2015 Annual Report
To our shareholders:
2015 has truly been a transformational year. In October, we merged Greatbatch and Lake Region Medical to form
the world’s largest implantable medical device outsource manufacturer. Upon shareholder approval we will change
the company name to Integer Holdings Corporation and our NYSE stock symbol to ITGR.
As the name suggests, we will combine both entities into a single, cohesive company capable of providing our
customers with a full portfolio of offerings ranging from discrete component technologies to full active implantable
medical devices. With this expanded capability and increased scale we are optimally positioned to drive sustainable
growth and profitability.
2015 also marked the completion of another strategic milestone, the FDA PMA approval of our internally developed
Algovita spinal cord neurostimulation system. We are one of a small number of companies in the world capable of
designing, developing and manufacturing full active implantable medical device systems. With additional device
capabilities from Lake Region Medical, we are in a stronger position to offer an even broader suite of technologies
to customers across our four product categories - Cardiac Rhythm Management & Neuromodulation, Cardio &
Vascular, Advanced Surgical & Orthopedics and non-medical markets such as Energy, Military & Environmental.
Our primary objective in 2016 is twofold; successfully integrate the legacy company cultures & operations into an
integrated entity and to further strengthen our customer partnerships. To that end, we have established a new
Integer leadership team, closely aligning our major product categories with those of our customers. Collectively,
this focus will allow us to increase customer collaboration, improve operating results and sustain a strong working
environment for our Associates.
As we look to the future, the Executive Leadership Team and I are highly focused on delivering improved organic
growth and outstanding returns for our investors. We are passionate and excited about the future, and hope you
share our enthusiasm for what we are creating at Integer.
Sincerely,
Thomas J. Hook
President & Chief Executive Officer
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, 2016
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.)
2595 Dallas Parkway
Suite 310
Frisco, Texas 75034
(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
Name of Each Exchange on Which Registered:
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by checkmark whether the registrant has submitted electronically 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
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
Accelerated filer
Non-accelerated filer
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
The aggregate market value of common stock held by non-affiliates as of July 3, 2015 (the last business day of the
registrant’s most recently completed second fiscal quarter), based on the last sale price of $53.50, as reported on the New York
Stock Exchange on that date: $1,342 million. Solely for the purpose of this calculation, shares held by directors and officers and
10 percent shareholders of the registrant have been excluded. This exclusion should not be deemed a determination or an
admission that these individuals are, in fact, affiliates of the registrant.
Shares of common stock outstanding as of March 1, 2016: 30,778,835
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are specifically incorporated by reference into the indicated parts of this report:
Document
Proxy Statement for the 2016 Annual Meeting of
Stockholders
Part III, Item 10
“Directors, Executive Officers and Corporate Governance”
Part
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 Accountant Fees and Services”
ITEM
NUMBER
1 Business
1A Risk Factors
1B Unresolved Staff Comments
2 Properties
3 Legal Proceedings
4 Mine Safety Disclosures
TABLE OF CONTENTS
PART I
PART II
5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6 Selected Financial Data
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A Quantitative and Qualitative Disclosures About Market Risk
8 Financial Statements and Supplementary Data
9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
9A Controls and Procedures
9B Other Information
10 Directors, Executive Officers and Corporate Governance
11 Executive Compensation
PART III
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13 Certain Relationships and Related Transactions, and Director Independence
14 Principal Accounting Fees and Services
PART IV
15 Exhibits, Financial Statement Schedules
Signatures
PAGE
NUMBER
3
22
31
31
31
31
32
34
35
60
62
113
113
113
114
114
114
114
114
115
116
- 2 -
PART I
ITEM 1.
BUSINESS
OVERVIEW
Greatbatch, Inc. manufactures and develops high-quality medical devices and components primarily for large original
equipment manufacturers (“OEMs”), which depend on us to design, develop and produce reliable, long-lasting, intellectual
property protected medical device technologies. During the fourth quarter of 2015, Greatbatch, Inc. acquired all of the
outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake Region Medical”) creating one of the largest medical
device outsource (“MDO”) manufacturers in the world serving the cardiac, neuromodulation, orthopaedics, cardio and vascular,
advanced surgical, portable medical, energy, environmental and military markets. Simultaneous with the close of the Lake
Region Medical acquisition, Greatbatch, Inc. also announced its intention to rename the combined entity Integer Holdings
Corporation. Integer is defined as complete, whole, and comprehensive, and represents the joining of Greatbatch, Inc. and Lake
Region Medical as well as the combined company's product and service offerings provided to customers. The new name is
subject to Greatbatch shareholder approval at the May 2016 annual meeting. When used in this report, the terms “Greatbatch,”
“we,” “us,” “our” and the “Company” mean Greatbatch, Inc. and its subsidiaries.
During 2015, we also announced a spin-off of a portion of our QiG reporting segment through a tax-free distribution of our QiG
Group LLC subsidiary (“QiG Group”) to the stockholders of Greatbatch on a pro rata basis (the “Spin-off”). Immediately prior
to completion of the Spin-off, QiG Group will be converted into a corporation organized under the laws of Delaware and
change its name to Nuvectra Corporation (“Nuvectra”). In February 2016, the Board of Directors of Greatbatch approved the
Spin-off with a distribution ratio whereby Greatbatch stockholders will receive one share of Nuvectra common stock for every
three shares of Greatbatch common stock held. The Spin-off is expected to be completed in March 2016. As a result of the Lake
Region Medical acquisition and pending Spin-off, the Company is reevaluating its operating and reporting segments, which is
expected to be finalized in 2016 once the corporate and management reporting structure realignment is completed. As of the
end of our 2015 fiscal year, we operate our business in three segments – Greatbatch Medical, QiG and Lake Region Medical.
The Greatbatch Medical segment designs and manufactures products where Greatbatch either owns or licenses the intellectual
property or has unique manufacturing and assembly expertise, primarily for the cardiac, neuromodulation, orthopaedic, portable
medical, vascular, energy, environmental and military markets. The Greatbatch Medical segment also offers value-added
assembly and design engineering services for medical devices using, in many cases, our proprietary technologies.
The QiG segment focuses on the design and development of medical device systems and components through a network of
research and development professionals who drive a diverse portfolio of new and innovative medical product opportunities.
QiG seeks to assist customers in accelerating the velocity of innovation while delivering an optimized supply chain and critical
cost efficiencies. QiG’s neurostimulation technology platform, which will be owned by Nuvectra after the completion of the
Spin-off, has the capability to provide treatment to patients in several established neurostimulation markets such as spinal cord
stimulation (“SCS”), sacral nerve stimulation (“SNS”), deep brain stimulation (“DBS”), and other emerging neurostimulation
markets. The QiG segment is comprised of QiG Group, NeuroNexus Technologies, Inc. (“NeuroNexus”), and Centro de
Construcción de Cardioestimuladores del Uruguay (“CCC”). The entities included in the pending Spin-off consist of QiG
Group and its subsidiaries Algostim LLC (“Algostim”) and PelviStim, LLC (“PelviStim”) and NeuroNexus. As an independent
publicly traded company after the completion of the Spin-off, Nuvectra will be focused on the development and
commercialization of its neurostimulation technology platform and, in particular, its Algovita® SCS system for the treatment of
chronic pain of the trunk and limbs (“Algovita”). The operations of CCC and certain other existing QiG research and
development capabilities will be retained by Greatbatch and are not included as part of the Spin-off.
Lake Region Medical has operated as a segment for Greatbatch since it was acquired during the fourth quarter of 2015. This
segment specializes in the design, development, and manufacturing of products across the medical component and device
spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated
outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services,
original device development, and supply chain management to its customers, who are located worldwide. This segment is
dedicated to providing our customers with reliable, high-quality, cost-efficient, integrated outsourced solutions in the medical
device space.
- 3 -
Since formation, Greatbatch has completed the following acquisitions either directly or indirectly through one of its
subsidiaries:
Acquisition Date
July 1997
Acquired Company
Business at Time of Acquisition
Wilson Greatbatch Ltd.
Founded in 1970, designed and manufactured
batteries for implantable medical and commercial
applications.
August 1998
Hittman Materials and Medical Components, Inc. Founded in 1962, designed and manufactured
August 2000
Battery Engineering, Inc.
June 2001
Sierra-KD Components division of Maxwell
Technologies, Inc.
July 2002
Globe Tool and Manufacturing Company, Inc.
March 2004
NanoGram Devices Corporation
April 2007
BIOMEC, Inc.
June 2007
Enpath Medical, Inc.
October 2007
IntelliSensing LLC
November 2007
Quan Emerteq LLC
November 2007
Engineered Assemblies Corporation
January 2008
P Medical Holding SA
ceramic and glass feedthroughs and specialized
porous coatings for electrodes used in implantable
medical devices (“IMDs”).
Founded in 1983, designed and manufactured
high-energy density batteries for industrial,
commercial, military and medical applications.
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.
Founded in 1954, designed and manufactured
precision enclosures used in IMDs and
commercial products used in the aerospace,
electronics and automotive sectors.
Founded in 1996, developed nanoscale materials
for battery and medical device applications.
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.
Founded in 1984, designed and integrated custom
battery solutions and electronics focused on
rechargeable systems for industrial, commercial,
military and portable medical applications.
Founded in 1994, designed, manufactured and
supplied delivery systems, instruments and
implants for the orthopaedics industry.
February 2008
DePuy Orthopaedics’ Chaumont, France
manufacturing facility
Manufactured hip and shoulder implants for
DePuy Orthopaedics.
December 2011
Micro Power Electronics, Inc. (“Micro Power”)
February 2012
NeuroNexus
Founded in 1990, designed custom battery packs,
smart chargers and power supplies for industrial,
military and portable medical applications.
Founded in 2004, medical device design firm
specializing in developing neural interface
technology, components and systems.
- 4 -
Acquisition Date
August 2014
CCC
Acquired Company
October 2015
Lake Region Medical
Business at Time of Acquisition
Founded in 1969, an active implantable
neuromodulation medical device systems
developer and manufacturer that produces a range
of medical devices including implantable pulse
generators, programmer systems, battery chargers,
patient wands and leads.
Founded in the 1940s, offers fully integrated
outsourced manufacturing, regulatory and
engineering services, contract manufacturing,
finished device assembly services, original device
development, and supply chain management
within the cardio, vascular and advanced surgical
markets.
FINANCIAL STATEMENT YEAR END
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. Fiscal years 2015, 2014 and 2013
ended on January 1, 2016, January 2, 2015, and January 3, 2014, respectively. Fiscal year 2015 and 2014 contained fifty-two
weeks and fiscal year 2013 contained fifty-three weeks.
SEGMENT INFORMATION
We operate our Company in three reportable segments: Greatbatch Medical, QiG, and Lake Region Medical. 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 in Note 19 “Business Segment, Geographic and Concentration
Risk Information” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. As a result of the Lake
Region Medical acquisition and the pending Spin-off, we are reevaluating our operating and reporting segments, which is
expected to be finalized in 2016 once our corporate and management reporting structure realignment is completed.
Greatbatch Medical
Greatbatch Medical’s products include medical devices and components for the cardiac, neuromodulation, orthopaedics,
vascular, portable medical, and energy markets among others. A brief description of these products and markets follows.
Cardiac and Neuromodulation – Products include batteries, capacitors, filtered and unfiltered feedthroughs, engineered
components, implantable stimulation leads and enclosures used in IMDs. Additionally, we offer value-added assembly for these
IMDs. 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 cardiac, which is comprised of devices such as implantable pacemakers, implantable cardioverter defibrillators
(“ICD”), cardiac resynchronization therapy (“CRT”) devices, and cardiac resynchronization therapy with backup defibrillation
devices (“CRT-D”). Another sector of the IMD market is neuromodulation, which is comprised of pacemaker-type devices that
stimulate nerves for the treatment of various conditions. Beyond established therapies for pain control, incontinence, movement
disorders (Parkinson’s disease, essential tremor and dystonia) and epilepsy, nerve stimulation for the treatment of other
disabilities such as sleep apnea, 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 symptoms treated by
each device:
Device
Pacemakers
ICDs
CRT/CRT-Ds
Neurostimulators
Principal Illness or Symptom
Abnormally slow heartbeat (Bradycardia)
Rapid and irregular heartbeat (Tachycardia)
Congestive heart failure
Chronic pain, incontinence, movement disorders, epilepsy,
obesity or depression
Cochlear hearing devices
Hearing loss
IMD systems generally include an implantable pulse generator (“IPG”) and one or more stimulation leads. An IPG is a battery
powered device that produces electrical pulses. The lead then carries this electrical pulse from the IPG to the heart, spinal cord
or other location in the body. Our portfolio of proprietary technologies, products, and capabilities has been built to provide our
cardiac and neuromodulation customers with a single source for the vast majority of the components and subassemblies
required to manufacture an IPG or lead, including complete lead systems. Our investments in research and development has
generated proprietary products such as the QHR®, QMR®
, and QCAPSTM primary battery and capacitor lines, which have enabled
- 5 -
our OEM partners to make improvements in their system offerings in terms of device reliability, size, longevity and power. Our
XcellionTM line of Lithium-Ion rechargeable batteries leverages decades of implantable battery research, development and
manufacturing expertise. This line of battery cells now includes the optional CoreGuardTM feature, which enables batteries to
discharge to zero volts without performance degradation.
We believe that the cardiac and neuromodulation markets continue to exhibit fundamentals for growth. Factors that are
impacting these markets are as follows:
• Growing patient population – Implantable pacemakers and ICDs remain primary therapies for a number of critical clinical
conditions, most of which are non-elective in nature. As the prevalence of many of these clinical conditions increase with
age, underlying population demographics in developed countries will provide an engine for procedure growth.
•
Focus on emerging markets – OEMs have increased their focus and investment to expand physicians’ awareness of these
life changing therapies, which we believe will result in increased utilization to improve quality of life for more patients
globally. These growth initiatives will drive increased utilization of existing cardiac technologies and provide an avenue for
new device and technology development as device manufacturers look to develop unique products for these markets.
• Trends in device features – IMD evolution continues to favor the development of smaller, longer lasting devices with
increased functionality and more physiologic shapes. Innovative battery, capacitor, enclosure, and filtering solutions such
as those provided by Greatbatch Medical are critical to the realization of these market needs.
• Growth within neuromodulation – Neuromodulation applications continue to grow at a faster pace than traditional markets,
and are expected to continue to expand as new therapeutic applications are identified. There continues to be growth in
clinical data supporting new applications and a growing focus and excitement from clinicians looking for treatment
alternatives for challenging patient conditions that have not been traditionally served by implantable stimulation devices.
As many cardiac OEM companies also operate as OEMs in the neuromodulation market, we believe Greatbatch is well
positioned to capitalize on these drivers of market growth based on the strength of our existing relationships. Additionally,
early stage neuromodulation OEMs have begun to receive CE mark and FDA approvals for their novel device systems and
therapies, further fueling incremental growth in the market and providing new potential partners for Greatbatch
technologies.
•
Innovative and disruptive technologies – Three innovative and disruptive device technologies (sub-cutaneous ICDs,
leadless pacemakers and injectable loop recorders) continued to receive significant attention from OEMs. These new
device technologies will play an important role in increasing utilization of critical therapy and diagnostic tools globally.
Our portfolio of technologies and next generation development efforts are vital to the advancement of these new therapy
and diagnostic platforms.
Orthopaedics – Products include hip and shoulder joint reconstruction implants, plates, screws and spinal devices, as well as
instruments and delivery systems used in hip and knee replacement, trauma fixation, extremity and spine surgeries. 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 single use instrumentation. Cases are used to store, transport and
arrange implant systems and other medical devices and related surgical instruments. Orthopaedic trays 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 to match the order of use in the
procedure and are securely held in clearly labeled, custom-formed pockets or brackets.
Many of the factors affecting the orthopaedics market are similar to the cardiac and neuromodulation markets and include:
• Aging population in developed markets – Conditions like osteoarthritis and spine degeneration are underlying drivers of a
diverse spectrum of reconstructive therapies, and increase significantly with age. Continued growth in the 65+ population,
along with an increased desire to remain active, will provide a driver for procedural growth.
• Rates of obesity – Rates of obesity globally have continued to rise, and are expected to do so for the foreseeable future.
Excess weight exacerbates wear on joints and will drive the need for replacement and revision procedures.
• New implant and surgical technology – The orthopaedic market continues to see a growing focus on minimally invasive
procedures across a number of sectors including joint reconstruction and spinal fusion, potentially expanding the use of
these therapeutic approaches.
- 6 -
• Growth in emerging markets – Growing affluence in emerging markets has provided an opportunity for global growth of a
number of orthopaedic procedures. Patient populations outside of developed markets continue to be underpenetrated, and
investment from large OEMs in these markets will provide for growth in the number of procedures of established therapies
that are completed.
Vascular – Products include off-the-shelf introducers, steerable sheaths, and components for high performance specialty
catheters that deliver minimally invasive therapies to treat disease states such as coronary, neurovascular and peripheral
vascular disease. Our customers include market leading OEMs within the interventional radiology, interventional cardiology,
electrophysiology and vascular access market. We believe that over the coming years these markets will experience strong
global procedural growth driven by:
• Growing global prevalence of vascular disease, reflecting both an aging population in many developed markets and the
continuing growth in the number of people with conditions such as diabetes, hypertension and obesity;
• Continued adoption of minimally invasive therapies in emerging markets; and
• Emergence of new minimally invasive therapies expanding patient pools to include patients who previously would have
remained either untreated or have undergone surgery.
Our products and capabilities seek to capitalize on the growth of the minimally invasive therapy markets by offering off-the-
shelf access devices such as introducers and steerable sheaths as well as design and manufacturing services for specialty
catheter components that enable the delivery and administration of predominantly cardiovascular, neurovascular and
endovascular therapies. Our broad portfolio of peelable, valved and non-valved introducers have gained strong adoption with
OEMs in both the cardiac rhythm management (“CRM”) market, for the placement of leads, as well as the vascular access
space where our introducers are used to place dialysis catheters, PICCs, CVCs and ports. We service these markets by
providing OEMs with customizable sterile kits or non-sterile product for inclusion in OEMs device kits. Our steerable sheaths
have gained significant traction in the electrophysiology market where market-leading OEMs utilize our steerable devices for
the delivery of diagnostic and ablation devices. Our specialty catheter shaft components provide OEMs with custom design,
prototyping, and manufacturing of the high performance catheter assemblies required to support the most demanding minimally
invasive catheter-based surgical procedures.
Portable Medical, Energy, Military and Environmental – Greatbatch Medical also provides customized battery power and
management systems, charging and docking stations, and power supplies. We design customized primary (non-rechargeable)
and secondary (rechargeable) battery solutions, which are used in the portable medical, energy, military and environmental
markets. Our primary and secondary power solutions are used where failure is not an option.
Greatbatch Medical’s primary lithium power solutions, which include high, moderate and low rate non-rechargeable cell
solutions, are utilized in extreme conditions and can withstand exceptionally high and low temperatures, sterilization, and high
shock and vibration. Our product designs incorporate protective circuitry, glass-to-metal hermetic seals, fuses and diodes to
help ensure safe, durable and reliable power as devices are subjected to these harsh conditions. Our primary batteries are often
used in remote and demanding environments, including down hole drilling tools, military communication devices and
oceanographic buoys.
In addition to primary power solutions, Greatbatch Medical offers customized secondary or rechargeable battery packs, in a
diverse range of chemistries for critical applications requiring rechargeable solutions. Rechargeable chemistries include lithium
ion, lithium ion polymer, nickel metal hydride, nickel cadmium, lithium iron phosphate and sealed lead acid. Greatbatch
Medical’s rechargeable battery packs include advanced electronics, smart charging and battery management systems and are
used in critical and life-saving applications, including automated external defibrillators, ventilators, powered surgical
instruments and portable oxygen concentrators, among others.
The portable medical market trends continue to be favorable with an aging population and the shift from clinical to home
settings for portable equipment to monitor and provide therapy. This market represents a strong opportunity despite cost
pressure from healthcare reform.
The following table summarizes information about our Greatbatch Medical products:
Product
Batteries
Description
Lithium iodine (“Li Iodine”)
Lithium silver vanadium oxide (“Li SVO”)
Lithium carbon monoflouride (“Li CFx”)
Lithium ion rechargeable (“Li Ion”)
Lithium SVO/CFx (“QHR” & “QMR”)
Principal Product Attributes
High reliability and predictability;
Long service life;
Customized configuration;
Light weight;
High energy density, small size
- 7 -
Product
Capacitors
EMI filters
Description
Storage for energy generated by a battery before
delivery to the heart. Used in ICDs and CRT-Ds.
Filters electromagnetic interference to limit
undesirable response, malfunctioning or
degradation in the performance of electronic
equipment
Principal Product Attributes
Stores more energy per unit volume (energy
density) than other existing technologies;
Customized configuration
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
High quality coated surface;
Flexible in utilizing any combination of
biocompatible coating surfaces;
Customized offering of surfaces and tips
Precision components
Machined
Molded and over molded products
High level of manufacturing precision;
Broad manufacturing flexibility
Enclosures and related
components
Titanium
Stainless steel
Value-added assemblies
Combination of multiple components in a single
package/unit
Precision manufacturing, flexibility in
configurations and materials
Leveraging products and capabilities to
provide subassemblies and assemblies;
Provides synergies in component
technology and procurement systems
Stimulation leads
Cardiac, neuromodulation and hearing restoration
stimulation leads
Custom and unique configurations that
increase therapy effectiveness, provide
finished device design and manufacturing
Introducers
Conduit to deliver CRM leads or placement of
dialysis catheters, CVCs, PICCs, and ports
Variety of sizes and configurations that
facilitate reliable access in vascular access
and CRM applications
Steerable sheaths
Steerable guide sheath for the delivery of diagnostic
and ablation catheters
Configurations to enable effective delivery
of diagnostic and therapeutic devices in
electrophysiology procedures.
Specialty catheter shaft
components
High performance catheter shafts designed to meet
intended clinical performance characteristics
Deep catheter design expertise and state-of-
the-art manufacturing services
Cases and trays
Delivery systems for cleaning and sterilizing
orthopaedic instruments and implants
High degree of customization;
Short, predictable development and
production timelines
Implants
Orthopaedic implants for large joint, spine,
extremity and trauma procedures
Precision manufacturing, leveraging
capabilities and product processes including
sterile packaging and coatings
- 8 -
Product
Instruments
Description
Reusable and single use orthopaedic instruments for
large joint, spine, extremity and trauma procedures
Principal Product Attributes
Designed to improve surgical techniques,
reduce surgery time, and increase surgical
precision
Manufactured primary
cells
Low-rate
Moderate-rate
High rate (spiral)
Assembled primary and
secondary battery packs
Highly-customized pack solutions
Optimized rate capability, shock and
vibration resistant, high and low
temperature tolerant, high energy density;
Ability to operate in low and high temp
applications
Diverse portfolio of cells in various sizes,
temperature ranges and rate capabilities,
custom-engineered and designed, value-add
charging and battery management systems
for secondary packs
A majority of the components and devices 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 competition.
QiG
The QiG segment was initially created in 2008 to facilitate and focus on the research and development of complete medical
devices or components. Through the acquisition of CCC and other strategic equity investments made by our Company, QiG has
established relationships with multiple emerging companies. In addition, QiG has established relationships with physicians
across the U.S. and Europe that operate in highly specialized fields, who help to support the design of medical device systems
with unique benefits to improve clinical outcomes. QiG seeks to assist customers in accelerating the velocity of innovation
while delivering an optimized supply chain and critical cost efficiencies. We are utilizing our market research to drive our
intellectual property portfolio with a goal of improved return on investment.
During 2015, Greatbatch announced the Spin-off of a portion of its QiG reporting segment through a tax-free distribution of its
QiG Group subsidiary to the stockholders of Greatbatch on a pro rata basis. The entities included in the pending Spin-off of
Nuvectra consist of QiG Group, Algostim, PelviStim and NeuroNexus. As an independent publicly traded company after the
completion of the Spin-off, Nuvectra will initially be focused on the development and commercialization of its
neurostimulation technology platform and, in particular, Algovita for the treatment of chronic pain of the trunk and limbs. In
February 2016, the Board of Directors of Greatbatch approved the Spin-off with a distribution ratio whereby Greatbatch
stockholders will receive one share of Nuvectra common stock for every three shares of Greatbatch common stock held. The
Spin-off is expected to be completed in March 2016. After the completion of the Spin-off, CCC and other existing research and
development capabilities will remain with this segment until we complete our reevaluation of our operating and reporting
segments in 2016.
As a result of our investments in QiG, we can develop or assist our customers to develop complete medical devices, as
highlighted by our successful development of Algovita for the treatment of chronic pain of the trunk and limbs, which received
approval from the United States Food and Drug Administration (“FDA”) during 2015. Although as previously noted Algovita
will be owned by Nuvectra after the completion of the Spin-off, using the retained operations of CCC and certain other existing
research and development capabilities of Greatbatch and Lake Region Medical, we will continue to assist customers with
design service and regulatory submissions, as well as manufacturing and distribution services. The medical devices that we can
design and develop are full product solutions that utilize the medical technology expertise and capabilities residing within
Greatbatch Medical. The benefits to our OEM customers of using our design and development services include shortening the
time to market for these medical devices, optimizing their supply chain and, ultimately, providing them with cost efficiencies.
In connection with the completion of the pending Spin-off, we will enter into a five year supply agreement with Nuvectra
pursuant to which Greatbatch Medical will manufacture and supply fully assembled Algovita systems and most of the products,
parts and components necessary for the production and assembly of Algovita. Additionally, in connection with the completion
of the Spin-off, we will enter into an agreement with Nuvectra that provides us with the exclusive right to supply Nuvectra with
products, parts and components necessary for production of future SNS or DBS medical devices that Nuvectra may seek to
commercialize for a period of five years after regulatory approval.
Acquired in 2014, CCC has expertise in developing and manufacturing active implantable medical devices. CCC has designed
and produced a wide range of devices for some of the world’s leading medical device companies, including implantable pulse
generators, programmer systems, battery chargers, patient wands and leads. CCC has the capability to assist customers in the
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design, development and commercialization of full product medical device solutions, including complete medical device
systems. Specifically, CCC has the capability to design the electronics, firmware and mechanics, of implantable and non-
implantable devices, to develop application software and custom leads, and to provide services of prototyping, encapsulation
and OEM manufacturing. CCC strives to provide on time, safe and effective products and services at competitive pricing, while
maintaining a culture of continuous improvement in compliance with the established standards and regulations. After the
pending Spin-off is completed, our design and development of complete medical device systems will be completed by our
combined teams in Greatbatch Medical, Lake Region Medical, and CCC. As a result, we are now able to more broadly partner
with medical device companies, leveraging Greatbatch Medical’s core components discrete technology, the design and
manufacturing expertise of Lake Region Medical, and the full device capabilities of CCC which will enhance our medical
device innovation efforts.
QiG utilizes a disciplined and diversified portfolio approach with three investment modes: new medical device systems
commercialization, collaborative programs with OEM customers and strategic equity positions in emerging healthcare
companies. A scorecard process is utilized to review and select the most strategically valuable ideas to pursue, taking into
account a host of variables including the market opportunity, regulatory pathway and reimbursement, market need and market
potential, intellectual property and projected financial return.
QiG’s revenue includes a limited release of Algovita in Europe, as well as various medical device products such as implantable
pulse generators, programmer systems, battery chargers, patient wands and leads to medical device companies residing
primarily in the cardiac and neuromodulation market as well as sales of neural interface technology, components, and systems
to the neuroscience and clinical markets.
Lake Region Medical
Lake Region Medical operates within the cardio, vascular and advanced surgical markets. A brief description of these products
and markets are as follows:
Cardio and Vascular - Within the cardio and vascular markets, Lake Region Medical concentrates on the design and
manufacturing of guidewires, catheters, vascular access products, and CRM and stimulation therapy components,
subassemblies and finished devices. Lake Region Medical operates across the product continuum from basic manufacturing of
single components to contract device manufacturing services to the design and production of its own products.
The following provides an overview of the main product lines within the cardio and vascular market:
• Vascular Access - The vascular access product lines include components and devices used primarily in catheter-based
interventional vascular devices. Utilizing proprietary platform technologies and advanced wire processing technologies,
Lake Region Medical manufactures high-precision guidewires that meet the fitness of use, criticality, and safety parameters
required by the medical device industry. Additionally, Lake Region Medical manufactures vascular closure devices that
provide rapid and reliable hemostasis to puncture sites. The full product line for the vascular access sub-segment includes
access guidewires, introducer sheaths and dilators, central venous catheters, implantable ports, hemodialysis catheters,
electrical and optical mechanical devices, catheter components, subassemblies, and complete devices.
• Cardiovascular and Structural Heart - The cardiovascular and structural heart product lines include products used for
vascular, cardiac surgery and structural heart disease. Within this product line, Lake Region Medical produces guidewire
and catheter components, subassemblies and completed devices for cardiovascular, cardiac surgery and structural heart
disease applications. For vascular procedures, product applications include guidewires, guide catheters, microcatheters,
ultrasound catheters, and delivery systems, balloon expandable delivery systems, stents, atherectomy devices, embolic
protection devices, catheter design and assembly, sterile packaging, catheter shafts, radiopaque marker bands, molded
hubs, fabricated hypotube assembly, and wire stent frames. For cardiac surgery and structural heart disease procedures,
product applications are comprised of access and delivery systems for patient foramen ovale closure devices, vessel
harvesting systems, beating heart surgery systems, transcatheter heart valves, heart valves and leaflets, and anastomosis
devices.
• Peripheral Vascular, Neurovascular, Urology, and Oncology - This product line is primarily focused on the design and
manufacturing of devices used during the treatment of peripheral arterial disease, peripheral transcatheter embolization and
occlusion, aortic aneurysm repair, arteriovenous malformations and endoscopic retrograde cholangiopancreatography.
Within this product line, Lake Region Medical produces guidewire and catheter components, subassemblies and completed
devices for the various applications.
The primary neurovascular applications for these products are cerebrovascular aneurysms, while the urology and oncology
applications are stone retrieval, thermal tumor ablation, transarterial chemoembolization and radio frequency probes. Lake
Region Medical products within this area include peripheral vascular and urology guidewires, neurovascular and oncology
micro-guidewires, angiographic and diagnostic guidewires, guiding catheters, support and crossing catheters, embolic
protection devices, micro-catheters, and delivery systems.
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• Electrophysiology and Stimulation Therapy - The electrophysiology and stimulation therapy product lines includes devices
that are used in the electrophysiology ablation catheter and cardiac rhythm systems. Within this product line, Lake Region
Medical produces guidewire and catheter components, subassemblies and completed devices for the various
electrophysiology applications as well as components and assemblies for cardiac and neurostimulation leads and IPGs.
Electrophysiology atrial fibrillation ablation catheters, which deliver therapy to the heart and eliminate tissue paths for
irregular electrical impulses, and electrophysiology catheters, which diagnose irregular electrical impulses in the heart’s
electrical system, are the focal points of Lake Region Medical’s electrophysiology offering. In the stimulation therapy
applications, CRM devices such as pacemakers, implantable cardioverter defibrillator, cardiac leads and neurostimulation
devices for spinal cord and deep brain stimulation are the primary applications of focus.
Advanced Surgical - Lake Region Medical provides supply chain solutions that support the development and manufacturing of
complex components, sub-assemblies, and finished devices for a range of surgical technologies to the advanced surgical
market. Portions of this market include endoscopy, laparoscopy, arthroscopy, orthopaedics, spinal, women’s health and drug
delivery.
The following provides an overview of the main product lines within the advanced surgical market:
•
Laparoscopy and General Surgery - This portion of the market includes devices used primarily for minimally invasive
procedures in the abdominal space, but may also be used in open or general surgery. Customers of Lake Region Medical’s
laparoscopy and general surgery products require energy-based devices and endomechanical devices that are efficient and
reliable. Lake Region Medical’s product line includes trocars, endoscopes and laparoscopes, closure devices, harmonic
scalpels, bipolar energy delivery devices, radio frequency probes, thermal tumor ablation devices and ophthalmic surgery
devices.
• Biopsy and Drug Delivery - Biopsy and drug delivery products include minimally invasive biopsy devices used to retrieve
tissue samples and for delivery of drug therapy. Lake Region Medical’s biopsy and drug delivery product line includes
biopsy and grasping forceps, breast biopsy devices, auto injection systems, cannula-based delivery systems, implantable
brachytherapy seeds, tubes, catheters, infusion and IV connectors, and wearable patient constant or variable delivery
systems.
•
Joint Preservation and Reconstruction - This portion of the market includes orthopaedic implants and fixation devices,
including their related surgical instruments used in large joint, extremities, trauma, spine and craniomaxillofacial applications.
Lake Region Medical manufactures a variety of reconstructive implants, components, and instruments used in joint preservation
and reconstruction. Lake Region Medical’s implant products include hip stems and sleeves, knee implant components,
extremity devices, long bone nails and screws, tissue anchor and fixation devices. Instrument products include knee
instruments, minimally invasive surgery and computer assisted surgery instruments, cutting blocks, measuring and sizing
instruments, impactors and hip instruments; stem inserters, anatomical broach handles and cup holders.
• Arthroscopy - This portion of the market includes devices used for minimally invasive surgery in a joint space, also referred to
as “sports medicine.” Lake Region Medical’s products includes shaver blades and burrs, ablation probes, and suture anchors,
which are used in procedures such as arthroscopic ACL reconstruction arthroscopic repair, rotator cuff repair, and hip labrum
repair.
• Engineered Tubing Solutions - Lake Region Medical’s engineered tubing solutions business is a comprehensive supply
chain solution suite for precision metal tubing manufacturing and fabrication. Lake Region Medical offers a fully
integrated precision tubing business, which encompasses design, manufacturing and supply chain management. Lake
Region Medical’s precision tubing products are primarily used in the medical, aerospace, automotive, chromatography,
defense, oil and gas, power generation, and sensor and temperature control markets.
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The following table summarizes information about our Lake Region Medical products:
Product
Access and infusion
therapy guidewires
Description
Principal Product Attributes
Guidewires for vascular access and
Wide variety of custom and standard
placement of dialysis catheters,
central venous catheters, peripherally
inserted central catheters and
implantable ports
configurations available in both full-length
coil and mandrel wire designs
Angiographic guidewires
Guidewires for delivery of
angiography and guide catheters
Polytetrafluoroethylene (“PTFE”) pre-coated
guidewires available in a wide variety of
custom & standard configurations
Introducer sheaths and
dilators
Facilitate subcutaneous access and
Generally consist of a kit that includes a
delivery of a variety of diagnostic and
interventional devices
guidewire, sheath, dilator, and needle
Size, configuration & coating depend on the
clinical and anatomical requirements
Interventional guidewires
Facilitate access and delivery of
diagnostic and therapeutic catheter-
based devices across a wide range of
interventional procedures
Advanced core, coatings & distal tips designs
based on procedure and application specific
needs
Structural heart
guidewires
Steerable sheaths
Embolic protection
devices
Delivery systems
Microcatheters
Electrical and optical
devices
Pre-curved guidewires used in a
variety of transcatheter approaches for
treating structural heart disease
Range of stiffness profiles, tip shape
configurations and transition zones to fit
procedural and safety needs
Used to gain access and deliver
therapeutic devices to the inner
chambers of the heart; primarily
diagnostic catheters, ablation catheters
and structural heart therapies
Diverse range of configurations designed to
achieve accurate positioning and deliver
devices during electrophysiology and
structural heart procedures
Baskets and filters employed to
protect distal arteries from
embolization during angioplasty,
stenting, and atherectomy procedures
that can cause emboli to lodge in
smaller arteries leading to reduced or
loss of blood flow
Guidewires, catheters, and sub-
assemblies used to deploy therapies,
including coil pushers that deploy
embolization coils; stent delivery
wires and catheters used to place
stents; and embolic protection
delivery and retrieval systems
Catheters with small inner lumens
used to deliver embolization therapies
including coils, particles, glues, and
other embolization products during
cancer, peripheral and neurovascular
procedures where occluding blood
flow is desired
Guidewire and catheter-based devices
that provide diagnostic information
(e.g. arterial pressure, imaging) when
planning and optimizing
interventional treatments
Range of basket designs, pore sizes and
construction materials for capturing emboli in
different parts of the body
Broad range of custom wire and catheter-
based systems incorporating different stiffness
profiles, tip shapes, and lengths to fit
procedural and safety needs
Range of catheters with differing lengths,
stiffness profiles, and small lumen diameters
Guidewires and catheters that incorporate
various mechanical, electrical / optical and
connectivity technologies
Orthopaedic implants
Orthopaedic implants for large joint,
Precision manufacturing, leveraging
spine, extremity and trauma
procedures
capabilities and product processes including
sterile packaging and coatings
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Product
Orthopaedic instruments
Description
Principal Product Attributes
Reusable and single use orthopaedic
instruments for large joint, spine,
extremity and trauma procedures
Designed to improve surgical techniques,
reduce surgery time, and increase surgical
precision
Cases and trays
Delivery systems for cleaning and
sterilizing orthopaedic instruments
and implants
High degree of customization;
Short, predictable development and
production timelines
Laparoscopic surgery
devices
Devices which include access devices,
such as trocars and cannulas; imaging
devices, such as endoscopes; energy
based devices, such as vessel cutters
and sealers and; endomechanical
devices, such as endocutters, tissue
staplers and other hand instruments
Precision manufacturing of tubing, machined
components, plastics and finished device
assembly
Arthroscopic surgery
devices
Biopsy and drug delivery
devices
Devices which include shavers and
Precision manufacturing of tubing, machined
burrs, devices for soft tissue ablation,
and tissue anchoring and suturing
instruments
Devices used for minimally invasive
access of the body for retrieval of
tissue or delivery of drug therapy such
as forceps, breast biopsy probes, and
other interventional surgical
instruments
components, plastics and finished device
assembly
Precision manufacturing of tubing, machined
components, plastics and finished device
assembly
RESEARCH AND DEVELOPMENT
Our position as a leading developer and manufacturer of medical devices and components 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 and enhancements to our existing products. In addition to our internal technology and product development efforts, we
also engage outside research institutions for unique technology projects. In order to facilitate the development of new and
improved medical devices systems, starting in 2008, we significantly increased our investments in research and development.
Net investments in medical device systems (including SG&A), which are being facilitated through our QiG segment, totaled
$25.8 million, $23.3 million and $30.5 million for 2015, 2014 and 2013, respectively. After the completion of the pending Spin-
off, we will continue to invest substantial resources in research, development and engineering to expand the use of our products
and develop new products within the markets we serve. After the pending Spin-off is completed, the Company’s design and
development of complete medical device systems will be completed by our combined teams in Greatbatch Medical, Lake
Region Medical, and CCC. Further information regarding our research and development activities can be found in the “Product
Development” section of Item 7 of this report.
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. Often, several patents covering various aspects of the design protect a single product. We believe
this provides broad protection of the inventions employed.
As of January 1, 2016, we have 1,209 active issued patents, of which 94 were acquired with the Lake Region Medical
acquisition. We also have 484 pending patent applications at various stages of approval. During 2015, there were 101 patent
applications filed and 92 patents issued. Of the 1,693 patents filed and pending, approximately 378 of these relate to complete
medical device systems.
After the completion of the Spin-off, Nuvectra, as an independent publicly-traded company, will own 153 patents and 119
pending patent applications that are included within the patent figures above, including the patents and patent applications that
embody the intellectual property underlying Algovita and Nuvectra’s neurostimulation technology platform.
In connection with the Spin-off, we expect to enter into two license agreements pursuant to which Nuvectra will license to us,
subject to specified restrictions, rights in certain intellectual property underlying Nuvectra’s neurostimulation technology
platform. Under the terms of the unrestricted license agreement, Nuvectra will grant us a perpetual, non-exclusive, worldwide
license to use, make, have made, offer to sell, sell, distribute and import certain patents, patent applications and other
intellectual property rights underlying Nuvectra’s neurostimulation technology platform for applications within the
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neurostimulation fields of use. Under the terms of the restricted license agreement, Nuvectra will grant us a perpetual, non-
exclusive, worldwide license to use, make, have made, offer to sell, sell, distribute and import certain other patents, patent
applications and other intellectual property rights underlying Nuvectra’s neurostimulation technology platform for applications
outside of the neurostimulation fields of use.
We are a party to several other license agreements with third parties under which we have obtained, on varying terms, exclusive
or non-exclusive rights to patents held by them. Examples of these agreements is the license of basic technology used in our
wet tantalum capacitors, filtered feedthroughs, wireless charging technology, and MRI compatible lead systems. We have also
granted rights to 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 Greatbatch.
MANUFACTURING AND QUALITY CONTROL
We leverage our strength as an innovative designer and manufacturer of finished devices and components to the medical device
industry. Our manufacturing and engineering services include: design, testing, component production, and device assembly. We
have integrated our proprietary technologies in our own products and those of our customers throughout the medical device
industry. Our flexible, high productivity manufacturing capabilities span sites across the United States, Mexico, Uruguay,
Europe, and Asia.
Due to the highly regulated nature of the products we produce, we have implemented strong quality systems across all sites.
The quality systems at our sites are compliant with and certified to various recognized international standards, requirements,
and directives. Each site’s quality system is certified under an applicable International Organization for Standardization (“ISO”)
quality system standard, such as ISO 13485 or ISO 9001. This certification requires, among other things, an implemented
quality system that applies (where applicable) to the design and manufacture of components, assemblies and finished medical
devices, including component quality and supplier control. Maintenance of these certifications for each facility requires
periodic re-examination from an independent notified body.
Along with ISO 13485, the facilities producing finished medical devices are subject to extensive and rigorous regulation by
numerous government bodies, including the FDA and comparable international regulatory agencies in order to ship product
worldwide. For these facilities, we maintain FDA registration and compliance to all applicable domestic and international
regulations. Compliance with applicable regulatory requirements is subject to continual review and is monitored through
periodic inspections by the FDA and other international regulatory bodies.
SALES AND MARKETING
We sell our products directly to our customers. In 2015, approximately 50% 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 in Note 19 “Business Segment, Geographic and Concentration Risk Information” of the
Notes to Consolidated Financial Statements contained in Item 8 of this report.
Although the majority of our customers contract with us to develop custom components and assemblies to fit their product
specifications, we also provide system and device solutions ready for market distribution by OEMs. 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 account executives support all activity and involve engineers and technology professionals in the sales process to
address customer requests appropriately. For system and device 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 leverage our account executives with support from our engineers to design and sell product solutions into our targeted
markets. Our account executives are trained to assist our customers in selecting appropriate chemistries and configurations. We
market our products and services through well-defined selling strategies and marketing campaigns that are customized for each
of the industries we target.
We have placed additional emphasis on reaching long-term agreements with our OEM customers in order to secure our revenue
base. At times, we have provided our customers with price concessions in exchange for entering into long-term agreements and
certain volume commitments.
Firm backlog orders at January 1, 2016 and January 2, 2015 were approximately $355 million and $174 million, respectively.
The majority of the orders outstanding at January 1, 2016 are expected to be shipped within one year.
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CUSTOMERS
Our Greatbatch Medical and Lake Region Medical customers include large multi-national OEMs and their subsidiaries such as,
in alphabetical order here and throughout this report, Abbott Labs, Biotronik, Boehringer Ingelheim, Boston Scientific,
Cyberonics, Halliburton Company, Johnson & Johnson, Medtronic, Nevro Corp., Philips Healthcare, Smith & Nephew, Sorin
Group, St. Jude Medical, Stryker, and Zimmer Biomet. During 2015, 2014, and 2013, Biotronik, Johnson & Johnson,
Medtronic, and St. Jude Medical collectively accounted for 52%, 54% and 56% of our total sales, respectively. We have been
successful in leveraging our diversified product line to further enhance our relationships with these customers and selling to
more of their operating divisions, which cover the cardiac, neuromodulation, orthopaedic and vascular markets. QiG customers
include numerous scientists, hospitals and universities throughout the world who perform research for the neuroscience and
clinical markets. With the acquisition of CCC in 2014, QiG customers also include various research companies and institutes
and early stage medical device companies.
The nature and extent of our selling relationship with each OEM customer is different in terms of breadth 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 at 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. During new contract negotiations, price level decreases (concessions) for future sales
may be offered to customers in exchange for volume and/or long-term commitments. Once new contracts are signed, these
prices are fixed and determinable for all future sales. 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. payment is 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 when title passes, generally at the point of shipment.
Our visibility into customer ordering patterns is over a relatively short period of time. Our customers may have inventory
management programs, vertical integration plans and/or alternate supply arrangements that we are unaware of. 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.
SUPPLIERS AND RAW MATERIALS
We purchase 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 both internally and with our customers. We
cannot quickly establish additional or replacement suppliers for these materials because of these rigid requirements. For these
critical raw materials, we maintain minimum safety stock levels and partner with suppliers through contract to help ensure the
continuity of supply. Historically, we have not experienced any significant interruptions or delays in obtaining critical raw
materials.
Many of the raw materials that are used in our products are subject to fluctuations in market price. In particular, the prices of
stainless steel, titanium and precious metals, such as platinum, have historically fluctuated, and the prices that we pay for these
materials, and, in some cases, their availability, are dependent upon general market conditions. In most cases, we have pass-
through pricing arrangements with our customers that purchase components containing precious metals or have established
firm-pricing agreements with our suppliers that are designed to minimize our exposure to market fluctuations.
For non-critical 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 these non-critical raw materials.
As discussed more fully in Item 1A “Risk Factors” of this report, our business depends on a continuous supply of raw materials
from a limited number of suppliers. If an unforeseen interruption of supply were to occur, we may be unable to obtain substitute
sources for these raw materials on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our
products profitably or on time. Additionally, we may be unable to quickly establish additional or replacement suppliers for
these materials as there are a limited number of worldwide suppliers.
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COMPETITION
Our existing and potential competitors include our OEM customers 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:
Greatbatch Medical
Product Line
Medical batteries
Capacitors
Feedthroughs
EMI filtering
Enclosures
Machined and molded components
Value added assembly
Catheters
Introducers
Stimulation leads
Orthopaedic trays, instruments and implants
Manufactured primary cells
Assembled primary and secondary battery packs
Competitors
Eagle-Picher
Quallion
AVX (subsidiary of Kyocera)
Critical Medical Components
Alberox (subsidiary of The Morgan Crucible Co. PLC)
AVX (subsidiary of Kyocera)
Eurofarad
Heraeus
Hudson
National
Team Vantage
Numerous
Creganna
Teleflex
Vention medical
Pressure Products
Theragenics (Galt)
Merit Medical
Oscor
Avalign Technologies
IMDS
Micropulse, Inc.
Juno
Orchid
Sandvik
Paragon
Tecomet
Tracer Technologies
Engineered Power
Saft
Ultralife
Vitzrocell
Totex
Palladium
ICC/Nexergy
BMZ
Ultralife
Saft
- 16 -
QiG
Product Line
Implantable medical devices
Medical device design and development
Lake Region Medical
Product Line
Access and infusion therapy guidewires
Angiographic guidewires
Introducer sheaths and dilators
Interventional guidewires
Structural heart guidewires
Steerable sheaths
Embolic protection devices
Competitors
St. Jude Medical
Boston Scientific
Medtronic
Johnson & Johnson
Cirtec Medical Systems
Stellar Technologies
Flextronics
Vention Medical
Competitors
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Merit Medical OEM
EP Flex
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Merit Medical OEM
Bard OEM
Heraeus (Neometrix)
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Merit Medical OEM
Oscor
Freudenberg Medical (Medventure)
Asahi Intecc
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
FMD Co.
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Merit Medical OEM
Bard OEM
EP Flex
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Oscor
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Merit Medical OEM
- 17 -
Product Line
Delivery systems
Microcatheters
Competitors
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Freudenberg Medical (Medventure)
Confluent Medical Technologies
Vention Medical
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Vention Medical
Electrical and optical devices
TE Connectivity (acquired AdvancedCath and definitive agreement to
acquire Creganna)
Orthopaedic implants, instruments, cases and
trays
Laparoscopic surgery devices
Arthroscopic surgery devices
Avalign Technologies
Micropulse, Inc.
Juno
Orchid
Paragon
Tecomet
Perryman
Norwood Medical
Norwood Medical
Remmele
Tegra
B & M Precision
3D Medical
Biopsy and drug delivery devices
Tegra
GOVERNMENT REGULATION
As described below, our business is subject to direct governmental regulation, including the laws and regulations generally
applicable to all 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.
Except as described below, 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 of our facilities or
any off-site location. We may, however, become subject to these environmental liabilities in the future as a result of our historic
or current operations.
Our Collegeville, PA facility, which was acquired as part of the Lake Region Medical acquisition, is subject to two
administrative consent orders entered into with the U.S. Environmental Protection Agency (the “EPA”), which require ongoing
groundwater treatment and monitoring at the site as a result of historic leaks from underground storage tanks. Upon approval by
the EPA of our proposed post remediation care plan, which requires a continuation of the groundwater treatment and
monitoring process at the site, we expect that the consent orders will terminate. During the first half of 2016, we expect a
decision from the EPA on whether our post remediation care plan has been approved. The groundwater treatment process at our
Collegeville facility consists of a groundwater extraction and treatment system and the performance of annual sampling of a
defined set of groundwater wells as a means to monitor containment within approved boundaries.
- 18 -
Our products are subject to regulation by numerous government agencies, including the FDA and comparable foreign agencies.
For some of our component technology, we have “master files” on record with the FDA. Master files may be used to provide
proprietary and confidential detailed information about technology, facilities, processes, or articles used in the manufacturing,
processing, packaging and storing of one or more medical device components. These master files may be used by device
manufacturers to support their PMA, investigational device exemption application (“IDE”) or premarket notification
(“510(k)”).
In the U.S., our introducer and delivery catheter products are considered Class II devices. The 510(k) process requires us to
demonstrate that our new medical devices are substantially equivalent to a legally marketed medical device. In order to support
a substantial equivalence claim, we must submit supporting data. In Europe, these devices are considered Class IIa and Class
III, respectively, under European Medical Device Directives. These Directives require companies that wish to manufacture and
distribute medical devices in European Union member countries to obtain a CE Marking for those products, which indicate that
the products meet minimum standards of performance, essential requirements, safety conformity assessment and quality.
The PMA process is a more rigorous process that is required to demonstrate that a new medical device is safe and effective.
This is demonstrated by generating data regarding design, manufacturing processes, materials, bench testing, and animal
testing, and typically human clinical data. Some of our products that we are developing are Class III medical devices that
require a PMA or, in the European Union, premarket approval through submission of a Design Dossier.
As a manufacturer of medical devices and components that go into medical devices, we are also subject to periodic inspection
by the FDA for compliance with the FDA’s Quality System Regulations and the applicable notified body in the European Union
to ensure conformity to the Medical Device Directives and Active Implantable Medical Device Directives. We believe that our
quality controls, development, testing, manufacturing, labeling, marketing and distribution of our medical devices conform to
the requirements of all pertinent 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, they may have a
material impact on our operational results in the future.
The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act
(collectively “Health Care Reform”) legislated broad-based changes to the U.S. healthcare system that could significantly
impact our business operations and financial results, including higher or lower revenue, as well as higher employee medical
costs and taxes. Health Care Reform imposes significant new taxes on medical device OEMs, which will result in a significant
increase in the tax burden on our industry and which could have a material negative impact on our financial condition, results
of operations and our cash flows. Beginning on January 1, 2016, the medical device excise tax was suspended through
December 31, 2017, but if this suspension is not continued or made permanent thereafter, the medical device excise tax will be
automatically reinstated starting on January 1, 2018. Other elements of Health Care Reform such as comparative effectiveness
research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions
could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our
business, results of operations and financial condition. Many significant parts of Health Care Reform will be phased in over the
next several years and require further guidance and clarification in the form of regulations. The medical device tax increased
our cost of sales by $0.6 million, $0.7 million, and $0.5 million in 2015, 2014 and 2013, respectively.
EMPLOYEES
The following table provides a breakdown of our employees:
Manufacturing – U.S.
General and administrative – U.S.
Sales and marketing – U.S.
Research, development and engineering – U.S.
Mexico
Europe
Uruguay
Asia
Total
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4,330
294
186
646
2,130
1,595
236
142
9,559
We also employ approximately 800 temporary employees worldwide to assist us with various projects and service functions
and address peaks in staff requirements. Our employees at our Chaumont, France, Tijuana, Mexico, and Aura, Germany
facilities are represented by a union. Nearly all of the positions at our foreign facilities are manufacturing related. 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 1, 2016. The officers’ terms of office run from
year to year until the first meeting of the Board of Directors occurring immediately following our Annual Meeting of
Stockholders, and until their successors are elected and qualified, except in the case of earlier death, retirement, resignation or
removal.
Mauricio Arellano, age 49, is Executive Vice President for Global Operations and has served in that office since June 2013.
From December 2010 to June 2013, he was President of Greatbatch Medical. Mr. Arellano served as Senior Vice President and
Business Leader of our Cardiac and Neurology Group from October 2008 until December 2010, Senior Vice President and
Business Leader of our Cardiac Rhythm Management (“CRM”) and Neuromodulation Group from January 2008 to October
2008, Senior Vice President and Business Leader of 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.
Jennifer M. Bolt, age 47, is President, Electrochem, and has served in that office since October 2015. From June 2013 to
October 2015 she was Vice President, Supply Chain and Operational Excellence for Greatbatch. Ms. Bolt held the position of
Vice President, Operations for Electrochem from May 2012 to June 2013, and prior to that served as Director of Operations of
our Raynham, MA facility from September 2007 to May 2012. Ms. Bolt joined our Company in May 2005 as the
Manufacturing Engineering Manager for our Alden, NY facility. Prior to joining our company, she served in a variety of
engineering and operational roles at General Motors/Delphi and Eastman Kodak.
Michael Dinkins, age 61, is Executive Vice President & Chief Financial Officer, and has served in that office since joining our
Company in May 2012. From 2008 until May 2012, he was Executive Vice President and Chief Financial Officer of USI
Insurance Services, an insurance intermediary company. From 2005 until 2008, he was Executive Vice President and Chief
Financial Officer of Hilb Rogal & Hobbs Co., an insurance and risk management services company. Prior to that, Mr. Dinkins
held senior positions at Guidant Corporation, Access Worldwide Communications, Cadmus Communications Group and
General Electric Company.
Jeremy Friedman, age 62, is President, Cardio & Vascular, an office he has held since the Company’s acquisition of Lake
Region Medical in October 2015. Prior to that acquisition, he was Executive Vice President of Lake Region Medical and
President and Chief Operating Officer of Lake Region Medical’s Cardio and Vascular Division from August 2013 to October
2015. From September 2007 to August 2013, he was Executive Vice President and Chief Financial Officer of Accellent, Inc.
From January 2001 until September 2007, Mr. Friedman held a number of leadership positions at Flextronics, a global contract
manufacturing services firm, including Chief Operating Officer of Flextronics Network Services in Stockholm, Sweden and
Senior Vice President of Finance and Operations, Components Division. From June 1994 until January 2001, he was President
and Chief Operating Officer of We’re Entertainment Inc., a specialty retailer of apparel and hard goods. Prior to 1994, Mr.
Friedman held a number of finance and operations positions with Phillips-Van Heusen Corporation and KPMG.
Antonio Gonzalez, age 42, is President, CRM & Neuromodulation, and has served in that office since October 2015. From
October 2014 to October 2015, he served as Vice President, Operations, Greatbatch Medical Mexico. Previously, Mr. Gonzalez
served as Executive Director, Operations Mexico between November 2011 and October 2014, Director of Global Supply Chain
from November 2007 to November 2011, Director of Strategic Projects from March 2006 to November 2007, and Supply
Chain Manager for Greatbatch Tecnologías de Mexico from January 2005 to March 2006. Prior to joining our Company, he
served in a variety of finance, operations, supply chain and customer management roles with Sanmina-SCI, BellSouth
Telecommunications, HSBC and ING Bank.
Andrew P. Holman, age 48, is President, Corporate Development, and has served in that role since October 2015. From June
2013 until October 2015, he served as Executive Vice President, Global Sales & Marketing - Greatbatch Medical. He joined
Greatbatch in April 2012 as Vice President of Sales and Marketing for Greatbatch Medical. From October 2011 until joining
Greatbatch, Mr. Holman was a consultant with HarQuinn, LLC. From September 2009 to October 2011, he served as Executive
Vice President, Sales & Marketing for DJO Global, Inc., and from October 2005 to June 2009, he served as President of the
Americas for the Orthopaedics business unit of Smith & Nephew, Inc. Mr. Holman previously held various sales and marketing
leadership positions at Johnson & Johnson, Inc., Boston Scientific Corporation and Xerox Corporation.
- 20 -
Thomas J. Hook, age 53, 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.
Timothy G. McEvoy, age 58, is Senior 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.
Declan Smyth, age 45, is President, Advanced Surgical & Orthopaedics, having served in that office since the Company’s
acquisition of Lake Region Medical in October 2015. From January 2013 to the Company’s acquisition of Lake Region
Medical in October 2015, he was President of Lake Region Medical’s Advanced Surgical Business. From January 2012 to
January 2013, he was Strategic Product Leader of Surgical Devices and Diagnostics at Accellent, Inc. and prior to that served as
Senior Director of Engineering at Accellent, Inc. from August 2009 to January 2012.
Kristin Trecker, age 50, is Executive Vice President and Chief Human Resources Officer. Prior to joining the Company in
November 2015, she served as Senior Vice President and Chief Human Resources Officer for MTS Systems in Minneapolis,
Minnesota from February 2012 until October 2015. From April 2006 to July 2011, she was Senior Vice President Human
Resources at Lawson Software.
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 SEC. 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, Assistant Corporate Controller – Reporting and
Shared Services, 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, and these
statements are subject to known and unknown risks, uncertainties and assumptions. Forward-looking statements include
statements relating to:
•
•
•
•
•
future sales, expenses and profitability;
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 “variations” or the negative of these
terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially
from those stated or implied by these forward-looking statements. In evaluating these statements and our prospects, you should
carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary factors and to others contained throughout this 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: our 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 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; product field actions or recalls; our inability to successfully
consummate and integrate acquisitions and to realize synergies and to operate these acquired businesses, including Lake Region
- 21 -
Medical, in accordance with expectations; our unsuccessful expansion into new markets; our failure to develop new products
including system and device products; the timing, progress and ultimate success of pending regulatory actions and approvals;
our inability to obtain licenses to key technology; regulatory changes, including Health Care Reform, 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.
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 2015, Biotronik, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for approximately 52% of our
revenues. Our supply agreements with these customers may 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, a reduction of business with that customer, or a delay or failure
by that customer to make payments due to us, 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 experience rapid technological changes, 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. We dedicate a
significant amount of resources to the development of our products and technologies. Our product development efforts may be
affected by a number of factors, including our ability to anticipate customer needs, develop new products, secure intellectual
property protection for our product, and manufacture products in a cost effective manner. 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 and enhancements 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 adversely affected.
The markets for our products have been growing in recent years. If the markets for our products do not grow as forecasted by
industry experts, our revenues could be less than expected. In addition, it is difficult to predict the rate at which the markets for
our products will grow or at which new and increased competition will result in market saturation. Slower growth in the
cardiac, neuromodulation, advanced surgical, orthopaedic, portable medical, cardio and vascular, environmental, military 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 adversely affected.
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 and/or supplier diversification initiatives and begin to
manufacture or dual-source 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, economies of scale,
personnel, sales, technical and marketing resources than us. These and other companies may develop products that are superior
or more cost effective to ours, which could result in lower revenues and operating results.
- 22 -
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 and modified products based on our existing technologies and
engineering capabilities, including the development of complete medical device systems. 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 products and markets include: longer product development cycles, the
inability to transfer our quality standards and technology into new products, the failure to receive or delay in receipt of
regulatory approval for new products or modifications to existing products, and the failure of our customers to accept the new
or modified products.
We are subject to pricing pressures from customers, which could harm our operating results.
We have made price concessions to some of our larger customers in recent years and we expect customer pressure for price
concessions will continue. Price concessions or reductions may cause our operating results to suffer.
We rely on third party suppliers for raw materials, key products and subcomponents, and if we are unable to obtain
these materials, products and/or 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, gold, CFx, palladium, stainless steel, aluminum, cobalt chrome, tantalum, platinum, ruthenium, gallium
trichloride, vanadium oxide, iridium, titanium and plastics. The supply and price of these raw materials are susceptible to
fluctuations due to transportation issues, government regulations, price controls, foreign civil unrest, worldwide economic
conditions or other unforeseen circumstances. Increasing global demand for these raw materials has caused 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. In addition, for reasons of quality, cost effectiveness or availability, we obtain some raw
materials from a sole supplier. Although we work closely with our suppliers to ensure continuity of supply, we may not be able
to continue to procure raw materials critical to our business at all or to procure them at acceptable price levels.
In addition, 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 our suppliers use to manufacture products and
subcomponents are proprietary, we may be unable to obtain comparable products and 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, 2016, we had $2.0 billion of intangible assets, representing 67% 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, this significant
amount of intangible assets increases the risk of a large charge to earnings in the event that the recoverability of these intangible
assets is impaired. In the event of such a charge to earnings, the market price of our common stock could be affected. In
addition, intangible assets with definite lives, which represent $894.0 million of our net intangible assets at January 1, 2016,
will continue to be amortized. We incurred total amortization expenses relating to these intangible assets of $17.5 million in
2015. These expenses will reduce our future earnings or increase our future losses.
Quality problems with our products could harm our reputation and erode our competitive advantage.
Quality is important to us and our customers, and our products are held to high quality and performance standards. In the event
our products fail to meet these standards, our reputation could be harmed, which could erode our competitive advantage over
competitors, causing us to lose customers and resulting in lower revenues.
- 23 -
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 that may be impacted by warranty claims. We reserve for
our exposure to warranty claims based upon recent historical experience and other specific information as it becomes available.
However, these reserves may not be adequate to cover future warranty claims. If these reserves are inadequate, additional
warranty costs or inventory write-offs may need to be incurred in the future, which could harm our operating results.
Regulatory issues resulting from product complaints, or recalls, or regulatory 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 applicable regulations and standards.
However, a product complaint, recall or negative regulatory audit may cause our products to be removed from the market and
harm our operating results or financial condition. In addition, during the period in which corrective action is being taken by us
to remedy a complaint, recall or negative audit, regulators may not allow our 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.
Our business exposes us to potential product liability claims that are inherent in the design, manufacture and sales of our
products. Product failures, including those that arise from the failure to meet product specifications, misuse or malfunction, or
design flaws, or the use of our products with components or systems not manufactured or sold by us could result in product
liability claims or a recall. Many of our products are components and function in interaction with our customers’ medical
devices. For example, our batteries are produced to meet electrical performance, longevity and other specifications, but the
actual performance of those products is dependent on how they are utilized as part of our customers’ devices over the lifetime
of their 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 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 and require us to pay significant damages. The occurrence of product liability claims or product
recalls could affect our operating results and financial condition.
We carry product liability insurance with 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 the following:
•
•
•
•
a substantial percentage of our costs are fixed in nature, which results in our operations being particularly sensitive to
fluctuations in production volumes;
changes in the mix of our revenue represented by our various products and customers could result in reductions in our
profits if the mix of our revenue represented by lower margin products increases;
timing of orders placed by our principal customers who account for a significant portion of our revenues; and
increased costs of raw materials or supplies.
If we are unable to protect our intellectual property and proprietary rights, our business could be harmed.
We rely on a combination of patents, licenses, trade secrets and know-how to establish and protect our rights to our
technologies and products. As of January 1, 2016, we have 1,209 active patents filed. However, the steps we have taken and
will take in the future to protect the intellectual property rights to our technologies and products 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,
- 24 -
consultants and third parties with which we do business. However, these agreements may be breached and, if breached, there
may be no adequate remedy available to us and we may be unable to prevent the unauthorized disclosure or use of our technical
knowledge, practices and/or procedures. If our trade secrets become known, we may lose our competitive advantages.
Additionally, as patents and other intellectual property protection expire we may lose our competitive advantage.
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, or 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 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 on 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, third parties may 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 that license technology to us against third
party claims of intellectual property infringement.
Any litigation or other challenges regarding our patents or other intellectual property could be costly and time consuming and
could divert the attention of 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 may 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 made subject to
significant damages or injunctions against development and sale of our products.
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. 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.
We may not be able to attract, train and retain a sufficient number of qualified employees to maintain and grow our
business.
We monitor the markets in which we compete and assess opportunities to better align expenses with revenues, while preserving
our ability to make needed investments in research and development projects, capital and our people that we believe are critical
to our long-term success. 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 qualified personnel.
We are dependent upon our senior management team and key technical 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, which could negatively impact our business. We may
not be able to locate or employ these qualified personnel on acceptable terms.
- 25 -
We may not realize the expected benefits from our cost savings and consolidation initiatives or those initiatives may have
unintended consequences, which may harm our business.
We have incurred significant charges related to various cost savings and consolidation initiatives. These initiatives were
undertaken to improve our operational effectiveness, efficiencies and profitability. Information regarding some of these
initiatives is discussed in Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements
contained in Item 8 of this report. Cost reduction efforts under these initiatives include various cost and efficiency improvement
measures, such as headcount reductions, the relocation of resources and administrative and functional activities, the closure of
facilities, the transfer of production lines, the sale of non-strategic assets and other efforts to streamline our business, among
other actions. These measures could yield unintended consequences, such as distraction of our management and employees,
business disruption, disputes with customers, attrition beyond our planned reduction in workforce and reduced employee
productivity. If any of these unintended consequences were to occur, they could negatively affect our business, financial
condition and results of operations. In addition, headcount reductions and customer disputes may subject us to the risk of
litigation, which could result in substantial cost. Moreover, our cost reduction efforts result in charges and expenses that impact
our operating results. Our cost savings and consolidation initiatives, or other expense reduction measures we take in the future,
may not result in the expected cost savings.
Successful integration of Lake Region Medical and anticipated benefits of the Lake Region Medical acquisition cannot
be assured and integration matters could divert attention of management away from operations. The Lake Region
Medical acquisition could have an adverse effect on our business relationships.
There can be no assurance that Lake Region Medical will be able to maintain and grow its business and operations. In addition,
the market segments in which Lake Region Medical operates may experience declines in customer demand and/or the entrance
of new competitors. Customers, suppliers and other third parties with business relationships with us or Lake Region Medical
may decide not to renew or may decide to seek to terminate, change or renegotiate their relationships with us and/or Lake
Region Medical as a result of the Lake Region Medical acquisition, whether pursuant to the terms of their existing agreements
with us, Lake Region Medical or otherwise.
Our ability to realize the anticipated benefits of the Lake Region Medical acquisition will depend, to a large extent, on our
ability to integrate the legacy businesses. Integrating and coordinating aspects of the operations and personnel of Lake Region
Medical with ours involves complex operational, technological and personnel-related challenges. This process is time-
consuming and expensive, disrupts the businesses of both companies and may not result in the full benefits expected by us,
including cost synergies expected to arise from supply chain efficiencies and overlapping general and administrative functions.
The potential difficulties, and resulting costs and delays, include:
• managing a larger combined company;
•
•
•
•
•
•
•
consolidating corporate and administrative infrastructures;
issues in integrating manufacturing, warehouse and distribution facilities, research and development and sales forces;
difficulties attracting and retaining key personnel;
loss of customers and suppliers and inability to attract new customers and suppliers;
unanticipated issues in integrating information technology, communications and other systems;
incompatibility of purchasing, logistics, marketing, administration and other systems and processes; and
unforeseen and unexpected liabilities related to the acquisition or Lake Region Medical’s business.
Additionally, the integration of our and Lake Region Medical’s operations, products and personnel may place a significant
burden on management and other internal resources. The attention of our management may be directed towards integration
considerations and may be diverted from our day-to-day business operations, and matters related to the integration may require
commitments of time and resources that could otherwise have been devoted to other opportunities that might have been
beneficial to us and our business. The diversion of management’s attention, and any difficulties encountered in the transition
and integration process, could harm our business, financial condition and operating results.
Even if our businesses are successfully integrated, we may not realize the full benefits of the Lake Region Medical acquisition,
including anticipated synergies, cost savings or growth opportunities, within the expected timeframe or at all. In addition, we
expect to incur significant integration and restructuring expenses to realize synergies. However, many of the expenses that will
be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the
savings that we expect to achieve from elimination of duplicative expenses and the realization of economies of scale and cost
savings. Although we expect that the realization of efficiencies related to the integration of the businesses may offset
- 26 -
incremental transaction, acquisition-related and restructuring costs over time, we cannot give any assurance that this net benefit
will be achieved in the near term, or at all.
Any of the matters described above could adversely affect our business or harm our financial condition, results of operations or
business prospects.
We incurred substantial additional indebtedness in connection with the Lake Region Medical acquisition and may not
be able to meet all of our debt obligations.
We incurred substantial additional indebtedness in connection with the Lake Region Medical acquisition. At January 1, 2016,
our total indebtedness was $1.7 billion as compared to $187 million at January 2, 2015. We funded the cash portion of the Lake
Region Medical acquisition consideration, the pay-off of certain outstanding indebtedness of ours and of Lake Region Medical
and the payment of transaction-related expenses through a combination of available cash-on-hand and proceeds from debt
financings, which financings consisted of the issuance of $360 million of 9.125% senior notes due 2023 and borrowings of $1.4
billion under our Senior Secured Credit Facility. As of January 1, 2016, our debt service obligations, comprised of principal and
interest, during the following 12 months are estimated to be approximately $130 million. As a result of the increase in our
outstanding indebtedness, demands on our cash resources have increased. The increased amount of outstanding indebtedness
could, among other things:
•
•
•
•
•
•
require us to dedicate a large portion of our cash flow from operations to the servicing and repayment of our outstanding
indebtedness, thereby reducing funds available for working capital, capital expenditures, research and development
expenditures and other general corporate requirements;
limit our ability to obtain additional financing to fund future working capital, capital expenditures, research and
development expenditures and other general corporate requirements in the future;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
restrict our ability to make strategic acquisitions or dispositions or to exploit business opportunities;
place us at a competitive disadvantage compared to our competitors that have less outstanding indebtedness; and
adversely affect the market price of our common stock.
We incurred substantial expenses related to the acquisition of Lake Region Medical and expect to continue to incur
substantial expenses related to its integration.
We have incurred substantial expenses in connection with the acquisition of Lake Region Medical and expect to continue to
incur substantial expenses in connection with its integration. Specifically, we incurred approximately $32 million of transaction
and integration costs related to the acquisition of Lake Region Medical during 2015. In addition, we have estimated the amount
of investment necessary to achieve the projected annual pre-tax operating synergies from the acquisition of Lake Region
Medical (which synergies are projected to be $25 million in 2016 and increase to at least $60 million in 2018), to be $69
million, which consists of $22 million in capital expenditures and $47 million of operating expenses, during the three-year
period after the completion of the acquisition. However, many of the expenses that will be incurred are, by their nature, difficult
to estimate accurately. These expenses could, particularly in the near term, exceed the savings that we expect to achieve from
elimination of duplicative expenses and the realization of economies of scale and cost savings. Although we expect that the
realization of efficiencies related to the integration of Lake Region Medical’s business will offset incremental transaction,
acquisition-related and restructuring costs over time, this net benefit may not be achieved in the near term, or at all.
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. In addition, even if
we are able to identify future acquisitions, we may not be able to effect such acquisitions under the terms of the indenture
governing our 9.125% senior notes due 2023 or our Senior Secured Credit Facility. 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.
Lake Region Medical was previously a private company and has not been required to comply with the Sarbanes-Oxley
Act of 2002 (“Sarbanes-Oxley”).
Sarbanes-Oxley requires public companies to have and maintain effective internal control over financial reporting to provide
reasonable assurance regarding the reliability of financial reporting and preparation of financial statements and to have
management report on the effectiveness of those controls on an annual basis (and have its independent public accountants attest
- 27 -
annually to the effectiveness of such internal controls). As a private company, Lake Region Medical was not required to comply
with the requirements of Sarbanes-Oxley.
In connection with the completion of the Lake Region Medical acquisition, we are beginning to apply our Sarbanes-Oxley
procedures regarding internal controls over financial reporting with respect to Lake Region Medical. This process will require a
significant amount of time from our management and other personnel and will require us to expend a significant amount of
financial resources, which is likely to increase our compliance costs. We will be required to assess Lake Region Medical’s
internal controls over financial reporting at the end of 2016.
The Spin-off of Nuvectra may not be completed in accordance with the expected plans or anticipated timeline and, if
completed, may not achieve the intended results.
On July 30, 2015, Greatbatch announced the Spin-off of a portion of its QiG reporting segment through a tax-free distribution
of Nuvectra to the stockholders of Greatbatch on a pro rata basis. In February 2016, the Board of Directors of Greatbatch
approved the Spin-off with a distribution ratio whereby Greatbatch stockholders will receive one share of Nuvectra common
stock for every three shares of Greatbatch common stock held. The Spin-off is expected to be completed in March 2016,
however, we could be delayed or prevented from completing the Spin-off, or be forced to complete it on terms or conditions
that are less favorable or different than currently expected, for a variety of reasons, including unanticipated developments, such
as uncertainty of the financial markets, or other legal or regulatory developments. Therefore, we cannot assure you that we will
be able to complete the Spin-off under the expected plans or anticipated timeline, if at all. Even if the Spin-off is completed, we
may not be able to realize some or all of the anticipated benefits from the Spin-off. Moreover, following the completion of the
Spin-off, the combined value of the common stock of the two publicly-traded companies may not be equal to or greater than
what the value of the Greatbatch common stock would have been had the Spin-off not occurred. In addition, we have spent,
and, prior to completion of the Spin-off, we expect to continue to spend substantial time, money and effort on completing the
Spin-off, without any assurance that it will be completed. Our investments in the Spin-off, in terms of financial and
management resources, may limit our ability to pursue other business opportunities and distract us from operating our
businesses as currently conducted.
Interruptions of our manufacturing operations could delay production and affect our operations.
Our products are designed and manufactured in facilities located around the world. In most cases, the manufacturing of specific
product lines is concentrated in one or a few locations. 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. Any accident, such as a chemical spill or fire, 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, and in particular our larger
facilities, could result in production delays, which could affect our operations and harm our business.
Our international sales and operations are subject to a variety of market and financial risks and costs that could affect
our profitability and operating results.
Our sales outside the U.S., which accounted for 50% of sales for 2015, and our operations in Europe, Asia, and Central and
South America are and will continue to be subject to a number of risks and potential costs, including:
•
•
•
•
•
•
changes in foreign economic conditions and/or regulatory requirements;
local product preferences and product requirements;
outstanding accounts receivables that take longer to collect than is typical in the U.S.;
difficulties in enforcing agreements through foreign legal systems;
less protection of intellectual property in some countries outside of the U.S.;
trade protection measures and import and export licensing requirements;
• work force instability;
•
•
political and economic instability; and
complex tax and cash management issues.
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 net financial results. However, fluctuations in
foreign currency exchange rates could have a significant negative impact on our financial results in the future.
- 28 -
Economic 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.
To date, we have been able to access debt and equity financing that has allowed us to complete acquisitions, 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
under our Senior Secured Credit Facility 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 and long-term obligations, fund operations, and
fund our strategic initiatives. An interruption in our access to external financing or financial transactions to hedge risk could
affect our business prospects and financial condition.
The failure of our information technology systems to perform as anticipated could disrupt our business and affect our
financial condition.
The efficient operation of our business is dependent on our information technology (“IT”) systems. Accordingly, we rely upon
the capacity, reliability and security of our IT hardware and software infrastructure and our ability to expand and update this
infrastructure in response to our changing needs. Despite our implementation of security measures, our systems are vulnerable
to damages from computer viruses, natural disasters, incursions by intruders or hackers, failures in hardware or software, power
fluctuations, cyber terrorists and other similar disruptions. The failure of our IT systems to perform as anticipated for any
reason or any significant breach of security could disrupt our business and result in numerous consequences, including reduced
effectiveness and efficiency of operations, inappropriate disclosure of confidential information, increased overhead costs and
loss of important information, which could have a material effect on our business and results of operations. In addition, we may
be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Risks Related To Our Industries
The healthcare industry is highly regulated and subject to various political, economic and regulatory changes that could
increase our compliance costs and 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, medical devices are subject to regulation by the FDA and similar governmental agencies. These
regulations cover a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales
and distribution. Compliance with these regulations may be time consuming, burdensome and expensive and could negatively
affect our ability to sell products. This may result in higher than anticipated costs or lower than anticipated revenues.
Furthermore, healthcare industry regulations are 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. Our failure 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 healthcare 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. Health Care Reform imposes significant new taxes on medical device
manufacturers. In 2015, the medical device tax increased our cost of sales by $0.6 million. Beginning on January 1, 2016, the
medical device excise tax will be suspended through December 31, 2017, but if this suspension is not continued or made
permanent thereafter, the medical device excise tax will be automatically reinstated starting on January 1, 2018 and would
result in a significant increase in the tax burden on our industry and which could have a material negative impact on our
financial condition, results of operations and our cash flows. Other elements of Health Care Reform such as comparative
effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and
other provisions could meaningfully change the way healthcare is developed and delivered, and may materially adversely
impact numerous aspects of our business, results of operations and financial condition.
Many significant parts of Health Care Reform will be phased in over time and require further guidance and clarification in the
form of regulations. As a result, many of the impacts of Health Care Reform will not be known until those regulations are
enacted, which we expect to occur over the next several years.
- 29 -
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 our products. 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 or transportation of batteries may be imposed that
may result in higher costs or lower operating results. In addition, we cannot predict the effect that additional or modified
environmental regulations may have on us or our customers.
Our international operations expose us to legal and regulatory risks, which could have a material effect on our business.
Our profitability and international operations are, and will continue to be, subject to risks relating to changes in foreign legal and
regulatory requirements. In addition, our international operations are governed by various U.S. laws and regulations, including the
Foreign Corrupt Practices Act (“FCPA”) and other similar laws that prohibit us and our business partners from making improper
payments or offers of payment to foreign governments and their officials and political parties for the purpose of obtaining or
retaining business. Any alleged or actual violations of these regulations may subject us to government scrutiny, severe criminal or
civil sanctions and other liabilities and could negatively affect our business, reputation, operating results, and financial condition.
Consolidation in the healthcare industry could result in greater competition and reduce our 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, our revenues would decrease and our operating results would suffer.
Our 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 energy market revenues are dependent on conditions in the oil and natural gas industry, which historically have
been volatile.
Sales of our products into the energy market depends upon the condition of the oil and gas industry. Currently, oil and natural
gas prices have been subject to significant fluctuation and the oil and gas exploration and production industry has historically
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, 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. A change in the oil and gas exploration and production industry or a reduction in the exploration and
production expenditures of oil and gas companies, such as has occurred during 2015, could cause our energy market revenues
to decline.
- 30 -
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
Our principal executive office and headquarters is located in Frisco, Texas, in a leased facility. As of January 1, 2016, we
operated 35 facilities in the U.S., 7 in Europe, 4 in Central and South America, and 2 in Asia. Of this amount, 33 were leased
and 15 were owned. We occupy over 2.5 million square feet of manufacturing and research, development, and engineering
space worldwide. We believe the facilities we operate and their equipment are effectively utilized, well maintained, generally
are in good condition, and will be able to accommodate our capacity needs to meet current levels of demand. We continuously
review our anticipated requirements for facilities and, on the basis of that review, may from time to time acquire additional
facilities and/or dispose of existing facilities. The acquisition of Lake Region Medical has significantly expanded our global
manufacturing footprint. This increased scope and scale presents a tremendous opportunity to rationalize our manufacturing
footprint across both the legacy Greatbatch and legacy Lake Region Medical facilities to achieve our cost savings and
synergies.
ITEM 3.
LEGAL PROCEEDINGS
In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”)
alleging that AVX had infringed the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in
implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. On January 26,
2016, a jury in the United States District Court for the District of Delaware returned a verdict finding that AVX infringed two
Greatbatch patents and awarded Greatbatch $37.5 million in damages. The finding is subject to post-trial proceedings, including
a possible appeal by AVX.
In January 2015, Lake Region Medical was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of
the NJDEP’s intent to revoke a no further action determination made by the NJDEP in favor of Lake Region Medical in 2002
pertaining to a property on which a subsidiary of Lake Region Medical operated a manufacturing facility in South Plainfield,
New Jersey beginning in 1971. Lake Region Medical sold the property in 2004 and vacated the facility in 2007. We are
cooperating with the NJDEP and believe the NJDEP’s notice of intent to revoke is unwarranted. In December 2014, the current
owner of the property commenced litigation against Lake Region Medical, one of its executive officers and other unrelated
third parties, alleging that the defendants caused or contributed to alleged groundwater contamination beneath the property. The
Company believes these allegations are without merit.
We are party to various other legal actions arising in the normal course of business. A description of pending legal actions
against the Company is set forth in Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial
Statements contained in Item 8 of this report. Other than as discussed in Note 15, we do not believe that the ultimate resolution
of any pending legal actions will have a material effect on our consolidated results of operations, financial position or cash
flows. However, litigation is subject to inherent uncertainties and there can be no assurance that any pending legal action, which
we currently believe to be immaterial, does not become material in the future.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
- 31 -
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 information on the prices of our common stock as reported by the NYSE:
2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Close
$
$
47.78 $
50.65
51.64
50.69
58.18 $
56.86
63.19
61.06
40.02 $
43.65
42.23
43.42
47.36 $
50.57
47.85
49.00
44.85
49.58
43.56
48.66
56.72
53.50
58.43
52.50
As of March 1, 2016, there were approximately 168 record holders of the Company’s common stock. The Company stock
account within our 401(k) plan is considered one record holder for the purposes of this calculation. We have not paid cash
dividends and currently intend to retain any earnings to further develop and grow our business.
- 32 -
PERFORMANCE GRAPH
The following graph compares, for the five year period ended January 1, 2016, the cumulative total stockholder return for
Greatbatch, Inc., the S&P SmallCap 600 Index, and the Hemscott Peer Group Index. The Hemscott Peer Group Index includes
approximately 133 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, 2010 and assumes
reinvestment of dividends. The stock price performance shown on the following graph is not necessarily indicative of future
price performance.
Company/Index
Greatbatch, Inc.
S&P Smallcap 600
Hemscott Peer Group Index
12/31/2010
12/30/2011
12/28/2012
1/3/2014
1/2/2015
1/1/2016
$
100.00 $
100.00
100.00
91.51 $
101.02
103.76
94.78 $
117.51
119.22
181.37 $
166.05
156.42
201.49 $
175.61
187.48
217.39
172.14
200.34
- 33 -
ITEM 6.
SELECTED FINANCIAL DATA
The following table provides selected financial data 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 (in thousands, except per share amounts):
Statement of Operations Data:
Sales
Net income (loss)
Earnings (loss) per share
Basic
Diluted
Balance Sheet Data:
Working capital
Total assets(3)
Long-term obligations(3)
Jan. 1
2016 (1)(2)
Jan. 2
2015 (1) (2)
Jan. 3,
2014 (1)
Dec. 28,
2012 (1)(2)
Dec. 30,
2011 (1)(2)
Years Ended
$
800,414 $
(7,594 )
687,787 $
55,458
663,945 $
36,267
646,177 $
(4,799 )
568,822
33,122
$
(0.29 ) $
(0.29 )
2.23 $
2.14
1.51 $
1.43
(0.20 ) $
(0.20 )
1.42
1.40
$
360,764 $
2,982,136
1,917,671
242,022 $
955,122
233,099
190,731 $
889,629
255,772
176,376 $
889,611
316,994
170,907
880,502
319,170
(1) From 2011 to 2015, we recorded material charges in Other Operating Expenses, Net, primarily related to our cost savings
and consolidation initiatives and our acquisitions. Additional information is set forth in Note 13 “Other Operating
Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
(2) On October 27, 2015, August 12, 2014, February 16, 2012, and December 15, 2011, we acquired Lake Region Medical
Holdings, Inc., Centro de Construcción de Cardioestimuladores del Uruguay, NeuroNexus Technologies, Inc., and Micro
Power Electronics, Inc., respectively. This data includes the results of operations of these companies subsequent to their
acquisition. Additional information is set forth in Note 2 “Acquisitions” of the Notes to Consolidated Financial Statements
contained in Item 8 of this report. Additionally, in connection with our acquisition of Lake Region Medical we issued
approximately $1.8 billion of long-term debt. Additional information is set forth in Note 9 “Debt” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report.
(3) In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2015-03, “Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that
debt issuance costs be presented as a direct reduction to the carrying amount of the related debt in the balance sheet rather
than as a deferred charge, consistent with the presentation of discounts on debt. ASU 2015-15, “Interest - Imputation of
Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs associated with Line-of-
Credit Arrangements,” was issued in August 2015 to clarify that the U.S. Securities and Exchange Commission staff would
not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and
subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless
of whether there are any outstanding borrowings on the line-of-credit arrangement.
As permitted, during the fourth quarter of 2015, we elected to early adopt these ASUs and elected to retrospectively apply
this guidance. As a result, the Company has reclassified all deferred debt issuance costs associated with our term-debt from
Other Assets to Long-Term Debt in the Consolidated Balance Sheets. Additional information is set forth in Note 1
“Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of
this report.
- 34 -
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 IN PART II, ITEM 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” OF THIS REPORT.
Our Business
• Our business
• Our acquisitions
• Our customers
• Use of non-GAAP financial information
• CEO view
•
Strategic and financial overview
• Cost savings and consolidation efforts
•
• Government regulation
Product development
Our Critical Accounting Estimates
Stock-based compensation
Inventories
• Business acquisitions and intangible assets
•
•
• Tangible long-lived assets
•
Provision for income taxes
Our Financial Results
Fiscal 2015 compared with fiscal 2014
Fiscal 2014 compared with fiscal 2013
•
•
• Liquidity and capital resources
• Off-balance sheet arrangements
• Litigation
• Contractual obligations
•
•
Inflation
Impact of recently issued accounting standards
Our Business
In the fourth quarter of 2015, we acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake
Region Medical”). As a result, we now have three reportable segments: Greatbatch Medical, QiG Group (“QiG”), and Lake
Region Medical. In February 2016, we announced that our Board of Directors has approved the spin-off of a portion of our QiG
segment (the “Spin-off”). The Spin-off is expected to be completed in March 2016. As a result of the Lake Region Medical
acquisition and the pending Spin-off, we are reevaluating our operating and reporting segments, which is expected to be
finalized in 2016 once our corporate and management reporting structure realignment is completed. Additional information is
set forth in Note 19 “Business Segment, Geographic and Concentration Risk Information” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report.
Simultaneous with the close of the Lake Region Medical acquisition, we also announced our intention to rename the combined
entity Integer Holdings Corporation (“Integer”). Integer is defined as complete, whole, and comprehensive, and represents the
joining of Greatbatch and Lake Region Medical as well as the combined company’s product and service offerings provided to
customers. The new name is subject to Greatbatch stockholder approval at our May 2016 annual meeting.
Greatbatch Medical designs and manufactures products where we either own the intellectual property or have unique
manufacturing and assembly expertise. These products include medical devices and components for the cardiac,
neuromodulation, orthopaedics, portable medical, vascular and energy markets among others. The Greatbatch Medical segment
also offers value-added assembly and design engineering services for medical devices that utilize its component products.
The QiG segment focuses on the design and development of medical device systems and components. QiG is in the process of
developing applications for its neurostimulation technology platform for emerging indications such as spinal cord stimulation
(“SCS”), sacral nerve stimulation (“SNS”), and deep brain stimulation (“DBS”), among others. QiG’s Algostim, LLC
- 35 -
(“Algostim”) subsidiary is focused on the development and commercialization of its Algovita SCS system (“Algovita”), the
first application of its neurostimulation technology platform, which received PMA approval in the fourth quarter of 2015. QiG’s
PelviStim LLC (“PelviStim”) subsidiary is focused on the commercialization of QiG’s neurostimulation technology platform
for SNS. The QiG segment also includes NeuroNexus Technologies, Inc. (“NeuroNexus”), and Centro de Construcción de
Cardioestimuladores del Uruguay (“CCC”). The Spin-off is expected to consist of QiG Group LLC and its subsidiaries
Algostim, PelviStim and NeuroNexus. The operations of CCC and certain other existing QiG research and development
capabilities will be retained and not included as part of the Spin-off.
QiG revenue includes sales of neural interface technology, components and systems to the neuroscience and clinical markets
from NeuroNexus, a limited release of Algovita in Europe, and CCC sales of various medical device products such as
implantable pulse generators, programmer systems, battery chargers, patient wands and leads to medical device companies.
Once the medical devices developed by CCC reach significant production levels, the responsibility for manufacturing these
products may be transferred to Greatbatch Medical. After the pending Spin-off is completed, our design and development of
complete medical device systems will be completed by our combined teams in Greatbatch Medical, Lake Region Medical, and
CCC.
Lake Region Medical has operated as a segment for Greatbatch since it was acquired during the fourth quarter of 2015. This
segment specializes in the design, development, and manufacturing of products across the medical component and device
spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated
outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services,
original device development, and supply chain management to its customers, who are located worldwide. This segment is
dedicated to providing our customers with reliable, high-quality, cost-efficient, integrated outsourced solutions in the medical
device space.
Our Acquisitions
On October 27, 2015, we acquired all of the outstanding common stock of Lake Region Medical, headquartered in Wilmington,
MA. Lake Region Medical is a manufacturer of interventional and diagnostic wire-formed medical devices and components
specializing in minimally invasive devices for cardiovascular, endovascular, and neurovascular applications. This acquisition
has added scale and diversification to enhance customer access and experience by providing a comprehensive portfolio of
technologies. The operating results of Lake Region Medical were included in our Lake Region Medical segment from the date
of acquisition. The aggregate purchase price of Lake Region Medical including debt assumed was $1.77 billion, which was
funded primarily through a new senior secured credit facility and the issuance of senior notes. Total assets acquired from Lake
Region Medical were $2.1 billion. Total liabilities assumed from Lake Region Medical were $1.3 billion. For 2015, Lake
Region Medical added approximately $138.6 million to our revenue and increased our net loss by $17.4 million.
On August 12, 2014, we purchased all of the outstanding common stock of CCC, headquartered in Montevideo, Uruguay. CCC
is an active implantable neuromodulation medical device systems developer and manufacturer that produces a range of medical
devices including implantable pulse generators, programmer systems, battery chargers, patient wands and leads. This
acquisition allows us to more broadly partner with medical device companies, complements our core discrete technology
offerings, and enhances our medical device innovation efforts. The operating results of CCC were included in our QiG segment
from the date of acquisition. The aggregate purchase price of CCC was $19.8 million, which we funded with cash on hand.
Total assets acquired from CCC were $26.2 million. Total liabilities assumed from CCC were $6.4 million. For 2014, CCC
added approximately $5.8 million to our revenue and increased our net income by $1.2 million.
Going forward, we will continue to evaluate certain acquisition opportunities to either enhance our top and bottom line growth
trajectory, and/or expand our pipeline technologies. Our strategic criteria for these acquisitions is that they should drive
expansion in our core markets, allow us to enter adjacent growth markets, are focused on proprietary technology, can be tightly
integrated into our operating base, and will enhance our return on invested capital.
Our Customers
Our products are designed to provide reliable, long-lasting solutions that meet the evolving requirements and needs of our
customers. 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 and Lake Region Medical customers include large multi-national original equipment manufacturers
(“OEMs”) and their subsidiaries such as Abbott Labs, Biotronik, Boehringer Ingelheim, Boston Scientific, Cyberonics,
Halliburton Company, Johnson & Johnson, Medtronic, Nevro Corp., Philips Healthcare, Smith & Nephew, Sorin Group, St.
Jude Medical, Stryker, and Zimmer Biomet. During 2015, Biotronik, Johnson & Johnson, Medtronic, and St. Jude Medical
collectively accounted for 52% of our total sales.
- 36 -
QiG customers include numerous scientists, hospitals, and universities throughout the world who perform research for the
neuroscience and clinical markets and a limited distributor in Europe. Additionally, CCC’s customers include various research
companies and institutes and early stage medical device companies.
Use of Non-GAAP Financial Information
In addition to our results reported in accordance with generally accepted accounting principles (“GAAP”), we provide adjusted
net income, adjusted earnings per diluted share, earnings before interest taxes depreciation and amortization (“EBITDA”),
adjusted EBITDA and organic constant currency sales growth rates. Adjusted net income and adjusted earnings per diluted
share consist of GAAP amounts adjusted for the following to the extent occurring during the period: (i) acquisition-related
charges, (ii) amortization of intangible assets (iii) facility consolidation, optimization, manufacturing transfer and system
integration charges, (iv) asset write-down and disposition charges, (v) charges in connection with corporate realignments or a
reduction in force, (vi) certain litigation expenses, charges and gains, (vii) unusual or infrequently occurring items, (viii)
gain/loss on cost and equity method investments, (ix) for 2013, design verification testing (“DVT”) expenses in connection with
developing our neuromodulation platform; (x) the income tax (benefit) related to these adjustments and (xi) certain tax items
related to the Federal research and development tax credit which are outside the normal benefit received for the period.
Adjusted earnings per diluted share are calculated by dividing adjusted net income by diluted weighted average shares
outstanding. Adjusted EBITDA consists of GAAP net income (loss) plus (i) the same adjustments as listed above except for
items (x), and (xi), (ii) GAAP stock-based compensation, interest expense, and depreciation, (iii) GAAP provision (benefit) for
income taxes and (iv) cash gains received from cost and equity method investments. To calculate organic constant currency
sales growth rates, which exclude the impact of changes in foreign currency exchange rates, as well as the impact of any
acquisitions or divestitures of product lines on sales growth rates, we convert current period sales from local currency to U.S.
dollars using the previous periods’ foreign currency exchange rates and exclude the amount of sales acquired/divested during
the period from the current/previous period amounts, respectively. We believe that the presentation of adjusted net income,
adjusted diluted earnings per share, EBITDA, adjusted EBITDA and organic constant currency sales growth rates provides
important supplemental information to management and investors seeking to understand the financial and business trends
relating to our financial condition and results of operations.
CEO View
2015 marked the completion of three major strategic initiatives for the Company. First, we received PMA approval from the
FDA for our Algovita SCS system. This is the first ever PMA device developed at Greatbatch, demonstrating our extensive
capabilities in bringing critical medical device technology to the market addressing the needs of patients worldwide. The FDA
approval of the Algovita device will facilitate the pending spin-off of Nuvectra, which is targeted for completion in March,
2016. Second, we completed the integration of CCC Medical Devices, which has provided a considerable return since being
acquired. Third, we closed on the acquisition of Lake Region Medical on October 27. The deal significantly expands our
capabilities in the Cardiac, Vascular and Orthopaedic markets and also extends our reach into the Advanced Surgical market
with a portfolio of minimally invasive devices used in laparoscopic and drug delivery applications. Completing the Lake
Region acquisition marked the achievement of a key strategic milestone. The combination of the two companies under the new
Integer brand establishes the Company as the premier global Medical Device Outsource partner, with the scale and breadth of
capabilities to meet the demands of our customers and the patients they serve. Our primary focus in 2016 will be to integrate
our cultures and operations into one single integrated entity. Thus far the merger of the two organizations has gone extremely
well and we are confident that we will be able to leverage the combined expertise to accelerate our growth over the long term.
Strategic and Financial Overview
The overriding long-term strategic objectives that we have been operating under are centered around four strategic imperatives:
1) Organic Growth; 2) Margin Expansion; 3) Medical Device Systems; and 4) Targeted Acquisitions.
Organic Growth – One of our overriding long-term strategic objectives is to profitably grow our company organically. Fiscal
year 2015 sales of $800.4 million increased 16% in comparison to the prior year period. 2015 revenue includes two months of
operations from Lake Region Medical, which added $138.6 million to sales. Additionally, sales for the year were impacted by
foreign currency exchange rate fluctuations, which reduced sales by approximately $14.5 million compared to the prior year.
On an organic constant currency basis, 2015 sales decreased 2% over the prior year primarily due to a decline in Electrochem
sales caused by the slowdown in the energy markets. Despite this decline in legacy Greatbatch sales, we were able to improve
our adjusted diluted EPS by 1% through lower performance-based compensation as well as on-going continuous improvement
projects.
Fiscal year 2014 sales of $687.8 million represented a 4% increase over 2013. After adjusting for the $5.8 million of revenue
added from our acquisition of CCC in August 2014, as well as the $1 million positive impact of foreign currency exchange
rates, sales increased 3% in 2014 due to double digit organic constant currency growth from our orthopaedic (12%) and
vascular (22%) product lines due to increased sales force productivity, marketing efforts, and market growth. Partially offsetting
these increases were declines in our portable medical and cardiac/neuromodulation product lines due to our strategic shift in
- 37 -
2013 to refocus our portable medical product line offerings to products that have higher profitability, and the impact of several
customer inventory reduction initiatives and the end of life impact of legacy products in our cardiac product line. Similar to our
revenue growth, our adjusted diluted EPS grew 16% from 2013 to 2014 due to our increased sales and operational leverage.
Going forward, growth in our cardiac/neuromodulation product line will continue to be negatively impacted by the end of life
on legacy products, as well as continued pressure from our customer’s diversification and cost reduction initiatives. We also
expect our Electrochem product line will continue to be negatively impacted by the downturn in the energy markets through the
end of 2016.
Margin Expansion – We have a longstanding history of operational excellence, which is one of our core competencies. This,
when combined with our medical device systems and our organic sales growth strategies, is expected to continue to drive both
gross and operating margin expansion.
This strategic imperative was evident in our 2015 and 2014 results as our gross profit as a percentage of sales (“Gross
Margin”), excluding the impact of the Lake Region Medical acquisition, increased 90 basis points and 60 basis points,
respectively. The 2015 increase was primarily due to lower performance-based compensation as well as on-going continuous
improvement projects. Our 2014 Gross Margin expansion primarily resulted from our operational leverage, due to higher sales
volumes, and our various productivity initiatives.
Excluding the impact of the Lake Region Medical acquisition ($12.6 million), the full year impact of CCC Medical Devices
($2.2 million), as well as higher legal fees in connection with intellectual property (“IP”) related litigation ($1.9 million)
selling, general and administrative expenses (“SG&A”) for 2015 decreased $4.8 million. This decrease was primarily driven by
lower performance-based compensation ($4.1 million), as well as cost savings from our various consolidation initiatives. For
2014, SG&A expenses increased 3% compared to 2013 due to our increased investment in sales and marketing resources.
Partially offsetting these increases were the cost savings generated as a result of our various cost savings and consolidation
initiatives. See “Cost Savings and Consolidation Efforts” contained in this item for further details on these initiatives.
Excluding the impact of the Lake Region Medical acquisition, which added $1.8 million to research, development and
engineering costs, net (“RD&E”), RD&E increased $1.4 million primarily due to lower customer cost reimbursements partially
offset by lower performance-based compensation. For 2014, RD&E expenses decreased 8% compared to 2013 as a result of a
lower level of design verification testing (“DVT”) costs incurred in connection with the development of our SCS system.
We invest substantial resources in integrating our acquisitions and streamlining our operations in order to drive organic growth
and profitability. This strategy was evident during 2015 and 2014 as we announced several initiatives to invest in capacity and
capabilities and consolidate our manufacturing footprint. As a result, other operating expenses, net (“OOE”) totaled $66.5
million, $15.3 million and $15.8 million for 2015, 2014 and 2013, respectively. OOE for 2015 also included $38.3 million of
transaction, professional and consulting fees incurred in connection with the Lake Region Medical acquisition and the Spin-off.
As we move forward, investing in our operations will continue to be critical to the success of our strategic imperative to drive
margin expansion and attain the stated synergy goals in connection with the Lake Region Medical acquisition. See “Cost
Savings and Consolidation Efforts” contained in this item for further details on these initiatives.
The net result of the above is that, GAAP and adjusted diluted earnings per share (“EPS”) for fiscal year 2015 were a loss of
$0.29 and earnings of $2.90, respectively, compared to earnings of $2.14 and $2.86, respectively, for 2014 and earnings of
$1.43 and $2.47 for 2013. The Company estimates that the Lake Region Medical acquisition was approximately 2% dilutive to
2015 adjusted diluted EPS, and that excluding this impact, adjusted diluted EPS would have increased approximately 3% in
comparison to 2014.
Summary - In 2006 we launched our medical device strategy, and over the course of the next nine years we have transformed
our Company from a $320 million primarily CRM components company to a $1.4 billion fully integrated medical device
company. We acquired 10 companies over this period and successfully integrated these businesses into one unified company.
With our proven track record of integrating organizations, we are confident that our new Integer leadership team, along with our
10,000 associates, have the drive and skill-set to advance our medical device strategy and create long term value for our
shareholders.
- 38 -
A reconciliation of GAAP net income (loss) and diluted EPS to adjusted amounts is as follows (in thousands, except per share
amounts):
Net income (loss) as reported
Adjustments:
Amortization of intangibles(a)(c)
Inventory step-up amortization (COS)(c)
IP related litigation (SG&A)(b)(c)
Medical device DVT expenses (RD&E)(c)(d)
Consolidation and optimization expenses (OOE)(c)(e)
Acquisition and integration expenses (income) (OOE)(c)(f)
Asset dispositions, severance and other (OOE)(c)(g)
Lake Region Medical transaction costs (interest expense)(c)(h)
(Gain) loss on cost and equity method investments, net (other
income, net)(c)(i)
CSN conversion option discount and deferred fee acceleration
amortization(c)
R&D Tax Credit(j)
Adjusted net income and diluted EPS(k)
$
Adjusted diluted weighted average shares(l)
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
Net
Income
(Loss)
Per
Diluted
Share
Net
Income
Per
Diluted
Share
Net
Income
Per
Diluted
Share
$
(7,594 ) $
(0.29 ) $
55,458 $
2.14 $ 36,267 $
1.43
12,273
15,605
2,871
—
21,158
25,885
5,099
6,151
0.45
0.57
0.11
—
0.77
0.95
0.19
0.23
9,637
195
1,626
—
6,567
61
3,463
—
0.37
0.01
0.06
—
0.25
—
0.13
—
9,105
—
179
3,765
10,602
(326 )
997
—
0.36
—
0.01
0.15
0.42
(0.01 )
0.04
—
(2,177 )
(0.08 )
(2,841 )
(0.11 )
451
0.02
—
—
79,271 $
27,304
—
—
2.90 $
—
—
74,166 $
25,975
—
—
3,007
(1,600 )
2.86 $ 62,447 $
25,323
0.12
(0.06 )
2.47
(a) Given our acquisition of Lake Region Medical in the fourth quarter of 2015 and in order to present our financial results in a
form more comparable to other medical device companies and less acquisitive companies, we began excluding intangible
asset amortization for purposes of calculating adjusted net income and adjusted diluted EPS. Prior period adjusted amounts
have been recalculated to exclude intangible amortization for all periods presented.
(b) In 2013, we filed suit against AVX Corporation alleging they were infringing on our intellectual property. Given the
complexity and significant costs incurred pursuing this litigation, during the second quarter of 2015, we began excluding
these litigation expenses from adjusted amounts. Total costs incurred in connection with this litigation in 2015 was $4.4
million pre-tax. This matter proceeded to trial during the first quarter of 2016 and a federal jury awarded Greatbatch $37.5
million in damages. Prior period adjusted amounts have been recalculated to exclude these costs for all periods presented.
(c) Net of tax amounts computed using a 35% U.S., Mexico, and France statutory tax rate, a 25% Uruguay statutory tax rate,
and a 12.5% Ireland statutory tax rate. Expenses that are not deductible for tax purposes (i.e. permanent tax differences) are
added back at 100%.
(d) As a result of our premarket approval (“PMA”) submission to the Food and Drug Administration (“FDA”) for Algovita in
December 2013, we no longer exclude DVT costs associated with this system from adjusted operating income and adjusted
diluted EPS.
(e) During 2015 and 2014, we incurred costs primarily related to the transfer of our Beaverton, OR portable medical and
Plymouth, MN vascular manufacturing operations to Tijuana, Mexico. Additionally, with the acquisition of Lake Region
Medical, these costs now include expenses incurred in connection with the closure of Lake Region Medical’s Arvada,
Colorado site and the consolidation of its two Galway, Ireland sites initiated by Lake Region Medical in 2014. During
2013, we incurred costs related to the rationalization of our orthopaedic footprint as well as in connection with our
operating unit realignment.
(f) During 2015, we incurred $33.1 million pre-tax in costs related to the acquisition of Lake Region Medical and the
integration of CCC Medical Devices. During 2014, we incurred costs related to the integration of CCC Medical Devices.
During 2013, we realized income related to the contingent consideration recorded in connection with the acquisition of
NeuroNexus.
- 39 -
(g) 2015 costs primarily include $6.0 million pre-tax in legal and professional fees incurred in connection with the pending
spin-off of Nuvectra. 2014 costs primarily include costs in connection with our business reorganization to realign our
contract manufacturing operations.
(h) We recorded $9.5 million pre-tax for 2015 in transaction costs (i.e. debt commitment fees, interest rate swap termination
costs, debt extinguishment charges) in connection with our acquisition of Lake Region Medical.
(i) Pre-tax amount is gain of $3.4 million for 2015, a gain of $4.4 million for 2014, and a loss of $0.7 million for 2013.
(j) The 2015 Federal R&D tax credit was enacted during the fourth quarter of 2015 and the 2014 Federal R&D tax credit was
enacted in the fourth quarter of 2014. Amounts assume that the tax credit was effective at the beginning of the year for
2015 and 2014. The 2013 and 2012 Federal R&D tax credit was enacted and recognized in 2013. The 2012 Federal R&D
tax credit amount is excluded for adjusted diluted EPS purposes.
(k) The per share data in this table have been rounded to the nearest $0.01 and therefore may not sum to the total.
(l) Full year 2015 adjusted diluted weighted average shares includes 941,000 shares of dilution related to outstanding equity
awards that were not dilutive for GAAP EPS purposes.
In connection with the Lake Region Medical acquisition, we incurred $1.8 billion of additional indebtedness. As of January 1,
2016, our debt service obligations, comprised of principal and interest, for 2016 are estimated to be approximately $130
million. As a result of this increase in our outstanding indebtedness, demands on our cash resources have increased
significantly. Accordingly, during 2015 we began presenting EBITDA and adjusted EBITDA in our SEC reports in order to
present a measure of our cash generation, which is important to holders of our public debt, and to be more consistent with how
other medical device companies report results. These measures are generally consistent with how we calculate adjusted
EBITDA for our debt covenant ratios.
A reconciliation of net income (loss) as reported to EBITDA and adjusted EBITDA is as follows (dollars in thousands):
(dollars in thousands)
Net income (loss) as reported
Interest expense
Provision (benefit) for income taxes
Depreciation
Amortization
EBITDA
Inventory step-up amortization
IP related litigation
Stock-based compensation expense
Medical device DVT expenses
Consolidation and optimization expenses
Acquisition and integration expenses (income)
Asset dispositions, severance and other
Noncash (gain) loss on cost and equity method investments
Adjusted EBITDA
Adjusted EBITDA as a % of sales
January 1,
2016
$
(7,594 ) $
Year Ended
January 2,
January 3,
2015
55,458
$
2014
36,267
33,513
(8,106 )
27,136
17,496
62,445
22,986
4,417
9,287
—
26,393
33,449
6,622
275
165,874
$
4,252
21,121
23,320
13,877
118,028
260
2,502
12,893
—
11,188
3
4,106
(1,190 )
11,261
12,571
22,799
13,167
96,065
—
276
12,965
5,793
14,758
(502 )
1,534
694
131,583
$
147,790
$
20.7 %
21.5 %
19.8 %
The changes in adjusted EBITDA for fiscal year 2015 versus fiscal year 2014 and 2013 are the result of the same factors that
drove the changes in adjusted diluted EPS as discussed above.
Medical Device Systems – In 2008, we began evolving our product offerings to include the development of complete medical
device systems in order to raise the growth and profitability profile of our Company. This medical device systems strategy is
being facilitated through QiG and leverages the component technology of Greatbatch Medical. More specifically, this strategy
includes the development of a neuromodulation platform that can be used to support multiple devices. Algovita, the first
application of QiG’s neurostimulation technology platform, is indicated for the treatment of chronic pain of the trunk and limbs.
- 40 -
Algovita received CE Mark approval during 2014 and PMA approval during the fourth quarter of 2015. QiG anticipates
launching Algovita commercially in the United States during the first half of 2016. Net medical device costs incurred by QiG
were $25.9 for 2015 compared to $23.3 million for 2014 and $30.5 million for 2013. Medical device costs for 2013 include
$5.8 million of DVT costs incurred in connection with the development of Algovita. After the pending Spin-off is completed,
our design and development of complete medical device systems will be completed by the combined teams in Greatbatch
Medical, Lake Region Medical, and CCC.
Targeted Acquisitions – The results for 2015, 2014 and 2013 include the impact of our acquisition of Lake Region Medical in
October 2015, CCC in August 2014, and NeuroNexus in February 2012. Going forward, we will continue to evaluate certain
acquisition opportunities to either enhance our top and bottom line growth trajectory, and/or expand our pipeline technologies.
Our strategic criteria for these acquisitions is that they should drive expansion in our core markets, allow us to enter adjacent
growth markets, focus on proprietary technology, can be tightly integrated into our operating base, and enhance our return on
invested capital.
Cost Savings and Consolidation Efforts
In 2015, 2014, and 2013, we recorded charges in OOE related to various cost savings and consolidation initiatives. These
initiatives were undertaken to improve our operational efficiencies and profitability the most significant of which are as follows
(dollars in millions):
Initiative
2014 investments in capacity and capabilities
Orthopaedic facilities optimization
Legacy Lake Region Medical consolidations
Expected
Expense
$34 - $39
$45 - $48
$13 - $15
Expected
Capital
$25 - $28
Expected
Annual
Cost
Savings
> $20
Expected
Completion
Date
2016
$30 - $35
$10 - $15
$4 - $5
$8 - $9
2016
2016
See Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this
report for additional information about the timing, cash flow impact, and amount of future expenditures for these initiatives. We
continually evaluate our operating structure in order to maximize efficiencies and drive margin expansion. In 2016, OOE is
expected to be comparable to the 2015 levels primarily due to the integration and consolidation efforts in connection with the
Lake Region Medical acquisition. We expect to achieve $25 million in annual savings for 2016 from the Lake Region Medical
acquisition and have a long-term goal of at least $60 million in annual savings, which is expected to be achieved over the next
three years.
- 41 -
Product Development
Greatbatch Medical and Lake Region Medical
Our core business is well positioned because our OEM customers leverage our portfolio of intellectual property, and we
continue to build a healthy pipeline of diverse medical technology opportunities. The combination of Greatbatch and Lake
Region Medical brings together two highly complementary organizations that can provide a new level of industry leading
capabilities and services to OEM customers while building value for shareholders. Through this transformative deal, we are at
the forefront of innovating technologies and products that help change the face of healthcare, providing our customers with a
distinct advantage as they bring complete systems and solutions to market. In turn, our customers will be able to accelerate
patient access to life enhancing therapies. The newly combined company will be able to offer a substantially more
comprehensive portfolio for customers utilizing the best technologies, providing a single point of support, and driving optimal
outcomes. Some of the more significant product development opportunities Greatbatch Medical and Lake Region Medical are
pursuing are as follows:
Product Line
Advanced Surgical, Orthopaedics,
and Portable Medical
Product Development Opportunities
Developing a portfolio of single use products and instruments for the orthopaedics
market.
Developing a portfolio of wireless products for the portable medical and orthopaedic
markets.
Cardio and Vascular
Developing a portfolio of catheter, wire-based, sensor and coating products for the
cardio and vascular markets.
Cardiac/Neuromodulation
Electrochem
QiG
Developing next generation technology programs including Gen 2 QHR battery, next
generation filtered feedthroughs, high voltage capacitors and vertically integrated lead
solutions.
Developing power solutions to advance performance and reliability of battery packs in
critical environments.
Through QiG, we can develop or assist our customers to develop complete medical devices. Algovita, our SCS system for the
treatment of chronic pain of the trunk and limbs, is the first application of QiG’s neurostimulation technology platform that was
designed to target unmet clinical needs with a focus on safety and product differentiation for all user groups. This product
received CE Mark approval in 2014, was approved by the United States Food and Drug Administration during 2015, and is
expected to commercially launch in the United States during the first half of 2016.
QiG is also working to develop additional medical device systems utilizing its neurostimulation platform in the fields of SNS
and DBS. After the pending Spin-off is completed, our design and development of complete medical device systems will be
completed by our combined teams in Greatbatch Medical, Lake Region Medical, and CCC. We are now able to more broadly
partner with medical device companies, leveraging Greatbatch Medical’s core components discrete technology, the design and
manufacturing expertise of Lake Region Medical, and the full device capabilities of CCC which will enhance our medical
device innovation efforts.
Government Regulation
The Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act
(collectively “Health Care Reform”) legislated broad-based changes to the U.S. healthcare system that could significantly
impact our business operations and financial results, including higher or lower revenue, as well as higher employee medical
costs and taxes. Health Care Reform imposes significant new taxes on medical device OEMs, which will result in a significant
increase in the tax burden on our industry and which could have a material negative impact on our financial condition, results of
operations and our cash flows. Beginning on January 1, 2016, the medical device excise tax was suspended through December
31, 2017, but if this suspension is not continued or made permanent thereafter, the medical device excise tax will be
automatically reinstated starting on January 1, 2018. Other elements of Health Care Reform such as comparative effectiveness
research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions
could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our
business, results of operations and financial condition. Many significant parts of Health Care Reform will be phased in over the
next several years and require further guidance and clarification in the form of regulations. The medical device tax increased
our cost of sales by $0.6 million, $0.7 million, and $0.5 million in 2015, 2014 and 2013, respectively.
Our Collegeville, PA facility, which was acquired as part of the Lake Region Medical acquisition, is subject to two
administrative consent orders entered into with the U.S. Environmental Protection Agency (the “EPA”), which require ongoing
- 42 -
groundwater treatment and monitoring at the site as a result of historic leaks from underground storage tanks. Upon approval by
the EPA of our proposed post remediation care plan, which requires a continuation of the groundwater treatment and monitoring
process at the site, we expect that the consent orders will terminate. During the first half of 2016, we expect a decision from the
EPA on whether our post remediation care plan has been approved. The groundwater treatment process at our Collegeville
facility consists of a groundwater extraction and treatment system and the performance of annual sampling of a defined set of
groundwater wells as a means to monitor containment within approved boundaries.
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 consolidated 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.
Business Acquisitions and Intangible Assets
We account for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and
liabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a company
is allocated to the tangible and intangible assets of the acquired company and liabilities we assume based on estimates of their
respective fair values at the date of acquisition. Any excess of the purchase price over the estimated fair values of the net
identified tangible and intangible assets acquired is recorded as goodwill. The judgments made in determining the estimated fair
value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of
operations. Additionally, these estimates also form the basis of whether or not an impairment charge should be recorded. For
these reasons, these estimates are considered to be critical accounting estimates.
Definite-lived intangible assets are amortized over the expected life of the asset. Goodwill and some of our intangible assets are
considered non-amortizing intangible assets as they are expected to generate cash flows indefinitely. Goodwill and indefinite-
lived intangible assets are not amortized but are required to be assessed for impairment on an annual basis or more frequently if
certain indicators are present. Goodwill is evaluated for impairment at the reporting unit level, which is defined as an operating
segment or one level below an operating segment. Definite-lived intangible assets are amortized over their estimated useful
lives and are assessed for impairment if certain indicators are present.
Assumptions/Approach Used
We base the fair value of identifiable tangible and intangible assets on detailed valuations that use information and assumptions
provided by management. The fair values of intangible assets are determined using one of three valuation approaches: market,
income or cost. The selection of a particular method depends on the reliability of available data and the nature of the asset. The
market approach values the asset based on available market pricing for comparable assets. The income approach values the
asset based on the present value of risk adjusted cash flows projected to be generated by that asset. The projected cash flows for
each asset considers multiple factors from the perspective of a marketplace participant, including current revenue from existing
customers, attrition trends, pricing, reasonable contract renewal assumptions, new product launches, cost synergies, royalty
rates and expected profit margins giving consideration to historical and expected margins. The cost approach values the asset by
determining the current cost of replacing that asset with another of equivalent economic utility. The cost to replace the asset
reflects the estimated reproduction or replacement cost, 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. When evaluating goodwill for impairment, we may first perform an assessment of qualitative factors, referred to as
the “step-zero” approach, to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying
amount. If, based on the review of the qualitative factors, we determine it is more-likely-than-not that the fair value of the
reporting unit is greater than its carrying value, the required two-step quantitative impairment test can be bypassed. If we do not
perform a qualitative assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, we
must perform the two-step quantitative impairment test, and calculate the estimated fair value of the reporting unit. If, based
upon the two-step impairment test, it is determined that 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
- 43 -
carrying value. Fair values for reporting units are determined based on the income and market approaches. Indefinite-lived
intangible assets are evaluated for impairment by using the income approach. Definite-lived intangible assets are reviewed at
least quarterly to determine if any conditions exist or a change in circumstances has occurred that would indicate impairment or
a change in their remaining useful life.
We do not believe that the legacy Greatbatch goodwill allocated to our Greatbatch Medical and QiG segments are at risk of
failing step one of future annual impairment tests unless operating conditions significantly deteriorate, given the results of our
2015 step zero qualitative analysis as well as the significant amount that our estimated fair value for these assets was in excess
of their respective book values as of January 3, 2014, the date of our last step one goodwill impairment test. The goodwill
allocated to our Lake Region Medical segment may be subject to future impairment if their actual operating results deteriorate
from the results from that were expected when we performed the initial purchase price allocation. Examples of a significant
deterioration in operating conditions, which could impact the valuation and/or result in an impairment of goodwill are as
follows: for Greatbatch Medical and Lake Region Medical, the loss of one or more significant customers, technology
obsolescence, product liability claims or significant manufacturing disruption, among others. For QiG, regulatory non-approval
of new medical device systems, lack of market acceptance, discontinuation of significant development projects, technology
obsolescence or failure of technology, among others.
Effect of Variation of Key Assumptions Used
The use of alternative valuation assumptions, including estimated cash flows and discount rates, and alternative estimated
useful life assumptions could result in significant changes to our intangible asset fair value estimates. These changes in fair
value estimates could impact the amount and timing of future intangible asset amortization expense and/or result in impairment
losses.
As part of our 2015 step zero qualitative goodwill analysis, we made certain assumptions by evaluating factors including, but
not limited to, macro-economic conditions, market and industry conditions, cost factors, competitive environment, share price
fluctuations, results of the last impairment test, and the operational stability and the overall financial performance of the
reporting units. We also make assumptions involving the projections of future revenues and expenses that impact the results of
our step-zero impairment analysis. Significant changes in these estimates and assumptions could create future impairment
losses to our goodwill. The assumptions used in our 2015 impairment analysis incorporate the forward-looking statements made
in this Management’s Discussion and Analysis of Financial Condition and Results of Operations section.
For the last step one impairment test for QiG, which was performed as of January 3, 2014, the fair value for our QiG reporting
unit was determined primarily through the use of the income approach. The projected cash flows used to determine the fair
value of the QiG reporting unit were based upon internal revenue and expense projections, discount rates and probability of
success factors based upon the stage of completion of the medical device projects within QiG. Revenue projections were
assumed to increase for QiG as market share was garnered by its medical devices. As QiG products were in the clinical and
development stage, projected market share penetration rates were assumed to grow from low single digits in the early years up
to maximum market share penetration rates that ranged between 6% and 15%. The discounted cash flow analysis for QiG
included a discount rate of 20% and probability of success factors ranging between 75% to 90%. The fair value calculation for
QiG was corroborated with market data such as recent acquisitions for comparable companies, analyst reports and discussions
with potential commercial partners of QiG.
For our indefinite-lived intangible assets, we make estimates of royalty rates ranging from 0.25% to 2.0%, future revenues and
discount rates ranging from 9.5% to 11.5%. Significant changes in these estimates could create future impairments of these
assets.
Estimation of the useful lives of indefinite- and definite-lived intangible assets is 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 intangible assets.
As a result of the Lake Region Medical acquisition and the expected Spin-off, the Company is reevaluating its operating and
reporting segments, which is expected to be finalized in 2016 once the corporate and management reporting structure
realignment is completed. The way we allocate resources and evaluate our businesses determines the reporting unit level which
goodwill is tested for impairment. Significant changes to these reporting units could create future impairments of goodwill.
As of January 1, 2016, we have $2.0 billion of intangible assets recorded on our consolidated balance sheet representing 67% of
total assets. This includes $894.0 million of amortizing intangible assets, $90.3 million of indefinite-lived intangible assets and
$1.0 billion of goodwill. A 1% change in the amortization of our intangible assets would change 2015 net income (loss) by
approximately $0.1 million, or approximately $0.004 per diluted share.
- 44 -
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 awards based on Company financial metrics is reassessed each period and recognized based upon the probability
that the performance targets will be achieved. Compensation cost for performance awards based on market metrics (such as
total shareholder return) is expensed each period whether the performance metrics are achieved or not. 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, as well as market and nonmarket performance award considerations. The total expense recognized over the vesting period
will only be for those awards that ultimately vest, as well as market and nonmarket performance award considerations.
Assumptions/Approach Used
We utilize the Black-Scholes Option 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.
The fair value of time-based as well as nonmarket-based performance restricted stock and restricted stock unit awards is equal
to the fair value of the Company’s stock on the date of grant. The fair value of market-based performance restricted stock unit
awards is determined by utilizing a Monte Carlo simulation model, which projects the value of Greatbatch stock versus our peer
group under numerous scenarios and determines the value of the award based upon the present value of these projected
outcomes.
Compensation cost for nonmarket-based performance awards is reassessed each period and recognized based upon the
probability that the performance targets will be achieved. That assessment is based upon actual and expected future
performance.
Stock-based compensation expense is recorded for those awards that are expected to vest, as well as market and nonmarket
performance award considerations. 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.
Effect of Variation of Key Assumptions Used
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 are
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 and its stock price will affect the likelihood that performance-based targets are achieved and could materially impact
the amount of stock-based compensation expense recognized.
A 1% change in our stock-based compensation expense would change 2015 net income (loss) by approximately $0.06 million,
or approximately $0.002 per diluted share.
- 45 -
Inventories
Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market.
Assumptions/Approach Used
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.
Effect of Variation 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.
As of January 1, 2016, we have $252.2 million of inventory recorded on our consolidated balance sheet representing 8% of total
assets. A 1% write-down of our inventory would change 2015 net income (loss) by approximately $1.6 million, or
approximately $0.06 per diluted share.
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 if certain indicators are present.
Assumptions/Approach Used
We assess the impairment of tangible long-lived assets when events or changes in circumstances indicate that the carrying value
of the asset (asset group) may not be recoverable. Factors that we consider in deciding when to perform an impairment review
include, but are not limited to: a significant decrease in the market price of the asset (asset group); a significant change in the
extent or manner in which a long-lived asset (asset group) is being used or in its physical condition; a significant change in
legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an action or
assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the
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 (asset group); or a
current expectation that, more likely than not, a long-lived asset (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 (asset group) to the related total future undiscounted cash flows. The projected cash flows for each asset (asset group)
considers multiple factors, including current revenue from existing customers, proceeds from the sale of the asset (asset group),
reasonable contract renewal assumptions, and expected profit margins giving consideration to historical and expected margins.
If an asset’s (assets group’s) carrying value is not recoverable through related undiscounted cash flows, the asset (asset group) is
considered to be impaired. Impairment is measured by comparing the asset’s (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.
Effect of Variation of Key Assumptions Used
Estimation of the cash flows and useful lives of tangible assets that are long-lived requires significant management judgment.
Events could occur that would materially affect our estimates and assumptions. 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 or the
useful lives. Also, as we make manufacturing process conversions and other facility consolidation decisions, we must make
subjective judgments regarding the remaining cash flows and 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 (asset groups).
As of January 1, 2016, we have $379.5 million of tangible long-lived assets recorded on our consolidated balance sheet
representing 13% of total assets. A 1% write-down in our tangible long-lived assets would change 2015 net income (loss) by
approximately $2.5 million, or approximately $0.09 per diluted share.
- 46 -
Provision for income taxes
Our consolidated financial statements 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.
Assumptions/Approach Used
In recording the provision for income taxes, management must estimate the future tax rates applicable to the reversal of
temporary differences based upon the 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 income 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 statutes of limitations. The provision for income taxes includes the impact of reserve provisions and changes to the reserves
that are considered appropriate.
Effect of Variation 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,
2016, we had $205.4 million of gross deferred tax assets on our consolidated balance sheet and a valuation allowance of $39.2
million has been established for certain deferred tax assets as it is more likely than not that they will not be realized. As January
1, 2016, the Company has federal net operating loss (“NOL”) carryforwards of approximately $386.2 million expiring at
various dates through 2035. If not utilized, these carryforwards will begin to expire in 2019. In assessing the realizability of
the deferred tax asset associated with the NOLs, management relied on the reversal of deferred tax liabilities within the U.S
taxing jurisdictions of approximately $866.3 million. A 1% change in the effective tax rate would impact the current year
benefit for income taxes by $0.2 million, and 2015 diluted earnings per share by $0.006 per diluted share.
- 47 -
Our Financial Results
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. Fiscal years 2015, 2014 and 2013
ended on January 1, 2016, January 2, 2015 and January 3, 2014, respectively. Fiscal years 2015 and 2014 contained fifty-two
weeks and fiscal year 2013 contained fifty-three weeks.
Year Ended
2015 vs. 2014
2014 vs. 2013
January 1,
2016
January 2,
2015
January 3,
2014
$
Change
%
Change
$
Change
%
Change
Dollars in thousands, except per share data
Product Line Sales:
Advanced Surgical, Orthopaedics, and
Portable Medical
Cardio and Vascular
Cardiac/Neuromodulation
Electrochem
Elimination of interproduct line sales
Total sales
Cost of sales
Gross profit
$ 243,385
143,260
356,064
59,449
(1,744 )
800,414
565,279
235,135
$ 216,339
58,770
330,921
81,757
—
687,787
456,389
231,398
$ 208,990
48,357
328,455
78,143
—
663,945
444,632
219,313
$ 27,046
84,490
25,143
(22,308 )
(1,744 )
112,627
108,890
3,737
13 % $
144 %
8 %
(27 )%
NA
16 %
24 %
2 %
Gross profit as a % of sales
29.4 %
33.6 %
33.0 %
4 %
22 %
1 %
7,349
10,413
2,466
3,614
23,842
11,757
12,085
5 %
— — %
4 %
3 %
6 %
Selling, general and administrative
expenses (SG&A)
SG&A as a % of sales
Research, development and engineering
costs, net (RD&E)
RD&E as a % of sales
Other operating expenses, net
Operating income
Operating margin
Interest expense
(Gain) loss on cost and equity method
investments, net
Other (income) expense, net
Provision (benefit) for income taxes
Effective tax rate
Net income (loss)
Net margin
Diluted earnings (loss) per share
$
102,530
90,602
88,107
11,928
13 %
2,495
3 %
12.8 %
13.2 %
13.3 %
52,995
49,845
54,077
3,150
6 %
(4,232 )
(8 )%
6.6 %
7.2 %
8.1 %
66,464
13,146
15,297
75,654
15,790
61,339
51,167
(62,508 )
334 %
(83 )%
(493 )
14,315
(3 )%
23 %
1.6 %
33,513
11.0 %
4,252
9.2 %
11,261
29,261
688 %
(7,009 )
(62 )%
(3,350 )
(1,317 )
(8,106 )
(4,370 )
(807 )
21,121
694
546
12,571
1,020
(23 )%
(5,064 )
(510 )
63%
(29,227 )
NA
(1,353 )
8,550
NA
NA
68 %
51.6 %
27.6 %
25.7 %
$
(7,594 )
$ 55,458
$ 36,267
$ (63,052 )
(114 )% $ 19,191
53%
(0.9 )%
(0.29 )
$
8.1 %
2.14
$
5.5 %
1.43
$
(2.43 )
(114 )% $
0.71
50%
- 48 -
Fiscal 2015 Compared with Fiscal 2014
Sales
Changes to sales by major product lines were as follows (dollars in thousands):
Sales:
Advanced Surgical, Orthopaedics, and Portable Medical $
Cardio and Vascular
Cardiac/Neuromodulation
Electrochem
Elimination of interproduct line sales
Total sales
$
Year Ended
2015 vs. 2014
January 1,
2016
January 2,
2015
$
Change
%
Change
243,385 $
143,260
356,064
59,449
(1,744 )
800,414 $
216,339 $
58,770
330,921
81,757
—
687,787 $
27,046
84,490
25,143
(22,308 )
(1,744 )
112,627
13 %
144 %
8 %
(27 )%
NA
16 %
Changes to sales by business segments were as follows (dollars in thousands):
Sales:
Greatbatch Medical
QiG
Lake Region Medical
Elimination of intersegment sales
Total sales
Year Ended
2015 vs. 2014
January 1,
2016
January 2,
2015
$
Change
%
Change
$
$
649,977 $
13,571
139,819
(2,953 )
800,414 $
678,285 $
9,502
—
—
687,787 $
(28,308 )
4,069
139,819
(2,953 )
112,627
(4 )%
43 %
100 %
NA
16 %
In connection with our acquisition of Lake Region Medical, we have recast our revenue by product line into the following four
categories:
• Advanced Surgical, Orthopaedics, and Portable Medical – Includes legacy Greatbatch Orthopaedics and Portable Medical
product line sales plus the legacy Lake Region Medical Advanced Surgical product line sales.
• Cardio and Vascular – Includes the legacy Greatbatch Vascular product line sales plus the legacy Lake Region Medical
Cardio and Vascular product line sales less the legacy Lake Region Medical Cardiac/Neuromodulation sales.
• Cardiac/Neuromodulation – Includes the legacy Greatbatch Cardiac/Neuromodulation and QiG sales plus the legacy Lake
Region Medical Cardiac/Neuromodulation sales previously included in their Cardio and Vascular product line sales.
• Electrochem – Includes the legacy Greatbatch Energy, Military and Environmental product line sales.
Total 2015 sales increased 16% to $800.4 million. The most significant drivers of this increase were as follows:
• Fiscal year 2015 Advanced Surgical, Orthopaedics, and Portable Medical sales increased 13% compared to the same period
of 2014 and includes $37.9 million of sales from the former Lake Region Medical since the date of acquisition. During
2015, this product line continued to be negatively impacted by the weakening Euro, which reduced sales by approximately
$14.5 million in comparison to the prior year. On an organic constant currency basis, our Advanced Surgical, Orthopaedics,
and Portable Medical sales increased 2% in comparison to 2014 primarily due to orthopaedics market growth and new
customer wins partially offset by lower portable medical sales due to our refocusing this product line’s product offerings to
products that have higher profitability.
• During 2015, our Cardio and Vascular sales increased $84.5 million in comparison to the prior year and includes $88.8
million of sales from the former Lake Region Medical since the date of acquisition. On an organic constant currency basis,
our Cardio and Vascular sales decreased 7% in comparison to 2014 due to the end of life on some legacy products. This
decrease was partially offset during the fourth quarter of 2015, as our customers built safety stock in anticipation of our
product line transfers to our Tijuana, Mexico facility in the first quarter of 2016. We expect our product line transfer to
Mexico will position us to be more competitive in both new and existing markets.
- 49 -
• For 2015, our Cardiac/Neuromodulation sales increased $25.1 million or 8% in comparison to 2014 and includes $13.7
million of sales from the former Lake Region Medical since the date of acquisition. On an organic constant currency basis,
our Cardiac/Neuromodulation sales increased 2% in comparison to the prior year primarily due to a neuromodulation
customer product launch, which was partially offset by the runoff of end of life products from our legacy cardiac customers.
• Full year 2015 Electrochem sales declined 27%. This decrease was primarily due to the slowdown in the energy markets,
which has caused customers to reduce drilling and exploration volumes. We expect the slowdown in the energy markets to
continue to be a headwind to Electrochem sales through the end of 2016.
Gross Profit
Changes to our Gross Margin percentage was primarily due to the following:
Performance-based compensation(a)
Production efficiencies, volume and mix(b)
Impact of Lake Region Medical acquisition(c)
Other
Total percentage point change to gross profit as a percentage of sales
2015-2014
% Point Change
0.9 %
0.1 %
(5.1 )%
(0.1 )%
(4.2 )%
(a) Amount represents the change in performance-based compensation versus the prior year period and is recorded based upon
the actual results achieved.
(b) Our Gross Margin percentage benefited from production efficiencies gained at our manufacturing facilities as a result of
our various lean and supply chain initiatives, which was partially offset by a higher sales mix of lower margin products.
(c) Amount represents the impact to our gross profit percentage related to the acquisition of Lake Region Medical in October
2015 and includes $23.0 million of inventory step-up amortization.
In the short-term, we expect our Gross Margins to be negatively impacted by the Lake Region Medical acquisition, which
historically has had lower gross margins than legacy Greatbatch, as well as continued pricing pressure from our OEM
customers. However, over the long-term, we expect to see our Gross Margin improve as we rationalize the manufacturing
footprint across both the legacy Greatbatch and legacy Lake Region Medical facilities - 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):
Performance-based compensation(a)
Legal fees(b)
Impact of Lake Region Medical acquisition(c)
Other
Net increase in SG&A
2015-2014
$ Change
(4,051 )
1,569
14,823
(413 )
11,928
$
$
(a) Amount represents the change in performance-based compensation versus the prior year and is recorded based upon the
actual results achieved.
(b) Amount represents an increase in legal costs compared to the prior year and includes higher intellectual property (“IP”)
related defense costs, as well as other corporate initiatives. In 2013, we filed suit against one of our
cardiac/neuromodulation competitors alleging they were infringing on our IP. Costs associated with this litigation
accounted for $1.9 million of the increase in SG&A expenses from 2014 to 2015.
(c) Amount represents the incremental SG&A expenses related to the acquisition of Lake Region Medical in October 2015 and
CCC acquired in August 2014.
- 50 -
RD&E Expenses, Net
Net RD&E costs were as follows (in thousands):
Research, development and engineering costs
Less: cost reimbursements
Total RD&E, net
Year Ended
January 1,
2016
January 2,
2015
Change
$
$
59,767 $
(6,772 )
52,995 $
58,974 $
(9,129 )
49,845 $
793
2,357
3,150
Net RD&E for 2015 increased $3.2 million to $53.0 million. Excluding the impact of the Lake Region Medical acquisition,
which added $1.8 million to RD&E expenses in 2015, the increase in RD&E was primarily attributable to lower customer cost
reimbursements. The $2.4 million decrease in customer cost reimbursements relates to the expiration of certain government
grants acquired in our NeuroNexus acquisition, which we were not eligible to renew, as well as the timing of achievement of
customer milestones. This increase was partially offset by lower performance-based compensation of $2.5 million, which was
recorded based upon actual results achieved.
Other Operating Expenses, Net
OOE was comprised of the following (in thousands):
2014 investments in capacity and capabilities(a)
Orthopaedic facility optimization(a)
2013 operating unit realignment(a)
Legacy Lake Region consolidations(a)
Other consolidation and optimization income(a)
Acquisition and integration costs(b)
Asset dispositions, severance and other(c)
Total other operating expenses, net
Year Ended
January 1,
2016
January 2,
2015
Change
$
$
23,037 $
1,395
—
1,961
—
33,449
6,622
66,464 $
8,925 $
1,317
1,017
—
(71 )
3
4,106
15,297 $
14,112
78
(1,017 )
1,961
71
33,446
2,516
51,167
(a) Refer to the “Cost Savings and Consolidation Efforts” section of this Item and Note 13 “Other Operating Expenses, Net”
of the Notes to Consolidated Financial Statements contained in Item 8 of this report for disclosures related to the timing
and level of remaining expenditures for these initiatives.
(b) During 2015, we incurred $23.7 million in transaction costs related to the acquisition of Lake Region Medical. These costs
primarily relate to professional and consulting fees incurred in connection with the due diligence efforts of this acquisition.
Additionally, during 2015, we incurred $8.6 million in Lake Region Medical integration costs, which primarily included
change-in-control payments to former Lake Region Medical executives, professional and consulting fees, and travel costs.
(c) During 2015 and 2014, we recorded losses in connection with various asset disposals and write-downs. During 2015, we
incurred $6.0 million in legal and professional costs in connection with the pending Spin-off of Nuvectra. During 2014, we
incurred $0.9 million of expense related to the separation of our Senior Vice President, Human Resources. Additionally,
during 2014, Greatbatch Medical recorded charges in connection with its business reorganization to align its contract
manufacturing operations. Costs incurred primarily related to consulting and IT development.
We continually evaluate our operating structure in order to maximize efficiencies and drive margin expansion. For 2016, other
operating expenses, net are expected to be approximately $60 million to $70 million, as we continue to invest in our capacity
and capabilities and the integration of Lake Region Medical. See “Cost Savings and Consolidation Efforts” contained in this
Item for further details on these initiatives.
- 51 -
Interest Expense
Interest expense for 2015 increased $29.3 million in comparison to 2014. This increase was primarily due to the $1.8 billion of
debt incurred in connection with the Lake Region Medical acquisition, as well as $9.5 million in one-time transaction costs (i.e.
debt commitment fees, interest rate swap termination costs, debt extinguishment charges) incurred in connection with our
acquisition of Lake Region Medical. Additionally, the current weighted average interest rate on our senior secured credit facility
is 5.69% compared to 1.79% for 2014. See Note 9 “Debt” of the Notes to Consolidated Financial Statements contained in
Item 8 of this report.
Gain on Cost and Equity Method Investments
During 2015, we recognized a $4.7 million gain and received a $3.6 million cash distribution from our equity method
investment, which contributed to the $3.4 million net gain on cost and equity method investments for the year. During 2014, we
sold one of our cost method investments, which resulted in a pre-tax gain of $3.2 million and contributed to the overall gain on
cost and equity method investments for the year. As of January 1, 2016 and January 2, 2015, we held $20.6 million and $14.5
million, respectively. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the
occurrence of events that suggest our investment may not be recoverable. These investments are in start-up research and
development companies whose fair value is highly subjective in nature and subject to significant fluctuations in the future that
could result in material gains or losses.
Other (Income) Expense, Net
Other (income) expense, net primarily includes the impact of foreign currency exchange rate fluctuations on transactions
denominated in foreign currencies. We recognized a gain of $1.3 million in 2015 and a gain of $1.3 million in 2014, primarily
due to the strengthening of the U.S. dollar relative to the Euro. We generally do not expect foreign currency exchange rate
fluctuations to have a material impact on our net results of operations.
Provision (Benefit) for Income Taxes
The effective tax rate for fiscal year 2015 was 51.6% compared to 27.6% for fiscal year 2014. On an adjusted basis, our
effective tax rate was 22.1% for 2015 compared to 28.8% for 2014. The 2015 and 2014 GAAP and adjusted effective tax rates
include the benefit of the Federal research and development tax credit (“R&D Tax Credit”), which was reinstated in the fourth
quarter of 2015 and fourth quarter of 2014, respectively. As required, the R&D Tax Credit is recognized in the quarter the
legislation is enacted. In addition to the above, the 2015 GAAP and adjusted effective tax rates benefited from higher income in
lower tax jurisdictions, which was partially offset by nondeductible transaction costs in connection with the acquisition of Lake
Region Medical and the pending spin-off of Nuvectra. These nondeductible transaction costs are not tax-effected for purposes
of calculating adjusted diluted EPS amounts.
The stand-alone U.S. component of the effective tax rate for 2015 reflected a $13.1 million benefit on $42.1 million of pre-tax
book loss (31.2%) versus $18.5 million tax expense on $56.8 million of pre-tax book income (32.6%) for 2014. The foreign
source income carries a lower overall effective tax rate than U.S. income. The stand-alone International component of the
effective tax rate for 2015 reflected a tax expense of $5.0 million on $26.5 million of pre-tax book income (19.0%) versus a tax
expense of $2.6 million on $19.8 million of pre-tax book income (13.3%) for 2014.
- 52 -
The provision (benefit) for income taxes for 2015 differs from the U.S. statutory rate due to the following (dollars in
thousands):
$
$
Income (loss) before provision for income
taxes
Provision (benefit) at statutory rate
Federal tax credits
Foreign rate differential
Uncertain tax positions
State taxes, net of federal benefit
Change in foreign tax rates
Non-deductible transaction costs
Valuation allowance
Other
Provision (benefit) for income taxes
$
U.S.
International
Combined
$
%
$
%
$
%
(42,166 )
$
26,466
$
(15,700 )
(14,758 )
(1,850 )
(331 )
(531 )
(1,490 )
—
4,867
943
6
(13,144 )
35.0 % $
4.4
0.8
1.3
3.5
—
(11.5 )
(2.2 )
—
31.2 % $
9,263
—
(2,849 )
—
—
(91 )
—
(317 )
(968 )
5,038
35.0 % $
—
(10.8 )
—
—
(0.3 )
—
(1.2 )
(3.7 )
(5,495 )
(1,850 )
(3,180 )
(531 )
(1,490 )
(91 )
4,867
626
(962 )
19.0 % $
(8,106 )
35.0 %
11.8
20.2
3.4
9.5
0.6
(31.0 )
(4.0 )
6.1
51.6 %
The U.S. component of the rate reflects the impact of non-deductible transaction costs related to the acquisition of Lake Region
Medical and the Nuvectra Spin-off, which resulted in a reduction in the overall U.S. benefit of 11.5%. The International
component of the rate, which increased from 2014 to 2015, reflects a reduction in the foreign rate differential due to a decrease
of taxable profits in lower tax jurisdictions as a result of additional costs incurred for ongoing expansion efforts.
There is a prospective potential for volatility of the effective tax rate due to several factors, including changes in the mix of pre-
tax income and the jurisdictions to which it relates, business acquisitions, settlements with taxing authorities, and foreign
currency exchange rate fluctuations. In addition, we continue to explore tax planning opportunities that may have a material
impact on our effective tax rate.
We believe it is reasonably possible that a reduction of approximately $0.1 million of the balance of unrecognized tax benefits
may occur within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements, which
would positively impact the effective tax rate in the period of reduction. As of January 1, 2016, approximately $8.5 million of
unrecognized tax benefits would favorably impact the effect tax rate (net of federal impact on state issues), if recognized.
Fiscal 2014 Compared with Fiscal 2013
Sales
Changes to sales by major product lines were as follows (dollars in thousands):
Sales:
Advanced Surgical, Orthopaedics, and Portable Medical
$
Cardio and Vascular
Cardiac/Neuromodulation
Electrochem
Elimination of interproduct line sales
Total sales
$
Year Ended
2014 vs. 2013
January 2,
2015
January 3,
2014
$
Change
%
Change
216,339 $
58,770
330,921
81,757
—
687,787 $
208,990 $
48,357
328,455
78,143
—
663,945 $
7,349
10,413
2,466
3,614
—
23,842
4 %
22 %
1 %
5 %
— %
4 %
- 53 -
Changes to sales by business segment were as follows (dollars in thousands):
Sales:
Greatbatch Medical
QiG
Elimination of Intersegment sales
Total sales
Year Ended
2014 vs. 2013
January 2,
2015
January 3,
2014
$
Change
%
Change
$
$
678,285 $
9,502
—
687,787 $
660,902 $
3,043
—
663,945 $
17,383
6,459
—
23,842
3 %
212 %
— %
4 %
Total 2014 sales increased 4% to $687.8 million. The most significant drivers of this increase were as follows:
• Advanced Surgical, Orthopaedics, and Portable Medical sales for 2014 increased 4% compared to the same period of 2013.
Foreign currency exchange rate fluctuations increased our 2014 Orthopaedics sales by approximately $1 million in
comparison to the prior year. Excluding the impact of foreign currency fluctuations, Orthopaedics sales increased 12% in
comparison to the prior year. The 2014 organic constant currency growth was primarily in orthopaedic implants and
instruments and was driven by our increased sales and marketing efforts and market growth. Additionally, our bone cutting
and preparation instruments have a strong position in the market place. During 2014, Portable Medical sales decreased
12% in comparison to 2013. During the second half of 2013, we began refocusing our product line offerings in the portable
medical space to products that have higher profitability. Correspondingly, we have discontinued or reduced volumes in
certain of our lower margin products. As part of our investment in capacity and capabilities and to better align our
resources, during the second quarter of 2014, we announced plans to transfer our portable medical operations into a new
facility located in Tijuana, Mexico.
•
•
For 2014, our Cardio and Vascular product line sales increased 22% in comparison to the prior year and reflects the
continued adoption of our products and the relaunch of a vascular medical device near the end of 2013, which, as
previously communicated, was voluntarily recalled in the fourth quarter of 2012.
For 2014, our Cardiac/Neuromodulation sales increased 1% and includes $5.8 million of sales from CCC, which we
acquired on August 12, 2014. CCC is an active implantable medical device systems developer and manufacturer that
designs and produces a range of devices for some of the world’s top medical device companies, including implantable
pulse generators, programmer systems, battery chargers, patient wands and leads. The increase in sales from CCC was
partially offset by the end of life for two legacy products, pricing pressure from our customers, and inventory adjustments
by several of our larger OEM customers.
• Electrochem product line sales for 2014 increased 5% compared to the same period of 2013. This increase was mainly
driven by new product introductions, our deepening relationship with our OEM customers, as well as the timing of
customer orders.
Gross Profit
Changes to gross profit as a percentage of sales were primarily due to the following:
Performance-based compensation(a)
Production efficiencies, volume and mix(b)
Impact of acquisition(c)
Price(d)
Other
Total percentage point change to gross profit as a percentage of sales
2014-2013
% Point Change
0.1 %
1.9 %
0.1 %
(1.2 )%
(0.3 )%
0.6 %
(a) Amount represents the change in performance-based compensation versus the prior year period and is recorded based upon
the actual results achieved.
(b) Our gross profit percentage benefited from production efficiencies gained at our manufacturing facilities as a result of our
various lean and supply chain initiatives, as well as higher production volumes due to increased sales. Partially offsetting
- 54 -
these production efficiencies was an increase in mix of lower margin sales in comparison to the prior year (i.e. higher mix
of orthopaedic sales and lower mix of cardiac/neuromodulation sales).
(c) Amounts represent the impact to our gross profit percentage related to the acquisition of CCC in August 2014.
(d) Our gross profit percentage was negatively impacted by contractual price concessions to our larger OEM customers, which
were given in exchange for long-term contracts and volume commitments.
SG&A Expenses
Changes to SG&A expenses were primarily due to the following (in thousands):
Selling and marketing(a)
Performance-based compensation(b)
Legal fees(c)
G&A personnel costs(d)
Impact of acquisition(e)
Other
Net increase in SG&A
2014-2013
$ Change
3,408
(991 )
2,555
(3,096 )
911
(292 )
2,495
$
$
(a) Amount represents the incremental costs related to our strategic initiative to increase selling and marketing resources to
drive core business growth and sustain a pipeline of revenue generating opportunities.
(b) Amount represents the change in performance-based compensation versus the prior year and is recorded based upon the
actual results achieved.
(c) Amount represents an increase in legal costs compared to the prior year and includes higher IP related defense costs, as
well as other corporate initiatives. In 2013, we filed suit against one of our cardiac/neuromodulation competitors alleging
they were infringing on our IP.
(d) Amount represents lower G&A personnel costs in comparison to the prior year and is primarily the result of our various
consolidation initiatives including our operating unit realignment that occurred during the second half of 2013.
(e) Amount represents the incremental SG&A expenses related to the acquisition of CCC in August 2014.
RD&E Expenses, Net
Net RD&E costs were as follows (in thousands):
Research, development, and engineering costs
Less cost reimbursements
Total RD&E, net
Year Ended
January 2,
2015
January 3,
2014
Change
$
$
58,974 $
(9,129 )
49,845 $
62,652 $
(8,575 )
54,077 $
(3,678 )
(554 )
(4,232 )
Net RD&E for 2014 decreased $4.2 million to $49.8 million. Net medical device costs incurred by QiG were $23.3 million for
2014 compared to $30.5 million for 2013. Medical device costs for 2014 include $4.2 million less DVT costs in comparison to
2013 as most of the testing was completed by the end of 2013. The decrease in DVT costs was partially offset by higher costs
incurred in connection with the development of our next generation cardiac products (i.e. batteries, capacitors, filtered
feedthroughs), higher performance-based compensation, which was accrued based upon the achievement of certain Algovita
milestones, and a higher rate of spend on other QiG medical device projects.
The increase in customer cost reimbursements in 2014 primarily relates to the timing of the achievement of milestones on
various customer cost reimbursement projects, partially offset by the expiration of certain government grants acquired from our
acquisition of NeuroNexus in 2012.
- 55 -
Other Operating Expenses, Net
OOE was comprised of the following (in thousands):
2014 investments in capacity and capabilities(a)
2013 operating unit realignment(a)
Orthopaedic facilities optimization(a)
Other consolidation and optimization costs(a)
Acquisition and integration (income) costs(b)
Asset dispositions, severance and other(c)
Total other operating expenses, net
Year Ended
January 2,
2015
January 3,
2014
Change
$
$
8,925 $
1,017
1,317
(71 )
3
4,106
15,297 $
— $
5,625
8,038
1,095
(502 )
1,534
15,790 $
8,925
(4,608 )
(6,721 )
(1,166 )
505
2,572
(493 )
(a) Refer to “Cost Savings and Consolidation Efforts” section of this Item and Note 13 “Other Operating Expenses, Net” of the
Notes to Consolidated Financial Statements contained in Item 8 of this report for disclosures related to the timing and level
of remaining expenditures for these initiatives.
(b) During 2014 and 2013, we recognized costs (income) related to the integration of Micro Power Electronics, Inc.,
NeuroNexus, and CCC. These expenses (income) were primarily for retention bonuses, travel costs in connection with
integration efforts, training, severance, and the change in fair value of the contingent consideration recorded in connection
with the NeuroNexus acquisition. Refer to Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated
Financial Statements contained in Item 8 of this report for disclosures related to the change in fair value of the contingent
consideration.
(c) During 2014 and 2013, we recorded losses in connection with various asset disposals and write-downs. During 2014, we
incurred $0.9 million of expense related to the separation of our Senior Vice President, Human Resources. Additionally,
during 2014, Greatbatch Medical recorded charges in connection with its business reorganization to align its contract
manufacturing operations. Costs incurred primarily related to consulting and IT development. During 2013, Greatbatch
Medical recorded a $0.9 million write-off related to its wireless sensing product line and QiG recorded a $0.5 million
write-off of NeuroNexus’s in-process research and development “IPR&D”.
Interest Expense
Interest expense for 2014 decreased $7.0 million over 2013 primarily due to the repayment of $198 million of convertible
subordinated notes during the first quarter of 2013, which had an effective interest rate of 8.5%. The weighted average interest
rate on our long-term debt as of January 2, 2015 was 1.79%. Additionally, interest expense was lower in 2014 due to lower
outstanding Credit Facility balances. During 2014 and 2013, we made net repayments of $10 million and $33.3 million on long-
term debt, respectively. See Note 9 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.
(Gain) Loss on Cost and Equity Method Investments
During 2014, we sold one of our cost method investments, which resulted in a pre-tax gain of $3.2 million and contributed to
the overall gain on cost and equity method investments for the year. During 2013, we incurred losses due to the writedown of
our cost and equity method investments.
Other (Income) Expense, Net
Other (income) expense, net primarily includes the impact of foreign currency exchange rate fluctuations on transactions
denominated in foreign currencies. In 2014, we recognized $1.3 million of foreign currency exchange gains compared to a loss
of $0.1 million for 2013, primarily due to the strengthening of the U.S. dollar relative to the Euro.
Provision for Income Taxes
The effective tax rate for 2014 was 27.6% versus 25.7% for 2013. The stand-alone U.S. component of the effective tax rate for
2014 was 32.6% versus 30.0% for 2013. The year over year increase is primarily attributable to a decrease in federal tax credits
recorded in 2014. $3.7 million of federal tax credits were recorded in 2013 as a result of the retroactive reinstatement of the
R&D Tax Credit versus $1.6 million in 2014. On January 2, 2013, the President signed into law the American Taxpayer Relief
Act of 2012 (the “Act”), which included a retroactive extension of the R&D tax credit that had expired on December 31, 2011.
Under the Act, the R&D credit was extended for two years retroactively from January 1, 2012 through December 31, 2013. As
the Act was signed into law on January 2, 2013, the effects of the change in the tax law were recognized in 2013. As such, a
- 56 -
benefit for the R&D credits earned both in 2012 and 2013 were recorded through the fiscal 2013 effective tax rate. The 2014
effective tax rate appropriately reflects only the 2014 tax credits.
The increase in rate from the reduction in recognized tax credits was partially offset by the impact of an increase in foreign
source income recognized in 2014. The foreign source income carries a lower overall effective tax rate than U.S. income.
The provision for income taxes for 2014 differs from the U.S. statutory rate due to the following (dollars in thousands):
U.S.
International
Combined
$
%
$
%
$
%
Income before provision for income
taxes
Provision at statutory rate
Federal tax credits
Foreign rate differential(a)
Uncertain tax positions
State taxes, net of federal benefit
Change in foreign tax rates(b)
Valuation allowance
Other
Provision for income taxes/effective
tax rate
$
$
56,801
19,881
(1,600 )
—
412
507
—
135
(842 )
$
19,778
$
76,579
35.0 % $
(2.8 )
—
0.7
0.9
—
0.2
(1.5 )
6,922
—
(3,276 )
—
—
(446 )
(434 )
(138 )
35.0 % $
—
(16.6 )
—
—
(2.3 )
(2.2 )
(0.7 )
26,803
(1,600 )
(3,276 )
412
507
(446 )
(299 )
(980 )
35.0 %
(2.1 )
(4.3 )
0.6
0.7
(0.6 )
(0.4 )
(1.3 )
$
18,493
32.6 % $
2,628
13.3 % $
21,121
27.6 %
(a) The tax rate reflects the impact of an increase in foreign source income, which carries a lower overall effective tax rate than
U.S. income.
(b) Amounts relate to the tax benefit resulting from a favorable Swiss tax ruling received in 2014. During 2014, our Swiss
subsidiary filed for a tax ruling requesting a reduced income tax rate in Switzerland. We received an approved ruling in
December 2014 effectively reducing the Swiss tax rate from 9.3% to approximately 6.5% depending on the jurisdictional
mix of revenues and expenditures. As such, the carrying value of the deferred taxes, which reflected a net deferred tax
liability position as of the date of enactment, have been adjusted to reflect the rate reduction. The adjusted carrying value
resulted in a reduction to the deferred tax liability and a corresponding deferred tax benefit.
Liquidity and Capital Resources
(dollars in thousands)
Cash and cash equivalents
Working capital
Current ratio
At
January 1, 2016 January 2, 2015
76,824
242,022
3.23
82,478 $
360,764 $
2.69
$
$
The increase in cash and cash equivalents from January 2, 2015 was primarily due to $467.9 in net cash provided by financing
activities and $12.5 million in net cash provided by operating activities. This increase was partially offset by the $423.4 net
cash paid for the Lake Region Medical acquisition and $44.6 million of capital expenditures. Additionally, working capital
balances increased $118.7 million from the end of 2014, primarily due to the $167.3 million of working capital acquired from
Lake Region Medical partially offset by the net cash outflow in connection with the acquisition of Lake Region Medical. Of the
$82.5 million of cash on hand as of January 1, 2016, $31.0 million is being held at our foreign subsidiaries and is considered
permanently reinvested.
Credit Facilities – In connection with the acquisition of Lake Region Medical, during the fourth quarter of 2015, we replaced
our existing credit facility and term loan with new senior secured credit facilities and completed a senior notes offering.
The new senior secured credit facilities (the “Senior Secured Credit Facilities”) consist of (i) a $200 million revolving credit
facility (the “Revolving Credit Facility”), (ii) a $375 million term loan A facility (the “TLA Facility”), and (iii) a $1,025 million
term loan B facility (the “TLB Facility”). We also completed a private offering of $360 million aggregate principal amount of
9.125% senior notes due on November 1, 2023 (the “Senior Notes”). The TLA Facility and TLB Facility were funded in full on
October 27, 2015, and used, together with cash on hand and the net proceeds from the Senior Notes to fund the cash portion of
- 57 -
the purchase price, to repay the outstanding debt of Lake Region Medical at closing, and to repay our term loan. The Revolving
Credit Facility will mature on October 27, 2020, the TLA Facility will mature on October 27, 2021, and the TLB Facility will
mature on October 27, 2022. The TLB facility was issued at a 1% discount.
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum total net leverage ratio (as
defined in the Senior Secured Credit Facilities) of 6.5:1.00, subject to step downs and (B) a minimum interest coverage ratio of
adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 3.00:1.00. As of
January 1, 2016, our total net leverage ratio, calculated in accordance with our credit agreement, was approximately 5.2 to 1.00.
For the twelve month period ended January 1, 2016, our ratio of adjusted EBITDA to interest expense, calculated in accordance
with our credit agreement, was approximately 4.8 to 1.00. The Senior Secured Credit Facilities include mandatory prepayments
customary for credit facilities of its nature. See Note 9 “Debt” of the Notes to Consolidated Financial Statements contained in
Item 8 of this report for a more detailed description of the Revolving Credit Facility.
The Revolving Credit Facility is supported by a consortium of fourteen banks with no bank controlling more than 27% of the
facility. As of January 1, 2016, the banks supporting 88% of the Revolving Credit Facility each had an S&P credit rating of at
least BBB or better, which is considered investment grade. The banks which support the remaining 12% of the Revolving
Credit Facility are not currently being rated.
Operating Activities – Cash flows from operating activities for 2015 were $12.5 million compared to $81.3 million for 2014.
This decrease was primarily due to $28.0 million of lower cash net income in comparison to the prior year as well as $40.8
million higher working capital balances, primarily accrued expenses in connection with the acquisition of Lake Region Medical
and the Spin-off, and higher inventory levels in anticipation of higher sales volumes, which fell short of expectations. We
expect inventory will decrease to more normalized levels by the end of 2016. Immediately prior to the completion of the
pending Spin-off, we expect to make a cash capital contribution of $75.0 million to Nuvectra, which is expected to be funded
with cash on hand and/or availability under our Revolving Credit Facility.
Cash flows from operating activities for 2014 of $81.3 million were $24.5 million above 2013. During 2013, the Company
made estimated tax payments of $28.8 million in connection with the retirement of our convertible subordinated notes.
Excluding these payments, cash flows from operating activities for 2014 were slightly below 2013 as the increased level of cash
operating income was more than offset by an increase in working capital levels primarily due to the timing of receivable
collections.
Investing Activities – Net cash used in investing activities for 2015 was $473.6 million compared to $35.9 million for 2014.
This increase was primarily related to $423.4 million of net cash used for the acquisition of Lake Region Medical as well as
$44.6 million of additional investments made in property, plant and equipment in connection with the consolidation and
optimization initiatives discussed in the “Cost Savings and Consolidation Efforts” section of this Item.
Net cash used in investing activities for 2014 of $35.9 million were $17.6 million above 2013. 2014 investing activities include
$16.0 million of net cash used for the acquisition of CCC as well as $24.8 million of cash used for the purchase of property,
plant and equipment. These transactions were partially offset by a $2.7 million contingent payment received in 2014 in
connection with the sale of certain non-core Swiss orthopaedic product lines, which closed during the first quarter of 2013, as
well as $2.2 million of net proceeds received from our cost and equity method investments.
Our current expectation is that capital spending for 2016 will be in the range of $60.0 million to $70.0 million, of which
approximately half is discretionary in nature. We anticipate that cash on hand, cash flows from operations, and available
borrowing capacity under our Revolving Credit Facility will be sufficient to fund these capital expenditures.
Financing Activities – Net cash provided by financing activities for 2015 was $467.9 million compared to net cash used in
financing activities of $2.4 million for the prior year period. The net cash inflow for 2015 included $1.75 billion in borrowings
to fund the acquisition of Lake Region Medical and $6.6 million of cash received from the exercise of stock options, which was
partially offset by $1.2 billion in long-term debt repayments and $45.9 million in debt issuance costs paid in connection with
the Lake Region Medical acquisition. Additionally, during 2015, we paid $9.9 million to purchase the non-controlling interests
in QiG’s Algostim and PelviStim subsidiaries.
Net cash used in financing activities for 2014 of $2.4 million was $21.0 million less than the cash used in financing activities in
2013. This cash outflow is the result of $10.0 million of principal payments on long-term debt partially offset by $8.3 million of
cash received from the exercise of stock options during 2014.
Capital Structure – After completion of the acquisition of Lake Region Medical, our capital structure consists of $1.7 billion of
debt outstanding on our Senior Secured Credit Facilities and Senior Notes and 30.6 million shares of common stock outstanding
as of January 1, 2016. As of January 1, 2016, we had $186.6 million of borrowing capacity available under the Revolving
Credit Facility. This amount may vary from period to period based upon our debt and EBITDA levels, which impacts the
covenant calculations discussed above. As of January 1, 2016, our debt service obligations, comprised of principal and interest,
- 58 -
for 2016 are estimated to be approximately $130 million. We believe that our cash flow from operations and available
borrowing capacity under the Revolving Credit Facility provide adequate liquidity to meet our short- and long-term funding
needs. We have clear line of sight to the committed Lake Region Medical acquisition synergies and believe we will be able to
de-lever the company to 3.5X to 3X over the next two to three years. If necessary, we are authorized to issue 100 million shares
of common stock and 100 million shares of preferred stock. We believe that, if needed, we can access public markets to raise
additional capital. We continuously evaluate our capital structure as it relates to our anticipated long-term funding needs.
Changes to our capital structure may occur as a result of this analysis or changes in market conditions.
Non-Guarantor Information – For the year ended January 1, 2016, after giving pro forma effect to the completion of the Lake
Region Medical acquisition and Nuvectra Spin-off, the non-Guarantors of our credit facilities represented approximately 26%
and 37% of our revenue and EBITDA, respectively. In addition, as of January 1, 2016, after giving pro forma effect to the
completion of the Nuvectra Spin-off, the non-Guarantors of our credit facilities held approximately 25% of our total tangible
assets and 3% of our total tangible liabilities. Tangible assets consist of total assets less intangible assets, intercompany
receivables, and deferred taxes. Tangible liabilities consist of total liabilities less intercompany payables and deferred taxes.
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 description of pending legal actions against the
Company is set forth in Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements
contained at Item 8 of this report. Other than as discussed in Note 15, we do not believe that the ultimate resolution of any
individual pending legal action will have a material effect on our consolidated results of operations, financial position or cash
flows. However, litigation is subject to inherent uncertainties and there can be no assurance that any pending legal action, which
we currently believe to be immaterial, does not become material in the future.
Contractual Obligations
The following table summarizes our contractual obligations at January 1, 2016:
Payments due by period
CONTRACTUAL OBLIGATIONS
Debt obligations(a)
Operating lease obligations(b)
Purchase obligations(b)
Foreign currency contracts(b)
Defined benefit plan obligations(c)
Total contractual obligations
Total
2,459,312 $
78,597
63,653
16,480
2,757
2,620,799 $
Less than 1
year
130,325 $
14,118
61,867
16,480
166
222,956 $
$
$
1-3 years
3-5 years
271,002 $
20,901
1,347
—
430
293,680 $
285,531 $
15,904
439
—
542
302,416 $
More than 5
years
1,772,454
27,674
—
—
1,619
1,801,747
(a) Includes annual interest expense on the $1.7 billion outstanding on our Senior Secured Credit Facilities and Senior Notes
based upon the period end weighted average interest rate of 5.69%. Also includes $3.7 million of deferred federal and state
taxes on our convertible subordinated notes that will be due between 2016 and 2018. See Note 9 “Debt” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report.
(b) See Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of
this report for additional information about our operating leases, purchase obligations and foreign currency contracts.
(c) See Note 10 “Benefit Plans” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for
additional information about our defined benefit plan obligations.
This table does not reflect $9.3 million of unrecognized tax benefits, as we are uncertain if or when such amounts may be
settled. Refer to Note 14 “Income Taxes” of the Notes to Consolidated Financial Statements in Item 8 of this report for
additional information about these unrecognized tax benefits.
We self-fund the medical insurance coverage provided to our U.S. based employees. We limit our risk through the use of stop
loss insurance. As of January 1, 2016, we had $4.0 million accrued related to our self-insurance obligations under our medical
plan. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is primarily based upon claim
history. This table does not reflect any potential future payments for self-insured medical claims.
- 59 -
Prior to 2011, we were a member of a group self-insurance trust that provided workers’ compensation benefits to employees of
the Company in Western New York (the “Trust”). Prior to being acquired by Greatbatch, Lake Region Medical self-insured the
workers’ compensation benefits provided to its employees. As of January 1, 2016, the Company utilized a traditional insurance
provider for workers’ compensation coverage for all associates. During 2015, the Company received an additional assessment
from the Trust of $0.9 million. As of January 1, 2016, we had $3.9 million accrued for workers’ compensation claims. This
accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is primarily based upon claim history and
assessments received. This table does not reflect any potential future payments for workers’ compensation benefits.
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, we evaluate all new accounting pronouncements issued by the Financial Accounting
Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”) or other
authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. See
Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of
this report for additional information about these recently issued accounting standards and their potential impact on our
financial condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency – We have foreign operations in Ireland, Germany, France, Switzerland, Mexico, Uruguay, and Malaysia
which expose us to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swiss francs,
Mexican pesos, Uruguayan pesos, and Malaysian ringgits. We continuously evaluate our foreign currency risk, and we use
operational hedges, as well as forward currency exchange rate contracts, to manage the impact of currency exchange rate
fluctuations on earnings and cash flows. We do not enter into currency exchange rate derivative instruments for speculative
purposes. 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 2015 annual sales. This amount is not indicative of the
hypothetical net earnings impact due to the partially offsetting impacts on cost of sales and operating expenses in those
currencies. The impact of foreign currency exposures will be more significant to our consolidated results in 2016 due to the
inclusion of a full year Lake Region Medical results. We estimate that foreign currency exchange rate fluctuations during 2015
decreased sales in comparison to 2014 by approximately $14.5 million.
Historically, we have entered into forward contracts to purchase Mexican pesos in order to hedge the risk of peso-denominated
payments associated with our operations in Mexico. In connection with the Lake Region Medical acquisition, we terminated
our outstanding forward contracts resulting in a $2.4 million payment to the foreign currency contract counterparty during
2015. During the fourth quarter of 2015, we entered into a new forward contract to purchase 23.5 million Mexican pesos per
month beginning in January 2016 through December 2016 at an exchange rate of $0.0584 per peso. This contract is being
accounted for as a cash flow hedge. As of January 1, 2016, this contract has a negative fair value of $0.3 million.
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 Consolidated Financial Statements as Comprehensive Income (Loss). The
translation adjustment for 2015 was a $7.8 million loss. 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) Expense, Net amounted to a gain of $1.3 million for 2015. 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 $53 million on our
foreign net assets as of January 1, 2016.
- 60 -
Interest Rates – Historically, we have entered into interest rate swap agreements in order to hedge against potential changes in
cash flows on our outstanding variable rate debt. As a result of the Lake Region Medical acquisition, the forecasted cash flows
that our interest rate swaps were hedging were no longer expected to occur. Accordingly, during 2015, we terminated our
outstanding interest rate swap agreements resulting in a $2.8 million payment to the interest rate swap counterparty. As of
January 1, 2016, we have no interest rate swap agreements outstanding.
As of January 1, 2016, we had $1.7 billion in outstanding debt, of which $360 million related to our Senior Notes which has a
fixed interest rate of 9.125%, $375 million related to our TLA Facility which has a variable interest rate, and $1,025 million
related to our TLB Facility which has a 1.00% LIBOR floor, thus has a variable interest rate when LIBOR is above 1.00%.
Interest rates on our TLA Facility and TLB Facility, reset, at our option, based upon the prime rate or LIBOR rate, thus
subjecting us to interest rate risk. We are currently evaluating our interest rate risk exposures and may take steps to mitigate
these exposures as appropriate. Refer to Note 9 “Debt” of the Notes to the Consolidated Financial Statements in Item 8 of this
report for additional information about our outstanding debt. A hypothetical one percentage point (100 basis points) increase in
the LIBOR rate on the $1.4 billion of unhedged variable rate debt outstanding at January 1, 2016 would increase our interest
expense by approximately $7 million.
- 61 -
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, 2016 and January 2, 2015
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended January
1, 2016, January 2, 2015, and January 3, 2014
Consolidated Statements of Cash Flows for the years ended January 1, 2016, January 2, 2015, and
January 3, 2014
Consolidated Statements of Stockholders’ Equity for the years ended January 1, 2016, January 2, 2015,
and January 3, 2014
Notes to Consolidated Financial Statements
63
64
66
67
68
69
70
- 62 -
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s certifying officers are responsible for establishing and maintaining adequate internal control over financial
reporting. The Company’s internal control over financial reporting is designed and maintained under the supervision of its
certifying officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the
Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally
accepted in the United States of America.
As of January 1, 2016, 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 (2013) 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, 2016 is effective.
In conducting the evaluation of the effectiveness of internal control over financial reporting as of January 1, 2016, as permitted
by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission, management
excluded the following subsidiary acquired in 2015:
•
Lake Region Medical Holdings, Inc.
This subsidiary represented approximately 66% of total assets, 17% of revenues, and 229% of net loss of the consolidated
financial statement amounts as of and for the year ended January 1, 2016. See Note 2 – “Acquisitions” of the Notes to
Consolidated Financial Statements contained in Item 8 of this report for a discussion of this acquisition and its impact on the
Company’s Consolidated Financial Statements.
The effectiveness of internal control over financial reporting as of January 1, 2016 has been audited by Deloitte & Touche LLP,
the Company’s independent registered public accounting firm.
Dated: March 1, 2016
Thomas J. Hook
President & Chief Executive Officer
Michael Dinkins
Executive Vice President & Chief Financial Officer
- 63 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Greatbatch, Inc.
Frisco, Texas
We have audited the internal control over financial reporting of Greatbatch, Inc. and subsidiaries (the “Company”) as of January
1, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over
Financial Reporting, management excluded from its assessment the internal control over financial reporting at Lake Region
Medical Holdings, Inc., which was acquired on October 27, 2015 and whose consolidated financial statements constitute 66%
of total assets, 17% of revenues, and 229% of net loss of the consolidated financial statement amounts as of and for the year
ended January 1, 2016. Accordingly, our audit did not include the internal control over financial reporting at Lake Region
Medical Holdings, Inc. 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.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
January 1, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) 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, 2016 of the
Company and our report dated March 1, 2016 expressed an unqualified opinion on those consolidated financial statements and
consolidated financial statement schedule, and included explanatory paragraphs regarding the Company’s changes in method of
accounting for its debt issuance costs and deferred income taxes.
Williamsville, New York
March 1, 2016
- 64 -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Greatbatch, Inc.
Frisco, Texas
We have audited the accompanying consolidated balance sheets of Greatbatch, Inc. and subsidiaries (the “Company”) as of
January 1, 2016 and January 2, 2015, and the related consolidated statements of operations and comprehensive income (loss),
cash flows, and stockholders’ equity for each of the three years in the period ended January 1, 2016. Our audits also included
the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and
consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express
an opinion on the consolidated financial statements and consolidated 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 audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated 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, 2016 and January 2, 2015, and the results of its operations and its cash flows for each of the three
years in the period ended January 1, 2016, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for debt
issuance costs as of January 1, 2016 and January 2, 2015 due to the adoption of Accounting Standards Update (“ASU”) No.
2015-03, Simplifying the Presentation of Debt Issuance Costs and ASU No. 2015-15, Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for deferred
income taxes as of January 1, 2016 due to the adoption of Accounting Standards Update No. 2015-17, Balance Sheet
Classification of Deferred Taxes.
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, 2016, based on the criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 1, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
Williamsville, New York
March 1, 2016
- 65 -
GREATBATCH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts of $1.0 million in 2015 and
$1.4 million in 2014
Inventories
Refundable income taxes
Deferred income taxes
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment, net
Amortizing intangible assets, net
Indefinite-lived intangible assets
Goodwill
Deferred income taxes
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
Accounts payable
Income taxes payable
Deferred income taxes
Accrued expenses
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or
outstanding in 2015 or 2014
Common stock, $0.001 par value, authorized 100,000,000 shares; 30,664,119 shares
issued and 30,601,167 shares outstanding in 2015; 25,099,293 shares issued and
25,070,931 shares outstanding in 2014
Additional paid-in capital
Treasury stock, at cost, 62,952 shares in 2015 and 28,362 shares in 2014
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
At
January 1,
2016
January 2,
2015
$
82,478 $
76,824
207,342
252,166
11,730
—
20,888
574,604
379,492
893,977
90,288
1,013,570
3,587
26,618
2,982,136 $
29,000 $
84,362
3,221
—
97,257
213,840
1,685,053
221,804
10,814
2,131,511
$
$
124,953
129,242
1,716
6,168
11,780
350,683
144,925
65,337
20,288
354,393
2,626
16,870
955,122
11,250
46,436
2,003
588
48,384
108,661
175,363
53,195
4,541
341,760
—
—
31
620,470
(3,100 )
231,854
1,370
850,625
2,982,136 $
$
25
366,073
(1,307 )
239,448
9,123
613,362
955,122
The accompanying notes are an integral part of these consolidated financial statements.
- 66 -
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands except per share data)
Sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative expenses
Research, development and engineering costs, net
Other operating expenses, net
Total operating expenses
Operating income
Interest expense
(Gain) loss on cost and equity method investments, net
Other (income) expense, net
Income (loss) before provision 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)
Other comprehensive income (loss):
Year Ended
$
January 1,
2016
800,414 $
565,279
235,135
January 2,
2015
687,787 $
456,389
231,398
January 3,
2014
663,945
444,632
219,313
102,530
52,995
66,464
221,989
13,146
33,513
(3,350 )
(1,317 )
(15,700 )
(8,106 )
$
$
$
(7,594 ) $
(0.29 ) $
(0.29 ) $
90,602
49,845
15,297
155,744
75,654
4,252
(4,370 )
(807 )
76,579
21,121
55,458 $
2.23 $
2.14 $
26,363
26,363
24,825
25,975
88,107
54,077
15,790
157,974
61,339
11,261
694
546
48,838
12,571
36,267
1.51
1.43
23,991
25,323
$
(7,594 ) $
55,458 $
36,267
Foreign currency translation gain (loss)
Net change in cash flow hedges, net of tax
Defined benefit plan liability adjustment, net of tax
Other comprehensive income (loss)
(7,841 )
108
(20 )
(7,753 )
Comprehensive income (loss)
$
(15,347 ) $
(3,502 )
(1,359 )
(374 )
(5,235 )
50,223 $
1,521
(382 )
272
1,411
37,678
The accompanying notes are an integral part of these consolidated financial statements.
- 67 -
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization
Debt related charges included in interest expense
Inventory step-up amortization
Stock-based compensation
Non-cash (gain) loss on cost and equity method investments, net
Other non-cash (gains) losses, net
Deferred income taxes
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from sale of orthopaedic product lines
Acquisition of property, plant and equipment
Proceeds from sale of property, plant and equipment
Proceeds from sale (purchase of) cost and equity method investments, net
Acquisitions, net of cash acquired
Other investing activities, net
Net cash used in investing activities
Cash flows from financing activities:
Principal payments of long-term debt
Proceeds from issuance of long-term debt, net of discount
Issuance of common stock
Payment of debt issuance costs
Purchase of non-controlling interests
Other financing activities, net
Net cash provided by (used in) financing activities
Effect of foreign currency exchange rates on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
(7,594 ) $
55,458 $
36,267
44,632
11,320
22,986
9,376
275
1,093
(10,298 )
3,684
(25,752 )
(1,861 )
3,129
(28,605 )
(9,906 )
12,479
—
(44,616 )
746
(6,300 )
(423,389 )
—
(473,559 )
(1,232,175 )
1,749,750
6,583
(45,933 )
(9,875 )
(440 )
467,910
(1,176 )
5,654
76,824
82,478 $
$
37,197
773
260
13,186
(4,370 )
(3,214 )
531
(11,731 )
(6,726 )
(3,281 )
(970 )
1,214
2,949
81,276
2,655
(24,827 )
4
2,248
(16,002 )
—
(35,922 )
(10,000 )
—
8,278
—
—
(655 )
(2,377 )
(1,618 )
41,359
35,465
76,824 $
35,966
6,366
—
14,101
694
255
(29,856 )
7,379
(11,508 )
(353 )
1,307
(1,176 )
(2,687 )
56,755
4,746
(18,858 )
300
(3,732 )
—
(740 )
(18,284 )
(458,282 )
425,000
12,807
(2,802 )
—
(81 )
(23,358 )
68
15,181
20,284
35,465
The accompanying notes are an integral part of these consolidated financial statements.
- 68 -
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
At December 28, 2012
Stock-based compensation
Net shares issued (acquired)
under stock incentive
plans
Income tax benefit from
stock options, restricted
stock and restricted stock
units
Shares contributed to 401(k)
Plan
Net income
Total other comprehensive
income, net
At January 3, 2014
Stock-based compensation
Net shares issued (acquired)
under stock incentive
plans
Income tax benefit from
stock options, restricted
stock and restricted stock
units
Shares contributed to 401(k)
Plan
Net income
Total other comprehensive
loss, net
At January 2, 2015
Stock-based compensation
Net shares issued (acquired)
under stock incentive
plans
Income tax benefit from
stock options, restricted
stock and restricted stock
units
Shares contributed to 401(k)
Plan
Issuance of shares in
connection with acquisition
Issuance of roll-over options
in connection with
acquisition
Purchase of non-controlling
interests in subsidiaries
Net loss
Total other comprehensive
loss, net
At January 1, 2016
Treasury
Stock
Common Stock
Additional
Paid-In
Capital
Shares Amount
23,732 $
—
24 $ 320,618
9,333
—
Shares Amount
(20 ) $
—
—
(452 ) $ 147,723 $
—
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Retained
Earnings
12,947 $
—
480,860
9,333
636
—
12,245
(17 )
(780 )
—
—
11,465
—
91
—
—
24,459
—
—
—
—
—
24
—
242
2,477
—
—
344,915
8,921
—
—
—
—
(37 )
—
—
—
—
—
(1,232 )
—
—
—
36,267
—
183,990
—
—
—
—
1,411
14,358
—
242
2,477
36,267
1,411
542,055
8,921
640
1
7,754
(86 )
(4,290 )
—
—
3,465
—
—
—
—
25,099
—
—
—
—
—
25
—
4,357
126
—
—
366,073
9,364
—
95
—
—
(28 )
—
—
—
4,215
—
—
55,458
—
(1,307 )
—
—
239,448
—
585
1
5,764
(107 )
(5,261 )
—
—
—
—
—
5,639
452
4,980
5
245,363
—
—
—
—
—
—
4,508
(16,693 )
—
—
30,664 $
—
—
31 $ 620,470
—
72
—
—
—
—
—
3,468
—
—
—
—
—
—
—
—
—
(7,594 )
—
(63 ) $ (3,100 ) $ 231,854 $
—
—
—
—
—
(5,235 )
9,123
—
—
—
—
—
—
—
—
(7,753 )
1,370 $
4,357
4,341
55,458
(5,235 )
613,362
9,364
504
5,639
3,920
245,368
4,508
(16,693 )
(7,594 )
(7,753 )
850,625
The accompanying notes are an integral part of these consolidated financial statements.
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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 subsidiaries (collectively, the “Company” or “Greatbatch”). All intercompany balances and transactions
have been eliminated in consolidation.
Nature of Operations – On October 27, 2015, the Company acquired all of the outstanding common stock of Lake
Region Medical Holdings, Inc. (“Lake Region Medical”) for a total purchase price including debt assumed of
approximately $1.77 billion. As a result, the Company now has three reportable segments: Greatbatch Medical, QiG
Group (“QiG”), and Lake Region Medical. In February 2016, Greatbatch announced that its Board of Directors has
approved the spin-off of a portion of its QiG segment through a tax-free distribution of its QiG Group LLC subsidiary to
the stockholders of Greatbatch on a pro rata basis (the “Spin-off”). Immediately prior to completion of the Spin-off, QiG
Group LLC will be converted into a corporation organized under the laws of Delaware and change its name to Nuvectra
Corporation (“Nuvectra”). The Spin-off is expected to be completed in March 2016. As a result of the Lake Region
Medical acquisition and the pending Spin-off, the Company is reevaluating its operating and reporting segments, which is
expected to be finalized in 2016 once the corporate and management reporting structure realignment is completed. Note
19 “Business Segment, Geographic and Concentration Risk Information” contains additional information on our reporting
segments.
Simultaneous with the close of the Lake Region Medical acquisition, the Company also announced its intention to rename
the combined entity Integer Holdings Corporation. Integer is defined as complete, whole, and comprehensive, and
represents the joining of Greatbatch and Lake Region Medical as well as the combined company's product and service
offerings provided to customers. The new name is subject to Greatbatch shareholder approval at the May 2016 annual
meeting.
Greatbatch Medical designs and manufactures products where Greatbatch either owns the intellectual property or has
unique manufacturing and assembly expertise. These products include medical devices and components for the cardiac,
neuromodulation, orthopaedics, portable medical, vascular and energy markets among others. The Greatbatch Medical
segment also offers value-added assembly and design engineering services for medical devices that utilize its component
products.
The QiG segment focuses on the design and development of medical device systems and components. QiG is in the
process of developing applications for its neurostimulation technology platform for emerging indications such as spinal
cord stimulation (“SCS”), sacral nerve stimulation (“SNS”), and deep brain stimulation (“DBS”), among others. QiG’s
Algostim, LLC (“Algostim”) subsidiary is focused on the development and commercialization of its Algovita SCS system
(“Algovita”), the first application of its neurostimulation technology platform and received PMA approval in the fourth
quarter of 2015. QiG’s PelviStim LLC (“PelviStim”) subsidiary is focused on the commercialization of QiG’s
neurostimulation technology platform for SNS. The QiG segment also includes NeuroNexus Technologies, Inc.
(“NeuroNexus”), and Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”). The Spin-off is expected to
consist of QiG Group LLC and its subsidiaries Algostim, PelviStim and NeuroNexus. The operations of CCC and certain
other existing QiG research and development capabilities will be retained and not included as part of the Spin-off.
Lake Region Medical has operated as a new segment for Greatbatch since it was acquired during the fourth quarter of
2015. This segment specializes in the design, development, and manufacturing of products across the medical component
and device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers
fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device
assembly services, original device development, and supply chain management to its customers.
The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated
subsidiaries.
Fiscal Year End – The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest
December 31. Fiscal years 2015, 2014 and 2013 ended on January 1, 2016, January 2, 2015 and January 3, 2014. Fiscal
years 2015 and 2014 each contained fifty-two weeks, while fiscal year 2013 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, Fair Value Measurements, 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
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the
ability to access. Level 1 valuations do 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 – Valuation is based on unobservable inputs that are significant to the overall fair value measurement. The degree
of judgment in determining fair value is greatest for Level 3 valuations.
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
valuation. To the extent that a 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. Note 18 “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. The carrying amount of cash and cash equivalents approximated
their fair value as of January 1, 2016 and January 2, 2015 based upon the short-term nature of these instruments.
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 and/or accounts receivable 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 19 “Business
Segment, Geographic and Concentration Risk 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.
Allowance for Doubtful Accounts – The Company provides credit, in the normal course of business, to its customers in
the form of trade receivables. Credit is extended based on evaluation of a customer’s financial condition and collateral is
not required. The Company maintains an allowance for those customer 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 carrying amount of trade receivables approximated their fair value as
of January 1, 2016 and January 2, 2015 based upon the short-term nature of these assets.
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
estimates of forecasted net sales of that product. A significant change in the timing or level of demand for products may
result in recording additional write-downs for excess, obsolete or expired inventory in the future. Note 4 “Inventories”
contains additional information on the Company’s inventory.
Property, Plant and Equipment (“PP&E”) – PP&E is carried at cost less accumulated depreciation. Depreciation is
computed 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 3-10 years; office equipment 3-10 years; and leasehold
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
improvements over the remaining lives of the improvements or the lease term, if less. The cost of repairs and maintenance
are 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. Note 6 “Property, Plant and Equipment, Net” contains additional information on the Company’s
PP&E.
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 net tangible and identifiable intangible
assets acquired is allocated to goodwill. All direct acquisition-related costs are expensed as incurred.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a
liability equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company re-
measures this liability each reporting period and records changes in the fair value through Other Operating Expenses, Net.
Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount
periods and rates, as well as changes in the timing, amount of, or the likelihood of achieving the applicable contingent
consideration.
Amortizing Intangible Assets – Amortizing intangible assets consists primarily of purchased technology and patents, and
customer lists. The Company amortizes its definite-lived intangible assets over their estimated useful lives utilizing an
accelerated or straight-line method of amortization, which approximates the projected cash flows used to fair value those
intangible assets at the time of acquisition. When the straight-line method of amortization is utilized, the estimated useful
life of the intangible asset is shortened to assure that recognition of amortization expense corresponds with the expected
cash flows. The amortization period for the Company’s amortizing intangible assets are as follows: purchased technology
and patents 5-15 years; customer lists 7-20 years and other intangible assets 1-10 years. Refer to Note 7 “Intangible
Assets” for additional information on the Company’s amortizing intangible assets.
Impairment of Long-Lived Assets – The Company assesses the impairment of definite-lived long-lived assets or asset
groups 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 change in the extent or manner in which a long-lived asset or asset group is being used
or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of a
long-lived asset or asset group, including an action or assessment by a regulator; 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.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future
undiscounted cash flows. If the carrying value is not recoverable, 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.
Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for
impairment. The Company assesses goodwill for impairment on the last day of each fiscal year, or more frequently if
certain events occur as described above. Goodwill is evaluated for impairment through the comparison of the fair value of
the reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an
assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its
carrying amount. This qualitative assessment is referred to as a “step zero” approach. If, based on the review of the
qualitative factors, the Company determines it is more-likely-than-not that the fair value of the reporting unit is greater
than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a step
zero assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, the Company
must perform a two-step impairment test, and calculate the estimated fair value of the reporting unit. If, based upon the
two-step impairment test, it is determined that 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
- 72 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carrying value. Under the two-step approach, fair values for reporting units are determined based on discounted cash
flows and market multiples.
The Company completed its annual goodwill impairment assessment for 2015 by performing a step zero qualitative
analysis. As part of this analysis, the Company evaluated factors including, but not limited to, macro-economic
conditions, market and industry conditions, cost factors, competitive environment, share price fluctuations, results of the
last impairment test, and the operational stability and the overall financial performance of the reporting units. After
completing the analysis, the Company determined that it was more likely than not that its reporting units fair values are
greater than the reporting units carrying values and the two-step impairment test is not necessary.
Other indefinite lived intangible assets 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 intangible asset to its carrying value. The
fair value is determined by using the income approach. Note 7 “Intangible Assets” contains additional information on the
Company’s long-lived intangible assets.
Debt Issuance Costs and Discounts – In April 2015, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs be presented as a direct reduction to the
carrying amount of the related debt in the balance sheet rather than as a deferred charge, consistent with the presentation
of discounts on debt. ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” was issued in August 2015 to clarify
that the U.S. Securities and Exchange Commission (“SEC”) staff would not object to an entity deferring and presenting
debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt
issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings on the line-of-credit arrangement.
As permitted, during the fourth quarter of 2015, the Company elected to early adopt these ASUs and has elected to
retrospectively apply this guidance. As a result, the Company has classified $35.9 million and $0.9 million as of January
1, 2016 and January 2, 2015, respectively, of deferred debt issuance costs associated with its term-debt from Other Assets
to Long-Term Debt in the Consolidated Balance Sheets. Deferred debt issuance costs associated with the Company’s
revolving credit facility of $4.8 million and $2.2 million as of January 1, 2016 and January 2, 2015, respectively, are
classified within Other Assets.
Debt issuance costs incurred in connection with the Company’s issuance of its revolving credit facility are amortized to
Interest Expense on a straight-line basis over the contractual term of the credit facility. Unamortized debt issuance costs
and unamortized debt discounts related to the Company’s term-debt are recorded as a reduction of the carrying value of
the related debt. These debt issuance costs and discounts are amortized to Interest Expense using the effective interest
method over the period from the date of issuance to the put option date (if applicable) or the maturity date, whichever is
earlier. The amortization of debt issuance costs and discounts are included in Debt Related Amortization Included in
Interest Expense in the Consolidated Statements of Cash Flows. Note 9 “Debt” contains additional information on the
Company’s debt issuance costs and discounts.
Other Long-Term Assets – Other long-term assets also include investments in equity securities of entities that are not
publicly traded and which do not have readily determinable fair values. The Company accounts for investments in these
entities under the cost or equity method depending on the type of ownership interest, as well as the Company’s ability to
exercise influence over these entities. Equity method investments are initially recorded at cost, and are subsequently
adjusted to reflect the Company’s share of earnings or losses of the investee. Cost method investments are recorded at
historical cost. Each reporting period, management evaluates these cost and equity method investments to determine if
there are any events or circumstances that are likely to have a significant effect on the fair value of the investment.
Examples of such impairment indicators include, but are not limited to: a recent sale or offering of similar shares of the
investment at a price below the Company’s cost basis; a significant deterioration in earnings performance; a significant
change in the regulatory, economic or technological environment of the 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
- 73 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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, within each taxing jurisdiction, 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 Provision for Income Taxes.
Penalties, if incurred, are recognized as a component of Selling, General and Administrative Expenses (“SG&A”).
The Company and its 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 the tax returns are filed. The
Company also files foreign tax returns on a separate company basis in the countries in which it operates.
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU requires
entities that present a classified balance sheet to classify all deferred income taxes as noncurrent assets or noncurrent
liabilities. Previous accounting principles required an entity to separate deferred income tax liabilities and assets into
current and noncurrent amounts in a classified balance sheet. As permitted, during the fourth quarter of 2015, the
Company elected to early adopt this ASU and has elected to prospectively apply its guidance. As a result, all deferred tax
assets or liabilities shown in the Consolidated Balance Sheet as of January 1, 2016, are classified as noncurrent. Prior
periods were not retrospectively adjusted for the adoption of this ASU. See Note 14 “Income Taxes” for additional
information.
Convertible Subordinated Notes (“CSN”) – For convertible debt instruments that may be settled in cash upon conversion,
the Company accounts 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 issuance, the Company determined the carrying amount of the liability component of CSN by measuring the fair
value of a similar liability that does not have the associated conversion option. 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. The carrying amount of the conversion option was recorded in Additional Paid-In Capital with an
offset to Long-Term Debt and was amortized using the effective interest method over the period from the date of issuance
to the maturity date. The amortization of discount related to the Company’s convertible debt instruments is included in
Debt Related Amortization Included in Interest Expense in the Consolidated Statements of Cash Flows. See Note 9
“Debt” for additional information.
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 designated its interest rate swaps (See Note 9 “Debt”) and foreign currency
contracts (See Note 15 “Commitments and Contingencies”) entered into 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 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 for forecasted transactions does not occur, or it becomes
probable that they will not occur, the Company reclassifies 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. The cash flows from the termination of interest rate swap agreements are reported as operating
activities in the consolidated statements of cash flows.
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 (including any
price concessions under long-term agreements), the buyer is obligated to pay us (i.e., not contingent on a future event), the
- 74 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 when title passes, generally at the point of shipment. Currently, the revenue recognition policy is the same
for Greatbatch Medical, Lake Region Medical and QiG. In general, for customers with long-term contracts, we have
negotiated fixed pricing arrangements. During new contract negotiations, price level decreases (concessions) for future
sales may be offered to customers in exchange for volume and/or long-term commitments. Once the new contracts are
signed, these prices are fixed and determinable for all future sales. 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. Taxes collected from customers relating to product sales and remitted to governmental authorities are
accounted for on a net basis. Accordingly, such taxes are excluded from Sales and Cost of Sales. In certain instances the
Company obtains component parts from its customers that are included in the final product sold back to the same
customer. These amounts are excluded from Sales and Cost of Sales recognized by the Company. The cost of these
customer supplied component parts amounted to $44.3 million, $48.1 million and $45.3 million in fiscal years 2015, 2014
and 2013, respectively.
Environmental Costs – Environmental expenditures that relate to an existing condition caused by past operations and that
do not provide future benefits are expensed as incurred. Liabilities are recorded when environmental assessments are
made, the requirement for remedial efforts is probable and the amount of the liability can be reasonably estimated.
Liabilities are recorded generally no later than the completion of feasibility studies. The Company has an ongoing
monitoring and identification process to assess how the activities, with respect to known exposures, are progressing
against the recorded liabilities, as well as to identify other potential remediation sites that are presently unknown.
Restructuring – The Company continually evaluates alternatives to align the business with the changing needs of its
customers and to lower operating costs. This includes the realignment of its existing manufacturing capacity, facility
closures, or similar actions, either in the normal course of business or pursuant to significant restructuring programs.
These actions may result in employees receiving voluntary or involuntary employee termination benefits, which may be
pursuant to contractual agreements. Voluntary termination benefits are accrued when an employee accepts the related
offer. Involuntary termination benefits are accrued upon the commitment to a termination plan and the benefit
arrangement is communicated to affected employees, or when liabilities are determined to be probable and estimable,
depending on the existence of a substantive plan for severance or termination. All other exit costs are expensed as
incurred. Refer to Note 13 “Other Operating Expenses, Net” for additional information.
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, through Cost of Sales,
based upon recent historical experience and other specific information as it becomes available. Note 15 “Commitments
and Contingencies” contains additional information on the Company’s product warranties.
Research, Development and Engineering Costs, Net (“RD&E”) – RD&E costs are expensed as incurred. The primary
costs are salary and benefits for personnel, material costs used in development projects and subcontracting costs. Cost
reimbursements for certain 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. These reimbursements do
not cover the complete cost of the development projects. Additionally, the technology developed under these cost
reimbursement projects is owned by the Company and is utilized for future products developed for other customers.
In-process research and development (“IPR&D”) represents research projects acquired in a business combination which
are expected to generate cash flows but have not yet reached technological feasibility. The primary basis for determining
the technological feasibility of these projects is whether or not regulatory approval has been obtained. The Company
classifies IPR&D acquired in a business combination as an indefinite-lived intangible asset until the completion or
abandonment of the associated projects. Upon completion, the Company determines the useful life of the IPR&D and
begins amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, the remaining
carrying amount of the associated IPR&D is written-off. The Company tests the IPR&D acquired for impairment at least
annually, and more frequently if events or changes in circumstances indicate that the assets may be impaired. The
impairment test consists of a comparison of the fair value of the intangible assets with their carrying amount. If the
carrying amount exceeds its fair value, the Company would record an impairment loss in an amount equal to the excess.
Note 12 “Research, Development and Engineering Costs, Net” contains additional information on the Company’s RD&E
activities.
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation – The Company records compensation costs related to stock-based awards granted to
employees based upon their estimated fair value on the grant date. Compensation cost for service-based awards is
recognized ratably over the applicable vesting period. Compensation cost for nonmarket-based performance awards is
reassessed each period and recognized based upon the probability that the performance targets will be achieved.
Compensation cost for market-based performance awards is expensed ratably over the applicable vesting period and is
recognized each period whether the performance metrics are achieved or not.
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock options granted. For
service-based and nonmarket-based performance 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. For market-based
performance restricted stock unit awards, the fair market value of the award is determined utilizing a Monte Carlo
simulation model, which projects the value of the Company’s stock under numerous scenarios and determines the value of
the award based upon the present value of those projected outcomes.
The amount of stock-based compensation expense recognized 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, excluding market and nonmarket
performance award considerations. Note 11 “Stock-Based Compensation” contains additional information on the
Company’s stock-based compensation.
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. 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 are included in Other (Income) Expense, Net and amounted to a gain of
$1.3 million for 2015, a gain of $1.3 million for 2014 and a loss of $0.1 million for 2013.
Defined Benefit Plans – The Company recognizes in its balance sheet as an asset or liability the overfunded or
underfunded status of its defined benefit plans provided to its employees located in Mexico, Switzerland, France and
Germany. This asset or liability is measured as the difference between the fair value of plan assets, if any, and the benefit
obligation of those plans. For these plans, 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. Defined benefit expenses are charged to Cost
of Sales, SG&A and RD&E expenses as applicable. Note 10 “Benefit Plans” contains additional information on these
costs.
Earnings (Loss) Per Share (“EPS”) – Basic EPS is calculated by dividing Net Income (Loss) by the weighted average
number of shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of
shares outstanding for potential common shares if dilutive to the EPS calculation and consist of stock options, unvested
restricted stock and restricted stock units and, if applicable, contingently convertible instruments such as convertible debt.
Note 16 “Earnings (Loss) Per Share” contains additional information on the computation of the Company’s EPS.
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, the net change in cash flow hedges, and defined benefit plan liability adjustments. The Consolidated
Statements of Operations and Comprehensive Income (Loss) and Note 17 “Accumulated Other Comprehensive Income”
contains additional information on the computation of the Company’s comprehensive income (loss).
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America (“U.S. GAAP”) 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 periods. Actual results could differ materially
from those estimates.
Reclassifications – Certain prior period amounts have been reclassified to conform to current year presentation. Refer to
Note 19, “Business Segment, Geographic and Concentration Risk Information,” for a description of the changes made to
the Company’s prior period product line sales classification to reflect the current year presentation. Additionally, during
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the current year the Company disclosed the Proceeds from Sale of Property, Plant and Equipment and Inventory Step-up
amortization separately in the Consolidated Statements of Cash Flows as these amounts were more material for disclosure
in the current year.
Recently Issued Accounting Pronouncements Not Yet Adopted – In the normal course of business, management evaluates
all new accounting pronouncements issued by the FASB, SEC, Emerging Issues Task Force (“EITF”), or other
authoritative accounting bodies to determine the potential impact they may have on the Company’s Consolidated
Financial Statements. Based upon this review, except as noted 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 February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires companies to recognize all
leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and
operating leases, and the classification criteria for distinguishing between finance leases and operating leases are
substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the
current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under
the lessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a
consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier
application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its
Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition
and Measurement of Financial Assets and Financial Liabilities.” This ASU requires equity investments (except those
accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured
at fair value with changes in fair value recognized in net income; requires entities to use the exit price notion when
measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets
and financial liabilities by measurement category and form of financial asset and requires entities to present separately in
other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability
at fair value in accordance with the fair value option. The new ASU is effective for public companies for fiscal years
beginning after December 15, 2017. Early adoption of the own credit provision is permitted. The Company is currently
evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the
Accounting for Measurement-Period Adjustments,” which amends the guidance for measurement-period adjustments
related to business combinations. The amended ASU requires that an acquirer recognize adjustments to provisional
amounts that are identified during the measurement period in the reporting period in which the adjustments are
determined. The acquirer will be required to record, in the same period’s financial statements, the effect on earnings of
changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts,
calculated as if the accounting had been completed at the acquisition date and disclose what the amounts in the previous
periods would have been if those changes were made as of the acquisition date. This ASU is effective for adjustments to
provisional amounts that occur in annual periods and interim periods within those annual periods beginning after
December 15, 2015. The Company is currently assessing the impact of adopting this ASU on its Consolidated Financial
Statements.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the
subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value.
Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. This ASU is effective for public business entities for fiscal years beginning after
December 15, 2016, and interim periods within those fiscal years. The Company is currently assessing the impact of
adopting this ASU on its Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The core principle behind
ASU No. 2014-09 is that an entity should recognize revenue in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for delivering goods and services. This model involves a five-step process that
includes identifying the contract with the customer, identifying the performance obligations in the contract, determining
the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing
revenue when the entity satisfies the performance obligations. This ASU allows two methods of adoption; a full
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
retrospective approach where historical financial information is presented in accordance with the new standard, and a
modified retrospective approach where this ASU is applied to the most current period presented in the financial
statements. In August 2015, the FASB issued ASU No 2015-14 “Revenue from Contracts with Customers: Deferral of the
Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December
15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. The
Company is currently assessing the financial impact of adopting ASU 2014-09 and the methods of adoption; however,
given the scope of the new standard, the Company is currently unable to provide a reasonable estimate regarding the
financial impact or which method of adoption will be elected.
In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of
Components of an Entity,” which amends the definition of a discontinued operation and requires entities to provide
additional disclosures about disposal transactions that do not meet the discontinued operations criteria. The revised ASU
changes how entities identify and disclose information about disposal transactions under U.S. GAAP. This ASU is
effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or
components initially classified as held for sale in periods beginning on or after December 15, 2014. This ASU is
applicable for disposal transactions, if any, that the Company enters into after January 2, 2015. This ASU did not
materially impact the Company’s Consolidated Financial Statements.
2. ACQUISITIONS
Lake Region Medical Holdings, Inc.
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc.
for a total purchase price including debt assumed of approximately $1.77 billion. Lake Region Medical specializes in the
design, development, and manufacturing of products across the medical component and device spectrum primarily serving
the cardio, vascular and advanced surgical markets.
The aggregate consideration paid by the Company to the stockholders of Lake Region Medical consisted of the following
(in thousands):
Cash consideration paid to Lake Region Medical stockholders and equity
award holders
$
478,490
Fair value of shares of Greatbatch common stock issued to Lake Region
Medical stockholders
Fair value of replacement stock options attributable to pre-acquisition
service
Total purchase consideration
245,368
4,508
728,366
$
The fair value of the Greatbatch common stock issued as part of the consideration was determined based upon the closing
stock price of Greatbatch’s shares as of the acquisition date. The fair value of the Greatbatch stock options issued as part
of the consideration was determined utilizing a Black-Scholes option pricing model as of the acquisition date.
Concurrently with the closing of the acquisition, the Company repaid all of the outstanding debt of Lake Region Medical
of approximately $1.0 billion. The cash portion of the purchase price and the repayment of Lake Region Medical’s debt
was primarily funded through a new senior secured credit facility and the issuance of senior notes. See Note 9 “Debt” for
additional information regarding the Company’s debt. The Company believes that the combination of Greatbatch and
Lake Region Medical brings together two highly complementary organizations that can provide a new level of industry
leading capabilities and services to original equipment manufacturer customers while building value for shareholders.
Through this acquisition, the Company believes that it will be at the forefront of innovating technologies and products that
help change the face of healthcare, providing its customers with a distinct advantage as they bring complete systems and
solutions to market. In turn, Greatbatch’s customers will be able to accelerate patient access to life enhancing therapies.
The transaction is consistent with Greatbatch's strategy of achieving profitable growth and continuous improvement to
drive margin expansion.
The operating results of Lake Region Medical have been included in the Company’s Lake Region Medical segment from
the date of acquisition. For 2015, Lake Region Medical added $138.6 million to the Company’s revenue and increased the
Company’s net loss by approximately $17.4 million.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the cost of the acquisition
was allocated to the Lake Region Medical assets acquired and liabilities assumed based on their fair values as of the
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill.
The value assigned to certain assets and liabilities are preliminary and are subject to revision as more detailed analyses are
completed and additional information about the fair value of assets acquired and liabilities assumed become available.
The final allocation may include changes to the acquisition date fair value of intangible assets, goodwill, deferred taxes, as
well as operating assets and liabilities, some of which may result in material adjustments.
The following table summarizes the preliminary allocation of Lake Region Medical purchase price to the assets acquired
and liabilities assumed (in thousands):
Assets acquired
Current assets
Property, plant and equipment
Amortizing intangible assets
Indefinite-lived intangible assets
Goodwill
Other non-current assets
Total assets acquired
Liabilities assumed
Current liabilities
Debt assumed
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$
$
269,815
216,473
849,000
70,000
661,788
1,629
2,068,705
102,485
1,044,675
193,179
1,340,339
728,366
The preliminary fair values of the assets acquired were determined using one of three valuation approaches: market,
income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the
nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The
income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated
by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset
and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a
marketplace participant including revenue projections from existing customers, attrition trends, technology life-cycle
assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The
cost approach estimates the value for a subject asset based on the cost to replace the asset and 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. These fair value measurement approaches are
based on significant unobservable inputs, including management estimates and assumptions.
Current Assets and Liabilities – The fair value of current assets and liabilities, excluding inventory, was assumed to
approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the market
approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the
potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale
of that inventory and a reasonable profit allowance. Based upon this methodology, the Company recorded the inventory
acquired at fair value resulting in an increase in inventory of $23.0 million.
Property, Plant and Equipment – The fair value of PP&E acquired was estimated by applying the cost approach for
personal property, buildings and building improvements and the market approach for land. The cost approach was applied
by developing a replacement cost and adjusting for depreciation and obsolescence. The value of the land acquired was
derived from market prices for comparable properties.
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets – The purchase price was allocated to intangible assets as follows (dollars in thousands):
Amortizing Intangible Assets
Technology
Customer lists
Indefinite-lived Intangible Assets
Trademarks and tradenames
$
$
$
Weighted
Average
Amortization
Period
(Years)
7
14
13
Fair Value
Assigned
160,000
689,000
849,000
Estimated
Useful Life
(Years)
19
29
27
Weighted
Average
Discount
Rate
11.5%
11.5%
11.5%
70,000
N/A
N/A
11.5%
The weighted average amortization period is less than the estimated useful life, as the Company is using an accelerated
amortization method, which approximates the distribution of cash flows used to fair value those intangible assets.
Technology – Technology consists of technical processes, patented and unpatented technology, manufacturing know-how,
trade secrets and the understanding with respect to products or processes that have been developed by Lake Region
Medical and that will be leveraged in current and future products. The fair value of technology acquired was determined
utilizing the relief from royalty method, a form of the income approach, with a royalty rate that ranged from 0.5% to 7%.
The estimated useful life of the technology is based upon management’s estimate of the product life cycle associated with
the technology before they will be replaced by new technologies.
Customer Lists – Customer lists represent the estimated fair value of non-contractual customer relationships Lake Region
Medical has as of the acquisition date. The primary customers of Lake Region Medical include large original equipment
manufacturers in various geographic locations around the world. These relationships were valued separately from
goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of
customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The
estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 5%, as
well as management’s understanding of the industry and product life cycles.
Trademarks and Tradenames – Trademarks and tradenames represent the estimated fair value of Lake Region Medical’s
corporate and product names. These tradenames were valued separately from goodwill at the amount that an independent
third party would be willing to pay for use of these names. The fair value of the trademarks and tradenames was
determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate that ranged
from 0.25% to 1%. Trademarks and tradenames were assumed to have an indefinite useful life based upon the significant
value the Lake Region Medical name has with OEMs in the medical component and device industries, their long history
of being an industry leader and producing quality and innovative components, and given managements current intention
of using this tradename indefinitely, which was assumed to be consistent with what a reasonable market participant would
also assume.
Goodwill – The excess of the purchase price over the fair value of net tangible and intangible assets acquired and
liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including the
value of Lake Region Medical’s highly trained assembled work force and management team, the incremental value
resulting from Lake Region Medical’s industry leading capabilities and services to OEMs, enhanced synergies, and the
expected revenue growth over time that is attributable to increased market penetration from future products and
customers. The goodwill acquired in connection with the acquisition was allocated to the Lake Region Medical segment
and is not deductible for tax purposes.
Long-term Debt – The fair value of long-term debt was assumed to be equal to what was paid by Greatbatch at the time of
closing in order to retire the debt, including prepayment penalties and fees.
Centro de Construcción de Cardioestimuladores del Uruguay
On August 12, 2014, the Company purchased all of the outstanding common stock of Centro de Construcción de
Cardioestimuladores del Uruguay, headquartered in Montevideo, Uruguay. CCC is an active implantable neuromodulation
medical device systems developer and manufacturer that produces a range of medical devices including implantable pulse
generators, programmer systems, battery chargers, patient wands and leads. This acquisition allows the Company to more
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
broadly partner with medical device companies, complements the Company’s core discrete technology offerings and
enhances the Company’s medical device innovation efforts.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the operating results of CCC
have been included in the Company’s QiG segment from the date of acquisition. For 2014, CCC added approximately
$5.8 million to the Company’s revenue and increased the Company’s net income by $1.2 million. The aggregate purchase
price of $19.8 million was funded with cash on hand.
The cost of the acquisition was allocated to the assets acquired and liabilities assumed from CCC based on their fair
values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired
recorded as goodwill. The valuation of the assets acquired and liabilities assumed from CCC was finalized during 2015
and did not result in a material adjustment to the original valuation of net assets acquired, including goodwill and
therefore was not reflected as a retrospective adjustment to the historical financial statements.
The following table summarizes the allocation of the CCC purchase price to the assets acquired and liabilities assumed as
of the acquisition date (in thousands):
Assets acquired
Current assets
Property, plant and equipment
Amortizing intangible assets
Goodwill
Total assets acquired
Liabilities assumed
Current liabilities
Deferred income taxes
Total liabilities assumed
Net assets acquired
$
$
10,670
1,131
6,100
8,296
26,197
4,842
1,590
6,432
19,765
The fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost.
The selection of a particular method for a given asset depended on the reliability of available data and the nature of the
asset, among other considerations.
Current Assets and Liabilities – The fair value of current assets and liabilities, excluding inventory, was assumed to
approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the market
approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the
potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale
of that inventory and a reasonable profit allowance. Based upon this methodology, the Company recorded the inventory
acquired at fair value resulting in an increase in inventory of $0.3 million.
Intangible Assets – The purchase price was allocated to intangible assets as follows (dollars in thousands):
Amortizing Intangible Assets
Technology
Customer lists
Trademarks and tradenames
Weighted
Average
Amortization
Period
(Years)
Weighted
Average
Discount
Rate
Fair
Value
Assigned
$
$
1,400
4,600
100
6,100
10
10
2
10
18%
18%
18%
18%
Technology – Technology consists of technical processes, unpatented technology, manufacturing know-how, trade secrets
and the understanding with respect to products or processes that have been developed by CCC and that will be leveraged
in current and future products. The fair value of technology acquired was determined utilizing the relief from royalty
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method, a form of the income approach, with a royalty rate of 3%. The weighted average amortization period of the
technology is based upon management’s estimate of the product life cycle associated with technology before they will be
replaced by new technologies.
Customer Lists – Customer lists represent the estimated fair value of non-contractual customer relationships CCC has as
of the acquisition date. The primary customers of CCC include medical device companies in various geographic locations
around the world. These relationships were valued separately from goodwill at the amount that an independent third party
would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period
excess-earnings method, a form of the income approach. The weighted average amortization period of the existing
customer base was based upon the historical customer annual attrition rate of 15%, as well as management’s
understanding of the industry and product life cycles.
Trademarks and Tradenames – Trademarks and tradenames represent the estimated fair value of corporate and product
names acquired from CCC. These tradenames were valued separately from goodwill at the amount that an independent
third party would be willing to pay for use of these names. The fair value of the trademarks and tradenames was
determined by utilizing the relief from royalty method, a form of the income approach, with a 0.5% royalty rate.
Goodwill – The excess of the purchase price over the fair value of net tangible and intangible assets acquired and
liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including: the
value of CCC’s highly trained assembled work force and management team; the incremental value that CCC’s technology
will bring to QiG’s medical devices; and the expected revenue growth over time that is attributable to increased market
penetration from future products and customers. The goodwill acquired in connection with the CCC acquisition was
allocated to the QiG business segment and is not deductible for tax purposes.
Pro Forma Results (Unaudited) – The following unaudited pro forma information presents the consolidated results of
operations of the Company, Lake Region Medical, and CCC as if those acquisitions occurred as of the beginning of fiscal
years 2014 (Lake Region Medical) and 2013 (CCC) (in thousands, except per share amounts):
Sales
Net income (loss)
Earnings (loss) per share:
Basic
Diluted
Year Ended
January 1,
2016
1,445,689 $
2,405
January 2,
2015
1,441,782 $
(25,865 )
January 3,
2014
677,657
37,612
0.08 $
0.08 $
(0.87 ) $
(0.87 ) $
1.57
1.49
$
$
$
The unaudited pro forma information presents the combined operating results of Greatbatch, Lake Region Medical, and
CCC, with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired
intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisitions at
Greatbatch’s interest rate, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory
tax rate. Fiscal year 2015 pro forma earnings were adjusted to exclude $32.3 million of acquisition-related costs (change-
in-control payments, investment banking fees, professional fees), $9.5 million of debt related charges (commitment fees,
swap termination fees, debt extinguishment fees) and $23.0 million of nonrecurring amortization expense related to the
fair value step-up of inventory incurred in 2015 as a result of the acquisition of Lake Region Medical. Fiscal year 2014
supplemental pro forma earnings were adjusted to include these charges. The unaudited pro forma consolidated basic and
diluted earnings (loss) per share calculations are based on the consolidated basic and diluted weighted average shares of
Greatbatch. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization
of potential cost savings, and any related integration costs. Certain costs 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.
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SUPPLEMENTAL CASH FLOW INFORMATION
(in thousands)
Noncash investing and financing activities:
Common stock contributed to 401(k) Plan
Property, plant and equipment purchases included in accounts payable
Common stock issued in connection with Lake Region Medical
acquisition
Replacement stock options issued in connection with Lake Region
Medical acquisition
Purchase of non-controlling interests in subsidiaries included in
accrued expenses
Cash paid during the year for:
Interest
Income taxes
Acquisition of noncash assets
Liabilities assumed
4. INVENTORIES
Inventories are comprised of the following (in thousands):
Raw materials
Work-in-process
Finished goods
Total
5. ASSETS HELD FOR SALE
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
3,920 $
7,401
4,341 $
2,926
2,477
2,103
245,368
4,508
6,818
13,057
6,312
2,013,604
1,340,339
—
—
—
3,521
13,565
22,434
6,432
—
—
—
4,989
44,165
—
—
At
January 1,
2016
107,296 $
93,729
51,141
252,166 $
$
$
January 2,
2015
73,354
38,930
16,958
129,242
Assets held for sale included in Prepaid Expenses and Other Current Assets, is comprised of the following (in thousands):
Asset
Business
Segment
Building and building improvements
Greatbatch Medical
$
At
January 1,
2016
January 2,
2015
996 $
1,635
During 2014, the Company transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to
assets held for sale and recognized a $0.4 million impairment charge that was recorded in Other Operating Expenses, Net.
During 2015, the Company sold $0.6 million of these assets held for sale with no additional gain or loss recognized.
Refer to Note 13 “Other Operating Expenses, Net” for additional information regarding this transaction and Note 18 “Fair
Value Measurements” for information regarding the fair value of the assets.
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY, PLANT AND EQUIPMENT, NET
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
At
January 1,
2016
285,068 $
130,184
43,947
36,745
16,243
21,774
76,835
852
611,648
(232,156 )
379,492 $
$
$
January 2,
2015
167,173
89,258
31,725
31,170
14,045
10,816
14,129
629
358,945
(214,020 )
144,925
Depreciation expense for property, plant and equipment was as follows (in thousands):
Depreciation expense
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
27,136 $
23,320 $
22,799
Construction work in process at January 1, 2016 and January 2, 2015 includes asset purchases related to the Company’s
2014 investment in capacity and capabilities initiatives. Additionally, construction work in process also relates to routine
purchases of machinery, equipment, and information technology assets to support normal recurring operations. Refer to
Note 13 “Other Operating Expenses, Net” for a description of the Company’s significant capital investment projects.
7. INTANGIBLE ASSETS
Amortizing intangible assets, net are comprised of the following (in thousands):
At January 1, 2016
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
At January 2, 2015
Purchased technology and patents
Customer lists
Other
Total amortizing intangible assets
Gross
Carrying
Amount
Accumulated
Amortization
Foreign
Currency
Translation
Net
Carrying
Amount
$
$
$
$
255,776 $
761,857
4,534
1,022,167 $
95,776 $
72,857
4,534
173,167 $
(83,708 )
(40,815 )
(4,946 )
(129,469 ) $
(75,894 ) $
(31,460 )
(4,619 )
(111,973 ) $
1,444 $
(986 )
821
1,279 $
1,966 $
1,374
803
4,143 $
173,512
720,056
409
893,977
21,848
42,771
718
65,337
- 84 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate intangible asset amortization expense is comprised of the following (in thousands):
Cost of sales
SG&A
RD&E
Total intangible asset amortization expense
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
$
7,403 $
9,681
412
17,496 $
6,201 $
7,009
667
13,877 $
6,822
5,800
545
13,167
Estimated future intangible asset amortization expense based upon the current carrying value is as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total estimated amortization expense
Estimated
Amortization
Expense
$
$
37,854
43,991
44,894
44,960
45,467
676,811
893,977
The change in indefinite-lived intangible assets during 2015 is as follows (in thousands):
At January 2, 2015
Indefinite-lived intangible assets acquired
At January 1, 2016
The change in goodwill during 2015 is as follows (in thousands):
Trademarks
and
Tradenames
$
$
20,288
70,000
90,288
At January 2, 2015
Goodwill acquired (Note 2)
Foreign currency translation
At January 1, 2016
Greatbatch
Medical
QiG
$
$
304,297 $
—
(368 )
303,929 $
50,096 $
—
—
50,096 $
Lake Region
Medical
— $
Total
354,393
661,788
(2,611 )
659,545 $ 1,013,570
661,788
(2,243 )
As of January 1, 2016, no accumulated impairment loss has been recognized for the goodwill allocated to the Company’s
Greatbatch Medical, QiG or Lake Region Medical segments.
- 85 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. ACCRUED EXPENSES
Accrued expenses are comprised of the following (in thousands):
Salaries and benefits
Profit sharing and bonuses
Accrued interest
Purchase of non-controlling interest in subsidiaries
Severance and change in control payments
Warranty and customer rebates
Other
Total
9. DEBT
Long-term debt is comprised of the following (in thousands):
Senior secured term loan A
Senior secured term loan B
9.125% senior notes, due 2023
Variable rate term loan
Revolving line of credit
Less unamortized discount on term loan B and debt issuance costs
Total debt
Less current portion of long-term debt
Total long-term debt
At
January 1,
2016
January 2,
2015
37,579 $
6,781
9,378
6,818
11,969
7,205
17,527
97,257 $
20,770
18,524
195
—
1,878
660
6,357
48,384
$
$
At
January 1,
2016
375,000 $
$
1,025,000
360,000
—
—
(45,947 )
1,714,053
29,000
1,685,053 $
$
January 2,
2015
—
—
—
187,500
—
(887 )
186,613
11,250
175,363
Senior Secured Credit Facilities – In connection with the Lake Region Medical acquisition, on October 27, 2015, the
Company replaced its existing credit facility with new senior secured credit facilities (the “Senior Secured Credit
Facilities”) consisting of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), (ii) a $375 million
term loan A facility (the “TLA Facility”), and (iii) a $1,025 million term loan B facility (the “TLB Facility”). The TLA
Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB facility was issued at a 1%
discount.
Term Loan Facilities
The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on
the TLA Facility, as well as the Revolving Credit Facility, are at the Company’s option, either at: (i) the prime rate plus
the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s Total Net Leverage Ratio,
as defined in the Senior Secured Credit Facilities agreement or (ii) the applicable LIBOR rate plus the applicable
margin, which will range between 1.75% and 3.25%, based on the Company’s Total Net Leverage Ratio. Interest rates
on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 3.25% or (ii) the applicable LIBOR
rate plus 4.25%, with LIBOR subject to a 1.00% floor.
Subject to certain conditions, one or more incremental term loan facilities may be added to the Term Loan Facilities so
long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.
- 86 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of January 1, 2016, the estimated fair value of TLB is $1,013 million, based on quoted market prices for the debt,
recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading
frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. The par
amount of TLA approximated its fair value as of January 1, 2016 based upon the debt being variable rate in nature.
Revolving Credit Facility
The Revolving Credit Facility matures on October 27, 2020. The Revolving Credit Facility also includes a $15 million
sublimit for swingline loans and a $30 million sublimit for standby letters of credit (which will subsequently decrease to
$25 million on April 27, 2016). The Company is required to pay a commitment fee on the unused portion of the
Revolving Credit Facility, which will range between 0.175% and 0.25%, depending on the Company’s Total Net
Leverage Ratio. As of January 1, 2016, there were no borrowings on the Revolving Credit Facility, but available
borrowing capacity was $186.6 million after giving effect to $13.4 million of outstanding standby letters of credit.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental
revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.
Covenants
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum Total Net Leverage
Ratio of 6.50:1.00, subject to step downs and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in
the Senior Secured Credit Facilities) to interest expense of not less than 3.00:1.00. The TLB Facility does not contain
any financial maintenance covenants.
The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur
additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the
Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment
of dividends or other amounts to Greatbatch Ltd. from the Company’s restricted subsidiaries; (vii) pay dividends on
capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated
indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to
the organizational documents of the Company or its subsidiaries or the documentation governing other senior
indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to
a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of
January 1, 2016, the Company was in compliance with all financial and negative covenants under the Senior Secured
Credit Facilities.
The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the
continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit
Facilities become immediately due and payable. The Senior Secured Credit Facilities are guaranteed by the Company, as
a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries
(other than Greatbatch Ltd., non-wholly owned joint ventures and certain other excluded subsidiaries). The Senior
Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; 1) the present
and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except
the Company); 2) sixty-six percent (66%) of all present and future shares of voting capital stock of each specified first-
tier foreign subsidiary; 3) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal
property; and 4) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other
guarantors.
9.125% Senior Notes due 2023 – On October 27, 2015, the Company completed a private offering of $360 million
aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”). All the Senior Notes
are outstanding as of January 1, 2016.
Interest on the Senior Notes is payable on May 1 and November 1 of each year, beginning on May 1, 2016. The
Company may redeem the Senior Notes, in whole or in part, prior to November 1, 2018 at a price equal to 100% of the
principal amount thereof plus a “make-whole” premium. Prior to November 1, 2018, the Company may redeem up to
40% of the aggregate principal amount of the Senior Notes using the proceeds from certain equity offerings at a
redemption price equal to 109.125% of the aggregate principal amount of the Senior Notes. As of January 1, 2016, the
estimated fair value of the Senior Notes are $354.6 million, based on quoted market prices of these notes, recent sales
- 87 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
prices for the notes and consideration of comparable debt instruments with similar interest rates and trading frequency,
among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
The Senior Notes are senior unsecured obligations of the Company. The Senior Notes contain restrictive covenants that,
among other things, limit the ability of the Company to: (i) incur or guarantee additional indebtedness or issue certain
disqualified stock or preferred stock; (ii) create certain liens; (iii) pay dividends or make distributions in respect of
capital stock; (iv) make certain other restricted payments; (v) enter into agreements that restrict certain dividends or
other payments; (vi) enter into sale-leaseback agreements; (vii) engage in certain transactions with affiliates; and
(viii) consolidate or merge with, or sell substantially all of their assets to, another person. These covenants are subject to
a number of limitations and exceptions that are described in the indenture agreement of the Senior Notes. The Senior
Notes provide for customary events of default, subject in certain cases to customary cure periods, in which the Senior
Notes and any unpaid interest would become due and payable.
As of January 1, 2016, the weighted average interest rate on all outstanding borrowings is 5.69%.
Contractual maturities of the Company’s debt facilities for the next five years and thereafter, excluding any discounts or
premiums, as of January 1, 2016 are as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total
$
$
29,000
31,344
40,719
47,750
47,750
1,563,437
1,760,000
Interest Rate Swaps – From time to time, the Company enters into interest rate swap agreements in order to hedge
against potential changes in cash flows on its outstanding variable rate debt. During 2012, the Company entered into a
three-year $150 million interest rate swap, which amortized $50 million per year. During 2014, the Company entered
into an additional interest rate swap. The first $45 million of notional amount of the swap was effective February 20,
2015, and the second $45 million of notional amount was scheduled to be effective February 22, 2016. These swaps
were accounted for as cash flow hedges. As a result of the Lake Region Medical acquisition, the forecasted cash flows
that the Company’s interest rate swaps were hedging were no longer expected to occur. Accordingly, during 2015, the
Company recognized an additional $2.8 million charge in Interest Expense relating to the termination of the interest rate
swap contracts. On October 27, 2015, the Company terminated its outstanding interest rate swap agreements resulting in
a $2.8 million payment to the interest rate swap counterparty. As of January 1, 2016, the Company has no interest rate
swap agreements outstanding. No portion of the change in fair value of the Company’s interest rate swaps during 2015,
2014, or 2013 were considered ineffective. The amount recorded as Interest Expense during 2015, 2014, and 2013
related to the Company’s interest rate swaps was $3.5 million, $0.5 million and $0.5 million, respectively.
Convertible Subordinated Notes – In March 2007, the Company issued $197.8 million of CSN at a 5% discount. CSN
accrued interest at 2.25% per annum. The effective interest rate of CSN, which took into consideration the amortization
of the discount and deferred fees related to the issuance of these notes, was 8.5%. On February 20, 2013, the Company
redeemed all outstanding CSN. The contractual interest and discount amortization for CSN were as follows (in
thousands):
Contractual interest
Discount amortization
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
— $
—
— $
—
634
5,368
Debt Issuance Costs and Discounts – In conjunction with the issuance of the Senior Secured Credit Facilities and the
Senior Notes, the Company incurred $45.9 million of debt issuance costs. As stated in Note 1, the Company has elected
to early-adopt ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Following this ASU, unamortized
debt issuance costs of $35.9 million and $0.9 million have been recorded as a reduction of the carrying value of the
related debt as of January 1, 2016 and January 2, 2015, respectively. Additionally, as of January 1, 2016 and January 2,
- 88 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2015, $4.8 million and $2.2 million, respectively, of debt issuance costs attributable to the Company’s revolving credit
facilities remain recorded as a component of Other Assets on the Consolidated Balance Sheets. These costs will amortize
into Interest Expense over the terms of the related credit facilities.
The change in deferred debt issuance costs related to the Company’s revolving credit facilities is as follows (in
thousands):
At January 3, 2014
Amortization during the period
At January 2, 2015
Financing costs deferred
Write-off during the period
Amortization during the period
At January 1, 2016
$
$
2,786
(586 )
2,200
4,152
(907 )
(654 )
4,791
The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as
follows (in thousands):
At January 3, 2014
Amortization during the period
At January 2, 2015
Financing costs incurred
Write-off during the period
Amortization during the period
At January 1, 2016
Debt Issuance
Costs
Unamortized
Discount on TLB
Facility
Total
$
$
1,074 $
(187 )
887
41,781
(732 )
(6,028 )
35,908 $
— $
—
—
10,250
—
(211 )
10,039 $
1,074
(187 )
887
52,031
(732 )
(6,239 )
45,947
During 2015, the Company wrote off $1.6 million of debt issuance costs in connection with the extinguishment and
modification of its term loan and revolving line of credit, respectively, which is included in Interest Expense on the
Consolidated Statements of Operations.
10. BENEFIT PLANS
Savings Plan – The Company sponsors a defined contribution 401(k) plan, for its U.S. based employees. The plan
provides for the deferral of employee compensation under Section 401(k) and a discretionary Company match. In 2015,
2014, and 2013, this match was 35% per dollar of participant deferral, up to 6% of the total compensation for legacy
Greatbatch associates. Net costs related to this defined contribution plan were $2.3 million in 2015, $2.2 million in 2014,
and $2.0 million in 2013.
In addition to the above, under the terms of the 401(k) plan document there is an annual discretionary defined
contribution of up to 4% of each legacy Greatbatch employee’s eligible compensation based upon the achievement of
certain performance targets. This amount is contributed to the 401(k) plan in the form of Company stock. Compensation
cost recognized related to the defined contribution plan was $0.0 million, $4.2 million, $4.8 million in 2015, 2014, and
2013, respectively. As of January 1, 2016, the 401(k) Plan held approximately 580,000 shares of Company stock.
Subsequent to the Lake Region Medical acquisition, the Company continued the 401(k) plan previously provided to
Lake Region Medical employees. This plan is available to most Lake Region employees whereby employees are allowed
to contribute up to 50% of gross salary. The Company matches 50% of an employee’s contributions for the first 6% of
the employee’s gross salary at a maximum contribution rate per employee of 3% of the employee’s gross salary. The
employee’s contributions vest immediately, while the Company’s contributions vest over a five-year period. Net costs
related to this defined contribution plan since the date of acquisition was $0.8 million in 2015.
- 89 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Defined Benefit Plans – The Company is required to provide its employees located in Switzerland, Mexico, France, and
Germany certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon
years of service, position, age and compensation. The defined benefit pension plan provided to the Company’s
employees located in Switzerland is a funded contributory plan, while the plans that provide benefits to the Company’s
employees located in Mexico, France, and Germany are unfunded and noncontributory. The liability and corresponding
expense related to these benefit plans is based on actuarial computations of current and future benefits for employees.
During 2012, the Company transferred most major functions performed at its facilities in Switzerland into other existing
facilities. As a result, the Company curtailed its defined benefit plan provided to employees at those Swiss facilities
during 2012. In accordance with ASC 715, this gain was recognized in Other Operating Expenses, Net as the related
employees were terminated. Since Swiss plan assets were sufficient to cover all plan liabilities, during 2012 the plan
assets were transferred into cash. During 2013, the plan assets that remained after settlement payments were made were
transferred to an AA- rated insurance carrier who bears the pension risk and longevity risk, and will be used to cover the
pension liability for the remaining retirees of the Swiss plan, as well as the remaining employees at that location.
Information relating to the funding position of the Company’s defined benefit plans as of the plans measurement date of
January 1, 2016 and January 2, 2015 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’ contribution
Actuarial loss
Benefits transferred in, net
Settlement/curtailment gain
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
Employer contributions (refund)
Plan participants’ contributions
Actual loss on plan assets
Benefits transferred in, net
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
Defined benefit liability classified as other current liabilities
Defined benefit liability classified as long-term liabilities
Accumulated benefit obligation at end of year
Year Ended
January 1,
2016
January 2,
2015
2,843 $
4,316
439
165
61
235
258
—
(325 )
7,992
437
69
61
(39 )
362
—
(19 )
871
7,121 $
46 $
7,075 $
6,299 $
2,422
—
203
75
36
630
155
(337 )
(341 )
2,843
731
(39 )
36
(101 )
198
(337 )
(51 )
437
2,406
25
2,381
1,938
$
$
$
$
$
- 90 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts recognized in Accumulated Other Comprehensive Income are as follows (in thousands):
Net loss occurring during the year
Amortization of losses
Prior service cost
Amortization of prior service cost
Foreign currency translation
Pre-tax adjustment
Taxes
Net loss
Year Ended
January 1,
2016
January 2,
2015
164 $
(156 )
(1 )
(9 )
—
(2 )
22
20 $
736
(138 )
(2 )
(11 )
(76 )
509
(135 )
374
$
$
The amortization of amounts in Accumulated Other Comprehensive Income expected to be recognized as components of
net periodic benefit expense during 2016 are as follows (in thousands):
Amortization of net prior service cost
Amortization of net loss
Net pension cost is comprised of the following (in thousands):
Service cost
Interest cost
Settlements loss
Expected return on assets
Recognized net actuarial loss
Net pension cost
$
$
$
10
172
Year Ended
January 1,
2016
January 2,
2015
439 $
165
—
(11 )
164
757 $
203
75
105
(3 )
45
425
The weighted-average rates used in the actuarial valuations were as follows:
Discount rate
Salary growth
Expected rate of return on assets
Projected Benefit Obligation
January 1,
2016
January 2,
2015
Net Pension Cost
2015
2014
2013
2.2 %
2.9 %
2.0 %
2.3 %
3.0 %
2.3 %
2.3 %
3.0 %
2.3 %
3.4 %
3.1 %
2.5 %
2.1 %
2.4 %
— %
The discount rate used is based on the yields of AA 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 earnings expectations on existing plan assets.
- 91 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan assets were comprised of the following (in thousands):
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
January 1,
2016
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
871 $
871 $
— $
— $
871 $
871 $
—
—
Fair Value Measurements Using
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
January 2,
2015
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
437 $
437 $
— $
— $
437 $
437 $
—
—
$
$
$
$
Insurance contract
Total
Insurance contract
Total
The fair value of Level 2 plan assets are obtained from quoted market prices in inactive markets or 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 benefit payments over the next ten years are as follows (in thousands):
2016
2017
2018
2019
2020
2020-2024
$
166
205
225
277
265
1,619
11. STOCK-BASED COMPENSATION
The components and classification of stock-based compensation expense were as follows (in thousands):
Stock options
Restricted stock and units
401(k) stock contribution
Total stock-based compensation expense
Cost of sales
Selling, general and administrative expenses
Research, development and engineering costs, net
Other operating expenses, net (Note 13)
Total stock-based compensation expense
- 92 -
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
2,708 $
6,668
—
9,376 $
795 $
7,510
982
89
9,376 $
2,523 $
6,417
4,246
13,186 $
3,530 $
7,923
1,440
293
13,186 $
3,490
5,843
4,768
14,101
3,864
7,907
1,194
1,136
14,101
$
$
$
$
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2014 and 2013, the Company recorded stock modification expense related to employee separation costs incurred
during 2014 and 2013 in connection with realignment initiatives. This modification expense was included within Other
Operating Expenses, Net. Refer to Note 13 “Other Operating Expenses, Net” for further discussion of these initiatives.
Summary of Plans
The Company’s 2005 Stock Incentive Plan (“2005 Plan”) has been frozen to any new award issuances. Stock options
remain outstanding under this 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 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.
The Company’s 2011 Stock Incentive Plan (“2011 Plan”), as amended, 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 2011 Plan. The 2011 Plan does not limit the
amount of restricted stock, restricted stock units or stock bonuses that may be awarded.
As of January 1, 2016, there were 289,734 and 75,361 shares available for future grants under the 2011 Plan and 2009
Plan, respectively. Due to plan sub-limits, of the shares available for grant, only 9,728 shares may be awarded under the
2009 Plan in the form of restricted stock, restricted stock units or stock bonuses.
Stock Options
Stock options granted generally vest over a three year period, expire 10 years from the date of grant, and 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 have not been granted since 2010.
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. 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 stock options, which represents the period of time that the stock 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 future 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.
The weighted-average fair value and assumptions used are as follows:
Weighted average grant date fair value
Risk-free interest rate
Expected volatility
Expected life (in years)
Expected dividend yield
Annual prevesting forfeiture rate
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
$
12.18
1.55 %
$
16.43
1.73 %
26 %
4.7
0 %
9 %
39 %
5.3
0 %
9 %
8.38
0.73 %
39 %
5.3
0 %
9 %
- 93 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes time and performance-vested stock option activity:
Outstanding at December 28, 2012
Granted
Exercised
Forfeited or expired
Outstanding at January 3, 2014
Granted
Exercised
Forfeited or expired
Outstanding at January 2, 2015
Granted
Replacement options granted in
connection with the Lake Region Medical
acquisition
Exercised
Forfeited or expired
Outstanding at January 1, 2016
Expected to vest at January 1, 2016
Exercisable at January 1, 2016
Number of
Stock
Options
2,060,772 $
372,676
(551,092 )
(88,686 )
1,793,670
183,571
(353,625 )
(33,279 )
1,590,337
301,547
119,900
(280,701 )
(52,183 )
1,678,900 $
1,643,386 $
1,467,256 $
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Life
(In Years)
Aggregate
Intrinsic
Value
(In Millions)
23.18
23.33
23.24
28.05
22.96
43.84
23.41
27.82
25.17
49.20
12.41
23.45
42.45
28.32
27.90
25.50
6.1 $
6.1 $
5.8 $
40.6
40.4
39.6
Intrinsic value is calculated for in-the-money options (exercise price less than market price) as the difference between the
market price of the Company’s common shares as of January 1, 2016 ($52.50) and the weighted average exercise price
of the underlying stock options, multiplied by the number of options outstanding and/or exercisable. As of January 1,
2016, $2.3 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 small 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,
2016
Year Ended
January 2,
2015
January 3,
2014
$
8,231 $
6,583
1,954
7,997 $
8,278
1,704
6,807
12,807
727
- 94 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock and Restricted Stock Units
Time-vested restricted stock and restricted stock unit awards granted typically vest in equal annual installments over a
three or four year period. The fair value of time-based as well as nonmarket-based performance restricted stock and
restricted stock unit awards is equal to the fair value of the Company’s stock on the date of grant. The following table
summarizes time-vested restricted stock and unit activity:
Nonvested at December 28, 2012
Granted
Vested
Forfeited
Nonvested at January 3, 2014
Granted
Vested
Forfeited
Nonvested at January 2, 2015
Granted
Vested
Forfeited
Nonvested at January 1, 2016
Time-Vested
Activity
Weighted
Average
Fair Value
80,269 $
67,230
(74,062 )
(5,862 )
67,575
63,817
(53,568 )
(9,992 )
67,832
44,629
(56,119 )
(17,107 )
39,235 $
23.48
26.76
23.93
22.26
26.37
44.78
34.16
35.30
36.22
49.84
37.93
40.48
47.40
Performance-based restricted stock units granted only vest if certain market-based performance metrics are achieved.
The amount of shares that ultimately vest range from 0 shares to 577,825 shares based upon the total shareholder return
of the Company relative to the Company’s compensation peer group over a three year performance period beginning in
the year of grant. The fair value of the restricted stock units were determined by utilizing a Monte Carlo simulation
model, which projects the value of Greatbatch stock versus the peer group under numerous scenarios and determines the
value of the award based upon the present value of these projected outcomes. The following table summarizes
performance-vested restricted stock and stock unit activity related to the Company’s plans:
Nonvested at December 28, 2012
Granted
Vested
Forfeited
Nonvested at January 3, 2014
Granted
Vested
Forfeited
Nonvested at January 2, 2015
Granted
Vested
Forfeited
Nonvested at January 1, 2016
Performance-
Vested
Activity
Weighted
Average
Fair Value
782,446 $
318,169
(49,139 )
(271,798 )
779,678
186,825
(221,470 )
(28,870 )
716,163
179,940
(270,198 )
(48,080 )
577,825 $
16.02
15.86
14.68
14.94
16.41
31.33
18.51
18.42
19.57
32.92
15.30
26.96
25.11
The realized tax benefit (expense) from the vesting of restricted stock and restricted stock units was $3.4 million, $2.3
million and $(0.4) million for 2015, 2014, 2013, respectively. As of January 1, 2016, there was $7.2 million of total
unrecognized compensation cost related to the restricted stock and restricted stock unit awards. That cost is expected to
- 95 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be recognized over a weighted-average period of approximately 2 years. The fair value of shares vested in 2015, 2014,
2013 was $16.1 million, $12.5 million and $4.0 million, respectively.
12. RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET
Research, Development and Engineering Costs, Net are comprised of the following (in thousands):
Research, development and engineering costs
Less: cost reimbursements
Total research, development and engineering costs, net
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
$
59,767 $
(6,772 )
52,995 $
58,974 $
(9,129 )
49,845 $
62,652
(8,575 )
54,077
13. OTHER OPERATING EXPENSES, NET
Other Operating Expenses, Net is comprised of the following (in thousands):
2014 investments in capacity and capabilities
Orthopaedic facilities optimization
2013 operating unit realignment
Legacy Lake Region Medical consolidations
Other consolidation and optimization costs (income)
Acquisition and integration costs (income)
Asset dispositions, severance and other
Total other operating expenses, net
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
$
23,037 $
1,395
—
1,961
—
33,449
6,622
66,464 $
8,925 $
1,317
1,017
—
(71 )
3
4,106
15,297 $
—
8,038
5,625
—
1,095
(502 )
1,534
15,790
2014 investments in capacity and capabilities. In 2014, the Company announced several initiatives to invest in capacity
and capabilities and to better align its resources to meet its customers’ needs and drive organic growth and profitability.
These included the following:
• Functions performed at the Company’s facility in Plymouth, MN to manufacture catheters and introducers will transfer
into the Company’s existing facility in Tijuana, Mexico. This initiative is expected to be substantially completed by
the first half of 2016 and is dependent upon our customers’ validation and qualification of the transferred products.
• Functions performed at the Company’s facilities in Beaverton, OR and Raynham, MA to manufacture products for the
portable medical market will transfer to a new facility in Tijuana, Mexico. This initiative is expected to be
substantially completed by the end of the first quarter of 2016 and is dependent upon our customers’ validation and
qualification of the transferred products. Products currently manufactured at the Beaverton facility, which do not
serve the portable medical market, are planned to transfer to the Company’s Raynham facility.
• The design engineering responsibilities previously performed at the Company’s Cleveland, OH facility were
transferred to the Company’s facilities in Minnesota in 2015.
• The realignment of the Company’s commercial sales operations was completed during the fourth quarter of 2015.
The total capital investment expected for these initiatives is between $25.0 million and $28.0 million, of which $21.3
million has been expended through January 1, 2016. Total restructuring charges expected to be incurred in connection
with this realignment are between $34.0 million and $39.0 million, of which $32.0 million has been incurred through
January 1, 2016. Expenses related to this initiative are recorded within the applicable segment and corporate cost centers
that the expenditures relate to and include the following:
• Severance and retention: $5.0 million - $7.0 million;
• Accelerated depreciation and asset write-offs: $2.0 million - $3.0 million; and
• Other: $27.0 million - $29.0 million
- 96 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other expenses primarily consist of costs to relocate certain equipment and personnel, duplicate personnel costs,
disposal, and travel expenditures. All expenses are cash expenditures except accelerated depreciation and asset write-
offs.
The change in accrued liabilities related to the 2014 investments in capacity and capabilities is as follows (in thousands):
At January 2, 2015
Restructuring charges
Write-offs
Cash payments
At January 1, 2016
Severance and
Retention
Accelerated
Depreciation/
Asset Write-offs
Other
Total
$
$
1,163 $
2,729
—
(2,463 )
1,429 $
— $
235
(235 )
—
— $
1,066 $
20,073
—
(19,544 )
1,595 $
2,229
23,037
(235 )
(22,007 )
3,024
Orthopaedic facilities optimization. In 2010, the Company began updating its Indianapolis, IN facility to streamline
operations, consolidate two buildings, increase capacity, further expand capabilities and reduce dependence on outside
suppliers. This initiative was completed in 2011.
In 2011, the Company began construction of an orthopaedic manufacturing facility in Fort Wayne, IN and transferred
manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was
completed in 2012.
During 2012, the Company transferred manufacturing and development operations performed at its facilities in Orvin
and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. In connection with this
consolidation, in 2013, the Company sold assets related to certain non-core Swiss orthopaedic product lines to an
independent third party. The purchase agreement provided the Company with an earn out payment based upon the
amount of inventory consumed by the purchaser within one year after the close of the transaction. As a result of this earn
out, a gain of $2.7 million was recorded in Other Operating Expenses, Net during 2014. During 2014, the Company
transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to held for sale and recognized a
$0.4 million impairment charge. During 2015, the Company sold $0.6 million of these assets held for sale with no
additional gain or loss recognized. Refer to Note 5 “Assets Held For Sale” for additional information.
During 2013, the Company began a project to expand its Chaumont, France facility in order to enhance its capabilities
and fulfill larger volume customer supply agreements. This initiative is expected to be completed over the next year.
The total capital investment expected to be incurred for these initiatives is between $30.0 million and $35.0 million, of
which $28.4 million has been expended through January 1, 2016. Total expense expected to be incurred for these
initiatives is between $45.0 million and $48.0 million, of which $43.9 million has been incurred through January 1,
2016. All expenses have been and will be recorded within the Greatbatch Medical segment and are expected to include
the following:
• Severance and retention: approximately $11.0 million;
• Accelerated depreciation and asset write-offs: approximately $13.0 million; and
• Other: $21.0 million - $24.0 million
Other expenses include production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs
associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and
asset write-offs.
The change in accrued liabilities related to the orthopaedic facilities optimizations is as follows (in thousands):
At January 2, 2015
Restructuring charges
Write-offs
Cash payments
At January 1, 2016
Severance
and
Retention
Accelerated
Depreciation/
Asset Write-offs
— $
—
—
—
— $
— $
88
(88 )
—
— $
$
$
- 97 -
Other
Total
287 $
1,307
—
(1,594 )
— $
287
1,395
(88 )
(1,594 )
—
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 operating unit realignment. In 2013, the Company initiated a plan to realign its operating structure in order to
optimize its continued focus on profitable growth. As part of this initiative, the sales and marketing and operations
groups of its former Implantable Medical and Electrochem Solutions reportable segments were combined into one sales
and marketing group and one operations group each serving Greatbatch Medical. This initiative was completed during
2014. Total restructuring charges incurred in connection with this realignment were $6.6 million. Expenses related to this
initiative were recorded within the applicable segment that the expenditures relate to and included the following:
• Severance and retention: $5.0 million; and
• Other: $1.6 million.
Other expenses primarily consisted of relocation and travel expenditures. All expenses were cash expenditures.
Legacy Lake Region Medical consolidations. In 2014, Lake Region Medical initiated plans to close its Arvada,
Colorado site, consolidate its two Galway, Ireland sites into one facility, and take other restructuring actions that will
result in a reduction in staff across manufacturing and administrative functions at certain locations. This initiative is
expected to be substantially completed by the end of 2016. The total capital investment expected for this initiative since
the acquisition date is between $4.0 million and $5.0 million, of which $0.9 million has been expended through
January 1, 2016. Total expense expected to be incurred for this initiative since the acquisition date is between $13.0
million and $15.0 million, of which $2.0 million has been incurred through January 1, 2016. All expenses have been and
will be recorded with the Lake Region Medical segment and are expected to include the following:
• Employee costs: $5.0 million - $6.0 million; and
• Other: $8.0 million - $9.0 million
Other expenses primarily consist of production inefficiencies, moving, revalidation, personnel, training, consulting, and
travel costs associated with these consolidation projects. All expenses are cash expenditures and are being recorded in the
Lake Region Medical segment.
The change in accrued liabilities related to these legacy Lake Region Medical consolidation initiatives is as follows (in
thousands):
At October 27, 2015
Restructuring charges
Write-offs
Cash payments
At January 1, 2016
Employee
Costs
Other Exit
Costs
Total
$
$
3,392 $
557
—
(282 )
3,667 $
653 $
1,404
—
(1,461 )
596 $
4,045
1,961
—
(1,743 )
4,263
Acquisition and integration costs (income). During 2015, the Company incurred $23.7 million in transaction costs
related to the acquisition of Lake Region Medical. These costs primarily relate to professional and consulting fees
incurred in connection with due diligence efforts of this acquisition, of which $0.7 million are accrued as of January 1,
2016. Expenses related to this initiative were recorded to corporate unallocated expenses. Additionally, during 2015, the
Company incurred $8.6 million in Lake Region Medical integration costs, which consisted primarily of change-in-
control payments to former Lake Region Medical executives, professional and consulting fees, and travel costs, of which
$6.2 million are accrued as of January 1, 2016 in the Lake Region Medical segment. Total expense expected to be
incurred on the integration of Lake Region Medical is between $40.0 million and $50.0 million and total capital
expenditures are expected to be between $20.0 million to $25.0 million.
During 2015, 2014, and 2013, the Company also incurred costs (income) related to the integration of CCC and
NeuroNexus Technologies, Inc. (“NeuroNexus”). These expenses were primarily for retention bonuses, travel costs in
connection with integration efforts, training, severance, and the change in fair value of the contingent consideration
recorded in connection with the NeuroNexus acquisition, which resulted in a gain of $0.8 million and $0.7 million in
2014 and 2013, respectively, and was categorized in Level 3 of the fair value hierarchy.
Asset dispositions, severance and other. During 2015, 2014, and 2013, the Company recorded losses in connection with
various asset disposals and/or write-downs. In addition, during 2015, the Company incurred legal and professional costs
in connection with the expected Spin-off of Nuvectra of $6.0 million, of which $0.5 million are accrued as of January 1,
2016. Expenses related to the expected Spin-off were recorded within the applicable segment and corporate cost centers
- 98 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to which the expenditures relate. The transaction is expected to be completed in March 2016. Deal related costs for the
Spin-off are estimated to be between $10.0 million and $12.0 million. Refer to Note 19 “Business Segment, Geographic
and Concentration Risk Information” for additional information on the expected Spin-off.
During 2014, the Company incurred $0.9 million of expense related to the separation of the Company’s Senior Vice
President, Human Resources. Additionally, during 2014, the Company recorded charges in connection with its business
reorganization to align its contract manufacturing operations. Costs incurred primarily related to consulting and IT
development and were completed in 2014.
During 2013, Greatbatch Medical recorded a $0.9 million write-off related to its wireless sensing product line and QiG
recorded a $0.5 million write-off of IPR&D. Refer to Note 18 “Fair Value Measurements” for additional information.
- 99 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. INCOME TAXES
The U.S. and international components of income (loss) before provision for income taxes were as follows (in
thousands):
U.S.
International
Total income (loss) before provision for income taxes
January 1,
2016
$
$
(42,166 ) $
26,466
(15,700 ) $
Year Ended
January 2,
2015
January 3,
2014
56,801 $
19,778
76,579 $
42,392
6,446
48,838
The provision (benefit) for income taxes was comprised of the following (in thousands):
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
Current:
Federal
State
International
Deferred:
Federal
State
International
$
(3,753 ) $
(367 )
6,312
2,192
(8,144 )
(880 )
(1,274 )
(10,298 )
Total provision (benefit) for income taxes
$
(8,106 ) $
16,293 $
1,299
2,998
20,590
1,211
(310 )
(370 )
531
21,121 $
39,353
1,604
1,470
42,427
(28,678 )
427
(1,605 )
(29,856 )
12,571
The provision (benefit) for income taxes differs from the U.S. statutory rate due to the following:
Statutory rate
Federal tax credits
Foreign rate differential
Uncertain tax positions
State taxes, net of federal benefit
Change in foreign tax rates
Non-deductible transaction costs
Valuation allowance
Other
$
January 1,
2016
(5,495 )
(1,850 )
(3,180 )
(531 )
(1,490 )
(91 )
4,867
626
(962 )
Effective tax rate
$
(8,106 )
Year Ended
January 2,
2015
January 3,
2014
35.0 % $
11.8
20.2
3.4
9.5
0.6
(31.0 )
(4.0 )
6.1
51.6 % $
26,803
(1,600 )
(3,276 )
412
507
(446 )
—
(299 )
(980 )
21,121
35.0 % $
(2.1 )
(4.3 )
0.6
0.7
(0.6 )
—
(0.4 )
(1.3 )
27.6 % $
17,093
(3,651 )
(348 )
831
1,148
(1,806 )
—
186
(882 )
12,571
35.0 %
(7.5 )
(0.7 )
1.7
2.3
(3.7 )
—
0.4
(1.8 )
25.7 %
- 100 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax assets (liabilities) consist of the following (in thousands):
Tax credits
Net operating loss carryforwards
Inventories
Accrued expenses
Stock-based compensation
Other
Gross deferred tax assets
Less valuation allowance
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
Current deferred tax liability
Noncurrent deferred tax asset
Noncurrent deferred tax liability
Net deferred tax liability
At
January 1,
2016
January 2,
2015
$
$
$
22,196 $
153,949
6,543
13,138
9,512
38
205,376
(39,171 )
166,205
(32,772 )
(347,896 )
(3,754 )
(384,422 )
(218,217 ) $
— $
—
3,587
(221,804 )
$
(218,217 ) $
5,828
6,721
3,335
4,338
9,341
1,659
31,222
(10,709 )
20,513
(2,646 )
(57,850 )
(5,006 )
(65,502 )
(44,989 )
6,168
(588 )
2,626
(53,195 )
(44,989 )
In November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes.” This ASU requires
entities that present a classified balance sheet to classify all deferred income taxes as noncurrent assets or noncurrent
liabilities. Previous accounting principles required an entity to separate deferred income tax liabilities and assets into
current and noncurrent amounts in a classified balance sheet. As permitted, during the fourth quarter of 2015, the
Company elected to early adopt this ASU and has elected to prospectively apply its guidance. As a result, all deferred tax
assets or liabilities shown in the Consolidated Balance Sheet as of January 1, 2016, are classified as noncurrent. Prior
periods were not retrospectively adjusted for the adoption of this ASU.
As of January 1, 2016, the Company has the following carryforwards available:
Jurisdiction
Federal
Tax
Attribute
Net Operating Loss
$
International
Net Operating Loss
State
Federal
Net Operating Loss
Foreign Tax Credit
U.S. and State
R&D Tax Credit
State
Investment Tax Credit
Amount
(in millions)
386.2
42.2
298.7
17.0
2.6
5.3
Begin to
Expire
2019
2016
2016
2019
2018
2016
Certain U.S. tax attributes are subject to limitations of Internal Revenue Code Section 382, which in general provides
that utilization is subject to an annual limitation if an ownership change results from transactions increasing the
ownership of certain shareholders or public groups in stock of a corporation by more than 50 percentage points over a
three- year period. Such an ownership change occurred upon the consummation of the acquisition of Lake Region
Medical. The Company does not anticipate that these limitations will affect utilization of these carryforwards prior to
their expiration.
- 101 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s federal net operating loss carryforward and certain other federal tax credits reported on its income tax
returns 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 tax amounts 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, 2016 and January 2, 2015 related to certain foreign
tax credits, state investment tax credits, and foreign and state net operating losses will not be realized. The increase in
the valuation allowance during 2015 is primarily attributable to the acquisition of Lake Region Medical.
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 an uncertain tax position, if recognized, would be recorded as an
adjustment to the Provision (Benefit) 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 relating to business combinations
Additions based upon tax positions related to the current year
Additions related to prior period tax positions
Reductions relating to settlements with tax authorities
Reductions as a result of a lapse of applicable statute of limitations
Balance, end of year
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
$
2,411 $
7,443
274
163
(550 )
(470 )
9,271 $
1,858 $
—
268
510
(225 )
—
2,411 $
970
—
325
651
(88 )
—
1,858
Greatbatch and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. The tax years that remain open and subject to tax audits varies depending on the tax jurisdiction. The
Internal Revenue Service finalized an audit of the 2012 and 2013 U.S. Federal income tax returns of the Company in the
first quarter of 2015. The impact to the income tax expense was not material. The U.S. subsidiary of the former Lake
Region Medical is still subject to U.S. federal, state, and local examinations for the taxable years 2006 to 2014.
It is reasonably possible that a reduction of approximately $0.1 million of the balance of unrecognized tax benefits may
occur within the next twelve months as a result of the lapse of the statute of limitations and/or audit settlements. As of
January 1, 2016, approximately $8.5 million of unrecognized tax benefits would favorably impact the effective tax rate
(net of federal impact on state issues), if recognized.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of Provision
(Benefit) for Income Taxes on the Consolidated Statement of Operations. During 2015, 2014, and 2013, the recorded
amounts for interest and penalties, respectively, were not significant.
As of January 1, 2016, no taxes have been provided on the undistributed earnings of certain foreign subsidiaries
amounting to $84 million. The Company intends to permanently reinvest these earnings. Quantification of the deferred
tax liability associated with these undistributed earnings is not practicable.
- 102 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. COMMITMENTS AND CONTINGENCIES
Litigation – In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation
(collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered
feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s
patented technology. On January 26, 2016, a jury in the U.S. District Court for the District of Delaware returned a verdict
finding that AVX infringed on two Greatbatch patents and awarded Greatbatch $37.5 million in damages. The finding is
subject to post-trial proceedings, including a possible appeal by AVX. The Company has recorded no gains in connection
with this litigation as no cash has been received.
In January 2015, Lake Region Medical was notified by the New Jersey Department of Environmental Protection
(“NJDEP”) of the NJDEP’s intent to revoke a no further action determination made by the NJDEP in favor of Lake
Region Medical in 2002 pertaining to a property on which a subsidiary of Lake Region Medical operated a
manufacturing facility in South Plainfield, New Jersey beginning in 1971. Lake Region Medical sold the property in
2004 and vacated the facility in 2007. We are cooperating with the NJDEP and believe the NJDEP’s notice of intent to
revoke is unwarranted. In December 2014, the current owner of the property commenced litigation against Lake Region
Medical, one of its executive officers and other unrelated third parties, alleging that the defendants caused or contributed
to alleged groundwater contamination beneath the property. The Company believes these allegations are without merit
and has concluded that any potential loss related to these allegations is not probable, and as such, no liability has been
recorded as of January 1, 2016.
The Company is a party to various other legal actions arising in the normal course of business. Other than what is
discussed in this note, the Company does not expect that the ultimate resolution of any other pending legal actions will
have a material effect on its consolidated results of operations, financial position, or cash flows, litigation is subject to
inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently
believes to be immaterial, does not become material in the future.
Environmental Matters – The Company’s Collegeville, PA facility, which was acquired as part of the Lake Region
Medical acquisition, is subject to two administrative consent orders entered into with the U.S. Environmental Protection
Agency (the “EPA”), which require ongoing groundwater treatment and monitoring at the site as a result of historic leaks
from underground storage tanks. Upon approval by the EPA of the Company’s proposed post remediation care plan,
which requires a continuation of the groundwater treatment and monitoring process at the site, the Company expects that
the consent orders will terminate. During the first half of 2016, the Company expects a decision from the EPA on
whether the Company’s post remediation care plan has been approved. The groundwater treatment process at the
Collegeville facility consists of a groundwater extraction and treatment system and the performance of annual sampling
of a defined set of groundwater wells as a means to monitor containment within approved boundaries. As of January 1,
2016, there is $1.1 million recorded in Other Long-Term Liabilities in the Consolidated Balance Sheets in connection
with this matter for the cost of on-going remediation.
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 $2.4 million, $3.3 million, and $3.5 million, for 2015, 2014 and 2013, respectively, and are primarily included in
Cost of Sales.
Product Warranties – The Company generally warrants that its products will meet customer specifications and will be
free from defects in materials and workmanship. The change in product warranty liability was comprised of the
following (in thousands):
Beginning balance
Additions to warranty reserve
Liabilities assumed from acquisition
Warranty claims paid
Ending balance
Year Ended
January 1,
2016
January 2,
2015
$
$
660 $
1,274
2,521
(1,139 )
3,316 $
1,819
953
—
(2,112 )
660
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Leases – The Company is a party to various operating lease agreements for buildings, machinery, equipment
and software. 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. Operating lease expense was as follows (in thousands):
Operating lease expense
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
6,516 $
4,281 $
4,379
Minimum future estimated annual operating lease expenses are as follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
Total estimated operating lease expense
$
$
14,118
10,951
9,950
8,979
6,925
27,674
78,597
Purchase Commitments – Contractual obligations for 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.
The Company’s purchase orders are normally based on its current manufacturing needs and are fulfilled by its vendors
within short time horizons. The Company enters 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, 2016, the total contractual
obligation related to such expenditures is approximately $63.7 million and will primarily be financed by existing cash
and cash equivalents, cash generated from operations, or the Company’s Senior Secured Credit Facilities. The Company
also enters 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.
Self-Insured Medical Plan – The Company self-funds the medical insurance coverage provided to its U.S. based
employees. The Company had specific stop loss coverage for claims incurred during 2015 exceeding $250 thousand per
associate for legacy Greatbatch employees and exceeding $275 thousand per associate for legacy Lake Region Medical
employees with no annual maximum aggregate stop loss coverage. As of January 1, 2016 and January 2, 2015, the
Company had $4.0 million and $1.8 million accrued related to the self-insurance of its medical plans, respectively. This
accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is primarily based upon claim history.
Foreign Currency Contracts – Historically, the Company has entered into forward contracts to purchase Mexican pesos
in order to hedge the risk of peso-denominated payments associated with its operations in Tijuana, Mexico. In connection
with the Lake Region Medical acquisition, the Company terminated its outstanding forward contracts resulting in a $2.4
million payment to the foreign currency contract counterparty during 2015. As of the date the contracts were terminated,
the Company had $1.6 million recorded in Accumulated Other Comprehensive Income related to these contracts, which
will be amortized to Cost of Sales as the inventory, which the contracts were hedging the cash flows to produce, is sold.
The impact to the Company’s results of operations from its forward contracts was as follows (in thousands):
Increase (reduction) in Cost of Sales
Ineffective portion of change in fair value
January 1,
2016
$
1,948 $
—
Year Ended
January 2,
2015
January 3,
2014
(168 ) $
—
(1,154 )
—
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding outstanding foreign currency contracts as of January 1, 2016 is as follows (dollars in thousands):
Instrument
FX Contract
Type of
Hedge
Aggregate
Notional
Amount
Start
Date
End
Date
Cash Flow $
16,480 Jan 2016 Dec 2016
$/Peso
0.0584 $
Fair
Value
Balance Sheet
Location
(307 ) Accrued Expenses
Self-Insured Workers’ Compensation – Prior to 2011, the Company was a member of a group self-insurance trust that
provided workers’ compensation benefits to employees of the Company in Western New York (the “Trust”). Prior to
being acquired by Greatbatch, Lake Region Medical self-insured the workers’ compensation benefits provided to its
employees. As of January 1, 2016, the Company utilized a traditional insurance provider for workers’ compensation
coverage for all associates. During 2015, the Company received an additional assessment from the Trust of $0.9 million.
As of January 1, 2016 and January 2, 2015, the Company had $3.9 million and $0.0 million, respectively, accrued for
workers’ compensation claims. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is
primarily based upon claim history and assessments received.
16. EARNINGS (LOSS) PER SHARE
The following table illustrates the calculation of Basic and Diluted EPS (in thousands, except per share amounts):
Numerator for basic EPS:
Net income (loss)
Denominator for basic EPS:
Weighted average shares outstanding
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units
Denominator for diluted EPS
Basic EPS
Diluted EPS
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
(7,594 ) $
55,458 $
36,267
26,363
24,825
23,991
—
26,363
(0.29 ) $
(0.29 ) $
1,150
25,975
2.23 $
2.14 $
1,332
25,323
1.51
1.43
$
$
The diluted weighted average share calculations do not include the following securities, which are not dilutive to the EPS
calculations or the performance criteria have not been met:
Time-vested stock options, restricted stock and restricted stock units
Performance-vested stock options and restricted stock units
January 1,
2016
1,718,135
577,825
Year Ended
January 2,
2015
175,549
—
January 3,
2014
18,480
—
For the 2013 period, no shares related to CSN were included in the diluted EPS calculation as the average share price of
the Company’s common stock for that period did not exceed CSN’s conversion price per share.
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GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income is comprised of the following (in thousands):
At January 2, 2015
$
(1,181 ) $
(2,558 ) $
11,450 $
7,711 $
1,412 $
9,123
Defined
Benefit
Plan
Liability
Cash
Flow
Hedges
Foreign
Currency
Translation
Adjustment
Total
Pre-Tax
Amount
Tax
Net-of-Tax
Amount
Unrealized loss on cash flow
hedges
Realized loss on foreign currency
hedges
Realized loss on interest rate swap
hedges
Net defined benefit plan liability
adjustments
Foreign currency translation loss
At January 1, 2016
$
—
—
—
(4,413 )
1,948
2,631
2
—
(1,179 ) $
—
—
(2,392 ) $
—
—
—
—
(4,413 )
1,545
(2,868 )
1,948
(682 )
1,266
2,631
(921 )
1,710
2
(7,841 )
3,609 $
(7,841 )
38 $
(22 )
—
1,332 $
(20 )
(7,841 )
1,370
Defined
Benefit
Plan
Liability
Cash
Flow
Hedges
Foreign
Currency
Translation
Adjustment
Total
Pre-Tax
Amount
Tax
Net-of-Tax
Amount
At January 3, 2014
$
(672 ) $
(468 ) $
14,952 $
13,812 $
546 $
14,358
Unrealized loss on cash flow
hedges
Realized gain on foreign currency
hedges
Realized loss on interest rate swap
hedges
Net defined benefit plan liability
adjustments
Foreign currency translation loss
At January 2, 2015
$
—
—
—
(2,372 )
(168 )
450
(509 )
—
(1,181 ) $
—
—
(2,558 ) $
—
—
—
—
(3,502 )
11,450 $
(2,372 )
(168 )
829
59
(1,543 )
(109 )
450
(157 )
293
(509 )
(3,502 )
7,711 $
135
—
1,412 $
(374 )
(3,502 )
9,123
The realized loss (gain) relating to the Company’s foreign currency and interest rate swap hedges were reclassified from
Accumulated Other Comprehensive Income and included in Cost of Sales and Interest Expense, respectively, in the
Consolidated Statements of Operations. Refer to Note 10 “Benefit Plans” for details on the change in defined benefit
plan liability adjustments.
18. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a
recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative
instruments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a
recurring basis.
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 received 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. The fair value of the Company’s foreign
currency contracts will be realized as Cost of Sales as the inventory, which the contracts are hedging the cash flows to
produce, is sold. Approximately $2.4 million is expected to be realized as additional Cost of Sales over the next twelve
months.
- 106 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Rate Swaps – The fair value of the Company’s interest rate swaps outstanding at January 2, 2015 was
determined through the use of a cash flow model that utilized observable market data inputs. These observable market
data inputs included LIBOR, swap rates, and credit spread curves. In addition to the above, the Company received a fair
value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. This fair
value calculation was categorized in Level 2 of the fair value hierarchy.
The following tables provide information regarding assets and liabilities recorded at fair value on a recurring basis (in
thousands):
Description
Liabilities
Foreign currency contracts (Note 15)
Description
Liabilities
Foreign currency contracts
Interest rate swaps
Fair Value Measurements Using
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
At January 1,
2016
$
307 $
— $
307 $
—
Fair Value Measurements Using
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
At January 2,
2015
$
1,568 $
990
— $
—
1,568 $
990
—
—
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis.
The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to
the short-term nature of these items. Refer to Note 9 “Debt” for further discussion regarding the fair value of the
Company’s Senior Secured Credit Facilities and Senior Notes.
A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:
Cost and Equity Method Investments – The Company holds investments in equity and other securities that are
accounted for as either cost or equity method investments, which are classified in Other Assets on the Consolidated
Balance Sheets. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the
occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost or equity
method investments is not adjusted if there are no identified events or changes in circumstances that may have a material
effect on the fair value of the investments. Gains and losses realized on cost and equity method investments are recorded
in Other (Income) Expense, Net, unless separately stated. The aggregate recorded amount of cost and equity method
investments at January 1, 2016 and January 2, 2015 was $20.6 million and $14.5 million, respectively. The Company’s
equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. This fund
accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as
income or loss to the fund in the period of change. As of January 1, 2016, the Company owned 6.7% of this fund.
During 2015, 2014 and 2013, the Company recognized impairment charges related to its cost method investments of $1.4
million, $0.0 million and $0.5 million, respectively. The fair value of these investments were determined by reference to
recent sales data of similar shares to independent parties in an inactive market. This fair value calculation is categorized
in Level 2 of the fair value hierarchy. During 2015, 2014, and 2013, the Company recognized a net gain (loss) on equity
method investments of $4.7 million, $1.2 million, and $(0.2) million, respectively. During 2015, the Company recorded a
gain and received a $3.6 million cash distribution from its equity method investment, which was classified as a cash flow
from operating activities in the Consolidated Statement of Cash Flows as it represented a return on investment. During
2014, the Company sold one of its cost method investments, which resulted in a pre-tax gain of $3.2 million.
Long-Lived Assets – The Company reviews the carrying amount of its long-lived assets to be held and used for potential
impairment whenever certain indicators are present as described in Note 1 “Summary of Significant Accounting
- 107 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Policies.” There were no impairment charges recorded during 2015 related to the Company’s long-lived assets. During
2014, the Company recorded a $0.4 million impairment charge related to its Orvin, Switzerland property held for sale.
The fair value of these assets were determined based upon recent sales data of similar assets and discussions with
potential buyers, and was categorized in Level 2 of the fair value hierarchy. During 2013, the Company wrote off $0.5
million of IPR&D allocated to its QiG segment as these projects were discontinued prior to reaching technological
feasibility. Additionally, during 2013, the Company wrote off $0.9 million of inventory and technology related to
Greatbatch Medical’s wireless sensing product line held for sale, as an agreement could not be reached with potential
buyers. The above impairment charges were recorded in Other Operating Expenses, Net. Refer to Note 13 “Other
Operating Expenses, Net” for further discussion.
The following table provides information regarding assets and liabilities recorded at fair value on a nonrecurring basis as
of January 1, 2016 and January 2, 2015 respectively (in thousands):
Fair Value Measurements Using
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
At January 1,
2016
$
1,100 $
— $
1,100 $
—
Fair Value Measurements Using
Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
At January 2,
2015
$
1,635 $
— $
1,635 $
—
Description
Assets
Cost method investment
Description
Assets
Assets Held for Sale
Fair Value of Other Financial Instruments
Pension Plan Assets – The fair value of the Company’s pension plan assets disclosed in Note 10 “Benefit Plans” are
determined based upon quoted market prices in inactive markets or 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. The Company’s pension plan assets are
categorized Level 2 of the fair value hierarchy.
19. BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical. As a result,
the Company now has three reportable segments: Greatbatch Medical, QiG and Lake Region Medical. In February 2016,
Greatbatch announced that its Board of Directors approved the spin-off of a portion of its QiG segment through a tax-free
distribution of its QiG Group LLC subsidiary to the stockholders of Greatbatch on a pro rata basis. The portion of the QiG
segment being spun-off will consist of QiG Group LLC and its subsidiaries: (i) Algostim, (ii) PelviStim, and
(iii) Greatbatch’s NeuroNexus subsidiary. It is expected that Greatbatch stockholders will receive one share of Nuvectra
common stock for every three shares of Greatbatch common stock held as of the record date. Upon completion of the
pending Spin-off, Nuvectra will be an independent, publicly-traded company and Greatbatch will not own any shares of
Nuvectra common stock. The operations of CCC and certain other existing QiG research and development capabilities
will be retained by Greatbatch and not included as part of the Spin-off. The Spin-off is expected to be completed in March
2016. As a result of the Lake Region Medical acquisition and pending Spin-off, the Company is reevaluating its operating
and reporting segments, which is expected to be finalized in 2016 once the corporate and management reporting structure
realignment is completed.
Greatbatch Medical designs and manufactures medical devices and components where Greatbatch either owns the
intellectual property or has unique manufacturing and assembly expertise. Greatbatch Medical provides medical devices
and components to the cardiac, neuromodulation, orthopaedics, portable medical, vascular and energy markets among
- 108 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
others. Greatbatch Medical also offers value-added assembly and design engineering services for medical devices that
utilize its component products.
The QiG segment focuses on the design and development of medical device systems and components. QiG is in the
process of developing applications for its neurostimulation technology platform for emerging indications such as SCS,
SNS, and DBS, among others. The QiG segment is comprised of the QiG Group, LLC, NeuroNexus, and CCC. QiG
facilitates the development of medical device systems through the establishment of limited liability companies (“LLCs”).
These LLCs do not own, but have the exclusive right to use the technology of Greatbatch in specific fields of use and
have an exclusive manufacturing agreement with Greatbatch Medical. As of January 2, 2015, QiG Group LLC owned
89% of two LLCs, Algostim and PelviStim, but was responsible for 100% of the expenses incurred by these LLCs.
However, no distributions were to be made to the minority holders of the LLCs until QiG was reimbursed for all expenses
paid. Minority interests in these LLCs were held by key opinion leaders and clinicians. During 2015, the Company
purchased the non-controlling interest in these LLCs for $16.7 million. Of this amount, $6.8 million remained payable as
of January 1, 2016 and was recorded in Accrued Expenses in the Consolidated Balance Sheet. For purposes of the
Consolidated Statement of Cash Flows for the year ended January 1, 2016, this liability was treated as a non-cash
financing transaction. As of January 1, 2016, QiG Group LLC now owns 100% of Algostim and PelviStim.
The purchase of outstanding non-controlling interests included $6.9 million paid to Drees Holding LLC, of which Scott F.
Drees, Chief Executive Officer (“CEO”) of Nuvectra, is the principal owner and the sole managing director. Mr. Drees
received his interests in Algostim and PelviStim in connection with entering into a long-term consulting agreement with
Nuvectra and prior to being appointed as its CEO in July 2015. Mr. Drees’ consulting agreement was terminated in
connection with his agreeing to serve in the role of Nuvectra CEO.
Algostim is focused on the development and commercialization of its Algovita SCS system, the first application of QiG’s
neurostimulation technology platform. Algovita is indicated for the treatment of chronic pain of the trunk and limbs.
Algovita received CE Mark approval during 2014. During the fourth quarter of 2015, QiG received final approval of its
PMA application for Algovita, which it anticipates launching commercially in the United States during the first half of
2016.
QiG revenue includes sales of neural interface technology, components and systems to the neuroscience and clinical
markets from NeuroNexus, a limited release of Algovita in Europe, and CCC sales of various medical device products
such as implantable pulse generators, programmer systems, battery chargers, patient wands and leads to medical device
companies. Once the medical devices developed by CCC reach significant production levels, the responsibility for
manufacturing these products may be transferred to Greatbatch Medical. After the pending Spin-off is completed, the
Company’s design and development of complete medical device systems will be completed by the combined teams in
Greatbatch Medical, Lake Region Medical, and CCC.
Lake Region Medical has operated as a segment for Greatbatch since it was acquired during the fourth quarter of 2015.
This segment specializes in the design, development, and manufacturing of products across the medical component and
device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully
integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device
assembly services, original device development, and supply chain management to its customers, who are located
worldwide.
As a result of the Lake Region Medical acquisition and pending Spin-off, the Company has recast its product line sales to
reflect the reclassification of Greatbatch, Inc. and Lake Region net sales from the historical product lines to the product
lines associated with those revenues that will be utilized for future revenue reporting.
As of January 1, 2016, the Company’s product lines consist of the following:
• Advanced Surgical, Orthopaedics, and Portable Medical: Includes legacy Greatbatch Orthopaedics and Portable
Medical product line sales plus the legacy Lake Region Medical Advanced Surgical product line sales. Products
include components, sub-assemblies, finished devices, implants, instruments and delivery systems for a range of
surgical technologies to the advanced surgical market, including laparoscopy, orthopaedics and general surgery, biopsy
and drug delivery, joint preservation and reconstruction, arthroscopy, and engineered tubing solutions. Products also
include life-saving and life-enhancing applications comprising of automated external defibrillators, portable oxygen
concentrators, ventilators, and powered surgical tools for the portable medical markets.
• Cardio and Vascular: Includes the legacy Greatbatch Vascular product line sales plus the legacy Lake Region
Medical Cardio and Vascular product line sales less the legacy Lake Region Medical Cardiac/Neuromodulation sales.
Products include introducers, steerable sheaths, guidewires, catheters, and stimulation therapy components,
- 109 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subassemblies and finished devices that deliver therapies for various markets such as coronary and neurovascular
disease, peripheral vascular disease, interventional radiology, vascular access, atrial fibrillation, and interventional
cardiology, plus products for medical imaging and pharmaceutical delivery.
• Cardiac/Neuromodulation: Includes the legacy Greatbatch Cardiac/Neuromodulation and QiG sales plus the legacy
Lake Region Medical Cardiac/Neuromodulation sales previously included in their Cardio and Vascular product line
sales. Products include batteries, capacitors, filtered and unfiltered feed-throughs, engineered components, implantable
stimulation leads, and enclosures used in implantable medical devices.
• Electrochem: Includes the legacy Greatbatch Energy, Military and Environmental product line sales. Products include
primary and rechargeable batteries and battery packs for demanding applications such as down hole drilling tools.
An analysis and reconciliation of the Company’s business segments, product lines and geographic information to the
respective information in the Consolidated Financial Statements follows. Intersegment sales between Greatbatch Medical
and QiG were not material for 2014 or 2013. Approximately $1.8 million of intersegment sales are included in Greatbatch
Medical and $1.2 million intersegment sales are included in Lake Region Medical. Sales by geographic area are presented
by allocating sales from external customers based on where the products are shipped (in thousands):
Product line sales:
Advanced Surgical, Orthopaedics, and Portable Medical
$
Cardio and Vascular
Cardiac/Neuromodulation
Electrochem
Elimination of interproduct line sales
Total sales
$
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
243,385 $
143,260
356,064
59,449
(1,744 )
800,414 $
216,339 $
58,770
330,921
81,757
—
687,787 $
208,990
48,357
328,455
78,143
—
663,945
Business segment sales:
Greatbatch Medical
QiG
Lake Region Medical
Elimination of intersegment sales
Total sales
Segment income (loss) from operations:
Greatbatch Medical
QiG
Lake Region Medical
Total segment income from operations
Unallocated operating expenses
Operating income
Unallocated other income (expense), net
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
$
649,977 $
13,571
139,819
(2,953 )
800,414 $
678,285 $
9,502
—
—
687,787 $
660,902
3,043
—
—
663,945
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
109,737 $
(25,855 )
(16,416 )
67,466
(54,320 )
13,146
(28,846 )
126,312 $
(23,256 )
—
103,056
(27,402 )
75,654
925
76,579 $
111,805
(30,484 )
—
81,321
(19,982 )
61,339
(12,501 )
48,838
Income (loss) before provision for income taxes
$
(15,700 ) $
- 110 -
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization:
Greatbatch Medical
QiG
Lake Region Medical
Total depreciation and amortization included in segment income
from operations
Unallocated depreciation and amortization
Total depreciation and amortization
Expenditures for tangible long-lived assets, excluding acquisitions:
Greatbatch Medical
QiG
Lake Region Medical
Total reportable segments
Unallocated long-lived tangible assets
Total expenditures
Identifiable assets:
Greatbatch Medical
QiG
Lake Region Medical
Total reportable segments
Unallocated assets
Total assets
Sales by geographic area:
United States
Non-Domestic locations:
Puerto Rico
Belgium
Rest of world
Total sales
- 111 -
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
30,160 $
1,862
32,249
64,271
3,347
67,618 $
31,906 $
2,101
—
34,007
3,450
37,457 $
31,112
1,539
—
32,651
3,315
35,966
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
32,921 $
1,160
7,525
41,606
6,448
48,054 $
19,006 $
1,453
—
20,459
5,187
25,646 $
13,242
2,134
—
15,376
2,798
18,174
January 1,
2016
At
January 2,
2015
January 3,
2014
798,609 $
68,637
1,971,071
2,838,317
143,819
2,982,136 $
761,225 $
76,529
—
837,754
117,368
955,122 $
758,369
56,245
—
814,614
75,015
889,629
$
$
$
$
$
$
January 1,
2016
Year Ended
January 2,
2015
January 3,
2014
$
401,380 $
312,539 $
325,090
136,898
62,546
199,590
800,414 $
127,702
65,308
182,238
687,787 $
117,961
67,155
153,739
663,945
$
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-lived tangible assets:
United States
Rest of world
Total
January 1,
2016
At
January 2,
2015
January 3,
2014
$
$
264,556 $
114,936
379,492 $
113,851 $
31,074
144,925 $
116,484
29,289
145,773
A significant portion of the Company’s sales and accounts receivable were to four customers as follows:
Customer A
Customer B
Customer C
Customer D
Sales
Year Ended
Accounts Receivable
At
January 1,
2016
January 2,
2015
January 3,
2014
January 1,
2016
January 2,
2015
18 %
17 %
12 %
5 %
52 %
18 %
18 %
12 %
6 %
54 %
16 %
20 %
13 %
7 %
56 %
23 %
8 %
6 %
7 %
44 %
23 %
4 %
8 %
12 %
47 %
20. QUARTERLY SALES AND EARNINGS DATA—UNAUDITED
2015
Sales
Gross profit
Net income (loss)
EPS—basic
EPS—diluted
2014
Sales
Gross profit
Net income
EPS—basic
EPS—diluted
4th Qtr.
3rd Qtr.
2nd Qtr.
1st Qtr.
(in thousands, except per share data)
$
$
317,567 $
73,140
(24,907 )
(0.85 )
(0.85 )
146,637 $
51,646
22
—
—
174,890 $
57,951
9,283
0.36
0.35
169,726 $
57,214
14,176
0.57
0.54
171,699 $
58,118
14,012
0.56
0.54
172,081 $
58,470
12,348
0.50
0.48
161,320
52,398
8,008
0.32
0.31
174,281
57,596
14,922
0.61
0.58
Net income (loss) in the third and fourth quarters of 2015 include $13.0 million and $57.1 million, respectively, of
charges incurred in connection with the Lake Region Medical acquisition (transaction and integration, inventory step-up
amortization, debt related charges) and Spin-off of Nuvectra (professional and consulting fees). Sales for the fourth
quarter of 2015 include $138.6 million from the acquisition of Lake Region Medical. Refer to Note 2 “Acquisitions.”
- 112 -
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 in Part II, Item 8, “Financial Statements and
Supplementary Data” of this report and is incorporated into this Item 9A by reference.
a. Evaluation of Disclosure Controls and Procedures
Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording,
processing, summarization and reporting of information in our reports that we file with the Securities and Exchange
Commission as of January 1, 2016. These disclosure controls and procedures have been designed to provide reasonable
assurance that material information relating to us, including our subsidiaries, is made known to our management, including
these officers, by our employees, and that this information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their
evaluation, as of January 1, 2016, our principal executive officer and principal financial officer have concluded that our
disclosure controls and procedures are effective.
b. Changes in Internal Control Over Financial Reporting
We acquired the following subsidiary during 2015:
•
Lake Region Medical Holdings, Inc.
We believe that the internal controls and procedures of the above mentioned subsidiary are reasonably likely to materially affect
our internal control over financial reporting. We are currently in the process of incorporating the internal controls and
procedures of this subsidiary into our internal controls over financial reporting.
The Company has begun to extend its Section 404 compliance program under the Sarbanes-Oxley Act of 2002 (the “Act”) and
the applicable rules and regulations under such Act to include this subsidiary. However, the Company has excluded this
subsidiary from management’s assessment of the effectiveness of internal control over financial reporting as of January 1, 2016,
as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission. This
subsidiary represented approximately 66% of total assets, 17% of revenues, and 229% of net loss of the consolidated financial
statement amounts as of and for the year ended January 1, 2016. The Company will report on its assessment of the internal
controls of its combined operations within the time period provided by the Act and the applicable Securities and Exchange
Commission rules and regulations concerning business combinations.
Other than as described above, there were no changes in the registrant’s internal control over financial reporting during our last
fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or are reasonably likely to
materially affect, internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
- 113 -
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding the Company’s directors appearing under the caption “Election of Directors” in the Company’s
Proxy Statement for its 2016 Annual Meeting of Stockholders is incorporated herein by reference.
Information regarding the Company’s executive officers is presented under the caption “Executive Officers of the
Company” in Part I of this Annual Report on Form 10-K.
The other information required by Item 10 is incorporated herein by reference from the Company’s Proxy Statement for
its 2016 Annual Meeting of Stockholders.
ITEM 11.
EXECUTIVE COMPENSATION
Information regarding executive compensation in the Company’s Proxy Statement for the 2016 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 and management and related stockholder matters,
including the table titled “Equity Compensation Plan Information,” in the Company’s Proxy Statement for the 2016
Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions, and director independence in the Company’s Proxy
Statement for the 2016 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 Company’s Proxy Statement for the 2016 Annual Meeting of Stockholders is
incorporated herein by reference.
- 114 -
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
PART IV
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 Annual Report on Form 10-K (in thousands):
Schedule II—Valuation and Qualifying Accounts
Col. C—Additions
Col. A
Description
January 1, 2016
Allowance for doubtful accounts
Valuation allowance for deferred income tax
assets
January 2, 2015
Allowance for doubtful accounts
Valuation allowance for deferred income tax
assets
January 3, 2014
Allowance for doubtful accounts
Valuation allowance for deferred income tax
assets
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
$
1,411 $
(70 )
$
459 (3)(4)
$
(846 ) (2)
$
954
$ 10,709
$
788
(1) $ 27,836
(3)(4)
$
(162 ) (5)
$ 39,171
$
2,001 $
98
$
14 (3)(4)
$
(702 ) (2)
$
1,411
$ 11,661
$
(729 ) (1) $
—
(4)
$
(223 ) (1)(5)
$ 10,709
$
2,372 $
(93 )
$
(15 ) (4)
$ 12,768
$
(1,263 ) (1) $
32
(4)
$
$
(263 ) (2)
$
2,001
124
(1)
$ 11,661
(1) Valuation allowance recorded in the provision for income taxes for certain net operating losses and tax credits. The net
decrease in allowance in 2014 and 2013 primarily relates to the use of net operating loss carryforwards.
(2) Accounts written off.
(3) Balance recorded as a part of our 2015 acquisition of Lake Region Medical and our 2014 acquisition of Centro de
Construcción de Cardioestimuladores del Uruguay.
(4)
Includes foreign currency translation effect.
(5) Primarily relates to return to provision adjustments for prior years.
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.
- 115 -
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 1, 2016
By /s/ Thomas J. Hook
Thomas J. Hook (Principal Executive Officer)
President and Chief 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
Date
March 1, 2016
President, Chief Executive
Officer and Director
(Principal Executive Officer)
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
March 1, 2016
Vice President and Corporate Controller (Principal
Accounting Officer)
March 1, 2016
/s/ Thomas J. Hook
Thomas J. Hook
/s/ Michael Dinkins
Michael Dinkins
/s/ Thomas J. Mazza
Thomas J. Mazza
/s/ Bill R. Sanford
Bill R. Sanford
/s/ Pamela G. Bailey
Pamela G. Bailey
/s/ Anthony P. Bihl III
Anthony P. Bihl III
/s/ Joseph W. Dziedzic
Joseph W. Dziedzic
/s/ Jean Hobby
Jean Hobby
/s/ M. Craig Maxwell
M. Craig Maxwell
Chairman
Director
Director
Director
Director
Director
/s/ Dr. Joseph A. Miller, Jr.
Director
Dr. Joseph A. Miller, Jr.
/s/ Filippo Passerini
Filippo Passerini
/s/ Peter H. Soderberg
Peter H. Soderberg
Director
Director
/s/ William B. Summers, Jr.
Director
William B. Summers, Jr.
- 116 -
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
March 1, 2016
EXHIBIT
NUMBER
2.1
3.1
3.2
4.1
4.2
10.1#
10.2#
10.3#
10.4#
10.5
10.6#
10.7#
10.8
10.9#
10.10#
10.11#
10.12#
10.13#
EXHIBIT INDEX
DESCRIPTION
Agreement and Plan of Merger, dated as of August 27, 2015, by and among Lake Region Medical Holdings,
Inc., Greatbatch, Inc. and Provenance Merger Sub Inc. (incorporated by reference to Exhibit 2.1 to our
Current Report on Form 8-K filed on August 31, 2015).
Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to
our Quarterly Report on Form 10-Q for the period ended June 27, 2008).
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K
for the year ended January 1, 2010).
Indenture (including from Note), dated as of October 27, 2015, by and among Greatbatch Ltd., the guarantors
from time to time party thereto and Wilmington Trust, National Association, as trustee(incorporated by
reference to Exhibit 4.1 to our Current Report on Form 8-K filed on October 28, 2015).
Stockholders Agreement, dated as of October 27, 2015, by and among Greatbatch, Inc., Kohlberg Kravis
Roberts & Co. L.P., Bain Capital Investors, LLC and each other stockholder party thereto (incorporated by
reference to Exhibit 4.2 to our Current Report on Form 8-K filed on October 28, 2015).
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 filed on May 22, 2000 (File No. 333-37554)).
Amendment to Greatbatch, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.2 to our
Annual Report on Form 10-K for the period ended January 3, 2014).
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 A
to our Definitive Proxy Statement on Schedule 14-A filed on April 20, 2012).
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 filed on May 22, 2000
(File No. 333-37554)).
Form of Change of Control Agreement between Greatbatch, Inc. and its executive officers (Thomas J. Hook,
Mauricio Arellano, and Timothy G. McEvoy) (incorporated by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the period ended July 1, 2011).
Form of Change of Control Agreement between Greatbatch, Inc. and its executive officers (Michael Dinkins,
Andrew P. Holman, Jennifer M. Bolt, Jeremy Friedman, Antonio Gonzalez, Declan Smyth, and Kristin
Trecker) (incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended
December 28, 2012).
Credit Agreement, dated as of October 27, 2015, by among Greatbatch Ltd., as the borrower, Greatbatch,
Inc., as parent, the financial institutions party thereto and Manufacturers and Traders Trust Company, as
administrative agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on
October 28, 2015).
Employment Agreement dated August 5, 2013 between Greatbatch, Inc. and Thomas J. Hook (incorporated
by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on August 9, 2013).
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).
2011 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on
Schedule 14A filed on April 14, 2014).
Amendment to Greatbatch, Inc. 2011 Stock Incentive Plan, Greatbatch, Inc. 2009 Stock Incentive Plan,
Greatbatch, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 to our Annual Report
on Form 10-K for the year ended January 3, 2014).
EXHIBIT
NUMBER
10.14#
10.15#
10.16#
10.17#
12.1*
21.1*
23.1*
31.1*
31.2*
32.1**
DESCRIPTION
Form of Restricted Stock Award Letter (incorporated by reference to Exhibit 10.15 to our Annual Report on
Form 10-K for the year ended January 3, 2014).
Form of Performance-Based Restricted Stock Units Award Letter (incorporated by reference to Exhibit 10.16
to our Annual Report on Form 10-K for the year ended January 3, 2014).
Form of Nonqualified Option Award Letter (incorporated by reference to Exhibit 10.17 to our Annual Report
on Form 10-K for the year ended January 3, 2014).
Form of Time-Based Restricted Stock Units Award Letter (incorporated by reference to Exhibit 10.18 to our
Annual Report on Form 10-K for the year ended January 3, 2014).
Ratio of Earnings to Fixed Charges (Unaudited)
Subsidiaries of Greatbatch, Inc.
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document
101.SCH*
XRBL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Link base Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
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.
** -
Furnished herewith.
# -
Indicates exhibits that are management contracts or compensation plans or arrangements required to be filed pursuant
to Item 15(b) of Form 10-K.
RATIO OF EARNINGS TO FIXED CHARGES (Unaudited)
EXHIBIT 12.1
Earnings:
Income (loss) before income taxes
Fixed Charges:
Interest expense
Discounts & debt issuance costs
Interest portion of rental expense
Total earnings and fixed charges
Fixed Charges:
Interest expense
Discounts & debt issuance costs
Interest portion of rental expense
Total fixed charges
Ratio of earnings to fixed charges
Jan. 1,
2016
Jan. 2,
2015
Year Ended
Jan. 3,
2014
Dec. 28,
2012
Dec. 30,
2011
$
(15,700 ) $
76,579 $
48,838 $
6,730 $
48,392
22,193
11,320
2,172
19,985 $
22,193 $
11,320
2,172
35,685 $
0.6
3,479
773
1,413
82,244 $
3,479 $
773
1,413
5,665 $
14.5
4,895
6,366
1,460
61,559 $
4,895 $
6,366
1,460
12,721 $
4.8
5,497
12,557
1,056
25,840 $
5,497 $
12,557
1,056
19,110 $
1.4
5,539
11,389
766
66,086
5,539
11,389
766
17,694
3.7
$
$
$
SUBSIDIARIES OF GREATBATCH, INC.
EXHIBIT 21.1
Subsidiary
Greatbatch Ltd.
Electrochem Solutions, Inc.
Micro Power Electronics, Inc.
Greatbatch-Globe Tool, Inc.
Precimed, Inc.
QiG Group, LLC
P Medical Holding SA
QiG Singapore Pte. Ltd.
Greatbatch Medical SA
Greatbatch LLC
Greatbatch Medical, S. de R.L. de C.V.
Greatbatch Medical SAS
Incorporated
New York
Massachusetts
Delaware
Minnesota
Pennsylvania
Delaware
Switzerland
Singapore
Switzerland
Delaware
Mexico
France
Greatbatch Medical Limited
United Kingdom
NeuroNexus Technologies, Inc.
AlgoStim LLC
PelviStim LLC
Greatbatch UHC SA
Michigan
Delaware
Delaware
Switzerland
Centro de Construcción de Cardioestimuladores del Uruguay SA
Uruguay
GBV, LLC
Greatbatch MCSO, S. de R.L. de C.V
Delaware
Mexico
Greatbatch European Business Development Organization, SA
Switzerland
Subsidiary
Lake Region Medical Holdings, Inc
Lake Region Medical, Inc.
Lake Region Medical Holdings Limited
Lake Region Medical Limited
Brivant Limited
Lake (Shanghai) Medical device Trading Co., Ltd.
Lake Region Medical, Limitada
American Technical Molding, Inc.
G&D LLC
UTI Holdings, LLC
Lake Region Medical GmbH
Star Guide Limited d/b/a Star Guide Europe
Spectrum Manufacturing, Inc.
MedSource Technologies Holdings, LLC
MedSource Technologies, LLC
Brimfield Precision, LLC
Kelco Acquisition LLC
MedSource Trenton LLC
Portlyn, LLC
Noble-Met LLC
Venusa, Ltd
Medis S.A de C.V.
Incorporated
Delaware
Maryland
Ireland
Ireland
Ireland
China
Costa Rica
California
Colorado
Delaware
Germany
Ireland
Nevada
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Virginia
New York
Mexico
Subsidiary
Venusa de Mexico, S.A. de C.V.
Lake Region Medical Sdn. Bhd.
Incorporated
Mexico
Malaysia
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-61476, 333-97209, 333-129002,
333-143519, 333-161159, 333-174559, 333-184604 and 333-196320 on Form S-8 of our reports dated March 1,
2016, relating to the consolidated financial statements and consolidated financial statement schedule of Greatbatch,
Inc. and subsidiaries (the “Company”) (which report expresses an unqualified opinion and includes explanatory
paragraphs relating to the Company’s changes in its method of accounting for debt issuance costs and deferred
income taxes), and the effectiveness of the Company’s internal control over financial reporting, appearing in this
Annual Report on Form 10-K of Greatbatch, Inc. for the year ended January 1, 2016.
Williamsville, New York
March 1, 2016
EXHIBIT 31.1
I, Thomas J. Hook, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended January 1, 2016 of Greatbatch, Inc.;
2. 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;
3. 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;
4. 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; and
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 auditor 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.
Dated: March 1, 2016
Thomas J. Hook
President and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, Michael Dinkins, certify that:
CERTIFICATION
1.
I have reviewed this annual report on Form 10-K for the fiscal year ended January 1, 2016 of Greatbatch, Inc.;
2. 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;
3. 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;
4. 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; and
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 auditor 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.
Dated: March 1, 2016
Michael Dinkins
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the
undersigned officers of Greatbatch, Inc. (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 10-K for the fiscal year ended January 1, 2016 (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 1, 2016
Dated: March 1, 2016
Thomas J. Hook
President and Chief Executive Officer
(Principal Executive Officer)
Michael Dinkins
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Board of Directors
Pamela G. Bailey
President and Chief Executive
Officer, The Grocery
Manufacturers Association
Joseph W. Dziedzic
Executive Vice President and
Chief Financial Officer, The
Brink’s Company
Jean Hobby
Retired Partner,
PricewaterhouseCoopers, LLP
Thomas J. Hook
President & Chief Executive
Officer, Greatbatch, Inc.
M. Craig Maxwell
Vice President and Chief
Technology and Innovation
Officer, Parker Hannifin
Corporation
Filippo Passerini
Operating Executive in U.S.
Buyouts, Carlyle Group
Bill R. Sanford, Chairman
Founder and Chairman,
Symark LLC
Peter H. Soderberg
Managing Partner,
Worthy Ventures Resources, LLC
William B. Summers, Jr.
Retired Chairman and Chief
Executive Officer,
McDonald Investments, Inc.
Corporate Leadership
Thomas J. Hook
President & Chief Executive Officer
Michael Dinkins
Executive Vice President &
Chief Financial Officer
Mauricio Arellano
Executive Vice President,
Global Operations
Kristin Trecker
Executive Vice President and Chief Human
Resources Officer
Jennifer M. Bolt
President, Electrochem
Jeremy Friedman
President, Cardio & Vascular
Antonio Gonzalez
President, CRM & Neuromodulation
Declan Smyth
President, Advanced Surgical &
Orthopaedics
Joseph Flanagan
Senior Vice President, Quality & Regulatory
Timothy G. McEvoy
Senior Vice President,
General Counsel & Secretary
Michael L. Spencer
Senior Vice President and Chief Ethics &
Compliance Officer (CECO)
Global Headquarters
Greatbatch, Inc.
2595 Dallas Parkway, Suite 310
Frisco, Texas 75034
Internet Address
www.greatbatch.com
Common Stock Listing
New York Stock Exchange
Trading Symbol: GB
Investor Information
Shareholders, securities analysts and investors
seeking more information about the company can
access information via the Internet or from the
Investor Relations Department:
Greatbatch, Inc.
2595 Dallas Parkway, Suite 310
Frisco, Texas 75034
Transfer Agent and Registrar
Computershare Shareholder Services
P.O. Box 30170
College Station, Texas 77842-3170
For Overnight Mail:
Computershare Shareholder Services
211 Quality Circle, Suite 210
College Station, Texas 77845
www.computershare.com/investor
Dedicated Toll Free Number: 1-877-832-7265
TDD Hearing Impaired: 1-800-231-5469
TDD Foreign Stockholders: 1-201-680-6610
Foreign Stockholders: 1-201-680-6578
Independent Registered
Public Accounting Firm
Deloitte & Touche LLP
Williamsville, NY
Greatbatch, Inc.
2595 Dallas Parkway
Suite 310
Frisco, Texas 75034
(716) 759-5600
www.greatbatch.com