evidence of the progress we have made in these initiatives can be seen in the improvement of
adjusted operating margin from 2008 to 2009. Our adjusted operating margin is expected to be
between 12.0% and 13.5% for 2010.
32
33
A reconciliation of GAAP operating income to adjusted operating income is as follows (in thousands):
Operating income as reported:
IPR&D write-down
Acquisition charges (inventory step-up)
Electrochem litigation charge
Write-down of intangible assets
Consolidation costs
Integration costs
Asset dispositions & other
Operating income – adjusted
Operating margin – adjusted
January 1,
2010
$ 1,048
-
-
34,500
15,921
7,069
3,077
948
$ 62,563
12.0%
Year Ended
January 2,
2009
$ 34,894
2,240
6,422
-
-
9,010
5,369
199
$ 58,134
10.6%
December 28,
2007
$ 20,020
16,093
2,276
-
-
5,228
-
96
$ 43,713
13.7%
Beginning in 2009, we adopted a change in accounting that required issuers of convertible debt that
may be settled in cash upon conversion, such as our CSN II (See Note 6 “Debt” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report), to recognize interest expense on
those instruments at their nonconvertible debt borrowing rate. As required, the 2008 and 2007
Consolidated Financial Statements presented in this report have been retroactively adjusted to reflect
the adoption of this change in accounting (See Note 1 “Summary of Significant Accounting Policies” of
the Notes to Consolidated Financial Statements contained in Item 8 of this report).
Our GAAP diluted earnings (loss) per share (“EPS”) for 2009, 2008 and 2007 were ($0.39), $0.62 and
$0.53, respectively. Adjusted diluted earnings per share, which excludes the items discussed above,
were $1.52, $1.40 and $1.27, respectively. A reconciliation of GAAP income (loss) before taxes to
adjusted net income and adjusted diluted EPS is as follows (in thousands, except per share amounts):
Income (loss) before taxes as reported:
IPR&D write-down
Acquisition charges (inventory step-up)
Electrochem litigation charge
Write-down of intangible assets
Consolidation costs
Integration costs
Asset dispositions & other
Sub-total
Convertible debt accounting change
Gain on extinguishment of debt & sale of
investment security
Adjusted income before taxes
Adjusted provision for income taxes
Adjusted net income
Adjusted diluted EPS
Number of shares (thousands)
January 1,
2010
$ (18,177)
-
-
34,500
15,921
7,069
3,077
948
43,338
7,311
Year Ended
January 2,
2009
$ 20,517
2,240
6,422
-
-
9,010
5,369
199
43,757
6,786
December 28,
2007
$ 23,919
16,093
2,276
-
-
5,228
-
96
47,612
4,769
-
50,649
14,688
$ 35,961
(3,242)
47,301
14,427
$ 32,874
(8,474)
43,907
14,270
$ 29,637
$ 1.52
24,000
$ 1.40
24,100
$ 1.27
24,400
34
We completed five acquisitions in 2007 and two in the first two months of 2008. These acquisitions
were enabled by our cash position and the financing we put in place during 2007. During 2009, we
generated $71.8 million of cash flow from operations compared to $57.1 million and $43.0 million in
2008 and 2007, respectively. This improvement is a direct result of the strategic initiatives discussed
in “Cost Savings and Consolidation Efforts,” which were designed to improve operational efficiency.
As of January 1, 2010, we had $37.9 million in cash and cash equivalents and $289.4 million of debt
including $30.5 million that comes due in June 2010. The remaining debt matures in 2012 and 2013.
CEO Message
I am proud of our strategic accomplishments in 2009. This year provided additional evidence of our
execution and progress towards achieving both our short-term operational goals and long-term
strategic objectives. With that said, I was not satisfied with the level of revenue we achieved in 2009.
Despite the turbulent global economy and uncertain healthcare environment, the markets we operate in
provide us opportunities. We have taken and will continue to take measures and actions that enable us
to capitalize on those opportunities.
Improving operating performance is a critical part of our long-term plan to drive shareholder value.
During 2009, we completed a number of strategic initiatives designed to improve operational
efficiency, including the consolidation of five facilities, the completion of four ERP system and back
office integrations, and the streamlining of our Orthopaedic operations to improve on-time delivery
and lead-time. Additionally, during 2009, we took steps and made difficult cost cutting decisions to
help offset the impact of lower revenue levels and higher R&D investment on our profitability. The
benefit of these initiatives can be seen in our financial results, which included the achievement of our
12% adjusted operating margin goal for 2009, 26% growth in cash flow from operations to $72 million
as well as the expansion of our gross margin to 31.9%. I consider these significant accomplishments
given the difficult operating environment. We will continue to institute our operating discipline to
improve performance, and are making strategic investments to drive both new product developments
as well as greater operational efficiency. We are certain that our dedication to improving the business
and closely following our strategic priorities has placed us in a strong position to benefit as the broader
economy and healthcare industry improves and to experience continued success in 2010 and beyond.
Product Development
Currently, we are developing a series of new products for customer applications in the CRM,
Neuromodulation, Vascular Access, Orthopaedic and Electrochem markets. Some of the key
development initiatives include:
1. To continue to develop complete systems solutions for our OEM customers in the markets we
operate in;
2. To continue the evolution of our Q series high rate ICD batteries;
3. To continue development of MRI compatible leadwires and other neuromodulation products;
4. To continue development of higher energy/higher density capacitors;
5. To integrate Biomimetic coating technology with therapy delivery devices;
6. To complete the design of next generation steerable catheters and introducers;
7. To further develop minimally invasive surgical techniques for the orthopaedics industry;
8. To develop disposable instrumentation for the orthopaedics industry;
9. To provide wireless sensing solutions to Electrochem customers; and
10. To develop a charging platform for Electrochem’s secondary offering.
35
Approximately $2.3 million of the BIOMEC purchase price in April 2007 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, thus were immediately expensed on the date of acquisition. The value
assigned to IPR&D related 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. The 510(k) application was approved by the Food and Drug Administration (“FDA”) and
sales began in 2009, which did not materially impact our results of operations. There have been no
significant changes from our original estimates with regard to these projects.
Approximately $13.8 million of the Enpath purchase price in June 2007 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, thus were immediately expensed on the date of acquisition. These projects
primarily represent the next generation of introducer and catheter products already being sold, 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 2010, which will replace existing products. These introducer projects acquired have been delayed
due to the timing of customer adoption and resolution of technical difficulties on some of the projects.
Additionally, future sales from our ViaSealTM introducer project are uncertain due to litigation (See
Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements
contained in Item 8 of this report). 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. The lost revenue from the delays in these introducer and catheter projects are expected to be
partially offset with revenue from other projects initiated after the acquisition of Enpath.
Approximately $2.2 million of the Precimed 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, thus were immediately expensed on the date of acquisition. 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, which incorporate new enhancements and
customer modifications. We commercially launched two of these products in 2008, one in 2009 and
another is expected in 2010. Two of the other orthopaedic projects acquired have been delayed and
three have been cancelled due to the timing of customer adoption, technical difficulties and the inability
of the projects to meet margin feasibility assessments. These changes are not expected to have a
material impact on operating income as these projects were expected to have lower operating margins.
Our Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with 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 1) It
requires assumptions to be made that were uncertain at the time the estimate was made; and 2) 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.
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
and are assessed for
impairment if certain
indicators are present.
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 in-
part on the income approach, and where appropriate,
the market approach or appraised values are also
considered. 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 are based upon the estimated
cash flows of the respective intangible asset and
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 2009
net income by approximately $0.07 million, or
approximately $0.003 per diluted share. As of
January 1, 2010, we have $406.3 million of
intangible assets recorded on our balance sheet
representing 49% of total assets. This includes
$82.1 million of amortizing intangible assets,
$20.3 million of indefinite lived intangible
assets and $303.9 million of goodwill.
36
37
Balance Sheet Caption /
Nature of Critical
Estimate Item
Stock-based compensation
We record compensation
costs related to our stock-
based awards which include
stock options, restricted
stock and restricted stock
units. 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. 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 awards 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 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 2009 net
income by approximately $0.03 million, or
approximately $0.001 per diluted share.
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.
Tangible long-lived assets
Property, plant and
equipment and other
tangible long-lived assets
are carried at cost. The cost
of property, plant and
equipment is charged to
depreciation expense over
the estimated life of the
operating assets primarily
using straight-line rates.
Tangible long-lived assets
are subject to impairment
assessment.
Assumptions / Approach Used
Effect of Variations of Key Assumptions Used
Variations in methods or assumptions could
have a material impact on our results. If our
demand forecast for specific products is greater
than actual demand and we fail to reduce
manufacturing output accordingly, we could be
required to record additional inventory write-
downs or expense a greater amount of overhead
costs, which would have a negative impact on
our net income. A 1% write-down of our
inventory would decrease 2009 net income by
approximately $0.7 million, or approximately
$0.03 per diluted share. As of January 1, 2010
we have $106.6 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 2009 net income by
approximately $1.1 million, or approximately
$0.05 per diluted share. As of January 1, 2010
we have $171.1 million of tangible long-lived
assets recorded on our balance sheet
representing 21% of total assets.
Inventory costing requires complex calculations that
include assumptions for overhead absorption, scrap,
sample calculations, manufacturing yield estimates
and the determination of which costs may be
capitalized. The valuation of inventory requires us to
estimate obsolete or excess inventory as well as
inventory that is not of saleable quality.
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: a
significant decrease in the market price of the asset
or asset group; a significant adverse change in the
extent or manner in which a long-lived asset or asset
group is being used or in its physical condition; an
accumulation of costs significantly in excess of the
amount originally expected for the acquisition or
construction; a current-period operating or cash flow
loss combined with a history of operating or cash
flow losses or a projection or forecast that
demonstrates continuing losses associated with the
use of a long-lived asset or asset group; or a current
expectation that, more likely than not, a long-lived
asset or asset group will be sold or otherwise
disposed of significantly before the end of its
previously estimated useful life. 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 assets, we
accelerate the rate of depreciation in order to fully
depreciate the assets over their shorter useful lives.
38
39
Balance Sheet Caption /
Nature of Critical
Estimate Item
Provision for income taxes
In accordance with the
liability method of
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.
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 1, 2010, we had $36.0 million of
deferred tax assets on our balance sheet and a
valuation allowance of $5.7 million has been
established for certain deferred tax assets as it is
more likely than not that they will not be
realized .
A 1% change in the effective tax rate would
impact the current year benefit by $0.2 million,
and 2009 diluted loss per share by $0.01 per
diluted share.
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.
Cost Savings and Consolidation Efforts
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 in Note 9 – “Other Operating
Expenses, Net” of the Notes to 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 third quarter of 2008 we consolidated six facilities into existing facilities with excess
capacity. The purpose of these consolidation projects was to streamline operations in order to improve
operating margins.
The total cost of these initiatives was $24.7 million, which was incurred from 2005 to 2008, and
consisted of the following:
(cid:2) Severance and retention - $7.4 million;
(cid:2) Production inefficiencies, moving and revalidation - $4.6 million;
(cid:2) Accelerated depreciation and asset write-offs - $1.1 million;
(cid:2) Personnel - $8.4 million; and
(cid:2) Other - $3.2 million.
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 our Greatbatch Medical business segment, $0.1 million in our
Electrochem segment and $1.0 million was recorded in unallocated operating expenses. No costs
related to these projects were incurred during 2009 as consolidations were complete and all payments
have been made.
2007 & 2008 facility shutdowns and consolidations – Beginning in the first quarter of 2007 and
ending in the fourth quarter of 2009, we consolidated six facilities into newly constructed facilities or
existing facilities with excess capacity. The purpose of these consolidation projects was to streamline
operations in order to improve operating margins.
The total cost incurred for these initiatives was $16.0 million and included the following:
(cid:2) Severance and retention - $4.5 million;
(cid:2) Production inefficiencies, moving and revalidation - $5.0 million;
(cid:2) Accelerated depreciation and asset write-offs - $4.2 million;
(cid:2) Personnel - $0.6 million; and
(cid:2) Other - $1.7 million.
All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset
write-offs. For 2009, costs relating to these initiatives of $1.6 million and $5.5 million were included in
the Greatbatch Medical and Electrochem business segments, respectively. Costs incurred during 2008 of
$0.3 million, $4.7 million and $3.3 million were included in unallocated Corporate expenses, Greatbatch
Medical and Electrochem business segments, respectively. The $0.5 million of costs incurred in 2007
were included in our Electrochem 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.
In 2010, we announced the opening of our orthopaedic design center located in Warsaw, IN. The new
facility will be equipped with the latest rapid prototyping equipment and is being leased. Additionally,
further investment is planned over the next three years to drive improvements and growth in all
orthopaedic locations.
Our Financial Results
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. Fiscal
years 2009, 2008 and 2007 ended on January 1, 2010, January 2, 2009 and December 28, 2007,
respectively. Fiscal year 2008 contained fifty-three weeks while fiscal years 2009 and 2007 contained
fifty-two weeks.
Beginning in 2009, we adopted a change in accounting which required issuers of convertible debt that
may be settled in cash upon conversion, such as our CSN II (See Note 6 “Debt” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report), to recognize interest expense on
those instruments at their nonconvertible debt borrowing rate. As required, the 2008 and 2007
Consolidated Financial Statements presented in this report have been retroactively adjusted to reflect
the adoption of this change in accounting (See Note 1 “Summary of Significant Accounting Policies” of
the Notes to Consolidated Financial Statements contained in Item 8 of this report).
40
41
Results of Operations Table
Dollars in thousands, except per share data
Greatbatch Medical
CRM/Neuromodulation
Vascular Access
Orthopaedic
Total Greatbatch Medical
Electrochem
Total sales
Cost of sales
Gross profit
Gross profit as a % of sales
Jan. 1,
2010
Year ended
Jan. 2,
2009 (1)
2009-2008
2008-2007
Dec. 28,
2007 (1)
$
Change
%
Change
$ Change
%
Change
$ 305,354
35,816
113,897
455,067
66,754
521,821
355,402
166,419
31.9%
$ 286,251
39,443
142,446
468,140
78,504
546,644
390,855
155,789
28.5%
$ 19,103
$ 253,676
16,146
(3,627)
- (28,549)
(13,073)
269,822
(11,750)
48,924
(24,823)
318,746
(35,453)
202,721
116,025
10,630
36.4%
7% $ 32,575
-9% 23,297
-20% 142,446
-3% 198,318
-15% 29,580
-5% 227,898
-9% 188,134
7% 39,764
3.4%
Selling, general, and administrative expenses
SG&A as a % of sales
70,294
13.5%
72,633
13.3%
44,674
14.0%
(2,339)
-3% 27,959
0.2%
Research, development and engineering costs, net
RD&E as a % of sales
33,562
6.4%
31,444
5.8%
29,914
9.4%
2,118
7% 1,530
0.6%
Other operating expenses, net
Operating income
Operating margin
Interest expense
Interest income
Gain on sale of investment security
Gain on extinguishment of debt
Other income, net
Provision (benefit) for income taxes
Effective tax rate
Net income (loss)
Net margin
61,515
1,048
0.2%
16,818
34,894
6.4%
21,417
20,020
6.3%
44,697
(33,846)
266% (4,599)
-97% 14,874
-6.2%
19,954
(711)
20,071
(324)
12,072
(7,050)
- (4,001)
(4,473)
(447)
11,969
50.0%
$ 11,950
-
- (3,242)
(1,624)
6,369
31.0%
$ 14,148
(522)
(9,176)
50.5%
$ (9,001)
117
387
-
3,242
1,102
(15,545)
$(23,149)
1% 7,882
-54% 6,339
NA 4,001
-100% 1,231
-68% (1,177)
-244% (5,600)
19.5%
-164% $ 2,198
-1.7%
2.6%
3.7%
-4.3%
13%
144%
NA
73%
60%
71%
93%
34%
-7.9%
63%
-0.7%
5%
-3.6%
-21%
74%
0.1%
65%
-90%
NA
-28%
263%
-47%
-19.0%
18%
-1.1%
Diluted earnings (loss) per share
$ (0.39)
$ 0.62
$ 0.53
$ (1.01)
-163% $ 0.09
17%
(1) Retroactively adjusted – See Note 1 “Summary of Significant Accounting Policies” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report.
Fiscal 2009 Compared with Fiscal 2008
Sales
Changes to sales by major product lines were as follows (in thousands):
Product Lines
Greatbatch Medical
CRM/Neuromodulation
Vascular Access
Orthopaedic
Total Greatbatch Medical
Electrochem
Total Sales
Year Ended
January 1,
2010
January 2,
2009
$
Change
%
Change
$ 305,354
35,816
113,897
455,067
66,754
$ 521,821
$ 286,251
39,443
142,446
468,140
78,504
$ 546,644
$ 19,103
(3,627)
(28,549)
(13,073)
(11,750)
$ (24,823)
7%
-9%
-20%
-3%
-15%
-5%
For 2009, revenue totaled $521.8 million compared to $546.6 million in 2008. 2008 results include
the benefit of an additional week of operations due to the Company’s fiscal year ending on the
closest Friday to December 31. This additional week added approximately $10 million to 2008
sales. Excluding this additional week of operations, 2009 annual revenue was 3% below the 2008
period as CRM/Neuromodulation revenue growth was offset by decreases in our other product lines,
which were impacted by the uncertain health care and economic environment.
Greatbatch Medical – Our 2009 revenue from our Greatbatch Medical business decreased $13.1
million or 3% from 2008. Excluding the additional week of sales, this decline was 1% as 9%
CRM/Neuromodulation revenue growth was offset by decreases in the Vascular Access and
Orthopaedic product lines, which were impacted by the uncertain health care environment.
For the year, CRM and Neuromodulation revenue increased 7%, driven by higher filtered
feedthrough, coated component and assembly revenue offset by lower battery and capacitor revenue.
CRM revenue is significantly impacted each quarter due to the timing of various customer product
launches, shifts in customer market share, customer inventory management initiatives as well as
marketplace field actions. During the first half of 2009, CRM revenue benefited from the timing of
various customer product launches and, as expected, began to return to more normalized growth
levels for the second half of 2009. Additionally, battery and capacitor sales for 2009 were impacted
by customer inventory adjustments and are expected to return to more normalized levels in 2010.
For the year, Vascular Access revenue was $35.8 million versus $39.4 million in 2008. These
decreases were primarily due to lower introducer sales as a result of customer inventory stocking
that took place during the first quarter of 2009 in connection with our on-going introducer litigation
(See Note 11 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements
contained in Item 8 of this report). Sales were also lower in comparison to the prior year due to the
one less week of operations. We remain optimistic about the potential of this product line as we
continue to work with customers on developing systems level products. However, many of the
projects that we are currently working on will not generate revenue until the second half of 2010.
Our Orthopaedic product line revenues were $113.9 million for 2009, a decrease of 20% from the
$142.4 million in 2008. This decrease was primarily due to reduced spending on elective procedures
and an increased emphasis on inventory management programs from our customers as a result of the
uncertain economic and regulatory environment. Additionally, Orthopaedic sales declined
approximately $5 million as 2008 revenue included the favorable impact of the release of acquired
42
43
backlog, favorable currency exchange rates and the additional week of sales in the fourth quarter
offset by the fact that we had our orthopaedic product line for the full year in 2009 versus a partial
year in 2008. During this industry downturn, we continue to streamline and invest in our
orthopaedic operations, which we believe present significant opportunities. We anticipate that these
challenging market conditions will persist through the first half of 2010.
Electrochem – 2009 sales for the Electrochem business segment were $66.8 million, compared to
$78.5 million in 2008. The decrease from the prior year primarily related to the slowdown in the
Energy and Portable Medical markets, which caused customers to reduce inventory levels and push
back projects. These conditions began to ease in the fourth quarter of 2009 but still remain a challenge
and are expected to continue into the first half of 2010. We continue to actively manage our business
so that we will be better prepared to meet the needs of our customers once the markets recover.
2010 Sales Outlook – 2010 annual revenue product line growth rates are expected to be as follows:
(cid:2) CRM & Neuromodulation: 2% to 5%
(cid:2) Vascular Access: 3% to 7%
(cid:2) Orthopaedic: 3% to 7%
(cid:2) Electrochem: 0% to 5%
These growth projections may be impacted by a variety of factors including a continued softening in
the orthopaedic and commercial energy markets, continued delays in elective surgeries, changes in
pricing or exchange rates and changes in health care reimbursement policies. See “Cautionary
Factors That May Affect Future Results” section contained in Item 1 of this report.
Gross Profit
Changes to gross profit as a percentage of sales were primarily due to the following:
Inventory step-up amortization (a)
Manufacturing efficiencies (b)
Selling price (c)
Mix change (d)
Foreign currency (e)
Performance-based compensation (f)
Other
Total percentage point change to gross profit
as a percentage of sales
2009-2008
% Increase
1.2%
1.8%
-1.1%
1.1%
0.5%
0.5%
-0.6%
3.4%
(a) 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. The amortization of inventory step-
up, which is recorded in Cost of Sales, was $6.4 million for 2008. There was no inventory step-
up amortization recorded in 2009.
(b) Our gross profit percentage benefited from manufacturing efficiencies realized due to an increase
in CRM and Neuromodulation revenue, as well as the consolidation of our Columbia, MD facility
into our Tijuana facility in June 2008 and our Blaine, MN facility into our Plymouth, MN facility
in April 2009 (See “Cost Savings and Consolidation Efforts” section of this Item). The additional
output absorbs a higher amount of lower fixed costs such as plant overhead and depreciation.
(c) Our gross profit percentage was negatively impacted in 2009 due to contractual volume price
reductions and price concessions made to our larger OEM customers on certain product lines.
We expect this pricing pressure to continue in the future.
(d) Our gross profit percentage benefited from an increase in sales of CRM and Neuromodulation
products as a percentage of total sales during 2009, which typically are higher margin products.
(e) During 2009, the value of the U.S. dollar strengthened significantly in comparison to the
Mexican Peso. This foreign currency exchange rate fluctuation resulted in a higher gross profit
percentage at our Tijuana, Mexico facility, which has Peso denominated expenses but sales
which are denominated in U.S. dollars.
(f) During 2009, we made difficult cost-cutting measures to help mitigate the impact of the lower
revenue levels on operating income. This included adjusting 2009 related discretionary
performance based compensation, which benefited Cost of Sales, by approximately $2.5 million
versus 2008.
We expect our gross profit as a percentage of sales to increase over the next several years as a result of our
consolidation and “Lean” initiatives. Additionally, over the long term, we expect new product
introductions resulting from current research and development efforts to help drive gross margin
expansion.
SG&A Expenses
Changes to SG&A expenses were primarily due to the following (in thousands):
Legal costs (a)
Performance-based compensation (b)
IT and Consulting (c)
Rebranding initiative (d)
Bad debt expense (e)
Other
Net decrease in SG&A
2009-2008
$ Decrease
$
(3,027)
(2,907)
1,658
722
371
844
(2,339)
$
(a) Amounts primarily represent lower fees incurred in connection with a patent infringement action
which went to trial in 2008 (See Note 11 “Commitments and Contingencies” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report), partially offset by higher
legal costs incurred in connection with the development and patenting of new technologies in 2009.
(b) During 2009, we made difficult cost-cutting measures to help mitigate the impact of the lower
revenue levels on operating income. This included adjusting 2009 related discretionary
performance based compensation, which benefited SG&A, by approximately $2.9 million in
comparison to 2008.
(c) Amounts relate to various corporate development initiatives as well as increased IT spending due
to our investment in IT infrastructure to support future growth including moving all of our
acquired facilities to one common ERP platform.
(d) During 2009, we launched a new branding initiative to unify our existing businesses under a
common vision and consolidated our medical entities under a single brand — Greatbatch
Medical. These increased costs primarily relate to consulting costs and the replacement of
collateral material in connection with this new brand.
(e) Amounts primarily relate to increased losses incurred on uncollectible receivables from
Electrochem and Orthopaedic customers given the economic slowdown in their related markets.
The Company does not expect future write-offs to materially impact our results of operations or
financial condition.
We expect to maintain SG&A expenses at the current levels as normal inflationary cost increases
and investment in sales and marketing are offset by cost cutting and consolidation initiatives.
44
45
RD&E Expenses
Net research, development and engineering costs were as follows (in thousands):
Year ended
January 1,
2010
January 2,
2009
Research and development costs
$
17,707
$
18,750
Engineering costs
Less cost reimbursements
Engineering costs, net
Total RD&E
26,438
(10,583)
15,855
22,447
(9,753)
12,694
$
33,562
$
31,444
Net research, development and engineering costs for 2009, as expected, were higher versus 2008 due
to the strategic decision in 2009 to further invest resources in the development of new technologies in
order to provide solutions for our customers and ultimately drive long-term growth. Reimbursement
on product development projects is dependent upon the timing of the achievement of milestones and
are netted against gross spending. In 2009, cost reimbursements also decreased as a percentage of
total engineering costs in comparison to 2008 due to the expiration of grants acquired from BIOMEC,
which are not expected to be replaced.
We expect net RD&E costs to continue to increase in 2010 as we further invest resources in the
development of new technologies, including the development of systems solutions for our customers,
and lower cost reimbursements. These systems projects (such as MRI compatibility and wireless
sensing) are niche product solutions that are not a core product of our OEM customer, but which fit
perfectly into our expertise and capabilities. This strategy also includes partnering with our OEM
customers, including sharing technology and resources, in order to bring these solutions to market.
The benefits to our OEM customers is that it will shorten their time to market for these niche products
by accelerating the velocity of innovation, optimizing their supply chain and ultimately provide them
with cost efficiencies. The revenue growth projections we provided in “2010 Sales Outlook” include
the benefits of some of these system level projects, primarily in the Vascular market. However, we
are anticipating that most of the revenue from these projects will not be realized until the 2011 to
2014 time frame.
Other Operating Expenses, Net
Electrochem litigation charge – On October 1, 2009, a Louisiana jury found in favor of a former
Electrochem customer on their claims made in connection with a failed business transaction dating
back to 1997. The jury awarded damages, including interest, of approximately $33 million. Our
post-trial motion for a new trial was denied, and we have appealed the judgment to the Louisiana
Court of Appeal. To date, the cost of defense in this litigation has been paid by our insurance
carrier. As a result of the jury verdict, the insurer has filed a declaratory judgment suit alleging that
there is no coverage for the jury verdict, and that it has no further obligation to defend. Additionally,
the insurer is seeking reimbursement of $1.3 million in defense costs expended prior to the jury
verdict. Based upon our best estimate of loss given the range of possible outcomes at this time, we
recorded a $34.5 million charge related to this litigation in 2009 (See Note 11 “Commitments and
Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report).
This accrual does not include the interest that will accrue on the award during the appeal process at
the Louisiana statutory rate and was included in our Electrochem segment.
Intangible asset write-down – As a result of the successful rebranding of our IMC segment to
Greatbatch Medical, during the fourth quarter of 2009, we wrote-down our non-Greatbatch
trademarks and tradenames by $15.9 million, which is included in the results for our Greatbatch
Medical segment. This charge was recorded based upon Management’s decision to discontinue use
of the associated tradenames and its determination that there would be no market participants willing
to purchase the previously acquired tradenames.
We do not believe that the remaining Greatbatch tradename is at risk of being impaired in the future.
Additionally, based upon our annual impairment analysis for goodwill, we do not believe that the
goodwill that is allocated to our Greatbatch Medical or Electrochem segments is at risk of failing step
one of our annual impairment test unless operating conditions for those segments significantly
deteriorates from current levels or we change our reporting structure. The assumptions used in our
annual impairment tests incorporate the growth rates disclosed in “2010 Sales Outlook” of this section.
Acquired In-Process Research and Development – Approximately $2.2 million of the purchase
price related to our 2008 acquisitions 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.
The remaining other operating expenses, net were as follows (in thousands):
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 1,
2010
-
$
7,069
3,077
948
11,094
$
January 2,
2009
$
663
8,347
5,369
199
14,578
$
(a) See “Cost Savings and Consolidation Efforts” section of this Item for disclosures related to these
expenditures.
(b) For 2009 and 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 programs 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 2009 and 2008, we recorded write-downs in connection with various asset disposals,
partially offset by insurance proceeds received. During 2009, we incurred approximately $0.6
million in severance charges in connection with various workforce reductions due to the lower
revenue levels.
In 2010, consolidation and integration expenses are expected to be approximately $4 million to $6 million.
Interest Expense and Interest Income
Interest expense, which includes the impact of the adoption of the new accounting for convertible
debt in both the 2009 and 2008 periods, and interest income for 2009 were consistent with the same
periods of 2008. Going forward, we expect interest expense to remain at current levels as the benefit
of paying down our long-term debt with excess cash flow from operations is expected to be offset by
increased borrowing costs in connection with the Electrochem Litigation (See Note 11
“Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in
Item 8 of this report), which required bonding in order to appeal.
46
47
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.
Other income, net
Gain on foreign currency contracts – In December 2007 and January 2008, we entered into three
forward currency contracts to purchase Swiss Francs and Euros in order to partially fund our
acquisition of Precimed, which was payable in Swiss Francs, and the Chaumont Facility, which 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 the first quarter of 2008 as Other Income, Net.
The remainder of other income, net primarily includes the impact of foreign currency exchange rate
fluctuations on our transactions denominated in foreign currencies. We generally do not expect
foreign currency exchange rate fluctuations to have a material impact on our net income.
Provision for Income Taxes
The effective tax rate (benefit) for 2009 was (50.5%) compared to 31.0% for 2008. The 2009
effective tax rate (benefit) includes the favorable impact of the resolution of tax audits and the lapse
of statutes of limitation on certain tax items. Additionally, the 2009 and 2008 effective tax rate
(benefit) includes the benefit of the Federal research and development tax credit. See Note 10
“Income Taxes” of the Notes to Consolidated Financial Statements contained at Item 8 of this report
for a reconciliation of the U.S. statutory rate to our effective tax rate (benefit). For 2010, we
currently expect our effective tax rate to approximate the 35% statutory rate due to the expiration of
the research and development tax credit at the end of 2009.
In February 2010, President Obama’s administration announced various proposals to modify certain
aspects of the rules governing the U.S. taxation of certain non-U.S. subsidiaries. Many details of the
proposals remain unknown and any legislation enacting such modifications would require
Congressional approval; however, changes to these rules could significantly impact our effective tax
rate.
Fiscal 2008 Compared with Fiscal 2007
Sales
Changes to sales by major product lines were as follows (in thousands):
Product Lines
Greatbatch Medical
CRM/Neuromodulation
Vascular Access
Orthopaedic
Total Greatbatch Medical
Electrochem
Total Sales
Year Ended
January 2,
2009
December 28,
2007
$
Change
%
Change
$ 286,251
39,443
142,446
468,140
78,504
$ 546,644
$ 253,676
16,146
-
269,822
48,924
$ 318,746
$ 32,575
23,297
142,446
198,318
29,580
$ 227,898
13%
144%
NA
73%
60%
71%
Sales were $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 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.
Greatbatch Medical – Our 2008 revenue from our Greatbatch Medical segment increased $198.3
million or 73% over 2007. Our acquisitions in 2007 and 2008 contributed $183.2 million to this
increase. Included in our Greatbatch Medical segment is our CRM/Neuromodulation product line
which saw year over year growth of $32.6 million, $17.5 million of which was attributable to our
acquisitions in 2007. 2008 revenue from our Greatbatch Medical segment also includes sales from
our Vascular Access and Orthopaedic product lines which increased $23.3 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 Greatbatch Medical
revenue in 2008. Additionally, Vascular Access revenue benefited from the timing of customer
inventory stocking for introducers in the fourth quarter of 2008. Orthopaedic 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 of approximately $6 million, which was fulfilled in 2008.
The $15.1 million of 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 – 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 as drilling activity was strong in 2008.
48
49
Gross Profit
Changes to gross profit 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 gross profit as a
percentage of sales
2008-2007
% Decrease
-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 lower gross profit 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 improve gross profit
as percentage of sales (See “Cost Savings and Consolidation Efforts” section of this Item).
(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 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.
(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 increase 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 increase was primarily driven by contractual price increases for our high rate medical
batteries and price increases contingent upon raw material costs.
(f) This increase was a result of a reduction in excess capacity in connection with our facility
consolidations completed in 2008 (See “Cost Savings and Consolidation Efforts” section of this
Item).
SG&A Expenses
Changes to SG&A expenses were primarily due to the following (in thousands):
Headcount increases associated with acquisitions (a)
Amortization (b)
Enpath legal expense (c)
Other (d)
Net increase in SG&A
2008-2007
$ Increase
18,854
$
2,839
4,018
2,248
27,959
$
(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 Note 11 “Commitments and Contingencies” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report.
(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.
RD&E Expenses
Net research, development and engineering costs were as follows (in thousands):
Year ended
January 2,
2009
December 28,
2007
Research and development costs
$
18,750
$
16,141
Engineering costs
Less cost reimbursements
Engineering costs, net
Total RD&E
22,447
(9,753)
12,694
18,929
(5,156)
13,773
$
31,444
$
29,914
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.
Other Operating Expenses, Net
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 the “Product
Development” section of this Item.
The remaining other operating expenses, net are as follows (in thousands):
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
$
663
8,347
5,369
199
14,578
4,697
531
-
96
5,324
$
$
50
51
(a) Refer to the “Cost Savings and Consolidation Efforts” section of this Item for additional
Liquidity and Capital Resources
disclosures related to these items.
(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 programs 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.
Interest Expense and Interest Income
Interest expense for 2008 is $7.9 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.
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.
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 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
(“CSN II”). 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 and January 2008, we entered into three forward currency contracts to purchase
Swiss Francs and Euros in order to partially fund our acquisition of Precimed, which was payable in
Swiss Francs, and the Chaumont Facility, which 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 the first quarter of
2008 as Other Income, Net.
Provision for Income Taxes
Our effective tax rate for fiscal year 2008 of 31.0% 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 50.0% 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.
(Dollars in millions)
Cash and cash equivalents(a)
Working capital (b)
Current ratio (b)
January 1,
2010
January 2,
2009
$
37.9
$
22.1
$
119.9
1.9:1.0
$
142.2
2.5:1.0
(a) Cash and cash equivalents increased over the prior year balances primarily due to cash flow from
operations of $71.8 million partially offset by normal capital expenditures of $19.7 million and
the repayment of long-term debt of $34 million during 2009.
(b) Our working capital and current ratio decreased in comparison to prior year-end amounts
primarily due to the reclassification of $30.5 million of long-term debt to Current Liabilities as
the put/call date on that debt is now within one year and the $34.5 million accrual in connection
with the Electrochem Litigation classified in Accrued Expenses (See Note 11 “Commitments and
Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this
report). This increase in Current Liabilities was partially offset by the cash generated from
operations during 2009. We expect to repay the current portion of long-term debt as well as any
potential litigation awards or settlements with existing cash on hand or borrowings under our
existing revolving line of credit.
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 and
approval by a majority of the lenders. The Credit Facility also contains a $15 million letter of credit
subfacility and a $15 million swingline subfacility. In connection with the Electrochem Litigation
we were required to bond the amount of the judgment and statutory interest in order to appeal. We
satisfied this requirement by posting a bond, which required collateralization. We received approval
from the lenders supporting our Credit Facility to increase the letter of credit subfacility by $35
million for use only in connection with bonding the appeal of the Electrochem Litigation. 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.
The Credit Facility is supported by a consortium of six banks with no bank controlling more than
25% of the facility. As of January 1, 2010, each bank supporting the Credit Facility has an S&P
credit rating of at least BBB- or better, which is considered investment grade.
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 also required to pay a fee
on our outstanding letter of credit equal to a margin between 1.00% and 2.00%, depending on our
leverage ratio, plus 0.125%. We are also 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 weighted average interest rate on borrowings under our revolving line of credit as of January 1,
2010, which does not include the impact of the interest rate swaps, was 2.0% and resets based upon
the six-month LIBOR rate. As of January 1, 2010, we had $114 million available under the Credit
Facility. This amount may vary from period to period based upon our debt and EBITDA levels,
which impacts the covenant calculations. The interest rate on the $23 million letter of credit
outstanding as of January 1, 2010 was 1.125%.
52
53
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 by the issuance of common stock of Greatbatch or
paid 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 limits the ability of the Company to make cash payments upon conversion of CSN II.
These limitations can be waived upon the Company’s request and approval of a simple majority of
the lenders.
The Credit Facility 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. For the twelve month period ending January
1, 2010, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our credit
agreement, was 9.11 to 1.00, well above the required limit. The Credit Facility also requires us to
maintain a total leverage ratio, as defined in the credit agreement, of not greater than 4.50 to 1.00.
As of January 1, 2010 our total leverage ratio, calculated in accordance with our credit agreement,
was 3.55 to 1.00, well below the required limit. The calculation of adjusted EBITDA and leverage
ratio exclude certain “extraordinary, unusual or non-recurring” expenses and non-cash charges such
as facility shutdown and consolidation costs (subject to certain limits as defined in the agreement), as
well as charges up to $35 million in connection with the Electrochem Litigation.
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.
As of January 1, 2010, we had $114 million available under our revolving line of credit. Based upon
our current capital needs, we anticipate utilizing free cash flow (cash flow from operations less
capital expenditures) to make principal payments on our long-term debt.
Operating activities – Net cash flows from operating activities for 2009 were $71.8 million, and
were generated from net income excluding non-cash items (i.e. depreciation, amortization, stock-
based compensation, non-cash charges and non-cash gains/losses) and were partially offset by
decreases in accounts payable and accrued expenses. Included in accounts receivable as of January
2, 2009 was an $11.6 million value added tax (“VAT”) receivable with the French government
related to inventory purchases for the Chaumont Facility. During 2009, we received payment of this
receivable. We anticipate that cash on hand along with cash flow from operations and availability
under our revolving line of credit will be sufficient to meet our operating (including any potential
legal settlements) needs.
Investing activities – Net cash used in investing activities for 2009 were $21.1 million and was
primarily related to maintenance capital expenditures. Our current expectation is that capital
spending will be in the range of $35 million to $45 million for 2010, of which approximately half is
discretionary in nature. These purchases relate to routine investments to support our internal growth
as well as additional investment in our orthopaedic business in order to further drive improvements
and growth including the purchase of rapid prototyping equipment for our new orthopaedic design
center opened in February 2010.
We anticipate that cash on hand along with cash flow from operations and availability under our
revolving line of credit will be sufficient to fund these capital expenditures. We regularly engage in
discussions relating to potential acquisitions. Going forward, we will continue to consider
strategically targeted and opportunistic acquisitions.
Financing activities – Cash flow used for financing activities for 2009 primarily related to $34.0
million net repayment of long-term borrowings. We continually assess our financing facilities and
capital structure to ensure liquidity and capital levels are sufficient to meet our strategic objectives.
In the future, we may adjust our capital structure as funding opportunities present themselves.
As of January 1, 2010, we have outstanding $30.5 million of CSN I, which contain a put option
exercisable on June 15, 2010 and is classified as a current liability. We expect to repay this current
portion of long-term debt with cash on hand or availability under our existing revolving line of credit
in June 2010.
Capital Structure – As of January 1, 2010, our capital structure consisted of $228.2 million of
convertible subordinated notes, $98.0 million of debt under our revolving line of credit and 23.2
million shares of common stock outstanding. Additionally, we had $37.9 million in cash and cash
equivalents, which is sufficient to meet our short-term operating cash needs. If necessary, we have
access to $114 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 party to various legal actions arising in the normal course of business. A complete list of all
material pending legal actions against the company are set forth at Note 11 “Commitments and
Contingencies” of the Notes to Consolidated Financial Statements contained at Item 8 of this report.
Except for the items set forth in Note 11, we do not believe that the ultimate resolution of any
pending legal actions will have a material adverse effect on our consolidated results of operations,
financial position or cash flows. However, 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.
Contractual Obligations
The following table summarizes our significant contractual obligations at January 1, 2010:
CONTRACTUAL OBLIGATIONS
Debt obligations (a)
Operating lease obligations (b)
Purchase obligations (b)
Foreign currency contracts (b)
Pension obligations (c)
Total
Payments due by period
Total
Less than 1
year
1-3 years
3-5 years
More than 5
years
$
357,587
$
45,265
$
112,315
$
200,007
$
-
12,079
20,795
6,000
2,835
20,289
6,000
4,066
506
-
3,500
1,678
-
-
-
-
11,410
407,871
$
848
75,237
$
2,032
118,919
$
2,349
205,856
$
6,181
7,859
$
54
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
CSN I and the Company is required to pay the $6.2 million of deferred taxes related to these
notes. Amounts also include the expected interest expense on the $98.0 million outstanding on
our line of credit based upon the period end weighted average interest rate of 3.9%, which
includes the impact of our interest rate swaps outstanding. See Note 6– “Debt” of the Notes to
Consolidated Financial Statements in this report for additional information about our debt
obligations.
(b) See Note 11 – “Commitments and Contingencies” of the Notes to Consolidated Financial
Statements in this report for additional information about our operating lease, purchase
obligations and foreign currency contracts.
(c) See Note 7 – “Employee Benefit Plans” of the Notes to Consolidated Financial Statements in this
report 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 1, 2010, our actuarially
determined pension benefit obligation exceeded the plans assets by $4.0 million.
This table does not reflect $3.4 million of unrecognized tax benefits as we are uncertain as to if or
when such amounts may be settled. Refer to Note 10 – “Income Taxes” of the Notes to
Consolidated Financial Statements in this Form 10-K for additional information about these
unrecognized tax benefits. Additionally, the table does not include any potential payments that may
be due in connection with the Electrochem Litigation (See Note 11 “Commitments and
Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report).
In previous year, we provided medical insurance to our U.S. employees by purchasing fully insured
coverage. In order to contain health care costs and provide us with greater plan flexibility, in 2010
we will be self-funding our U.S. medical coverage. The risk to the Company is being limited by
using appropriate stop loss and aggregate loss insurance coverage.
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 the normal course of business, Management evaluates all new accounting pronouncements issued
by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission
(“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants
(“AICPA”) or other authoritative accounting body to determine the potential impact they may have
on the Company’s Consolidated Financial Statements. Based upon this review, other than as
discussed below, Management does not expect any of the recently issued accounting
pronouncements, which have not already been adopted, to have a material impact on the Company’s
Consolidated Financial Statements.
In June 2009, the FASB issued amendments to the consolidation guidance in ASC 810-10 applicable
to variable interest entities which affects the overall consolidation analysis. These amendments are
effective for fiscal years beginning after November 15, 2009. We are currently assessing the impact
of these amendments on our consolidated financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency – We have significant foreign operations in France, Mexico and Switzerland,
which exposes the Company to foreign currency exchange rate fluctuations due to transactions
denominated in Euros, Pesos and Swiss Francs, respectively. We continuously evaluate our foreign
currency risk and will take action from time to time in order to best mitigate these risks, which
includes the use of various derivative instruments such as forward currency exchange contracts. A
hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign
currency exposures would have had an impact of approximately $8 million on our annual sales. This
amount is not indicative of the hypothetical net earnings impact due to partially offsetting impacts on
cost of sales and operating expenses in those currencies. We estimate that foreign currency exchange
rate fluctuations during 2009 reduced sales in comparison to 2008 by approximately $5 million.
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, Net.
In February 2009, we entered into forward contracts 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.
These contracts were entered into in order to hedge the risk of peso-denominated payments
associated with the operations at our Tijuana, Mexico facility. These contracts were accounted for
as a cash flow hedges. The amount recorded as a reduction of Cost of Sales during 2009 related to
these forward contracts was $0.6 million.
In December 2009, we entered into forward contracts to purchase 6.6 million Mexican pesos per month
from January 2010 to December 2010 at an exchange rate of 13.159 pesos per one U.S. dollar. These
contracts were entered into in order to hedge the risk of peso-denominated payments associated with
the operations at our Tijuana, Mexico facility for 2010. These contracts are being accounted for as cash
flow hedges and had a negative fair value of $0.09 million as of January 1, 2010, which is recorded
within Other Current Liabilities in the Consolidated Balance Sheet.
In February 2010, the Company entered into forward contracts to purchase an additional 3.3 million
Mexican pesos per month from February 2010 to December 2010 at an exchange rate of 13.1595
pesos per one U.S. dollar. These contracts were entered into in order to hedge the risk of peso
denominated payments associated with the operations at our Tijuana, Mexico facility for 2010.
These contracts are being accounted for as cash flow hedges.
56
57
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 1, 2010 and January 2,
2009
Consolidated Statements of Operations and Comprehensive Income
(Loss) for the years ended January 1, 2010, January 2, 2009 and
December 28, 2007
Consolidated Statements of Cash Flows for the years ended January
1, 2010, January 2, 2009 and December 28, 2007
Consolidated Statements of Stockholders’ Equity for the years ended
January 1, 2010, January 2, 2009 and December 28, 2007
Notes to Consolidated Financial Statements
We translate all assets and liabilities of our foreign operations, where the U.S. dollar is not the
functional currency, 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 Condensed Consolidated Financial Statements as Comprehensive Income (Loss). The
translation adjustment for 2009 was a $4.6 million gain. 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, Net amounted to a gain of $0.7
million and $0.1 million for 2009 and 2008, respectively, and a loss of $0.04 million for 2007. A
hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign
currency net assets would have had an impact of approximately $9 million on our foreign net assets
as of January 1, 2010.
Interest Rate Swaps – As of January 1, 2010, we had $98 million outstanding on our revolving line
of credit. Interest rates reset on this debt based upon the six-month 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 1,
2010
Pay
fixed
rate
Balance
sheet
location
Int. rate swap Cash flow
Int. rate swap Cash flow
Int. rate swap Cash flow
(In thousands)
80,000
$
18,000
50,000
148,000
$
3/5/2008
12/18/2008
7/7/2010
7/7/2010 3.09%
12/18/2010 2.00%
1.08%
0.45%
7/7/2011 2.16% 6M LIBOR
2.64%
(In thousands)
(1,073)
$
(217)
(322)
(1,612)
$
Other Current Liabilities
Other Current Liabilities
Other Long-Term Liabilities
The estimated fair value of the interest rate swap agreements represents the amount we would have to
pay to terminate the contracts. No portion of the change in fair value of the interest rate swaps
during 2009 was considered ineffective. The amount recorded as Interest Expense related to the
interest rate swaps was $1.4 million (Expense) and $0.4 million (Income) during 2009 and 2008,
respectively.
A hypothetical one percentage point change in the LIBOR interest rate on the $98 million of floating
rate revolving line of credit debt outstanding would not have an impact on our interest expense due
to the interest rate swap agreements we have in place.
58
59
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 1, 2010, 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 1, 2010 is effective.
The effectiveness of internal control over financial reporting as of January 1, 2010 has been
audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm.
Dated: March 2, 2010
Thomas J. Hook
President & Chief Executive Officer
Thomas J. Mazza
Senior Vice President & Chief Financial Officer
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 1, 2010, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. 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.
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.
60
61
In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of January 1, 2010, 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 consolidated financial
statement schedule as of and for the year ended January 1, 2010, of the Company and our report
dated March 2, 2010, expressed an unqualified opinion on those financial statements and financial
statement schedule and included an explanatory paragraph regarding the Company’s change in
method of accounting for its convertible debt instruments.
Buffalo, New York
March 2, 2010
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 1, 2010 and January 2, 2009, and the related
consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and
cash flows for each of the three years in the period ended January 1, 2010. 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 1, 2010 and January 2, 2009, and the results of
their operations and their cash flows for each of the three years in the period ended January 1,
2010, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such 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.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method
of accounting for its convertible debt instruments in all years presented.
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 1, 2010, 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 2, 2010, expressed an unqualified opinion on the Company’s internal control over
financial reporting.
62
63
Buffalo, New York
March 2, 2010
GREATBATCH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories
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
January 1,
2010
January 2,
2009 (1)
$
$
37,864
81,488
106,609
13,896
13,313
253,170
153,601
82,076
20,288
303,926
2,458
15,024
830,543
22,063
86,364
112,304
8,086
6,754
235,571
166,668
90,259
36,130
302,221
1,942
15,242
848,033
$
$
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
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 11)
Stockholders' equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares;
no shares issued or outstanding in 2009 or 2008
Common stock, $0.001 par value, authorized 100,000,000
$
30,450
34,395
403
67,996
133,244
258,972
54,043
4,560
450,819
$
-
48,727
4,128
40,497
93,352
314,384
57,905
7,601
473,242
-
-
shares; 23,190,105 shares issued and 23,157,097 shares outstanding in 2009
and 22,970,916 shares issued and 22,943,176 shares outstanding in 2008
Additional paid-in capital
Treasury stock, at cost, 33,008 shares in 2009 and 27,740 shares in 2008
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and stockholders' equity
23
291,926
(635)
86,262
2,148
379,724
830,543
$
23
283,322
(741)
95,263
(3,076)
374,791
848,033
$
(1) Retroactively adjusted - See Note 1.
The accompanying notes are an integral part of these consolidated financial statements
Sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative expenses
Research, development and engineering costs, net
Electrochem litigation charge
Intangible asset write-down
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, net
Income (loss) before provision (benefit) for
income taxes
Provision (benefit) for income taxes
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Weighted average shares outstanding:
Basic
Diluted
Comprehensive income (loss):
Net income (loss)
Foreign currency translation adjustment
Unrealized loss on cash flow hedges, net of tax
Defined benefit pension plan liability adjustment
Net unrealized 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 (loss)
(1) Retroactively adjusted - See Note 1.
January 1,
2010
Year Ended
January 2,
2009 (1)
$
521,821
355,402
166,419
$
546,644
390,855
155,789
December 28,
2007 (1)
$
318,746
202,721
116,025
70,294
33,562
34,500
15,921
-
11,094
1,048
20,071
(324)
-
-
(522)
72,633
31,444
-
-
2,240
14,578
34,894
19,954
(711)
(3,242)
-
(1,624)
44,674
29,914
-
-
16,093
5,324
20,020
12,072
(7,050)
(4,473)
(4,001)
(447)
(18,177)
(9,176)
(9,001)
$
20,517
6,369
14,148
$
23,919
11,969
11,950
$
$
$
(0.39)
(0.39)
$
$
0.63
0.62
$
$
0.54
0.53
22,926
22,926
22,525
22,861
22,152
22,422
$
(9,001)
$
14,148
$
11,950
4,562
(200)
862
-
(228)
(906)
(1,942)
-
-
-
-
(923)
-
(3,777)
$
-
11,072
$
(2,601)
8,426
$
64
65
The accompanying notes are an integral part of these consolidated financial statements
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income to net cash from operating activities:
January 1,
2010
Year Ended
January 2,
2009 (1)
December 28,
2007 (1)
$
(9,001)
$
14,148
$
11,950
Depreciation and amortization
Stock-based compensation
Accrual for Electrochem litigation charge
Intangible asset write-down
Gain on extinguishment of debt
Gain on sale of investment security
Acquired in-process research and development
Other non-cash (gains) losses
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
Other financing activities
Net cash provided by (used in) 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
47,229
5,204
34,500
15,921
-
-
-
(559)
(10,120)
5,876
6,898
(2,364)
(12,668)
(5,050)
(4,100)
71,766
-
-
(19,674)
(1,050)
-
(417)
(21,141)
-
(46,000)
12,000
-
212
(718)
(34,506)
(318)
15,801
22,063
52,168
11,211
-
-
(3,242)
-
2,240
2,994
(704)
(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
(495)
81,657
(1,442)
(11,410)
33,473
30,611
9,252
-
-
(4,473)
(4,001)
16,093
(972)
(6,604)
(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
187
65,165
-
(37,674)
71,147
Cash and cash equivalents, end of year
$
37,864
$
22,063
$
33,473
(1) Retroactively adjusted - See Note 1.
The accompanying notes are an integral part of these consolidated financial statements
66
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B
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. The Company has revised its
Consolidated Statements of Operations to include a presentation of Gross Profit and to combine
intangible amortization expense related to cost of sales with Cost of Sales.
Nature of Operations – The Company operates its business in two reportable segments – Greatbatch
Medical and Electrochem Solutions (“Electrochem”). During 2009, the Company rebranded its
Implantable Medical Component (“IMC”) segment as Greatbatch Medical. Greatbatch Medical designs
and manufactures systems, components and devices for the Cardiac Rhythm Management (“CRM”),
Neuromodulation, Vascular Access and Orthopaedic markets. Greatbatch Medical customers include
large multi-national original equipment manufacturers OEMs. The Company’s products include: 1)
batteries, capacitors, filtered and unfiltered feedthroughs, engineered components and enclosures used in
Implantable Medical Devices (“IMDs”); 2) instruments and delivery systems used in hip and knee
replacement, trauma and spine surgeries as well as hip, knee and shoulder implants; and 3) introducers,
catheters, steerable sheaths and implantable stimulation leads. Additionally, Greatbatch Medical offers
value-added assembly and design engineering services for medical systems and devices within the markets
in which it operates.
Electrochem is a leader in technology solutions for critical industrial applications, including customized
battery power and wireless sensing systems. Originating from the lithium cell invented for the
implantable pacemaker by the Company’s founder, Wilson Greatbatch, Electrochem’s technology and
superior quality and reliability is utilized in markets world-wide.
Fiscal Year End – The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. Fiscal years 2009, 2008 and 2007 ended on January 1, 2010, January 2, 2009 and
December 28, 2007, respectively. Fiscal years 2009 and 2007 contained fifty-two weeks while fiscal
year 2008 contained fifty-three weeks.
Fair Value Measurements – 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. Accounting Standards Codification (“ASC”) 820-10 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:
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 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 cash and cash equivalents, trade receivables and accounts payable,
approximated their fair value as of January 1, 2010 because of the short-term nature of these
instruments. Note 12 – “Fair Value Measurements” contains additional information on assets and
liabilities recorded at fair value in the consolidated financial statements.
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.
Investments Available for Sale – The Company did not hold any investment securities at January 1,
2010 or January 2, 2009. In previous years, the Company classified its investment securities purchased
as available-for-sale. 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.
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 13 – “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 insured limits. The
Company performs on-going credit evaluations of its banks.
68
69
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 $2.5 million at January 1, 2010 and $1.6 million at January 2, 2009.
Inventories – Inventories are stated at the lower of cost, determined using the first-in first-out method,
or market. Write-downs 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 write-downs
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 acquisition method of
accounting. Under the acquisition 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. Prior to
2009 the Company included all direct acquisition-related costs as part of the purchase price. Beginning in
2009, the Company adopted a change in accounting which requires, if applicable, any direct acquisition-
related costs to be expensed as incurred.
On April 3, 2007, the Company acquired substantially all of the assets of BIOMEC, Inc. (“BIOMEC”).
BIOMEC was a biomedical device company based in Cleveland, OH. The results of BIOMEC’s operations
were included in the Greatbatch Medical business from the date of acquisition. The purchase price and
other direct costs of BIOMEC totaled $11.4 million, which was 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 was immediately expensed, and $5.1 million of
goodwill.
On June 15, 2007, the Company completed its acquisition of Enpath Medical, Inc. (“Enpath”). Enpath
designed, developed, manufactured and marketed single use medical device products for the cardiac
rhythm management, neuromodulation and interventional radiology markets. The results of Enpath’s
operations were included in the Greatbatch Medical business from the date of acquisition. The purchase
price and other direct costs of Enpath totaled $98.4 million, which was 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 was immediately expensed, and $48.9 million of goodwill.
On October 26, 2007, the Company acquired substantially all of the assets of IntelliSensing, LLC
(“IntelliSensing”). IntelliSensing designed and manufactured wireless sensor solutions that measure
temperature, pressure, flow and other critical data. The results of IntelliSensing’s operations were included
in the Electrochem business from the date of acquisition. The purchase price and other direct costs of
IntelliSensing totaled $3.9 million, which was 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, the Company acquired substantially all of the assets of Quan Emerteq, LLC
(“Quan”). Quan designed, developed and manufactured single use medical device products for the
vascular, CRM and neuromodulation markets. The results of Quan’s operations were included in the
Greatbatch Medical business from the date of acquisition. The purchase price and other direct costs of
Quan totaled $60.0 million, which was 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, the Company acquired substantially all of the assets of Engineered Assemblies
Corporation (“EAC”). EAC was a leading provider of custom battery solutions and electronics
integration focused on rechargeable battery systems. The results of EAC’s operations were included in
the Electrochem business from the date of acquisition. The purchase price and other direct costs of EAC
totaled $15.1 million, which was 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, the Company acquired P Medical Holding SA (“Precimed”) which had
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 was a leading
technology-driven supplier to the orthopaedic industry. The results of Precimed’s operations were
included in the Greatbatch Medical business from the date of acquisition. The purchase price and other
direct costs of Precimed totaled $85.0 million, which was 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 was 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 the Greatbatch Medical
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.
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, Quan and EAC as if those acquisitions had occurred as of the beginning of 2007.
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.
70
71
Amounts in thousands, except per share amounts:
(Unaudited)
Sales
Net income
Earnings per share:
Basic
Diluted
Year Ended
January 2,
2009
$ 555,139
20,128
December 28,
2007
$ 502,043
15,613
$0.90
$0.86
$0.70
$0.68
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.
Amortizing Intangible Assets – Acquired intangible assets other than goodwill and trademarks and
tradenames consist primarily of purchased technology, patents and customer lists. The Company is
amortizing its currently held 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.
Impairment of Long-Lived Assets – The Company assesses the impairment of definite lived long-lived
assets or asset group when events or changes in circumstances indicate that the carrying value may not be
recoverable. Factors that are considered in deciding when to perform an impairment review include: A
significant decrease in the market price of the asset or asset group; A significant adverse change in the
extent or manner in which a long-lived asset or asset group is being used or in its physical condition; An
accumulation of costs significantly in excess of the amount originally expected for the acquisition or
construction; A current-period operating or cash flow loss combined with a history of operating or cash
flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-
lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset
group will be sold or otherwise disposed of significantly before the end of its previously estimated useful
life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Recoverability potential is measured by comparing the carrying amount of the asset or asset group to the
related total future undiscounted cash flows. If the carrying value is not recoverable through related cash
flows, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset
or asset group’s carrying amount to its fair value. When it is determined that useful lives of assets are
shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in
order to fully depreciate the assets over their new shorter useful lives.
Currently, goodwill and trademarks and tradenames recorded 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 similar to those described above. 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 (as described above), 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
has occurred during 2009, 2008 or 2007. During 2009, the Company recognized a $15.9 million
impairment charge related to its trademarks and tradenames – See Note 4 “Intangible Assets.” No
impairment of the Company’s trademarks and tradenames occurred during 2008 or 2007.
Other Long-Term Assets – Other long-term 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 interest 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 long-term
deferred financing fees amounted to $3.0 million at January 1, 2010 and $4.1 million at January 2, 2009.
Prior year amounts have been retroactively adjusted for the change in accounting for convertible debt
adopted in 2009 – See “Convertible Subordinated Notes.” The amortization of debt discount and
deferred fees is included in Depreciation and Amortization in the Consolidated Statements of Cash
Flows.
Other long-term assets also include 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 1, 2010 and January 2, 2009 was
$11.9 million and $10.9 million, respectively. The Company has determined that these investments are
not considered variable interest entities. The Company’s exposure related to these entities is limited to
its recorded investment. These investments are in start-up research and development companies whose
fair value is highly subjective in nature and subject to future fluctuations, which could be significant.
72
73
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 accounts for uncertain tax positions using a “more likely than not” recognition threshold.
The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax
law, the measurement of tax positions taken or expected to be taken in tax returns, the effective
settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to
a tax position. These tax positions are evaluated on a quarterly basis. 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.
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.
Convertible Subordinated Notes – Beginning in 2009, the Company adopted a change in accounting
which required issuers of convertible debt instruments that may be settled in cash upon conversion, such
as the Company’s CSN II as described in Note 6, to 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.
Upon adoption, the Company determined the carrying amount of the liability component of CSN II by
measuring the fair value of a similar liability that does not have the associated conversion option as of the
date CSN II was issued (March 2007). The carrying amount of the conversion option was then
determined by deducting the fair value of the liability component from the initial proceeds received from
the issuance of CSN II.
The carrying amount of the conversion option was retroactively recorded as Additional Paid-In Capital
with an offset to Long-Term Debt and is being amortized using the effective interest method over the
period from the date of issuance to the contractual maturity date. Deferred financing fees incurred in
connection with the issuance of CSN II, previously recorded as Long-Term Other Assets, were allocated
proportionally to the proceeds of the liability and equity components. The deferred financing fees
allocated to the debt component are being amortized using the effective interest method over the period
from the date of issuance to contractual maturity date, whichever is earlier. The deferred financing fees
allocated to the equity component were recorded as an offset to Additional Paid-In Capital.
As required, the 2008 and 2007 Consolidated Financial Statements presented in this report have been
retroactively adjusted to reflect the adoption of this change in accounting for convertible debt as if it were
in effect on the date CSN II were originally issued.
The following table provides the impact of this accounting change on the 2008 and 2007 Consolidated
Financial Statements:
(in thousands except per share amounts)
Consolidated Balance Sheet
(As of January 2, 2009)
ASSETS
Other assets
Total assets
LIABILITIES
Long-term debt
Deferred income taxes - long-term
Total liabilities
STOCKHOLDERS' EQUITY
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
Consolidated Statement of Operations
(Year ended January 2, 2009)
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
(Year ended December 28, 2007)
Interest expense
Income before provision for income taxes
Provision for income taxes
Net income
Earnings per share:
Basic
Diluted
Consolidated Statement of Cash Flows
(Year ended January 2, 2009)
Net income
Depreciation and amortization
Deferred income taxes
Net cash provided by operating activities
(Year ended December 28, 2007)
Net income
Depreciation and amortization
Deferred income taxes
Net cash provided by operating activities
Impact of
As Previously Accounting
Reported
Change
Adjusted
Amounts
$
16,140
848,931
$
(898)
(898)
$
15,242
848,033
352,920
44,306
498,179
251,772
102,774
350,752
848,931
(38,536)
13,599
(24,937)
31,550
(7,511)
24,039
(898)
314,384
57,905
473,242
283,322
95,263
374,791
848,033
$
13,168
27,303
8,744
18,559
$
6,786
(6,786)
(2,375)
(4,411)
$
19,954
20,517
6,369
14,148
0.82
0.81
7,303
28,688
13,638
15,050
0.68
0.67
(0.19)
(0.19)
4,769
(4,769)
(1,669)
(3,100)
(0.14)
(0.14)
0.63
0.62
12,072
23,919
11,969
11,950
0.54
0.53
$
18,559
45,382
1,671
57,101
$
(4,411)
6,786
(2,375)
-
$
14,148
52,168
(704)
57,101
15,050
25,842
(4,935)
42,965
(3,100)
4,769
(1,669)
-
11,950
30,611
(6,604)
42,965
74
75
Derivative Financial Instruments – The Company recognizes all derivative financial instruments in its
consolidated financial statements at fair value. Changes in the fair value of derivative instruments are
recorded in earnings unless hedge accounting criteria are met. The Company’s interest rate swap and
foreign currency contracts outstanding as of January 1, 2010 are designated as cash flow hedges. The
effective portion of the 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 the changes in fair value of these cash flow hedges is recorded in earnings. In the
event the hedged cash flow does not occur, or it becomes probable that it will not occur, the Company
would reclassify the amount of any gain or loss on the related cash flow hedge to income (expense) at
that time. Cash flows related to these derivative financial instruments are included in cash flows from
operating activities.
Revenue Recognition – The Company recognizes revenue when it is realized or realizable and earned. This
occurs when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or
determinable, the buyer is obligated to pay us (i.e., not contingent on a future event), the risk of loss is transferred,
there is no obligation of future performance, collectability is reasonably assured and the amount of future returns
can reasonably be estimated. With regards to the Company’s customers (including distributors), those criteria are
met at the time of shipment when title passes. The Company includes shipping and handling fees billed to
customers in sales. Shipping and handling costs associated with inbound and outbound freight are
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 $27.8 million, $35.1 million and $35.1 million in 2009, 2008 and 2007, respectively.
Product Warranties – The Company allows customers to return defective or damaged products for
credit, replacement, or exchange. The Company 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.
Research and Development and Engineering Costs – Research and development costs are expensed as
incurred. The primary costs are salary and benefits for personnel, material costs used in the development
projects and subcontracting costs. 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 1,
2010
Year Ended
January 2,
2009
December 28,
2007
Research and development costs
$
17,707
$
18,750
$
16,141
Engineering costs
Less: cost reimbursements
Engineering costs, net
Total research, development and
engineering costs, net
26,438
(10,583)
15,855
22,447
(9,753)
12,694
18,929
(5,156)
13,773
$
33,562
$
31,444
$
29,914
Purchased In-Process Research and Development (“IPR&D”) – The Company defines IPR&D as the
value assigned to research and development projects acquired that have not yet reached technological
feasibility and have no alternative future use. The Company believes a research and development
project is not technically feasible until the related products have received regulatory approval. Prior to
2009, when the Company acquired another entity, the portion of the purchase price allocated to IPR&D
was immediately expensed on the acquisition date. Beginning in 2009, the Company adopted a change
in accounting which requires IPR&D projects acquired to be recognized on the balance sheet at fair
value as an indefinite-lived intangible asset regardless of whether there is an alternative future use for
the IPR&D. In future periods, the IPR&D intangible asset will be amortized or written-down depending
on the outcome of the project similar to other indefinite-lived assets – See “Amortizing Intangible
Assets” and “Impairment of Long-Lived Assets.” As of January 1, 2010, the Company does not have
any IPR&D intangible assets recorded on its balance sheet.
Determining the portion of the purchase price to allocate 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.
Stock-Based Compensation – The Company records compensation costs related to stock-based awards
granted to employees based on the estimated fair value of the award on the grant date. 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.
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 $0.7 million and $0.1 million for
2009 and 2008, respectively, and a loss of $0.04 million for 2007.
Defined Benefit Pension Plans – The Company recognizes in its balance sheet as an asset or liability the
overfunded or underfunded status of its defined benefit pension plans provided to its employees located in
Switzerland and France. This asset or liability is measured as the difference between the fair value of plan
assets and the benefit obligation of those plans. 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. Actuarial 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, are recognized as a component of
Accumulated Other Comprehensive Income (Loss). Pension expense is charged to operating expenses.
76
77
Earnings (Loss) Per Share – Basic earnings (loss) per share is calculated by dividing net income (loss)
by the weighted average number of shares outstanding during the period. Diluted earnings (loss) per
share is calculated by adjusting the weighted average number of shares outstanding 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 6 – “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 (loss) 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 (loss) 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 (loss) per share (in thousands,
except per share amounts):
Numerator for basic earnings (loss) per share:
Income (loss) from continuing operations
Denominator for basic earnings (loss) per share:
Weighted average shares outstanding
Effect of dilutive securities:
Stock options and unvested restricted stock
Denominator for diluted earnings per share
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
(9,001)
$
14,148
$
11,950
22,926
-
22,926
22,525
336
22,861
22,152
270
22,422
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
(0.39)
(0.39)
$
$
0.63
0.62
$
$
0.54
0.53
The diluted weighted average share calculations do not include the following as they are not dilutive to
the earnings (loss) per share calculations or the respective performance criteria have not been met as of
the reporting date:
Time-based equity awards
Performance-based equity awards
Convertible subordinated notes
January 1,
2010
1,523,000
1,026,000
756,000
Year Ended
January 2,
2009
1,500,000
515,000
1,267,000
December 28,
2007
664,000
287,000
2,027,000
Comprehensive Income (Loss) – The Company’s comprehensive income (loss) as reported in the
Consolidated Statements of Operations and Comprehensive Income (Loss) includes net income (loss),
foreign currency translation adjustments, unrealized gain (loss) on cash flow hedges, the net unrealized
gain (loss) on short-term investments available for sale, adjusted for any realized gains (losses), and
defined benefit pension plan liability adjustments.
Accumulated other comprehensive income (loss) is comprised of the following (in thousands):
Defined
benefit
pension plan
liability
Cash flow
hedges
Foreign
currency
translation
adjustment
Total pre-tax
amount
Tax amount
Net-of tax-
amount
Balance at January 2, 2009
Net unrealized loss on cash flow hedges
Net pension liability adjustments
Net foreign currency translation gain
Balance at January 1, 2010
(2,513)
-
1,058
-
(1,455)
(1,394)
(307)
-
-
(1,701)
(228)
-
-
4,562
4,334
(4,135)
(307)
1,058
4,562
1,178
$
1,059
107
(196)
-
$
970
(3,076)
(200)
862
4,562
2,148
$
$
$
$
$
$
$
$
$
$
Supplemental Cash Flow Information (in thousands):
Cash paid during the year for:
Interest
Income taxes
Noncash investing and financing activities:
Net unrealized loss on cash flow hedges, 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 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
9,234
4,473
$
10,021
3,811
$
5,325
17,341
$
(200)
4,015
$
(906)
3,472
-
$
2,956
1,259
632
-
-
2,762
741
-
1,473
3,307
140
117,782
-
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.
Recently Issued Accounting Pronouncements – In the normal course of business, Management
evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board
(“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”),
American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting body to
determine the potential impact they may have on the Company’s Consolidated Financial Statements.
Based upon this review, other than as discussed below, Management does not expect any of the recently
issued accounting pronouncements, which have not already been adopted, to have a material impact on
the Company’s Consolidated Financial Statements.
78
79
In June 2009, the FASB issued amendments to the consolidation guidance in ASC 810-10 applicable to
variable interest entities which affects the overall consolidation analysis. These amendments are
effective for fiscal years beginning after November 15, 2009. The Company is currently assessing the
impact of these amendments on its consolidated financial position and results of operations.
2.
INVENTORIES
Inventories are comprised of the following (in thousands):
Raw material
Work-in-process
Finished goods
Total
January 1,
2010
January 2,
2009
$
54,002
28,329
24,278
$
58,352
28,851
25,101
$
106,609
$
112,304
3. 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
Leasehold improvements
Furniture and fixtures
Land and land improvements
Construction work in process
Other
Accumulated depreciation
Total
January 1,
2010
January 2,
2009
$
125,524
68,489
32,472
17,277
10,259
10,175
7,696
790
$
109,911
68,346
27,558
17,031
9,488
11,671
17,452
662
272,682
(119,081)
262,119
(95,451)
$
153,601
$
166,668
Depreciation expense for property, plant and equipment during 2009, 2008 and 2007 was $27.1 million,
$25.5 million and $16.4 million, respectively.
4.
INTANGIBLE ASSETS
Amortizing intangible assets are comprised of the following (in thousands):
Gross
carrying
amount
Accumulated
amortization
Foreign
currency
translation
Net carrying
amount
January 1, 2010
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
January 2, 2009
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
$
$
$
$
$
$
$
$
82,673
46,818
3,519
133,010
81,639
46,547
3,508
131,694
(42,289)
(7,264)
(2,410)
(51,963)
(35,881)
(4,056)
(1,964)
(41,901)
399
612
18
1,029
184
271
11
466
40,783
40,166
1,127
82,076
45,942
42,762
1,555
90,259
$
$
$
$
$
$
$
$
Intangible amortization expense was $10.1 million, $10.7 million and $5.6 million for 2009, 2008 and
2007, respectively. All intangible amortization expense is included in Cost of Sales except for
amortization primarily related to the Company’s customer lists, which totaled $3.7 million, $3.9 million
and $1.0 million for 2009, 2008 and 2007 respectively, and is included in Selling, General and
Administrative Expenses. Annual intangible amortization expense is estimated to be $9.6 million for
2010, $9.5 million for 2011, $9.4 million for 2012, $8.6 million for 2013 and $7.9 million for 2014.
The change in trademarks and tradenames during 2009 is as follows (in thousands):
Balance at January 2, 2009
Write-down
Foreign currency translation
Balance at January 1, 2010
$
$
36,130
(15,921)
79
20,288
As a result of the successful rebranding of the Company’s IMC segment to Greatbatch Medical, during
the fourth quarter of 2009, the Company wrote-down its non-Greatbatch trademarks and tradenames by
$15.9 million. This charge was recorded based upon the Company’s decision to discontinue use of the
associated tradenames and the Company’s determination that there would be no market participants
willing to purchase the previously acquired tradenames. In addition to the above, the Company incurred
expense of $0.7 million in 2009 related to its rebranding initiative, which includes additional advertising
costs, and is included in Selling, General and Administrative Expenses.
The change in goodwill during 2009 is as follows (in thousands):
Balance at January 2, 2009
Foreign currency translation
Balance at January 1, 2010
Greatbatch
Medical
$
$
292,278
1,705
293,983
Electrochem
9,943
$
-
9,943
$
Total
$
$
302,221
1,705
303,926
80
81
As of January 1, 2010, no accumulated impairment loss has been recognized for the goodwill allocated to
the Company’s Greatbatch Medical or Electrochem segments.
5. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the following (in thousands):
Litigation accrual
Salaries and benefits
Profit sharing and bonuses
Warranty
Other
Total
6. DEBT
January 1,
2010
$
36,000
12,605
9,544
1,330
8,517
January 2,
2009
$
1,500
11,757
14,860
1,395
10,985
$
67,996
$
40,497
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
Total debt
Less: current portion
Total long-term debt
January 1,
2010
$
January 2,
2009
$
98,000
30,450
197,782
(36,810)
289,422
(30,450)
258,972
132,000
30,450
197,782
(45,848)
314,384
-
314,384
$
$
Revolving Line of Credit – The Company has a senior credit facility (the “Credit Facility”) consisting of
a $235 million revolving credit facility, which can be increased to $335 million upon the Company’s
request and approval by a majority of the lenders. The Credit Facility also contains a $15 million letter
of credit subfacility and a $15 million swingline subfacility. In connection with the Electrochem
Litigation described in Note 11 the Company was required to bond the amount of the judgment and
statutory interest in order to appeal. The Company satisfied this requirement by posting a bond, which
required collateralization. The Company received approval from the lenders supporting the Credit
Facility to increase the letter of credit subfacility by $35 million for use only in connection with bonding
the appeal of the Electrochem Litigation.
The Credit Facility is secured by the Company’s non-realty assets including cash, accounts 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, as defined in the credit agreement. 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 fee on its
outstanding letter of credit equal to a margin between 1.00% and 2.00%, depending on the Company’s
leverage ratio, as defined in the credit agreement, plus 0.125%. The Company is also 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, as defined in the credit agreement.
82
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 by the issuance of common stock of Greatbatch or paid 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 repurchase of Greatbatch stock to $60 million and
limit the ability of the Company to make cash payments upon conversion of CSN II. These limitations
can be waived upon the Company’s request and approval of a simple majority of the lenders.
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 4.50 to 1.00. The calculation of adjusted EBITDA and leverage
ratio exclude certain “extraordinary, unusual or non-recurring” expenses and non-cash charges such as
facility shutdown and consolidation costs (subject to certain limits as defined in the agreement), as well
as charges up to $35 million in connection with the Electrochem Litigation. As of January 1, 2010, the
Company was in compliance with all 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.
The weighted average interest rate on borrowings under the Company’s revolving line of credit as of
January 1, 2010, which does not include the impact of the interest rate swaps described below, was 2.0%
and resets based upon the six-month LIBOR rate. As of January 1, 2010, the Company had $114 million
available under the Credit Facility. This amount may vary from period to period based upon the debt
levels of the Company as well as the level of EBITDA which impacts the covenant calculations
described above. The interest rate on the $23 million letter of credit outstanding as of January 1, 2010
was 1.125%.
Interest Rate Swaps – The Company has 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 indexed to the
six-month LIBOR rate. No credit risk was hedged. The receive variable leg of the swap 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 forecasted cash flows. Information regarding
the Company’s outstanding interest rate swaps is as follows:
Instrument
Type of
hedge
Notional
amount
Start
date
End
date
Current
receive
floating
rate
Pay
fixed
rate
Fair
value
January 1,
2010
Balance
sheet
location
Int. rate swap Cash flow
Int. rate swap Cash flow
Int. 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%
1.08%
0.45%
7/7/2011 2.16% 6M LIBOR
7/7/2010
2.64%
83
(In thousands)
(1,073)
$
(217)
(322)
(1,612)
$
Other Current Liabilities
Other Current Liabilities
Other Long-Term Liabilities
The estimated fair value of the interest rate swap agreements represents the amount the Company would
have to pay to terminate the contracts. No portion of the change in fair value of the interest rate swaps
during 2009 was considered ineffective. The amount recorded as Interest Expense related to the interest
rate swaps was $1.4 million (Expense) and $0.4 million (Income) during 2009 and 2008, respectively.
Convertible Subordinated Notes – In May 2003, the Company completed a private placement of $170
million of 2.25% convertible subordinated notes, due June 15, 2013 (“CSN I”). 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 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 notes, which contained a put option exercisable on June 15, 2010, at a discount.
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, and are due on June 15,
2013. Holders may convert the notes into shares of the Company’s common stock at a conversion price
of $40.29 per share, which is equivalent to a conversion ratio 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. The fair value of CSN I as of January 1, 2010 was
approximately $30 million and is based on recent sales prices.
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. As a result of this provision, beginning in the second quarter of 2009 the remaining balance of
CSN I, along with the associated deferred tax liability and deferred fees, were classified as short-term in
the Consolidated Balance Sheet and will be repaid with availability under the Company’s revolving line
of credit or cash on hand. 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, and are due on June 15,
2013. 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 fair value of CSN II as of January 1, 2010 was approximately $169 million and is based on recent
sales prices.
The effective interest rate of CSN II, which takes into consideration the amortization of the original
discount, deferred fees related to the issuance of these notes and the discount recognized under the new
accounting for convertible debt (See Note 1), is 8.5%. The discount on CSN II is being amortized to the
maturity date of the convertible notes utilizing the effective interest method. As of January 1, 2010, the
carrying amount of the discount related to the convertible debt equity component was $31.0 million. As
of January 1, 2010, the if-converted value of CSN II notes does not exceed its principal amount as the
Company’s closing stock price of $19.23 did not exceed the conversion price of $34.70 per share.
The contractual interest and discount amortization for CSN II were as follows (in thousands):
Contractual interest
Discount amortization
January 1,
2010
$
4,450
9,038
Year Ended
January 2,
2009
$
4,450
8,461
December 28,
2007
$
3,360
5,990
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, based upon a predetermined table as set forth in the
indenture agreement, 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.
CSN II contains a net share settlement feature that requires the Company to pay cash for each $1,000 of
principal to be converted. 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 holders in shares of its common stock, which it currently does not plan to exercise.
84
85
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, affecting the
Company. 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.
Deferred Financing Fees – The following is a reconciliation of deferred financing fees for 2009 and
2008 (in thousands):
Previously reported balance at December 28, 2007
Change in accounting for convertible debt
$
6,411
(1,083)
Retroactively adjusted amounts
Financing costs deferred
Written-off during the year
Amortization during the year
Balance at January 2, 2009
Amortization during the year
Balance at January 1, 2010
7. EMPLOYEE BENEFIT PLANS
5,328
14
(124)
(1,122)
4,096
(1,068)
3,028
$
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 2009, 2008 and 2007, 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 2009, $1.5 million in 2008 and $1.0 million in
2007.
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 $4.4 million in 2008 and $3.6
million in 2007. No discretionary contribution was made for 2009 as the Company did not meet its
performance objectives for the year. As of January 1, 2010, the 401(k) Plan held 687,337 shares of
Company stock.
Pension Plans – The Company is required to provide its employees located in Switzerland and France
certain defined pension benefits. Under these plans, benefits accrue to employees based upon years of
service, position, age and compensation. The defined benefit pension plan that provides benefits to the
Company’s employees located in Switzerland is a funded contributory plan while the pension plan that
provides benefits to the Company’s employees located in France is unfunded and noncontributory.
Information relating to the funding position of the Company’s defined benefit pension plans as of the
plans measurement date of January 1, 2010 and January 2, 2009 were as follows (in thousands):
Change in projected benefit obligation:
Projected benefit obligation at beginning of year
Projected benefit obligation acquired
Service cost
Interest cost
Plan participants' contributions
Actuarial (gain) 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 gain (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
Pension liability classified as other current assets
Pension liability classified as long-term liabilities
Accumulated benefit obligation at end of year
Year Ended
January 1,
2010
January 2,
2009
$
13,439
-
891
407
839
(467)
(1,434)
-
619
14,294
$
-
14,017
679
480
873
446
(1,317)
(1,941)
202
13,439
7,454
-
2,283
839
701
(1,415)
-
458
10,320
-
10,484
922
873
(2,013)
(1,292)
(1,718)
198
7,454
$
$
3,974
15
$
$
3,959
12,877
$
$
5,985
12
$
$
5,973
12,128
Amounts recognized in accumulated other comprehensive (gain) loss:
Net (gain) loss occurring during the year
Amortization of gains (losses)
Net gain on settlements
Foreign currency translation
Pre-tax adjustment
Taxes
Net (gain) loss
(850)
(129)
-
(79)
(1,058)
196
(862)
$
$
$
$
2,886
4
(152)
(225)
2,513
(571)
1,942
86
87
Net pension cost is comprised of the following (in thousands):
Year Ended
January 1,
2010
January 2,
2009
Service cost
Interest cost
Expected return on plan assets
Settlements
Recognized net actuarial (gain) loss
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
$
$
891
407
(318)
-
129
1,109
679
480
(427)
152
(4)
880
$
$
Year Ended
January 1,
2010
3.0%
2.5%
4.0%
1.5%
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 7% to 8% and 2.5% to 4.5%,
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 target and actual pension fund asset allocation as of the valuation date was as
follows:
Asset Category:
Fixed income
Equity
Real-estate
Cash
Other
Target
60%
25%
5%
5%
5%
2009
Actual
51%
33%
6%
8%
2%
100%
100%
The target 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.
Fair value measurements using
At
January 1,
2010
Quoted prices in
active markets for
identical assets
(Level 1)
Significant
other
observable
inputs
Significant
unobservable
inputs
(Level 2)
(Level 3)
$
830
$
830
$
-
$
-
430
2,444
496
2,521
2,064
217
424
642
252
430
2,444
496
2,521
1,847
-
-
-
-
-
-
-
-
217
217
424
642
252
-
-
-
-
-
-
-
-
-
$
10,320
$
8,568
$
1,752
$
-
Description
Cash
Equity securities:
U.S. companies
International companies
Emerging markets
Fixed income:
Government & government agencies
Corporate
Convertible
Insurance contracts
Real-estate
Other
Total
The fair value of Level 1 pension assets are obtained by reference to the last quoted price of the
respective security on the market which it trades. The fair value of Level 2 pension assets are obtained
from valuation 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.
Estimated pension benefit payments over the next ten years are as follows (in thousands):
2010
2011
2012
2013
2014
2015-2019
$
848
949
1,083
1,189
1,160
6,181
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, which vests on a
straight-line basis over ten years, up to the applicable local state university tuition rate. For certain
employees and executives, the dependent children benefit is not limited. Minimum academic
achievement is required in order to receive reimbursement under both programs. Aggregate expenses
under the programs were approximately $1.5 million, $1.3 million and $1.5 million in 2009, 2008 and
2007, respectively.
8. STOCK-BASED COMPENSATION
Compensation costs related to stock-based payments totaled $5.2 million, $6.8 million and $5.7 million
for 2009, 2008 and 2007, respectively. Of these amounts, $4.4 million, $5.7 million and $4.5 million were
included in Selling, General and Administrative Expenses, respectively. The remaining stock-based
compensation expense is primarily included in Cost of Sales. During 2009, the Company reversed $2.6
million of previously recorded compensation expense related to performance based stock options as it was
no longer probable that the performance metrics would be achieved on these awards. Stock-based
88
89
compensation expense included in the Consolidated Statements of Cash Flows includes costs recognized
for stock-based awards and the annual stock contribution to the Company’s 401(k) Plan. See Note 7 –
“Employee Benefit Plans.”
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.
The Company’s 2009 Stock Incentive Plan (“2009 Plan”) authorizes the issuance of up to 1,350,000
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 2009 Plan.
The 2009 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 200,000 shares of the 1,350,000 shares authorized.
As of January 1, 2010, 1,052,731 and 353,962 shares were available for future grants of stock options,
stock appreciation rights, restricted stock, restricted stock units or stock bonuses under the 2009 Plan
and 2005 Plan, respectively. Due to the respective plans sub-limits, of the shares available for grant
only 200,000 and 353,962 shares may be issued under the 2009 Plan and the 2005 Plan, respectively, in
the form of restricted stock, restricted stock units or stock bonuses.
Stock Options
Stock options granted generally vest over a four year period. 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.
90
The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock
options. 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, the stock option expense that the Company records
for future grants may differ significantly from what the Company recorded in the current period. Stock-
based compensation expense is only recorded for those awards that are expected to vest. Pre-vesting
forfeiture estimates for determining appropriate stock-based compensation expense are estimated at the
time of grant based on historical experience. Revisions are made to those estimates in subsequent
periods if actual forfeitures differ from estimated forfeitures. For retirement eligible employees, whose
awards immediately vest, a 0% forfeiture rate is used.
The weighted-average fair value and assumptions used are as follows:
Year Ended
January 2,
2009
January 1,
2010
December 28,
2007
Weighted-average fair value
Risk-free interest rate
Expected volatility
Expected life (in years)
Expected dividend yield
Pre-vesting forfeiture rate
$8.63
2.03%
39%
5.6
0%
9%
The following tables summarize stock option activity:
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
Granted
Exercised
Forfeited or Expired
Outstanding at January 1, 2010
Expected to Vest at January 1, 2010
Exercisable at January 1, 2010
Number of
time-vested
stock options
1,285,658
230,477
(138,667)
(76,301)
Weighted
average
exercise
price
$
24.64
25.11
19.04
29.32
1,301,167
452,964
(131,100)
(124,737)
1,498,294
243,920
(13,736)
(366,355)
1,362,123
1,312,036
1,018,212
25.04
20.21
16.85
25.21
24.28
26.53
15.45
27.27
$
$
$
23.94
23.94
24.03
91
$8.38
2.91%
39%
5.2
0%
9%
Weighted
average
remaining
contractual
life
(in years)
$11.84
4.52%
40%
5.3
0%
9%
Aggregate
intrinsic value
(in millions)
6.8
6.7
6.3
$0.3
$0.3
$0.3
Weighted
average
remaining
contractual
life
(in years)
Aggregate
intrinsic value
(in millions)
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:
Outstanding at December 29, 2006
Granted
Exercised
Forfeited or Expired
Outstanding at December 28, 2007
Granted
Forfeited or Expired
Outstanding at January 2, 2009
Granted
Forfeited or Expired
Outstanding at January 1, 2010
Expected to Vest at January 1, 2010
Exercisable at January 1, 2010
Number of
performance-
vested stock
options
340,871
146,231
(2,635)
(41,612)
442,855
417,888
(62,179)
798,564
310,407
(106,987)
1,001,984
574,001
222,199
Weighted
average
exercise
price
$
22.98
29.65
22.38
24.17
25.08
21.88
22.24
23.62
26.53
24.00
$
$
$
24.48
24.33
22.87
8.1
7.9
6.1
$0.0
$0.0
$0.0
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 1,
2010 ($19.23) and the weighted average exercise price of the underlying options, multiplied by the
number of options outstanding and/or exercisable.
As of January 1, 2010, $4.8 million of unrecognized compensation cost related to non-vested stock
options is expected to be recognized over a weighted-average period of approximately 2 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.
Proceeds from the exercise of stock options are credited to common stock at par value and the excess is
credited to additional paid-in capital. A portion of the options outstanding 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 stock 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 stock options result in the creation of a deferred tax asset, which is a temporary
difference, until the time that the option is exercised. The following table provides certain information
relating to the exercise of stock options (in thousands):
Intrinsic value
Cash received
Tax benefit realized
January 1,
2010
$
80
212
24
Year Ended
January 2,
2009
$
974
2,210
313
December 28,
2007
$
1,338
2,699
292
92
Nonvested at December 29, 2006
Shares granted (1)
Shares vested
Shares forfeited
Nonvested at December 28, 2007
Shares granted
Shares vested
Shares forfeited
Activity
Weighted average
fair value
204,156
122,031
(36,435)
(7,618)
282,134
142,441
(194,269)
(22,541)
$
23.32
27.17
23.56
23.30
24.96
20.08
24.04
21.39
Nonvested at January 2, 2009
Shares granted
Shares vested
Shares forfeited
Nonvested at January 1, 2010 (1)
(1) Includes 24,000 performance-vested restricted stock with a weighted average grant date fair value of $23.07 per share.
207,765
100,358
(104,412)
(18,713)
184,998
22.86
26.17
23.79
23.49
24.06
$
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 (expense) from the vesting of restricted stock and
restricted stock units was ($0.1 million), $0.04 million and $0.03 million for 2009, 2008 and 2007,
respectively. As of January 1, 2010, there was $3.9 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.
9. OTHER OPERATING EXPENSES, NET
Other operating expenses, net 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 1,
2010
$
-
7,069
3,077
948
11,094
$
93
Year ended
January 2,
2009
$
December 28,
2007
$
663
8,347
5,369
199
14,578
4,697
531
-
96
5,324
$
$
(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. That 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 would be moved into its Tijuana
Facility and that the research, development and engineering and product development functions at its
Columbia Facility and at ARL would 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 and development activities and business growth opportunities.
The total cost of these projects was $24.7 million, which was incurred from 2005 to 2008, and consisted
of the following:
(cid:2) Severance and retention - $7.4 million;
(cid:2) Production inefficiencies, moving and revalidation - $4.6 million;
(cid:2) Accelerated depreciation and asset write-offs - $1.1 million;
(cid:2) Personnel - $8.4 million; and
(cid:2) Other - $3.2 million.
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 Greatbatch Medical business segment, $0.1 million in the
Electrochem segment and $1.0 million was recorded in unallocated operating expenses. No costs related
to these projects were incurred during 2009 as consolidations were complete and all payments have been
made. Accrued liabilities related to the 2005 & 2006 facility shutdowns and consolidations are
comprised of the following (in thousands):
Severance
and
retention
2,150
$
159
(2,234)
Production
inefficiencies,
moving and
revalidation
-
$
42
(42)
Personnel
-
$
184
(184)
Other
-
$
278
(278)
Total
$
2,150
663
(2,738)
Balance, December 28, 2007
Restructuring charges
Cash payments
Balance, January 2, 2009
$
75
$
-
$
-
$
-
$
75
Cash payments
Balance, January 1, 2010
(75)
$
-
$
-
$
-
$
-
(75)
$
-
(b) 2007 & 2008 facility shutdowns and consolidations. In the first quarter of 2007, the Company
announced that it would close its Electrochem manufacturing facility in Canton, MA and construct a
new 81,000 square foot replacement facility in Raynham, MA. This initiative was not cost savings
driven but capacity driven and was completed in the first quarter of 2009.
In the second quarter of 2007, the Company announced that it would 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 and administrative and research and 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
(Electrochem), closed its leased manufacturing facility in Orchard Park, NY (Electrochem), and
consolidated its Saignelegier, Switzerland manufacturing facility (Orthopaedics). The operations of
these facilities were relocated to existing facilities that had excess capacity.
In the fourth quarter of 2008, management approved a plan for the consolidation of its Teterboro, NJ
(Electrochem manufacturing), Blaine, Minnesota (Vascular Access manufacturing) and Exton,
Pennsylvania (Orthopaedics corporate office) facilities into existing facilities that had excess capacity.
The Blaine, MN and Exton, PA consolidations were completed in the second quarter of 2009. The
Teterboro, NJ initiative was completed in the fourth quarter of 2009.
The total cost incurred for these facility shutdowns and consolidations was $16.0 million and included
the following:
(cid:2) Severance and retention - $4.5 million;
(cid:2) Production inefficiencies, moving and revalidation - $5.0 million;
(cid:2) Accelerated depreciation and asset write-offs - $4.2 million;
(cid:2) Personnel - $0.6 million; and
(cid:2) Other - $1.7 million.
All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset
write-offs. For 2009, costs relating to these initiatives of $1.6 million and $5.5 million were included in
the Greatbatch Medical and Electrochem business segments, respectively. Costs incurred during 2008 of
$0.3 million, $4.7 million and $3.3 million were included in unallocated Corporate expenses, Greatbatch
Medical and Electrochem business segments, respectively. All costs incurred in 2007 were included in the
Electrochem segment.
As a result of these consolidation initiatives, two Greatbatch Medical facilities and one Electrochem facility
are classified as held for sale as of January 1, 2010. These facilities are recorded at the lower of their
carrying amount or estimated fair value less cost to sell. The fair value of these facilities is primarily
determined by reference to recent sales data for comparable facilities taking into consideration recent
offers, if any, received from prospective buyers of the facility, which is categorized as Level 2 of the fair
value hierarchy. For 2009 and 2008, write-downs of $0.3 million and $1.7 million, respectively, were
recorded relating to the two Greatbatch Medical facilities and is included in Other Operating Expense, Net.
These facilities are expected to be sold within the next year and have a carrying value of $5.3 million as of
January 1, 2010 and are included in Other Current Assets in the Consolidated Balance Sheet.
94
95
Accrued liabilities related to the 2007 & 2008 facility shutdowns and consolidations are comprised of
the following (in thousands):
Severance
and
retention
570
$
2,661
-
(2,637)
594
$
Production
inefficiencies,
moving and
revalidation
$
-
2,074
-
(2,074)
$
-
Accelerated
depreciation/
asset write-
offs
-
$
2,978
(2,978)
-
$
-
Personnel
-
$
82
-
(82)
$
-
Other
-
$
552
-
(552)
$
-
Balance, December 28, 2007
Restructuring charges
Write-offs
Cash payments
Balance, January 2, 2009
$
Total
570
8,347
(2,978)
(5,345)
594
$
Restructuring charges
Write-offs
Cash payments
Balance, January 1, 2010
1,796
-
(1,466)
924
$
2,948
-
(2,948)
$
-
671
(671)
-
$
-
534
-
(534)
$
-
1,120
-
(1,120)
$
-
7,069
(671)
(6,068)
924
$
(c) Integration costs. For 2009 and 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.
(d) Asset dispositions and other. During 2009, 2008 and 2007, the Company recorded write-downs in
connection with various asset disposals, which were partially offset by insurance proceeds received. During
2009, the Company incurred approximately $0.6 million in severance charges in connection with various
workforce reductions.
10. INCOME TAXES
The U.S. and international components of income (loss) before provision (benefit) for income taxes
were as follows (in thousands):
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
U.S.
International
$
$
$
(15,285)
(2,892)
(18,177)
25,946
(5,429)
20,517
$
$
$
23,004
915
23,919
The provision (benefit) for income taxes was comprised of the following (in thousands):
Current:
Federal
State
International
Deferred:
Federal
State
International
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
827
(177)
294
$
5,860
693
520
$
17,661
592
320
944
(9,256)
(153)
(711)
(10,120)
7,073
3,024
(692)
(3,036)
(704)
18,573
(6,407)
(25)
(172)
(6,604)
$
(9,176)
$
6,369
$
11,969
The provision (benefit) 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
Uncertain tax positions
In-process research and development
State taxes, net of federal benefit
Valuation allowance
Other
Effective tax rate
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
(35.0)
0.0
(5.5)
1.9
(7.8)
0.0
(1.2)
(0.1)
(2.8)
(50.5)
%
%
35.0
(7.5)
(4.4)
4.0
0.8
3.0
(0.9)
0.9
0.1
31.0
%
%
35.0
0.0
(5.2)
0.0
0.7
20.3
1.6
(0.7)
(1.7)
50.0
%
%
In February 2010, President Obama’s administration announced various proposals to modify certain
aspects of the rules governing the U.S. taxation of certain non-U.S. subsidiaries. Many details of the
proposals remain unknown and any legislation enacting such modifications would require Congressional
approval; however, changes to these rules could significantly impact the Company’s effective tax rate.
During 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 authority’s 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.
96
97
Deferred tax assets (liabilities) consist of the following (in thousands):
Year Ended
January 1,
2010
January 2,
2009
$
$
Tax credits
Net operating loss carryforwards
Inventories
Accrued expenses
Stock-based compensation
Other
Gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Property, plant and equipment
Intangible assets
Convertible subordinated notes
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
5,318
4,189
4,139
15,871
5,711
807
36,035
(5,656)
30,379
(3,471)
(35,808)
(28,789)
(68,068)
(37,689)
5,307
3,633
4,904
3,110
4,790
1,374
23,118
(4,485)
18,633
(4,233)
(37,020)
(25,257)
(66,510)
(47,877)
$
$
13,896
2,458
(54,043)
(37,689)
$
$
$
8,086
1,942
(57,905)
(47,877)
$
As of January 1, 2010, the Company has the following carryforwards available:
Jurisdiction
U.S.
Switzerland
State
State
State
Tax
attribute
Net Operating Loss
Net Operating Loss
Net Operating Loss
R&D Credit
Investment Tax Credit
Amount
$ 2.9 million
11.1 million
14.8 million
0.4 million
4.9 million
(1)
(1)
Begin to
expire
2022
2011
(1) Various
Various
Various
(1) These tax attributes were acquired primarily as part of the Precimed acquisition in 2008. The
utilization of certain 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 the accounting for
uncertain tax positions, 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.
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 1, 2010 and 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
the Company has 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, the
Company believes that its 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 business combinations
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
January 1,
2010
$
5,686
396
-
(1,185)
(700)
Year Ended
January 2,
2009
$
1,678
699
3,979
(373)
(233)
December 28,
2007
$
1,787
110
280
(481)
-
(779)
3,418
$
(64)
5,686
$
(18)
1,678
$
The tax years that remain open and subject to tax audits varies depending on the tax jurisdiction. During
2009, the IRS completed their review of the Company’s 2006 and 2007 U.S. income tax returns. The
2008 tax year remains open for examination. In addition, the state of Massachusetts completed its audit
of the 2004-2006 tax years of the Company.
It is reasonably possible that a reduction in the range of $0.0 million to $0.7 million of the balance of
unrecognized tax benefits may occur within the next 12 months as a result of the lapse of the statute of
limitations. As of the end of 2009, approximately $1.9 million of unrecognized tax benefits would
favorably impact the effective tax rate (net of federal benefit on state issues), if recognized.
11. 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.
98
99
As previously reported, in 2002, a former Electrochem customer, Input/Output Marine Systems
(“Input/Output”), commenced an action against the Company alleging breach of contract,
misappropriation of trade secrets, negligence, unfair trade practices and fraud arising out of a failed
business transaction dating back to 1997 (the “Electrochem Litigation”). Although summary judgment
was awarded in favor of the Company in February 2007, the Louisiana Court of Appeal reversed the
decision of the trial court and reinstated the case. After trial in September 2009, a jury found in favor of
Input/Output on the fraud, unfair trade practices and breach of contract claims and awarded damages in
the amount of $21.7 million. The final judgment in the matter included an award of prejudgment
interest bringing the total judgment to approximately $33 million. The Company’s post-trial motion for
a new trial was denied, and the Company has now appealed the judgment to the Louisiana Court of
Appeal. During the appeal process, interest on the judgment will accrue based upon the Louisiana
statutory rate, which is currently 5.5%.
To date, the cost of defense in the Input/Output litigation has been paid by the Company’s insurance
carrier. As a result of the jury verdict, the insurer has filed a declaratory judgment suit alleging that
there is no coverage for the jury verdict, and that it has no further obligation to defend. Additionally, the
insurer is seeking reimbursement of $1.3 million in defense costs expended prior to the jury verdict.
The Company does not believe the insurer is entitled to reimbursement of the prior defense costs and is
vigorously defending the suit.
During 2009, the Company accrued $34.5 million in connection with the Input/Output litigation.
As previously reported, on June 12, 2006, Enpath Medical, Inc. (“Enpath”), a subsidiary of the
Company that has since been merged into Greatbatch Ltd., 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 four 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. The Company
has appealed the judgment to the U.S. Court of Appeals for the Federal Circuit, and oral arguments were
heard before that tribunal on April 21, 2009. As a result of a post-trial motion and pending the appeal,
the Company is permitted to continue to sell FlowGuard™ provided that it pays into an escrow fund a
royalty of between $1.50 and $2.25 for each sale of a FlowGuard™ valved introducer. The amount paid
into escrow during 2009 was $0.9 million and $1.4 million in total as of January 1, 2010.
License agreements – The Company is a party to various license agreements for technology that is
utilized in certain of its products. The most significant of these agreements are the licenses for basic
technology used in the production of wet tantalum capacitors, filtered feedthroughs and MRI compatible
lead systems. Expenses related to license agreements were $3.3 million, $3.0 million and $2.1 million,
for 2009, 2008 and 2007, respectively, and are included in Cost of Sales.
Product Warranties – The change in product warranty liability was comprised of the following (in
thousands):
Year Ended
January 1,
2010
January 2,
2009
Beginning balance
Warranty reserves acquired
Additions to warranty reserve
Warranty claims paid
Ending balance
$
$
1,395
-
668
(733)
1,330
1,454
142
1,185
(1,386)
1,395
$
$
Operating Leases – The Company is a party to various operating lease agreements for buildings,
equipment and software. The Company incurred operating lease expense of $3.4 million, $3.8 million,
and $2.2 million, in 2009, 2008 and 2007, respectively. Minimum future annual operating lease
payments are $2.8 million in 2010; $2.1 million in 2011 $2.0 million in 2012; $1.9 million in 2013; $1.6
million in 2014 and $1.7 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 – With respect to its operations 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 those obligations.
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 capital and 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 1, 2010, the total contractual obligation
related to such expenditures is $20.8 million, the majority of which is expected to be paid in 2010 and
will be financed by cash and cash equivalents or financing under the Credit Facility. 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.
100
101
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 purchase price of Precimed, which 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 purchase price of the Chaumont Facility, which was payable in Euros. The net
result of the above contracts, which were settled upon the funding of the respective acquisitions, was a
gain of $2.4 million, $1.6 million of which was recorded in 2008 as Other Income, Net.
In February 2009, the Company entered into forward contracts 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. These
contracts were entered into in order to hedge the risk of peso-denominated payments associated with the
operations at the Company’s Tijuana, Mexico facility and were accounted for as cash flow hedges. No
portion of the change in fair value of these foreign currency contracts during 2009 was considered
ineffective. The amount recorded as a reduction of Cost of Sales during 2009 related to these forward
contracts was $0.6 million.
In December 2009, the Company entered into forward contracts to purchase 6.6 million Mexican pesos per
month from January 2010 to December 2010 at an exchange rate of 13.159 pesos per one U.S. dollar.
These contracts were entered into in order to hedge the risk of peso-denominated payments associated with
the operations at the Company’s Tijuana, Mexico facility for 2010. These contracts are being accounted
for as cash flow hedges and had a negative fair value of $0.09 million as of January 1, 2010, which is
recorded within Other Current Liabilities in the Consolidated Balance Sheet.
2010 Foreign Currency Contracts (Unaudited) – In February 2010, the Company entered into forward
contracts to purchase an additional 3.3 million Mexican pesos per month from February 2010 to
December 2010 at an exchange rate of 13.1595 pesos per one U.S. dollar. These contracts were entered
into in order to hedge the risk of peso denominated payments associated with the operations at the
Company’s Tijuana, Mexico facility for 2010. These contracts are being accounted for as cash flow
hedges.
Assets held for sale – Assets held for sale are recorded at the lower of their carrying amount or estimated
fair value less cost to sell. For the two properties written-down in 2008 and 2009, the fair value was
primarily determined by reference to recent sales data for comparable facilities taking into consideration
recent offers, if any, received from prospective buyers of the facility. The Company’s assets held for
sale that are recorded at fair value are categorized in Level 2 of the fair value hierarchy.
Interest rate swaps – The fair value of interest rate swaps are determined through the use of cash flow models
that utilize observable market data inputs to estimate fair value. These observable market data inputs include
LIBOR and swap rates, and credit spread curves. In addition to the above, the Company receives fair value
estimates from the interest rate swap counterparty to verify the reasonableness of the Company’s estimates.
The Company’s interest rate swaps are categorized in Level 2 of the fair value hierarchy.
Foreign currency contracts – The fair value of foreign currency contracts are determined through the use of
cash flow models that utilize observable market data inputs to estimate fair value. These observable market
data inputs include foreign exchange rate and credit spread curves. In addition to the above, the Company
receives fair value estimates from the foreign currency contract counterparty to verify the reasonableness of
the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair
value hierarchy.
Convertible subordinated notes – The fair value of the Company’s convertible subordinated notes
disclosed in Note 6 – “Debt” were determined by reference to 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 7 –
“Employee Benefit Plans” are determined based upon quoted market prices in active markets or
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 1 or Level 2 of the fair value hierarchy.
12. FAIR VALUE MEASUREMENTS
13. BUSINESS SEGMENT INFORMATION
The following table provides information regarding assets and liabilities recorded at fair value in the
Company’s Consolidated Balance Sheet as of January 1, 2010 (in thousands):
Description
Assets
Assets held for sale (Note 9)
Liabilities
Foreign currency contracts (Note 11)
Interest rate swaps (Note 6)
Fair value measurements using
Quoted
prices in
active
markets
for
identical
assets
At
January 1,
2010
Significant
other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
3,207
$
-
$
3,207
$
-
-
-
89
1,612
-
-
89
1,612
102
The Company operates its business in two reportable segments – Greatbatch Medical and Electrochem.
During 2009, the Company rebranded its IMC segment as Greatbatch Medical. The Greatbatch Medical
segment designs and manufactures systems, components and devices for the CRM, Neuromodulation,
Vascular Access and Orthopaedic markets. The Company’s products include: 1) batteries, capacitors,
filtered and unfiltered feedthroughs, engineered components and enclosures used in IMDs; 2) instruments
and delivery systems used in hip and knee replacement, trauma and spine surgeries as well as hip, knee
and shoulder implants; and 3) introducers, catheters, steerable sheaths and implantable stimulation leads.
Additionally, Greatbatch Medical offers value-added assembly and design engineering services for
medical systems and devices within the markets in which it operates.
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.
103
The Company defines segment income (loss) from operations as sales less cost of sales and expenses
attributable to segment-specific selling, general and administrative, research, development and
engineering expenses, and other operating expenses. Segment income (loss) also includes a portion of
non-segment specific selling, general and administrative expenses based on allocations appropriate to
the expense categories. The remaining unallocated operating expenses are primarily corporate
headquarters and administrative function expenses. 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 and investments,
non-segment specific 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 Greatbatch Medical segment results for 2009 includes a $15.9 million intangible asset write-down
(See Note 4). The 2009 Electrochem operating loss includes a $34.5 million charge related to the
Electrochem Litigation (See Note 11). The Greatbatch Medical 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. Greatbatch Medical 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.
An analysis and reconciliation of the Company’s business segment and product line information to the
respective information in the consolidated financial statements is presented below (in thousands):
Sales:
Greatbatch Medical
CRM/Neuromodulation
Vascular Access
Orthopaedic
Total Greatbatch Medical
Electrochem
Total sales
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
305,354
35,816
113,897
$
286,251
39,443
142,446
$
253,676
16,146
-
455,067
66,754
468,140
78,504
269,822
48,924
$
521,821
$
546,644
$
318,746
Segment income (loss) from operations:
Greatbatch Medical
Electrochem
Total segment income from operations
Unallocated operating expenses
Operating income as reported
Unallocated other income (expense)(1)
Income (loss) before provision (benefit) for
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
46,270
(32,734)
$
49,760
9,499
$
25,367
9,378
13,536
(12,488)
1,048
(19,225)
59,259
(24,365)
34,894
(14,377)
34,745
(14,725)
20,020
3,899
income taxes as reported
$
(18,177)
$
20,517
$
23,919
Depreciation and amortization:
Greatbatch Medical
Electrochem
Total depreciation and amortization included
in segment income from operations
Unallocated depreciation and amortization(1)
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
29,869
2,860
$
36,987
2,748
$
19,166
1,632
32,729
14,500
39,735
12,433
20,798
9,813
Total depreciation and amortization
$
47,229
$
52,168
$
30,611
Expenditures for tangible long-lived assets,
excluding acquisitions:
Greatbatch Medical
Electrochem
Total reportable segments
Unallocated long-lived tangible assets
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
11,261
910
$
11,414
19,602
$
12,847
7,558
12,171
7,040
31,016
16,562
20,405
2,087
Total expenditures
$
19,211
$
47,578
$
22,492
(1) Retroactively adjusted to reflect change in accounting for convertible debt. See Note 1.
104
105
Identifiable assets, net:
Greatbatch Medical
Electrochem
Total reportable segments
Unallocated assets (1)
Total assets
Sales by geographic area:
United States
Non-domestic countries:
Puerto Rico
United Kingdom & Ireland
France
Belgium
All other
As of
January 1,
2010
January 2,
2009
$
663,539
79,157
$
678,565
65,631
742,696
87,847
744,196
103,837
$
830,543
$
848,033
January 1,
2010
Year Ended
January 2,
2009
December 28,
2007
$
245,974
$
266,985
$
153,708
76,823
66,255
37,373
29,431
65,965
56,941
75,917
74,670
-
72,131
42,132
67,409
13,065
-
42,432
Consolidated sales
$
521,821
$
546,644
$
318,746
Long-lived tangible assets:
United States
Foreign countries
As of
January 1,
2010
January 2,
2009 (1)
$
132,605
38,478
$
141,733
42,119
Consolidated long-lived assets
$
171,083
$
183,852
A significant portion of the Company’s sales and accounts receivable were to four customers as follows:
January 1,
2010
22%
17%
12%
12%
63%
Customer A
Customer B
Customer C
Customer D
Total
Sales
Year Ended
January 2,
2009
17%
14%
13%
12%
56%
December 28,
2007
25%
17%
25%
0%
67%
Accounts Receivable
As of
January 1,
2010
13%
19%
11%
5%
48%
January 2,
2009
11%
12%
9%
5%
37%
(1) Retroactively adjusted to reflect change in accounting for convertible debt. See Note 1.
14. QUARTERLY SALES AND EARNINGS DATA – UNAUDITED
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.
2009
Sales
Gross profit
Net income (loss) (1)(2)
Earnings (loss) per share - basic
Earnings (loss) per share - diluted
2008
Sales
Gross profit
Net income (loss) (3) (4)
Earnings (loss) per share - basic (4)
Earnings (loss) per share - diluted (4)
$
125,808
41,646
(1,534)
(0.07)
(0.07)
(in thousands, except per share data)
$
$
121,470
39,137
134,725
41,472
(20,693)
(0.90)
(0.90)
6,562
0.29
0.28
$
139,818
44,164
6,664
0.29
0.28
$
146,600
46,742
$
136,242
41,753
$
141,648
40,595
$
122,154
26,699
7,364
0.33
0.31
6,516
0.29
0.28
4,713
0.21
0.21
(4,445)
(0.20)
(0.20)
(1) Net loss in the 2009 fourth quarter includes the write-down of intangible assets. See Note 4.
(2) Net loss in the 2009 third quarter includes the Electrochem Litigation. See Note 11.
(3) Net loss in the 2008 first quarter includes inventory step-up amortization and an IPR&D charge
related to our 2007 and 2008 acquisitions.
(4) Retroactively adjusted to reflect change in accounting for convertible debt. See Note 1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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” along with the attestation report of our
independent registered public accounting firm.
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 1, 2010, 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 – There have been no changes in our
internal control over financial reporting that occurred 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.
106
107
ITEM 9B. OTHER INFORMATION
None.
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 2010 Annual
Meeting of Stockholders, which will be filed with the Securities and Exchange Commission on or
about April 14, 2010.
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.
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 2010 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 2010
Annual Meeting of Stockholders is incorporated herein by reference.
PART IV
The other information required by Item 10 is incorporated by reference to the Company’s definitive
Proxy Statement for its 2010 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission on or about April 14, 2010.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
ITEM 11.
EXECUTIVE COMPENSATION
Information regarding executive compensation in the Proxy Statement for the 2010 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
2010 Annual Meeting of Stockholders is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding the Company’s equity compensation plans:
Number of securities to
be issued upon exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
( a )
( b )
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
( c )(2)
2,435,276
$
24.17
1,406,693
-
2,435,276
$
-
24.17
-
1,406,693
Plan Category
(As of January 1, 2010)
Equity compensation plans
approved by security holders (1)
Equity compensation plan not
approved by security holders
Total
(1) Consists of stock options issued under the 1997 and 1998 Stock Option Plan, Non-Employee Director Stock
Incentive Plan, 2005 Stock Incentive Plan and the 2009 Stock Incentive Plan. Also includes 71,169 shares of
restricted stock units that were granted under the 2005 Stock Incentive Plan at a weighted average grant date fair
value of $26.02 per share.
(2) As of January 1, 2010, 1,406,693 shares were available for future grants of stock options, stock appreciation
rights, restricted stock, restricted stock units or stock bonuses. Due to plan sub-limits, of the shares available for
grant only 553,962 shares may be issued in the form of restricted stock, restricted stock units or stock bonuses.
(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.”
(2)
The following financial statement schedule is included in this report on Form 10-K (in thousands):
Schedule II – Valuation and Qualifying Accounts
Additions
Col. B
Balance at
Beginning
of Period
Charged to
Costs & Expenses
Charged to
Other Accounts-
Describe
Col. D
Deductions -
Describe
Col. E
Balance at
End of
Period
$
1,603
$
961
$
-
$
(112)
(2)
$
2,452
$
4,485
$
1,171
(1)
$
-
$
-
$
5,656
$
758
$
590
$
374
(4)
$
(119)
(2)
$
1,603
$
3,969
$
-
$
580
(4)
$
(64)
(1)
$
4,485
$
532
$
151
$
173
(3)
$
(98)
(2)
$
758
$
4,342
$
-
$
-
$
(373)
(1)
$
3,969
Col. A
Description
January 1, 2010
Allowance for
doubtful accounts
Valuation allowance
for deferred income
tax assets
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
(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) Balances recorded as a part of our 2007 acquisitions of Enpath Medical, Quan Emerteq and EAC.
(4) Balances recorded as a part of our 2008 acquisitions of P Medical Holding SA.
108
109
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.
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, 2010
By /s/ Thomas J. Hook
Thomas J. Hook
President & Chief Executive Officer
(Principal Executive Officer)
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
Title
/s/ Thomas J. Hook
Thomas J. Hook
/s/ Thomas J. Mazza
Thomas J. Mazza
/s/ Marco F. Benedetti
Marco F. Benedetti
/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
President & Chief Executive
Officer & Director
Senior Vice President & Chief
Financial Officer
(Principal Financial Officer)
Corporate Controller
(Principal Accounting Officer)
Date
March 2, 2010
March 2, 2010
March 2, 2010
Chairman
March 2, 2010
Director
Director
Director
March 2, 2010
March 2, 2010
March 2, 2010
/s/Dr. Joseph A. Miller, Jr.
Dr. Joseph A. Miller, Jr.
Director
March 2, 2010
Signature
Title
Date
/s/ Peter H. Soderberg
Peter H. Soderberg
Director
March 2, 2010
/s/ William B. Summers, Jr.
William B. Summers, Jr.
Director
March 2, 2010
/s/ John P. Wareham
John P. Wareham
Director
March 2, 2010
/s/ Dr. Helena S. Wisniewski
Dr. Helena S. Wisniewski
Director
March 2, 2010
EXHIBIT
NUMBER
EXHIBIT INDEX
DESCRIPTION
3.1
3.2*
4.1
4.2
4.3
4.4
4.5
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 as of March 2, 2009.
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).
110
111
10.1#
10.2#
10.3#
10.4#
10.5#
10.6#
10.7
10.8
10.9
10.10*
10.11*
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)).
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)).
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. (incorporated by reference to Exhibit 10.8 to our
Annual Report on Form 10-K for the year ended January 2, 2009)
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. (incorporated by reference to Exhibit 10.9 to our
Annual Report on Form 10-K for the year ended January 2, 2009)
Amendment No. 3 to Credit Agreement dated as of March 31, 2009 by and among
Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust
Company, as administrative agent.
Amendment No. 4 to Credit Agreement dated as of October 30, 2009 by and among
Greatbatch Ltd., the lenders party thereto and Manufacturers and Traders Trust
Company, as administrative agent.
10.12#
2002 Restricted Stock Plan (incorporated by reference to Appendix B to our Definitive
Proxy Statement on Schedule 14A filed on April 9, 2003).
10.13
10.14+
10.15+
10.16+
10.17+
10.18#
10.19#
10.20#
10.21#
10.22#
10.23#
10.24#
10.25#
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).
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).
2009 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive
Proxy Statement on Schedule 14A filed on April 13, 2009).
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).
112
113
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.
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).
31.2*
32.1*
10.26+
10.27
10.28+
10.29+
10.30+
10.31+
10.32+
10.33+
Form of Exchange and Purchase Agreement dated March 22, 2007, by and between
Greatbatch, Inc. and certain other parties thereto related to its outstanding 2 1/4%
Convertible Subordinated Debentures due 2013. (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).
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*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
114
115
EXHIBIT 12.1
RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
Jan. 1,
2010
Jan. 2,
2009 (1)
Year-ended
Dec. 28,
2007 (1)
Dec. 29,
2006
Dec. 30,
2005
$
(18,177)
-
$
20,517
(162)
$
23,919
(21)
$
23,534
-
$
15,464
(30)
Earnings:
Income (loss) before income taxes
Pretax credits
Fixed Charges:
Interest expense
Capitalized interest
Discounts & deferred financing fees
Interest portion of rental expense
Total earnings and fixed charges
9,930
-
10,106
1,053
2,912
$
10,435
171
9,583
850
41,394
$
5,427
22
6,967
574
36,888
$
3,966
-
719
584
28,803
$
3,965
32
703
502
20,636
$
Fixed Charges:
Interest expense
Capitalized interest
Discounts & deferred financing fees
Interest portion of rental expense
Total fixed charges
$
$
$
$
$
9,930
-
10,106
1,053
21,089
10,435
171
9,583
850
21,039
5,427
22
6,967
574
12,990
3,966
-
719
584
5,269
3,965
32
703
502
5,202
$
$
$
$
$
Ratio of earnings to fixed charges
0.1
2.0
2.8
5.5
4.0
(1) Retroactively restated - See Note 1 “Summary of Significant Accounting Policies” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report.
EXHIBIT 21.1
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, 333-143519, and 333-161159 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 2, 2010, relating to the consolidated financial
statements and consolidated financial statement schedule of Greatbatch, Inc. and subsidiaries
(the “Company”) (which report expressed an unqualified opinion and included an explanatory
paragraph regarding the Company's change in method of accounting for its convertible debt
instruments), 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 1,
2010.
Buffalo, New York
March 2, 2010
SUBSIDIARIES OF GREATBATCH, INC.
Subsidiary
Greatbatch Ltd., doing business as Greatbatch Medical
(direct subsidiary of Greatbatch, Inc.)
Greatbatch LLC
(direct subsidiary of Greatbatch Ltd.)
Greatbatch Medical, S. de R.L. de C.V.
(owned 99% by Greatbatch LLC & 1% by Greatbatch, Inc.)
Electrochem Solutions, Inc.
(direct subsidiary of Greatbatch Ltd.)
Incorporated
New York
Delaware
Mexico
Massachusetts
Greatbatch-Globe Tool, Inc., doing business as Greatbatch Medical
(direct subsidiary of Greatbatch Ltd.)
Minnesota
Precimed Inc., doing business as Greatbatch Medical
(direct subsidiary of Greatbatch Ltd.)
P Medical Holding SA
(direct subsidiary of Greatbatch Ltd.)
Greatbatch Medical SA
(direct subsidiary of P Medical Holding SA)
Greatbatch Medical SAS
(direct subsidiary of Greatbatch Medical SA)
Pennsylvania
Switzerland
Switzerland
France
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, 2010
Thomas J. Hook
President & Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.1
I, Thomas J. Hook, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the fiscal year ended January 1, 2010 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.
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, 2010
_________________
Thomas J. Mazza
Senior Vice President &
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 31.2
I, Thomas J. Mazza, certify that:
CERTIFICATION
1.
2.
3.
4.
I have reviewed this report on Form 10-K for the fiscal year ended January 1, 2010 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.
EXHIBIT 32.1
Board of Directors
Corporate Leadership
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 1, 2010 (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, 2010
Dated: March 2, 2010
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.
Bill R. Sanford, Chairman
Founder & Chairman,
Symark LLC
Thomas J. Hook
President & Chief
Executive Offi cer
Susan H. Campbell
Senior Vice President,
Orthopaedics
Thomas J. Mazza
Senior Vice President
& Chief Financial Offi cer
Barbara M. Davis
Vice President,
Human Resources
Mauricio Arellano
Senior Vice President,
Cardiac & Neurology
Susan M. Bratton
Senior Vice President,
Electrochem
Timothy G. McEvoy
Vice President,
General Counsel
& Secretary
Peter H. Soderberg
Managing Partner,
Worthy Ventures
Resources, LLC
William B. Summers, Jr.
Retired Chairman &
Chief Executive Offi cer,
McDonald Investments, Inc.
John P. Wareham
Non-Executive Chairman,
STERIS Corporation
Dr. Helena S. Wisniewski
Chief Executive,
Equinox Toys, LLC
Pamela G. Bailey
President & Chief
Executive Offi cer,
The Grocery
Manufacturers
Association
Michael Dinkins
Executive Vice President
& Chief Financial Offi cer,
USI Insurance Services
Thomas J. Hook
President & Chief
Executive Offi cer,
Greatbatch, Inc.
Kevin C. Melia
Non-Executive Chairman,
Vette Corporation
Dr. Joseph A. Miller, Jr.
Executive Vice President
& Chief Technology
Offi cer, Corning, Inc.
Shareholder Information
INVESTOR
INFORMATION
TRANSFER AGENT
AND REGISTRAR
Shareholders, securities
BNY Mellon
analysts and investors
Shareowner Services
seeking more information
480 Washington
about the company can
Boulevard
access information via
Jersey City, NJ 07310
the Internet or from
Tel: 800 288-9541
the Investor Relations
TDD: 800 231-5469
Department:
INDEPENDENT
10000 Wehrle Drive
REGISTERED PUBLIC
Clarence, NY 14031
ACCOUNTING FIRM
www.greatbatch.com
Deloitte & Touche LLP
Buffalo, NY