a5822223.htm
U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
Quarter ended September 26, 2008
Commission
File Number 1-16137
GREATBATCH,
INC.
(Exact
name of Registrant as specified in its charter)
Delaware
(State of
incorporation)
16-1531026
(I.R.S.
employer identification no.)
10000
Wehrle Drive
Clarence,
New York
14031
(Address
of principal executive offices)
(716)
759-5600
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ]
|
|
Accelerated
filer [X]
|
Non-accelerated
filer [ ]
|
|
Smaller
reporting company
[ ]
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes [ ] No [ X ]
The number
of shares outstanding of the Company’s common stock, $0.001 par value per share,
as of November 4, 2008 was: 22,912,001 shares.
GREATBATCH,
INC.
TABLE
OF CONTENTS FOR FORM 10-Q
AS
OF AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 26, 2008
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Page
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COVER
PAGE
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1
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TABLE
OF CONTENTS
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2
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ITEM
1. |
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3
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4
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5
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6
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7
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ITEM
2. |
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33
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ITEM
3. |
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50
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ITEM
4. |
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52
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ITEM
1. |
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53
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ITEM
1A. |
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53
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ITEM
2. |
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53
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ITEM
3. |
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53
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ITEM
4. |
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53
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ITEM
5. |
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54
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ITEM
6. |
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54
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54
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54
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CONDENSED
CONSOLIDATED BALANCE SHEETS - Unaudited
|
|
(in
thousands except share and per share data)
|
|
|
|
As
of
|
|
|
|
September
26,
|
|
|
December
28,
|
|
ASSETS
|
|
2008
|
|
|
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
20,015 |
|
|
$ |
33,473 |
|
Short-term
investments available for sale
|
|
|
- |
|
|
|
7,017 |
|
Accounts
receivable, net of allowance of $1,997 in 2008
|
|
|
|
|
|
|
|
|
and
$758 in 2007
|
|
|
84,806 |
|
|
|
56,962 |
|
Inventories,
net of reserve
|
|
|
98,833 |
|
|
|
71,882 |
|
Refundable
income taxes
|
|
|
1,401 |
|
|
|
377 |
|
Deferred
income taxes
|
|
|
7,899 |
|
|
|
6,469 |
|
Prepaid
expenses and other current assets
|
|
|
5,460 |
|
|
|
5,044 |
|
Total
current assets
|
|
|
218,414 |
|
|
|
181,224 |
|
Property,
plant and equipment, net
|
|
|
171,297 |
|
|
|
114,946 |
|
Amortizing
intangible assets, net
|
|
|
92,301 |
|
|
|
71,268 |
|
Trademarks
and tradenames
|
|
|
36,117 |
|
|
|
32,582 |
|
Goodwill
|
|
|
299,858 |
|
|
|
248,540 |
|
Other
assets
|
|
|
14,947 |
|
|
|
15,291 |
|
Total
assets
|
|
$ |
832,934 |
|
|
$ |
663,851 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
53,792 |
|
|
$ |
33,433 |
|
Accrued
expenses and other current liabilities
|
|
|
35,345 |
|
|
|
30,975 |
|
Total
current liabilities
|
|
|
89,137 |
|
|
|
64,408 |
|
Long-term
debt
|
|
|
352,315 |
|
|
|
241,198 |
|
Deferred
income taxes
|
|
|
43,855 |
|
|
|
35,346 |
|
Other
long-term liabilities
|
|
|
4,419 |
|
|
|
228 |
|
Total
liabilities
|
|
|
489,726 |
|
|
|
341,180 |
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, authorized 100,000,000
|
|
|
|
|
|
|
|
|
shares;
no shares issued or outstanding in 2008 or 2007
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.001 par value, authorized 100,000,000
|
|
|
|
|
|
|
|
|
shares;
22,910,699 shares issued and outstanding in 2008 and
|
|
|
|
|
|
|
|
|
22,477,340
shares issued and 22,470,299 shares outstanding in 2007
|
|
|
23 |
|
|
|
22 |
|
Additional
paid-in capital
|
|
|
248,570 |
|
|
|
238,574 |
|
Treasury
stock, at cost, no shares in 2008 and 7,041 shares in 2007
|
|
|
- |
|
|
|
(140 |
) |
Retained
earnings
|
|
|
94,275 |
|
|
|
84,215 |
|
Accumulated
other comprehensive income
|
|
|
340 |
|
|
|
- |
|
Total
stockholders’ equity
|
|
|
343,208 |
|
|
|
322,671 |
|
Total
liabilities and stockholders' equity
|
|
$ |
832,934 |
|
|
$ |
663,851 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
AND
COMPREHENSIVE INCOME - Unaudited
|
|
(in
thousands except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Sales
|
|
$ |
136,242 |
|
|
$ |
79,009 |
|
|
$ |
400,044 |
|
|
$ |
234,331 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Cost
of sales - excluding amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
intangible assets
|
|
|
92,779 |
|
|
|
48,647 |
|
|
|
285,856 |
|
|
|
141,697 |
|
Cost
of sales - amortization of intangible assets
|
|
|
1,710 |
|
|
|
1,222 |
|
|
|
5,141 |
|
|
|
3,164 |
|
Selling,
general and administrative expenses
|
|
|
15,681 |
|
|
|
11,362 |
|
|
|
52,685 |
|
|
|
32,130 |
|
Research,
development and engineering costs, net
|
|
|
6,793 |
|
|
|
8,423 |
|
|
|
23,722 |
|
|
|
21,856 |
|
Acquired
in-process research and development
|
|
|
- |
|
|
|
(2,260 |
) |
|
|
2,240 |
|
|
|
16,093 |
|
Other
operating expense, net
|
|
|
3,565 |
|
|
|
1,275 |
|
|
|
7,474 |
|
|
|
4,796 |
|
Operating
income
|
|
|
15,714 |
|
|
|
10,340 |
|
|
|
22,926 |
|
|
|
14,595 |
|
Interest
expense
|
|
|
3,268 |
|
|
|
2,112 |
|
|
|
9,908 |
|
|
|
5,345 |
|
Interest
income
|
|
|
(142 |
) |
|
|
(1,586 |
) |
|
|
(663 |
) |
|
|
(6,028 |
) |
Gain
on sale of investment security
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,001 |
) |
Gain
on extinguishment of debt
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,473 |
) |
Other
(income) expense, net
|
|
|
(234 |
) |
|
|
70 |
|
|
|
(1,597 |
) |
|
|
156 |
|
Income
before provision for income taxes
|
|
|
12,822 |
|
|
|
9,744 |
|
|
|
15,278 |
|
|
|
23,596 |
|
Provision
for income taxes
|
|
|
5,193 |
|
|
|
4,744 |
|
|
|
5,218 |
|
|
|
11,326 |
|
Net
income
|
|
$ |
7,629 |
|
|
$ |
5,000 |
|
|
$ |
10,060 |
|
|
$ |
12,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.34 |
|
|
$ |
0.23 |
|
|
$ |
0.45 |
|
|
$ |
0.55 |
|
Diluted
|
|
$ |
0.33 |
|
|
$ |
0.22 |
|
|
$ |
0.44 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,557 |
|
|
|
22,214 |
|
|
|
22,493 |
|
|
|
22,129 |
|
Diluted
|
|
|
24,087 |
|
|
|
23,872 |
|
|
|
22,697 |
|
|
|
24,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,629 |
|
|
$ |
5,000 |
|
|
$ |
10,060 |
|
|
$ |
12,270 |
|
Foreign
currency translation adjustment
|
|
|
(4,914 |
) |
|
|
- |
|
|
|
366 |
|
|
|
- |
|
Unrealized
loss on interest rate swap, net of tax
|
|
|
(351 |
) |
|
|
- |
|
|
|
(26 |
) |
|
|
- |
|
Unrealized
loss on short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
during
the period, net of tax
|
|
|
(20 |
) |
|
|
- |
|
|
|
- |
|
|
|
(869 |
) |
Less:
reclassification adjustment for net realized gain on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
short-term
investments during the period, net of tax
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,601 |
) |
|
|
|
(20 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,470 |
) |
Other
comprehensive income (loss)
|
|
|
(5,285 |
) |
|
|
- |
|
|
|
340 |
|
|
|
(3,470 |
) |
Comprehensive
income
|
|
$ |
2,344 |
|
|
$ |
5,000 |
|
|
$ |
10,400 |
|
|
$ |
8,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
10,060 |
|
|
$ |
12,270 |
|
Adjustments
to reconcile net income to net cash provided
|
|
|
|
|
|
|
|
|
by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
35,206 |
|
|
|
18,539 |
|
Stock-based
compensation
|
|
|
8,073 |
|
|
|
7,092 |
|
Gain
on sale of investment security
|
|
|
- |
|
|
|
(4,001 |
) |
Gain
on extinguishment of debt
|
|
|
- |
|
|
|
(4,473 |
) |
Acquired
in-process research and development
|
|
|
2,240 |
|
|
|
16,093 |
|
Other
non-cash gains
|
|
|
75 |
|
|
|
(126 |
) |
Deferred
income taxes
|
|
|
2,837 |
|
|
|
(8,378 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(17,205 |
) |
|
|
(8,205 |
) |
Inventories
|
|
|
(8,055 |
) |
|
|
(4,936 |
) |
Prepaid
expenses and other current assets
|
|
|
46 |
|
|
|
(610 |
) |
Accounts
payable
|
|
|
15,555 |
|
|
|
8,721 |
|
Accrued
expenses and other current liabilities
|
|
|
(631 |
) |
|
|
(4,090 |
) |
Income
taxes refundable/payable
|
|
|
(1,163 |
) |
|
|
2,946 |
|
Net
cash provided by operating activities
|
|
|
47,038 |
|
|
|
30,842 |
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of short-term investments
|
|
|
(2,010 |
) |
|
|
(59,208 |
) |
Proceeds
from maturity/disposition of short-term investments
|
|
|
9,027 |
|
|
|
109,971 |
|
Acquisition
of property, plant and equipment
|
|
|
(35,830 |
) |
|
|
(10,852 |
) |
Purchase
of cost method investments
|
|
|
(2,550 |
) |
|
|
(1,750 |
) |
Acquisitions,
net of cash acquired
|
|
|
(104,817 |
) |
|
|
(109,737 |
) |
Other
investing activities
|
|
|
266 |
|
|
|
407 |
|
Net
cash used in investing activities
|
|
|
(135,914 |
) |
|
|
(71,169 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
(repayments) under short-term line of credit
|
|
|
- |
|
|
|
(1,000 |
) |
Principal
payments of long-term debt
|
|
|
(40,651 |
) |
|
|
(6,093 |
) |
Proceeds
from issuance of long-term debt
|
|
|
117,000 |
|
|
|
76,000 |
|
Debt
issuance costs
|
|
|
- |
|
|
|
(6,619 |
) |
Issuance
of common stock
|
|
|
956 |
|
|
|
2,699 |
|
Excess
tax benefits from stock-based awards
|
|
|
171 |
|
|
|
377 |
|
Repurchase
of treasury stock
|
|
|
(793 |
) |
|
|
(205 |
) |
Net
cash provided by financing activities
|
|
|
76,683 |
|
|
|
65,159 |
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency exchange rates on cash and cash
equivalents
|
|
|
(1,265 |
) |
|
|
- |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(13,458 |
) |
|
|
24,832 |
|
Cash
and cash equivalents, beginning of year
|
|
|
33,473 |
|
|
|
71,147 |
|
Cash
and cash equivalents, end of period
|
|
$ |
20,015 |
|
|
$ |
95,979 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
|
|
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY - Unaudited
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 28, 2007
|
|
|
22,477 |
|
|
$ |
22 |
|
|
$ |
238,574 |
|
|
|
(7 |
) |
|
$ |
(140 |
) |
|
$ |
84,215 |
|
|
$ |
- |
|
|
$ |
322,671 |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
4,808 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
4,808 |
|
Grant/forfeiture
of restricted stock
|
|
|
94 |
|
|
|
1 |
|
|
|
(793 |
) |
|
|
36 |
|
|
|
793 |
|
|
|
- |
|
|
|
- |
|
|
|
1 |
|
Vesting
of restricted stock units
|
|
|
51 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercise
of stock options
|
|
|
61 |
|
|
|
- |
|
|
|
956 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
956 |
|
Repurchase
of shares to settle employee tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
witholding
on vested restricted stock and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock units
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(29 |
) |
|
|
(653 |
) |
|
|
- |
|
|
|
- |
|
|
|
(653 |
) |
Tax
impact from stock based awards
|
|
|
- |
|
|
|
- |
|
|
|
80 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
80 |
|
Shares
issued in connection with
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
Quan Emerteq acquisition
|
|
|
60 |
|
|
|
- |
|
|
|
1,473 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,473 |
|
Shares
contributed to 401(k) Plan
|
|
|
168 |
|
|
|
- |
|
|
|
3,472 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,472 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
10,060 |
|
|
|
- |
|
|
|
10,060 |
|
Total
other comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
340 |
|
|
|
340 |
|
Balance,
September 26, 2008
|
|
|
22,911 |
|
|
$ |
23 |
|
|
$ |
248,570 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
94,275 |
|
|
$ |
340 |
|
|
$ |
343,208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information (Accounting
Principles Board Opinion (“APB”) No. 28, Interim Financial Reporting)
and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of financial position, results of operations,
and cash flows in conformity with accounting principles generally accepted in
the United States of America (“US GAAP”). Operating results for
interim periods are not necessarily indicative of results that may be expected
for the fiscal year as a whole. In the opinion of management, the
condensed consolidated financial statements reflect all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation of
the results of Greatbatch, Inc. and its wholly-owned subsidiary Greatbatch Ltd.
(collectively “Greatbatch” or the “Company”) for the periods
presented. The preparation of financial statements in conformity with
US GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, sales, expenses, and related
disclosures at the date of the financial statements and during the reporting
period. Actual results could differ from these estimates. The
December 28, 2007 condensed consolidated balance sheet data was derived from
audited financial statements but does not include all disclosures required by US
GAAP. For further information, refer to the consolidated financial
statements and notes included in the Company’s Annual Report on Form 10-K for
the year ended December 28, 2007. The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st. For
52-week years, each quarter contains 13 weeks. The third quarter of
2008 and 2007 each contained 13 weeks and ended on September 26, and September
28, respectively.
P
Medical Holding SA
On January
7, 2008, the Company acquired P Medical Holding SA (“Precimed”) with
administrative offices in Orvin, Switzerland and Exton, PA, manufacturing
operations in Switzerland and Indiana and sales offices in Japan, China and the
United Kingdom. This transaction diversifies the Company’s revenue
and establishes the Company as a leading supplier to the orthopedics
industry.
This
transaction was accounted for under the purchase method of accounting in
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141
Business
Combinations. Accordingly, the results of Precimed’s
operations were included in the condensed consolidated financial statements from
the date of acquisition. The aggregate purchase price was $82.5
million, consisting of the cash issued at closing to Precimed shareholders
($79.8 million), and other direct acquisition-related costs, including financial
advisory, legal and accounting services ($2.7 million). Additionally, the
purchase agreement includes a contingent payment which can range from 0 Swiss
Francs (“CHF”) to 12,000,000 CHF depending on Precimed’s 2008 earnings
performance. Based upon the exchange ratio of 0.9173 CHF per one U.S.
dollar as of September 26, 2008, the maximum contingent payment would be
approximately $11.0 million and is subject to change due to foreign currency
fluctuations and the final calculation of the contingent payment in the first
quarter of 2009. During the third quarter of 2008, a $2.5 million
contingent payment, which was based upon future earnings, was accrued relating
to an acquisition consummated by Precimed in 2006. The purchase price
was funded with cash on hand and borrowings under the Company’s revolving credit
agreement. Concurrently with the closing of the acquisition, the Company
assumed and immediately repaid $31.7 million of Precimed’s long-term
debt.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The cost
of the acquisition was allocated to the assets acquired and liabilities assumed
from Precimed based on their preliminary fair values as of the acquisition
date, with the amount exceeding the fair value recorded as
goodwill. As the estimated fair values of certain assets and
liabilities are preliminary in nature, they are subject to adjustment as
additional information is obtained, including, but not limited to, settlement of
the contingent payment, the finalization of our intangible asset valuation, the
final reconciliation and valuation of tangible assets, the Company incurring
direct acquisition costs in connection with this transaction and the resolution
of pre-acquisition tax positions. The valuations will be finalized
within 12 months of the close of the acquisition. Any changes to the
preliminary valuation may result in material adjustments to the fair value of
the assets and liabilities acquired, as well as goodwill.
The
following table summarizes the preliminary allocation of the cost of the
acquisition to the assets acquired and liabilities assumed as of the close of
the acquisition (in thousands):
|
|
As
of
|
|
(in
thousands)
|
|
January
7, 2008
|
|
Assets
acquired
|
|
|
|
Current
assets
|
|
$ |
34,190 |
|
Property,
plant and equipment
|
|
|
25,534 |
|
Acquired
IPR&D
|
|
|
2,240 |
|
Amortizing
intangible assets
|
|
|
28,902 |
|
Trademarks
and tradenames
|
|
|
3,514 |
|
Goodwill
|
|
|
45,073 |
|
Other
assets
|
|
|
1,275 |
|
Total
assets acquired
|
|
|
140,728 |
|
Liabilities
assumed
|
|
|
|
|
Current
liabilities
|
|
|
25,634 |
|
Long-term
liabilities
|
|
|
32,600 |
|
Total
liabilities assumed
|
|
|
58,234 |
|
Purchase
price
|
|
$ |
82,494 |
|
The fair
values of the assets acquired were preliminarily determined using one of three
valuation approaches: market, income and cost. The selection of a
particular method for a given asset depended on the reliability of available
data and the nature of the asset, among other considerations. The market
approach, which estimates the value for a subject asset based on available
market pricing for comparable assets, was utilized for land and in-process and
finished inventory. The income approach, which estimates the value for a
subject asset based on the present value of cash flows projected to be generated
by the asset, was used for certain intangible assets such as technology and
patents, customer relationships, trademarks and tradenames, in-process research
and development (“IPR&D”) and for the noncompete agreements with employees.
The projected cash flows were discounted at a required rate of return that
reflects the relative risk of the Precimed transaction
and the time value of money. The projected cash flows for each asset
considered multiple factors, including current revenue from existing customers,
attrition trends, reasonable contract renewal assumptions from the perspective
of a marketplace participant, and expected profit margins giving consideration
to historical and expected margins. The cost approach was used for
the majority of real and personal property and raw materials inventory.
The cost to replace a given asset reflects the estimated reproduction or
replacement cost for the property, less an allowance for loss in value due to
depreciation or obsolescence, with specific consideration given to economic
obsolescence if indicated.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Current assets and current
liabilities – The fair value of current assets (except inventory) and
current liabilities was assumed to approximate their carrying value as of the
acquisition date due to the short-term nature of these assets and
liabilities.
The fair
value of the in-process and finished inventory acquired was estimated by
applying a version of the market approach called the comparable sales
method. This approach estimates the fair value of the asset by
calculating the potential sales generated from selling the inventory and
subtracting from it the costs related to the completion and sale of that
inventory and a reasonable profit allowance. Based upon this
methodology, the Company recorded the inventory acquired at fair value resulting
in an increase in inventory of $5.6 million. During the first quarter
of 2008, the Company expensed as cost of sales the step-up value relating to the
acquired Precimed inventory sold during 2008. Raw materials
inventory was valued at replacement cost.
Property, plant and
equipment (“PP&E”) - The fair value of the PP&E acquired was
estimated by applying the cost approach for personal property, buildings and
building improvements and the market approach for land. The cost
approach was applied by developing a replacement cost and adjusting for
depreciation and obsolescence. The value of the land acquired was
derived from market prices for comparable properties.
Intangible assets -
The purchase price was allocated to specific intangible assets on a preliminary
basis as follows (dollars in thousands):
|
|
|
Fair
value
assigned
|
|
|
Weighted
average
amortization
period
(years)
|
|
|
Weighted
average
discount
rate
|
|
|
Amortizing intangible
assets
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
16,111 |
|
|
|
20 |
|
|
|
13 |
% |
|
Technology
and patents
|
|
|
11,771 |
|
|
|
15 |
|
|
|
14 |
% |
|
Noncompete
agreements
|
|
|
1,020 |
|
|
|
5 |
|
|
|
13 |
% |
|
|
|
$ |
28,902 |
|
|
|
17 |
|
|
|
13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
$ |
3,514 |
|
|
indefinite
|
|
|
|
13 |
% |
|
Acquired
IPR&D
|
|
$ |
2,240 |
|
|
|
- |
|
|
|
14 |
% |
Customer
relationships – Customer relationships represent the preliminary
estimated fair value of both the contractual and non-contractual customer
relationships Precimed has as of the acquisition date. The
primary customers of Precimed include Johnson & Johnson, Smith &
Nephew, Stryker, Medtronic and Zimmer, some of which are also customers of
Greatbatch. These relationships were valued separately from goodwill
at the amount which an independent third party would be willing to pay for these
relationships. The fair value of customer relationships was
determined using the multi-period excess-earnings method, a form of the income
approach. The Company determined that the estimated useful life of the
intangible assets associated with the existing customer relationships is
approximately 20 years. This life was based upon historical customer
attrition and management’s understanding of the industry and regulatory
environment. The expected cash flows associated with these customer
relationships were nominal after 20 years.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Technology and
patents - Technology and patents consists of technical processes,
patented and unpatented technology, manufacturing know-how and the understanding
with respect to products or processes that have been developed by Precimed and
that will be leveraged in current and future products. The fair value of
technology and patents acquired was determined utilizing the relief from royalty
method. The Company determined that the estimated useful life of the
technology and patents is approximately 15 years. This life is based upon
management’s estimate of the product life cycle associated with technology and
patents before they will be replaced by new technologies. The expected cash
flows associated with technology and patents were nominal after 15
years.
Trademarks and
tradenames – Trademarks and tradenames represent the estimated fair value
of corporate and product names acquired from Precimed, which will be utilized by
the Company in the future. These tradenames were valued separately
from goodwill at the amount which an independent third party would be willing to
pay for use of these names. The fair value of the trademarks and
tradenames was determined by applying the relief from royalty method of the
income approach. The tradenames are inherently valuable as the
Company believes they convey favorable perceptions about the products with which
they are associated. This in turn generates consistent and increased
demand for the products, which provides the Company with greater revenues, as
well as greater production and operating efficiencies. Thus, the
Company will realize larger profit margins than companies without the
tradenames. At this time, the Company intends to utilize these
trademarks and tradenames for an indefinite period of time, thus these
intangible assets are not being amortized but are tested for impairment on an
annual basis.
Acquired IPR&D -
Approximately $2.2 million of the purchase price represents the estimated fair
value of acquired IPR&D projects that had not yet reached technological
feasibility and had no alternative future use. Accordingly, the
amount was immediately expensed on the acquisition date and is not deductible
for tax purposes. The value assigned to IPR&D related to Reamer,
Instrument Kit, Locking Plate and Cutting Guide projects. These
projects primarily represent the next generation of products already being sold
by Precimed which incorporate new enhancements and customer
modifications. The Company expects to commercially launch these
products in 2008 and 2009. For purposes of valuing the IPR&D, the
Company estimated total costs to complete the projects to be approximately $0.2
million. If the Company is not successful in completing these projects on a
timely basis, future sales may be adversely affected resulting in erosion of the
Company’s market share.
The fair
value of these projects was determined based on the excess earnings
method. This model utilized discount rates that took into
consideration the internal rate of return expected from the Precimed transaction
and the risks surrounding the successful development and commercialization of
each of the IPR&D projects. The Company believes that the
estimated acquired IPR&D amounts represent their fair value at the date of
acquisition and do not exceed the amount an independent third party would be
willing to pay for the projects.
Goodwill - The excess
of the purchase price over the preliminary fair value of net tangible and
intangible assets acquired of $45.1 million was allocated to
goodwill. Various factors contributed to the establishment of
goodwill, including: the value of Precimed’s highly trained assembled work force
and management team; the expected revenue growth over time that is attributable
to increased market penetration from future products and customers; and the
incremental value to the Company’s IMC business from expanding and diversifying
its revenues. The goodwill acquired in connection with the Precimed
acquisition was allocated to the Company’s IMC business segment and is not
deductible for tax purposes.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
DePuy Orthopedics Chaumont, France
Facility
On
February 11, 2008, Precimed acquired the assets of DePuy Orthopedics (“DePuy”)
Chaumont, France manufacturing facility (the “Chaumont
Facility”). The Chaumont Facility produces hip and shoulder implants
for DePuy Ireland which distributes them worldwide through various DePuy selling
entities. This transaction, which included a new four year supply
agreement with DePuy, enhances Greatbatch’s and Precimed’s strategic
relationship with DePuy, one of the largest orthopedic companies in the
world. The addition of this facility will align Precimed closer to
its orthopedic customers and further extends its offerings to a full range of
orthopedic implants.
This
transaction was accounted for under the purchase method of
accounting. Accordingly, the results of the Chaumont Facility were
included in our condensed consolidated financial statements from the date of
acquisition. The aggregate purchase price was approximately $28.7
million, consisting of the cash issued to DePuy ($27.0 million), and other
direct acquisition-related costs, including financial advisory, transfer tax,
legal and accounting fees ($1.7 million). The aggregate purchase
price was preliminarily allocated to the assets acquired ($6.3 million
inventory, $13.4 million PP&E) and liability assumed from the Chaumont
Facility based on their fair values as of the close of the acquisition, with the
amount exceeding the fair value recorded as goodwill ($6.2
million). As the values of certain assets and liabilities are
preliminary in nature, they are subject to adjustment as additional information
is obtained, including, but not limited to, the finalization of our valuation,
the final reconciliation and confirmation of tangible assets, the Company
incurring direct acquisition costs in connection with this transaction and
the resolution of tax positions. Any changes to the preliminary
valuation may result in material adjustments to the fair value of the assets and
liabilities acquired, as well as goodwill.
Various
factors contributed to the establishment of goodwill, including: the value of
the Chaumont Facility’s highly trained assembled work force; the expected
revenue growth over time and the incremental value to the Company’s Orthopedics
business from having the capability to manufacture joint implants; and the
strategic partnership established with DePuy, one of the largest orthopedic
companies in the world. Goodwill resulting from the Chaumont Facility
acquisition was allocated to the Company’s IMC business segment and is not
deductible for tax purposes.
Pro
Forma Results (Unaudited)
The
following unaudited pro forma information presents the consolidated results of
operations of the Company, Precimed, and the Chaumont Facility as if those
acquisitions had occurred as of the beginning of each of the fiscal periods
presented. Additionally, 2007 amounts reflect the Company’s 2007
acquisition of Enpath Medical, Inc. (June 2007) (“Enpath”), Quan Emerteq LLC
(November 2007) (“Quan”) and Engineered Assemblies Corporation (“EAC”) (November
2007) as if those acquisitions had occurred as of the beginning of 2007 (in
thousands, except per share amounts):
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
(Unaudited)
|
|
September
26,
2008
|
|
|
September
28,
2007
|
|
|
September
26,
2008
|
|
|
September
28,
2007
|
|
|
Sales
|
|
$ |
136,242 |
|
|
$ |
119,386 |
|
|
$ |
414,859 |
|
|
$ |
379,746 |
|
|
Net
income
|
|
|
7,629 |
|
|
|
5,686 |
|
|
|
16,632 |
|
|
|
23,097 |
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.34 |
|
|
$ |
0.25 |
|
|
$ |
0.74 |
|
|
$ |
1.04 |
|
|
Diluted
|
|
$ |
0.33 |
|
|
$ |
0.25 |
|
|
$ |
0.72 |
|
|
$ |
0.98 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The
unaudited pro forma information presents the combined operating results of
Greatbatch, Precimed, the Chaumont Facility, Enpath, Quan and EAC, with the
results prior to the acquisition date adjusted to include the pro forma impact
of the amortization of acquired intangible assets and depreciation of fixed
assets based on the preliminary purchase price allocation, the elimination of
the non-recurring IPR&D charge ($2.2 million in 2008 and $16.1 million in
2007) and inventory step-up amortization recorded by Greatbatch ($6.4 million in
2008 and $1.3 million in 2007), the adjustment to interest income/expense
reflecting the cash paid in connection with the acquisition, including
acquisition-related expenses, at Greatbatch’s weighted average interest
income/expense rate, and the impact of income taxes on the pro forma adjustments
utilizing the applicable statutory tax rate, except for IPR&D which is not
deductible for tax purposes. The unaudited pro forma consolidated
basic and diluted earnings per share are based on the consolidated basic and
diluted weighted average shares of Greatbatch.
The
unaudited pro forma results are presented for illustrative purposes only and do
not reflect the realization of potential cost savings, and any related
integration costs. Certain cost savings may result from the acquisition;
however, there can be no assurance that these cost savings will be achieved.
These pro forma results do not purport to be indicative of the results
that would have actually been obtained if the acquisitions occurred as of the
beginning of each of the periods presented, nor does the pro forma data intend
to be a projection of results that may be obtained in the future.
3.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
Noncash
investing and financing activities (in thousands):
|
|
|
|
|
|
|
Net
unrealized loss on available-for-sale securities
|
|
$ |
- |
|
|
$ |
(869 |
) |
Unrealized
loss on interest rate swap, net
|
|
|
(26 |
) |
|
|
- |
|
Common
stock contributed to 401(k) Plan
|
|
|
3,472 |
|
|
|
2,956 |
|
Property,
plant and equipment purchases included
|
|
|
|
|
|
|
|
|
in
accounts payable
|
|
|
4,170 |
|
|
|
1,958 |
|
Deferred
financing fees and acquisition costs included in
|
|
|
|
|
|
|
|
|
accrued
expenses and other current liabilities
|
|
|
293 |
|
|
|
1,029 |
|
Exchange
of convertible subordinated notes
|
|
|
- |
|
|
|
117,782 |
|
Shares
issued in connection with a 2007 business acquisition
|
|
|
1,473 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
6,020 |
|
|
$ |
2,429 |
|
Income
taxes
|
|
|
2,643 |
|
|
|
16,718 |
|
Acquisition
of noncash assets and liabilities:
|
|
|
|
|
|
|
|
|
Assets
acquired
|
|
$ |
167,195 |
|
|
$ |
126,182 |
|
Liabilities
assumed
|
|
|
58,906 |
|
|
|
15,678 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Inventories
are comprised of the following (in thousands):
|
|
|
September
26,
|
|
|
December
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
45,545 |
|
|
$ |
38,561 |
|
|
Work-in-process
|
|
|
29,861 |
|
|
|
19,603 |
|
|
Finished
goods
|
|
|
23,427 |
|
|
|
13,718 |
|
|
Total
|
|
$ |
98,833 |
|
|
$ |
71,882 |
|
Amortizing
intangible assets are comprised of the following (in thousands):
|
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Foreign
currency
translation
|
|
|
Net
carrying
amount
|
|
|
September 26,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
technology and patents
|
|
$ |
81,639 |
|
|
$ |
(34,113 |
) |
|
$ |
98 |
|
|
$ |
47,624 |
|
|
Customer
relationships
|
|
|
46,094 |
|
|
|
(3,299 |
) |
|
|
218 |
|
|
|
43,013 |
|
|
Other
|
|
|
3,508 |
|
|
|
(1,854 |
) |
|
|
10 |
|
|
|
1,664 |
|
|
Total
amortizing intangible assets
|
|
$ |
131,241 |
|
|
$ |
(39,266 |
) |
|
$ |
326 |
|
|
$ |
92,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
technology and patents
|
|
$ |
69,813 |
|
|
$ |
(28,968 |
) |
|
$ |
- |
|
|
$ |
40,845 |
|
|
Customer
relationships
|
|
|
29,983 |
|
|
|
(840 |
) |
|
|
- |
|
|
|
29,143 |
|
|
Other
|
|
|
2,660 |
|
|
|
(1,380 |
) |
|
|
- |
|
|
|
1,280 |
|
|
Total
amortizing intangible assets
|
|
$ |
102,456 |
|
|
$ |
(31,188 |
) |
|
$ |
- |
|
|
$ |
71,268 |
|
|
Aggregate
amortization expense for the third quarter of 2008 and 2007 was $2.6
million and $1.6 million,
respectively. Aggregate amortization expense for the nine
months ended September 26, 2008 and September 28, 2007 was $8.1 million
and $3.6 million, respectively. As of September 26, 2008,
amortization expense is estimated to be $2.7 million for the remainder of
2008, $10.1 million for 2009, $9.6 million for 2010, $9.5 million for
2011, $9.4 million for 2012 and $8.6 million for
2013.
|
|
The
change in trademarks and tradenames during 2008 is as follows (in
thousands):
|
|
Balance
at December 28, 2007
|
|
$ |
32,582 |
|
|
Acquired
in 2008
|
|
|
3,514 |
|
|
Foreign
currency translation
|
|
|
21 |
|
|
Balance
at September 26, 2008
|
|
$ |
36,117 |
|
The
Company is currently performing a review of its market strategy to determine the
best use of its “non-Greatbatch” tradenames, including those acquired with its
recent acquisitions. The outcome of this review may impact the useful
lives of the Company’s “non-Greatbatch” tradenames which had a value of $20.3
million as of September 26, 2008.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
|
The
change in goodwill during 2008 is as follows (in
thousands):
|
|
|
|
IMC
|
|
|
Electrochem
|
|
|
Total
|
|
|
Balance
at December 28, 2007
|
|
$ |
238,810 |
|
|
$ |
9,730 |
|
|
$ |
248,540 |
|
|
Adjustments
to goodwill related to 2007 acquisitions
|
|
|
(29 |
) |
|
|
213 |
|
|
|
184 |
|
|
Goodwill
recorded for 2008 acquisitions
|
|
|
51,288 |
|
|
|
- |
|
|
|
51,288 |
|
|
Foreign
currency translation
|
|
|
(154 |
) |
|
|
- |
|
|
|
(154 |
) |
|
Balance
at September 26, 2008
|
|
$ |
289,915 |
|
|
$ |
9,943 |
|
|
$ |
299,858 |
|
Long-term
debt is comprised of the following (in thousands):
|
|
|
September
26,
|
|
|
December
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Revolving
line of credit
|
|
$ |
110,000 |
|
|
$ |
- |
|
|
Convertible
subordinated notes
|
|
|
|
|
|
|
|
|
|
2.25%
convertible subordinated notes I, due 2013
|
|
|
52,218 |
|
|
|
52,218 |
|
|
2.25%
convertible subordinated notes II, due 2013
|
|
|
197,782 |
|
|
|
197,782 |
|
|
Unamortized
discount
|
|
|
(7,685 |
) |
|
|
(8,802 |
) |
|
Total
convertible subordinated notes
|
|
|
242,315 |
|
|
|
241,198 |
|
|
Total
long-term debt
|
|
$ |
352,315 |
|
|
$ |
241,198 |
|
Revolving Line of
Credit - The Company has a senior credit facility (the “Credit Facility”)
consisting of a $235 million revolving line of credit, which can be increased to
$335 million upon the Company’s request. The Credit Facility also
contains a $15 million letter of credit subfacility and a $15 million swingline
subfacility. The Credit Facility is secured by the Company’s
non-realty assets including cash, accounts and notes receivable, and
inventories, and has an expiration date of May 22, 2012 with a one-time option
to extend to April 1, 2013 if no default has occurred. Interest rates
under the Credit Facility are, at the Company’s option, based upon the current
prime rate or the LIBOR rate plus a margin that varies with the Company’s
leverage ratio. If interest is paid based upon the prime rate, the
applicable margin is between minus 1.25% and 0.00%. If interest is
paid based upon the LIBOR rate, the applicable margin is between 1.00% and
2.00%. The Company is required to pay a commitment fee between 0.125%
and 0.250% per annum on the unused portion of the Credit Facility based on the
Company’s leverage ratio.
The Credit
Facility contains limitations on the incurrence of indebtedness, limitations on
the incurrence of liens and licensing of intellectual property, limitations on
investments and restrictions on certain payments. Except to the
extent paid for by common equity of Greatbatch or paid for out of cash on hand,
the Credit Facility limits the amount paid for acquisitions in total to $100
million. The restrictions on payments, among other things, limit
repurchases of Greatbatch’s stock to $60 million and limits the ability of the
Company to make cash payments upon conversion of CSN II (as defined
below). These limitations can be waived upon the Company’s request
and approval of a simple majority of the lenders. Such waiver was
obtained in order to fund the Precimed acquisition.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The Credit
Facility also requires the Company to maintain a ratio of adjusted EBITDA, as
defined in the credit agreement, to interest expense of at least 3.00 to 1.00,
and a total leverage ratio, as defined in the credit agreement, of not greater
than 5.00 to 1.00 from May 22, 2007 through September 29, 2009 and not greater
than 4.50 to 1.00 from September 30, 2009 and thereafter.
The Credit
Facility contains customary events of default. Upon the occurrence
and during the continuance of an event of default, a majority of the lenders may
declare the outstanding advances and all other obligations under the Credit
Facility immediately due and payable.
In
connection with the Company’s acquisition of Precimed and the Chaumont Facility,
the Company borrowed $117 million under its revolving line of credit in the
first quarter of 2008. The Company repaid $7.0 million under the revolving line
of credit since that time. The weighted average interest rate on
these borrowings as of September 26, 2008, which does not include the impact of
the interest rate swap described below, was 4.1%. Interest rates
reset based upon the six-month ($87 million), three-month ($15 million) and
two-month ($8 million) LIBOR rate. Based upon current capital needs, management
does not anticipate making significant principal payments on the revolving line
of credit within the next twelve months. As of September 26, 2008,
the Company had $125 million available under its revolving line of
credit.
Interest Rate Swap –
During the first quarter of 2008, the Company entered into an $80 million
notional receive floating-pay fixed interest rate swap indexed to the six-month
LIBOR rate that expires on July 7, 2010. The objective of this swap
is to hedge against potential changes in cash flows on $80 million of the
Company’s revolving line of credit, which is indexed to the six-month LIBOR
rate. No credit risk was hedged. The receive variable leg
of the swap and the variable rate paid on the revolving line of credit bear the
same rate of interest, excluding the credit spread, and reset and pay interest
on the same dates. The Company intends to continue electing the
six-month LIBOR as the benchmark interest rate on the debt. If the
Company repays the debt it intends to replace the hedged item with similarly
indexed forecast cash flows. The pay fixed leg of the swap bears an
interest rate of 3.09%, which does not include the credit spread (currently
1.00%).
The
Company accounts for this interest rate swap under SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities, as amended. SFAS No. 133
requires that all derivatives are recognized as either assets or liabilities in
the condensed consolidated balance sheet at fair value. Changes in
the fair value of the derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether the derivative is used in a
qualifying hedge strategy and, if so, whether the hedge is a cash flow or fair
value hedge. In order to qualify as a hedge, the Company must
document the hedging strategy at its inception, including the nature of the risk
being hedged and how the effectiveness of the hedge will be
measured. The Company evaluates hedge effectiveness at inception and
on an ongoing basis. If a derivative is no longer expected to be highly
effective, hedge accounting is discontinued.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The
Company designated the interest rate swap as a cash flow hedge. The
Company recognizes the portion of the change in fair value of the interest rate
swap that is considered effective as a direct charge or credit to accumulated
other comprehensive income (a component of stockholders’ equity), net of
tax. The ineffective portion of the change in fair value, if any, is
recorded to interest expense. Amounts recorded in accumulated other
comprehensive income are periodically reclassified to interest expense to offset
interest expense on the hedged portion of the revolving line of credit resulting
from fluctuations in the six-month LIBOR interest rate.
The
negative fair value of the interest rate swap of $0.04 million as of September
26, 2008 is based on Level 2 measurements in the fair value hierarchy as
described in SFAS No. 157 – see Note 8 – and is recorded in other current
liabilities. As of September 26, 2008, a negative fair value
adjustment of $0.03 million was recorded in accumulated other comprehensive
income, net of income tax benefits of $0.01 million. No portion of
the change in fair value of the interest rate swap during the first nine months
of 2008 was considered ineffective. The amount recorded as an offset
to interest expense during the first nine months of 2008 related to the interest
rate swap was $0.4 million.
Convertible
Subordinated Notes - In May 2003, the Company completed a private
placement of $170 million of 2.25% convertible subordinated notes, due 2013
(“CSN I”). In March 2007, the Company entered into separate,
privately negotiated agreements to exchange $117.8 million of CSN I for an
equivalent principal amount of a new series of 2.25% convertible subordinated
notes due 2013 (“CSN II”) (collectively the “Exchange”) at a 5%
discount. The primary purpose of the Exchange was to eliminate the
June 15, 2010 call and put option that is included in the terms of CSN
I. In connection with the Exchange, the Company issued an additional
$80 million aggregate principal amount of CSN II at a price of $950 per $1,000
of principal.
The
Exchange was accounted for as an extinguishment of debt and resulted in a
pre-tax gain of $4.5 million in the first quarter of 2007. As a
result of the extinguishment, the Company had to recapture the tax interest
expense that was previously deducted on the extinguished notes. This
resulted in an additional current income tax liability of approximately $11.3
million, which was paid throughout 2007. This amount was previously
recorded as a non-current deferred tax liability on the balance
sheet. The following is a summary of the significant terms of CSN I
and CSN II:
CSN I - The notes
bear interest at 2.25% per annum, payable semi-annually. Holders may
convert the notes into shares of the Company’s common stock at a conversion
price of $40.29 per share, which is equivalent to a conversion ratio of 24.8219
shares per $1,000 of principal, subject to adjustment, before the close of
business on June 15, 2013 only under the following circumstances: (1) during any
fiscal quarter commencing after July 4, 2003, if the closing sale price of the
Company’s common stock exceeds 120% of the $40.29 conversion price for at least
20 trading days in the 30 consecutive trading day period ending on the last
trading day of the preceding fiscal quarter; (2) subject to certain exceptions,
during the five business days after any five consecutive trading day period in
which the trading price per $1,000 of principal for each day of such period was
less than 98% of the product of the closing sale price of the Company’s common
stock and the number of shares issuable upon conversion of $1,000 of principal;
(3) if the notes have been called for redemption; or (4) upon the occurrence of
certain corporate events.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Beginning
June 20, 2010, the Company may redeem any of the notes at a redemption price of
100% of their principal amount, plus accrued interest. Note holders
may require the Company to repurchase their
notes on June 15, 2010 or at any time prior to their maturity following a
fundamental change, as defined in the indenture, at a repurchase price of 100%
of their principal amount, plus accrued interest. The notes are
subordinated in right of payment to all of our senior indebtedness and
effectively subordinated to all debts and other liabilities of the Company’s
subsidiaries.
Beginning
with the six-month interest period commencing June 15, 2010, the Company will
pay additional contingent interest during any six-month interest period if the
trading price of the notes for each of the five trading days immediately
preceding the first day of the interest period equals or exceeds 120% of the
principal amount of the notes.
CSN II - The notes
bear interest at 2.25% per annum, payable semi-annually. The holders
may convert the notes into shares of the Company’s common stock at a conversion
price of $34.70 per share, which is equivalent to a conversion ratio of 28.8219
shares per $1,000 of principal. The conversion price and the
conversion ratio will adjust automatically upon certain changes to the Company’s
capitalization.
The notes
are convertible at the option of the holders at such time as: (i) the closing
price of the Company’s common stock exceeds 150% of the conversion price of the
notes for 20 out of 30 consecutive trading days; (ii) the trading price per
$1,000 of principal is less than 98% of the product of the closing sale price of
common stock for each day during any five consecutive trading day period and the
conversion rate per $1,000 of principal; (iii) the notes have been called for
redemption; (iv) the Company distributes to all holders of common stock rights
or warrants entitling them to purchase additional shares of common stock at less
than the average closing price of common stock for the ten trading days
immediately preceding the announcement of the distribution; (v) the Company
distributes to all holders of common stock any form of dividend which has a per
share value exceeding 5% of the price of the common stock on the day prior to
such date of distribution; (vi) the Company effects a consolidation, merger,
share exchange or sale of assets pursuant to which its common stock is converted
to cash or other property; (vii) the period beginning 60 days prior to but
excluding June 15, 2013; and (viii) certain fundamental changes, as defined in
the indenture, occur or are approved by the Board of Directors.
Conversions
in connection with corporate transactions that constitute a fundamental change
require the Company to pay a premium make-whole amount whereby the conversion
ratio on the notes may be increased by up to 8.2 shares per $1,000 of
principal. The premium make-whole amount will be paid in shares of
common stock upon any such conversion, subject to the net share settlement
feature of the notes described below.
The notes
contain a net share settlement feature that requires the Company to pay cash for
each $1,000 of principal to be converted. Any amounts in excess of
$1,000 will be settled in shares of the Company’s common stock, or at the
Company’s option, cash. The Company has an irrevocable election to
pay the holders in shares of its common stock, which it currently does not plan
to exercise.
The notes
are redeemable by the Company at any time on or after June 20, 2012, or at
the option of a holder upon the occurrence of certain fundamental changes, as
defined in the indenture, affecting the Company. The notes are
subordinated in right of payment to all of our senior indebtedness and
effectively subordinated to all debts and other liabilities of the Company’s
subsidiaries.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Beginning
with the six-month interest period commencing June 15, 2012, the Company will
pay additional contingent interest during any six-month interest period if the
trading price of the notes for each of the five trading days immediately
preceding the first day of the interest period equals or exceeds 120% of the
principal amount of the notes.
Acquired
Debt
- Concurrently with the close of the Precimed acquisition, the Company
assumed and repaid $31.7 million of long-term debt acquired. Additionally, the
Company assumed a mortgage note of $2.0 million with a former owner that
carried an interest rate of 3%. The Company repaid this note in
full in September 2008.
Deferred
Financing Fees - The following is a reconciliation of deferred financing
fees for the first nine months of 2008, which are included in other assets (in
thousands):
|
Balance
at December 28, 2007
|
|
$ |
6,411 |
|
|
Financing
costs deferred
|
|
|
14 |
|
|
Amortization
during the period
|
|
|
(993 |
) |
|
Balance
at September 26, 2008
|
|
$ |
5,432 |
|
In
connection with the Precimed and Chaumont Facility acquisitions, the Company
recorded a pension liability related to defined benefit pension plans provided
to non-U.S. employees of those businesses. Under these plans,
benefits accrue to employees based upon years of service, position, age and
compensation. The liability and corresponding expense related to
these pension plans is based on actuarial computations of current and future
benefits for employees. Pension expense is charged to current
operating expenses. The accumulated benefit obligation, projected
benefit obligation and fair value of plan assets as of the acquisition date,
which was also the measurement date, were $12.3 million, $14.0 million and $10.5
million, respectively.
|
The
change in the net pension liability for the first nine months of 2008 is
as follows (in thousands):
|
|
Balance
at December 28, 2007
|
|
$ |
- |
|
|
Acquired
in 2008
|
|
|
3,534 |
|
|
Net
periodic pension cost
|
|
|
581 |
|
|
Foreign
currency translation
|
|
|
7 |
|
|
Balance
at September 26, 2008
|
|
$ |
4,122 |
|
Net
pension cost is comprised of the following (in thousands):
|
|
|
Nine
months ended
|
|
|
|
|
September
26,
2008
|
|
|
Service
cost
|
|
$ |
532 |
|
|
Interest
cost
|
|
|
377 |
|
|
Expected
return on plan assets
|
|
|
(328 |
) |
|
Net
pension cost
|
|
$ |
581 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The
principal actuarial assumptions used were as follows:
|
Discount
rate
|
|
|
3.9 |
% |
|
Expected
rate of return on plan assets
|
|
|
4.0 |
% |
|
Salary
growth
|
|
|
2.6 |
% |
The
discount rate used is based on the yields of foreign government bonds with a
duration matching the duration of the liabilities plus 20 to 30 basis points to
reflect the risk of investing in corporate bonds. The expected rate
of return on plan assets reflects long-term earnings expectations on existing
plan assets and those contributions expected to be received during the current
plan year. In estimating that rate, appropriate consideration was
given to historical returns earned by plan assets in the fund and the rates of
return expected to be available for reinvestment. Rates of return
were adjusted to reflect current capital market assumptions and changes in
investment allocations. Equity securities and fixed income securities
were assumed to earn a return in the range of 7% to 8% and 3% to 4%,
respectively. The long-term inflation rate was estimated to be
1.8%. When these overall return expectations are applied to the
pension plan’s target allocation, the expected rate of return is determined to
be 4.0%.
The
weighted average asset allocation as of the valuation date was as
follows:
|
Asset
Category:
|
|
Target
|
|
|
Actual
|
|
|
Bonds
|
|
|
60 |
% |
|
|
52 |
% |
|
Equity
|
|
|
25 |
% |
|
|
32 |
% |
|
Other
|
|
|
15 |
% |
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
This
allocation is consistent with the Company’s goal of diversifying the pension
plans assets in order to preserve capital while achieving investment results
that will contribute to the proper funding of pension obligations and cash flow
requirements.
Estimated
benefit payments over the next ten years are as follows (in
thousands):
|
Remainder
2008
|
|
$ |
242 |
|
|
2009
|
|
|
975 |
|
|
2010
|
|
|
874 |
|
|
2011
|
|
|
940 |
|
|
2012
|
|
|
1,045 |
|
|
2013-2017
|
|
|
5,747 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
8.
|
FAIR
VALUE MEASUREMENTS
|
Beginning
in fiscal year 2008, the Company adopted the provisions of SFAS No. 157,
Fair Value
Measurements, for all financial
assets and liabilities and nonfinancial assets and liabilities that are
recognized or disclosed at fair value on a recurring basis (at least annually).
Under this standard, fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an
orderly transaction between market participants at the measurement
date.
SFAS
No. 157 establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs that market participants would use
in pricing the asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that
reflect the Company’s assumptions about the assumptions market participants
would use in pricing the asset or liability developed based on the best
information available in the circumstances. The hierarchy is broken down
into three levels based on the reliability of inputs as follows:
Level 1 — Valuations
based on quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access. Since valuations are based on
quoted prices that are readily and regularly available in an active market,
valuation of these products does not entail a significant degree of
judgment.
Level 2 — Valuation
is determined from quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar instruments in markets that are
not active or by model-based techniques in which all significant inputs are
observable in the market.
Level 3—Valuations
based on inputs that are unobservable and significant to the overall fair value
measurement. The degree of judgment exercised in determining fair
value is greatest for instruments categorized in Level 3.
The
availability of observable inputs can vary from asset/liability to
asset/liability and is affected by a wide variety of factors, including, the
type of asset/liability, whether the asset/liability is established in the
marketplace, and other characteristics particular to the transaction. To
the extent that valuation is based on models or inputs that are less observable
or unobservable in the market, the determination of fair value requires more
judgment. In certain cases, the inputs used to measure fair value may fall
into different levels of the fair value hierarchy. In
such cases, for disclosure purposes the level in the fair value hierarchy
within which the fair value measurement in its entirety falls is determined
based on the lowest level input that is significant to the fair value
measurement in its entirety.
Fair value
is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even when
market assumptions are not readily available, assumptions are required to
reflect those that market participants would use in pricing the asset or
liability at the measurement date.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Valuation
Techniques
Short-term investments
available for sale - The fair value of short-term investments available
for sale is obtained from an independent pricing service that utilizes
multidimensional relational models with observable
market data inputs to estimate fair value. These observable market
data inputs include benchmark yields, reported trades, broker/dealer quotes,
issuer spreads, benchmark securities, bids, offers and reference data. The
Company’s short-term investments available for sale are categorized in Level 2
of the fair value hierarchy. The Company did not have any short-term
investments available for sale as of September 26, 2008.
Interest rate swap -
The fair value of our interest rate swap is obtained from an independent pricing
service that utilizes cash flow models with observable market data inputs to
estimate fair value. These observable
market data inputs include LIBOR and swap rates. The Company’s interest
rate swap is categorized in Level 2 of the fair value hierarchy.
The
following table provides information regarding financial assets and liabilities
measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
Fair
value measurements at reporting date using
|
|
|
Description
|
|
At
September
26,
2008
|
|
|
Quoted
prices
in
active
markets
for
identical
assets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level
2)
|
|
|
Significant
unobservable
inputs
(Level
3)
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
|
$ |
(40 |
) |
|
$ |
- |
|
|
$ |
(40 |
) |
|
$ |
- |
|
As of
September 26, 2008, the Company did not have any nonfinancial assets and
liabilities that are recognized or disclosed at fair value on a recurring
basis.
9.
|
STOCK-BASED
COMPENSATION
|
Under SFAS
No. 123(R), the Company records compensation costs related to all stock-based
awards. Compensation costs related to share-based payments for the
three and nine months ended September 26, 2008 totaled $1.5 million, $1.0
million net of tax, or $0.04 per diluted share and $4.8 million, $3.2 million
net of tax, or $0.14 per diluted share, respectively. This compares
to $1.4 million, $0.9 million net of tax, or $0.04 per diluted share and $4.3
million, $2.8 million net of tax, or $0.11 per diluted share for the three and
nine months ended September 28, 2007, respectively.
In October
2008, the Board of Directors approved the award of approximately 400,000
performance-based stock options to management in accordance with the Company’s
supplemental annual long-term incentive plan. These stock options
were awarded with an exercise price equal to the closing Greatbatch stock price
on the date of grant of $21.88.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
The
following table summarizes stock option activity related to the Company’s
stock-based incentive plans:
|
|
|
Number
of
stock
options
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
|
|
|
Aggregate
intrinsic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 28, 2007
|
|
|
1,744,022 |
|
|
$ |
25.04 |
|
|
|
|
|
|
|
|
Granted
|
|
|
442,630 |
|
|
|
20.09 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(60,560 |
) |
|
|
15.79 |
|
|
|
|
|
|
|
|
Forfeited
or Expired
|
|
|
(113,400 |
) |
|
|
26.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at September 26, 2008
|
|
|
2,012,692 |
|
|
$ |
24.17 |
|
|
|
7.2 |
|
|
$ |
5.8 |
|
|
Exercisable
at September 26, 2008
|
|
|
960,380 |
|
|
$ |
25.39 |
|
|
|
5.8 |
|
|
$ |
2.3 |
|
|
(1) |
Intrinsic
value is calculated for in-the-money options (exercise price less than
market price) outstanding and/or exercisable as the difference between the
market price of our common shares as of September 26, 2008 ($25.78) and
the exercise price of the underlying options, multiplied by the number of
options outstanding and/or
exercisable.
|
The
weighted-average fair value and assumptions used to value options granted are as
follows:
|
|
|
Nine
months ended
|
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Weighted-average
fair value
|
|
$ |
7.94 |
|
|
$ |
12.33 |
|
|
Risk-free
interest rate
|
|
|
2.92 |
% |
|
|
4.62 |
% |
|
Expected
volatility
|
|
|
40 |
% |
|
|
41 |
% |
|
Expected
life (in years)
|
|
|
5.2 |
|
|
|
5.4 |
|
|
Expected
dividend yield
|
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
The
following table summarizes restricted stock and restricted stock unit activity
related to the Company’s plans:
|
|
|
|
|
|
Weighted
average
|
|
|
|
|
Activity
|
|
|
fair
value
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 28, 2007
|
|
|
282,134 |
|
|
$ |
24.96 |
|
|
Shares
granted
|
|
|
141,793 |
|
|
|
20.06 |
|
|
Shares
vested
|
|
|
(94,221 |
) |
|
|
23.72 |
|
|
Shares
forfeited
|
|
|
(11,570 |
) |
|
|
22.15 |
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested
at September 26, 2008
|
|
|
318,136 |
|
|
$ |
23.24 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
10.
|
OTHER
OPERATING EXPENSES
|
Other
operating expenses, net in the Company’s Condensed Consolidated Statements of
Operations and Comprehensive Income are comprised of the following (in
thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(a)
2005 facility shutdowns and consolidations
|
|
$ |
335 |
|
|
$ |
1,040 |
|
|
$ |
672 |
|
|
$ |
4,289 |
|
(b)
2007 & 2008 facility shutdowns and consolidations
|
|
|
1,322 |
|
|
|
126 |
|
|
|
2,954 |
|
|
|
408 |
|
(c)
Integration costs
|
|
|
1,812 |
|
|
|
- |
|
|
|
3,876 |
|
|
|
- |
|
Asset
dispositions and other
|
|
|
96 |
|
|
|
109 |
|
|
|
(28 |
) |
|
|
99 |
|
|
|
$ |
3,565 |
|
|
$ |
1,275 |
|
|
$ |
7,474 |
|
|
$ |
4,796 |
|
(a) 2005 facility
shutdowns and consolidations. In the first quarter of
2005, the Company announced its intent to close the Carson City, NV facility and
consolidate the work performed at that facility into the Tijuana, Mexico
facility. This consolidation project was completed in the third
quarter of 2007.
In the
fourth quarter of 2005, the Company announced its intent to close both the
Columbia, MD facility (“Columbia Facility”) and the Fremont, CA Advanced
Research Laboratory (“ARL”). The Company also announced that the
manufacturing operations at the Columbia Facility will be moved into the Tijuana
Facility and that the research, development and engineering and product
development functions at the Columbia Facility and at ARL will relocate to the
Technology Center in Clarence, NY. The ARL portion of this
consolidation project was completed in the fourth quarter of
2006. The Columbia Facility portion of this consolidation project was
completed in the third quarter of 2008.
The total
cost for these facility consolidations was $18.8 million. The major categories
of costs include the following:
|
a.
|
Severance
and retention - $7.4 million;
|
|
b.
|
Production
inefficiencies and revalidation - $1.6
million;
|
|
c.
|
Accelerated
depreciation and asset write-offs - $1.1
million;
|
|
d.
|
Personnel
- $5.9 million; and
|
All
categories of costs are considered to be cash expenditures, except accelerated
depreciation and asset write-offs. The expenses for the facility
shutdowns and consolidations are included in the IMC business
segment.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – Unaudited
Accrued
liabilities related to the 2005 facility shutdowns and consolidations are
comprised of the following (in thousands):
|
|
|
Severance
and
retention
|
|
|
Production
inefficiencies
and
revalidation
|
|
|
Personnel
|
|
|
Other
|
|
|
Total
|
|
|
Balance,
December 29, 2006
|
|
$ |
2,904 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
2,904 |
|
|
Restructuring
charges
|
|
|
1,405 |
|
|
|
1,037 |
|
|
|
1,678 |
|
|
|
577 |
|
|
|
4,697 |
|
|
Cash
payments
|
|
|
(2,459 |
) |
|
|
(1,037 |
) |
|
|
(1,678 |
) |
|
|
(577 |
) |
|
|
(5,751 |
) |
|
Balance,
December 28, 2007
|
|
$ |
1,850 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
1,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charges
|
|
|
159 |
|
|
|
42 |
|
|
|
193 |
|
|
|
278 |
|
|
|
672 |
|
|
Cash
payments
|
|
|
(1,798 |
) |
|
|
(42 |
) |
|
|
(193 |
) |
|
|
(278 |
) |
|
|
(2,311 |
) |
|
Balance,
September 26, 2008
|
|
$ |
211 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
211 |
|
(b) 2007 &
2008 facility shutdowns and consolidations. In the first quarter of
2007, the Company announced that it will close its current Electrochem
manufacturing facility in Canton, MA and construct a new 80,000 square foot
replacement facility in Raynham, MA. This initiative is not cost savings driven
but capacity driven for the commercial group.
In the
second quarter of 2007, the Company announced that it will consolidate its
corporate offices in Clarence, NY into its existing Research and Development
center also in Clarence, NY after an expansion of that facility was
complete. This expansion and relocation was completed in the third
quarter of 2008.
As a
result of its acquisitions in 2007 and 2008, during the second quarter of 2008,
the Company began reorganizing and consolidating various general and
administrative and research and development functions throughout the
organization in order to optimize those resources.
During the
third quarter of 2008, the Company ceased manufacturing at its facility in
Suzhou, China, which was acquired from EAC, and closed its manufacturing
facility in Orchard Park, NY, which was acquired from Intellisensing,
LLC. Additionally, the Company initiated the consolidation of one
Switzerland manufacturing location, which was acquired from
Precimed. The operations at these facilities will be relocated to
existing facilities which have excess capacity.
The above
initiatives are expected to be completed over the next three to nine
months. The total cost for these facility shutdowns and
consolidations is expected to be approximately $5.5 million to $6.9 million of
which $3.5 million has been incurred through September 26, 2008. The
major categories of costs include the following:
|
a.
|
Severance
and retention - $1.5 million - $1.9
million;
|
|
b.
|
Production
inefficiencies and revalidation - $1.6 million - $2.0
million;
|
|
c.
|
Accelerated
depreciation and asset write-offs - $1.6 million - $2.0
million;
|
|
d.
|
Personnel
- $0.3 million - $0.4 million; and
|
|
e.
|
Other
- $0.5 million - $0.6
million.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) –
Unaudited
All
categories of costs are considered to be cash expenditures, except accelerated
depreciation and asset write-offs. For the nine months ended
September 26, 2008 expenses of $1.1 million related to the Electrochem facility
expansion, Suzhou, China shutdown and Orchard Park facility consolidation which
are included in the Electrochem business segment. For the nine months
ended September 26, 2008 costs related to the relocation of the Company’s
corporate offices and reorganizing and consolidating various general and
administrative and research and development functions of $1.4 million were
included in the IMC business segment. The costs incurred in 2007 relate to the
facility expansion in Raynham, MA and are included in the Electrochem business
segment. As of September 26, 2008 and December 28, 2007, $0.2 million
and $0.5 million of accrued consolidation expenses relate to the IMC business
segment, respectively. The remaining $0.4 million of restructuring
charges were not allocated as they primarily related to corporate
functions.
Accrued
liabilities related to the 2007 & 2008 facility shutdowns and consolidations
are comprised of the following (in thousands):
|
|
|
Severance
and
retention
|
|
|
Production
inefficiencies
and
revalidation
|
|
|
Accelerated
depreciation/
asset
write-offs
|
|
|
Personnel
|
|
|
Other
|
|
|
Total
|
|
|
Balance,
December 29, 2006
|
|
$ |
570 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
570 |
|
|
Restructuring
charges
|
|
|
- |
|
|
|
- |
|
|
|
531 |
|
|
|
- |
|
|
|
- |
|
|
|
531 |
|
|
Write-offs
|
|
|
- |
|
|
|
- |
|
|
|
(531 |
) |
|
|
- |
|
|
|
- |
|
|
|
(531 |
) |
|
Cash
payments
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Balance,
December 28, 2007
|
|
$ |
570 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charges
|
|
|
1,439 |
|
|
|
461 |
|
|
|
788 |
|
|
|
82 |
|
|
|
184 |
|
|
|
2,954 |
|
|
Write-offs
|
|
|
- |
|
|
|
- |
|
|
|
(788 |
) |
|
|
- |
|
|
|
- |
|
|
|
(788 |
) |
|
Cash
payments
|
|
|
(1,756 |
) |
|
|
(461 |
) |
|
|
- |
|
|
|
(82 |
) |
|
|
(184 |
) |
|
|
(2,483 |
) |
|
Balance,
September 26, 2008
|
|
$ |
253 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
253 |
|
Subsequent
Event - In October 2008, management of the Company approved a plan for
the closure of its Teterboro, New Jersey (Electrochem manufacturing), Blaine,
Minnesota (Therapy Delivery manufacturing) and Exton, Pennsylvania (Orthopedics
corporate office) facilities. The operations at these facilities will be moved
to other existing facilities of the Company with excess capacity.
The total
cost for these facility consolidations is estimated to be between $5.7 million
and $7.0 million and will be incurred over the next twelve to fifteen
months. The major categories of costs include:
|
a.
|
Severance
and retention - $2.1 million to $2.5
million;
|
|
b.
|
Production
inefficiencies and revalidation - $0.3 million to $0.5
million;
|
|
c.
|
Accelerated
depreciation and asset write-offs - $1.5 million to $1.7
million;
|
|
d.
|
Personnel
- $1.2 million to $1.4 million; and
|
|
e.
|
Other
- $0.6 million to $0.9 million.
|
(c) Integration
costs. During the first nine months of 2008, the Company incurred costs
related to the integration of the companies acquired in 2007 and
2008. The integration initiatives include the implementation of the
Oracle ERP system, training and compliance with Company policies as well as the
implementation of lean manufacturing and six sigma initiatives. The
expenses are primarily for consultants, relocation and travel costs that will
not be required after the integrations are completed. The Company
expects to continue to incur these types of costs for the remainder of 2008 and
into the first half of 2009 at a quarterly rate that is consistent with the
current quarter amount.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) –
Unaudited
During the
third quarter of 2008, the balance of unrecognized tax benefits increased
approximately $0.6 million to $1.7 million. This is a result of an
increase of $0.7 million relating to tax positions taken in the current year,
offset by $0.1 million relating to a settlement with a taxing
authority. As of September 26, 2008, approximately $0.9 million of
unrecognized tax benefits would impact goodwill if recognized prior to December
31, 2008 (the adoption date of FAS 141R). Of the remaining approximately
$0.8 million of unrecognized tax benefits, approximately $0.6 million would
favorably impact the effective tax rate (net of federal benefit on state
issues), if recognized. We are still analyzing the impact of
Financial Accounting Standards Board (“FASB”) Interpretation No. 48 Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB SFAS No. 109, with respect to
the 2008 acquisitions. The Company does not anticipate that the total
unrecognized tax benefits would significantly change within the next twelve
months.
In the
fourth quarter of 2008, the Emergency Economic Stabilization Act (the Act) was
signed into law. This Act extended the research and development tax
credit for 2008 and 2009, retroactive to the beginning of 2008. In
accordance with US GAAP, reported net earnings for the third quarter of 2008 do
not include this benefit, which will be recognized as a reduction in the overall
effective tax rate in the fourth quarter.
12.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation – The Company is a party to
various legal actions arising in the normal course of business. While the
Company does not believe that the ultimate resolution of any such pending
actions will have a material adverse effect on its results of operations,
financial position or cash flows, except as indicated below, litigation is
subject to inherent uncertainties. If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact in the period in which
the ruling occurs.
As
previously reported, on June 12, 2006, Enpath was named as defendant in a
patent infringement action filed by Pressure Products Medical Supplies, Inc.
(“Pressure Products”) in the U.S. District Court in the Eastern District of
Texas. Pressure Products alleged that Enpath’s FlowGuard™ valved
introducer, which has been on the market for more than three years, infringes
claims in the Pressure Products patents and sought damages and injunctive
relief. Revenues from products sold that include the FlowGuard™ valved
introducer were approximately $3.0 million, $2.0 million and $1.5 million for
2007, 2006 and 2005, respectively. Pressure Products made the same
allegations against Enpath’s ViaSeal™ prototype introducer, which has not been
sold. Enpath filed an answer denying liability and a counterclaim seeking
to invalidate the patents. Trial began on June 6, 2008 and on June 12,
2008, a jury found that Enpath is infringing the Pressure Products patents, but
not willfully, and awarded damages in the amount of $1.1 million, which was
significantly less than what was sought. Pressure Products filed post-trial
motions to enforce the judgment, enjoin future sales of FlowGuard™ and ViaSeal™,
seek enhanced damages and seek an award of attorneys’ fees. Enpath filed a
motion to overturn the jury verdict and have the court invalidate the patents as
a matter of law. Following a hearing on those motions on July 31, 2008,
the Court denied Enpath’s motion to overturn the jury verdict, denied Pressure
Products’ motions for enhanced damages and attorneys’ fees (though the court
made a limited award of attorneys’ fees related to Enpath’s counterclaim for
antitrust and patent misuse), enjoined sales of ViaSeal™, but permitted future
sales of FlowGuard™ provided that Enpath, pending
any appeal, pay into an escrow fund a royalty of between $1.50 and $2.25 for
each sale of a FlowGuard™ valved introducer. The amount accrued as escrow
during the third quarter of 2008 was $0.08 million. The Court further
awarded Pressure Products costs and fees, which were extensively reduced
following Enpath’s objections. Although there can be no assurance as
to the ultimate outcome, Enpath continues to believe that Pressure Products’
case is without merit. Accordingly, Enpath appealed the final
judgment to the U.S. Court of Appeals for the Federal Circuit and the appeal was
docketed with the Federal Circuit on September 29, 2008. In
connection with the appeals process, the Company was required to post a $1.8
million bond in order to cover any potential pre and post-judgment interest
and/or costs. During the third quarter of 2008 the Company incurred
$0.3 million ($4.2 million year-to-date) of costs related to this
litigation.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) –
Unaudited
During
2002, a former non-medical customer commenced an action alleging that Greatbatch
had used proprietary information of the customer to develop certain
products. We have meritorious defenses and are vigorously defending the
matter. The potential risk of loss is up to $1.7 million.
Product
Warranties - The Company generally warrants that its products will meet
customer specifications and will be free from defects in materials and
workmanship. The Company accrues its estimated exposure to warranty
claims based upon recent historical experience and other specific information as
it becomes available.
The change
in aggregate product warranty liability for the quarter ended September 26, 2008
is as follows (in thousands):
|
Beginning
balance at June 27, 2008
|
|
$ |
1,373 |
|
|
Additions
to warranty reserve
|
|
|
577 |
|
|
Warranty
claims paid
|
|
|
(209 |
) |
|
Ending
balance at September 26, 2008
|
|
$ |
1,741 |
|
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. Our purchase orders are
normally based on our current manufacturing needs and are fulfilled by our
vendors within short time horizons. We enter into blanket orders with
vendors that have preferred pricing and terms, however these orders are normally
cancelable by us without penalty. As of September 26, 2008, the total
contractual obligation related to such expenditures is approximately $20.7
million and primarily relate to material purchase commitments. These
commitments will be financed by existing cash, availability under the Company’s
line of credit or cash generated from operations. We also enter into
contracts for outsourced services; however, the obligations under these
contracts were not significant and the contracts generally contain clauses
allowing for cancellation without significant penalty.
Operating
Leases - The Company is a party to various operating lease agreements for
buildings, equipment and software. Minimum future annual operating
lease payments are $0.6 million for the remainder of 2008; $2.1 million in 2009;
$1.6 million in 2010; $1.4 million in 2011; $1.4 million in 2012 and $3.4
million thereafter. The Company primarily leases buildings, which
accounts for the majority of the future lease payments.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) – Unaudited
Foreign Currency
Contract - In December 2007, the Company entered into a forward contract
to purchase 80,000,000 CHF, at an exchange rate of 1.1389 CHF per one U.S.
dollar, in order to partially fund the purchase price of Precimed, which was
payable in Swiss Francs. In January 2008, the Company entered into an
additional forward contract to purchase 20,000,000 CHF at an exchange rate of
1.1156 per one U.S. dollar. The Company entered into a similar
foreign exchange contract in January 2008 in order to fund the purchase price of
the Chaumont Facility, which was payable in Euros. The net result of
the above contracts, which were settled upon the funding of the respective
acquisitions, was a gain of $2.4 million, $1.6 million of which was recorded in
the first quarter of 2008 as other income.
13.
|
EARNINGS
PER SHARE (“EPS”)
|
The
following table reflects the calculation of basic and diluted EPS (in thousands,
except per share amounts):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Numerator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,629 |
|
|
$ |
5,000 |
|
|
$ |
10,060 |
|
|
$ |
12,270 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on convertible notes and related
deferred
financing fees, net of tax
|
|
|
223 |
|
|
|
223 |
|
|
|
- |
|
|
|
1,175 |
|
Numerator
for diluted earnings per share
|
|
$ |
7,852 |
|
|
$ |
5,223 |
|
|
$ |
10,060 |
|
|
$ |
13,445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
22,557 |
|
|
|
22,214 |
|
|
|
22,493 |
|
|
|
22,129 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
subordinated notes
|
|
|
1,296 |
|
|
|
1,296 |
|
|
|
- |
|
|
|
2,270 |
|
Stock
options and unvested restricted stock
|
|
|
234 |
|
|
|
362 |
|
|
|
204 |
|
|
|
340 |
|
Dilutive
potential common shares
|
|
|
1,530 |
|
|
|
1,658 |
|
|
|
204 |
|
|
|
2,610 |
|
Denominator
for diluted earnings per share
|
|
|
24,087 |
|
|
|
23,872 |
|
|
|
22,697 |
|
|
|
24,739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.34 |
|
|
$ |
0.23 |
|
|
$ |
0.45 |
|
|
$ |
0.55 |
|
Diluted
earnings per share
|
|
$ |
0.33 |
|
|
$ |
0.22 |
|
|
$ |
0.44 |
|
|
$ |
0.54 |
|
The
diluted weighted average share calculations do not include the following as they
are not dilutive to the EPS calculations:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time
based stock options and restricted stock
|
|
|
1,375,000 |
|
|
|
319,000 |
|
|
|
1,509,259 |
|
|
|
600,000 |
|
Performance
based stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock units
|
|
|
276,000 |
|
|
|
338,000 |
|
|
|
276,000 |
|
|
|
338,000 |
|
Convertible
subordinated notes
|
|
|
- |
|
|
|
- |
|
|
|
1,296,000 |
|
|
|
- |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) – Unaudited
The
Company’s comprehensive income (loss) as reported in the Condensed Consolidated
Statements of Operations and Comprehensive Income includes net income, foreign
currency translations gains (losses), unrealized loss on its interest rate swap
and the net unrealized loss on short-term investments available for sale,
adjusted for any realized gains/losses.
The
Company translates all assets and liabilities of its foreign subsidiaries, where
the US 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 these translation adjustments is
recorded in the condensed consolidated financial statements as comprehensive
income (loss). The aggregate translation adjustment for 2008 was $0.4
million. Translation adjustments are not adjusted for income taxes as
they relate to permanent investments in the Company’s foreign subsidiaries. Net
foreign currency transaction gains and losses included in other income amounted
to a gain of $0.3 million for the third quarter of 2008 and of $0.1 million for
the first nine months of 2008.
The
Company has designated its interest rate swap - see Note 6 - as a
cash flow hedge under SFAS No. 133. Accordingly, the effective
portion of any change in the fair value of the swap is recorded in comprehensive
income (loss), net of tax. The net unrealized loss on the Company’s
interest rate swap recorded in comprehensive income was $0.4 million for the
third quarter of 2008 and is reported net of a deferred income tax benefit of
$0.2 million. The net unrealized loss on the Company’s interest rate
swap recorded in comprehensive income was $0.03 million for the first nine
months of 2008 and is reported net of a deferred income tax benefit of $0.01
million.
The net
unrealized loss on short-term investments available for sale of $0.02 million
for the three month period ending September 26, 2008 is reported in the
condensed consolidated financial statements net of a deferred tax benefit of
$0.01 million. The net unrealized loss on short-term investments
available for sale of $0.9 million for the nine month period ending September
28, 2007 is reported in the condensed consolidated financial statements net
of a deferred tax benefit of $0.5 million.
15.
|
BUSINESS
SEGMENT AND GEOGRAPHIC INFORMATION
|
The
Company operates its business in two reportable segments – Implantable Medical
Components (“IMC”) and Electrochem. The IMC segment includes sales of
cardiac rhythm management (“CRM”), neuromodulation, therapy delivery and
orthopedic products. The therapy delivery product line was added
through the acquisitions of Enpath (2nd Qtr.)
and Quan (4th Qtr.)
in 2007. The orthopedic product line was added through the
acquisition of Precimed and the Chaumont Facility in the first quarter of
2008. The Electrochem segment includes revenue from the Company’s
wholly-owned subsidiary Electrochem Solutions, Inc. Electrochem designs and
manufactures high performance batteries and battery packs for use in the energy,
security, portable medical, environmental, mobile data and process
markets. With the acquisitions of EAC and IntelliSensing in the
fourth quarter of 2007, the Electrochem business includes revenue from the
design and manufacturing of rechargeable battery and wireless sensor
systems.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) – Unaudited
The
Company defines segment income from operations as sales less cost of sales
including amortization and expenses attributable to segment-specific selling,
general and administrative, research, development and engineering expenses, and
other operating expenses. Segment income also includes a portion of
non-segment specific selling, general and administrative, and research,
development and engineering expenses based on allocations appropriate to the
expense categories. The remaining unallocated operating expenses are
primarily corporate and administrative function expenses. The
unallocated operating expenses along with other income and expense are not
allocated to reportable segments. Transactions between the two
segments are not significant. IMC segment results for the first nine
months of 2008 includes $6.4 million and $2.2 million of inventory step-up
amortization and IPR&D expense, respectively, related to the acquisitions in
2007 and 2008. IMC segment results for the third quarter of 2007
includes $1.1 million and ($2.3 million) of inventory step-up amortization and
IPR&D expense, respectively, related to the acquisitions in
2007. IMC segment results for the first nine months of 2007 includes
$1.3 million and $16.1 million of inventory step-up amortization and IPR&D
expense, respectively, related to the acquisitions in 2007.
An
analysis and reconciliation of the Company’s business segment information to the
respective information in the condensed consolidated financial statements is as
follows (in thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
Sales:
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
IMC
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/Neuromodulation
|
|
$ |
64,859 |
|
|
$ |
56,956 |
|
|
$ |
187,848 |
|
|
$ |
188,159 |
|
Therapy
Delivery
|
|
|
14,521 |
|
|
|
10,047 |
|
|
|
46,824 |
|
|
|
11,632 |
|
Orthopedic
|
|
|
37,940 |
|
|
|
- |
|
|
|
106,700 |
|
|
|
- |
|
Total
IMC
|
|
|
117,320 |
|
|
|
67,003 |
|
|
|
341,372 |
|
|
|
199,791 |
|
Electrochem
|
|
|
18,922 |
|
|
|
12,006 |
|
|
|
58,672 |
|
|
|
34,540 |
|
Total
sales
|
|
$ |
136,242 |
|
|
$ |
79,009 |
|
|
$ |
400,044 |
|
|
$ |
234,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
income from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IMC
|
|
$ |
17,904 |
|
|
$ |
10,930 |
|
|
$ |
30,590 |
|
|
$ |
18,147 |
|
Electrochem
|
|
|
3,126 |
|
|
|
2,445 |
|
|
|
8,122 |
|
|
|
7,577 |
|
Total
segment income from operations
|
|
|
21,030 |
|
|
|
13,375 |
|
|
|
38,712 |
|
|
|
25,724 |
|
Unallocated
operating expenses
|
|
|
(5,316 |
) |
|
|
(3,035 |
) |
|
|
(15,786 |
) |
|
|
(11,129 |
) |
Operating
income as reported
|
|
|
15,714 |
|
|
|
10,340 |
|
|
|
22,926 |
|
|
|
14,595 |
|
Unallocated
other income (expense)
|
|
|
(2,892 |
) |
|
|
(596 |
) |
|
|
(7,648 |
) |
|
|
9,001 |
|
Income
before provision for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes as reported
|
|
$ |
12,822 |
|
|
$ |
9,744 |
|
|
$ |
15,278 |
|
|
$ |
23,596 |
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) – Unaudited
Sales by
geographic area are presented in the following table by allocating sales from
external customers based on where the products are shipped to (in
thousands):
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Sales
by geographic area:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
66,327 |
|
|
$ |
39,189 |
|
|
$ |
198,442 |
|
|
$ |
110,174 |
|
|
Non-Domestic
locations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
France
|
|
|
19,237 |
|
|
|
4,019 |
|
|
|
55,854 |
|
|
|
10,516 |
|
|
United
Kingdom
|
|
|
19,575 |
|
|
|
13,289 |
|
|
|
52,414 |
|
|
|
51,553 |
|
|
Puerto
Rico
|
|
|
13,707 |
|
|
|
11,131 |
|
|
|
40,457 |
|
|
|
28,615 |
|
|
All
other
|
|
|
17,396 |
|
|
|
11,381 |
|
|
|
52,877 |
|
|
|
33,473 |
|
|
Consolidated
sales
|
|
$ |
136,242 |
|
|
$ |
79,009 |
|
|
$ |
400,044 |
|
|
$ |
234,331 |
|
Long-lived
tangible assets by geographic area are as follows (in
thousands):
|
|
|
As
of
|
|
|
|
|
September
26,
|
|
|
December
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Long-lived
tangible assets:
|
|
|
|
|
|
|
|
United
States
|
|
$ |
143,142 |
|
|
$ |
111,364 |
|
|
Non-Domestic
locations
|
|
|
43,102 |
|
|
|
18,873 |
|
|
Consolidated
long-lived assets
|
|
$ |
186,244 |
|
|
$ |
130,237 |
|
Four
customers accounted for a significant portion of the Company’s sales as
follows:
|
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
17%
|
|
|
|
25%
|
|
|
|
17%
|
|
|
|
26%
|
|
|
Customer
B
|
|
|
14%
|
|
|
|
20%
|
|
|
|
13%
|
|
|
|
26%
|
|
|
Customer
C
|
|
|
13%
|
|
|
|
18%
|
|
|
|
13%
|
|
|
|
15%
|
|
|
Customer
D
|
|
|
13%
|
|
|
|
0%
|
|
|
|
12%
|
|
|
|
0%
|
|
|
Total
|
|
|
57%
|
|
|
|
63%
|
|
|
|
55%
|
|
|
|
67%
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) – Unaudited
16.
|
IMPACT
OF RECENTLY ISSUED ACCOUNTING
STANDARDS
|
In June
2008, the FASB issued Staff Position (“FSP”) 03-6-1,
“Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.”
This FSP concluded that all outstanding unvested share-based payment awards
(restricted stock) that contain rights to nonforfeitable dividends are considered
participating securities. Accordingly, the two-class method of computing basic
and diluted EPS is required for these securities. The Company does not believe
FSP 03-6-1 will materially impact its consolidated financial statements,
which will be effective beginning in fiscal year 2009.
In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement).” This FSP requires issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) separately account for the liability and equity components of those
instruments in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. This
statement is effective beginning in fiscal year 2009 and will be applied
retrospectively to all periods presented in future financial
statements. The Company is still evaluating the impact of FSP APB
14-1 on its consolidated financial statements. Preliminary estimates
indicate that this FSP will increase 2009 non-cash interest expense by
approximately $7 million to $8 million and correspondingly reduce 2009 diluted
EPS by approximately $0.19 per share to $0.22 per share.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133, and requires entities to
provide enhanced qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair values and amounts of
gains and losses on derivative contracts, and disclosures about
credit-risk-related contingent features in derivative agreements. The
Company is still evaluating the impact of SFAS No. 161 on its consolidated
financial statements which will be effective beginning in fiscal year
2009.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. This Statement replaces FASB Statement No. 141,
Business Combinations
but retains the fundamental requirements in SFAS No. 141 that the
acquisition method of accounting (which SFAS No. 141 called the purchase method) be used for
all business combinations. This Statement also retains the guidance
in SFAS No. 141 for identifying and recognizing intangible assets separately
from goodwill. However, SFAS No. 141(R) significantly changed the
accounting for business combinations with regards to the number of assets and
liabilities assumed that are to be measured at fair value, the accounting for
contingent consideration and acquired contingencies as well as the accounting
for direct acquisition costs and IPR&D. SFAS No. 141(R) is
effective for acquisitions consummated beginning in fiscal year 2009 and will
materially impact the Company’s consolidated financial statements if an
acquisition is consummated after the date of adoption.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial
Statements—an amendment of ARB No.
51. This Statement amends Accounting Research Bulletin No. 51
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. The Company
is still evaluating the impact of SFAS No. 160 on its consolidated financial
statements, which is effective beginning in fiscal year 2009.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) – Unaudited
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value while applying US GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 establishes a fair
value hierarchy that distinguishes between (1) market participant assumptions
based on market data obtained from independent sources and (2) the reporting
entity’s own assumptions developed based on unobservable inputs. In
February 2008, the FASB issued FSP FAS 157-b—Effective Date of FASB Statement No.
157. This FSP (1) partially defers the effective date of SFAS
No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities and (2) removes certain leasing transactions from the scope of SFAS
No. 157. The provisions of SFAS No. 157 applicable to the Company
beginning in fiscal year 2008 did not have a material effect on its consolidated
financial statements. The Company is still evaluating what impact the
provisions of SFAS No. 157 that were deferred will have on its consolidated
financial statements, which are effective beginning in fiscal year
2009.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our
Business
Greatbatch,
Inc. is a leading designer and manufacturer of high quality, innovative products
and systems to customers in the cardiac, neuromodulation, orthopedics and
commercial markets. When used in this report, the terms “we,” “us,” “our”
and the “Company” mean Greatbatch, Inc. and its subsidiaries. We
believe that our proprietary technology, close customer relationships, multiple
product offerings, market leadership and dedication to quality provide us with
competitive advantages and create a barrier to entry for potential market
entrants.
The
Company operates its business in two reportable segments – Implantable Medical
Components (“IMC”) and Electrochem. The IMC segment includes sales of
cardiac rhythm management (“CRM”), neuromodulation, therapy delivery and
orthopedic products. The therapy delivery product line was added
through the acquisitions of Enpath Medical, Inc. (“Enpath”) and Quan Emerteq,
LLC (“Quan”) in the second quarter and fourth quarter of 2007,
respectively. The orthopedic product line was added through the
acquisition of P Medical Holding SA (“Precimed”) and the DePuy Orthopedics
Chaumont, France manufacturing facility (the “Chaumont Facility”) in the first
quarter of 2008. The Electrochem segment includes revenue from the
Company’s wholly-owned subsidiary Electrochem Solutions, Inc.
(“Electrochem”). Electrochem designs and manufactures high
performance batteries and battery packs for use in the energy, security,
portable medical, environmental, mobile data and process
markets. With the acquisitions of Engineered Assemblies Corporation
(“EAC”) and IntelliSensing, LLC (“Intellisensing”) in the fourth quarter of
2007, the Electrochem business includes revenue from the design and
manufacturing of rechargeable battery and wireless sensor systems.
Our
Customers
Our IMC
customers include leading Original Equipment Manufacturers (“OEM”), in
alphabetical order here and throughout this report, such as Biotronik, Boston
Scientific, DePuy Orthopedics, Johnson & Johnson, Medtronic, the Sorin
Group, Smith & Nephew, St. Jude Medical and Zimmer Holdings,
Inc. The nature and extent of our selling relationships with each
IMC customer are different in terms of breadth of component products
purchased, purchased product volumes, length of contractual commitment, ordering
patterns, inventory management and selling prices. During 2007 and in
the first quarter of 2008, we completed five acquisitions in the IMC market
consistent with our strategic objective to diversify our customer base and
market concentration. For the first nine months of 2008, Boston
Scientific, DePuy Orthopedics, Medtronic and St. Jude Medical, collectively
accounted for 55% of our total sales, compared to 67% for the comparable 2007
period. Additionally, for the first nine months of 2008 sales to the
CRM market were below 50% of total sales compared to approximately 80% for the
same period in 2007.
Our
Electrochem customers are companies involved in the energy, security, portable
medical, environmental, mobile data and process markets and include Conmed
Linvatec, General Electric, Halliburton Company, PathFinder Energy Services,
Thales, Weatherford International and Zoll Medical.
Financial
Overview
Consolidated
sales in the third quarter of 2008 were $136.2 million, including $48.7 million
incremental revenue related to our acquisitions in 2007 and 2008, an increase of
72% over the prior year quarter. Excluding acquisitions, sales for the third
quarter of 2008 increased by 12% over the prior year primarily due to higher
sales of CRM products. Compared to the second quarter of 2008, sales
decreased $5.4 million primarily due to lower orthopedic revenue resulting from
holiday shutdowns at our European facilities.
Operating
income increased to $15.7 million for the third quarter of 2008, compared to
$10.3 million and $11.4 million for the third quarter of 2007 and second quarter
of 2008, respectively. Operating income for the third quarter of 2008
included $3.6 million of acquisition related charges, consolidation costs and
integration expenses compared to $0.1 million for the same period in 2007 and
$2.9 million for the second quarter of 2008. Operating margin
(operating income/sales) is lower due to the impact of our acquisitions in 2007
and 2008. We have initiated various consolidation initiatives aimed at
streamlining our operations and improving operating
profitability. The progress made on these initiatives can be seen by
the significant improvement in operating income over the last two
quarters. While this expansion in operating margin is indicative of
the type of improvements we are trying to achieve, we do not believe the current
quarter’s results can be assumed for a full year run-rate given the non-linear
nature of our business. In particular, the timing of customer orders,
inventory production and the implementation of our various operating initiatives
can all significantly impact, both positively and negatively, our operating
margins from quarter to quarter.
As of the
end of the third quarter of 2008, cash and cash equivalents totaled $20.0
million. These funds along with the cash generated from operations
($47.7 million for the first nine months of 2008) and the availability under our
line of credit are sufficient to meet our operating and investment activities
for the foreseeable future, including the cash expenditures relating to our
consolidation initiatives. Since the beginning of the year, we have
repaid $9 million of our debt.
Our CEO’s
View
We have
been working diligently on completing the integration of our strategic
acquisitions to improve the overall diversification of our business and leverage
the core operational and product development strengths of our
company. We believe this will significantly enhance our long term
growth and profitability. This
diversification strategy has helped expand our opportunity within a variety of
new markets, including the orthopedics and therapy delivery
markets. As part of the acquisitions, we were able to add proprietary
technologies and product lines to our portfolio as well as strategic
manufacturing and product development capabilities. In addition, we
expanded and diversified our global customer relationships.
Although
the acquisitions helped diversify our customer base and reduce our
concentration, it also created additional opportunities to sell a broader
portfolio of products across multiple divisions within several key accounts.
Instead of simply selling just to the cardiac rhythm management sector within
one of our customers, we can now sell to their orthopedics business,
neuromodulation, and therapy delivery sectors. We have taken great strides in
diversifying Greatbatch and will continue to integrate these new businesses and
look for ways to drive both near term and long term revenue gains.
Another
key element of our strategy is focused on streamlining our operational
efficiencies and optimizing our production. At Greatbatch, we have a history of
successfully optimizing and consolidating operations. We have already identified
and implemented several key initiatives to enhance the operating performance of
these new businesses and move them closer to our operating model. As evidenced
by the improvement in our operating margin from the second quarter of 2008, we
have begun to realize several of the benefits. We have approached this
initiative on several different fronts and expect our plans to take two years to
implement.
Based on
this and our current portfolio of research and development activities, we feel
we are in a strong competitive position for future growth and
profitability.
Product
Development
Currently,
we are developing a series of new products for customer applications in the CRM,
neuromodulation, therapy delivery, orthopedics and commercial
markets. Some of the key development initiatives
include:
|
1.
|
Continue
the evolution of our Q series high rate ICD
batteries;
|
|
2.
|
Continue
development of MRI compatible product
lines;
|
|
3.
|
Integrate
Biomimetic coating technology with therapy delivery
devices;
|
|
4.
|
Complete
design of next generation steerable
catheters;
|
|
5.
|
Further
minimally invasive surgical techniques for orthopedics
industry;
|
|
6.
|
Develop
disposable instrumentation;
|
|
7.
|
Provide
wireless sensing solutions to commercial customers;
and
|
|
8.
|
Develop
a charging platform for commercial secondary
offering.
|
In May
2008, we announced the execution of a letter of intent in which the Sorin Group
will leverage our MRI technology in their future CRM devices. At the same time
we continue to explore and develop similar relationships with other customers in
both the CRM and neuromodulation space. The MRI compatible leadwire system is
just one aspect of our goal to continue to deliver innovative solutions for our
customers that improve the functionality, safety, and efficiency of their
products.
Approximately
$2.3 million of the BIOMEC, Inc. (“BIOMEC”) purchase price was allocated to the
estimated fair value of acquired in-process research and development
(“IPR&D”) projects that had not yet reached technological feasibility and
had no alternative future use as of the acquisition date. The value
assigned to IPR&D relates to projects that incorporate BIOMEC’s
novel-polymer coating (biomimetic) technology that mimics the surface of
endothelial cells of blood vessels. We expect various products that
utilize the biomimetic coatings technology to be commercially launched by OEMs
in 2009 once Food and Drug Administration (“FDA”) approval is received.
There were no significant changes from our original estimates with regard to
these projects during the third quarter of 2008.
Approximately
$13.8 million of the Enpath purchase price was allocated to the estimated fair
value of acquired IPR&D projects that had not yet reached technological
feasibility and had no alternative future use. These projects primarily
represent the next generation of introducer and catheter products already being
sold by Enpath which incorporate new enhancements and customer
modifications. We expect to commercially launch various introducer
products in 2008 and 2009 which will replace existing products. However, some of
the introducer projects acquired have been delayed due to timing of customer
adoption and transition and technical difficulties of some of the
projects. Additionally, future sales from our ViaSealTM
introducer project have been enjoined due to litigation (See
“Litigation”). The catheter IPR&D project, to which a portion of
the Enpath purchase price was allocated, has been put on hold indefinitely in
order to allocate resources to more profitable projects. These delays
in introducer and catheter projects are not expected to have a material impact
on our results of operations.
Approximately
$2.2 million of the Precimed purchase price was allocated to the preliminary
estimated fair value of acquired IPR&D projects that had not yet reached
technological feasibility and had no alternative future use. The
value assigned to IPR&D related to Reamer, Instrument Kit, Locking Plate and
Cutting Guide projects. These projects primarily represent the next
generation of products already being sold by Precimed which incorporate new
enhancements and customer modifications. We expect to commercially
launch these products in 2008 and 2009. Several of the orthopedic
projects acquired have been delayed and one has been cancelled due to the timing
of customer adoption, technical difficulties and feasibility assessments. These
changes are not expected to have a material impact on our results of
operations.
Cost Savings and
Consolidation Efforts
2005 facility shutdowns and
consolidations - In the first quarter of 2005, we announced our intent to
close the Carson City, NV facility and consolidate the work performed at that
facility into the Tijuana, Mexico facility. This consolidation
project was completed in the third quarter of 2007.
In the
fourth quarter of 2005, we announced our intent to close both the Columbia, MD
facility (“Columbia Facility”) and the Fremont, CA Advanced Research Laboratory
(“ARL”). We also announced that the manufacturing operations at the
Columbia Facility would be moved into the Tijuana Facility and that the
research, development and engineering and product development functions at the
Columbia Facility and at ARL would relocate to the Technology Center in
Clarence, NY. The ARL move and closure portion of this consolidation
project was completed in the fourth quarter of 2006. The Columbia
Facility portion of this consolidation project was completed in the third
quarter of 2008.
The total
cost for these consolidations was $18.8 million and include the
following:
|
·
|
Severance
and retention - $7.4 million;
|
|
·
|
Production
inefficiencies and revalidation - $1.6
million;
|
|
·
|
Accelerated
depreciation and asset write-offs - $1.1
million;
|
|
·
|
Personnel
- $5.9 million; and
|
All
categories of costs are considered to be cash expenditures, except accelerated
depreciation and asset write-offs. The expenses for the 2005 facility
shutdowns and consolidations are included in the IMC business
segment.
2007 & 2008 facility
shutdowns and consolidations - In the first quarter of
2007, we announced that we will close our current Electrochem manufacturing
facility in Canton, MA and construct a new 80,000 square foot replacement
facility in Raynham, MA. This initiative is not cost savings driven but capacity
driven for the commercial group.
In the
second quarter of 2007, we announced that we will consolidate our corporate
offices in Clarence, NY into our existing Research and Development center in
Clarence, NY after an expansion of that facility was complete. This
expansion and relocation was completed in the third quarter of
2008.
As a
result of our acquisitions in 2007 and 2008, during the second quarter of 2008,
we began reorganizing and consolidating various general and administrative and
research and development functions throughout the organization in order to
optimize those resources.
During the
third quarter of 2008, we ceased manufacturing at our facility in Suzhou, China,
which was acquired from EAC, and closed our manufacturing facility in Orchard
Park, NY, which was acquired from Intellisensing, LLC. Additionally,
we initiated the consolidation of one Switzerland manufacturing location, which
we acquired from Precimed. The operations at these facilities will be
relocated to existing facilities which have excess capacity.
The above
initiatives are expected to be completed over the next three to nine
months. The total cost for these facility shutdowns and
consolidations is expected to be approximately $5.5 million to $6.9 million of
which $3.5 million has been incurred through September 26, 2008. The
major categories of costs include the following:
|
·
|
Severance
and retention - $1.5 million - $1.9
million;
|
|
·
|
Production
inefficiencies and revalidation - $1.6 million - $2.0
million;
|
|
·
|
Accelerated
depreciation and asset write-offs - $1.6 million - $2.0
million;
|
|
·
|
Personnel
- $0.3 million - $0.4 million; and
|
|
·
|
Other
- $0.5 million - $0.6 million.
|
All
categories of costs are considered to be cash expenditures, except accelerated
depreciation and asset write-offs. For the nine months ended
September 26, 2008 expenses of $1.1 million related to the Electrochem facility
expansion, Suzhou, China shutdown and Orchard Park facility consolidation which
are included in the Electrochem business segment. For the nine months
ended September 26, 2008 costs related to the relocation of our corporate
offices and reorganizing and consolidating various general and administrative
and research and development functions of $1.4 million were included in the IMC
business segment. The costs incurred in 2007 relate to the facility expansion in
Raynham, MA and are included in the Electrochem business segment. As of
September 26, 2008 and December 28, 2007, $0.2 million and $0.5 million of
accrued consolidation expenses relate to the IMC business segment, respectively.
The remaining $0.4 million of restructuring charges were not allocated as they
primarily related to corporate functions.
Integration costs -
During the first nine months of 2008, we incurred costs related to the
integration of the companies we acquired in 2007 and 2008. The
integration initiatives include the implementation of the Oracle ERP system,
training and compliance with our policies and procedures to support the
compliance and regulatory environment of an SEC company, as well as the
implementation of lean manufacturing and six sigma initiatives. The
expenses are primarily outside consultants, travel and communication charges
that will not be required in the future. We expect to continue to
incur these types of costs for the remainder of 2008 and into the first half of
2009 at a quarterly rate that is consistent with the current quarter
amount.
Subsequent
Event - In October 2008, management of the Company approved a plan for
the closure of its Teterboro, New Jersey (Electrochem manufacturing), Blaine,
Minnesota (Therapy Delivery manufacturing) and Exton, Pennsylvania (Orthopedics
corporate office) facilities. The operations at these facilities will be moved
to other existing facilities with excess capacity. The total cost for
these facility consolidations is estimated to be between $5.7 million and $7.0
million and will be incurred over the next twelve to fifteen
months. The major categories of costs include the
following:
|
a.
|
Severance
and retention - $2.1 million to $2.5
million;
|
|
b.
|
Production
inefficiencies and revalidation - $0.3 million to $0.5
million;
|
|
c.
|
Accelerated
depreciation and asset write-offs - $1.5 million to $1.7
million;
|
|
d.
|
Personnel
- $1.2 million to $1.4 million; and
|
|
e.
|
Other
- $0.6 million to $0.9 million.
|
Our Financial
Results
We utilize
a fifty-two, fifty-three week fiscal year ending on the Friday nearest December
31st. For 52-week years, each quarter contains 13
weeks. The third quarter of 2008 and 2007 ended on September 26, and
September 28, respectively. The commentary that follows should be
read in conjunction with our consolidated financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Form 10-K for the fiscal year ended December 28,
2007.
|
|
Three
months ended
|
|
|
|
|
|
|
|
|
Nine
months ended
|
|
|
|
|
|
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
$
|
|
|
%
|
|
|
September
26,
|
|
|
September
28,
|
|
|
$
|
|
|
%
|
|
In
thousands, except per share data
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
|
2008
|
|
|
2007
|
|
|
Change
|
|
|
Change
|
|
IMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/Neuromodulation
|
|
$ |
64,859 |
|
|
$ |
56,956 |
|
|
|
7,903 |
|
|
|
14 |
% |
|
$ |
187,848 |
|
|
$ |
188,159 |
|
|
|
(311 |
) |
|
|
0 |
% |
Therapy
Delivery
|
|
|
14,521 |
|
|
|
10,047 |
|
|
|
4,474 |
|
|
|
45 |
% |
|
|
46,824 |
|
|
|
11,632 |
|
|
|
35,192 |
|
|
NA
|
|
Orthopedic
|
|
|
37,940 |
|
|
|
- |
|
|
|
37,940 |
|
|
NA
|
|
|
|
106,700 |
|
|
|
- |
|
|
|
106,700 |
|
|
NA
|
|
Total
IMC
|
|
|
117,320 |
|
|
|
67,003 |
|
|
|
50,317 |
|
|
|
75 |
% |
|
|
341,372 |
|
|
|
199,791 |
|
|
|
141,581 |
|
|
|
71 |
% |
Electrochem
|
|
|
18,922 |
|
|
|
12,006 |
|
|
|
6,916 |
|
|
|
58 |
% |
|
|
58,672 |
|
|
|
34,540 |
|
|
|
24,132 |
|
|
|
70 |
% |
Total
sales
|
|
|
136,242 |
|
|
|
79,009 |
|
|
|
57,233 |
|
|
|
72 |
% |
|
|
400,044 |
|
|
|
234,331 |
|
|
|
165,713 |
|
|
|
71 |
% |
Cost
of sales -
excluding
amortization
of intangible
assets
|
|
|
92,779 |
|
|
|
48,647 |
|
|
|
44,132 |
|
|
|
91 |
% |
|
|
285,856 |
|
|
|
141,697 |
|
|
|
144,159 |
|
|
|
102 |
% |
Cost
of sales - amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of
intangible assets
|
|
|
1,710 |
|
|
|
1,222 |
|
|
|
488 |
|
|
|
40 |
% |
|
|
5,141 |
|
|
|
3,164 |
|
|
|
1,977 |
|
|
|
62 |
% |
Total
Cost of Sales
|
|
|
94,489 |
|
|
|
49,869 |
|
|
|
44,620 |
|
|
|
89 |
% |
|
|
290,997 |
|
|
|
144,861 |
|
|
|
146,136 |
|
|
|
101 |
% |
Cost
of sales as a % of sales
|
|
|
69.4 |
% |
|
|
63.1 |
% |
|
|
|
|
|
|
6.3 |
% |
|
|
72.7 |
% |
|
|
61.8 |
% |
|
|
|
|
|
|
10.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, and
administrative
expenses
(SG&A)
|
|
|
15,681 |
|
|
|
11,362 |
|
|
|
4,319 |
|
|
|
38 |
% |
|
|
52,685 |
|
|
|
32,130 |
|
|
|
20,555 |
|
|
|
64 |
% |
SG&A
as a % of sales
|
|
|
11.5 |
% |
|
|
14.4 |
% |
|
|
|
|
|
|
-2.9 |
% |
|
|
13.2 |
% |
|
|
13.7 |
% |
|
|
|
|
|
|
-0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
development
and
engineering costs,
net
(RD&E)
|
|
|
6,793 |
|
|
|
8,423 |
|
|
|
(1,630 |
) |
|
|
-19 |
% |
|
|
23,722 |
|
|
|
21,856 |
|
|
|
1,866 |
|
|
|
9 |
% |
RD&E
as a % of sales
|
|
|
5.0 |
% |
|
|
10.7 |
% |
|
|
|
|
|
|
-5.7 |
% |
|
|
5.9 |
% |
|
|
9.3 |
% |
|
|
|
|
|
|
-3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating expense, net
|
|
|
3,565 |
|
|
|
(985 |
) |
|
|
4,550 |
|
|
NA
|
|
|
|
9,714 |
|
|
|
20,889 |
|
|
|
(11,175 |
) |
|
|
-53 |
% |
Operating
income
|
|
|
15,714 |
|
|
|
10,340 |
|
|
|
5,374 |
|
|
|
52 |
% |
|
|
22,926 |
|
|
|
14,595 |
|
|
|
8,331 |
|
|
|
57 |
% |
Operating
margin
|
|
|
11.5 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
-1.6 |
% |
|
|
5.7 |
% |
|
|
6.2 |
% |
|
|
|
|
|
|
-0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
3,268 |
|
|
|
2,112 |
|
|
|
1,156 |
|
|
|
55 |
% |
|
|
9,908 |
|
|
|
5,345 |
|
|
|
4,563 |
|
|
|
85 |
% |
Interest
income
|
|
|
(142 |
) |
|
|
(1,586 |
) |
|
|
1,444 |
|
|
|
-91 |
% |
|
|
(663 |
) |
|
|
(6,028 |
) |
|
|
5,365 |
|
|
|
-89 |
% |
Other
(income) expense, net
|
|
|
(234 |
) |
|
|
70 |
|
|
|
(304 |
) |
|
NA
|
|
|
|
(1,597 |
) |
|
|
(8,318 |
) |
|
|
6,721 |
|
|
|
-81 |
% |
Provision
for income taxes
|
|
|
5,193 |
|
|
|
4,744 |
|
|
|
449 |
|
|
|
9 |
% |
|
|
5,218 |
|
|
|
11,326 |
|
|
|
(6,108 |
) |
|
|
-54 |
% |
Effective
tax rate
|
|
|
40.5 |
% |
|
|
48.7 |
% |
|
|
|
|
|
|
-8.2 |
% |
|
|
34.2 |
% |
|
|
48.0 |
% |
|
|
|
|
|
|
-13.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
7,629 |
|
|
$ |
5,000 |
|
|
$ |
2,629 |
|
|
|
53 |
% |
|
$ |
10,060 |
|
|
$ |
12,270 |
|
|
$ |
(2,210 |
) |
|
|
-18 |
% |
Net
margin
|
|
|
5.6 |
% |
|
|
6.3 |
% |
|
|
|
|
|
|
-0.7 |
% |
|
|
2.5 |
% |
|
|
5.2 |
% |
|
|
|
|
|
|
-2.7 |
% |
Diluted
earnings per share
|
|
$ |
0.33 |
|
|
$ |
0.22 |
|
|
$ |
0.11 |
|
|
|
50 |
% |
|
$ |
0.44 |
|
|
$ |
0.54 |
|
|
$ |
(0.10 |
) |
|
|
-19 |
% |
Sales
IMC. The nature and extent of
our selling relationship with each OEM customer is different in terms of
products purchased, selling prices, product volumes, ordering patterns and
inventory management. We have pricing arrangements with our customers that
at times do not specify minimum order quantities. Our visibility to
customer ordering patterns is over a relatively short period of time and can
significantly change from quarter to quarter. Our customers may have
inventory management programs and alternate supply arrangements of which we are
unaware. Additionally, the relative market share among the OEM
manufacturers changes periodically. Consequently, these and other factors can
significantly impact our sales in any given period.
Our
customers may initiate field actions with respect to market-released
products. These actions may include product recalls or communications
with a significant number of physicians about a product or labeling
issue. The scope of such actions can range from very minor issues
affecting a small number of units to more significant actions. There
are a number of factors, both short-term and long-term, related to these field
actions that may impact our results. Also, changing customer order
patterns due to market share shifts or accelerated device replacements may also
impact our sales results as customer inventory levels may have to be rebalanced
to match demand.
Third
quarter sales for the IMC business segment were $117.3 million, a 75% increase
over the prior year quarter and a 3% decrease over the second quarter of
2008.
The CRM
and neuromodulation product line reported revenues of $64.9 million for the
third quarter of 2008, a 14% increase compared to third quarter 2007 and
consistent with the sequential quarter. In comparison to the prior year, the
third quarter benefited from the increased adoption of our Q Series high rate
ICD batteries as well as higher feedthrough and assembly
revenue. These benefits were partially offset by lower demand for
coated components, due to a customer recall near the end of 2007 unrelated to
Greatbatch products, lower ICD battery sales and lower capacitor
sales.
2008 third
quarter revenues for the Therapy Delivery product line were $14.5 million,
compared to $10.0 million for the comparable 2007 quarter and $15.8 million for
the second quarter 2008. This increase over the prior year is
primarily due to the Quan acquisition in November 2007 which added $5.5 million
to revenue. The decrease from the sequential quarter was a result of
lower demand for our catheter products.
The
Orthopedic product line reported $37.9 million in sales for the quarter compared
to $41.0 million in the second quarter of 2008. This quarter’s
results include the seasonal impact of holiday manufacturing facility shut downs
at our European locations.
Electrochem. We
have pricing arrangements with our Electrochem customers that do not specify
minimum quantities. Therefore, our visibility to customer ordering
patterns is over a relatively short period of time.
Third
quarter sales for Electrochem were $18.9 million compared to $12.0 million in
the third quarter 2007 and $20.1 million in the second quarter of
2008. The increase in sales compared with the prior year is a result
of the acquisition of EAC in November 2007 which added $6.2 million to revenue,
as well as strong demand from the oil and gas market. The decrease
from the sequential quarter was primarily due to the timing of orders from our
customers.
Given the
results for the first three quarters of 2008, we remain comfortable that we will
achieve our original guidance for 2008 sales of between $490 million and $530
million. Looking forward into 2009, we expect to see revenue grow to
the range of $570 million to $610 million.
Cost
of sales
Changes
from the prior year to cost of sales as a percentage of sales were primarily due
to the following:
|
|
September
26, 2008
|
|
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended
|
|
|
ended
|
|
Impact
of 2008 and 2007 acquisitions
(a)
|
|
|
8.3 |
% |
|
|
8.1 |
% |
Inventory
step-up amortization(b)
|
|
|
-0.8 |
% |
|
|
1.3 |
% |
Mix
change (c)
|
|
|
1.4 |
% |
|
|
1.1 |
% |
Volume
(d)
|
|
|
-2.4 |
% |
|
|
0.4 |
% |
Other
|
|
|
-0.2 |
% |
|
|
0.0 |
% |
Total
percentage point change to cost of sales as a
|
|
|
|
|
|
|
|
|
percentage
of sales
|
|
|
6.3 |
% |
|
|
10.9 |
% |
(a)
|
We
completed seven acquisitions from the second quarter of 2007 to the first
quarter of 2008. The acquired companies are currently operating
with a higher cost of sales percentage than our legacy businesses due to
less efficient operations and products/contracts that generally carry
lower margins. We are currently in the process of applying our
“Lean” manufacturing processes to their operations and formalizing plans
for plant consolidation in order to lower cost of sales as a percentage of
sales. These initiatives, as well as increased sales volumes,
are expected to help improve our cost of sales percentage over the next
two years.
|
(b)
|
In
connection with our acquisitions in 2008 and 2007, the value of inventory
on hand was stepped-up to reflect the fair value at the time of
acquisition. This stepped-up value is amortized to cost of
sales – excluding intangible amortization as the inventory to which the
adjustment relates is sold. The inventory step-up amortization
was $6.4 million and $1.3 million for the first nine months of 2008 and
2007, respectively and $1.1 million for the third quarter of
2007. No inventory step-up amortization was recorded in the
third quarter of 2008.
|
(c)
|
The
revenue increase from 2007, excluding acquisitions, was primarily from
higher feedthrough, assembly and commercial battery sales, which generally
have lower margins. Additionally, revenue from coated
components, which is generally a higher margin product, was lower due to a
customer recall issue.
|
(d)
|
This
decrease in cost of sales is primarily due to higher production of legacy
products (mainly feedthrough, assembly and commercial battery), which
absorb a higher amount of fixed costs such as plant overhead and
depreciation. The higher commercial battery production resulted
from the building of safety stock in anticipation of the move of the
Canton facility to the new Raynham
facility.
|
We expect
our cost of sales as a percentage of sales to decrease over the next several
years as a result of our “Lean” initiatives and consolidation efforts, the
elimination of excess capacity and the elimination of inventory step-up
amortization related to the acquisitions.
SG&A
expenses
Changes
from the prior year to SG&A expenses were due to the following (in
thousands):
|
|
September
26, 2008
|
|
|
|
Three
months
|
|
|
Nine
months
|
|
|
|
ended
|
|
|
ended
|
|
Impact
of 2008 and 2007 acquisitions
(a)
|
|
$ |
3,798 |
|
|
$ |
14,687 |
|
Amortization
(b)
|
|
|
513 |
|
|
|
2,468 |
|
Enpath
litigation fees
(c)
|
|
|
80 |
|
|
|
3,935 |
|
Other
|
|
|
(72 |
) |
|
|
(535 |
) |
Net
increase in SG&A
|
|
$ |
4,319 |
|
|
$ |
20,555 |
|
(a)
|
We
completed seven acquisitions from the second quarter of 2007 to the first
quarter of 2008. Personnel working for the acquired companies
in functional areas such as Finance, Human Resources and Information
Technology were the primary drivers of this increase. The
remaining increase was for consulting, travel and other administrative
expenses to operate these areas. We are currently in the
process of consolidating our administrative operations in order to lower
SG&A costs. These initiatives are expected to be
implemented by the end of 2009 as we move to a shared services environment
and convert all systems to one ERP
system.
|
(b)
|
In
connection with our acquisitions in 2008 and 2007, the value of customer
relationships and non-compete agreements were recorded at fair value at
the time of acquisition. These intangible assets are amortized
to SG&A over their estimated useful
lives.
|
(c)
|
Amount
represents legal fees incurred in connection with the patent infringement
action filed by Pressure Products Medical Supplies, Inc. against Enpath in
2006 which continued to be defended during the current quarter – see
“Litigation.”
|
RD&E
expenses
Net
research, development and engineering costs are as follows (in
thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
$ |
4,534 |
|
|
$ |
4,493 |
|
|
$ |
14,193 |
|
|
$ |
12,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
costs
|
|
|
4,774 |
|
|
|
5,389 |
|
|
|
16,867 |
|
|
|
12,511 |
|
Less
cost reimbursements
|
|
|
(2,515 |
) |
|
|
(1,459 |
) |
|
|
(7,338 |
) |
|
|
(2,690 |
) |
Engineering
costs, net
|
|
|
2,259 |
|
|
|
3,930 |
|
|
|
9,529 |
|
|
|
9,821 |
|
Total
research and development and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
engineering
costs, net
|
|
$ |
6,793 |
|
|
$ |
8,423 |
|
|
$ |
23,722 |
|
|
$ |
21,856 |
|
The
changes in total research and development costs and engineering costs, net
(“RD&E”) for the three and nine months ended September 26, 2008 was
primarily a result of the acquisitions in 2007 and 2008, which added $1.0
million to RD&E for the third quarter of 2008 and $7.1 million to RD&E
for the nine month period. These increases were offset by our efforts
to streamline these functions, which began during the second quarter of 2008, to
better align these resources, and the timing of cost
reimbursements. RD&E expenses were 5.0% of sales for the third
quarter of 2008 and are expected to remain at these levels for the foreseeable
future.
Other
Operating Expenses
Acquired In-Process Research
and Development - Approximately $2.2 million of the Precimed
purchase price and $16.1 million of the Enpath and BIOMEC purchase price was
allocated to IPR&D projects acquired. These projects had not yet
reached technological feasibility and had no alternative future use as of the
acquisition date, thus were expensed in the first quarter of 2008 for Precimed
and the second quarter of 2007 for Enpath and BIOMEC. The Enpath IPR&D
valuation was lowered by $2.3 million during the third quarter of 2007 due to
the finalization of assumptions used in the excess earnings analysis. The
valuation of the IPR&D for Precimed is preliminary in nature and is subject
to adjustment as additional information is obtained. The valuation will be
finalized within 12 months of the close of the acquisition. Any changes to
the preliminary valuation may result in material adjustments to the
IPR&D.
The
remaining other operating expenses are comprised of the following costs (in
thousands):
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
26,
|
|
|
September
28,
|
|
|
September
26,
|
|
|
September
28,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
(a)
2005 facility shutdowns and consolidations
|
|
$ |
335 |
|
|
$ |
1,040 |
|
|
$ |
672 |
|
|
$ |
4,289 |
|
(a)
2007 & 2008 facility shutdowns and
consolidations
|
|
|
1,322 |
|
|
|
126 |
|
|
|
2,954 |
|
|
|
408 |
|
(a)
Integration costs
|
|
|
1,812 |
|
|
|
- |
|
|
|
3,876 |
|
|
|
- |
|
Asset
dispositions and other
|
|
|
96 |
|
|
|
109 |
|
|
|
(28 |
) |
|
|
99 |
|
|
|
$ |
3,565 |
|
|
$ |
1,275 |
|
|
$ |
7,474 |
|
|
$ |
4,796 |
|
(a)
|
Refer
to the “Cost Savings and Consolidation Efforts” discussion for disclosure
related to the timing and level of remaining expenditures for these items
as of September 26, 2008.
|
Interest
expense and interest income
Interest
expense for the three and nine month periods ended September 26, 2008 is $1.2
million and $4.6 million higher, respectively, than the prior year periods
primarily due to the additional $80 million of 2.25% convertible notes issued at
the end of the first quarter of 2007 as well as the additional interest expense
associated with $117 million of debt used to fund our acquisitions in
2008. Interest income for the three and nine months ended September
26, 2008 decreased by $1.4 million and $5.4 million, respectively, in comparison
to the same period of 2007 primarily due to the cash deployed in connection with
our acquisitions in 2008 and 2007. We expect interest income to
remain comparable to the current quarter’s level for the foreseeable
future. We are required to adopt Financial Accounting Standards Board
(“FASB”) Staff Position (“FSP”) FSP APB 14-1, “Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)” beginning in
2009. Preliminary estimates indicate that this FSP will
increase 2009 non-cash interest expense by approximately $7 million to $8
million.
Other
(income) expense, net
Gain on foreign currency
contracts - In December 2007, we entered into a forward contract to
purchase 80,000,000 Swiss Francs (“CHF”), at an exchange rate of 1.1389 CHF per
one U.S. dollar, in order to partially fund our acquisition of Precimed, which
closed in January 2008 and was payable in Swiss Francs. In January
2008, we entered into an additional forward contract to purchase 20,000,000 CHF
at an exchange rate of 1.1156 per one U.S. dollar. We entered into a
similar foreign exchange contract in January 2008 in order to fund our
acquisition of the Chaumont Facility, which closed in February 2008 and was
payable in Euros. The net result of the above transactions was a gain
of $2.4 million, $1.6 million of which was recorded in the first quarter of 2008
as other income.
Gain on sale of investment
security - In the second quarter of 2007, the Company sold an equity
security investment which resulted in a pre-tax gain of $4.0
million.
Gain on extinguishment of
debt - In March
2007, we entered into separate, privately negotiated agreements to exchange
$117.8 million of our original $170.0 million of 2.25% convertible subordinated
notes due 2013 (“CSN I”) for an equivalent principal amount of a new series of
2.25% convertible subordinated notes due 2013. The primary purpose of
this transaction was to eliminate the June 15, 2010 call and put option that is
included in the terms of CSN I. This exchange was accounted for as an
extinguishment of debt and resulted in a net pre-tax gain of $4.5
million.
Provision
for income taxes
The
year-to-date effective tax rate at the end of the third quarter of 2008 was 34%
compared to 48% for 2007. The effective tax rate includes the impact
of a Swiss tax holiday that was granted during the second quarter of 2008 which
resulted in a reduction of deferred tax liabilities of approximately $0.9
million. In addition, the effective tax rate for the first quarter of
2008 and second and third quarters of 2007 includes the impact of the acquired
IPR&D written off in connection with the Precimed, BIOMEC and Enpath
acquisitions which is not deductible for tax purposes. The effective
tax rate for the third quarter of 2008 of 40% increased from 29% in the
sequential quarter due to the Swiss tax holiday.
In the
fourth quarter of 2008, the Emergency Economic Stabilization Act (the “Act”) was
signed into law. The Act extended the research and development tax
credit for 2008 and 2009, retroactive to the beginning of 2008. Net
earnings for the third quarter of 2008 do not include this benefit, which will
be recognized as a reduction in the overall effective tax rate in the fourth
quarter. The effective tax rate (including the impact of this credit) is
expected to be approximately 35% for 2008.
Liquidity and Capital
Resources
|
|
September
26,
|
|
|
December
28,
|
|
(Dollars
in millions)
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and short-term investments
(a)(b)
|
|
$ |
20.0 |
|
|
$ |
40.5 |
|
Working
capital
(b)
|
|
$ |
129.3 |
|
|
$ |
116.8 |
|
Current
ratio (b)
|
|
2.5:1.0
|
|
|
2.8:1.0
|
|
(a)
|
Short-term
investments consist of investments acquired with maturities that exceed
three months and are less than one year at the time of
acquisition.
|
(b)
|
Cash
and cash equivalents and short-term investments decreased primarily due to
the cash used to acquire Precimed and the Chaumont Facility and capital
expenditures which were funded by $76.3 million of net cash received from
borrowings and $47.7 million of cash flow generated from
operations. Our working capital and current ratio remained
relatively consistent with year-end amounts. We expect cash
generated from operations to be sufficient to fund our consolidation and
integration initiatives, future capital expenditures and to make debt
service payments.
|
Revolving Line of
Credit
We have a
senior credit facility (the “Credit Facility”) consisting of a $235 million
revolving credit line, which can be increased to $335 million upon our
request. The Credit Facility also contains a $15 million letter of
credit subfacility and a $15 million swingline subfacility. The
Credit Facility is secured by our non-realty assets including cash, accounts and
notes receivable, and inventories, and has an expiration date of May 22, 2012
with a one-time option to extend to April 1, 2013 if no default has
occurred.
Interest
rates under the Credit Facility are, at our option, based upon the current prime
rate or the LIBOR rate plus a margin that varies with our leverage
ratio. If interest is paid based upon the prime rate, the applicable
margin is between minus 1.25% and 0.00%. If interest is paid based
upon the LIBOR rate, the applicable margin is between 1.00% and
2.00%. We are required to pay a commitment fee between 0.125% and
0.250% per annum on the unused portion of the Credit Facility based on our
leverage ratio.
The Credit
Facility contains limitations on the incurrence of indebtedness, limitations on
the incurrence of liens and licensing of intellectual property, limitations on
investments and restrictions on certain payments. Except to the
extent paid for by common equity of Greatbatch or paid for out of cash on hand,
the Credit Facility limits the amount paid for acquisitions in total to $100
million. The restrictions on payments, among other things, limit
repurchases of Greatbatch’s stock to $60 million and limits our ability to make
cash payments upon conversion of our subordinated notes. These
limitations can be waived upon our request and approval of a simple majority of
the lenders. Such waiver was obtained in order to fund the Precimed
acquisition.
In
addition, the Credit Facility requires us to maintain a ratio of adjusted
EBITDA, as defined in the credit agreement, to interest expense of at least 3.00
to 1.00, and a total leverage ratio, as defined in the credit agreement, of not
greater than 5.00 to 1.00 from May 22, 2007 through September 29, 2009 and not
greater than 4.50 to 1.00 from September 30, 2009 and thereafter. As
of September 26, 2008, we were in compliance with these financial
covenants.
The Credit
Facility contains customary events of default. Upon the occurrence
and during the continuance of an event of default, a majority of the lenders may
declare the outstanding advances and all other obligations under the Credit
Facility immediately due and payable.
In
connection with our acquisition of Precimed and the Chaumont Facility, we
borrowed $117 million under our revolving line of credit during the first
quarter of 2008. We repaid $7.0 million under this revolving line of
credit since that time. The weighted average interest rate on these
borrowings as of September 26, 2008, which does not include the impact of the
interest rate swap described below, was 4.1%. Interest rates reset
based upon the six-month ($87 million), three-month ($15 million) and two-month
($8 million) LIBOR rate. Based upon current capital needs, we do not anticipate
making significant principal payments on the revolving line of credit within the
next twelve months. As of September 26, 2008, the Company had $125
million available under its revolving line of credit.
Interest Rate Swap –
During the first quarter of 2008, we entered into an $80 million notional
receive floating-pay fixed interest rate swap indexed to the six-month LIBOR
rate that expires on July 7, 2010. The objective of this swap is to
hedge against potential changes in cash flows on $80 million of our revolving
line of credit, which is indexed to the six-month LIBOR rate. No
credit risk was hedged. The receive variable leg of the swap and the
variable rate paid on the revolving line of credit bear the same rate of
interest, excluding the credit spread, and reset and pay interest on the same
dates. We intend to keep electing six-month LIBOR as the benchmark
interest rate on the debt. If we repay the debt we intend to replace
the hedged item with similarly indexed forecast cash flows. The pay
fixed leg of the swap bears an interest rate of 3.09%, which does not include
the credit spread.
As of
September 26, 2008, the interest rate swap had a negative fair value of $0.04
million which was recorded in accumulated other comprehensive income, net of
deferred income taxes of $0.01 million. No portion of the change in
fair value of the interest rate swap during the first nine months of 2008 was
considered ineffective. The amount recorded as an offset to interest
expense during the first nine months of 2008 related to the interest rate swap
was $0.4 million.
Operating
activities
Net cash
flows from operating activities for the nine months ended September 26, 2008
increased $16.2 million over the comparable period in 2007. This
increase was primarily driven by higher net income excluding non-cash items
(consisting of depreciation, amortization, stock-based compensation, non-cash
gains/losses) of $10.3 million and cash flow provided by operating
accounts. The extinguishment of debt in the first quarter of 2007
resulted in a reclassification of approximately $11.3 million of current income
tax liability, which was paid over the remainder of 2007. This amount was
previously recorded as a non-current deferred tax liability on the balance
sheet. The remaining variances can be attributed to the timing of
cash receipts and payments, including those related to the companies acquired in
2007 and 2008.
Investing
activities
Net cash
used in investing activities of $135.9 million for the nine months ended
September 26, 2008 increased $64.7 million over the comparable period in
2007. This was primarily the result of the acquisition of Precimed
and the Chaumont Facility in 2008. The increase in property, plant
and equipment purchases of $25.0 million primarily relates to construction of
our new Electrochem manufacturing facility in Raynham, MA and the expansion of
our corporate offices initiated in the third quarter of 2007. The
remaining capital expenditures for 2008 are expected to total approximately $15
million to $20 million.
Financing
activities
Cash flow
provided by financing activities for the first nine months of 2008 was primarily
related to $117.0 million of borrowings on our revolving line of credit taken in
connection with the acquisition of Precimed and the Chaumont Facility, of which
$7.0 million was repaid as of September 26, 2008. We repaid $31.7
million of the debt assumed from Precimed simultaneously with the close of the
acquisition and an additional $2.0 million in the third quarter of
2008. We repaid $7.1 million of debt assumed from Enpath
simultaneously with the close of the acquisition. During the first
quarter of 2007 we received net proceeds of $76.0 million in connection with our
issuance of 2.25% convertible subordinated notes and paid $6.6 million of
financing fees related to that transaction and the new revolving credit
agreement discussed above.
Capital
structure
At
September 26, 2008, our capital structure consisted of $242.3 million of
convertible subordinated notes, $110.0 million of debt under our revolving line
of credit and 22.9 million shares of common stock
outstanding. Additionally, we have $20.0 million in cash, cash
equivalents which is sufficient to meet our short-term operating cash
needs. If necessary, we have access to $125 million under our
available line of credit and are authorized to issue 100 million shares of
common stock and 100 million shares of preferred stock. The market
value of our outstanding common stock since our initial public offering has
exceeded our book value; accordingly, we believe that if needed we can access
public markets to raise additional capital. Our capital structure
allows us to support our internal growth and provides liquidity for corporate
development initiatives. Our current expectation for the remainder of
2008 is that capital spending will be approximately $15 million to $20
million.
Off-Balance Sheet
Arrangements
We have no
off-balance sheet arrangements within the meaning of Item 303(a)(4) of
Regulation S-K.
Contractual
Obligations
The
following table summarizes our contractual obligations at September 26, 2008,
and the effect such obligations are expected to have on our liquidity and cash
flows in future periods, and include the impact of the Precimed and Chaumont
Facility acquisitions.
|
|
Payments
due by period
|
|
|
|
Total
|
|
|
Remainder
of
2008
|
|
|
|
2009-2010
|
|
|
|
2011-2012
|
|
|
After
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt obligations (a)
|
|
$ |
403,256 |
|
|
$ |
2,534 |
|
|
$ |
20,270 |
|
|
$ |
127,639 |
|
|
$ |
252,813 |
|
Operating
lease obligations
(b)
|
|
|
10,473 |
|
|
|
642 |
|
|
|
3,667 |
|
|
|
2,795 |
|
|
|
3,369 |
|
Purchase
obligations (b)
|
|
|
20,719 |
|
|
|
4,494 |
|
|
|
16,225 |
|
|
|
- |
|
|
|
- |
|
Pension
obligations
(c)
|
|
|
9,823 |
|
|
|
242 |
|
|
|
1,849 |
|
|
|
1,985 |
|
|
|
5,747 |
|
Total
|
|
$ |
444,271 |
|
|
$ |
7,912 |
|
|
$ |
42,011 |
|
|
$ |
132,419 |
|
|
$ |
261,929 |
|
(a)
|
Includes
the annual interest expense on the convertible debentures of 2.25%, or
$5.6 million, and on our variable-rate revolving line of credit of $4.5
million based upon the period end weighted average interest rate of
4.1%. These amounts assume the 2010 conversion feature is not
exercised on the $52.2 million of 2.25% convertible subordinated notes
issued in May 2003 and that the amount outstanding on our revolving line
of credit is not repaid until the expiration of the facility in May
2012. These amounts also do not include the impact of our $80
million notional interest rate swap entered into to hedge a portion of the
outstanding revolving line of credit. See Note 6 – “Long-Term Debt” of the
Notes to the Condensed Consolidated Financial Statements in this Form 10-Q
for additional information about our long-term debt
obligations.
|
(b)
|
See
Note 12 – “Commitments and Contingencies” of the Notes to the Condensed
Consolidated Financial Statements in this Form 10-Q for additional
information about our operating lease and purchase
obligations.
|
(c)
|
See
Note 7 – “Pension Plans” of the Notes to the Condensed Consolidated
Financial Statements in this Form 10-Q for additional information about
our pension plan obligations acquired in connection with the Precimed and
Chaumont Facility acquisitions. These amounts do not include
any potential future contributions to the pension plan that may be
necessary if the rate of return earned on the pension plan assets is not
sufficient to fund the rate of increase of our pension
liability. Future cash contributions may be
required.
|
Litigation
We are a
party to various legal actions arising in the normal course of business. While
we do not believe that the ultimate resolution of any such pending activities
will have a material adverse effect on our consolidated results of operations,
financial position or cash flows, except as indicated below, litigation is
subject to inherent uncertainties. If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact in the period in which
the ruling occurs.
As
previously reported, on June 12, 2006, Enpath was named as defendant in a
patent infringement action filed by Pressure Products Medical Supplies, Inc.
(“Pressure Products”) in the U.S. District Court in the Eastern District of
Texas. Pressure Products alleged that Enpath’s FlowGuard™ valved
introducer, which has been on the market for more than three years, infringes
claims in the Pressure Products patents and sought damages and injunctive
relief. Revenues from products sold that include the FlowGuard™ valved
introducer were approximately $3.0 million, $2.0 million and $1.5 million for
2007, 2006 and 2005, respectively. Pressure Products made the same
allegations against Enpath’s ViaSeal™ prototype introducer, which has not been
sold. Enpath filed an answer denying liability and a counterclaim seeking
to invalidate the patents. Trial began on June 6, 2008 and on June 12,
2008, a jury found that Enpath is infringing the Pressure Products patents, but
not willfully, and awarded damages in the amount of $1.1 million, which was
significantly less than what was sought. Pressure Products filed post-trial
motions to enforce the judgment, enjoin future sales of FlowGuard™ and ViaSeal™,
seek enhanced damages and seek an award of attorneys’ fees. Enpath filed a
motion to overturn the jury verdict and have the court invalidate the patents as
a matter of law. Following a hearing on those motions on July 31, 2008,
the Court denied Enpath’s motion to overturn the jury verdict, denied Pressure
Products’ motions for enhanced damages and attorneys’ fees (though the court
made a limited award of attorneys’ fees related to Enpath’s counterclaim for
antitrust and patent misuse), enjoined sales of ViaSeal™, but permitted future
sales of FlowGuard™ provided that Enpath, pending any appeal, pay into an escrow
fund a royalty of between $1.50 and $2.25 for each sale of a FlowGuard™ valved
introducer. The amount accrued as escrow during the third quarter of 2008
was $0.08 million. The Court further awarded Pressure Products costs
and fees, which were extensively reduced following Enpath’s
objections. Although there can be no assurance as to the ultimate
outcome, Enpath continues to believe that Pressure Products’ case is without
merit. Accordingly, Enpath appealed the final judgment to the U.S.
Court of Appeals for the Federal Circuit and the appeal was docketed with the
Federal Circuit on September 29, 2008. In connection with the appeals
process, we were required to post a $1.8 million bond in order to cover any
potential pre and post-judgment interest and/or costs. During the
third quarter of 2008 the Company incurred $0.3 million ($4.2 million
year-to-date) of costs related to this litigation.
During
2002, a former non-medical customer commenced an action alleging that Greatbatch
had used proprietary information of the customer to develop certain
products. We have meritorious defenses and are vigorously defending the
matter. The potential risk of loss is up to $1.7 million.
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. Additionally, increasing global demand for some
of the critical raw materials we need for our business has caused the prices of
these materials to increase significantly. Our results may be
negatively impacted by an increase in the price of these critical raw
materials. This risk is partially mitigated as many of the supply
agreements with our customers allow us to partially adjust prices for the impact
of any raw material price increases and the supply agreements with our vendors
have final one-time buy clauses to meet a long-term
need. Historically, raw material price increases have not materially
impacted our results of operations.
Impact of Recently Issued
Accounting Standards
In June
2008, the FASB issued FSP 03-6-1,
“Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.”
This FSP concluded that all outstanding unvested share-based payment awards
(restricted stock) that contain rights to nonforfeitable dividends are considered
participating securities. Accordingly, the two-class method of computing basic
and diluted EPS is required for these securities. We do not believe FSP
03-6-1 will materially impact our consolidated financial statements, which
will be effective beginning in fiscal year 2009.
In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement).” This FSP requires issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) separately account for the liability and equity components of those
instruments in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. This
statement is effective beginning in fiscal year 2009 and will be applied
retrospectively to all periods presented in future financial
statements. We are still evaluating the impact of FSP APB 14-1 on our
consolidated financial statements. Preliminary estimates indicate
that this FSP will increase 2009 non-cash interest expense by approximately $7
million to $8 million and correspondingly reduce 2009 diluted EPS by
approximately $0.19 per share to $0.22 per share.
In March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures
about Derivative Instruments and Hedging Activities. SFAS No. 161 amends
and expands the disclosure requirements of SFAS No. 133, and requires entities
to provide enhanced qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair values and amounts of
gains and losses on derivative contracts, and disclosures about
credit-risk-related contingent features in derivative agreements. We
are still evaluating the impact of SFAS No. 161 on our consolidated
financial statements which will be effective beginning in fiscal year
2009.
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations. This
Statement replaces FASB Statement No. 141, Business Combinations but
retains the fundamental requirements in SFAS No. 141 that the acquisition
method of accounting (which SFAS No. 141 called the purchase method) be used for
all business combinations. This Statement also retains the guidance
in SFAS No. 141 for identifying and recognizing intangible assets separately
from goodwill. However, SFAS No. 141(R) significantly changed the
accounting for business combinations with regards to the number of assets and
liabilities assumed that are to be measured at fair value, the accounting for
contingent consideration and acquired contingencies as well as the accounting
for direct acquisition costs and IPR&D. SFAS No. 141(R) is
effective for acquisitions consummated beginning in fiscal year 2009 and will
materially impact our consolidated financial statements if an acquisition is
consummated after the date of adoption.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No.
51. This Statement amends Accounting Research Bulletin No. 51
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. We are
still evaluating the impact of SFAS No. 160 on our consolidated financial
statements, which is effective beginning in fiscal year 2009.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value while applying generally accepted accounting
principles, and expands disclosures about fair value measurements. SFAS
No. 157 establishes a fair value hierarchy that distinguishes between (1) market
participant assumptions based on market data obtained from independent sources
and (2) the reporting entity’s own assumptions developed based on unobservable
inputs. In February 2008, the FASB issued FSP FAS 157-b—Effective Date of FASB Statement No.
157. This FSP (1) partially defers the effective date of SFAS
No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities and (2) removes certain leasing transactions from the scope of SFAS
No. 157. The provisions of SFAS No. 157 applicable to us beginning in
fiscal year 2008 did not have a material effect on our consolidated financial
statements. We are still evaluating what impact the provisions of SFAS No.
157 that were deferred will have on our consolidated financial statements, which
are effective beginning in fiscal year 2009.
Application of Critical
Accounting Estimates
Our
unaudited condensed consolidated financial statements are based on the selection
of accounting policies and the application of significant accounting estimates,
some of which require management to make significant assumptions. We
believe that some of the more critical estimates and related assumptions that
affect our financial condition and results of operations are in the areas of
inventories, goodwill and other indefinite lived intangible assets, long-lived
assets, share-based compensation and income taxes. For further
information, refer to Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and Item 8 “Financial Statements and
Supplementary Data” in our Annual Report on Form 10-K for the year ended
December 28, 2007. During the three months ended September 26, 2008,
we did not change or adopt new accounting policies that had a material effect on
our consolidated financial condition and results of operations.
Forward-Looking
Statements
Some of
the statements contained in this Quarterly Report on Form 10-Q and other written
and oral statements made from time to time by us and our representatives are not
statements of historical or current fact. As such, they are “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
|
•
|
future
sales, expenses and profitability;
|
|
•
|
the
future development and expected growth of our business and the markets we
operate in;
|
|
•
|
our
ability to successfully execute our business model and our business
strategy;
|
|
•
|
our
ability to identify trends within the implantable medical devices, medical
components, and commercial power sources markets and to offer products and
services that meet the changing needs of those
markets;
|
|
•
|
projected
capital expenditures; and
|
|
•
|
trends
in government regulation.
|
You can
identify forward-looking statements by terminology such as “may,” “will,”
“should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of these
terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from
those suggested by these forward-looking statements. In evaluating
these statements and our prospects generally, you should carefully consider the
factors set forth below. All forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by these cautionary factors and to others contained throughout this
report. We are under no duty to update any of the forward-looking
statements after the date of this report or to conform these statements to
actual results.
Although
it is not possible to create a comprehensive list of all factors that may cause
actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to successfully consummate and
integrate acquisitions, unsuccessful expansion into new markets, competition,
inability to obtain licenses to key technology, regulatory changes or
consolidation in the healthcare industry, and other risks and uncertainties that
arise from time to time as described in the Company's Annual Report on Form 10-K
and other periodic filings with the Securities and Exchange
Commission.
ITEM
3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
With our
acquisition of Precimed and the Chaumont Facility, we significantly increased
our exposure to foreign currency exchange rate fluctuations due to transactions
denominated in Swiss Francs, British Pounds and Euros. We are
currently in the process of evaluating our foreign currency risk as a result of
these transactions in order to develop a plan to best mitigate these risks,
which could include the use of various derivative instruments. We
believe that a hypothetical 10% change in the value of the U.S. Dollar in
relation to our most significant foreign currency exposures would not have a
material impact on our net earnings due to partially offsetting impacts between
sales and cost of sales and operating expenses.
In
December 2007, we entered into a forward contract to purchase 80,000,000 CHF, at
an exchange rate of 1.1389 CHF per one U.S. dollar, in order to partially fund
the acquisition of Precimed, which closed in January 2008 and was payable in
Swiss Francs. In January 2008, we entered into an additional forward
contract to purchase 20,000,000 CHF at an exchange rate of 1.1156 per one U.S.
dollar. We entered into a similar foreign exchange contract in
January 2008 in order to fund the acquisition of the Chaumont Facility, which
closed in February 2008 and was payable in Euros. The net result of the
above transactions was a gain of $2.4 million, $1.6 million of which was
recorded in 2008 as other income.
We
translate all assets and liabilities of our foreign operations of Precimed and
the Chaumont Facility acquired in 2008 at the period-end exchange rate and
translate sales and expenses at the average exchange rates in effect during the
period. The net effect of these translation adjustments is recorded
in the condensed consolidated financial statements as comprehensive income
(loss). The aggregate translation adjustment for the first nine
months of 2008 was a gain of $0.4 million. Translation adjustments
are not adjusted for income taxes as they relate to permanent investments in our
foreign subsidiaries. Net foreign currency transaction gains and
losses included in other income amounted to a gain of $0.3 million for the third
quarter of 2008 and $0.1 million during the first nine months of
2008. 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 $11 million on our foreign net assets as of September
26, 2008.
Borrowings
under our revolving line of credit bear interest at fluctuating market rates
based upon the Prime Rate or LIBOR Rate. At September 26, 2008, we
had $110.0 million outstanding debt under our line of credit and thus were
subject to interest rate fluctuations. To help mitigate this risk,
during the first quarter of 2008, we entered into an $80 million notional
receive floating-pay fixed interest rate swap indexed to the six-month LIBOR
rate that expires on July 7, 2010. The objective of this swap is to
hedge against potential changes in cash flows on $80 million of our revolving
line of credit, which is indexed to the six-month LIBOR rate. No credit risk was
hedged. The receive variable leg of the swap and the variable rate
paid on the revolving line of credit bear the same rate of interest, excluding
the credit spread, and reset and pay interest on the same dates. We
intend to continue electing six-month LIBOR as the benchmark interest rate on
the debt. If we repay the debt we intend to replace the hedged item with
similarly indexed forecast cash flows. The pay fixed leg of the swap
bears an interest rate of 3.09%, which does not include our credit
spread.
As of
September 26, 2008, a negative fair value adjustment of $0.04 million was
recorded related to our interest rate swap. No portion of the change
in fair value of the interest rate swap during the first nine months of 2008 was
considered ineffective. The amount recorded as an offset to interest
expense during the first nine months of 2008 related to the interest rate swap
was $0.4 million.
A
hypothetical 10% change in the LIBOR interest rate to the remaining $30 million
of floating rate debt would have had an impact of approximately $0.1 million on
our 2008 interest expense. This amount is not indicative of the
hypothetical net earnings impact due to partially offsetting impacts on our
short-term investments and cash and cash equivalents to interest
income.
a. Evaluation of Disclosure
Controls and Procedures.
Our
management, including the principal executive officer and principal financial
officer, evaluated our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to
the recording, processing, summarization and reporting of information in our
reports that we file with the SEC as of September 26, 2008. 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 other of our
employees, and that this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in the
SEC’s rules and forms.
Based on
their evaluation, as of September 26, 2008, 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
completed the following acquisitions during 2007 and 2008:
|
·
|
Enpath
Medical, Inc. (“Enpath”) on June 15,
2007
|
|
·
|
IntelliSensing,
LLC on October 26, 2007
|
|
·
|
Quan
Emerteq, LLC (“Quan”) on November 16,
2007
|
|
·
|
Engineered
Assemblies Corporation (“EAC”) on November 16,
2007
|
|
·
|
P
Medical Holding SA on January 7,
2008
|
|
·
|
DePuy
Orthopedics Chaumont, France manufacturing facility on February 11,
2008
|
We believe
that the internal controls and procedures of the above mentioned acquisitions
are reasonably likely to materially affect our internal control over financial
reporting. We are currently in the process of incorporating the
internal controls and procedures of these acquisitions into our internal
controls over financial reporting.
The
Company continues to extend its Section 404 compliance program under the
Sarbanes-Oxley Act of 2002 (the “Act”) and the applicable rules and regulations
under such Act to include these acquisitions. This included the
conversion of the legacy ERP systems of Enpath, Quan and EAC in the third
quarter of 2008 to the Oracle-based platform currently being utilized by other
Greatbatch locations. The Company has excluded the 2007
acquisitions listed above from management’s assessment of the effectiveness of
internal control over financial reporting as of December 28, 2007, as permitted
by the guidance issued by the Office of the Chief Accountant of the Securities
and Exchange Commission. The Company will report on its assessment of
the internal controls of its combined operations within the time period provided
by the Act and the applicable SEC rules and regulations concerning business
combinations.
There were
no other changes in the registrant’s internal control over financial reporting
during our fiscal quarter to which this Quarterly Report on Form 10-Q relates
that have materially affected, or are reasonably likely to materially affect,
internal control over financial reporting, other than the above mentioned
acquisitions.
As
previously reported, on June 12, 2006, Enpath was named as defendant in a
patent infringement action filed by Pressure Products Medical Supplies, Inc.
(“Pressure Products”) in the U.S. District Court in the Eastern District of
Texas. Pressure Products alleged that Enpath’s FlowGuard™ valved
introducer, which has been on the market for more than three years, infringes
claims in the Pressure Products patents and sought damages and injunctive
relief. Revenues from products sold that include the FlowGuard™ valved
introducer were approximately $3.0 million, $2.0 million and $1.5 million for
2007, 2006 and 2005, respectively. Pressure Products made the same
allegations against Enpath’s ViaSeal™ prototype introducer, which has not been
sold. Enpath filed an answer denying liability and a counterclaim seeking
to invalidate the patents. Trial began on June 6, 2008 and on June 12,
2008, a jury found that Enpath is infringing the Pressure Products patents, but
not willfully, and awarded damages in the amount of $1.1 million, which was
significantly less than what was sought. Pressure Products filed post-trial
motions to enforce the judgment, enjoin future sales of FlowGuard™ and ViaSeal™,
seek enhanced damages and seek an award of attorneys’ fees. Enpath filed a
motion to overturn the jury verdict and have the court invalidate the patents as
a matter of law. Following a hearing on those motions on July 31, 2008,
the Court denied Enpath’s motion to overturn the jury verdict, denied Pressure
Products’ motions for enhanced damages and attorneys’ fees (though the court
made a limited award of attorneys’ fees related to Enpath’s counterclaim for
antitrust and patent misuse), enjoined sales of ViaSeal™, but permitted future
sales of FlowGuard™ provided that Enpath, pending any appeal, pay into an escrow
fund a royalty of between $1.50 and $2.25 for each sale of a FlowGuard™ valved
introducer. The amount accrued as escrow during the third quarter of 2008
was $0.08 million. The Court further awarded Pressure Products costs
and fees, which were extensively reduced following Enpath’s
objections. Although there can be no assurance as to the ultimate
outcome, Enpath continues to believe that Pressure Products’ case is without
merit. Accordingly, Enpath appealed the final judgment to the U.S.
Court of Appeals for the Federal Circuit and the appeal was docketed with the
Federal Circuit on September 29, 2008. In connection with the appeals
process, the Company was required to post a $1.8 million bond in order to cover
any potential pre and post-judgment interest and/or costs. During the
third quarter of 2008 the Company incurred $0.3 million ($4.2 million
year-to-date) of costs related to this litigation.
There have
been no material changes in risk factors as previously disclosed in the
Company’s Form 10-K for the year ended December 28, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS. None.
None.
See the
Exhibit Index for a list of those exhibits filed
herewith.
Pursuant
to the requirements 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.
Dated: November
4, 2008
|
GREATBATCH,
INC.
By /s/ Thomas J.
Hook
Thomas
J. Hook
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
By /s/ Thomas J.
Mazza
Thomas
J. Mazza
Senior
Vice President and Chief Financial Officer
(Principal
Financial Officer)
|
|
|
|
By /s/ Marco F.
Benedetti
Marco
F. Benedetti
Corporate
Controller
(Principal
Accounting Officer)
|
Exhibit
No.
|
|
Description
|
|
|
|
3.1
|
|
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).
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3.2
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Amended
and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our
quarterly report on Form 10-Q for the period ended March 29,
2002).
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31.1*
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Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
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31.2*
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Certification
of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
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32*
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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.
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* - Filed
herewith.
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