UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For The
Fiscal Year Ended January 2, 2009
Commission
File Number 1-16137
GREATBATCH,
INC.
(Exact
name of Registrant as specified in its charter)
Delaware
(State
of Incorporation)
|
16-1531026
(I.R.S.
Employer Identification
No.)
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10000
Wehrle Drive
Clarence,
New York 14031
(Address
of principal executive offices)
(716)
759-5600
(Registrant’s
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Title
of Each Class:
|
Name
of Each Exchange on Which Registered:
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Common
Stock, Par Value $.001 Per Share
|
New
York Stock Exchange
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Preferred
Stock Purchase Rights
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New
York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer [ ]
|
|
Accelerated
filer [X]
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Non-
accelerated filer [ ]
|
|
Smaller
reporting company
[ ]
|
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [ ] No [X]
The
aggregate market value of common stock of Greatbatch, Inc. held by nonaffiliates
as of June 27, 2008, based on the last sale price of $17.20, as reported on the
New York Stock Exchange: $382.3 million. Solely for the purpose of
this calculation, shares held by directors and officers and 10 percent
shareholders of the Registrant have been excluded. Such exclusion
should not be deemed a determination by or an admission by the Registrant that
these individuals are, in fact, affiliates of the Registrant.
Shares of
common stock outstanding on March 2, 2009: 23,039,217
DOCUMENTS
INCORPORATED BY REFERENCE
The
following documents, in whole or in part, are specifically incorporated by
reference in the indicated part of the Company’s Proxy Statement:
Document
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Part
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Proxy
Statement for the 2009 Annual Meeting of Stockholders
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Part
III, Item 10
“Directors,
Executive Officers and Corporate Governance”
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Part
III, Item 11
“Executive
Compensation”
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Part
III, Item 12
“Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters”
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Part
III, Item 13
“Certain
Relationships and Related Transactions, and Director
Independence”
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Part
III, Item 14
“Principal
Accounting Fees and Services”
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TABLE
OF CONTENTS
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ITEM
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PAGE
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NUMBER
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NUMBER
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1
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4
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1A
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17
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1B
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27
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2
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27
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3
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29
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4
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29
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5
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29
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6
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31
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7
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32
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7A
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59
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8
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61
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9
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112
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9A
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113
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9B
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113
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10
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114
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11
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114
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12
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114
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13
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114
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14
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114
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15
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114
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Signatures |
116
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OVERVIEW
Greatbatch,
Inc. is a leading developer and manufacturer of critical products used in
medical devices for the cardiac rhythm management, neuromodulation, vascular,
orthopedic and interventional radiology markets. Additionally,
Greatbatch, Inc. is a world leader in the design, manufacture and distribution
of electrochemical cells, battery packs and wireless sensors for demanding
applications in markets such as energy, security, portable medical,
environmental monitoring and more. When used in this report, the
terms “we,” “us,” “our” and the “Company” mean Greatbatch, Inc. and its
subsidiaries.
We believe
that our proprietary technology, close customer relationships, multiple product
offerings, market leadership and dedication to quality provide us with
competitive advantages and create a barrier to entry for potential market
entrants.
The
Company is a Delaware corporation that was incorporated in 1997 and since that
time has completed the following acquisitions:
Acquisition date
|
|
Acquired company
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|
Business at time of
acquisition
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July
1997
|
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Wilson
Greatbatch Ltd. (“WGL”)
|
|
Founded
in 1970, the company designed and manufactured batteries for implantable
medical devices (“IMD”) and commercial applications including oil and gas,
aerospace, and oceanographic.
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August
1998
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|
Hittman
Materials and Medical Components, Inc. (“Hittman”)
|
|
Founded
in 1962, the company designed and manufactured ceramic and glass
feedthroughs and specialized porous coatings for electrodes used in
IMDs.
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August
2000
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|
Battery
Engineering, Inc. (“BEI”)
|
|
Founded
in 1983, the company designed and manufactured high-energy density
batteries for industrial, commercial, military and medical
applications.
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June
2001
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Sierra-KD
Components division of Maxwell Technologies, Inc.
(“Sierra”)
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|
Founded
in 1986, the company designed and manufactured ceramic electromagnetic
filtering capacitors and integrated them with wire feedthroughs for use in
IMDs. Sierra also designed and manufactured ceramic capacitors
for military, aerospace and commercial
applications.
|
Acquisition date
|
|
Acquired company
|
|
Business at time of
acquisition
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July
2002
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Globe
Tool and Manufacturing Company, Inc. (“Globe”)
|
|
Founded
in 1954, the company designed and manufactured precision enclosures used
in IMDs and commercial products used in the aerospace, electronic, and
automotive sectors.
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March
2004
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NanoGram
Devices Corporation (“NanoGram”)
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Founded
in 1996, the company developed nanoscale materials for battery and medical
device applications.
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April 2007
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BIOMEC,
Inc. (“BIOMEC”)
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|
Established
in 1998, the company provided medical device design and component
integration to early-stage and established customers.
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June
2007
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Enpath
Medical, Inc. (“Enpath”)
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Founded
in 1981, the company designed, developed, and manufactured venous
introducers and dilators, implantable leadwires, steerable sheaths and
steerable catheters.
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October
2007
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IntelliSensing
LLC (“IntelliSensing”)
|
|
Established
in 2005, the company designed and manufactured battery-powered wireless
sensing solutions for demanding commercial
applications.
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November
2007
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Quan
Emerteq LLC (“Quan”)
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|
Founded
in 1998, the company designed, developed, and manufactured single use
medical device products and components including delivery systems,
catheters, stimulation leadwires and microcomponents and
assemblies.
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November
2007
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Engineered
Assemblies Corporation (“EAC”)
|
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Founded
in 1984, the company designed and integrated custom battery solutions and
electronics focused on rechargeable systems.
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January
2008
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P
Medical Holding SA (“Precimed”)
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Founded
in 1994, the company designed, manufactured and supplied trays,
instruments and implants for orthopedic original equipment manufacturers
(“OEM”).
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February
2008
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DePuy
Orthopaedics’ Chaumont, France manufacturing facility
(“DePuy”)
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The
facility manufactured hip, shoulder trauma and knee implants for
DePuy.
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FINANCIAL
STATEMENT YEAR END
We utilize
a fifty-two, fifty-three week fiscal year ending on the Friday nearest December
31st. Fiscal
years 2008, 2007 and 2006 ended on January 2, 2009, December 28, 2007 and
December 29, 2006, respectively. Fiscal year 2008 contained
fifty-three weeks while fiscal years 2007 and 2006 contained fifty-two
weeks.
SEGMENT
INFORMATION
We operate
our business in two reportable segments – Implantable Medical Components (“IMC”)
and Electrochem Solutions (“Electrochem”). Segment information
including sales from external customers, profit or loss, and assets by segment
as well as sales from external customers and long-lived assets by geographic
area are set forth at Note 15 – “Business Segment Information” of the Notes to
the Consolidated Financial Statements contained at Item 8 of this
report.
IMPLANTABLE
MEDICAL DEVICE INDUSTRY
An IMD is
an instrument that is surgically inserted into the body to provide diagnosis or
therapy.
One sector
of the IMD market is cardiac rhythm management (“CRM”), which is comprised of
devices such as implantable pacemakers, implantable cardioverter defibrillators
(“ICDs”), cardiac resynchronization therapy (“CRT”) devices, and cardiac
resynchronization therapy with backup defibrillation devices
(“CRT-D”).
A new
emerging opportunity sector of the IMD market is the neuromodulation market,
which is comprised of pacemaker-type devices that stimulate nerves for the
treatment of various conditions. Beyond approved therapies of pain
control, incontinence, Parkinson’s disease and epilepsy, nerve stimulation for
the treatment of other disabilities such as migraines, obesity and depression
has shown promising results.
The
following table sets forth the main categories of battery-powered IMDs and the
principal illness or symptom treated by each device:
Device
|
Principal Illness or
Symptom
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Pacemakers
|
Abnormally
slow heartbeat (Bradycardia)
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ICDs
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Rapid
and irregular heartbeat (Tachycardia)
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CRT/CRT-Ds
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Congestive
heart failure
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Neurostimulators
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Chronic
pain, movement disorders, epilepsy, obesity or
depression
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Left
ventricular assist devices (LVADs)
|
Heart
failure
|
Drug
pumps
|
Diabetes
or chronic pain
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We believe
that the CRM and Neuromodulation markets continue to exhibit strong underlying
growth fundamentals and that we are well positioned to continue to participate
in this market growth. Increased demand is being driven by the
following factors:
|
·
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Advances in medical
technology – new therapies will allow physicians to use IMDs to
treat a wider range of heart
diseases.
|
|
·
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New, more
sophisticated implantable devices – device manufacturers
are developing new CRM devices and adding new features to existing
products.
|
|
·
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New indications for
CRM devices
– the patient groups that are eligible for CRM devices have
increased. Insurance guidelines may allow device reimbursements
for these expanding patient
populations.
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·
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Growth within
neuromodulation – approved segments growing at 17% CAGR with
additional new indications and therapies targeted to complete clinical
activities within two years.
|
|
·
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Expansion of
neuromodulation applications – therapies expected
to expand as new therapeutic applications for pulse generators are
identified.
|
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·
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An aging
population
– the number of people in the U.S. that are over age 65 is expected
to double in the next 30 years.
|
|
·
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New performance
requirements – government regulators are increasingly requiring
that IMDs be protected from electromagnetic interference
(“EMI”).
|
|
·
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Global markets
– increased market penetration
worldwide.
|
With the
acquisition of Enpath and Quan during 2007, we obtained new product offerings
for vascular access. These offerings include products that deliver
therapies for coronary/neurovascular disease, peripheral vascular disease,
neuromodulation, CRM, as well as products for medical imaging and drug and
pharmaceutical delivery. These products seek to capitalize on the
growth in the Neuromodulation and CRM markets, specifically with new indications
for neuromodulation devices. In addition, we continue to see strong
growth in the vascular markets because of stent delivery procedures,
peripheral-vascular disease therapies, and new indications for tissue extraction
or ablation.
|
·
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Continued focus on
minimally invasive procedures – Patients and health care providers
looking for minimally invasive technologies to treat disease expanding
both catheter based procedures and associated vascular
access.
|
In early
2008, with the acquisition of Precimed and the Chaumont manufacturing facility,
we entered the orthopedic sector of the IMD market. Many of the
factors affecting the orthopedic market segment are similar to the CRM
market. These factors include aging population, new implant and
surgical technology, rising rates of obesity, a growing replacements market and
emerging affluence in developing nations. As a result, we believe
that the orthopedic market will also continue to exhibit strong growth
fundamentals.
ELECTROCHEM
SOLUTIONS INDUSTRY
Our
customized rechargeable and non-rechargeable battery solutions are used in a
number of demanding industrial markets such as energy, security, portable
medical, environmental monitoring and more. Applications in these
segments cover a number of battery-powered systems including downhole drilling
tools, hand-held military communications, automated external defibrillators, and
more.
Electrochem’s
primary power systems are used in these core markets because of extreme
operating conditions and long life requirements. Our primary
batteries operate reliably and safely at extremely high and low temperatures and
with high shock and vibration.
Our
rechargeable power systems include a number of chemistries including lithium,
nickel and lead acid. We provide value-added solutions to complement
our secondary power systems such as charging and battery
management.
Our unique
wireless sensing system is a complete solution, incorporating advanced,
ruggedized sensors, gateways and software. Electrochem’s patented
system is a complete solution, utilizing our own battery power and offering
control and monitoring for applications in existing markets such as energy and
new markets such as process control.
We expect
the demand for reliable portable power and integrated wireless sensing solutions
to continue to rise with demand in energy, security and portable medical
segments.
PRODUCTS
The
following table provides information about our principal products:
IMPLANTABLE MEDICAL
COMPONENTS:
|
PRODUCT
|
|
DESCRIPTION
|
|
PRINCIPAL
PRODUCT ATTRIBUTES
|
Batteries
|
|
Power
sources include:
¨Lithium iodine
(“Li Iodine”)
¨Lithium silver
vanadium oxide (“Li SVO”)
¨Lithium carbon
monoflouride (“Li CFx”)
¨Lithium ion
rechargeable (“Li Ion”)
¨Lithium
SVO/CFx (“QHR”
& “QMR”)
|
|
High
reliability and predictability
Long
service life
Customized
configuration
Light
weight
Compact
and less intrusive
|
Capacitors
|
|
Storage
for energy generated by a battery before delivery to the
heart. Used in ICDs and CRT-Ds.
|
|
Stores
more energy per unit volume (energy density) than other existing
technologies
Customized
configuration
|
EMI
filters
|
|
Filters
electromagnetic interference to limit undesirable response, malfunctioning
or degradation in the performance of electronic equipment
|
|
High
reliability attenuation of EMI RF over wide frequency ranges
Customized
design
|
Feedthroughs
|
|
Allow
electrical signals to be brought from inside hermetically sealed IMD to an
electrode
|
|
Ceramic
to metal seal is substantially more durable than traditional
seals
Multifunctional
|
Coated
electrodes
|
|
Deliver
electric signal from the feedthrough to a body part undergoing
stimulation
|
|
High
quality coated surface
Flexible
in utilizing any combination of biocompatible coating
surfaces
Customized
offering of surfaces and tips
|
Precision
components
|
|
¨Machined
¨Molded and
over molded products
|
|
High
level of manufacturing precision
Broad
manufacturing flexibility
|
Enclosures
and related components
|
|
¨Titanium
¨Stainless
steel
|
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Precision
manufacturing, flexibility in configurations and materials
|
Value-added
assemblies
|
|
Combination
of multiple components in a single package/unit
|
|
Leveraging
products and capabilities to provide subassemblies and
assemblies
Provides
synergies in component technology and procurement systems
|
PRODUCT
|
|
DESCRIPTION
|
|
PRINCIPAL
PRODUCT ATTRIBUTES
|
Leads
|
|
Cardiac,
neuro and hearing restoration stimulation leads
|
|
Custom
and unique configurations that increase therapy effectiveness, provide
finished device design and manufacturing
|
Introducers
|
|
Creates
a conduit to insert infusion catheters, guidewires, implantable ports,
pacemaker leads and other therapeutic devices into a blood
vessel
|
|
Variety
of sizes and materials that facilitate problem-free access in a variety of
clinical applications
|
|
|
|
|
|
Catheters
|
|
Delivers
therapeutic devices to specific sites in the body
|
|
Enable
safe, simple delivery of therapeutic and diagnostic devices, soft tip and
steerability. Provide regulatory clearance and finished
device
|
Implants
|
|
Orthopedic
implants for reconstructive hip, shoulder, knee, trauma and spine
procedures
|
|
Precision
manufacturing, leveraging capabilities and products, complete processes
including sterile packaging and coatings
|
Instruments
|
|
Orthopedic
instruments for reconstructive and trauma procedures
|
|
Designed
to improve surgical techniques, reduce surgery time, increase surgical
precision and decrease risk of contamination
|
Trays
|
|
Delivery
systems for cleaning and sterilizing orthopedic instruments and
implants
|
|
Deliver
turn-key full service
kits
|
ELECTROCHEM SOLUTIONS:
|
Cells
|
|
¨Moderate-rate
¨Spiral (high
rate)
|
|
Optimized
rate capability, shock and vibration resistant
High
energy density
|
Primary
and rechargeable battery packs
|
|
Bundling
of commercial batteries in a customer specific
configuration
|
|
Increased
power and recharging capabilities and ease of integration into customer
applications
|
Wireless
sensors
|
|
Operates
where wired sensors are undesirable or impractical
|
|
Measures
pressure and temperature at the same time, withstands harsh
environments
|
RESEARCH
AND DEVELOPMENT
Our
position as a leading developer and manufacturer of components for IMDs and
commercial batteries is largely the result of our long history of technological
innovation. We invest substantial resources in research, development
and engineering. Our scientists, engineers and technicians focus on
improving existing products, expanding the use of our products and developing
new products. In addition to our internal technology and product
development efforts, we also engage outside research institutions for unique
technology projects.
PATENTS
AND PROPRIETARY TECHNOLOGY
We rely on
a combination of patents, licenses, trade secrets and know-how to establish and
protect our proprietary rights to our technologies and products. We
have 372 active U.S. patents and 264 active foreign patents. We also
have 272 U.S. and 373 foreign pending patent applications at various stages of
approval. During the past three years, we have been granted 87 new
U.S. patents, of which 13 were granted in 2008. Corresponding foreign
patents have been issued or are expected to be issued in the near
future. Often, several patents covering various aspects of the design
protect a single product. We believe this provides broad protection
of the inventions employed.
We are
also a party to several license agreements with third parties under which we
have obtained, on varying terms, the exclusive or non-exclusive rights to
patents held by them. One of these agreements is for the basic
technology used in our wet tantalum capacitors. We have also granted
rights in our patents to others under license agreements.
It is our
policy to require our management and technical employees, consultants and other
parties having access to our confidential information to execute confidentiality
agreements. These agreements prohibit disclosure of confidential
information to third parties except in specified circumstances. In
the case of employees and consultants, the agreements generally provide that all
confidential information relating to our business is the exclusive property of
the Company.
MANUFACTURING
AND QUALITY CONTROL
While we
have adequate capacity we primarily manufacture small lot sizes, as most
customer orders range from a few hundred to a few thousand units. As
a result, our ability to remain flexible is an important factor in maintaining
high levels of productivity. Each of our production teams receives
assistance from a manufacturing support team, which typically consists of
representatives from our quality control, engineering, manufacturing, materials
and procurement departments. Our quality systems are compliant with
and certified to various recognized international standards.
Our
commercial battery facilities in Raynham, MA and Teterboro, NJ, and our
facilities in Alden, NY and Minneapolis, MN (enclosure manufacturing and
engineering) are ISO 9001-2000 registered, which requires compliance with
regulations regarding quality systems of product design (where applicable),
supplier control, manufacturing processes and management review. This
certification can only be achieved after completion of an audit conducted by an
independent authority.
The
Quality Systems of our facilities in Tijuana, Mexico, Minneapolis, MN, Clarence,
NY (machining and assembly of components), and the Orvin, Switzerland (Precimed)
sites are certified to the requirements of ISO 13485 for the design
(where applicable) and manufacture of components and finished device
assemblies. This level of certification allows for the manufacture
and distribution (via CE mark) of finished medical devices as well as device
components in Europe and finished medical devices in Canada. This
certification gives us the ability to serve as a manufacturing partner to
medical device manufacturers, which we believe will improve our competitive
position in the vascular access, CRM and emerging neuromodulation and orthopedic
markets. Our Vascular Access facility (Minneapolis, MN) and several
of our Orthopedics facilities (Switzerland and France) are also registered with
the FDA, thus enabling the manufacture and distribution of FDA cleared
registered medical devices inside the U.S.
We are
currently working with several neuromodulation companies that can benefit from
our expanded capabilities. Providing device level manufacturing
capability allows us to move up our customers’ supply-chain and helps to drive
both component and sub-assembly growth.
Our
existing manufacturing plants are audited by several notified bodies (TUV,
G-Med, QMI, BSI, and the National Standards Authority of Ireland). To
maintain certification, all facilities must be reexamined routinely by their
respective notified body.
SALES
AND MARKETING
Products
from our IMC business are sold directly to our customers. In our
Electrochem business, we utilize a combination of direct and indirect sales
methods, depending on the particular product. In 2008, approximately
49% of our products were sold in the U.S. Sales to countries outside
of the U.S. are primarily to customers whose corporate offices are located and
headquartered in the U.S. Information regarding our sales by
geographic area is set forth at Note 15 – “Business Segment
Information” of the Notes to the Consolidated Financial Statements contained at
Item 8 of this report.
The
majority of our medical customers contract with us to develop custom components
and assemblies to fit their product specifications. As a result, we
have established close working relationships between our internal program
managers and our customers. We market our products and technologies
at industry meetings and trade shows domestically and
internationally.
Internal
sales managers support all activity and involve engineers and technology
professionals in the sales process to address customer requests
appropriately.
We sell
our commercial cells and battery packs directly to the end user, directly to
manufacturers that incorporate our products into other devices for resale, or to
distributors who sell our products to manufacturers and end
users. Our sales managers are trained to assist our customers in
selecting appropriate chemistries and configurations. We market our
Electrochem products at various technical trade meetings. We also
place print advertisements in relevant trade publications.
Firm
backlog orders at January 2, 2009 and December 28, 2007 were approximately
$190.4 million and $107.2 million, respectively. Most of these orders
are expected to be shipped within one year. See Customers section
below for further discussion.
CUSTOMERS
Our IMC
customers include leading OEMs, in alphabetical order here and throughout this
report, such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson,
Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and
Zimmer. During 2007 and 2008, we completed seven acquisitions
consistent with our strategic objective to diversify our customer base and
market concentration. As a result, in 2008, Boston Scientific,
Medtronic and St. Jude Medical, collectively accounted for 44% of our total
sales, compared to 67% in 2007 and 2006.
The nature
and extent of our selling relationships with each IMC customer are different in
terms of breadth of component products purchased, purchased product volumes,
length of contractual commitment, ordering patterns, inventory management and
selling prices. We have pricing arrangements with our customers that
at times do not specify minimum order quantities. Our visibility to
customer ordering patterns is over a relatively short period of
time. Our customers may have inventory management programs and
alternate supply arrangements of which we are unaware. Additionally,
the relative market share among OEM device manufacturers changes
periodically. These and other factors can significantly impact our
sales.
Our
Electrochem customers are primarily companies involved in demanding applications
in markets such as energy, security, portable medical and environmental
monitoring including Halliburton Company, Weatherford International, General
Electric, Thales, Zoll Medical Corp. and Scripps Institution of
Oceanography.
SUPPLIERS
AND RAW MATERIALS
We
purchase certain critical raw materials from a limited number of suppliers due
to the technically challenging requirements of the supplied product and/or the
lengthy process required to qualify these materials with our
customers. We cannot quickly establish additional or replacement
suppliers for these materials because of these requirements. In the
past, we have not experienced any significant interruptions or delays in
obtaining these raw materials. We maintain minimum safety stock
levels of critical raw materials.
For other
raw material purchases, we utilize competitive pricing methods such as bulk
purchases, precious metal pool buys, blanket orders, and long-term contracts to
secure supply. We believe that there are alternative suppliers or
substitute products available at competitive prices for all of the materials we
purchase.
COMPETITION
Existing
and potential competitors in our IMC business includes leading IMD manufacturers
such as Biotronik, Boston Scientific, DePuy, Johnson & Johnson, Medtronic,
Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer that
currently have vertically integrated operations and may expand their vertical
integration capability in the future. Competitors also include
independent suppliers who typically specialize in one type of
component.
Our known
non-vertically integrated competitors include the following:
Product Line
|
Competitors
|
Medical
batteries
|
Litronik
(a subsidiary of Biotronik)
Eagle-Picher
|
Capacitors
|
Critical
Medical Components
|
Feedthroughs
|
Alberox
(subsidiary of The Morgan Crucible Co. PLC)
|
EMI
filtering
|
AVX
(subsidiary of Kyocera)
Eurofarad
|
Enclosures
|
Heraeus
Hudson
|
Commercial
batteries/battery packs
|
Engineered
Power
Saft
Tadiran
Tracer
Technologies
Ultralife
Nexergy
Micro-power
Accutech
vMonitor
|
Product Line
|
Competitors
|
Machined
and molded components
|
Numerous
|
Value
added assembly
|
Numerous
|
Orthopedic
trays, instruments and implants
|
Symmetry
Paragon
Accelent
Teleflex
Viasys
Orchid
|
Catheters
|
Teleflex
|
Leads
|
Oscor
|
GOVERNMENT
REGULATION
Except as
described below, our business is not subject to direct governmental regulation
other than the laws and regulations generally applicable to businesses in the
jurisdictions in which we operate. We are subject to federal, state
and local environmental laws and regulations governing the emission, discharge,
use, storage and disposal of hazardous materials and the remediation of
contamination associated with the release of these materials at our facilities
and at off-site disposal locations. Our manufacturing and research,
development and engineering activities may involve the controlled use of small
amounts of hazardous materials. Liabilities associated with hazardous
material releases arise principally under the federal Comprehensive
Environmental Response, Compensation and Liability Act and analogous state laws
that impose strict, joint and several liability on owners and operators of
contaminated facilities and parties that arrange for the off-site disposal of
hazardous materials. We are not aware of any material noncompliance
with the environmental laws currently applicable to our business and we are not
subject to any material claim for liability with respect to contamination at any
Company facility or any off-site location. We cannot assure you that
we will not become subject to such environmental liabilities in the future as a
result of historic or current operations.
To varying
degrees, our products are subject to regulation by numerous government agencies,
including the U.S. Food and Drug Administration (“FDA”) and comparable foreign
agencies. The medical product components we manufacture are not
subject to regulation by the FDA. However, the FDA and related state
and foreign governmental agencies regulate the completed devices we manufacture
as well as our customers’ products as finished medical devices.
We have
“master files” on record with the FDA. Master files may be used to
provide confidential detailed information about facilities, processes, or
articles used in the manufacturing, processing, packaging and storing of one or
more medical device components. These submissions may be used by
device manufacturers to support the premarket notification process required by
Section 510(k) of the Federal Food Drug & Cosmetic Act. This
notification process is necessary to obtain clearance from the FDA to market a
device for human use in the U.S.
The
medical devices we manufacture and market are subject to regulation by the FDA
and, in some instances, by state and foreign authorities. Pursuant to
the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act
and related regulations, medical devices intended for human use are classified
into three categories (Classes I, II and III), depending upon the degree of
regulatory control to which they will be subject. In the U.S., our
introducer and delivery catheter products are considered Class II
devices.
If a Class
II device is substantially equivalent to an existing (predicate) device that has
been continuously marketed since the effective date of the 1976 Amendments, FDA
requirements may be satisfied through a Pre-market Notification Submission or
510(k) under which the applicant provides product information supporting its
claim of substantial equivalence. In a 510(k) Submission, the FDA may
also require that we provide clinical test results demonstrating the safety and
efficacy of the device. Generally, Class III devices are typically
life-sustaining, life supporting, or implantable devices that must receive
Pre-Market Approval (“PMA”) by the FDA to ensure their safety and
effectiveness. A PMA is a more rigorous approval process typically
requiring human clinical studies. Certain leads that we manufacture
and market are Class III devices, but any required PMA is submitted and received
by our customers.
As a
manufacturer of medical devices, we are also subject to certain other FDA
regulations and our device manufacturing processes and facilities are subject to
on-going review by the FDA in order to ensure compliance with the current Good
Manufacturing Practices Regulation (21CFR820). We believe that our
manufacturing and quality and regulatory systems conform to the requirements of
all pertinent FDA regulations. Our sales and marketing practices are
subject to regulation by the U.S. Department of Health and Human Services
pursuant to federal anti-kickback laws, and are also subject to similar state
laws.
We are
also subject to various other environmental, transportation and labor laws as
well as various other directives and regulations both in the U.S. and
abroad. We believe that compliance with these laws will not have a
material impact on our capital expenditures, earnings or competitive
position. Given the scope and nature of these laws, however, there
can be no assurance that they will not have a material impact on our results of
operations. We assess potential contingent liabilities on a quarterly
basis. At present, we are not aware of any such liabilities that
would have a material impact on our business.
RECRUITING
AND TRAINING
We invest
substantial resources in our recruiting efforts that focus on supplying quality
personnel to support our business objectives. We have established a
number of programs that are designed to challenge and motivate our
employees. All staff are encouraged to be proactive in contributing
ideas. Feedback surveys are used to collect suggestions on ways that
our business and operations can be improved. We further meet our
hiring needs through outside sources as required.
We provide
a training program for our new employees that is designed to educate them on
safety, quality, business strategy, corporate culture, and the methodologies and
technical competencies that are required for our business. Our safety
training programs focus on such areas as basic industrial safety practices and
emergency response procedures to deal with any potential fires or chemical
spills. All of our employees are required to participate in a
specialized training program that is designed to provide an understanding of our
quality objectives. Supporting our lifelong learning environment, we
offer our employees a tuition reimbursement program and encourage them to
continue their education at accredited colleges and
universities. Many of our professionals attend seminars on topics
that are related to our corporate objectives and strategies. We
believe that comprehensive training is necessary to ensure that our employees
have state of the art skills, utilize best practices, and have a common
understanding of work practices.
EMPLOYEES
The
following table provides a breakdown of employees as of January 2,
2009:
Manufacturing
|
|
|
1,580 |
|
General
and administrative
|
|
|
139 |
|
Sales
and marketing
|
|
|
36 |
|
Research,
development and engineering
|
|
|
199 |
|
Chaumont,
France facility
|
|
|
214 |
|
Switzerland
facilities
|
|
|
233 |
|
Tijuana,
Mexico facility
|
|
|
882 |
|
Total
|
|
|
3,283 |
|
We also
employ a number of temporary employees to assist us with various projects and
service functions and address peaks in staff requirements. Our
employees are not represented by any union. Approximately 170 and 180
positions at our Switzerland and France locations, respectively, are
manufacturing in nature. The positions at our Tijuana, Mexico
facility are primarily manufacturing. We believe that we have a good
relationship with our employees.
EXECUTIVE
OFFICERS OF THE COMPANY
Information
concerning our executive officers is presented below as of March 2,
2009. The officers’ terms of office run until the first meeting of
the Board of Directors after our Annual Meeting, which takes place immediately
following our Annual Meeting of Stockholders and until their successors are
elected and qualified, except in the case of earlier death, retirement,
resignation or removal.
Mauricio Arellano, age 42, is
Senior Vice President and the Business Leader for our Cardiac and Neurology
Group. He served as the Senior Vice President and Business Leader of
our CRM and Neuromodulation Group from January 2008 to October 2008, our Medical
Solutions Group from November 2006 to January 2008 and as Vice President of
Greatbatch Mexico from January 2005 to November 2006. Mr. Arellano
joined our Company in October 2003 as the Plant Manager of our former Carson
City, NV facility. Prior to joining our Company, he served in a
variety of human resources and operational roles with Tyco Healthcare –
Especialidades Medicas Kenmex and with Sony de Tijuana Este.
Susan M. Bratton, age 52, is
Senior Vice President and Business Leader for our Commercial
Group. She served as Vice President of Corporate Quality from March
2001 to January 2005, as General Manager of our Electrochem Division from July
1998 to March 2001 and as Director of Procurement from June 1991 to July
1998. Ms. Bratton has held various other positions with our Company
since joining us in 1976.
Susan H. Campbell, age 44, is
Senior Vice President and the Business Leader for our Orthopedics
Group. Ms. Campbell had served as Senior Vice President for Global
Manufacturing and Supply Chain from January 2008 until October 2008 and the
Business Leader for our Medical Power Group from January 2005 until January
2008. She joined our Company in April 2003 as the Plant Manager for
our medical battery facility. Prior to that time, Ms. Campbell was a
plant manager for Delphi Corporation and General Motors
Corporation.
Barbara M. Davis, age 58, is
Vice President for Human Resources, a position she has held since April
2004. She joined our Company in October 1998 as Director of Human
Resources and Organization Development.
Richard M. Farrell, age 46, is
Vice President of our QIG Group. Mr. Farrell joined the Company with
our acquisition of Quan in November 2007 as Vice President for Business
Development. He was a founder of and had been employed by
Quan in a variety of roles, since 1998, most recently as its Vice President
of Business Development.
Thomas J. Hook, age 46, is our
President & Chief Executive Officer. Prior to August 2006, he was
our Chief Operating Officer, a position he assumed upon joining our Company in
September 2004. From August 2002 until September 2004, Mr. Hook was
employed by CTI Molecular Imaging where he had served as President, CTI
Solutions Group.
Thomas J. Mazza, age 55, is
Senior Vice President & Chief Financial Officer, a position he has held
since August 2005. He joined our Company in November 2003 as Vice
President and Corporate Controller. Prior to that, Mr. Mazza served
in a variety of financial roles with Foster Wheeler Ltd., including Vice
President and Corporate Controller.
Timothy G. McEvoy, age 51, is
Vice President, General Counsel & Secretary, a position he has held since
joining our Company in February 2007. From 1992 until January 2007,
he was employed in a variety of legal roles by Manufacturers and Traders Trust
Company, most recently as Administrative Vice President and Deputy General
Counsel.
AVAILABLE
INFORMATION
We make
available free of charge through our internet website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable after we
electronically file those reports with, or furnish them to, the Securities and
Exchange Commission. Our Internet address is www.greatbatch.com. The
information contained on our website is not incorporated by reference in this
annual report on Form 10-K and should not be considered a part of this report.
These items may also be obtained free of charge by written request made to
Christopher J. Thome, Manager of External Reporting and Investor Relations,
Greatbatch, Inc., 10000 Wehrle Drive, Clarence, New York 14031.
CAUTIONARY
FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of
the statements contained in this annual report on Form 10-K and other written
and oral statements made from time to time by us and our representatives, are
not statements of historical or current fact. As such, they are
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions.
They
include statements relating to:
|
•
|
future
sales, expenses and profitability;
|
|
•
|
the
future development and expected growth of our business and
industry;
|
|
•
|
our
ability to execute our business model and our business
strategy;
|
|
•
|
our
ability to identify trends within our industries and to offer products and
services that meet the changing needs of those markets;
and
|
|
•
|
projected
capital expenditures.
|
You can
identify forward-looking statements by terminology such as “may,” “will,”
“should,” “could,” “expects,” “intends,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential” or “continue” or the negative of these
terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from
those suggested by these forward-looking statements. In evaluating
these statements and our prospects generally, you should carefully consider the
factors set forth below. All forward-looking statements attributable
to us or persons acting on our behalf are expressly qualified in their entirety
by these cautionary factors and to others contained throughout this
report. We are under no duty to update any of the forward-looking
statements after the date of this report or to conform these statements to
actual results.
Although
it is not possible to create a comprehensive list of all factors that may cause
actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers;
customer ordering patterns; product obsolescence; our inability to market
current or future products; pricing pressure from customers; our ability to
timely and successfully implement our cost reduction and plant consolidation
initiatives; our reliance on third party suppliers for raw materials, products
and subcomponents; fluctuating operating results; our inability to maintain high
quality standards for our products; challenges to our intellectual property
rights; product liability claims; our inability to successfully consummate and
integrate acquisitions and to realize synergies and to operate these acquired
businesses in accordance with expectations; our unsuccessful expansion into new
markets; our inability to obtain licenses to key technology; regulatory changes
or consolidation in the healthcare industry; global economic factors including
currency exchange rates and interest rates; and other risks and uncertainties
that arise from time to time and are described in Item 1A of this
report.
Our
business faces many risks. Any of the risks discussed below, or
elsewhere in this report or in our other SEC filings, could have a material
impact on our business, financial condition or results of
operations. Additional risks and uncertainties not presently known to
us or that we currently believe to be immaterial may also impair our business
operations.
Risks
Related To Our Business
We
depend heavily on a limited number of customers, and if we lose any of them or
they reduce their business with us, we would lose a substantial portion of our
revenues.
In 2008,
Boston Scientific, Medtronic and St. Jude Medical, collectively accounted for
approximately 44% of our revenues. Our supply agreements with these
customers might not be renewed. Furthermore, many of our supply
agreements do not contain minimum purchase level requirements and therefore
there is no guaranteed source of revenue that we can depend upon under these
agreements. The loss of any large customer or a reduction of business
with that customer for any reason would harm our business, financial condition
and results of operations.
If
we do not respond to changes in technology, our products may become obsolete and
we may experience a loss of customers and lower revenues.
We sell
our products to customers in several industries that are characterized by rapid
technological changes, frequent new product introductions and evolving industry
standards. Without the timely introduction of new products and
enhancements, our products and services will likely become technologically
obsolete over time and we may lose a significant number of our
customers. In addition, other new products introduced by our
customers may require fewer of our batteries or components. We
dedicate a significant amount of resources to the development of our products
and technologies and we would be harmed if we did not meet customer requirements
and expectations. Our inability, for technological or other reasons,
to successfully develop and introduce new and innovative products could result
in a loss of customers and lower revenues.
If
we are unable to successfully market our current or future products, our
business will be harmed and our revenues and operating results will be
reduced.
The market
for our medical and commercial products has been growing in recent
years. If the market for our products does not grow as rapidly as
forecasted by industry experts, our revenues could be less than
expected. In addition, it is difficult to predict the rate at which
the market for our products will grow or at which new and increased competition
will result in market saturation. Slower growth in the CRM,
Orthopedic, Vascular Access or Energy markets in particular would negatively
impact our revenues. In addition, we face the risk that our products
will lose widespread market acceptance. Our customers may not
continue to utilize the products we offer and a market may not develop for our
future products.
We
may at times determine that it is not technically or economically feasible for
us to continue to manufacture certain products and we may not be successful in
developing or marketing them. Additionally, new technologies that we
develop may not be rapidly accepted because of industry-specific factors,
including the need for regulatory clearance, entrenched patterns of clinical
practice and uncertainty over third party reimbursement. If this occurs, our
business will be harmed and our operating results will be negatively
affected.
We
are subject to pricing pressures from customers, which could harm operating
results.
We have
made price reductions to some of our large customers in recent years and we
expect customer pressure for price reductions will continue. Price
concessions or reductions may cause our operating results to
suffer. In addition, any delay or failure by a large customer to make
payments due to us would harm our operating results and financial
condition.
We
rely on third party suppliers for raw materials, key products and subcomponents
and if we are unable to obtain these materials, products and subcomponents on a
timely basis or on terms acceptable to us, our ability to manufacture products
will suffer.
Our
business depends on a continuous supply of raw materials. The
principal raw materials used in our business include lithium, iodine, tantalum,
platinum, ruthenium, gallium trichloride, tantalum pellets, vanadium pentoxide,
iridium, and titanium. Raw materials needed for our business are
susceptible to fluctuations due to transportation, government regulations, price
controls, economic climate or other unforeseen
circumstances. Increasing global demand for some of the raw materials
we need for our business, including platinum, iridium, gallium trichloride,
tantalum and titanium, has caused the prices of these materials to increase
significantly. In addition, there are a limited number of worldwide
suppliers of several raw materials needed to manufacture our products, including
lithium, gallium trichloride, carbon monofluoride, and tantalum. We
may not be able to continue to procure raw materials critical to our business or
to procure them at acceptable price levels.
We rely on
third party manufacturers to supply many of our products and
subcomponents. Manufacturing problems may occur with these and other
outside sources, as a supplier may fail to develop and supply products and
subcomponents to us on a timely basis, or may supply us with products and
subcomponents that do not meet our quality, quantity and cost
requirements. If any of these problems occur, we may be unable to
obtain substitute sources for these products and subcomponents on a timely basis
or on terms acceptable to us, which could harm our ability to manufacture our
own products and components profitably or on time. In addition, to
the extent the processes that our suppliers use to manufacture products and
subcomponents are proprietary, we may be unable to obtain comparable
subcomponents from alternative suppliers.
We
may never realize the full value of our intangible assets, which represent a
significant portion of our total assets.
At January
2, 2009, we had $428.6 million of intangible assets, representing 50% of our
total assets. These intangible assets consist primarily of goodwill,
trademarks, tradenames, customer lists and patented technology arising from our
acquisitions. Goodwill and other intangible assets with indefinite
lives are not amortized, but are tested annually or upon the occurrence of
certain events that indicate that the assets may be impaired. We may
not receive the recorded value for our intangible assets if we sell or liquidate
our business or assets. In addition, the material concentration of
intangible assets increases the risk of a large charge to earnings in the event
that the recoverability of these intangible assets is impaired, and in the event
of such a charge to earnings, the market price of our common stock could be
adversely affected. In addition, intangible assets with definite
lives, which represent $90.3 million of our net intangible assets at January 2,
2009, will continue to be amortized. We incurred total amortization
expenses relating to these intangible assets of $10.7 million in 2008. These expenses will
reduce our future earnings or increase our future losses.
Quality
problems with our products could harm our reputation for producing high quality
products, erode our competitive advantage.
Our
products are held to high quality and performance standards. In the
event that our products fail to meet these standards, our reputation for
producing high quality products could be harmed, which would damage our
competitive advantage and could result in lower revenues.
Quality
problems with our products could result in warranty claims and additional
costs.
We
generally allow customers to return defective or damaged products for credit,
replacement, or exchange. We generally warrant that our products will
meet customer specifications and will be free from defects in materials and
workmanship. Additionally, we carry a safety stock of inventory for
our customers which may be impacted by warranty claims. We accrue for
our exposure to warranty claims based upon recent historical experience and
other specific information as it becomes available. However, such
reserves may not be adequate to cover future warranty claims and additional
warranty costs and/or inventory write-offs may be incurred which could harm our
operating results or financial condition.
Regulatory
issues resulting from product complaints/recalls or regulatory body audits could
harm our ability to produce and supply products or bring new products to
market.
Our
products are designed, manufactured and distributed globally in compliance with
all pertinent regulations and standards. However, a product complaint
recall or negative regulatory body audit may cause products to be removed from
the market. In addition, during the corrective phase, regulatory
bodies may not allow new products to be cleared for marketing and
sale.
If
we become subject to product liability claims, our operating results and
financial condition could suffer.
The
manufacturing and sale of our products expose us to potential product liability
claims and product recalls, including those that may arise from failure to meet
product specifications, misuse or malfunction of, or design flaws in our
products, or use of our products with components or systems not manufactured or
sold by us. Many of our products are components and function in
interaction with our customers’ medical devices. For example, our
batteries are produced to meet various electrical performance, longevity and
other specifications, but the actual performance of those products is dependent
on how they are in fact utilized as part of the customers’ devices over the
lifetime of the products. Product performance and device interaction
from time to time have been, and may in the future be, different than expected
for a number of reasons. Consequently, it is possible that customers
may experience problems with their medical devices that could require device
recall or other corrective action, where our batteries met the specification at
delivery, and for reasons that are not related primarily or at all to any
failure by our product to perform in accordance with
specifications. It is possible that our customers (or end-users) may
in the future assert that our products caused or contributed to device failure
where our product was not the primary cause of the device performance
issue. Even if these assertions do not lead to product liability or
contract claims, they could harm our reputation and our customer
relationships.
Provisions
contained in our agreements with key customers attempting to limit our damages,
including provisions to limit damages to liability for gross negligence, may not
be enforceable in all instances or may otherwise fail to protect us from
liability for damages. Product liability claims or product recalls,
regardless of their ultimate outcome, could require us to spend significant time
and money in litigation or require us to pay significant damages. The
occurrence of product liability claims or product recalls could adversely affect
our operating results and financial condition.
We carry
liability insurance coverage that is limited in scope and amount. We
may not be able to maintain this insurance at a reasonable cost or on reasonable
terms, or at all. This insurance may not be adequate to protect us
against a product liability claim that arises in the future.
Our
operating results may fluctuate, which may make it difficult to forecast our
future performance and may result in volatility in our stock price.
Our
operating results have fluctuated in the past and are likely to fluctuate
significantly from quarter to quarter due to a variety of factors, including but
not limited to the following:
·
|
the
fixed nature of a substantial percentage of our costs, which results in
our operations being particularly sensitive to fluctuations in
revenue;
|
·
|
changes
in the relative portion of our revenue represented by our various products
and customers, which could result in reductions in our profits if the
relative portion of our revenue represented by lower margin products
increases;
|
·
|
timing
of orders placed by our principal customers who account for a significant
portion of our revenues; and
|
·
|
increased
costs of raw materials or supplies.
|
If
we are unable to protect our intellectual property and proprietary rights, our
business could be adversely affected.
We rely on
a combination of patents, licenses, trade secrets and know-how to establish and
protect our proprietary rights to our technologies and products. As
of January 2, 2009, we held 372 active U.S. patents and 264 active foreign
patents. However, the steps we have taken or will take to protect our
proprietary rights may not be adequate to deter misappropriation of our
intellectual property. In addition to seeking formal patent
protection whenever possible, we attempt to protect our proprietary rights and
trade secrets by entering into confidentiality and non-compete agreements with
employees, consultants and third parties with which we do
business. However, these agreements can be breached and, if they are,
there may not be an adequate remedy available to us and we may be unable to
prevent the unauthorized disclosure or use of our technical knowledge, practices
or procedures. If our trade secrets become known, we may lose our
competitive advantages.
If third
parties infringe or misappropriate our patents or other proprietary rights, our
business could be seriously harmed. We may be required to spend
significant resources to monitor our intellectual property rights, we may not be
able to detect infringement of these rights and may lose our competitive
advantages associated with our intellectual property rights before we do
so. In addition, competitors may design around our technology or
develop competing technologies that do not infringe on our proprietary
rights.
We
may be subject to intellectual property claims, which could be costly and time
consuming and could divert our management from our business
operations.
In
producing our products, third parties may claim that we are infringing on their
intellectual property rights, and we may be found to have infringed those
intellectual property rights. We may be unaware of intellectual
property rights of others that may be used in our technology and
products. In addition, third parties may claim that our patents have
been improperly granted and may seek to invalidate our existing or future
patents. If any claim for invalidation prevailed, the result could be
greatly expanded opportunities for third parties to manufacture and sell
products that compete with our products and our revenues from any related
license agreements would decrease accordingly. We also typically do
not receive significant indemnification from parties which license technology to
us against third party claims of intellectual property
infringement.
Any
litigation or other challenges regarding our patents or other intellectual
property could be costly and time consuming and could divert our management and
key personnel from our business operations. The complexity of the
technology involved in producing our products, and the uncertainty of
intellectual property litigation increases these risks. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. However, we may not be able to obtain
royalty or license agreements on terms acceptable to us, or at
all. We also may be subject to significant damages or injunctions
against development and sale of our products. See “Litigation” of
Item 7 Management’s Discussion and Analysis of Financial Condition and Results
of Operations.
We
are dependent upon our senior management team and key personnel and the loss of
any of them could significantly harm us.
Our future
performance depends to a significant degree upon the continued contributions of
our senior management team and key technical personnel. Our products
are highly technical in nature. In general, only highly qualified and
trained scientists have the necessary skills to develop our
products. The loss or unavailability to us of any member of our
senior management team or a key technical employee could significantly harm
us. We face intense competition for these professionals from our
competitors, customers and companies operating in our industry. To
the extent that the services of members of our senior management team and key
technical personnel would be unavailable to us for any reason, we would be
required to hire other personnel to manage and operate our company and to
develop our products and technology. We may not be able to locate or
employ such qualified personnel on acceptable terms.
We
may not be able to attract, train and retain a sufficient number of qualified
employees to maintain and grow our business.
Our
success will depend in large part upon our ability to attract, train, retain and
motivate highly skilled employees and management. There is currently
aggressive competition for employees who have experience in technology and
engineering. We compete intensely with other companies to recruit and
hire from this limited pool. The industries in which we compete for
employees are characterized by high levels of employee
attrition. Although we believe we offer competitive salaries and
benefits, we may have to increase spending in order to attract, train and retain
personnel.
We
may make acquisitions that could subject us to a number of operational risks and
we may not be successful in integrating companies we acquire into our existing
operations.
We have
made and expect to make in the future acquisitions that complement our core
competencies in technology and manufacturing to enable us to manufacture and
sell additional products to our existing customers and to expand our business
into related markets. Implementation of our acquisition strategy
entails a number of risks, including:
·
|
inaccurate
assessments of potential liabilities associated with the acquired
businesses;
|
·
|
the
existence of unknown and/or undisclosed liabilities associated with the
acquired businesses;
|
·
|
diversion
of our management’s attention from our core
businesses;
|
·
|
potential
loss of key employees or customers of the acquired
businesses;
|
·
|
difficulties
in integrating the operations and products of an acquired business or in
realizing projected revenue growth, efficiencies and cost savings;
and
|
·
|
increases
in indebtedness and limitation in our ability to access capital if
needed.
|
Since the
end of 2006, we have made seven acquisitions: BIOMEC in April 2007; Enpath in
June 2007; IntelliSensing in October 2007; Quan in November 2007; EAC in
November 2007; and most recently Precimed in January 2008 and the Chaumont
Facility in February 2008. These acquisitions have increased the size
and scope of our operations, and may place a strain on our managerial,
operational and financial resources and systems. Any failure by us to
manage this growth and successfully integrate these acquisitions could harm our
business and our financial condition and results.
If
we are not successful in making acquisitions to expand and develop our business,
our operating results may suffer.
A
component of our strategy is to make acquisitions that complement our core
competencies in technology and manufacturing to enable us to manufacture and
sell additional products to our existing customers and to expand our business
into related markets. Our continued growth may depend on our ability
to identify and acquire companies that complement or enhance our business on
acceptable terms. We may not be able to identify or complete future
acquisitions. Some of the risks that we may encounter include
expenses associated with and difficulties in identifying potential targets, the
costs associated with unsuccessful acquisitions, and higher prices for acquired
companies because of competition for attractive acquisition
targets. Our failure to acquire additional companies could cause our
operating results to suffer.
We
may face competition from our principal medical customers that could harm our
business and we may be unable to compete successfully against new entrants and
established companies with greater resources.
Competition
in connection with the manufacturing of our products may intensify in the
future. One or more of our customers may undertake additional
vertical integration initiatives and begin to manufacture some or all of their
components that we currently supply them which could cause our operating results
to suffer. The market for commercial power sources is competitive,
fragmented and subject to rapid technological change. Many other
commercial power source suppliers are larger and have greater financial,
operational, personnel, sales, technical and marketing resources than our
company. These and other companies may develop products that are
superior to ours, which could result in lower revenues and operating
results.
Accidents
at one of our facilities could delay production and adversely affect our
operations.
Our
business involves complex manufacturing processes and hazardous materials that
can be dangerous to our employees. Although we employ safety
procedures in the design and operation of our facilities, there is a risk that
an accident or death could occur in one of our facilities. Any
accident, such as a chemical spill, could result in significant manufacturing
delays or claims for damages resulting from injuries, which would harm our
operations and financial condition. The potential liability resulting
from any such accident or death, to the extent not covered by insurance, could
harm our financial condition and/or operating results. Any disruption
of operations at any of our facilities could harm our business.
We
intend to expand into new markets and our proposed expansion plans may not be
successful, which could harm our operating results.
We intend
to expand into new markets through the development of new product applications
based on our existing component technologies. These efforts have
required and will continue to require us to make substantial investments,
including significant research, development and engineering expenditures and
capital expenditures for new, expanded or improved manufacturing
facilities. Specific risks in connection with expanding into new
markets include the inability to transfer our quality standards into new
products, the failure of customers in new markets to accept our products, and
competition. We may not be able to successfully manage expansion into
new markets and products and these unsuccessful efforts may harm our operating
results.
Our
failure to obtain licenses from third parties for new technologies or the loss
of these licenses could impair our ability to design and manufacture new
products and reduce our revenues.
We
occasionally license technologies from third parties rather than depending
exclusively on our own proprietary technology and developments. For
example, we license a capacitor patent from another company. Our
ability to license new technologies from third parties is and will continue to
be critical to our ability to offer new and improved products. We may
not be able to continue to identify new technologies developed by others and
even if we are able to identify new technologies, we may not be able to
negotiate licenses on favorable terms, or at all. Additionally, we
could lose rights granted under licenses for reasons beyond our
control.
Our
international operations and sales are subject to a variety of risks and costs
that could adversely affect our profitability and operating
results.
Our sales
to countries outside the U.S., which accounted for 51% of net sales for 2008,
our Mexico, Switzerland and France locations are subject to certain foreign
country risks. Our international operations are, and will continue to
be, subject to a number of risks and potential costs, including:
·
|
changes
in foreign regulatory requirements;
|
·
|
local
product preferences and product
requirements;
|
·
|
longer-term
receivables than are typical in the
U.S.;
|
·
|
difficulties
in enforcing agreements through certain foreign legal
systems;
|
·
|
less
protection of intellectual property in some countries outside of the
U.S.;
|
·
|
trade
protection measures and import and export licensing
requirements;
|
·
|
work
force instability;
|
·
|
political
and economic instability; and
|
·
|
complex
tax and cash management issues.
|
We incur
certain expenses related to our foreign operations that are denominated in a
foreign currency. Historically, foreign currency fluctuations have
not had a material effect on our consolidated financial
statements. However, fluctuations in foreign currency exchange rates
could have a significant negative impact on our profitability and operating
results.
The
current economic environment and credit market uncertainty could interrupt our
access to capital markets, borrowings, or financial transactions to hedge
certain risks, which could adversely affect our financial
condition.
As of
January 2, 2009, we had $352.9 million of long-term debt with varying
maturities, including our convertible subordinated notes and revolving line of
credit. These arrangements have allowed us to make investments in growth
opportunities and fund working capital requirements. In addition, we enter
into financial transactions to hedge certain risks, including
foreign exchange and interest rate risk. Our continued access to capital
markets, the stability of our lenders and their willingness to support our
needs, and the stability of the parties to our financial transactions that
hedge risks are essential for us to meet our current obligations, fund
operations, and fund our strategic initiatives. An interruption
in our access to external financing or financial transactions to hedge risk
could adversely affect our business prospects and financial condition. See
further information regarding our liquidity in “Liquidity and Capital Resources”
under Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”
Risks
Related To Our Industries
The
healthcare industry is subject to various political, economic and regulatory
changes that could force us to modify how we develop and price our
products.
The
healthcare industry is highly regulated and is influenced by changing political,
economic and regulatory factors. Several of our product lines are
subject to international, federal, state and local health and safety, packaging
and product content regulations. In addition, IMDs produced by our
medical customers are subject to regulation by the U.S. Food and Drug
Administration and similar governmental agencies. These regulations
govern a wide variety of product activities from design and development to
labeling, manufacturing, promotion, sales and
distribution. Compliance with these regulations may be time
consuming, burdensome and expensive and could negatively affect our customers’
abilities to sell their products, which in turn would adversely affect our
ability to sell our products. This may result in higher than
anticipated costs or lower than anticipated revenues.
These
regulations are also complex, change frequently and have tended to become more
stringent over time. Federal and state legislatures have periodically
considered programs to reform or amend the U.S. healthcare system at both the
federal and state levels. In addition, these regulations may contain
proposals to increase governmental involvement in healthcare, lower
reimbursement rates or otherwise change the environment in which healthcare
industry participants operate. We may be required to incur
significant expenses to comply with these regulations or remedy past violations
of these regulations. Any failure by our company to comply with
applicable government regulations could also result in cessation of portions or
all of our operations, impositions of fines and restrictions on our ability to
carry on or expand our operations. In addition, because many of our
products are sold into regulated industries, we must comply with additional
regulations in marketing our products.
Our
business is subject to environmental regulations that could be costly to comply
with.
Federal,
state and local regulations impose various environmental controls on the
manufacturing, transportation, storage, use and disposal of batteries and
hazardous chemicals and other materials used in, and hazardous waste produced
by, the manufacturing of power sources and components. Conditions
relating to our historical operations may require expenditures for clean-up in
the future and changes in environmental laws and regulations may impose costly
compliance requirements on us or otherwise subject us to future
liabilities. Additional or modified regulations relating to the
manufacture, transportation, storage, use and disposal of materials used to
manufacture our batteries and components or restricting disposal of batteries
may be imposed. In addition, we cannot predict the effect that
additional or modified regulations may have on us or our customers.
Consolidation
in the healthcare industry could result in greater competition and reduce our
IMC revenues and harm our business.
Many
healthcare industry companies are consolidating to create new companies with
greater market power. As the healthcare industry consolidates,
competition to provide products and services to industry participants will
become more intense. These industry participants may try to use their
market power to negotiate price concessions or reductions for our
products. If we are forced to reduce our prices because of
consolidation in the healthcare industry, our revenues would decrease and our
operating results would suffer.
Our
IMC business is indirectly subject to healthcare industry cost containment
measures that could result in reduced sales of our products.
Several of
our customers rely on third party payors, such as government programs and
private health insurance plans, to reimburse some or all of the cost of the
procedures in which our products are used. The continuing efforts of
government, insurance companies and other payors of healthcare costs to contain
or reduce those costs could lead to patients being unable to obtain approval for
payment from these third party payors. If that occurred, sales of
IMDs may decline significantly, and our customers may reduce or eliminate
purchases of our products. The cost containment measures that
healthcare payors are instituting, both in the U.S. and internationally, could
reduce our revenues and harm our operating results.
Our
Electrochem revenues are dependent on conditions in the oil and natural gas
industry, which historically have been volatile.
Sales of
our commercial products depend to a great extent upon the condition of the oil
and gas industry. In the past, oil and natural gas prices have been
volatile and the oil and gas exploration and production industry has been
cyclical, and it is likely that oil and natural gas prices will continue to
fluctuate in the future. The current and anticipated prices of oil
and natural gas influence the oil and gas exploration and production business
and are affected by a variety of political and economic factors beyond our
control, including worldwide demand for oil and natural gas, worldwide and
domestic supplies of oil and natural gas, the ability of the Organization of
Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and
pricing, the level of production of non-OPEC countries, the price and
availability of alternative fuels, political stability in oil producing regions
and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves. An adverse change
in the oil and gas exploration and production industry or a reduction in the
exploration and production expenditures of oil and gas companies could cause our
revenues from Electrochem product sales to decline.
None.
Our
executive offices are located in Clarence, New York. The following
table sets forth information about all of our significant facilities as of
January 2, 2009:
Location
|
Sq. Ft.
|
Own/Lease
|
Principal Use
|
Alden,
NY
|
125,000
|
Own
|
Medical
battery and capacitor manufacturing
|
Blaine,
MN
|
32,400
|
Own
|
Medical
device manufacturing and engineering (formerly Quan)
|
Canton,
MA
|
32,000
|
Own
|
Commercial
battery manufacturing and research, development and engineering
("RD&E").
|
Chaumont,
France
|
59,200
|
Own
|
Manufacturing
of orthopedic and surgical goods (formerly DePuy)
|
Clarence,
NY
|
117,800
|
Own
|
Corporate
offices and RD&E
|
Clarence,
NY
|
20,800
|
Own
|
Machining
and assembly of components
|
Clarence,
NY
|
18,600
|
Lease
|
Machining
and assembly of components
|
Cleveland,
OH
|
16,900
|
Lease
|
Office
and lab space for strategic design and innovation (formerly
BIOMEC)
|
Columbia
City, IN
|
40,000
|
Lease
|
Manufacturing
of orthopedic and surgical goods (formerly
Precimed)
|
Corgemont,
Switzerland
|
34,400
|
Lease
|
Manufacturing
of orthopedic and surgical goods (formerly Precimed)
|
Indianapolis,
IN
|
82,600
|
Own
|
Manufacturing
of orthopedic and surgical goods (formerly Precimed)
|
Minneapolis,
MN
|
72,000
|
Own
|
Enclosure
manufacturing and engineering
|
Orvin,
Switzerland
|
34,400
|
Own
|
Manufacturing
of orthopedic and surgical goods (formerly Precimed)
|
Plymouth,
MN
|
95,700
|
Lease
|
Introducers,
catheters and leads manufacturing and engineering (formerly
Enpath)
|
Raynham,
MA
|
81,000
|
Own
|
Commercial
battery manufacturing and RD&E
|
Teterboro,
NJ
|
23,500
|
Lease
|
Office,
warehousing and manufacturing (formerly EAC)
|
Tijuana,
Mexico
|
144,000
|
Lease
|
Value-added
assembly, and feedthrough, electrode and EMI filtering
manufacturing
|
We believe
these facilities are suitable and adequate for our current
business. During 2008, construction of our new 81,000 square foot
manufacturing facility in Raynham, MA was completed. Additionally,
the expansion of our research and development location in Clarence, NY was
completed in mid-2008. This provided an additional 35,000 square feet
of space for our corporate headquarters and replaced the 45,000 square feet of
leased space previously utilized. Finally, in 2008 we ceased
operations at our Orchard Park, NY, Suzhou, China, and Saignelegier, Switzerland
facilities.
We are
involved in various legal actions arising in the normal course of
business. While we do not believe that the ultimate resolution of any
such pending activities will have a material adverse effect on our consolidated
results of operations, financial position, or cash flows, litigation is subject
to inherent uncertainties. If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact in the period in which
the ruling occurs.
As
previously reported, on June 12, 2006, Enpath was named as defendant in a patent
infringement action filed by Pressure Products Medical Supplies, Inc. (“Pressure
Products”) in which Pressure Products alleged that Enpath’s FlowGuard™ valved
introducer, which has been on the market for more than three years, and Enpath’s
ViaSeal™ prototype introducer, which has not been sold, infringes claims in
Pressure Products patents. After trial, a jury found that Enpath
infringed the Pressure Products patents, but not willfully, and awarded damages
in the amount of $1.1 million. Enpath has appealed the final judgment to the
U.S. Court of Appeals for the Federal Circuit. As a result of a
post-trial motion and pending the appeal, Enpath is permitted to continue to
sell FlowGuard™ provided that Enpath pays into an escrow fund a royalty of
between $1.50 and $2.25 for each sale of a FlowGuard™ valved introducer.
The amount accrued as escrow during 2008 was $0.5 million. During
2008, the Company incurred $4.5 million of costs related to this
litigation.
During
2002, a former non-medical customer commenced an action alleging that the
Company had used proprietary information of the customer to develop certain
products. The Company believes that it has meritorious defenses and
is vigorously defending the matter. The potential risk of loss is
between $0.0 and $1.7 million.
No matters
were submitted to a vote of security holders during the fourth quarter of
2008.
ITEM 5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
The
Company’s common stock trades on the New York Stock Exchange (“NYSE”) under the
symbol “GB.” The following table sets forth for the periods indicated
the high, low and closing sales prices per share for the common stock as
reported by the NYSE:
2007
|
|
High
|
|
|
Low
|
|
|
Close
|
|
First
Quarter 2007
|
|
$ |
30.05 |
|
|
$ |
25.04 |
|
|
$ |
25.50 |
|
Second
Quarter 2007
|
|
|
33.17 |
|
|
|
25.31 |
|
|
|
32.40 |
|
Third
Quarter 2007
|
|
|
34.96 |
|
|
|
26.00 |
|
|
|
26.59 |
|
Fourth
Quarter 2007
|
|
|
27.50 |
|
|
|
18.52 |
|
|
|
19.91 |
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter 2008
|
|
$ |
23.48 |
|
|
$ |
17.18 |
|
|
$ |
18.79 |
|
Second
Quarter 2008
|
|
|
19.79 |
|
|
|
15.49 |
|
|
|
17.20 |
|
Third
Quarter 2008
|
|
|
27.08 |
|
|
|
16.86 |
|
|
|
25.78 |
|
Fourth
Quarter 2008
|
|
|
27.41 |
|
|
|
17.72 |
|
|
|
26.72 |
|
As of
March 2, 2009 there were 250 record holders of the Company’s common
stock. The Company stock account included in our 401(k) plan is
considered one record holder for the purposes of this
calculation. There are approximately 1,700 holders of Company stock
in the 401(k) including active and former employees. We have not paid cash
dividends and currently intend to retain any earnings to further develop and
grow our business.
To satisfy
minimum tax withholding requirements on vested restricted stock awards as
allowed under the Company’s 2002 and 2005 stock incentive plans, the Company
repurchased 56,755 shares from employees of the Company at an average cost of
$24.57 per share in 2008. The price of these repurchases was based
upon the closing market price of the Company’s stock on the date of
vesting.
PERFORMANCE
GRAPH
The
following graph compares for the five year period ended January 2, 2009, the
cumulative total stockholder return for Greatbatch, Inc., the S&P SmallCap
600 Index, and the Hemscott Peer Group Index. The Hemscott Peer Group
Index includes approximately 200 comparable companies included in the Hemscott
Industry Group 520 Medical
Instruments & Supplies and 521 Medical Appliances &
Equipment. The graph assumes that $100 was invested on January
2, 2004 and assumes reinvestment of dividends. The stock price
performance shown on the following graph is not necessarily indicative of future
price performance:
The
following table provides selected financial data of our Company for the periods
indicated. You should read this data along with Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” and
Item 8, “Financial Statements and Supplementary Data” appearing elsewhere in
this report. The consolidated statement of operations data and the
consolidated balance sheet data for the fiscal years indicated have been derived
from our consolidated financial statements and related notes.
|
|
Jan.
2,
|
|
|
Dec.
28,
|
|
|
Dec.
29,
|
|
|
Dec.
30,
|
|
|
Dec.
31,
|
|
Years
ended
|
|
2009
(3)
|
|
|
2007
(3)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
(in
thousands, except per share data)
|
|
|
|
|
Consolidated Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
546,644 |
|
|
$ |
318,746 |
|
|
$ |
271,142 |
|
|
$ |
241,097 |
|
|
$ |
200,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
27,303 |
(1) |
|
|
28,688 |
(1) |
|
|
23,534 |
(1) |
|
|
15,464 |
(1)(2) |
|
|
23,732 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.82 |
|
|
$ |
0.68 |
|
|
$ |
0.74 |
|
|
$ |
0.47 |
|
|
$ |
0.67 |
|
Diluted
|
|
|
0.81 |
|
|
|
0.67 |
|
|
|
0.73 |
|
|
|
0.46 |
(2) |
|
|
0.66 |
(2) |
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$ |
142,219 |
|
|
$ |
116,816 |
|
|
$ |
199,051 |
|
|
$ |
151,958 |
|
|
$ |
132,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
|
848,931 |
|
|
|
663,851 |
|
|
|
547,827 |
|
|
|
512,911 |
|
|
|
476,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations
|
|
|
404,827 |
|
|
|
276,772 |
|
|
|
205,859 |
|
|
|
200,261 |
|
|
|
193,948 |
|
(1)
|
From
2005 to 2008, we recorded charges in other operating expenses, net related
to our ongoing cost savings and consolidation
efforts. Additional information is set forth at Note
11 – “Other Operating Expenses” of the Notes to the
Consolidated Financial Statements contained in Item 8 of this
report.
|
(2)
|
Beginning
in fiscal year 2006, we adopted Financial Accounting Standards Board,
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (“SFAS No. 123(R)”), and related Securities and
Exchange Commission rules included in Staff Accounting Bulletin No.
107. Under SFAS No. 123(R) we are now required to record
compensation costs related to all stock-based awards. Income
before income taxes and diluted earnings per share would have been lower
by $3.4 million or $0.10 per share for 2005, respectively, and $3.2
million or $0.10 per share for 2004, respectively. Additional information
is set forth at Note 10 – “Stock-Based Compensation” of the Notes to the
Consolidated Financial Statements contained in Item 8 of this
report.
|
(3)
|
During
2008, we acquired P Medical Holding, SA (January 2008) and DePuy
Orthopaedics Chaumont, France facility (February 2008). During
2007, we acquired BIOMEC, Inc. (April 2007), Enpath Medical, Inc. (June
2007), IntelliSensing, LLC (October 2007), Quan Emerteq, LLC (November
2007), and Engineered Assemblies Corporation (November
2007). These amounts include the results of operations of these
companies subsequent to their acquisitions. As a result of these
acquisitions, the Company recorded charges in 2008 and 2007 of $8.7
million and $17.8 million, respectively related to inventory step up
amortization and in process research and
development. Additional information is set forth at Note 2 –
“Acquisitions” of the Notes to the Consolidated Financial Statements
contained in Item 8 of this
report.
|
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
YOU SHOULD
READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND RELATED
NOTES INCLUDED ELSEWHERE IN THIS REPORT.
Overview
Our
Business
Cost Savings and
Consolidation Efforts
|
·
|
2005
& 2006 facility shutdowns and
consolidations
|
|
·
|
2007
& 2008 facility shutdowns and
consolidations
|
Our Critical Accounting
Estimates
|
·
|
Valuation
of goodwill, other identifiable intangible assets and
IPR&D
|
|
·
|
Stock-based
compensation
|
|
·
|
Tangible
long-lived assets
|
|
·
|
Provision
for income taxes
|
Our Financial
Results
|
·
|
Results
of operations table
|
|
·
|
Fiscal
2008 compared with fiscal 2007
|
|
·
|
Fiscal
2007 compared with fiscal 2006
|
|
·
|
Liquidity
and capital resources
|
|
·
|
Off-balance
sheet arrangements
|
|
·
|
Contractual
obligations
|
|
·
|
Impact
of recently issued accounting
standards
|
Our
Business
We operate
our business in two reportable segments – Implantable Medical Components (“IMC”)
and Electrochem Solutions (“Electrochem”). Our IMC business designs
and manufactures components and devices for the Cardiac Rhythm Management
(“CRM”), Neuromodulation, Vascular Access and Orthopedic
markets. Additionally, our IMC business offers value-added assembly
and design engineering services for products that incorporate Implantable
Medical Device (“IMD”) components.
Our IMC
customers include leading original equipment manufacturers (“OEM”), in
alphabetical order here and throughout this report, such as Biotronik, Boston
Scientific, DePuy Orthopaedics, Johnson & Johnson, Medtronic, Smith &
Nephew, Sorin Group, St. Jude Medical, Stryker and Zimmer. We entered
the Vascular Access and Orthopedic markets through our acquisitions in 2008 and
2007.
Electrochem
is a world leader in the design, manufacture and distribution of electrochemical
cells, battery packs and wireless sensors for demanding applications in markets
such as energy, security, portable medical, environmental monitoring and
more. Electrochem broadened its product portfolio through its
acquisitions of Engineered Assemblies Corporation (“EAC”) and IntelliSensing,
LLC in 2007, and can now design and provide its customers rechargeable battery
and wireless sensor systems.
CEO
Message
The last
two years have represented significant change at Greatbatch. As our
diversification strategy continues to progress, we have acquired seven
companies, streamlined operations, and have built a diverse offering of products
and unique technologies to better serve an expanded customer base. The results
of this are made evident by our record sales in 2008.
Our 2008
results reflect the continued successful execution of our strategic plan.
Despite the turmoil in the broader economy, our diversification strategy and
focus on delivering innovative solutions for our customers enabled us to drive
improved operating performance. Additionally, to support our growth
strategies, we are working diligently on the integration of our family of
companies so we can optimize performance and deliver innovative value to our
customers and our shareholders. We are extremely satisfied with the
progress we have made on the integration of our acquisitions. In addition, we
remain committed to ongoing improvements in our operating performance through
further leveraging our diversified revenue base, continued facility
consolidation, and product development activities which are focused on high
value-added products across all of our business segments. We will continue to
evaluate opportunities to leverage our cutting edge technology, operational
capabilities, and unmatched dedication to driving innovation for our customers.
We believe we have set a solid foundation to further strengthen and expand our
position in the marketplace and we remain confident in Greatbatch’s future
growth opportunities.
Our
Acquisitions
On April
3, 2007, we acquired substantially all of the assets of BIOMEC, Inc.
(“BIOMEC”). BIOMEC is a biomedical device company based in Cleveland,
OH. The results of BIOMEC’s operations were included in our IMC
business from the date of acquisition. The purchase price and other direct
costs of BIOMEC totaled $11.4 million, which we paid in cash. Total
assets acquired from BIOMEC were $12.0 million, of which $7.4 million were
intangible assets, including $2.3 million of in-process research and development
(“IPR&D”), which we immediately expensed, and $5.1 million of
goodwill.
On June
15, 2007, we completed our acquisition of Enpath Medical, Inc.
(“Enpath”). Enpath designs, develops, manufactures and markets single
use medical device products for the cardiac rhythm management, neuromodulation
and interventional radiology markets. The results of Enpath’s
operations were included in our IMC business from the date of
acquisition. The purchase price and other direct costs of Enpath
totaled $98.4 million, which we paid in cash. Total assets acquired
from Enpath were $113.8 million, of which $91.3 million
were intangible assets, including $13.8 million of IPR&D which we
immediately expensed, and $48.9 million of goodwill.
On October
26, 2007 we acquired substantially all of the assets of IntelliSensing, LLC
(“IntelliSensing”). IntelliSensing designs and manufactures wireless
sensor solutions that measure temperature, pressure, flow and other critical
data. The results of IntelliSensing’s operations were included in our
Electrochem business from the date of acquisition. The purchase price
and other direct costs of IntelliSensing totaled $3.9 million, which we paid in
cash. Total assets acquired from IntelliSensing were $4.0 million, of
which $3.8 million were intangible assets, including $1.9 million of
goodwill.
On
November 16, 2007, we acquired substantially all of the assets of Quan Emerteq,
LLC (“Quan”). Quan designs, develops and manufactures single use medical
device products for the vascular, CRM and neuromodulation markets. The
results of Quan’s operations were included in our IMC business from the date of
acquisition. The purchase price and other direct costs of Quan totaled
$60.0 million, which we primarily paid in cash. Total assets acquired from
Quan were $62.8 million, of which $52.4 million were intangible assets,
including $32.2 million of goodwill.
On
November 16, 2007, we acquired substantially all of the assets
of Engineered Assemblies Corporation (“EAC”). EAC is a leading
provider of custom battery solutions and electronics integration focused on
rechargeable battery systems. The results of EAC’s operations were
included in our Electrochem business from the date of acquisition.
The purchase price and other direct costs of EAC totaled $15.1
million, which we paid in cash. Total assets acquired from EAC were
$16.7 million, of which $7.9 million were intangible assets, including $5.5
million of goodwill.
On January
7, 2008, we acquired P Medical Holding SA (“Precimed”) which has administrative
offices in Orvin, Switzerland and Exton, PA, manufacturing operations in
Switzerland and Indiana and sales offices in Japan, China and the United
Kingdom. Precimed is a leading technology-driven supplier to the
orthopedic industry. The results of Precimed’s operations were
included in our IMC business from the date of acquisition. The
purchase price and other direct costs of Precimed totaled $85.0 million,
which we paid in cash. Total assets acquired from Precimed were
$143.0 million, of which $82.3 million were intangible assets, including $2.2
million of IPR&D which we immediately expensed, and $47.2 million of
goodwill.
On
February 11, 2008, Precimed completed its previously announced acquisition of
DePuy Orthopaedics (“DePuy”) Chaumont, France manufacturing facility (the
“Chaumont Facility”). The Chaumont Facility produces hip and shoulder
implants for DePuy Ireland who distributes them worldwide through various DePuy
selling entities. This transaction included a new four year supply
agreement with DePuy. The results of DePuy’s operations were included
in our IMC business from the date of acquisition. The purchase price
and other direct costs of the Chaumont Facility totaled $28.7 million, which was
paid in cash. Total assets acquired from the Chaumont Facility were
$29.3 million, of which $6.6 million was goodwill.
Going
forward, we expect the pace of acquisitions to be less than the 2008 & 2007
level. However, we will continue to pursue strategically targeted and
opportunistic acquisitions.
Our
Customers
Our
products are designed to provide reliable, long lasting solutions that meet the
evolving requirements and needs of our customers and the end users of their
products. The nature and extent of our selling relationships with
each customer are different in terms of breadth of products purchased, purchased
product volumes, length of contractual commitment, ordering patterns, inventory
management and selling prices.
Our IMC
customers include leading OEMs, such as Biotronik, Boston Scientific, DePuy,
Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude
Medical, Stryker and Zimmer. During 2007 and in the first quarter of
2008, we completed seven acquisitions in order to diversify our customer base
and market concentration. As a result, in 2008 Boston Scientific,
Medtronic and St. Jude Medical collectively accounted for 44% of our total
sales, compared to 67% in 2007 and 2006.
Our
Electrochem customers are primarily companies involved in energy, security,
portable medical, environmental monitoring and more. We have entered
into long-term supply agreements with some of those customers. Some
of these customers include, General Electric, Halliburton Company, PathFinder
Energy Services and Weatherford International.
Financial
Overview
We
achieved sales of $546.6 million for 2008, an increase of 71% over the previous
year. 2008 benefitted from our acquisitions in 2007 and 2008 which
added approximately $208.2 million of incremental revenue as well as organic
growth of 7%. This included approximately $10 million of revenue due
to the additional week of sales in 2008 resulting from our fiscal year-end
falling in 2009 (closest Friday to December 31st).
During
2008, we were extremely focused on the integration of our seven acquisitions
from 2007 and 2008. This included the initiation and implementation
of numerous cost savings and consolidation initiatives, as well as leveraging
the diversified revenue base that we acquired to drive improved operating
performance.
Our
diluted earnings per share for 2008 totaled $0.81 compared to $0.67 for
2007. 2008 results were reduced by $0.59 per share of net charges and
gains such as IPR&D charges, non-recurring acquisition related charges
(inventory step-up amortization) and charges related to our cost savings and
consolidation initiatives partially offset by a debt extinguishment gain. 2007
results were reduced by $0.60 per share of similar charges, net of
gains.
We
completed five acquisitions in 2007 and two in the first two months of
2008. These acquisitions were enabled by our strong cash position and
the financing we put in place during the first half of 2007. As of
January 2, 2009, we had $22.1 million in cash and cash equivalents and $352.9
million of long-term debt. Payment on $30.5 million of this debt is
due in June 2010 with the remaining debt due in 2012 and 2013. For
2008, we generated $57.1 million of cash flow from operations compared to $43.0
million in 2007, an increase of 33%.
Product
Development
Currently,
we are developing a series of new products for customer applications in the CRM,
neuromodulation, vascular access, orthopedics and commercial
markets. Some of the key development initiatives
include:
|
1.
|
Continue
the evolution of our Q series high rate ICD
batteries;
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|
2.
|
Continue
development of MRI compatible product
lines;
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|
3.
|
Integrate
Biomimetic coating technology with vascular access
devices;
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|
4.
|
Complete
design of next generation steerable
catheters;
|
|
5.
|
Advance
minimally invasive surgical techniques for orthopedics
industry;
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6.
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Develop
disposable instrumentation;
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|
7.
|
Provide
wireless sensing solutions to commercial customers;
and
|
|
8.
|
Develop
a charging platform for commercial secondary
offering.
|
In May
2008, we announced the execution of a letter of intent in which the Sorin Group
will leverage our MRI technology in their future CRM devices. At the same time
we continue to explore and develop similar relationships with other customers in
both the CRM and neuromodulation space. MRI compatible components are just one
example of our strategy to continue to deliver innovative solutions for our
customers that improve the functionality, safety, and efficiency of their
products.
Approximately
$2.3 million of the BIOMEC purchase price was allocated to the estimated fair
value of acquired IPR&D projects that had not yet reached technological
feasibility and had no alternative future use as of the acquisition
date. The value assigned to IPR&D relates to projects that
incorporate BIOMEC’s novel-polymer coating (biomimetic) technology that
mimics the surface of endothelial cells of blood vessels. An
agreement was reached in 2008 with an OEM partner to provide coating material
and services for their catheter products. Testing was conducted to
support this application, and a 510(k) was submitted to the Food and Drug
Administration (“FDA”) in December requesting clearance to market this
product. We expect approval of this 510(k) in early 2009, with
product sales to commence following this clearance. There were no
significant changes from our original estimates with regard to these projects
during 2008.
Approximately
$13.8 million of the Enpath purchase price was allocated to the estimated fair
value of acquired IPR&D projects that had not yet reached technological
feasibility and had no alternative future use. These projects primarily
represent the next generation of introducer and catheter products already being
sold by Enpath which incorporate new enhancements and customer
modifications. One introducer project was launched near the end of
2008. We expect to commercially launch the other introducer products
under development in 2009 which will replace existing products. These
introducer projects acquired have been delayed due to timing of customer
adoption and transition and technical difficulties of some of the
projects. Additionally, future sales from our ViaSealTM
introducer project have been enjoined due to litigation (See
“Litigation”). The catheter IPR&D project, to which a portion of
the Enpath purchase price was allocated, has been put on hold indefinitely in
order to allocate resources to other projects. These delays in
introducer and catheter projects are not expected to have a material impact on
our results of operations.
Approximately
$2.2 million of the Precimed purchase price was allocated to the preliminary
estimated fair value of acquired IPR&D projects that had not yet reached
technological feasibility and had no alternative future use. The
value assigned to IPR&D related to Reamer, Instrument Kit, Locking Plate and
Cutting Guide projects. These projects primarily represent the next
generation of products already being sold by Precimed which incorporate new
enhancements and customer modifications. We commercially
launched a portion of these products in 2008 and expect to launch others in
2009. Several of the other orthopedic projects acquired have been
delayed and two have been cancelled due to the timing of customer adoption,
technical difficulties, inability to meet margin goals and feasibility
assessments. These changes are not expected to have a material impact on our
results of operations as these projects were assumed to have lower
margins.
Cost Savings and
Consolidation Efforts
From 2005
to 2008, we recorded charges in other operating expenses related to our ongoing
cost savings and consolidation efforts. Additional information is set
forth in Note 11 – “Other Operating Expenses” of the Notes to the Consolidated
Financial Statements contained in Item 8 of this report.
2005 & 2006
facility shutdowns and consolidations - Beginning in the first quarter of
2005 and ending in the second quarter of 2006 we consolidated our medical
capacitor manufacturing operations in Cheektowaga, NY, and our implantable
medical battery manufacturing operations in Clarence, NY, into our advanced
power source manufacturing facility in Alden, NY (“Alden
Facility”). We also consolidated our capacitor research, development
and engineering operations from our Cheektowaga, NY facility into our technology
center in Clarence, NY.
In the
first quarter of 2005, we announced our intent to close our Carson City, NV
facility and consolidate the work performed at that facility into our Tijuana,
Mexico facility. This consolidation project was completed in the
third quarter of 2007.
In the
fourth quarter of 2005, we announced our intent to close our Columbia, MD
facility (“Columbia Facility”) and Fremont, CA Advanced Research Laboratory
(“ARL”). We also announced that the manufacturing operations at our
Columbia Facility will be moved into our Tijuana Facility and that the research,
development and engineering and product development functions at our Columbia
Facility and at ARL will relocate to our technology center in Clarence,
NY. The ARL portion of this consolidation project was completed in
the fourth quarter of 2006. The Columbia Facility portion of this
consolidation project was completed in the third quarter of 2008.
During the
fourth quarter of 2006, we completed a plan for consolidating our corporate
and business unit organization structure. A significant portion of
the annual savings from this initiative was reinvested into research
& development activities and business growth
opportunities.
The total
cost of these projects was $24.7 million, which was incurred from 2005 to 2008,
and included the following:
·
|
Severance
and retention - $7.4 million;
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·
|
Production
inefficiencies, moving and revalidation - $4.6
million;
|
·
|
Accelerated
depreciation and asset write-offs - $1.1
million;
|
·
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Personnel
- $8.4 million; and
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All
categories of costs were considered to be cash expenditures, except accelerated
depreciation and asset write-offs. Approximately $23.6 million of
these expenses for the facility shutdowns and consolidations were included in
the IMC business segment, $0.1 million in the Electrochem segment (2006) and
$1.0 million was recorded in unallocated operating expenses (2006).
2007 & 2008
facility shutdowns and consolidations - In the first quarter of 2007, we
announced that we will close our current Electrochem manufacturing facility in
Canton, MA and construct a new 81,000 square foot replacement facility in
Raynham, MA. This initiative is not cost savings driven but capacity
driven for the Electrochem group.
In the
second quarter of 2007, we announced that we will consolidate our corporate
offices in Clarence, NY into our existing research and development center also
in Clarence, NY after an expansion of that facility was
complete. This expansion and relocation was completed in the third
quarter of 2008.
During the
second and third quarters of 2008, we reorganized and consolidated various
general & administrative and research & development functions throughout
the organization in order to optimize those resources with the businesses we
acquired in 2007 and 2008.
In the
second half of 2008, we ceased manufacturing at our facility in Suzhou, China,
which was acquired from EAC, and closed our leased manufacturing facility in
Orchard Park, NY, which was acquired from
IntelliSensing. Additionally, we consolidated our Saignelegier,
Switzerland manufacturing facility, which was acquired from
Precimed. The operations of these facilities were relocated to
existing facilities which have excess capacity. The facility in China
is expected to be used as a procurement office in 2009.
In the
fourth quarter of 2008, we approved a plan for the closure of our Teterboro, New
Jersey (Electrochem manufacturing), Blaine, Minnesota (Vascular Access
manufacturing) and Exton, Pennsylvania (Orthopedics corporate office)
facilities. The operations at these facilities will be moved to other
existing facilities with excess capacity.
The above
initiatives are expected to be completed over the next twelve
months. The total cost for these facility shutdowns and
consolidations is expected to be approximately $13.5 million to $15.0 million of
which $8.9 million has been incurred through January 2, 2009.
The major
categories of costs include the following:
·
|
Severance
and retention - $4.3 million to $4.6
million;
|
·
|
Production
inefficiencies, moving and revalidation - $2.4 million to $2.7
million;
|
·
|
Accelerated
depreciation and asset write-offs - $4.1 million to $4.4
million;
|
·
|
Personnel
- $1.2 million to $1.5 million; and
|
·
|
Other
- $1.5 million to $1.8 million.
|
As a
result of our consolidation initiatives, during 2008 two facilities were
determined to be impaired. Accordingly, these facilities, which had a
carrying amount of $5.1 million, were written down to their fair value of $3.4
million. This resulted in an impairment charge of $1.7 million, which
was included in other operating expense.
All
categories of costs are considered to be cash expenditures, except accelerated
depreciation and asset write-offs. For 2008, costs of $5.0 million
are included in the IMC business segment. For 2008 and 2007, costs of
$3.3 million and $0.5 million, respectively, are included in the Electrochem
business segment. The annual anticipated cost savings from these
initiatives is estimated to be approximately $5 million to $6 million, and will
not be fully realized until 2010.
Our Critical Accounting
Estimates
The
preparation of our consolidated financial statements in accordance with
generally accepted accounting principles in the United States of America
(“GAAP”) requires us to make estimates and assumptions that affect reported
amounts and related disclosures. The methods, estimates and judgments
we use in applying our accounting policies have a significant impact on the
results we report in our financial statements. Management considers
an accounting estimate to be critical if:
|
·
|
It
requires assumptions to be made that were uncertain at the time the
estimate was made; and
|
|
·
|
Changes
in the estimate or different estimates that could have been selected could
have a material impact on our consolidated results of operations,
financial position or cash flows.
|
Our most
critical accounting estimates are described below. We also have other
policies that we consider key accounting policies, such as our policies for
revenue recognition; however, these policies do not meet the definition of
critical accounting estimates, because they do not generally require us to make
estimates or judgments that are difficult or subjective.
Balance
Sheet Caption / Nature of Critical Estimate Item
|
|
Assumptions
/ Approach Used
|
|
Effect
of Variations of Key Assumptions Used
|
Valuation
of goodwill, other identifiable intangible assets and
IPR&D
When
we acquire a company, we allocate the purchase price to the assets we
acquire and liabilities we assume based on their fair value at the date of
acquisition.
We
then allocate the purchase price in excess of net tangible assets acquired
to identifiable intangible assets, including IPR&D. Other
indefinite lived intangible assets, such as trademarks and tradenames, are
considered non-amortizing intangible assets as they are expected to
generate cash flows indefinitely.
Goodwill
is recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of the net identified tangible and intangible assets
acquired.
Indefinite
lived intangibles and goodwill are required to be assessed for impairment
on an annual basis or more frequent if certain indicators are
present.
Definite-lived
intangible assets are amortized over their estimated useful
lives.
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We
base the fair value of identifiable tangible and intangible assets
(including IPR&D) on detailed valuations that use information and
assumptions provided by management. The fair values of the
assets acquired and liabilities assumed are determined using one of three
valuation approaches: market, income and cost. The selection of a
particular method for a given asset depends on the reliability of
available data and the nature of the asset, among other
considerations. The market approach values the subject asset
based on available market pricing for comparable assets. The
income approach values the subject asset based on the present
value of risk adjusted cash flows projected to be generated by the
asset. The projected cash flows for each asset considers
multiple factors, including current revenue from existing customers,
attrition trends, reasonable contract renewal assumptions from the
perspective of a marketplace participant, and expected profit margins
giving consideration to historical and expected margins. The cost
approach values the subject asset by determining the current cost of
replacing that asset with another of equivalent economic
utility. The cost to replace a given asset reflects the
estimated reproduction or replacement cost for the asset, less an
allowance for loss in value due to depreciation or obsolescence, with
specific consideration given to economic obsolescence if
indicated.
We
perform an annual review on the last day of each fiscal year, or more
frequently if indicators of potential impairment exist, to determine if
the recorded goodwill and other indefinite lived intangible assets are
impaired. We assess goodwill for impairment by comparing the
fair value of our reporting units to their carrying value to determine if
there is potential impairment. If the fair value of a reporting
unit is less than its carrying value, an impairment loss is recorded to
the extent that the implied fair value of the goodwill within the
reporting unit is less than its carrying value. Fair values for
reporting units are determined based primarily on the income approach,
however where appropriate, the market approach or appraised values are
also used. Definite-lived intangible assets such as purchased
technology, patents and customer lists are reviewed at least quarterly to
determine if any adverse conditions exist or a change in circumstances has
occurred that would indicate impairment or a change in their remaining
useful life. Indefinite lived intangible assets such as
trademarks and tradenames are evaluated for impairment by using the income
approach.
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|
The
use of alternative valuation assumptions, including estimated cash flows
and discount rates, and alternative estimated useful life assumptions
could result in different purchase price allocations. In
arriving at the value of the IPR&D, we additionally consider among
other factors: the in-process projects stage of completion; commercial
feasibility of the project; the complexity of the work completed as of the
acquisition date; the projected costs to complete; the expected
introduction date and the estimated useful life of the
technology. Significant changes in these estimates and
assumptions could impact the value of the assets and liabilities recorded
which would change the amount and timing of future intangible asset
amortization expense.
We
make certain estimates and assumptions that affect the determination of
the expected future cash flows from our reporting units for our goodwill
impairment testing. These include sales growth, cost of
capital, and projections of future cash flows. Significant
changes in these estimates and assumptions could create future impairment
losses to our goodwill.
For
indefinite lived assets such as trademarks and tradenames, we make certain
estimates of revenue streams, royalty rates and other future benefits.
Significant changes in these estimates could create future impairments of
these indefinite lived intangible assets.
Estimation
of the useful lives of definite-lived intangible assets requires
significant management judgment. Events could occur that would
materially affect our estimates of the useful
lives. Significant changes in these estimates and assumptions
could change the amount of future amortization expense or could create
future impairments of these definite-lived intangible assets.
A 1%
change in the amortization of our intangible assets would
increase/decrease current year net income by approximately $0.07 million,
or approximately $0.003 per diluted share. As of January 2,
2009 we have $428.6 million of intangible assets recorded on our balance
sheet representing 50% of total assets. This includes $90.3
million of amortizing intangible assets, $36.1 million of indefinite lived
intangible assets and $302.2 million of
goodwill.
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Balance
Sheet Caption / Nature of Critical Estimate Item
|
|
Assumptions
/ Approach Used
|
|
Effect
of Variations of Key Assumptions
Used
|
Stock-based
compensation
We
record compensation costs related to our stock-based awards in accordance
with Financial Accounting Standards Board (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment
(“SFAS No. 123(R)”), and related Securities and Exchange Commission
rules included in Staff Accounting Bulletin No. 107. Under
the fair value recognition provisions of SFAS No. 123(R), we measure
stock-based compensation cost at the grant date based on the fair value of
the award.
Compensation
cost for service-based awards is recognized ratably over the applicable
vesting period. Compensation cost for performance-based awards
is reassessed each period and recognized based upon the probability that
the performance targets will be achieved. The amount of
stock-based compensation expense recognized during a period is based on
the portion of the awards that are ultimately expected to
vest. The total expense recognized over the vesting period will
only be for those awards that ultimately vest.
|
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We
utilize the Black-Scholes Options Pricing Model to determine the fair
value of stock options under SFAS No. 123(R). We are required
to make certain assumptions with respect to selected Black Scholes model
inputs, including expected volatility, expected life, expected dividend
yield and the risk-free interest rate. Expected volatility is
based on the historical volatility of our stock over the most recent
period commensurate with the estimated expected life of the stock
options. The expected life of stock options granted, which
represents the period of time that the stock options are expected to be
outstanding, is based, primarily, on historical data. The
expected dividend yield is based on our history and expectation of
dividend payouts. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant for a period
commensurate with the estimated expected life.
For
restricted stock and restricted stock unit awards, the fair market value
is determined based upon the closing value of our stock price on the grant
date.
Compensation
cost for performance-based stock options and restricted stock units is
reassessed each period and recognized based upon the probability that the
performance targets will be achieved. That assessment is based
upon our actual and expected future performance as well as that of the
individuals who have been granted performance-based awards.
Stock-based
compensation expense is only recorded for those awards that are expected
to vest. Forfeiture estimates for determining appropriate
stock-based compensation expense are estimated at the time of grant based
on historical experience and demographic
characteristics. Revisions are made to those estimates in
subsequent periods if actual forfeitures differ from estimated
forfeitures.
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|
Option
pricing models were developed for use in estimating the value of traded
options that have no vesting restrictions and are fully
transferable. Because our share-based payments have
characteristics significantly different from those of freely traded
options, and because changes in the subjective input assumptions can
materially affect our estimates of fair values, existing valuation models
may not provide reliable measures of the fair values of our share-based
compensation. Consequently, there is a risk that our estimates
of the fair values of our share-based compensation awards may bear little
resemblance to the actual values realized upon the exercise, expiration or
forfeiture of those share-based payments in the future. Stock
options may expire worthless or otherwise result in zero intrinsic value
as compared to the fair values originally estimated on the grant date and
reported in our consolidated financial
statements. Alternatively, value may be realized from these
instruments that is significantly in excess of the fair values originally
estimated on the grant date and reported in our consolidated financial
statements. There are significant differences among valuation
models. This may result in a lack of comparability with other
companies that use different models, methods and assumptions.
There
is a high degree of subjectivity involved in selecting assumptions to be
utilized to determine fair value and forfeiture assumptions. If
factors change and result in different assumptions in the application of
SFAS No. 123(R) in future periods, the expense that we record for future
grants may differ significantly from what we have recorded in the current
period. Additionally, changes in performance of the Company or
individuals who have been granted performance-based awards that affect the
likelihood that performance based targets are achieved could materially
impact the amount of stock-based compensation expense
recognized.
A 1%
change in our stock based compensation expense would increase/decrease
current year net income by approximately $0.04 million, or approximately
$0.002 per diluted
share.
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Balance
Sheet Caption / Nature of Critical Estimate Item
|
|
Assumptions
/ Approach Used
|
|
Effect
of Variations of Key Assumptions
Used
|
Inventories
Inventories
are stated at the lower of cost, determined using the first-in, first-out
method, or market.
|
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Inventory
standard costing requires complex calculations that include assumptions
for overhead absorption, scrap, sample calculations, manufacturing yield
estimates and the determination of which costs are
capitalizable. The valuation of inventory requires us to
estimate obsolete or excess inventory as well as inventory that is not of
saleable quality.
|
|
Variations
in methods or assumptions could have a material impact on our
results. If our demand forecast for specific products is
greater than actual demand and we fail to reduce manufacturing output
accordingly, we could be required to record additional inventory reserves,
which would have a negative impact on our net income.
A 1%
write-down of our inventory would decrease current year net income by
approximately $0.7 million, or approximately $0.03 per diluted
share. As of January 2, 2009 we have $112.3 million of
inventory recorded on our balance sheet representing 13% of total
assets.
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Tangible
long-lived assets
Property,
plant and equipment and other tangible long-lived assets are carried at
cost. This cost is charged to depreciation or amortization
expense over the estimated life of the operating assets primarily using
straight-line rates. Long-lived assets are subject to
impairment assessment.
|
|
We
assess the impairment of tangible long-lived assets when events or changes
in circumstances indicate that the carrying value of the assets may not be
recoverable. Factors that we consider in deciding when to
perform an impairment review include significant under-performance of a
business or product line in relation to expectations, significant negative
industry or economic trends, and significant changes or planned changes in
our use of the assets. Recoverability potential is measured by
comparing the carrying amount of the asset group to the related total
future undiscounted cash flows. The projected cash flows for
each asset group considers multiple factors, including current revenue
from existing customers, proceeds from the sale of the asset group,
reasonable contract renewal assumptions from the perspective of a
marketplace participant, and expected profit margins giving consideration
to historical and expected margins. If an asset group’s
carrying value is not recoverable through related cash flows, the asset
group is considered to be impaired. Impairment is measured by
comparing the asset group’s carrying amount to its fair
value. When it is determined that useful lives of assets are
shorter than originally estimated, and there are sufficient cash flows to
support the carrying value of the asset group, we accelerate the rate of
depreciation in order to fully depreciate the assets over their new
shorter useful lives.
|
|
Estimation
of the useful lives of tangible assets that are long-lived requires
significant management judgment. Events could occur, including
changes in cash flow that would materially affect our estimates and
assumptions related to depreciation. Unforeseen changes in
operations or technology could substantially alter the assumptions
regarding the ability to realize the return of our investment in
long-lived assets. Also, as we make manufacturing process
conversions and other facility consolidation decisions, we must make
subjective judgments regarding the remaining useful lives of our assets,
primarily manufacturing equipment and buildings. Significant
changes in these estimates and assumptions could change the amount of
future depreciation expense or could create future impairments of these
long-lived assets.
A 1%
write-down in our tangible long-lived assets would decrease current year
net income by approximately $1.2 million, or approximately $0.05 per
diluted share. As of January 2, 2009 we have $182.8 million of
tangible long-lived assets recorded on our balance sheet representing 22%
of total assets.
|
Balance
Sheet Caption / Nature of Critical Estimate Item
|
|
Assumptions
/ Approach Used
|
|
Effect
of Variations of Key Assumptions
Used
|
Provision
for income taxes
In
accordance with the liability method of accounting for income taxes
specified in SFAS No. 109, Accounting for Income
Taxes, the provision for income taxes is the sum of income taxes
both currently payable and deferred. The changes in deferred
tax assets and liabilities are determined based upon the changes in
differences between the bases of assets and liabilities for financial
reporting purposes and the tax bases of assets and liabilities as measured
by the enacted tax rates that management estimates will be in effect when
the differences reverse.
Beginning
in 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109(“FIN No.
48”), to assess and record income tax uncertainties. FIN
No. 48 prescribes a recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return and also provides guidance on various
related matters such as derecognition, interest and penalties, and
disclosure.
|
|
In
relation to recording the provision for income taxes, management must
estimate the future tax rates applicable to the reversal of temporary
differences, make certain assumptions regarding whether book/tax
differences are permanent or temporary and if temporary, the related
timing of expected reversal. Also, estimates are made as to
whether taxable operating income in future periods will be sufficient to
fully recognize any gross deferred tax assets. If recovery is
not likely, we must increase our provision for taxes by recording a
valuation allowance against the deferred tax assets that we estimate will
not ultimately be recoverable. Alternatively, we may make
estimates about the potential usage of deferred tax assets that decrease
our valuation allowances.
The
calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax regulations. Significant
judgment is required in evaluating our tax positions and determining our
provision for income taxes. During the ordinary course of
business, there are many transactions and calculations for which the
ultimate tax determination is uncertain. We establish reserves
for uncertain tax positions when we believe that certain tax positions do
not meet the more likely than not threshold. We adjust these
reserves in light of changing facts and circumstances, such as the outcome
of a tax audit or the lapse of the statute of limitations. The
provision for income taxes includes the impact of reserve provisions and
changes to the reserves that are considered appropriate. We
follow FIN No. 48 for accounting for our uncertain tax
positions.
|
|
Changes
could occur that would materially affect our estimates and assumptions
regarding deferred taxes. Changes in current tax laws and tax
rates could affect the valuation of deferred tax assets and liabilities,
thereby changing the income tax provision. Also, significant
declines in taxable income could materially impact the realizable value of
deferred tax assets. At January 2, 2009, we had $23.1 million
of deferred tax assets on our balance sheet and a valuation allowance of
$4.5 million has been established for certain deferred tax assets as it is
more likely than not that they will not be realized.
A 1%
increase in the effective tax rate would increase the current year
provision by $0.3 million, reducing diluted earnings per share by $0.01
based on shares outstanding at January 2,
2009.
|
Our Financial
Results
The
commentary that follows should be read in conjunction with our consolidated
financial statements and related notes. We utilize a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st. Fiscal
years 2008, 2007, and 2006 ended on January 2, 2009, December 28, and December
29, respectively. Fiscal year 2008 contained fifty-three weeks while
fiscal years 2007 and 2006 contained fifty-two weeks.
Results
of Operations Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended
|
|
|
2008-2007
|
|
|
2007-2006
|
|
Dollars
in thousands, except per share data
|
|
Jan.
2,
2009
|
|
|
Dec.
28,
2007
|
|
|
Dec.
29,
2006
|
|
|
$
Change
|
|
|
%
Change
|
|
|
$
Change
|
|
|
%
Change
|
|
IMC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CRM/Neuromodulation
|
|
$ |
278,279 |
|
|
$ |
251,426 |
|
|
$ |
227,407 |
|
|
$ |
26,853 |
|
|
|
11 |
% |
|
$ |
24,019 |
|
|
|
11 |
% |
Vascular
Access
|
|
|
47,415 |
|
|
|
18,396 |
|
|
|
- |
|
|
|
29,019 |
|
|
|
158 |
% |
|
|
18,396 |
|
|
NA
|
|
Orthopedics
|
|
|
142,446 |
|
|
|
- |
|
|
|
- |
|
|
|
142,446 |
|
|
NA
|
|
|
|
- |
|
|
NA
|
|
Total
IMC
|
|
|
468,140 |
|
|
|
269,822 |
|
|
|
227,407 |
|
|
|
198,318 |
|
|
|
73 |
% |
|
|
42,415 |
|
|
|
19 |
% |
Electrochem
|
|
|
78,504 |
|
|
|
48,924 |
|
|
|
43,735 |
|
|
|
29,580 |
|
|
|
60 |
% |
|
|
5,189 |
|
|
|
12 |
% |
Total
sales
|
|
|
546,644 |
|
|
|
318,746 |
|
|
|
271,142 |
|
|
|
227,898 |
|
|
|
71 |
% |
|
|
47,604 |
|
|
|
18 |
% |
Cost
of sales - excluding amortization of intangible assets
|
|
|
384,014 |
|
|
|
198,184 |
|
|
|
164,885 |
|
|
|
185,830 |
|
|
|
94 |
% |
|
|
33,299 |
|
|
|
20 |
% |
Cost
of sales - amortization of intangible assets
|
|
|
6,841 |
|
|
|
4,537 |
|
|
|
3,813 |
|
|
|
2,304 |
|
|
|
51 |
% |
|
|
724 |
|
|
|
19 |
% |
Total
cost of sales
|
|
|
390,855 |
|
|
|
202,721 |
|
|
|
168,698 |
|
|
|
188,134 |
|
|
|
93 |
% |
|
|
34,023 |
|
|
|
20 |
% |
Cost
of sales as a % of sales
|
|
|
71.5 |
% |
|
|
63.6 |
% |
|
|
62.2 |
% |
|
|
|
|
|
|
7.9 |
% |
|
|
|
|
|
|
1.4 |
% |
Selling,
general, and administrative expenses
|
|
|
72,633 |
|
|
|
44,674 |
|
|
|
38,785 |
|
|
|
27,959 |
|
|
|
63 |
% |
|
|
5,889 |
|
|
|
15 |
% |
SG&A
as a % of sales
|
|
|
13.3 |
% |
|
|
14.0 |
% |
|
|
14.3 |
% |
|
|
|
|
|
|
-0.7 |
% |
|
|
|
|
|
|
-0.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research,
development and engineering costs, net
|
|
|
31,444 |
|
|
|
29,914 |
|
|
|
24,225 |
|
|
|
1,530 |
|
|
|
5 |
% |
|
|
5,689 |
|
|
|
23 |
% |
RD&E
as a % of sales
|
|
|
5.8 |
% |
|
|
9.4 |
% |
|
|
8.9 |
% |
|
|
|
|
|
|
-3.6 |
% |
|
|
|
|
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
operating expense
|
|
|
16,818 |
|
|
|
21,417 |
|
|
|
17,058 |
|
|
|
(4,599 |
) |
|
|
-21 |
% |
|
|
4,359 |
|
|
|
26 |
% |
Operating
income
|
|
|
34,894 |
|
|
|
20,020 |
|
|
|
22,376 |
|
|
|
14,874 |
|
|
|
74 |
% |
|
|
(2,356 |
) |
|
|
-11 |
% |
Operating
margin
|
|
|
6.4 |
% |
|
|
6.3 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
0.1 |
% |
|
|
|
|
|
|
-2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
13,168 |
|
|
|
7,303 |
|
|
|
4,605 |
|
|
|
5,865 |
|
|
|
80 |
% |
|
|
2,698 |
|
|
|
59 |
% |
Interest
income
|
|
|
(711 |
) |
|
|
(7,050 |
) |
|
|
(5,775 |
) |
|
|
6,339 |
|
|
|
-90 |
% |
|
|
(1,275 |
) |
|
|
22 |
% |
Gain
on sale of investment security
|
|
|
- |
|
|
|
(4,001 |
) |
|
|
- |
|
|
|
4,001 |
|
|
NA
|
|
|
|
(4,001 |
) |
|
NA
|
|
Gain
on extinguishment of debt
|
|
|
(3,242 |
) |
|
|
(4,473 |
) |
|
|
- |
|
|
|
1,231 |
|
|
|
-28 |
% |
|
|
(4,473 |
) |
|
NA
|
|
Other
(income) expense, net
|
|
|
(1,624 |
) |
|
|
(447 |
) |
|
|
12 |
|
|
|
(1,177 |
) |
|
|
263 |
% |
|
|
(459 |
) |
|
NA
|
|
Provision
for income taxes
|
|
|
8,744 |
|
|
|
13,638 |
|
|
|
7,408 |
|
|
|
(4,894 |
) |
|
|
-36 |
% |
|
|
6,230 |
|
|
|
84 |
% |
Effective
tax rate
|
|
|
32.0 |
% |
|
|
47.5 |
% |
|
|
31.5 |
% |
|
|
|
|
|
|
-15.5 |
% |
|
|
|
|
|
|
16.0 |
% |
Net
income
|
|
$ |
18,559 |
|
|
$ |
15,050 |
|
|
$ |
16,126 |
|
|
$ |
3,509 |
|
|
|
23 |
% |
|
$ |
(1,076 |
) |
|
|
-7 |
% |
Net
margin
|
|
|
3.4 |
% |
|
|
4.7 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
-1.3 |
% |
|
|
|
|
|
|
-1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$ |
0.81 |
|
|
$ |
0.67 |
|
|
$ |
0.73 |
|
|
$ |
0.14 |
|
|
|
21 |
% |
|
$ |
(0.06 |
) |
|
|
-8 |
% |
Fiscal 2008 Compared with
Fiscal 2007
Sales
Sales were
a record $546.6 million in 2008, an increase of 71% compared to
2007. This growth was achieved through acquisitions and organic
growth of 7%. Our acquisitions, which expanded our product lines and
diversified our customer base, contributed $208.2 million incremental revenue in
2008. Revenue for 2008 also included approximately $10 million of
additional sales as a result of 2008 being a 53 week fiscal year versus 2007
which had 52 weeks.
IMC - The nature and extent of
our selling relationship with our customers is different in terms of
products purchased, selling prices, product volumes, ordering patterns and
inventory management. We have pricing arrangements with our customers
that at times do not specify minimum order quantities. Our visibility
to customer ordering patterns is over a relatively short period of
time. Our customers may have inventory management programs and
alternate supply arrangements of which we are unaware. Additionally,
the relative market share among the OEM device manufacturers changes
periodically. Consequently, these and other factors can significantly
impact our sales in any given period.
Our 2008
revenue from our IMC business increased $198.3 million or 73% over
2007. Our acquisitions in 2007 and 2008 contributed $183.2 million to
this increase. Included in our IMC segment is our CRM/Neuromodulation product
line which saw year over year growth of $26.9 million, $11.8 million of which
was attributable to our acquisitions in 2007. 2008 revenue from our
IMC segment also includes sales from our Vascular Access and Orthopedic product
lines which increased $29.0 million and $142.4 million, respectively over the
prior year and were acquired near the end of 2007 and beginning of
2008. The additional week of sales added approximately $9 million to
our IMC revenue in 2008. Additionally, Vascular Access revenue
benefited from the timing of customer inventory stocking for
introducers in the fourth quarter of 2008, which may impact first quarter of
2009 revenues. Orthopedic sales during the first three quarters of
2008 benefited from the release of excess backlog that was on hand at the time
of the Precimed acquisitions, which has since been fulfilled.
The
non-acquisition related increase in CRM/Neuromodulation revenue in 2008 was
primarily due to higher feedthrough, and assembly revenue partially offset by
lower ICD battery, coated components and ICD capacitor sales. The
increase in feedthrough revenue can be attributed to market growth as well as
the timing of customer product launches. The increase in assembly sales
reflected an increase in price during 2008 due to contractual agreements related
to material price increases. The decrease in ICD battery revenue is
primarily due to customer vertical integration partially offset by increased
adoption of our Q Series high rate ICD batteries. The decline in
coated component sales is primarily the result of a customer changing product
mix near the end of 2007 due to marketplace field actions. Revenues
in 2007 included an increased level of capacitor sales due to a customer supply
issue in the first half of 2007.
Electrochem -
Similar to IMC customers, we have pricing arrangements with our customers
that many times do not specify minimum quantities. Our visibility to
customer ordering patterns is over a relatively short period of time as most
customers utilize short term purchase orders as opposed to long-term
contracts.
Electrochem
sales grew $29.6 million or 60% in 2008 to $78.5 million. This
included $25.0 million of incremental revenue from our acquisitions in
2007. On an organic basis Electrochem revenue increased 11%, which
includes approximately $1 million of additional revenue as a result of 2008
being a 53 week fiscal year versus 2007 which had 52 weeks. The core
growth in Electrochem sales primarily came from our energy
markets. Oil and gas drilling activity was strong during 2008, but is
expected to be more tempered in 2009 due to the economic slow
down. Additionally, we continue to gain market share across our
markets.
2009 Sales
Outlook - We expect our full year 2009 sales will be in the range of $550
million to $600 million. This revenue projection assumes that we will
continue to grow faster than our underlying market by leveraging our diversified
revenue base and our strength in the development and manufacturing of custom
technologies for our customers. These growth projections may be impacted by a
variety of factors including a softening in the orthopedic and commercial energy
markets, potential delays in elective surgeries, the current financial
market unrest, changes in exchange rates and changes in the health care
reimbursement policies. Within the IMD markets we serve, the
orthopedics market represents the least predictable market due to the elective
nature of many of the surgeries.
Cost
of Sales
Changes
from the prior year to cost of sales as a percentage of sales were primarily due
to the following:
|
|
2008-2007
|
|
|
|
%
Increase
|
|
Impact
of 2008 and 2007 acquisitions
(a)
|
|
|
8.5 |
% |
Inventory
step-up amortization
(b)
|
|
|
1.5 |
% |
Mix
change
(c)
|
|
|
1.2 |
% |
Volume
change
(d)
|
|
|
-1.0 |
% |
Price
change
(e)
|
|
|
-0.8 |
% |
Impact
of annualized consolidation savings
(f)
|
|
|
-1.5 |
% |
Total
percentage point change to cost of sales as a
|
|
percentage
of sales
|
|
|
7.9 |
% |
a.
|
We
completed seven acquisitions from the second quarter of 2007 to the first
quarter of 2008. The acquired companies are currently operating
with a higher cost of sales percentage than our legacy businesses due to
less efficient operations and products/contracts that generally carry
lower margins. We are currently in the process of applying our
lean manufacturing processes to their operations and implementing plans
for plant consolidation in order to lower cost of sales as percentage of
sales (See “Cost Savings and Consolidation Efforts”). These
initiatives, as well as increased sales volumes, are expected to help
improve our cost of sales percentage over the next two
years.
|
b.
|
In
connection with our acquisitions in 2008 and 2007, the value of inventory
on hand was stepped-up to reflect the fair value at the time of
acquisition. This stepped-up value is amortized to cost of
sales – excluding intangible amortization as the inventory to which the
adjustment relates is sold. The inventory step-up amortization
was $6.4 million and $1.7 million for 2008 and 2007,
respectively. As of January 2, 2009 there was no remaining
inventory step-up to be
amortized.
|
c.
|
The
revenue increase in 2008, excluding acquisitions, included a higher mix of
low-rate medical batteries and assembly sales, which generally have lower
margins. Additionally, revenue from coated components, ICD
capacitors and high-rate medical batteries, which are generally higher
margin products, were lower.
|
d.
|
This
decrease is primarily due to higher feedthrough production which absorbed
a higher amount of fixed costs such as plant overhead and
depreciation. In addition, higher overhead efficiencies were
driven by greater inventory build for moves and replenishment of safety
stock.
|
e.
|
This
decrease was primarily driven by contractual price increases for our high
rate medical batteries and price increases contingent upon raw material
costs.
|
f.
|
This
decrease was a result of a reduction in excess capacity in connection with
our facility consolidations completed in 2008 (See “Cost Savings and
Consolidation Efforts”).
|
We expect
cost of sales as a percentage of sales to benefit in future years from our
consolidation efforts and the elimination of excess capacity.
SG&A
Expenses
Changes
from the prior year to SG&A expenses were primarily due to the following (in
millions):
|
|
2008-2007
|
|
|
|
$
Increase
|
|
Headcount
increases associated with acquisitions (a)
|
|
$ |
18.9 |
|
Amortization
(b)
|
|
|
2.8 |
|
Enpath
legal expense (c)
|
|
|
4.0 |
|
Other
(d)
|
|
|
2.3 |
|
Net
increase in SG&A
|
|
$ |
28.0 |
|
a.
|
Personnel
acquired in functional areas such as Finance, Human Resources and
Information Technology were the primary drivers of this
increase. The remaining increase was for consulting, travel and
other administrative expenses to operate those
areas.
|
b.
|
In
connection with our acquisitions in 2008 and 2007, the value of customer
relationships and non-compete agreements were recorded at fair value at
the time of acquisition. These intangible assets are amortized
to SG&A over their estimated useful
lives.
|
c.
|
Amount
represents increased costs incurred in connection with a patent
infringement action which went to trial in 2008 – see
“Litigation.”
|
d.
|
Increase
is primarily a result of 2008 being a 53 week fiscal year versus 2007
which had 52 weeks, including additional payroll taxes that resulted from
fiscal year 2008 ending in 2009.
|
SG&A
expenses as a percentage of sales are expected to decline in the near term as
synergies from our acquisitions are realized.
RD&E
Expenses
Net
research, development and engineering costs were as follows (in
millions):
|
|
Year
ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
$ |
18.8 |
|
|
$ |
16.1 |
|
|
|
|
|
|
|
|
|
|
Engineering
costs
|
|
|
22.4 |
|
|
|
18.9 |
|
Less
cost reimbursements
|
|
|
(9.8 |
) |
|
|
(5.1 |
) |
Engineering
costs, net
|
|
|
12.6 |
|
|
|
13.8 |
|
Total
RD&E
|
|
$ |
31.4 |
|
|
$ |
29.9 |
|
The
increase in RD&E expenses for 2008 was primarily due to our acquisitions in
2007 and 2008 which added $5.3 million of incremental research and development
costs, $4.1 million of incremental engineering costs and $2.7 million of
incremental cost reimbursements. These increases were offset by our
efforts to streamline these functions in 2008 to better align resources as well
as the timing of cost reimbursements. RD&E expenses are expected
to increase in 2009, reflecting our continued development of and investment in
core product technologies.
Other
Operating Expenses
Acquired
In-Process Research and Development - Approximately
$2.2 million and $16.1 million of the purchase price related to the 2008 and
2007 acquisitions, respectively, was allocated to IPR&D projects
acquired. These projects had not yet reached technological
feasibility and had no alternative future use as of the acquisition date, thus
were immediately expensed on the date of acquisition. Additional
information regarding these projects is set forth in Note 2 – “Acquisitions” of
the Notes to the Consolidated Financial Statements contained in Item 8 of this
report and “Product Development” section of this Item.
The
remaining other operating expenses are as follows (in
millions):
|
|
Year
ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
(a)
2005 & 2006 facility shutdowns and consolidations
|
|
$ |
0.7 |
|
|
$ |
4.7 |
|
(a)
2007 & 2008 facility shutdowns and consolidations
|
|
|
8.3 |
|
|
|
0.5 |
|
(b)
Integration costs
|
|
|
5.4 |
|
|
|
- |
|
(c)
Asset dispositions and other
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
$ |
14.6 |
|
|
$ |
5.3 |
|
a.
|
Refer
to the “Cost Savings and Consolidation Efforts” section of this Item for
disclosures related to the timing and level of remaining expenditures for
these items as of January 2, 2009.
|
b.
|
For
2008, we incurred costs related to the integration of the companies
acquired in 2007 and 2008. The integration initiatives include
the implementation of the Oracle ERP system, training and compliance with
policies as well as the implementation of lean manufacturing and six sigma
initiatives. The expenses are primarily for consultants,
relocation and travel costs that will not be required after the
integrations are completed.
|
c.
|
During
2008 and 2007, we had various asset disposals which were partially offset
by insurance proceeds received on previously disposed
assets.
|
In 2009
consolidation and integration expenses are expected to be approximately $10
million to $13 million.
Interest
Expense and Interest Income
Interest
expense for 2008 is $5.9 million higher than 2007 primarily due to the
additional $80 million of 2.25% convertible notes issued at the beginning of
2007 as well as the additional interest expense associated with line of credit
draws used to fund our acquisitions and debt extinguishment in
2008. See Note 8 – “Debt” of the Notes to the Consolidated Financial
Statements in this Form 10-K for additional information about our long-term debt
obligations.
We expect
non-cash interest expense to increase materially in 2009 as a result of the
changes in accounting for convertible debt effective in 2009. See
“Impact of Recently Issued Accounting Standards” section of this Item for a
further description of these changes. Cash interest costs for 2009
should remain relatively consistent with 2008 as we have fixed a significant
portion of our interest costs utilizing interest rate swaps.
Interest
income for 2008 decreased by $6.3 million in comparison to the prior year
primarily due to the cash deployed in connection with our acquisitions in 2007
and 2008. We expect interest income to remain comparable to the
current year level for the foreseeable future.
Gain
on sale of investment security
In the
second quarter of 2007, we sold an investment security which resulted in a
pre-tax gain of $4.0 million.
Gain
on extinguishment of debt
In
December 2008 we entered into privately negotiated agreements under which we
repurchased $21.8 million in aggregate principal amount of our original $170.0
million of 2.25% convertible subordinated notes due 2013 (“CSN I”) at $845.38
per $1,000 of principal. The primary purpose of this transaction was
to retire the debentures, which contained a put option exercisable on June 15,
2010, at a discount. This transaction was funded with availability
under our existing line of credit. This transaction was accounted for
as an extinguishment of debt and resulted in a pre-tax gain of $3.2
million.
In the
first quarter of 2007, we exchanged $117.8 million of our original $170.0
million of CSN I for an equivalent principal amount of a new series of 2.25%
convertible subordinated notes due 2013. The primary purpose of this
transaction was to eliminate the June 15, 2010 call and put option that is
included in the terms of the exchanged CSN I. We accounted for this
exchange as an extinguishment of debt, which resulted in a net pre-tax gain of
$4.5 million.
Other
(income) expense, net
In
December 2007, we entered into a forward contract to purchase 80,000,000 Swiss
Francs (“CHF”), at an exchange rate of 1.1389 CHF per one U.S. dollar, in order
to partially fund our acquisition of Precimed, which closed in January 2008 and
was payable in Swiss Francs. In January 2008, we entered into an
additional forward contract to purchase 20,000,000 CHF at an exchange rate of
1.1156 per one U.S. dollar. We entered into a similar foreign
exchange contract in January 2008 in order to fund our acquisition of the
Chaumont Facility, which closed in February 2008 and was payable in Euros.
The net result of the above transactions was a gain of $2.4 million, $1.6
million of which was recorded in 2008 and $0.8 million in
2007.
Provision
for Income Taxes
Our
effective tax rate for fiscal year 2008 of 32.0% is lower than the U.S.
statutory rate primarily as a result of the Swiss Tax Holiday tax benefit,
offset in part by the IPR&D charge from the acquisition of Precimed, which
was not deductible for income tax purposes. Our effective tax rate
for fiscal year 2007 of 47.5% was higher than the U.S. statutory rate primarily
as a result of the IPR&D charge from the acquisition of Enpath, which was
not deductible for income tax purposes. We expect our effective tax
rate in 2009 to be more in line with the 35% U.S. statutory rate.
Fiscal 2007 Compared with
Fiscal 2006
Sales
We
achieved sales growth of 18% in 2007 compared to 2006. This growth
was achieved through acquisitions and organic growth of 8%. This
growth came during a period in which the CRM industry continued to recover from
a difficult 2006. Our acquisitions which expanded our product lines
and diversified our customer base represented a 10% increase in
revenue.
IMC - We achieved
year-over-year growth of 19% in our IMC business despite our underlying markets
growing at a low-single digit pace and an approximate 1% net reduction in
selling prices. Our acquisitions represented a 10% increase in IMC
revenue. ICD capacitors, ICD batteries, assembly products and coated
electrodes were the primary growth drivers. ICD capacitor sales
increased due to a non-recurring customer supply issue in the first half of the
year. Growth in ICD batteries was primarily due to increased sales of
our “Q” technology battery which was introduced near the end of 2006, partially
offset by lower prices. This growth represents increased adoption of
our high rate battery technology.
Consistent
with our strategy to increase the integration of our component products
(including enclosures) into our assembly business, assembly revenues, which are
included in Other IMC revenue, increased by 48% in
2007. Correspondingly, revenues from enclosures decreased by 13% over
the same period. In addition to the above, the increase in assembly
sales reflected an increase in price due to contractual agreements related to
material price increases.
Electrochem -
Electrochem sales grew by 12% in 2007 through a combination of increased
market penetration, new product introductions, greater value-added pack assembly
and acquisitions. Our acquisitions represented a 7% increase in
Electrochem revenue. The core growth rate slowed from the prior year
partially due to the favorable benefit of approximately $1.5 to $2.5 million in
customer inventory stocking in 2006 as they consolidated
operations.
Cost
of Sales
Changes
from the prior year to cost of sales as a percentage of sales were primarily due
to the following:
|
|
2007-2006
|
|
|
|
%
Increase
|
|
Price
reduction
(a)
|
|
|
0.5 |
% |
Inventory
step-up
(b)
|
|
|
0.5 |
% |
Excess
capacity at Columbia Facility
(c)
|
|
|
0.4 |
% |
Total
percentage point change to cost of sales as a
|
|
percentage
of sales
|
|
|
1.4 |
% |
a.
|
This
increase was primarily due to contractual price concessions negotiated
with our larger customers. Price reductions were negotiated in
exchange for longer term commitments, primarily in the IMC
segment.
|
b.
|
In
connection with our acquisitions, the value of inventory on hand was
stepped-up to reflect the fair value at the time of
acquisition. The inventory step-up amortization, which is
recorded as cost of sales – excluding intangible amortization, was $1.7
million.
|
c.
|
The
Columbia Facility was operating with excess capacity during 2007 as its
production transitioned to our Tijuana, Mexico Facility. The
excess capacity cost is approximately $1.2 million. In accordance with our
inventory accounting policy, excess capacity costs are
expensed.
|
SG&A
Expenses
Changes
from the prior year to SG&A expenses were primarily due to the following (in
millions):
|
|
2007-2006
|
|
|
|
$
Increase
|
|
Headcount
increases associated with acquisitions (a)
|
|
$ |
3.8 |
|
Amortization
(b)
|
|
|
1.0 |
|
Increased
sales and marketing workforce (c)
|
|
|
0.9 |
|
Increased
legal expense (d)
|
|
|
0.5 |
|
Other
|
|
|
(0.3 |
) |
Net
increase in SG&A
|
|
$ |
5.9 |
|
a.
|
Personnel
working for the acquired companies in functional areas such as Finance,
Human Resources and Information Technology were the primary drivers of
this increase. The remaining increase was for consulting,
travel and other administrative expenses to operate these
areas.
|
b.
|
Relates
to the amortization of customer relationships and non-compete agreements
recorded as a result of our acquisitions in
2007.
|
c.
|
The
increase in sales and marketing workforce was primarily a result of our
planned efforts to increase the marketing and sales of our
products.
|
d.
|
The
increase in legal expense is primarily due to increased staffing levels
and activity related to customer contract renewals during the
year.
|
RD&E
Expenses
Net
research, development and engineering costs were as follows (in
millions):
|
|
Year
ended
|
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
$ |
16.1 |
|
|
$ |
16.1 |
|
|
|
|
|
|
|
|
|
|
Engineering
costs
|
|
|
18.9 |
|
|
|
9.9 |
|
Less
cost reimbursements
|
|
|
(5.1 |
) |
|
|
(1.8 |
) |
Engineering
costs, net
|
|
|
13.8 |
|
|
|
8.1 |
|
Total
RD&E
|
|
$ |
29.9 |
|
|
$ |
24.2 |
|
The
increase in RD&E expenses for 2007 was primarily due to a planned headcount
increase in engineering personnel as we continue to invest substantial resources
in product technologies. Additionally, $1.9 million of research and
development costs, $4.9 million of engineering costs and $2.6 million of cost
reimbursements were a result of the acquisitions in
2007. Reimbursement on product development projects increased
compared to last year primarily due to the timing of the achievement of
milestones, as well as the Enpath and BIOMEC acquisitions, which added $2.6
million of cost reimbursements.
Other
Operating Expenses
Acquired
In-Process Research and Development - Approximately
$2.3 million and $13.8 million of the BIOMEC and Enpath purchase prices,
respectively, represent the estimated fair value of IPR&D projects acquired
from those companies. These projects had not yet reached
technological feasibility and had no alternative future use as of the
acquisition date, thus were immediately expensed on the date of
acquisition.
The
remaining other operating expenses are as follows (in millions):
|
|
Year
Ended
|
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2007
|
|
|
2006
|
|
(a)
2005 & 2006 facility shutdowns and consolidations
|
|
$ |
4.7 |
|
|
$ |
11.0 |
|
(a)
2007 & 2008 facility shutdowns and consolidations
|
|
|
0.5 |
|
|
|
- |
|
(b)
Asset dispositions and other
|
|
|
0.1 |
|
|
|
6.1 |
|
|
|
$ |
5.3 |
|
|
$ |
17.1 |
|
a.
|
Refer
to “Cost Savings and Consolidation Efforts” section of this Item for
additional disclosures.
|
b.
|
During
2007, we had various asset disposals which were offset by $0.5 million of
insurance proceeds on previously disposed assets. During 2006,
we recorded a loss of $4.4 million related to the write-off of a battery
test system that was under development. Upon completion of our
engineering and technical evaluation, it was determined that the system
could not meet the required specifications in a cost effective
manner. This charge was included in the IMC business
segment. The remaining expense for 2006 includes charges for
various asset dispositions and $0.8 million for professional fees related
to a potential acquisition that was no longer considered
probable.
|
Interest
Expense and Interest Income
Interest
expense for 2007 is higher than the prior year period primarily due to the
additional $80 million of 2.25% convertible notes issued at the end of the first
quarter of 2007 and additional amortization of deferred fees and discounts
associated with these notes and the notes exchanged at that time. See
Note 8 – “Debt” of the Notes to the Consolidated Financial Statements in this
Form 10-K for additional information about our long-term debt
obligations. Interest income for 2007 increased in comparison to 2006
primarily due to increased cash, cash equivalents and short-term investment
balances, as well as higher rates earned.
Gain
on sale of investment security
In the
second quarter of 2007, we sold an investment security which resulted in a
pre-tax gain of $4.0 million.
Gain
on extinguishment of debt
In the
first quarter of 2007, we exchanged $117.8 million of our original $170.0
million of CSN I for an equivalent principal amount of a new series of 2.25%
convertible subordinated notes due 2013. The primary purpose of this
transaction was to eliminate the June 15, 2010 call and put option that is
included in the terms of the exchanged CSN I. We accounted for this
exchange as an extinguishment of debt, which resulted in a net pre-tax gain of
$4.5 million ($2.9 million net of tax) or $0.13 per diluted share.
Other
(income) expense, net
In
December 2007, we entered into a forward contract to purchase 80,000,000 CHF, at
an exchange rate of 1.1389 CHF per one U.S. dollar, in order to partially fund
our acquisition of Precimed, which closed in January 2008 and was payable in
Swiss Francs. The net result of the above transaction was a gain of
$0.8 million which was recorded in 2007 as Other Income (Expense),
Net.
Provision
for Income Taxes
Our
effective tax rate is higher than the U.S. statutory rate primarily as a result
of the IPR&D charge from the acquisition of Enpath, which is non-deductible
for income tax purposes. As a result, our effective tax rate was
47.5% in 2007. Excluding this IPR&D charge, our effective tax
rate was consistent with 2006.
Liquidity and Capital
Resources
|
|
As
of
|
|
|
|
January
2,
|
|
|
December
28,
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and short-term investments
(a)(b)
|
|
$ |
22.1 |
|
|
$ |
40.5 |
|
Working
capital(b)
|
|
$ |
142.2 |
|
|
$ |
116.8 |
|
Current
ratio(b)
|
|
2.5:1.0
|
|
|
2.8:1.0
|
|
a.
|
We
did not hold any short-term investments as of January 2,
2009. Short-term investments in 2007 consisted of municipal,
U.S. Government Agency and corporate notes and bonds acquired with
maturities that exceed three
months.
|
b.
|
Cash
and cash equivalents and short-term investments decreased primarily due to
the cash used to acquire Precimed and the Chaumont Facility and capital
expenditures which were funded by $79.9 million of net cash received from
borrowings and $57.1 million of cash flow generated from
operations. Our increase in working capital was primarily due
to the growth of the Company. As a percentage of assets,
working capital remained consistent with the prior year at approximately
17%. Our current ratio remained relatively consistent with 2007
year-end amounts. We expect cash generated from operations to
be sufficient to fund our consolidation and integration initiatives,
future capital expenditures, contractual obligations and debt service
payments.
|
Revolving line of
credit - We have a senior credit facility (the “Credit Facility”)
consisting of a $235 million revolving line of credit, which can be increased to
$335 million upon our request. The Credit Facility also contains a
$15 million letter of credit subfacility and a $15 million swingline
subfacility. The Credit Facility is secured by our non-realty assets
including cash, accounts and notes receivable, and inventories, and has an
expiration date of May 22, 2012 with a one-time option to extend to April 1,
2013 if no default has occurred. Interest rates under the Credit
Facility are, at our option, based upon the current prime rate or the LIBOR rate
plus a margin that varies with our leverage ratio. If interest is
paid based upon the prime rate, the applicable margin is between minus 1.25% and
0.00%. If interest is paid based upon the LIBOR rate, the applicable
margin is between 1.00% and 2.00%. We are required to pay a
commitment fee between 0.125% and 0.250% per annum on the unused portion of the
Credit Facility based on our leverage ratio.
The Credit
Facility contains limitations on the incurrence of indebtedness, limitations on
the incurrence of liens and licensing of intellectual property, limitations on
investments and restrictions on certain payments. Except to the
extent paid for by common equity of Greatbatch or paid for out of cash on hand,
the Credit Facility limits the amount paid for acquisitions in total to $100
million. The restrictions on payments, among other things, limit
repurchases of our stock to $60 million and our ability to make cash payments
upon conversion of our convertible subordinated notes, and
dividends. These limitations can be waived upon approval of a simple
majority of the lenders. Such waiver was obtained in order to fund the Precimed
acquisition and repurchase our convertible subordinated notes in
2008.
The Credit
Facility also requires us to maintain a ratio of adjusted EBITDA, as defined in
the credit agreement, to interest expense of at least 3.00 to 1.00, and a total
leverage ratio, as defined in the credit agreement, of not greater than 5.00 to
1.00 from May 22, 2007 through September 29, 2009 and not greater than 4.50 to
1.00 from September 30, 2009 and thereafter. As of January 2, 2009, we are in
compliance with the required covenants.
The Credit
Facility contains customary events of default. Upon the occurrence
and during the continuance of an event of default, a majority of the lenders may
declare the outstanding advances and all other obligations under the Credit
Facility immediately due and payable.
In
connection with our acquisition of Precimed and the Chaumont Facility, we
borrowed $117 million under this revolving line of credit in 2008. We
borrowed an additional net $15.0 million under the revolving line of credit
since that time in order to fund the repurchase of convertible subordinated
notes. The weighted average interest rate on these borrowings as of
January 2, 2009, which does not include the impact of our interest rate swaps,
was 3.8%. Interest rates reset based upon the six-month ($105
million), three-month ($8 million), two-month ($13 million) and one-month ($6
million) LIBOR rate. Based upon current capital needs, we do not
anticipate making significant principal payments on the revolving line of credit
within the next twelve months. As of January 2, 2009, we had $103 million
available under our revolving line of credit.
Extinguishment of
Debt - In December 2008 we entered into privately negotiated agreements
under which we repurchased $21.8 million in aggregate principal amount of our
2.25% convertible subordinated notes due 2013 at $845.38 per $1,000 of
principal. The primary purpose of this transaction was to retire the
debentures, which contained a put option exercisable on June 15, 2010, at a
discount. This transaction was funded with availability under our
existing line of credit. This transaction was accounted for as an
extinguishment of debt and resulted in a pre-tax gain of $3.2
million.
As of
January 2, 2009 we have outstanding $30.5 million of 2.25% convertible
subordinated notes due 2013, which contain a put option exercisable on June 15,
2010. We believe that our cash flow from operations, as well as
availability under our existing line of credit will be sufficient to fund the
repayment of these notes if put to us. The remaining $197.8 million
of convertible subordinated notes are not due until 2013 and do not have a put
option.
Operating
Activities - Net
cash flows from operating activities for 2008 increased $14.1 million over
2007. This increase was primarily driven by higher net income
excluding non-cash items (consisting of depreciation, amortization, stock-based
compensation, non-cash gains/losses) of $20.4 million. This increase was
partially offset by cash flow used by our operating accounts, primarily
inventory, due to the timing of inventory purchases and inventory safety stock
build-up. The extinguishment of debt in 2008 resulted in a
reclassification of approximately $3.2 million of current income tax liability,
which will be paid in 2009. This amount was previously recorded as a
non-current deferred tax liability on the balance sheet. The
remaining variances can be attributed to the timing of cash receipts and
payments, including those related to the companies acquired in 2007 and
2008.
We
anticipate that cash flow from operations will be sufficient to meet our
operating, capital expenditure and debt service needs, other than for
acquisitions. Included in accounts receivable as of January 2, 2009
is an $11.6 million value added tax receivable with the French government
related to inventory purchases for the Chaumont Facility. We have
made claims with the proper French authorities and fully expect to collect this
amount in the first half of 2009, however collection is not
guaranteed.
Investing
Activities - Net cash used in investing activities was $148.7 million for
2008. This was primarily the result of the acquisition of Precimed
and the Chaumont Facility in 2008. The increase in property, plant
and equipment purchases over 2007 of $24.2 million primarily relates to the
construction of our new Electrochem manufacturing facility in Raynham, MA and
the expansion of our corporate offices in 2008.
Our
current expectation for 2009 is that capital spending will be in the range of
$30.0 million to $40.0 million of which approximately half are discretionary in
nature. These purchases relate to routine investments to support our
internal growth and to maintain our technology leadership. We anticipate cash
flow from operations will be sufficient to fund these capital
expenditures.
We
regularly engage in discussions relating to potential
acquisitions. We continually assess our financing facilities and
capital structure to ensure liquidity and capital levels are sufficient to meet
our strategic objectives. Going forward, we will continue to pursue
strategically targeted and opportunistic acquisitions.
Financing
Activities - Cash
flow provided by financing activities for 2008 primarily related to $117.0
million of borrowings on our revolving line of credit taken in connection with
the acquisition of Precimed and the Chaumont Facility and an additional net
$15.0 million of borrowings under our revolving line of credit in order to fund
our repurchase of $22 million par value of our convertible subordinated
notes. We repaid $33.6 million of the debt assumed from Precimed
during 2008. In 2007, we repaid $7.1 million of debt assumed from
Enpath. During 2007, we received net proceeds of $76.0 million in
connection with our issuance of 2.25% convertible subordinated notes and paid
$6.6 million of financing fees related to that transaction and the new revolving
credit agreement discussed above.
Capital
Structure - At
January 2, 2009, our capital structure consisted of $220.9 million of
convertible subordinated notes, $132.0 million of debt under our revolving line
of credit and 22.9 million shares of common stock
outstanding. Additionally, we have $22.1 million in cash and cash
equivalents which is sufficient to meet our short-term operating cash
needs. If necessary, we have access to $103 million under our
available line of credit and are authorized to issue 100 million shares of
common stock and 100 million shares of preferred stock. The market
value of our outstanding common stock since our initial public offering has
exceeded our book value; accordingly, we believe that if needed we can access
public markets to raise additional capital. Our capital structure
allows us to support our internal growth and provides liquidity for corporate
development initiatives.
Off-Balance Sheet
Arrangements
We have no
off-balance sheet arrangements within the meaning of Item 303(a)(4) of
Regulation S-K.
Litigation
We are a
party to various legal actions arising in the normal course of
business. While we do not believe that the ultimate resolution of any
such pending activities will have a material adverse effect on our consolidated
results of operations, financial position, or cash flows, litigation is subject
to inherent uncertainties. If an unfavorable ruling were to occur,
there exists the possibility of a material adverse impact in the period in which
the ruling occurs.
As
previously reported, on June 12, 2006, Enpath was named as defendant in a patent
infringement action filed by Pressure Products Medical Supplies, Inc. (“Pressure
Products”) in which Pressure Products alleged that Enpath’s FlowGuard™ valved
introducer, which has been on the market for more than three years, and Enpath’s
ViaSeal™ prototype introducer, which has not been sold, infringes claims in
Pressure Products patents. After trial, a jury found that Enpath
infringed the Pressure Products patents, but not willfully, and awarded damages
in the amount of $1.1 million. Enpath has appealed the final judgment to the
U.S. Court of Appeals for the Federal Circuit. As a result of a
post-trial motion and pending the appeal, Enpath is permitted to continue to
sell FlowGuard™ provided that Enpath pays into an escrow fund a royalty of
between $1.50 and $2.25 for each sale of a FlowGuard™ valved introducer.
The amount accrued as escrow during 2008 was $0.5 million. During
2008, we incurred $4.5 million of costs related to this litigation.
During
2002, a former non-medical customer commenced an action alleging that Greatbatch
had used proprietary information of the customer to develop certain
products. We have meritorious defenses and are vigorously defending the
matter. The potential risk of loss is up to $1.7 million.
Contractual
Obligations
The
following table summarizes our significant contractual obligations at January 2,
2009:
|
|
Payments
due by period
|
|
CONTRACTUAL
OBLIGATIONS
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5
years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt Obligations (a)
|
|
$ |
397,972 |
|
|
$ |
10,019 |
|
|
$ |
49,461 |
|
|
$ |
338,492 |
|
|
$ |
- |
|
Operating
Lease Obligations
(b)
|
|
|
11,068 |
|
|
|
2,910 |
|
|
|
3,370 |
|
|
|
2,803 |
|
|
|
1,985 |
|
Purchase
Obligations (c)
|
|
|
18,062 |
|
|
|
18,062 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Pension
Obligations (d)
|
|
|
9,852 |
|
|
|
703 |
|
|
|
1,590 |
|
|
|
2,010 |
|
|
|
5,549 |
|
Total
|
|
$ |
436,954 |
|
|
$ |
31,694 |
|
|
$ |
54,421 |
|
|
$ |
343,305 |
|
|
$ |
7,534 |
|
a.
|
Includes
the annual interest expense on our convertible debentures of 2.25%, which
is paid semi-annually. These amounts assume the June 2010 put
option is exercised on the $30.5 million of 2.25% convertible subordinated
notes outstanding issued in May 2003. Also includes the
expected interest expense on the $132 million outstanding on our line of
credit based upon the period end weighted average interest rate of 3.7%,
which includes the impact of our interest rate swaps
outstanding. See Note 8 – “Debt” of the Notes to the
Consolidated Financial Statements in this Form 10-K for additional
information about our long-term debt
obligations.
|
b.
|
See
Note 13 – “Commitments and Contingencies” of the Notes to the Consolidated
Financial Statements in this Form 10-K for additional information about
our operating lease obligations.
|
c.
|
For
the purposes of this table, contractual obligations for purchases of goods
or services are defined as agreements that are enforceable and legally
binding and that specify all significant terms, including: fixed or
minimum quantities; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Our purchase orders are
normally based on our current manufacturing needs and are fulfilled by our
vendors within short time horizons. We enter into blanket
orders with vendors that have preferred pricing and terms, however these
orders are normally cancelable by us without
penalty.
|
d.
|
See
Note 9 – “Employee Benefit Plans” of the Notes to the Consolidated
Financial Statements in this Form 10-K for additional information about
our pension plan obligations. These amounts do not include any
potential future contributions to our pension plan that may be necessary
if the rate of return earned on pension plan assets is not sufficient to
fund the rate of increase of our pension liability. Future cash
contributions may be required. As of January 2, 2009 our
actuarially determined pension liability exceeded the plans assets by $6.0
million.
|
This table
does not include the forward contract entered into in February 2009 to purchase
10 million Mexican pesos per month from March 2009 to December 2009 at an
exchange rate of 14.85 pesos per one U.S. dollar. This contract was
entered into in order to hedge the risk of peso denominated payments associated
with the operations at our Tijuana, Mexico facility. This contract
will be accounted for as a cash flow hedge.
Inflation
We utilize
certain critical raw materials (including precious metals) in our products that
we obtain from a limited number of suppliers due to the technically challenging
requirements of the supplied product and/or the lengthy process required to
qualify these materials with our customers. We cannot quickly
establish additional or replacement suppliers for these materials because of
these requirements. Our results may be negatively impacted by an
increase in the price of these critical raw materials. This risk is
partially mitigated as many of the supply agreements with our customers allow us
to partially adjust prices for the impact of any raw material price increases
and the supply agreements with our vendors have final one-time buy clauses to
meet a long-term need. Historically, raw material price increases
have not materially impacted our results of operations.
Impact of Recently Issued
Accounting Standards
In June
2008, the Emerging Issues Task Force (“EITF”) issued EITF 07-5, Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock. This Issue
prescribes a two step process for determining whether an instrument (or an
embedded feature), such as our convertible subordinated notes, is indexed to our
stock as follows: Step 1: if the
instrument is not based on (a) an observable market, other than the market for
our stock, or (b) an observable index, other than an index calculated or
measured solely by reference to our own operations then the instrument is
considered indexed to our own stock. Step 2: if
the instrument settlement amount is fixed then the instrument is considered
indexed to our own stock. If we determine that our convertible
subordinated notes are not indexed to our own stock, they would not meet the
scope exception in paragraph 11(a) of SFAS No. 133 and thus would be accounted
for under SFAS No. 133. We are still evaluating the impact of EITF
07-5 on our consolidated financial statements, which is effective beginning in
fiscal year 2009.
In June
2008, the FASB issued Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” This FSP
concluded that all outstanding unvested share-based payment awards (restricted
stock) that contain rights to nonforfeitable dividends are considered
participating securities. Accordingly, the two-class method of
computing basic and diluted EPS is required for these securities. FSP
03-6-1, which was effective beginning in fiscal year 2009, did not have a
material impact on our consolidated financial statements and will be applied
retrospectively to all periods presented in future financial
statements.
In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement).” This FSP requires issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) separately account for the liability and equity components of those
instruments in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods.
This statement is effective beginning in fiscal year 2009 and will be
applied retrospectively to all periods presented in future financial
statements. This FSP is only applicable prospectively if we determine
that our convertible subordinated notes are indexed to our own stock under the
guidance of EITF 07-5. We estimate that this FSP, if applicable, will increase
2009 non-cash interest expense by approximately $7 million to $8 million and
reduce 2009 diluted EPS by approximately $0.19 per share to $0.22 per
share.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133, and requires entities to
provide enhanced qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair values and amounts of
gains and losses on derivative contracts, and disclosures about
credit-risk-related contingent features in derivative agreements. We will
make the required disclosures beginning in 2009.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. This Statement replaces FASB Statement No. 141,
Business Combinations
but retains the guidance in SFAS No. 141 for identifying and recognizing
intangible assets separately from goodwill. However, SFAS No. 141(R)
significantly changed the accounting for business combinations with regards to
the number of assets and liabilities assumed that are to be measured at fair
value, the accounting for contingent consideration and acquired contingencies as
well as the accounting for direct acquisition costs and
IPR&D. SFAS No. 141(R) is effective for acquisitions consummated
beginning in fiscal year 2009 and will materially impact our consolidated
financial statements if we consummate an acquisition after the date of
adoption. SFAS No. 141(R) provides that any changes to an entity’s
acquired uncertain tax positions and valuation allowances associated with
acquired deferred tax assets will no longer be applied to goodwill, regardless
of the acquisition date of the associated business combination. As
such, any changes to the acquired uncertain tax positions and valuation
allowances will be recognized as an adjustment to income tax
expense.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51. This
Statement amends Accounting Research Bulletin No. 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 did not have a material
impact on our consolidated financial statements, which was effective beginning
in fiscal year 2009.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value while applying U.S. GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 establishes a fair
value hierarchy that distinguishes between (1) market participant assumptions
based on market data obtained from independent sources and (2) the reporting
entity’s own assumptions developed based on unobservable inputs. In
February 2008, the FASB issued FSP FAS 157-b—Effective Date of FASB Statement No.
157. This FSP (1) partially deferred the effective date of
SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities and (2) removed certain leasing transactions from the scope of SFAS
No. 157. Effective in fiscal year 2008, we adopted the provisions of
SFAS No. 157 for all financial assets and financial liabilities and nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value on a recurring basis. The provisions of SFAS No. 157 that were
effective in 2009, did not materially impact our consolidated financial
statements.
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign
Currency
With our
acquisition of Precimed and the Chaumont Facility, we significantly increased
our exposure to foreign currency exchange rate fluctuations due to transactions
denominated in Swiss Francs and Euros. We continually evaluate our
exposure to foreign currency risk and develop hedging strategy’s to best
mitigate these risks, which include the use of various derivative
instruments. We believe that a hypothetical 10% change in the value
of the U.S. dollar in relation to our most significant foreign currency
exposures would not have a material impact on our net earnings as the impact of
foreign currency rates on revenue is almost entirely offset by the inverse
impact on our cost of sales and operating expenses.
In
December 2007, we entered into a forward contract to purchase 80,000,000 CHF, at
an exchange rate of 1.1389 CHF per one U.S. dollar, in order to partially fund
the acquisition of Precimed, which closed in January 2008 and was payable in
Swiss Francs. In January 2008, we entered into an additional forward
contract to purchase 20,000,000 CHF at an exchange rate of 1.1156 per one U.S.
dollar. We entered into a similar foreign exchange contract in
January 2008 in order to fund the acquisition of the Chaumont Facility, which
closed in February 2008 and was payable in Euros. The net result of the
above transactions was a gain of $2.4 million, $1.6 million of which was
recorded in 2008 as other (income) expense, net.
In
February 2009, we entered into a forward contract to purchase 10 million Mexican
pesos per month from March 2009 to December 2009 at an exchange rate of 14.85
pesos per one U.S. dollar. This contract was entered into in order to
hedge the risk of peso denominated payments associated with the operations at
our Tijuana, Mexico facility. This contract will be accounted for as
a cash flow hedge.
We
translate all assets and liabilities of our foreign operations of Precimed and
the Chaumont Facility acquired in 2008 at the period-end exchange rate and
translate sales and expenses at the average exchange rates in effect during the
period. The net effect of these translation adjustments is recorded
in the consolidated financial statements as comprehensive income
(loss). The aggregate translation adjustment for 2008 was a loss of
$0.2 million. Translation adjustments are not adjusted for income
taxes as they relate to permanent investments in our foreign
subsidiaries. Net foreign currency transaction gains and losses
included in other income amounted to a gain of $0.1 million for
2008. A hypothetical 10% change in the value of the U.S. Dollar in
relation to our most significant foreign currency subsidiary (P Medical Holding
SA - Swiss Francs) would
have had an impact of approximately $10 million on these foreign net assets as
of January 2, 2009.
Included
in accounts receivable as of January 2, 2009 is an $11.6 million value added tax
receivable with the French government related to inventory purchases for the
Chaumont Facility. We have made claims with the proper French
authorities and fully expect to collect this amount in the first half of 2009,
however collection is not guaranteed. This receivable is denominated
in Euros and is subject to foreign currency risk, which could be
material.
Interest
Rate Swaps
As of
January 2, 2009, we had $132 million outstanding on our revolving line of
credit. Interest rates reset on this debt based upon the six-month
($105 million), three-month ($8 million), two-month ($13 million) and one-month
($6 million) LIBOR rate, thus subjecting us to interest rate
risk. During 2008, we entered into three receive floating-pay fixed
interest rate swaps indexed to the six-month LIBOR rate. The
objective of these swaps is to hedge against potential changes in cash flows on
our outstanding revolving line of credit. No credit risk was
hedged. The receive variable leg of the swaps and the variable rate
paid on the revolving line of credit bear the same rate of interest, excluding
the credit spread, and reset and pay interest on the same dates.
Information
regarding our outstanding interest rate swaps is as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
Pay
|
|
|
receive
|
|
|
value
|
|
|
|
Type
of
|
|
Notional
|
|
Start
|
|
End
|
|
fixed
|
|
|
floating
|
|
|
January
2,
|
|
Instrument
|
|
hedge
|
|
amount
|
|
date
|
|
date
|
|
rate
|
|
|
rate
|
|
|
2009
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Interest
rate swap
|
|
Cash
flow
|
|
$ |
80,000 |
|
3/5/2008
|
|
7/7/2010
|
|
|
3.09 |
% |
|
|
3.14 |
% |
|
$ |
(1,484 |
) |
Interest
rate swap
|
|
Cash
flow
|
|
|
18,000 |
|
12/18/2008
|
|
12/18/2010
|
|
|
2.00 |
% |
|
|
2.17 |
% |
|
|
- |
|
Interest
rate swap
|
|
Cash
flow
|
|
|
50,000 |
|
7/7/2010
|
|
7/7/2011
|
|
|
2.16 |
% |
|
6M
LIBOR
|
|
|
|
90 |
|
|
|
|
|
$ |
148,000 |
|
|
|
|
|
|
2.64 |
% |
|
|
|
|
|
$ |
(1,394 |
) |
The
estimated fair value of the interest rate swap agreement represents the amount
we expect to receive (pay) to terminate the contracts. No portion of
the change in fair value of the interest rate swaps during 2008 was considered
ineffective. The amount recorded as an offset to interest expense in
2008 related to the interest rate swaps was $0.4 million.
A
hypothetical one percentage point change in the LIBOR interest rate on the
remaining $34 million of floating rate debt would have had an impact of
approximately $0.3 million on our interest expense. This amount is
not indicative of the hypothetical net earnings impact due to partially
offsetting impacts on our cash and cash equivalents to interest
income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The
following are set forth below:
Management’s
Report on Internal Control Over Financial Reporting
Reports of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of January 2, 2009 and December 28, 2007
Consolidated
Statements of Operations and Comprehensive Income for the years ended January 2,
2009, December 28, 2007 and December 29, 2006
Consolidated
Statements of Cash Flows for the years ended January 2, 2009, December 28, 2007
and December 29, 2006
Consolidated
Statements of Stockholders’ Equity for the years ended January 2, 2009, December
28, 2007 and December 29, 2006
Notes to
Consolidated Financial Statements
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Company’s certifying officers are responsible for establishing and maintaining
adequate internal control over financial reporting. The Company’s
internal control over financial reporting is designed and maintained under the
supervision of its certifying officers to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Company’s
financial statements for external reporting purposes in accordance with
accounting principles generally accepted in the United States of
America.
As of
January 2, 2009, management conducted an assessment of the effectiveness of the
Company’s internal control over financial reporting based on the framework
established in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment,
management has determined that the Company’s internal control over financial
reporting as of January 2, 2009 is effective.
In
conducting the evaluation of the effectiveness of internal control over
financial reporting as of January 2, 2009, as permitted by the guidance issued
by the Office of the Chief Accountant of the Securities and Exchange Commission,
management excluded the following subsidiaries acquired in 2008:
|
·
|
P
Medical Holding SA and subsidiaries, including the DePuy Orthopaedics
Chaumont, France manufacturing
facility
|
These
subsidiaries represented approximately 39% and 21% of net and total assets,
respectively, and 26% of revenues of the consolidated financial statement
amounts as of and for the year ended January 2, 2009. See Note 2 -
“Acquisitions” for a discussion of these acquisitions and their impact on the
Company’s Consolidated Financial Statements.
The
effectiveness of internal control over financial reporting as of January 2, 2009
has been audited by Deloitte & Touche LLP, the Company’s independent
registered public accounting firm.
Dated:
March 2, 2009
/s/ Thomas J. Hook
|
|
/s/ Thomas J. Mazza
|
Thomas
J. Hook
|
|
Thomas
J. Mazza
|
President
& Chief Executive Officer
|
|
Senior
Vice President & Chief Financial
Officer
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Greatbatch,
Inc.
Clarence,
New York
We have
audited the internal control over financial reporting of Greatbatch, Inc. and
subsidiaries (the "Company") as of January 2, 2009, based on criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management’s
Report on Internal Control Over Financial Reporting, management excluded from
its assessment the internal control over financial reporting at Precimed, Inc.
and P Medical Holding SA and subsidiaries, which were acquired in 2008, and
whose financial statements constitute 39% and 21% of net and total assets,
respectively, and 26% of revenues of the consolidated financial statement
amounts as of and for the year ended January 2, 2009. Accordingly, our
audit did not include the internal control over financial reporting at Precimed,
Inc. and P Medical Holding SA and subsidiaries. The Company's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed by, or
under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of
the inherent limitations of internal control over financial reporting, including
the possibility of collusion or improper management override of controls,
material misstatements due to error or fraud may not be prevented or detected on
a timely basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject
to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of January 2, 2009, based on the criteria
established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements and
financial statement schedule as of and for the year ended January 2, 2009, of
the Company and our report dated March 3, 2009, expressed an unqualified opinion
on those financial statements and financial statement schedule.
/s/
Deloitte & Touche LLP
Buffalo,
New York
March 3,
2009
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of
Greatbatch,
Inc.
Clarence,
New York
We have
audited the accompanying consolidated balance sheets of Greatbatch, Inc. and
subsidiaries (the "Company") as of January 2, 2009 and December 28, 2007, and
the related consolidated statements of operations and comprehensive income,
stockholders' equity, and cash flows for each of the three years in the period
ended January 2, 2009. Our audits also included the consolidated
financial statement schedule listed in the Index at Item 15(a)(2). These
financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statements and financial statement schedule
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of January 2, 2009 and
December 28, 2007, and the results of its operations and its cash flows for each
of the three years in the period ended January 2, 2009, in conformity with
accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of January 2, 2009, based on the criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 3, 2009, expressed an unqualified
opinion on the Company's internal control over financial reporting.
/s/
Deloitte & Touche LLP
Buffalo,
New York
March 3,
2009
GREATBATCH,
INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(in
thousands except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
January
2,
|
|
|
December
28,
|
|
ASSETS
|
|
2009
|
|
|
2007
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
22,063 |
|
|
$ |
33,473 |
|
Short-term
investments available for sale
|
|
|
- |
|
|
|
7,017 |
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
86,364 |
|
|
|
56,962 |
|
Inventories,
net
|
|
|
112,304 |
|
|
|
71,882 |
|
Refundable
income taxes
|
|
|
- |
|
|
|
377 |
|
Deferred
income taxes
|
|
|
8,086 |
|
|
|
6,469 |
|
Prepaid
expenses and other current assets
|
|
|
6,754 |
|
|
|
5,044 |
|
Total
current assets
|
|
|
235,571 |
|
|
|
181,224 |
|
Property,
plant and equipment, net
|
|
|
166,668 |
|
|
|
114,946 |
|
Amortizing
intangible assets, net
|
|
|
90,259 |
|
|
|
71,268 |
|
Trademarks
and tradenames
|
|
|
36,130 |
|
|
|
32,582 |
|
Goodwill
|
|
|
302,221 |
|
|
|
248,540 |
|
Deferred
income taxes
|
|
|
1,942 |
|
|
|
- |
|
Other
assets
|
|
|
16,140 |
|
|
|
15,291 |
|
Total
assets
|
|
$ |
848,931 |
|
|
$ |
663,851 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
48,727 |
|
|
$ |
33,433 |
|
Income
taxes payable
|
|
|
4,128 |
|
|
|
- |
|
Accrued
expenses and other current liabilities
|
|
|
40,497 |
|
|
|
30,975 |
|
Total
current liabilities
|
|
|
93,352 |
|
|
|
64,408 |
|
Long-term
debt
|
|
|
352,920 |
|
|
|
241,198 |
|
Deferred
income taxes
|
|
|
44,306 |
|
|
|
35,346 |
|
Other
long-term liabilities
|
|
|
7,601 |
|
|
|
228 |
|
Total
liabilities
|
|
|
498,179 |
|
|
|
341,180 |
|
Commitments
and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, authorized 100,000,000 shares;
|
|
|
|
|
|
no
shares issued or outstanding in 2008 or 2007
|
|
|
- |
|
|
|
- |
|
Common
stock, $0.001 par value, authorized 100,000,000
|
|
|
|
|
|
|
|
|
shares;
22,970,916 shares issued and 22,943,176 shares outstanding in
2008
|
|
|
|
|
|
and
22,477,340 shares issued and 22,470,299 shares outstanding in
2007
|
|
|
23 |
|
|
|
22 |
|
Additional
paid-in capital
|
|
|
251,772 |
|
|
|
238,574 |
|
Treasury
stock, at cost, 27,740 shares in 2008 and 7,041 shares in
2007
|
|
|
(741 |
) |
|
|
(140 |
) |
Retained
earnings
|
|
|
102,774 |
|
|
|
84,215 |
|
Accumulated
other comprehensive loss
|
|
|
(3,076 |
) |
|
|
- |
|
Total
stockholders’ equity
|
|
|
350,752 |
|
|
|
322,671 |
|
Total
liabilities and stockholders' equity
|
|
$ |
848,931 |
|
|
$ |
663,851 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
GREATBATCH,
INC.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
AND
COMPREHENSIVE INCOME
|
|
(in
thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
546,644 |
|
|
$ |
318,746 |
|
|
$ |
271,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales - excluding amortization of
|
|
|
|
|
|
|
|
|
|
|
|
|
intangible
assets
|
|
|
384,014 |
|
|
|
198,184 |
|
|
|
164,885 |
|
Cost
of sales - amortization of intangible assets
|
|
|
6,841 |
|
|
|
4,537 |
|
|
|
3,813 |
|
Selling,
general and administrative expenses
|
|
|
72,633 |
|
|
|
44,674 |
|
|
|
38,785 |
|
Research,
development and engineering costs, net
|
|
|
31,444 |
|
|
|
29,914 |
|
|
|
24,225 |
|
Acquired
in-process research and development
|
|
|
2,240 |
|
|
|
16,093 |
|
|
|
- |
|
Other
operating expenses, net
|
|
|
14,578 |
|
|
|
5,324 |
|
|
|
17,058 |
|
Operating
income
|
|
|
34,894 |
|
|
|
20,020 |
|
|
|
22,376 |
|
Interest
expense
|
|
|
13,168 |
|
|
|
7,303 |
|
|
|
4,605 |
|
Interest
income
|
|
|
(711 |
) |
|
|
(7,050 |
) |
|
|
(5,775 |
) |
Gain
on extinguishment of debt
|
|
|
(3,242 |
) |
|
|
(4,473 |
) |
|
|
- |
|
Gain
on sale of investment security
|
|
|
- |
|
|
|
(4,001 |
) |
|
|
- |
|
Other
(income) expense, net
|
|
|
(1,624 |
) |
|
|
(447 |
) |
|
|
12 |
|
Income
before provision for income taxes
|
|
|
27,303 |
|
|
|
28,688 |
|
|
|
23,534 |
|
Provision
for income taxes
|
|
|
8,744 |
|
|
|
13,638 |
|
|
|
7,408 |
|
Net
income
|
|
$ |
18,559 |
|
|
$ |
15,050 |
|
|
$ |
16,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.82 |
|
|
$ |
0.68 |
|
|
$ |
0.74 |
|
Diluted
|
|
$ |
0.81 |
|
|
$ |
0.67 |
|
|
$ |
0.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,525 |
|
|
|
22,152 |
|
|
|
21,803 |
|
Diluted
|
|
|
24,128 |
|
|
|
22,422 |
|
|
|
26,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,559 |
|
|
$ |
15,050 |
|
|
$ |
16,126 |
|
Foreign
currency translation adjustment
|
|
|
(228 |
) |
|
|
- |
|
|
|
- |
|
Unrealized
loss on interest rate swaps, net of tax
|
|
|
(906 |
) |
|
|
- |
|
|
|
- |
|
Defined
benefit pension plan liability adjustment
|
|
|
(1,942 |
) |
|
|
- |
|
|
|
- |
|
Net
unrealized gain (loss) on short-term
|
|
|
|
|
|
|
|
|
|
|
|
|
investments
available for sale, net of tax
|
|
|
- |
|
|
|
(923 |
) |
|
|
3,594 |
|
Less:
reclassification adjustment for net realized
|
|
|
|
|
|
|
|
|
|
gain
on short-term investments available for sale,
|
|
|
|
|
|
|
|
|
|
net
of tax
|
|
|
- |
|
|
|
(2,601 |
) |
|
|
- |
|
Comprehensive
income
|
|
$ |
15,483 |
|
|
$ |
11,526 |
|
|
$ |
19,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
GREATBATCH,
INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
18,559 |
|
|
$ |
15,050 |
|
|
$ |
16,126 |
|
Adjustments
to reconcile net income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
45,382 |
|
|
|
25,842 |
|
|
|
19,309 |
|
Stock-based
compensation
|
|
|
11,211 |
|
|
|
9,252 |
|
|
|
9,717 |
|
Gain
on extinguishment of debt
|
|
|
(3,242 |
) |
|
|
(4,473 |
) |
|
|
- |
|
Gain
on sale of investment security
|
|
|
- |
|
|
|
(4,001 |
) |
|
|
- |
|
Acquired
in-process research and development
|
|
|
2,240 |
|
|
|
16,093 |
|
|
|
- |
|
Other
non-cash (gains) losses/asset writedowns, net
|
|
|
2,994 |
|
|
|
(972 |
) |
|
|
5,379 |
|
Deferred
income taxes
|
|
|
1,671 |
|
|
|
(4,935 |
) |
|
|
4,888 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(18,640 |
) |
|
|
(14,523 |
) |
|
|
(1,288 |
) |
Inventories
|
|
|
(21,077 |
) |
|
|
(1,969 |
) |
|
|
(12,483 |
) |
Prepaid
expenses and other current assets
|
|
|
(35 |
) |
|
|
(238 |
) |
|
|
(855 |
) |
Accounts
payable
|
|
|
14,285 |
|
|
|
11,138 |
|
|
|
64 |
|
Accrued
expenses and other liabilities
|
|
|
1,589 |
|
|
|
(4,581 |
) |
|
|
(1,011 |
) |
Income
taxes
|
|
|
2,164 |
|
|
|
1,282 |
|
|
|
(641 |
) |
Net
cash provided by operating activities
|
|
|
57,101 |
|
|
|
42,965 |
|
|
|
39,205 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(2,010 |
) |
|
|
(70,058 |
) |
|
|
(54,800 |
) |
Proceeds
from maturity/disposition of short-term investments
|
|
|
9,027 |
|
|
|
133,578 |
|
|
|
53,808 |
|
Acquisition
of property, plant and equipment
|
|
|
(44,172 |
) |
|
|
(19,993 |
) |
|
|
(15,445 |
) |
Purchase
of cost method investment, net of distributions
|
|
|
(4,300 |
) |
|
|
(1,750 |
) |
|
|
- |
|
Acquisitions,
net of cash acquired
|
|
|
(107,577 |
) |
|
|
(188,148 |
) |
|
|
- |
|
Other
investing activities
|
|
|
306 |
|
|
|
567 |
|
|
|
64 |
|
Net
cash used in investing activities
|
|
|
(148,726 |
) |
|
|
(145,804 |
) |
|
|
(16,373 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments
under line of credit, net
|
|
|
- |
|
|
|
(1,000 |
) |
|
|
- |
|
Principal
payments of long-term debt
|
|
|
(62,058 |
) |
|
|
(6,093 |
) |
|
|
(464 |
) |
Proceeds
from issuance of long-term debt
|
|
|
142,000 |
|
|
|
76,000 |
|
|
|
- |
|
Payment
of debt issuance costs
|
|
|
- |
|
|
|
(6,628 |
) |
|
|
- |
|
Issuance
of common stock
|
|
|
2,210 |
|
|
|
2,699 |
|
|
|
2,082 |
|
Excess
tax benefits from stock-based awards
|
|
|
298 |
|
|
|
392 |
|
|
|
294 |
|
Repurchase
of treasury stock
|
|
|
(793 |
) |
|
|
(205 |
) |
|
|
- |
|
Net
cash provided by financing activities
|
|
|
81,657 |
|
|
|
65,165 |
|
|
|
1,912 |
|
Effect
of foreign currency exchange on cash and cash equivalents
|
|
|
(1,442 |
) |
|
|
- |
|
|
|
- |
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(11,410 |
) |
|
|
(37,674 |
) |
|
|
24,744 |
|
Cash
and cash equivalents, beginning of year
|
|
|
33,473 |
|
|
|
71,147 |
|
|
|
46,403 |
|
Cash
and cash equivalents, end of year
|
|
$ |
22,063 |
|
|
$ |
33,473 |
|
|
$ |
71,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
GREATBATCH,
INC.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Treasury
|
|
|
|
|
|
other
|
|
|
Total
|
|
|
|
Common
stock
|
|
|
paid-in
|
|
|
stock
|
|
|
Retained
|
|
|
comprehensive
|
|
|
stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
capital
|
|
|
Shares
|
|
|
Amount
|
|
|
earnings
|
|
|
income
(loss)
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005
|
|
|
21,752 |
|
|
$ |
22 |
|
|
$ |
215,614 |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
53,039 |
|
|
$ |
(70 |
) |
|
$ |
268,605 |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
6,417 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,417 |
|
Net
shares issued under stock incentive plans
|
|
|
257 |
|
|
|
- |
|
|
|
2,082 |
|
|
|
(8 |
) |
|
|
(205 |
) |
|
|
- |
|
|
|
- |
|
|
|
1,877 |
|
Income
tax benefit from stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
restricted stock
|
|
|
- |
|
|
|
- |
|
|
|
294 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
294 |
|
Shares
contributed to 401(k)
|
|
|
110 |
|
|
|
- |
|
|
|
2,780 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,780 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
16,126 |
|
|
|
- |
|
|
|
16,126 |
|
Total
other comprehensive gain, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,594 |
|
|
|
3,594 |
|
Balance,
December 29, 2006
|
|
|
22,119 |
|
|
|
22 |
|
|
|
227,187 |
|
|
|
(8 |
) |
|
|
(205 |
) |
|
|
69,165 |
|
|
|
3,524 |
|
|
|
299,693 |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
5,673 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
5,673 |
|
Net
shares issued under stock incentive plans
|
|
|
248 |
|
|
|
- |
|
|
|
2,494 |
|
|
|
1 |
|
|
|
65 |
|
|
|
- |
|
|
|
- |
|
|
|
2,559 |
|
Income
tax benefit from stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock
|
|
|
- |
|
|
|
- |
|
|
|
264 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
264 |
|
Shares
contributed to 401(k)
|
|
|
110 |
|
|
|
- |
|
|
|
2,956 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,956 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
15,050 |
|
|
|
- |
|
|
|
15,050 |
|
Total
other comprehensive loss, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,524 |
) |
|
|
(3,524 |
) |
Balance,
December 28, 2007
|
|
|
22,477 |
|
|
|
22 |
|
|
|
238,574 |
|
|
|
(7 |
) |
|
|
(140 |
) |
|
|
84,215 |
|
|
|
- |
|
|
|
322,671 |
|
Stock-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
6,822 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
6,822 |
|
Net
shares issued under stock incentive plans
|
|
|
266 |
|
|
|
1 |
|
|
|
1,417 |
|
|
|
(21 |
) |
|
|
(601 |
) |
|
|
- |
|
|
|
- |
|
|
|
817 |
|
Income
tax benefit from stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
14 |
|
Shares
issued in connection with the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quan
Emerteq acquisition
|
|
|
60 |
|
|
|
- |
|
|
|
1,473 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
1,473 |
|
Shares
contributed to 401(k)
|
|
|
168 |
|
|
|
- |
|
|
|
3,472 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
3,472 |
|
Net
income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
18,559 |
|
|
|
- |
|
|
|
18,559 |
|
Total
other comprehensive loss, net
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,076 |
) |
|
|
(3,076 |
) |
Balance,
January 2, 2009
|
|
|
22,971 |
|
|
$ |
23 |
|
|
$ |
251,772 |
|
|
|
(28 |
) |
|
$ |
(741 |
) |
|
$ |
102,774 |
|
|
$ |
(3,076 |
) |
|
$ |
350,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
|
GREATBATCH,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of
Consolidation - The consolidated financial statements include the
accounts of Greatbatch, Inc. and its wholly owned subsidiary (collectively, the
“Company” or “Greatbatch”). All intercompany balances and
transactions have been eliminated in consolidation.
Nature of
Operations - The Company operates its business in two reportable segments
– Implantable Medical Components (“IMC”) and Electrochem Solutions
(“Electrochem”). The IMC business designs and manufactures components
and devices for the Cardiac Rhythm Management (“CRM”), Neuromodulation, Vascular
Access and Orthopedic markets. Additionally, the IMC business offers
value-added assembly and design engineering services for products that
incorporate Implantable Medical Device (“IMD”) components. IMC
customers include leading original equipment manufacturers (“OEM”), in
alphabetical order here and throughout this report, such as Biotronik, Boston
Scientific, DePuy Orthopaedics (“DePuy”), Johnson & Johnson, Medtronic,
Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and
Zimmer. IMC entered the Vascular Access market through its
acquisition of Enpath Medical, Inc. (“Enpath”) and Quan Emerteq, LLC (“Quan”) in
2007 and the Orthopedic market through its acquisition of P Medical Holding SA
(“Precimed”) and the assets of DePuy’s Chaumont, France manufacturing
facility (the “Chaumont Facility”) in early 2008.
Electrochem
is a world leader in the design, manufacture and distribution of electrochemical
cells, battery packs and wireless sensors for demanding applications in markets
such as energy, security, portable medical, environmental monitoring and
more. Electrochem broadened its product portfolio through its
acquisitions of Engineered Assemblies Corporation (“EAC”) and IntelliSensing,
LLC in 2007, and can now design and provide its customers rechargeable battery
and wireless sensor systems.
Fiscal Year
End - The Company utilizes a fifty-two, fifty-three week fiscal year
ending on the Friday nearest December 31st. Fiscal
years 2008, 2007 and 2006 ended on January 2, 2009, December 28, 2007 and
December 29, 2006, respectively. Fiscal year 2008 contained
fifty-three weeks while fiscal years 2007 and 2006 contained fifty-two
weeks.
Fair Value
Measurements – Beginning in fiscal year 2008, the Company adopted
the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value Measurements, for
all financial assets and liabilities and nonfinancial assets and liabilities
that are recognized or disclosed at fair value on a recurring basis (at least
annually). Under this standard, fair value is defined as the price
that would be received to sell an asset or paid to transfer a liability
(i.e. the “exit price”)
in an orderly transaction between market participants at the measurement
date. See Recent
Accounting Pronouncements in this note for further
information.
SFAS
No. 157 establishes a hierarchy for inputs used in measuring fair value
that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when
available. Observable inputs are inputs that market participants
would use in pricing the asset or liability developed based on market data
obtained from sources independent of the Company. Unobservable inputs
are inputs that reflect the Company’s assumptions about the assumptions market
participants would use in pricing the asset or liability developed based on the
best information available in the circumstances. The hierarchy is
broken down into three levels based on the reliability of inputs as
follows:
Level 1 — Valuations
based on quoted prices in active markets for identical assets or liabilities
that the Company has the ability to access. Since valuations are
based on quoted prices that are readily and regularly available in an active
market, valuation of these products does not entail a significant degree of
judgment.
Level 2 — Valuation
is determined from quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar instruments in markets that are
not active or by model-based techniques in which all significant inputs are
observable in the market.
Level 3—Valuations
based on inputs that are unobservable and significant to the overall fair value
measurement. The degree of judgment exercised in determining fair
value is greatest for instruments categorized in Level 3.
The
availability of observable inputs can vary and is affected by a wide variety of
factors, including, the type of asset/liability, whether the asset/liability is
established in the marketplace, and other characteristics particular to the
transaction. To the extent that valuation is based on models or
inputs that are less observable or unobservable in the market, the determination
of fair value requires more judgment. In certain cases, the inputs
used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, for disclosure purposes the level in the
fair value hierarchy within which the fair value measurement in its entirety
falls is determined based on the lowest level input that is significant to the
fair value measurement in its entirety.
Fair value
is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure. Therefore, even
when market assumptions are not readily available, assumptions are required to
reflect those that market participants would use in pricing the asset or
liability at the measurement date.
The
carrying amount of financial instruments, including cash and cash equivalents,
trade receivables and accounts payable, approximated their fair value as of
January 2, 2009 because of the short maturity of these instruments.
Cash and
Cash
Equivalents - Cash and cash equivalents consist of cash and highly
liquid, short-term investments with maturities at the time of purchase of three
months or less.
Short-Term Investments
– The Company did not hold any short-term investments at the end of
2008. Short-term investments at December 28, 2007 are comprised of
municipal, U.S. Government Agency and corporate notes and bonds acquired with
maturities that exceed three months. All short-term investments as of
December 28, 2007 are classified as available-for-sale and have a maturity of
less than one year at the time of acquisition. Available-for-sale
securities are carried at fair value with the unrealized gain or loss, net of
tax, reported in accumulated other comprehensive income (loss) as a separate
component of stockholders’ equity. Realized gains and losses and
investment income are included in net income. The cost of securities
sold is based on the specific identification method. Unrealized losses
considered to be other than temporary are recognized in net income.
Concentration of
Credit Risk - Financial instruments that potentially subject the Company
to concentration of credit risk consist principally of accounts
receivable. A significant portion of the Company’s sales are to four
customers, all in the medical device industry, and, as such, the Company is
directly affected by the condition of those customers and that
industry. However, the credit risk associated with trade receivables
is partially mitigated due to the stability of those customers. The
Company performs on-going credit evaluations of its customers. Note 15 –
“Business Segment Information” contains information on sales and accounts
receivable for these customers. The Company maintains cash deposits
with major banks, which from time to time may exceed federally insured
limits. The Company performs on-going credit evaluations of its
banks.
Included
in accounts receivable as of January 2, 2009 is an $11.6 million value added tax
receivable with the French government related to inventory purchases for the
Chaumont Facility. The Company has made claims with the proper French
authorities and fully expects to collect this amount in the first half of 2009,
however collection is not guaranteed. This receivable is denominated
in Euros and is subject to foreign currency risk, which could be
material.
Allowance for
Doubtful Accounts - The Company provides credit, in the normal course of
business, to its customers in the form of trade receivables. The
Company maintains an allowance for doubtful customer accounts for those
receivables that it does not expect to collect. The Company accrues
its estimated losses from uncollectable accounts receivable to the allowance
based upon recent historical experience, the length of time the receivable has
been outstanding and other specific information as it becomes
available. Provisions to the allowance for doubtful accounts are
charged to current operating expenses. Actual losses are charged
against this allowance when incurred. The allowance for doubtful
accounts was $1.6 million at January 2, 2009 and $0.8 million at December 28,
2007.
Inventories
- Inventories are stated at the lower of cost, determined using the first-in
first-out method, or market. Provisions for excess, obsolete or
expired inventory are based primarily on how long the inventory has been held as
well as our estimates of forecasted net sales of that product. A
significant change in the timing or level of demand for our products may result
in recording additional provisions for excess, obsolete or expired inventory in
the future.
Property, Plant
and Equipment - Property,
plant and equipment is carried at cost. Depreciation is computed
primarily by the straight-line method over the estimated useful lives of the
assets, as follows: buildings and building improvements 7-40 years;
machinery and equipment 3-8 years; office equipment 3-10 years; and leasehold
improvements over the remaining lives of the improvements or the lease term, if
less. The cost of repairs and maintenance is expensed as
incurred; renewals and betterments are capitalized. Upon retirement
or sale of an asset, its cost and related accumulated depreciation or
amortization is removed from the accounts and any gain or loss is recorded in
operating income or expense.
Business
Combinations – The Company records its business combinations under the
purchase method of accounting. Under the purchase method of
accounting, the Company allocates the purchase price of each acquisition to the
tangible and identifiable intangible assets acquired and liabilities assumed
based on their respective fair values at the date of acquisition. The
fair value of identifiable intangible assets is based upon detailed valuations
that use various assumptions made by management. Any excess of the
purchase price over the fair value of the net tangible and intangible assets
acquired is allocated to goodwill.
Amortizing
Intangible Assets – Acquired intangible assets other than goodwill and
trademark and tradenames consist primarily of purchased technology, patents and
customer lists. The Company amortizes its definite-lived intangible
assets on a straight-line basis over their estimated useful lives as
follows: purchased technology and patents 5-15 years; customer lists
7-20 years and other intangible assets 1-10 years.
Purchased
In-Process Research and Development (“IPR&D”) – When the Company
acquires another entity, a portion of the purchase price is allocated, as
applicable, to IPR&D. The Company defines IPR&D as the value
assigned to those projects for which the related products have not received
regulatory approval and have no alternative future use. Determining
the portion of the purchase price allocated to IPR&D requires the Company to
make significant estimates. The amount of the purchase price
allocated to IPR&D is determined by estimating the future cash flows of each
project and discounting the net cash flows back to their present
values. The discount rate used is determined at the time of
acquisition in accordance with accepted valuation methods. These
methodologies include consideration of the risk of the project not achieving
commercial feasibility.
Impairment of
Long-Lived
Assets – The Company assesses the impairment of definite lived long-lived
assets when events or changes in circumstances indicate that the carrying value
of the assets may not be recoverable. Factors that are considered in
deciding when to perform an impairment review include significant
under-performance of a business or product line in relation to expectations,
significant negative industry or economic trends, and significant changes or
planned changes in the use of the assets.
Recoverability
potential is measured by comparing the carrying amount of the asset group to the
related total future undiscounted cash flows. If an asset group’s
carrying value is not recoverable through related cash flows, the asset group is
considered to be impaired. Impairment is measured by comparing the
asset group’s carrying amount to its fair value. When it is
determined that useful lives of assets are shorter than originally estimated,
and there are sufficient cash flows to support the carrying value of the assets,
the rate of depreciation is accelerated in order to fully depreciate the assets
over their new shorter useful lives.
Goodwill
and trademarks and tradenames are not amortized but are periodically tested for
impairment. The Company assesses goodwill for impairment by comparing
the fair value of its reporting units to their carrying amounts on the last day
of each fiscal year, or more frequently if certain events occur or circumstances
change, to determine if there is potential impairment. If the fair
value of a reporting unit is less than its carrying value, an impairment loss is
recorded to the extent that the implied fair value of the goodwill within the
reporting unit is less than its carrying value. Fair values for
reporting units are determined based on discounted cash flows, market multiples
or appraised values as appropriate. Indefinite lived intangible
assets such as trademarks and tradenames are assessed for impairment on the last
day of each fiscal year, or more frequently if certain events occur or
circumstances change, by comparing the fair value of the asset to their carrying
value. The fair value is determined by using a relief-from-royalty
approach. The Company has determined that, based on the impairment
tests performed, no impairment of goodwill or trademarks and tradenames have
occurred during 2008, 2007 or 2006.
Other
Assets – Other
assets includes deferred costs incurred in connection with the Company’s
issuance of its convertible subordinated notes and revolving line of
credit. These costs are being amortized using the effective yield
method over the period from the date of issuance to the put option date (if
applicable) or the contractual maturity date, whichever is
earlier. Total net deferred financing fees amounted to $5.0 million
at January 2, 2009 and $6.4 million at December 28, 2007.
Other
assets also include long-term investments in equity securities of entities which
the Company does not have the ability to exercise significant influence over and
are accounted for using the cost method. Each reporting period,
management evaluates these investments to determine if there are any events or
circumstances that are likely to have a significant adverse effect on the fair
value of the investment. Examples of such impairment indicators
include, but are not limited to: a significant deterioration in earnings
performance; a significant adverse change in the regulatory, economic or
technological environment of an investee; or a significant doubt about an
investee’s ability to continue as a going concern. If an impairment
indicator is identified, management will estimate the fair value of the
investment and compare it to its carrying value. The estimation of
fair value considers all available financial information related to the
investee, including, but not limited to, valuations based on recent third-party
equity investments in the investee. If the fair value of the
investment is less than its carrying value, the investment is impaired and a
determination as to whether the impairment is other-than-temporary is
made. Impairment is deemed to be other-than-temporary unless the
Company has the ability and intent to hold the investment for a period
sufficient for a market recovery up to the carrying value of the
investment. Further, evidence must indicate that the carrying value
of the investment is recoverable within a reasonable period. For
other-than-temporary impairments, an impairment loss is recognized equal to the
difference between the investment’s carrying value and its fair
value.
The
aggregate recorded amount of cost method investments at January 2, 2009 and
December 28, 2007 was $10.9 million and $6.8 million,
respectively. The Company has determined that these investments are
not considered variable interest entities as defined in Financial Accounting
Standards Board (“FASB”) Interpretation (“FIN”) 46(R), Consolidation of Variable Interest Entities, an
interpretation of ARB
No. 51. The Company’s exposure related to these entities is
limited to its recorded investment. These investments are in research
and development companies whose fair value is subject to future
fluctuations, which could be significant.
Income
Taxes - The consolidated financial statements of the Company have been
prepared using the asset and liability approach in accounting for income taxes,
which requires the recognition of deferred income taxes for the expected future
tax consequences of net operating losses, credits, and temporary differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities. A valuation allowance is provided on deferred tax assets if
it is determined that it is more likely than not that the asset will not be
realized.
The
Company and its domestic subsidiaries file a consolidated U.S. federal income
tax return. State tax returns are filed on a combined or separate basis
depending on the applicable laws in the jurisdictions where tax returns are
filed. The Company also files foreign tax returns on a separate company
basis in the countries in which it operates.
Beginning
in fiscal year 2007, the Company adopted the provisions of FIN No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB SFAS No. 109. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized under SFAS
No. 109. FIN No. 48 prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return and also provides
guidance on various related matters such as derecognition, interest and
penalties, and disclosure. Upon adoption of FIN No. 48, the Company
did not recognize any adjustment to its $1.8 million of unrecognized tax
benefits. The Company recognizes interest expense related to
uncertain tax positions as Interest Expense. Penalties, if incurred,
are recognized as a component of Selling, General and Administrative
Expenses.
Derivative
Financial Instruments –
The Company recognizes all derivative financial instruments in its
consolidated financial statements at fair value in accordance with FASB
Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities. Changes in the fair value
of derivative instruments are recorded in earnings unless hedge accounting
criteria are met. All of the Company’s derivative financial
instruments as of January 2, 2009 are designated as cash flow
hedges. There were no derivative financial instruments outstanding as
of December 28, 2007. The effective portion of changes in fair value
of these cash flow hedges is recorded each period, net of tax, in accumulated
other comprehensive income (loss) until the related hedged transaction
occurs. Any ineffective portion of changes in fair value of these
cash flow hedges is recorded in earnings.
Foreign Currency
Translation - The Company translates all assets and liabilities of its
foreign subsidiaries, where the U.S. dollar is not the functional currency, at
the period-end exchange rate and translates income and expenses at the average
exchange rates in effect during the period. The net effect of this
translation is recorded in the consolidated financial statements as accumulated
other comprehensive income (loss). Translation adjustments are not
adjusted for income taxes as they relate to permanent investments in the
Company’s foreign subsidiaries. Net foreign currency transaction gains and
losses included in other income/expense amounted to a gain of $0.1 million
for 2008 and were not material for 2007 and 2006.
Revenue
Recognition - Revenue from the sale of products is recognized at the time
the product is shipped and title passes to our customers. The Company
includes shipping and handling fees billed to customers in
sales. Shipping and handling costs associated with inbound and
outbound freight are generally recorded in cost of sales. In certain
instances the Company obtains component parts for sub-assemblies from its
customers that are included in the final product. These amounts were
excluded from sales and cost of sales recognized by the Company. The cost of
these customer supplied component parts amounted to $35.1 million, $35.1 million
and $18.8 million in 2008, 2007 and 2006, respectively.
Product
Warranties – The Company allows customers to return defective or damaged
products for credit, replacement, or exchange. The Company generally
warrants that its products will meet customer specifications and will be free
from defects in materials and workmanship. The Company accrues its
estimated exposure to warranty claims based upon recent historical experience
and other specific information as it becomes available.
Research and
Development and Engineering Costs – Research and development costs are
expensed as incurred. The primary costs are salary and benefits for
personnel. Engineering costs are expensed as
incurred. Cost reimbursements for engineering services from customers
for whom the Company designs products are recorded as an offset to engineering
costs upon achieving development milestones specified in the
contracts.
Net
research, development and engineering costs are comprised of the following (in
thousands):
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development costs
|
|
$ |
18,750 |
|
|
$ |
16,141 |
|
|
$ |
16,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
costs
|
|
|
22,447 |
|
|
|
18,929 |
|
|
|
9,888 |
|
Less:
cost reimbursements
|
|
|
(9,753 |
) |
|
|
(5,156 |
) |
|
|
(1,759 |
) |
Engineering
costs, net
|
|
|
12,694 |
|
|
|
13,773 |
|
|
|
8,129 |
|
Total
research, development and engineering costs, net
|
|
$ |
31,444 |
|
|
$ |
29,914 |
|
|
$ |
24,225 |
|
Stock-Based
Compensation - The
Company records compensation costs related to stock-based awards in accordance
with SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS
No. 123(R)”), and related Securities and Exchange Commission (“SEC”) rules
included in Staff Accounting Bulletin (“SAB”) No. 107. Under the
fair value recognition provisions of SFAS No. 123(R), the Company measures
stock-based compensation cost at the grant date based on the estimated fair
value of the award. Compensation cost for service-based awards is
recognized ratably over the applicable vesting period. Compensation
cost for performance-based awards is reassessed each period and recognized based
upon the probability that the performance targets will be
achieved. The Company utilizes the Black-Scholes option pricing model
to estimate the fair value of stock options granted. For restricted
stock and restricted stock unit awards, the fair market value of the award is
determined based upon the closing value of the Company’s stock price on the
grant date. The amount of stock-based compensation expense recognized
during a period is based on the portion of the awards that are ultimately
expected to vest. The Company estimates pre-vesting forfeitures at
the time of grant by analyzing historical data and revises those estimates in
subsequent periods if actual forfeitures differ from those
estimates. The total expense recognized over the vesting period will
only be for those awards that ultimately vest.
Defined Benefit
Pension Plans - In connection with the Precimed and Chaumont Facility
acquisitions, the Company recorded a pension liability related to defined
benefit pension plans provided to non-U.S. employees of those
businesses. The Company accounts for these pension plans in
accordance with SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans. This Statement
requires an employer to recognize in its balance sheet as an asset or liability
the overfunded or underfunded status of a defined benefit pension plan, measured
as the difference between the fair value of plan assets and the benefit
obligation. For a pension plan, the benefit obligation is the
projected benefit obligation which is calculated based on actuarial computations
of current and future benefits for employees. SFAS No. 158
requires that gains or losses and prior service costs or credits that arise
during the period, but are not included as components of net periodic benefit
expense, be recognized as a component of accumulated other Comprehensive
income. Pension expense is charged to current operating
expenses.
Earnings Per
Share - Basic
earnings per share is calculated by dividing net income by the weighted average
number of shares outstanding during the period. Diluted earnings per
share is calculated by adjusting for potential common shares, which consist of
stock options, unvested restricted stock and restricted stock units and
contingently convertible instruments.
Holders of
the Company’s convertible subordinated notes may convert them into shares of the
Company’s common stock under certain circumstances (see Note 8 –
“Debt”). The Company includes the effect of the conversion of these
convertible notes in the calculation of diluted earnings per share using the
if-converted method or the treasury method for instruments that may be settled
in cash at the Company’s election and which the Company has the ability and
intent to settle them in cash, as long as the effect is dilutive. For
computation of earnings per share under conversion conditions, the number of
diluted shares outstanding increases by the amount of shares that are
potentially convertible during that period. Also, net income is
adjusted for the calculation to add back interest expense on the convertible
notes as well as unamortized discount and deferred financing fees amortization
recorded during the period.
The
following table reflects the calculation of basic and diluted earnings per share
(in thousands, except per share amounts):
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
Numerator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
$ |
18,559 |
|
|
$ |
15,050 |
|
|
$ |
16,126 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense on convertible notes and related deferred financing fees, net of
tax
|
|
|
871 |
|
|
|
- |
|
|
|
3,064 |
|
Numerator
for diluted earnings per share
|
|
$ |
19,430 |
|
|
$ |
15,050 |
|
|
$ |
19,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
22,525 |
|
|
|
22,152 |
|
|
|
21,803 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes
|
|
|
1,267 |
|
|
|
- |
|
|
|
4,219 |
|
Stock
options and unvested restricted stock
|
|
|
336 |
|
|
|
270 |
|
|
|
312 |
|
Dilutive
potential common shares
|
|
|
1,603 |
|
|
|
270 |
|
|
|
4,531 |
|
Denominator
for diluted earnings per share
|
|
|
24,128 |
|
|
|
22,422 |
|
|
|
26,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$ |
0.82 |
|
|
$ |
0.68 |
|
|
$ |
0.74 |
|
Diluted
earnings per share
|
|
$ |
0.81 |
|
|
$ |
0.67 |
|
|
$ |
0.73 |
|
The
diluted weighted average share calculations do not include the following as they
are not dilutive to the earnings per share calculations or the respective
performance criteria have not been met as of the reporting date:
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
Time
based stock options and restricted stock
|
|
|
1,500,000 |
|
|
|
664,000 |
|
|
|
1,084,000 |
|
Performance
based stock options and
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted
stock units
|
|
|
515,000 |
|
|
|
287,000 |
|
|
|
215,000 |
|
Convertible
subordinated notes
|
|
|
- |
|
|
|
2,027,000 |
|
|
|
- |
|
Comprehensive
Income - The Company’s comprehensive income as reported in the
Consolidated Statements of Operations and Comprehensive Income includes net
income, foreign currency translation gains (losses), unrealized gain (loss) on
its interest rate swaps, the net unrealized gain (loss) on short-term
investments available for sale, adjusted for any realized gains/losses, and the
overfunded or underfunded status of the Company’s defined benefit pension
plans.
Accumulated
other comprehensive loss is comprised of the following (in
thousands):
|
|
Pre-tax
|
|
|
Tax
|
|
|
Net-of-tax
|
|
|
|
amount
|
|
|
amount
|
|
|
amount
|
|
Balance
at December 28, 2007
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Foreign
currency translation adjustment
|
|
|
(228 |
) |
|
|
- |
|
|
|
(228 |
) |
Unrealized
loss on interest rate swaps
|
|
|
(1,394 |
) |
|
|
488 |
|
|
|
(906 |
) |
Defined
benefit pension plan liability adjustment
|
|
|
(2,513 |
) |
|
|
571 |
|
|
|
(1,942 |
) |
Balance
at January 2, 2009
|
|
$ |
(4,135 |
) |
|
$ |
1,059 |
|
|
$ |
(3,076 |
) |
Supplemental Cash
Flow Information (in thousands):
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
10,021 |
|
|
$ |
5,325 |
|
|
$ |
3,888 |
|
Income
taxes
|
|
|
3,811 |
|
|
|
17,341 |
|
|
|
2,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
unrealized gain (loss) on available-for-
|
|
|
|
|
|
|
|
|
|
|
|
|
sale
securities
|
|
$ |
- |
|
|
$ |
(923 |
) |
|
$ |
3,594 |
|
Unrealized
loss on interest rate swaps, net
|
|
|
(906 |
) |
|
|
- |
|
|
|
- |
|
Common
stock contributed to 401(k) Plan
|
|
|
3,472 |
|
|
|
2,956 |
|
|
|
2,780 |
|
Property,
plant and equipment purchases
|
|
|
|
|
|
|
|
|
|
|
|
|
included
in accounts payable
|
|
|
2,762 |
|
|
|
3,307 |
|
|
|
808 |
|
Unsettled
purchase of treasury stock
|
|
|
741 |
|
|
|
140 |
|
|
|
205 |
|
Exchange
of convertible subordinated notes
|
|
|
- |
|
|
|
117,782 |
|
|
|
- |
|
Shares
issued in connection with business
|
|
|
|
|
|
|
|
|
|
|
|
|
acquisition
|
|
|
1,473 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of non-cash assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
acquired
|
|
$ |
169,508 |
|
|
$ |
209,946 |
|
|
$ |
- |
|
Liabilities
assumed
|
|
|
58,693 |
|
|
|
20,395 |
|
|
|
- |
|
Use of
Estimates - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of sales and expenses during the
reporting period. Actual results could differ materially from those
estimates.
In June
2008, the FASB issued Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities.” This FSP
concluded that all outstanding unvested share-based payment awards (restricted
stock) that contain rights to nonforfeitable dividends are considered
participating securities. Accordingly, the two-class method of
computing basic and diluted EPS is required for these securities. FSP
03-6-1, which was effective beginning in fiscal year 2009, did not have a
material impact on the Company’s consolidated financial statements and will be
applied retrospectively to all periods presented in future financial
statements.
In May
2008, the FASB issued FSP APB 14-1, “Accounting for Convertible Debt
Instruments that May be Settled in Cash Upon Conversion (Including Partial Cash
Settlement).” This FSP requires issuers of convertible debt
instruments that may be settled in cash upon conversion (including partial cash
settlement) separately account for the liability and equity components of those
instruments in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods. This statement is effective beginning in fiscal year 2009
and will be applied retrospectively to all periods presented in future financial
statements. This FSP is only applicable prospectively if the Company
determines that its convertible subordinated notes are indexed to its own stock
under the guidance of EITF 07-5. The Company estimates that this FSP, if
applicable, will increase 2009 non-cash interest expense by approximately $7
million to $8 million and reduce 2009 diluted EPS by approximately $0.19 per
share to $0.22 per share.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No. 161 amends and
expands the disclosure requirements of SFAS No. 133, and requires entities to
provide enhanced qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair values and amounts of
gains and losses on derivative contracts, and disclosures about
credit-risk-related contingent features in derivative agreements. The
Company will make the required disclosures beginning in 2009.
In
December 2007, the FASB issued SFAS No. 141(R), Business
Combinations. This Statement replaces FASB Statement No. 141,
Business Combinations
but retains the guidance in SFAS No. 141 for identifying and recognizing
intangible assets separately from goodwill. However, SFAS No. 141(R)
significantly changed the accounting for business combinations with regards to
the number of assets and liabilities assumed that are to be measured at fair
value, the accounting for contingent consideration and acquired contingencies as
well as the accounting for direct acquisition costs and
IPR&D. SFAS No. 141(R) is effective for acquisitions consummated
beginning in fiscal year 2009 and will materially impact the Company’s
consolidated financial statements if an acquisition is consummated after the
date of adoption. SFAS No. 141(R) provides that any changes to an entity’s
acquired uncertain tax positions and valuation allowances associated with
acquired deferred tax assets will no longer be applied to goodwill, regardless
of the acquisition date of the associated business combination. Any
changes to the acquired uncertain tax positions and valuation allowances will be
recognized as an adjustment to income tax expense.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No.
51. This Statement amends Accounting Research Bulletin No. 51
to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160
did not have a material impact on the Company’s consolidated financial
statements, which was effective beginning in fiscal year 2009.
In
September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. This Statement defines fair value, establishes a
framework for measuring fair value while applying U.S. GAAP, and expands
disclosures about fair value measurements. SFAS No. 157 establishes a fair
value hierarchy that distinguishes between (1) market participant assumptions
based on market data obtained from independent sources and (2) the reporting
entity’s own assumptions developed based on unobservable inputs. In
February 2008, the FASB issued FSP FAS 157-b—Effective Date of FASB Statement No.
157. This FSP (1) partially deferred the effective date of
SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial
liabilities and (2) removed certain leasing transactions from the scope of SFAS
No. 157. Effective in fiscal year 2008, the Company adopted the
provisions of SFAS No. 157 for all financial assets and financial liabilities
and nonfinancial assets and non financial liabilities that are recognized or
disclosed at fair value on a recurring basis. The provisions of SFAS No. 157
that were effective in 2009, did not materially impact the Company’s
consolidated financial statements.
P Medical Holding
SA - On January 7, 2008, the Company acquired P Medical Holding SA
(“Precimed”) with administrative offices in Orvin, Switzerland and Exton, PA,
manufacturing operations in Switzerland and Indiana and sales offices in Japan,
China and the United Kingdom. This transaction diversified the
Company’s revenue and established the Company as a leading supplier to the
orthopedics industry.
This
transaction was accounted for under the purchase method of
accounting. Accordingly, the results of Precimed’s operations were
included in the consolidated financial statements from the date of
acquisition. The aggregate purchase price was $85.0 million,
consisting of the cash issued at closing to Precimed shareholders ($82.4
million), and other direct acquisition-related costs, including financial
advisory, legal and accounting services ($2.6 million). Additionally,
the purchase agreement included a contingent payment which ranged from 0 to
12,000,000 Swiss Francs (“CHF”) depending on Precimed’s 2008 earnings
performance. Based upon the final contingent earn-out calculation, no
contingent payment was made. During 2008, a $2.6 million contingent
payment was made relating to an acquisition consummated by Precimed in
2006. The purchase price was funded with cash on hand and borrowings
under the Company’s revolving credit agreement. Concurrently with the
closing of the transaction, the Company immediately repaid $31.6 million of
Precimed’s long-term debt.
The cost
of the acquisition was allocated to the assets acquired and liabilities assumed
from Precimed based on their fair values as of the acquisition date, with
the amount exceeding the fair value recorded as goodwill. The fair
values of the assets acquired were determined using one of three valuation
approaches: market, income and cost. The selection of a particular
method for a given asset depended on the reliability of available data and the
nature of the asset, among other considerations.
The market
approach, which estimates the value for a subject asset based on available
market pricing for comparable assets, was utilized for land and in-process and
finished inventory. The income approach, which estimates the value
for a subject asset based on the present value of cash flows projected to be
generated by the asset, was used for certain intangible assets such as
technology and patents, customer relationships, trademarks and tradenames,
IPR&D and for the noncompete agreements with employees. The
projected cash flows were discounted at a required rate of return that
reflects the relative risk of the Precimed transaction and the time value
of money. The projected cash flows for each asset considered multiple
factors, including current revenue from existing customers, attrition trends,
reasonable contract renewal assumptions from the perspective of a marketplace
participant, and expected profit margins giving consideration to historical and
expected margins. The cost approach was used for the majority of real
and personal property and raw materials inventory. The cost to
replace a given asset reflects the estimated reproduction or replacement cost
for the property, less an allowance for loss in value due to depreciation or
obsolescence, with specific consideration given to economic obsolescence if
indicated.
The
following table summarizes the final allocation of the cost of the acquisition
to the assets acquired and liabilities assumed as of the close of the
acquisition (in thousands):
|
|
As
of
|
|
(in
thousands)
|
|
January
7, 2008
|
|
Assets
acquired
|
|
|
|
Current
assets
|
|
$ |
33,982 |
|
Property,
plant and equipment
|
|
|
25,070 |
|
Acquired
IPR&D
|
|
|
2,240 |
|
Amortizing
intangible assets
|
|
|
29,355 |
|
Trademarks
and tradenames
|
|
|
3,514 |
|
Goodwill
|
|
|
47,160 |
|
Other
assets
|
|
|
1,720 |
|
Total
assets acquired
|
|
|
143,041 |
|
Liabilities
assumed
|
|
|
|
|
Current
liabilities
|
|
|
25,421 |
|
Long-term
liabilities
|
|
|
32,599 |
|
Total
liabilities assumed
|
|
|
58,020 |
|
Purchase
price
|
|
$ |
85,021 |
|
Current assets and current
liabilities – The fair value of current assets (except inventory) and
current liabilities was assumed to approximate their carrying value as of the
acquisition date due to the short-term nature of these assets and
liabilities.
The fair
value of the in-process and finished inventory acquired was estimated by
applying a version of the market approach called the comparable sales
method. This approach estimates the fair value of the asset by
calculating the potential sales generated from selling the inventory and
subtracting from it the costs related to the completion and sale of that
inventory and a reasonable profit allowance. Based upon this
methodology, the Company recorded the inventory acquired at fair value resulting
in an increase in inventory of $5.6 million. During the first quarter
of 2008, the Company expensed the entire step-up value as cost of sales as the
acquired Precimed inventory to which that step-up value was related was
sold during that period. Raw materials inventory was valued at
replacement cost.
Property, plant and
equipment (“PP&E”) - The fair value of the PP&E acquired was
estimated by applying the cost approach for personal property, buildings and
building improvements and the market approach for land. The cost
approach was applied by developing a replacement cost and adjusting for
depreciation and obsolescence. The value of the land acquired was
derived from market prices for comparable properties.
Intangible assets -
The purchase price was allocated to specific intangible assets as follows
(dollars in thousands):
|
|
Fair
value
assigned
|
|
|
Weighted
average
amortization
period
(years)
|
|
|
Weighted
average
discount
rate
|
|
Amortizing intangible
assets
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$ |
16,564 |
|
|
|
20
|
|
|
|
13%
|
|
Technology
and patents
|
|
|
11,771 |
|
|
|
15
|
|
|
|
14%
|
|
Noncompete
agreements
|
|
|
1,020 |
|
|
|
5
|
|
|
|
13%
|
|
|
|
$ |
29,355 |
|
|
|
17
|
|
|
|
13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
$ |
3,514 |
|
|
|
indefinite
|
|
|
|
13%
|
|
Acquired
IPR&D
|
|
$ |
2,240 |
|
|
|
-
|
|
|
|
14%
|
|
Customer
relationships – Customer relationships represent the estimated fair value
of both the contractual and non-contractual customer relationships
Precimed has as of the acquisition date. The primary customers
of Precimed include Johnson & Johnson, Smith & Nephew, Stryker,
Medtronic and Zimmer, some of which are also customers of
Greatbatch. These relationships were valued separately from goodwill
at the amount which an independent third party would be willing to pay for these
relationships. The fair value of customer relationships was
determined using the multi-period excess-earnings method, a form of the income
approach. The Company determined that the estimated useful life of
the intangible assets associated with the existing customer relationships is
approximately 20 years. This life was based upon historical customer
attrition and management’s understanding of the industry and regulatory
environment. The expected cash flows associated with these customer
relationships were nominal after 20 years.
Technology and
patents - Technology and patents consists of technical processes,
patented and unpatented technology, manufacturing know-how and the understanding
with respect to products or processes that have been developed by Precimed and
that will be leveraged in current and future products. The fair value
of technology and patents acquired was determined utilizing the relief from
royalty method. The Company determined that the estimated useful life
of the technology and patents is approximately 15 years. This life is
based upon management’s estimate of the product life cycle associated with
technology and patents before they will be replaced by new
technologies. The expected cash flows associated with technology and
patents were nominal after 15 years.
Trademarks and
tradenames – Trademarks and tradenames represent the estimated fair value
of corporate and product names acquired from Precimed, which will be utilized by
the Company in the future. These tradenames were valued separately
from goodwill at the amount which an independent third party would be willing to
pay for use of these names. The fair value of the trademarks and
tradenames was determined by applying the relief from royalty method of the
income approach. The tradenames are inherently valuable as the
Company believes they convey favorable perceptions about the products with which
they are associated. This in turn generates consistent and increased
demand for the products, which provides the Company with greater revenues, as
well as greater production and operating efficiencies. Thus, the
Company will realize larger profit margins than companies without the
tradenames. At this time, the Company intends to utilize these
trademarks and tradenames for an indefinite period of time given that
Greatbatch is new to the orthopedics market and is not well known in that
industry. Thus these intangible assets are not being amortized but
are tested for impairment on an annual basis.
Acquired IPR&D -
Approximately $2.2 million of the purchase price represents the fair value of
acquired IPR&D projects that had not yet reached technological feasibility
and had no alternative future use. Accordingly, the amount was
immediately expensed on the acquisition date and is not deductible for tax
purposes. The value assigned to IPR&D related to Reamer,
Instrument Kit, Locking Plate and Cutting Guide projects. These
projects primarily represent the next generation of products already being sold
by Precimed which incorporate new enhancements and customer
modifications. The commercial launch of these products was
assumed to be in 2008 and 2009. For purposes of valuing the
IPR&D, the Company estimated total costs to complete the projects to be
approximately $0.2 million. If the Company is not successful in completing
these projects, future sales may be adversely affected resulting in erosion of
the Company’s market share.
The fair
value of these projects was determined based on the excess earnings
method. This model utilized discount rates that took into
consideration the internal rate of return expected from the Precimed transaction
and the risks surrounding the successful development and commercialization of
each of the IPR&D projects. The Company believes that the
estimated acquired IPR&D amounts represent their fair value at the date of
acquisition and do not exceed the amount an independent third party would be
willing to pay for the projects.
Goodwill - The excess
of the purchase price over the fair value of net tangible and intangible assets
acquired of $47.2 million was allocated to goodwill. Various factors
contributed to the establishment of goodwill, including: the value of Precimed’s
highly trained assembled work force and management team; the expected revenue
growth over time that is attributable to increased market penetration from
future products and customers; and the incremental value to the Company’s IMC
business from expanding and diversifying its revenues. The goodwill
acquired in connection with the Precimed acquisition was allocated to the
Company’s IMC business segment and is not deductible for tax
purposes.
DePuy
Orthopaedics Chaumont, France Facility - On February 11, 2008,
Precimed acquired the assets of DePuy Orthopaedics (“DePuy”) Chaumont, France
manufacturing facility (the “Chaumont Facility”). The Chaumont
Facility produces hip and shoulder implants for DePuy Ireland which distributes
them worldwide through various DePuy selling entities. This
transaction, which included a new four year supply agreement with DePuy,
enhances Greatbatch’s and Precimed’s strategic relationship with DePuy, one of
the largest orthopedic companies in the world. The addition of this
facility will align Precimed closer to its orthopedic customers and further
extends its offerings to a full range of orthopedic implants.
This
transaction was accounted for under the purchase method of
accounting. Accordingly, the results of the Chaumont Facility were
included in our consolidated financial statements from the date of
acquisition. The aggregate purchase price was $28.7 million,
consisting of the cash issued to DePuy ($27.0 million), and other direct
acquisition-related costs, including financial advisory, transfer tax, legal and
accounting fees ($1.7 million). The aggregate purchase price was
allocated to the assets acquired ($6.3 million inventory, $13.4 million
PP&E) and pension liability assumed from the Chaumont Facility based on
their fair values as of the close of the acquisition, with the amount exceeding
the fair value recorded as goodwill ($6.6 million).
Various
factors contributed to the establishment of goodwill, including: the value of
the Chaumont Facility’s highly trained assembled work force; the expected
revenue growth over time and the incremental value to the Company’s Orthopedics
business from having the capability to manufacture joint implants; and the
strategic partnership established with DePuy, one of the largest orthopedic
companies in the world. Goodwill resulting from the Chaumont Facility
acquisition was allocated to the Company’s IMC business segment and is not
deductible for tax purposes.
Pro Forma Results
(Unaudited) - The following unaudited pro forma information presents the
consolidated results of operations of the Company, Precimed, and the Chaumont
Facility as if those acquisitions had occurred as of the beginning of each of
the fiscal years presented. Additionally, 2007 amounts reflect the
Company’s 2007 acquisition of Enpath (June 2007), Quan (November 2007) and EAC
(November 2007) as if those acquisitions had occurred as of the beginning of
2007 (in thousands, except per share amounts):
|
|
Year
Ended
|
|
(Unaudited)
|
|
January
2,
2009
|
|
|
December
28,
2007
|
|
Sales
|
|
$ |
555,139 |
|
|
$ |
502,043 |
|
Net
income
|
|
|
24,539 |
|
|
|
18,713 |
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
1.09 |
|
|
$ |
0.84 |
|
Diluted
|
|
$ |
1.05 |
|
|
$ |
0.82 |
|
The
unaudited pro forma information presents the combined operating results of
Greatbatch, Precimed, the Chaumont Facility, Enpath, Quan and EAC, with the
results prior to the acquisition date adjusted to include the pro forma impact
of the amortization of acquired intangible assets and depreciation of fixed
assets based on the purchase price allocation, the elimination of non-recurring
IPR&D charges ($2.2 million in 2008 and $13.8 million in 2007) and inventory
step-up amortization recorded by Greatbatch ($6.4 million in 2008 and $1.7
million in 2007), the adjustment to interest income/expense reflecting the cash
paid in connection with the acquisition, including acquisition-related expenses,
at Greatbatch’s weighted average interest income/expense rate, and the impact of
income taxes on the pro forma adjustments utilizing the applicable statutory tax
rate, except for IPR&D which is not deductible for tax
purposes. The unaudited pro forma consolidated basic and diluted
earnings per share are based on the consolidated basic and diluted weighted
average shares of Greatbatch.
The
unaudited pro forma results are presented for illustrative purposes only and do
not reflect the realization of potential cost savings, and any related
integration costs. Certain cost savings may result from the
acquisition; however, there can be no assurance that these cost savings will be
achieved. These pro forma results do not purport to be indicative of
the results that would have been obtained, or to be a projection of results that
may be obtained in the future.
3.
SHORT-TERM
INVESTMENTS
Short-term
investments available for sale are comprised of the following (in
thousands):
|
|
Cost
|
|
|
Gross
unrealized
gains
|
|
|
Gross
unrealized
losses
|
|
|
Estimated
fair
value
|
|
December 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Paper
|
|
$ |
1,087 |
|
|
$ |
5 |
|
|
$ |
- |
|
|
$ |
1,092 |
|
U.S.
Government Agencies
|
|
|
1,469 |
|
|
|
4 |
|
|
|
- |
|
|
|
1,473 |
|
Corporate
Bonds
|
|
|
4,452 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
4,452 |
|
Total
short-term investments
|
|
$ |
7,008 |
|
|
$ |
13 |
|
|
$ |
(4 |
) |
|
$ |
7,017 |
|
The
Company did not hold any short-term investments as of January 2,
2009. During 2007, the Company sold an equity security investment
which resulted in a pre-tax gain of $4.0 million.
Inventories
are comprised of the following (in thousands):
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
|
|
|
|
|
Raw
material
|
|
$ |
58,352 |
|
|
$ |
38,561 |
|
Work-in-process
|
|
|
28,851 |
|
|
|
19,603 |
|
Finished
goods
|
|
|
25,101 |
|
|
|
13,718 |
|
Total
|
|
$ |
112,304 |
|
|
$ |
71,882 |
|
5.
PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment are comprised of the following (in thousands):
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
|
|
|
|
|
|
|
Manufacturing
machinery and equipment
|
|
$ |
109,911 |
|
|
$ |
80,447 |
|
Buildings
and building improvements
|
|
|
68,346 |
|
|
|
35,611 |
|
Information
technology hardware and software
|
|
|
27,558 |
|
|
|
21,671 |
|
Construction
work in process
|
|
|
17,452 |
|
|
|
23,115 |
|
Leasehold
improvements
|
|
|
17,031 |
|
|
|
19,957 |
|
Land
and land improvements
|
|
|
11,671 |
|
|
|
6,024 |
|
Furniture
and fixtures
|
|
|
9,488 |
|
|
|
5,345 |
|
Other
|
|
|
662 |
|
|
|
210 |
|
|
|
|
262,119 |
|
|
|
192,380 |
|
Accumulated
depreciation
|
|
|
(95,451 |
) |
|
|
(77,434 |
) |
Total
|
|
$ |
166,668 |
|
|
$ |
114,946 |
|
Depreciation
expense for property, plant and equipment during 2008, 2007 and 2006 was $25.5
million, $16.4 million and $14.8 million, respectively.
Amortizing
intangible assets are comprised of the following (in thousands):
|
|
Gross
carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Foreign
currency
translation
|
|
|
Net
carrying
amount
|
|
January 2, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
technology and patents
|
|
$ |
81,639 |
|
|
$ |
(35,881 |
) |
|
$ |
184 |
|
|
$ |
45,942 |
|
Customer
lists
|
|
|
46,547 |
|
|
|
(4,056 |
) |
|
|
271 |
|
|
|
42,762 |
|
Other
|
|
|
3,508 |
|
|
|
(1,964 |
) |
|
|
11 |
|
|
|
1,555 |
|
Total
amortizing intangible assets
|
|
$ |
131,694 |
|
|
$ |
(41,901 |
) |
|
$ |
466 |
|
|
$ |
90,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 28, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased
technology and patents
|
|
$ |
69,813 |
|
|
$ |
(28,968 |
) |
|
$ |
- |
|
|
$ |
40,845 |
|
Customer
lists
|
|
|
29,983 |
|
|
|
(840 |
) |
|
|
- |
|
|
|
29,143 |
|
Other
|
|
|
2,660 |
|
|
|
(1,380 |
) |
|
|
- |
|
|
|
1,280 |
|
Total
amortizing intangible assets
|
|
$ |
102,456 |
|
|
$ |
(31,188 |
) |
|
$ |
- |
|
|
$ |
71,268 |
|
Intangible
amortization expense was $10.7 million, $5.6 million and $3.8 million for 2008,
2007 and 2006, respectively. Prior to 2007, all intangible
amortization expense was included in Cost of Sales. Intangible
amortization expense included in Selling, General and Administrative Expenses
related to the customer lists and non-compete agreements acquired in 2008 and
2007 was $3.9 million and $1.0 million, respectively. Annual
intangible amortization expense is estimated to be $10.0 million for 2009, $9.5
million for 2010, $9.4 million for 2011, $9.3 million for 2012 and $8.5 million
for 2013.
The change
in trademarks and tradenames during 2008 is as follows (in
thousands):
Balance
at December 28, 2007
|
|
$ |
32,582 |
|
Acquired
in 2008
|
|
|
3,514 |
|
Foreign
currency translation
|
|
|
34 |
|
Balance
at January 2, 2009
|
|
$ |
36,130 |
|
The
Company is currently performing a review of its market strategy to determine the
best use of its “non-Greatbatch” tradenames, including those acquired with its
recent acquisitions. The outcome of this review, which is expected to
be completed in 2009, may impact the useful lives of the Company’s
“non-Greatbatch” tradenames which had a value of $20.3 million as of January 2,
2009.
The change
in goodwill during 2008 is as follows (in thousands):
|
|
IMC
|
|
|
Electrochem
|
|
|
Total
|
|
Balance
at December 28, 2007
|
|
$ |
238,810 |
|
|
$ |
9,730 |
|
|
$ |
248,540 |
|
Adjustments
to goodwill related to 2007 acquisitions
|
|
|
(118 |
) |
|
|
213 |
|
|
|
95 |
|
Goodwill
recorded for 2008 acquisitions
|
|
|
53,760 |
|
|
|
- |
|
|
|
53,760 |
|
Foreign
currency translation
|
|
|
(174 |
) |
|
|
- |
|
|
|
(174 |
) |
Balance
at January 2, 2009
|
|
$ |
292,278 |
|
|
$ |
9,943 |
|
|
$ |
302,221 |
|
7.
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities are comprised of the following (in
thousands):
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Salaries
and benefits
|
|
$ |
11,757 |
|
|
$ |
10,655 |
|
Profit
sharing and bonuses
|
|
|
14,860 |
|
|
|
13,669 |
|
Warranty
|
|
|
1,395 |
|
|
|
1,454 |
|
Other
|
|
|
12,485 |
|
|
|
5,197 |
|
Total
|
|
$ |
40,497 |
|
|
$ |
30,975 |
|
Long-term
debt is comprised of the following (in thousands):
|
|
January
2,
|
|
|
December
28,
|
|
|
|
2009
|
|
|
2007
|
|
Revolving
line of credit
|
|
$ |
132,000 |
|
|
$ |
- |
|
2.25%
convertible subordinated notes I, due 2013
|
|
|
30,450 |
|
|
|
52,218 |
|
2.25%
convertible subordinated notes II, due 2013
|
|
|
197,782 |
|
|
|
197,782 |
|
Unamortized
discount
|
|
|
(7,312 |
) |
|
|
(8,802 |
) |
Total
long-term debt
|
|
$ |
352,920 |
|
|
$ |
241,198 |
|
Revolving Line of
Credit - The Company has a senior credit facility (the “Credit Facility”)
consisting of a $235 million revolving line of credit, which can be increased to
$335 million upon the Company’s request. The Credit Facility also
contains a $15 million letter of credit subfacility and a $15 million swingline
subfacility. The Credit Facility is secured by the Company’s
non-realty assets including cash, accounts and notes receivable, and
inventories, and has an expiration date of May 22, 2012 with a one-time option
to extend to April 1, 2013 if no default has occurred. Interest rates
under the Credit Facility are, at the Company’s option, based upon the current
prime rate or the LIBOR rate plus a margin that varies with the Company’s
leverage ratio. If interest is paid based upon the prime rate, the
applicable margin is between minus 1.25% and 0.00%. If interest is
paid based upon the LIBOR rate, the applicable margin is between 1.00% and
2.00%. The Company is required to pay a commitment fee between 0.125%
and 0.250% per annum on the unused portion of the Credit Facility based on the
Company’s leverage ratio.
The Credit
Facility contains limitations on the incurrence of indebtedness, limitations on
the incurrence of liens and licensing of intellectual property, limitations on
investments and restrictions on certain payments. Except to the
extent paid for by the common equity of Greatbatch or paid for out of cash on
hand, the Credit Facility limits the amount paid for acquisitions in total to
$100 million. The restrictions on payments, among other things, limit
repurchases of Greatbatch’s stock to $60 million and the ability of the Company
to make cash payments upon conversion of CSN II (as defined below) and
dividends. These limitations can be waived upon the Company’s request
and approval of a simple majority of the lenders. Such waiver was
obtained in order to fund the Precimed acquisition and repurchase the Company’s
convertible subordinated notes in 2008.
The Credit
Facility also requires the Company to maintain a ratio of adjusted EBITDA, as
defined in the credit agreement, to interest expense of at least 3.00 to 1.00,
and a total leverage ratio, as defined in the credit agreement, of not greater
than 5.00 to 1.00 from May 22, 2007 through September 29, 2009 and not greater
than 4.50 to 1.00 from September 30, 2009 and thereafter. As of
January 2, 2009, the Company was in compliance with the required
covenants.
The Credit
Facility contains customary events of default. Upon the occurrence
and during the continuance of an event of default, a majority of the lenders may
declare the outstanding advances and all other obligations under the Credit
Facility immediately due and payable.
In
connection with the Company’s acquisition of Precimed and the Chaumont Facility,
the Company borrowed $117 million under its revolving line of credit in the
first quarter of 2008. The Company borrowed an additional net $15.0
million under the revolving line of credit since that time in order to fund the
repurchase of CSN I as discussed below. The weighted average interest
rate on these borrowings as of January 2, 2009, which does not include the
impact of the interest rate swaps described below, was 3.8%. Interest
rates reset based upon the six-month ($105 million), three-month ($8 million),
two-month ($13 million) and one-month ($6 million) LIBOR rate. Based
upon current capital needs, management does not anticipate making significant
principal payments on the revolving line of credit within the next twelve
months. As of January 2, 2009, the Company had $103 million available
under its revolving line of credit. The carrying amount of credit
facility borrowings approximates their fair values at January 2, 2009 given
their variable interest rates.
Interest Rate
Swaps – During 2008, the Company entered into three receive floating-pay
fixed interest rate swaps indexed to the six-month LIBOR rate. The
objective of these swaps is to hedge against potential changes in cash flows on
the Company’s outstanding revolving line of credit, which is also indexed to the
six-month LIBOR rate. No credit risk was hedged. The
receive variable leg of the swaps and the variable rate paid on the revolving
line of credit bear the same rate of interest, excluding the credit spread, and
reset and pay interest on the same dates. The Company intends to
continue electing the six-month LIBOR as the benchmark interest rate on the debt
being hedged. If the Company repays the debt it intends to replace
the hedged item with similarly indexed forecast cash
flows. Information regarding the Company’s outstanding interest rate
swaps is as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
Pay
|
|
|
receive
|
|
|
value
|
|
|
|
Type
of
|
|
Notional
|
|
Start
|
|
End
|
|
fixed
|
|
|
floating
|
|
|
January
2,
|
|
Instrument
|
|
hedge
|
|
amount
|
|
date
|
|
date
|
|
rate
|
|
|
rate
|
|
|
2009
|
|
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
|
Interest
rate swap
|
|
Cash
flow
|
|
$ |
80,000 |
|
3/5/2008
|
|
7/7/2010
|
|
|
3.09 |
% |
|
|
3.14 |
% |
|
$ |
(1,484 |
) |
Interest
rate swap
|
|
Cash
flow
|
|
|
18,000 |
|
12/18/2008
|
|
12/18/2010
|
|
|
2.00 |
% |
|
|
2.17 |
% |
|
|
- |
|
Interest
rate swap
|
|
Cash
flow
|
|
|
50,000 |
|
7/7/2010
|
|
7/7/2011
|
|
|
2.16 |
% |
|
6M
LIBOR
|
|
|
|
90 |
|
|
|
|
|
$ |
148,000 |
|
|
|
|
|
|
2.64 |
% |
|
|
|
|
|
$ |
(1,394 |
) |
The
estimated fair value of the interest rate swap agreement represents the amount
the Company expects to receive (pay) to terminate the contracts. No
portion of the change in fair value of the interest rate swaps during 2008 was
considered ineffective. The amount recorded as an offset to interest
expense in 2008 related to the interest rate swaps was $0.4
million.
Convertible
Subordinated Notes - In May 2003, the Company completed a private
placement of $170 million of 2.25% convertible subordinated notes, due 2013
(“CSN I”). In November 2003, the Company had a registration statement
with the SEC declared effective with respect to these notes and the underlying
common stock.
In March
2007, the Company entered into separate, privately negotiated agreements to
exchange $117.8 million of CSN I for an equivalent principal amount of a new
series of 2.25% convertible subordinated notes due 2013 (“CSN II”) (collectively
the “Exchange”) at a 5% discount. The primary purpose of the Exchange
was to eliminate the June 15, 2010 call and put option that is included in the
terms of CSN I. In connection with the Exchange, the Company issued
an additional $80 million aggregate principal amount of CSN II at a price of
$950 per $1,000 of principal. In June 2007, the Company had a
registration statement with the SEC declared effective with respect to these
notes and the underlying common stock. The Exchange was accounted for
as an extinguishment of debt and resulted in a pre-tax gain of $4.5
million. As a result of the extinguishment, the Company had to
recapture the tax interest expense that was previously deducted on the
extinguished notes. This resulted in an additional current income tax
liability of approximately $11.3 million, which was paid in
2007. This amount was previously recorded as a non-current deferred
tax liability on the balance sheet.
In
December 2008 the Company entered into privately negotiated agreements under
which it repurchased $21.8 million in aggregate principal amount of its
outstanding CSN I at $845.38 per $1,000 of principal. The primary
purpose of this transaction was to retire the debentures, which contained a put
option exercisable on June 15, 2010, at a discount. This transaction
was funded with availability under the Company’s existing line of
credit. This transaction was accounted for as an extinguishment of
debt and resulted in a pre-tax gain of $3.2 million. As a result of
the extinguishment, the Company had to recapture the tax interest expense that
was previously deducted on the extinguished notes. This resulted in
an additional current income tax liability of approximately $3.2 million, which
will be paid in the first quarter of 2009. This amount was previously
recorded as a non-current deferred tax liability on the balance
sheet.
The
following is a summary of the significant terms of CSN I and CSN
II:
CSN I - The notes
bear interest at 2.25% per annum, payable semi-annually. Holders may
convert the notes into shares of the Company’s common stock at a conversion rate
of 24.8219 shares per $1,000 of principal, subject to adjustment, before the
close of business on June 15, 2013 only under the following circumstances: (1)
during any fiscal quarter commencing after July 4, 2003, if the closing sale
price of the Company’s common stock exceeds 120% of the $40.29 conversion price
for at least 20 trading days in the 30 consecutive trading day period ending on
the last trading day of the preceding fiscal quarter; (2) subject to certain
exceptions, during the five business days after any five consecutive trading day
period in which the trading price per $1,000 of principal for each day of such
period was less than 98% of the product of the closing sale price of the
Company’s common stock and the number of shares issuable upon conversion of
$1,000 of principal; (3) if the notes have been called for redemption; or (4)
upon the occurrence of certain corporate events.
Beginning
June 20, 2010, the Company may redeem any of the notes at a redemption price of
100% of their principal amount, plus accrued interest. Note holders
may require the Company to repurchase their notes on June 15, 2010 or at any
time prior to their maturity following a fundamental change, as defined in the
indenture agreement, at a repurchase price of 100% of their principal amount,
plus accrued interest. The notes are subordinated in right of payment
to all of our senior indebtedness and effectively subordinated to all debts and
other liabilities of the Company’s subsidiaries.
Beginning
with the six-month interest period commencing June 15, 2010, the Company will
pay additional contingent interest during any six-month interest period if the
trading price of the notes for each of the five trading days immediately
preceding the first day of the interest period equals or exceeds 120% of the
principal amount of the notes.
CSN II - The notes
bear interest at 2.25% per annum, payable semi-annually. The holders
may convert the notes into shares of the Company’s common stock at a conversion
price of $34.70 per share, which is equivalent to a conversion ratio of 28.8219
shares per $1,000 of principal. The conversion price and the
conversion ratio will adjust automatically upon certain changes to the Company’s
capitalization. CSN II notes were issued at a price of $950 per
$1,000 of principal. The effective interest rate of CSN II notes,
which takes into consideration the amortization of the discount and deferred
fees related to the issuance of those notes, was 3.55%.
The notes
are convertible at the option of the holders at such time as: (i) the closing
price of the Company’s common stock exceeds 150% of the conversion price of the
notes for 20 out of 30 consecutive trading days; (ii) the trading price per
$1,000 of principal is less than 98% of the product of the closing sale price of
common stock for each day during any five consecutive trading day period and the
conversion rate per $1,000 of principal; (iii) the notes have been called for
redemption; (iv) the Company distributes to all holders of common stock rights
or warrants entitling them to purchase additional shares of common stock at less
than the average closing price of common stock for the ten trading days
immediately preceding the announcement of the distribution; (v) the Company
distributes to all holders of common stock any form of dividend which has a per
share value exceeding 5% of the price of the common stock on the day prior to
such date of distribution; (vi) the Company affects a consolidation, merger,
share exchange or sale of assets pursuant to which its common stock is converted
to cash or other property; (vii) the period beginning 60 days prior to but
excluding June 15, 2013; and (viii) certain fundamental changes, as defined in
the indenture agreement, occur or are approved by the Board of
Directors.
Conversions
in connection with corporate transactions that constitute a fundamental change
require the Company to pay a premium make-whole amount whereby the conversion
ratio on the notes may be increased by up to 8.2 shares per $1,000 of
principal. The premium make-whole amount will be paid in shares of
common stock upon any such conversion, subject to the net share settlement
feature of the notes described below.
The notes
contain a net share settlement feature that requires the Company to pay cash for
each $1,000 of principal. Any amounts in excess of $1,000 will be
settled in shares of the Company’s common stock, or at the Company’s option,
cash. The Company has a one-time irrevocable election to pay the
principal amount in shares of its common stock, which it currently does not plan
to exercise.
The notes
are redeemable by the Company at any time on or after June 20, 2012, or at the
option of a holder upon the occurrence of certain fundamental changes, as
defined in the agreement. The notes are subordinated in right of
payment to all of our senior indebtedness and effectively subordinated to all
debts and other liabilities of the Company’s subsidiaries.
The
fair-value of the convertible subordinated notes based on recent sales prices as
of January 2, 2009 and December 28, 2007 was approximately $188 million and $220
million, respectively.
Acquired
Debt -
Concurrently with the close of the Precimed acquisition, the Company
assumed and repaid $31.6 million of long-term debt acquired. Additionally, the
Company assumed a mortgage note of $2.0 million with a former owner that carried
an interest rate of 3%. The Company repaid this note in full in
2008.
Deferred
Financing Fees - The following is a reconciliation of deferred financing
fees for 2008 and 2007, which are included in other assets (in
thousands):
Balance
at December 29, 2006
|
|
$ |
2,305 |
|
Financing
costs deferred
|
|
|
6,632 |
|
Written-off
during the year
|
|
|
(1,416 |
) |
Amortization
during the year
|
|
|
(1,110 |
) |
Balance
at December 28, 2007
|
|
|
6,411 |
|
Financing
costs deferred
|
|
|
14 |
|
Written-off
during the year
|
|
|
(124 |
) |
Amortization
during the year
|
|
|
(1,307 |
) |
Balance
at January 2, 2009
|
|
$ |
4,994 |
|
9.
EMPLOYEE
BENEFIT PLANS
Savings Plan
- The Company sponsors a defined contribution 401(k) plan, which covers
substantially all of its U.S. based employees. The plan provides for
the deferral of employee compensation under Section 401(k) and a discretionary
Company match. In 2008, 2007 and 2006, this match was $0.35 per
dollar of participant deferral, up to 6% of the total compensation for each
participant. Net costs related to this defined contribution plan were
$1.5 million in 2008, $1.0 million in 2007 and $0.9 million in
2006.
In
addition to the above, under the terms of the 401(k) plan document there is an
annual discretionary defined contribution for substantially all U.S. based
employees equal to five percent of each employee’s eligible
compensation. This amount is contributed to the 401(k) plan in the
form of Company stock. Compensation cost recognized related to the
defined contribution was approximately $4.4 million in 2008, $3.6 million in
2007 and $3.3 million in 2006. As of January 2, 2009, the 401(k) Plan
held 534,116 shares of Company stock and there were approximately 150,500
committed-to-be released shares for the plan, which equals the estimated number
of shares to settle the liability based on the closing market price of the
Company’s stock at January 2, 2009 of $26.72.
Pension Plans
- In
connection with the Precimed and Chaumont Facility acquisitions, the Company
recorded a pension liability related to defined benefit pension plans provided
to non-U.S. based employees of those businesses. Under these plans,
benefits accrue to employees based upon years of service, position, age and
compensation.
Information
relating to the funding position of the Company’s defined benefit pension plans
as of the plans measurement date of January 2, 2009 were as follows (in
thousands):
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
|
2009
|
|
Change
in projected benefit obligation:
|
|
|
|
Projected
benefit obligation at beginning of year
|
|
$ |
- |
|
Projected
benefit obligation acquired
|
|
|
14,017 |
|
Service
cost
|
|
|
679 |
|
Interest
cost
|
|
|
480 |
|
Plan
participants' contributions
|
|
|
873 |
|
Actuarial
loss
|
|
|
446 |
|
Benefits
paid
|
|
|
(1,317 |
) |
Settlements
|
|
|
(1,941 |
) |
Foreign
currency translation
|
|
|
202 |
|
Projected
benefit obligation at end of year
|
|
|
13,439 |
|
Change
in fair value of plan assets:
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
|
- |
|
Plan
assets acquired
|
|
|
10,484 |
|
Employer
contributions
|
|
|
922 |
|
Plan
participants' contributions
|
|
|
873 |
|
Actual
loss on plan assets
|
|
|
(2,013 |
) |
Benefits
paid
|
|
|
(1,292 |
) |
Settlements
|
|
|
(1,718 |
) |
Foreign
currency translation
|
|
|
198 |
|
Fair
value of plan assets at end of year
|
|
|
7,454 |
|
Projected
benefit obligation in excess of plan
|
|
|
|
|
assets
at end of year
|
|
$ |
5,985 |
|
Current
portion of pension liability
|
|
$ |
12 |
|
Noncurrent
portion of pension liability
|
|
$ |
5,973 |
|
Accumulated
benefit obligation at end of year
|
|
$ |
12,128 |
|
Amounts
recognized in accumulated other comprehensive loss:
|
|
|
|
Net
loss occurring during the year
|
|
$ |
2,886 |
|
Net
(gain) on settlements
|
|
|
(373 |
) |
Pre-tax
adjustment
|
|
|
2,513 |
|
Taxes
|
|
|
(571 |
) |
Net
adjustment
|
|
$ |
1,942 |
|
Net
pension cost is comprised of the following (in thousands):
|
|
Year
Ended
|
|
|
|
January
2, 2009
|
|
Service
cost
|
|
$ |
679 |
|
Interest
cost
|
|
|
480 |
|
Expected
return on plan assets
|
|
|
(427 |
) |
Settlements
|
|
|
152 |
|
Recognized
net actuarial gain
|
|
|
(4 |
) |
Net
pension cost
|
|
$ |
880 |
|
The
principal actuarial assumptions used were as follows:
|
|
Year
Ended
|
|
|
|
January
2, 2009
|
|
Discount
rate
|
|
|
3.0%
|
|
Salary
growth
|
|
|
2.5%
|
|
Expected
rate of return on plan assets
|
|
|
4.0%
|
|
Long-term
inflation rate
|
|
|
1.5%
|
|
The
discount rate used is based on the yields of foreign government bonds with a
duration matching the duration of the liabilities plus approximately 50 basis
points to reflect the risk of investing in corporate bonds. The
expected rate of return on plan assets reflects long-term earnings expectations
on existing plan assets and those contributions expected to be received during
the current plan year. In estimating that rate, appropriate
consideration was given to historical returns earned by plan assets in the fund
and the rates of return expected to be available for
reinvestment. Rates of return were adjusted to reflect current
capital market assumptions and changes in investment
allocations. Equity securities and fixed income securities were
assumed to earn a return in the range of 6% to 7% and 2% to 3%,
respectively. When these overall return expectations are applied to
the pension plan’s target allocation, the expected rate of return is determined
to be 4.0%.
The
weighted average asset allocation as of the valuation date was as
follows:
Asset
Category:
|
|
Target
|
|
|
Actual
|
|
Bonds
|
|
|
60 |
% |
|
|
47 |
% |
Equity
|
|
|
25 |
% |
|
|
20 |
% |
Other
|
|
|
15 |
% |
|
|
33 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
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):
2009
|
|
$ |
703 |
|
2010
|
|
|
753 |
|
2011
|
|
|
837 |
|
2012
|
|
|
952 |
|
2013
|
|
|
1,058 |
|
2014-2018
|
|
|
5,549 |
|
Education
Assistance Program - The
Company reimburses tuition, textbooks and laboratory fees for college or other
job related programs for all of its U.S. based employees. The Company
also reimburses college tuition for the dependent children of its full-time
U.S. based employees. For certain employees, the dependent children
benefit vests on a straight-line basis over ten years. Minimum
academic achievement is required in order to receive reimbursement under both
programs. Aggregate expenses under the programs were approximately
$1.3 million, $1.5 million and $1.2 million in 2008, 2007 and 2006,
respectively.
10.
STOCK-BASED
COMPENSATION
Compensation
costs related to share-based payments totaled $6.8 million, $5.7 million and
$6.4 million for 2008, 2007 and 2006, respectively. These amounts
included accelerated vesting expense for certain retirement-eligible employees
of $0.01 million, $0.1 million and $2.4 million, respectively, and modification
expense of $0.05 million, $0.6 million and $0.3 million, respectively.
This modification expense relates to the Company’s adoption of executive
retirement guidelines in 2005 for senior level executives and the extension of
the exercise period after termination for all outstanding stock options of its
former Chief Executive Officer in 2006. Stock-based compensation
expense included in the Consolidated Statements of Cash Flows includes costs
recognized for stock options, restricted stock, restricted stock units and the
annual share contribution to the 401(k) Plan. See Note 9 – “Employee Benefit
Plans.”
Proceeds
from the exercise of stock options under stock option plans are credited to
common stock at par value and the excess is credited to additional paid-in
capital. A portion of the Company’s granted options qualify as
incentive stock options (“ISO”) for income tax purposes. As such, a
tax benefit is not recorded at the time the compensation cost related to the
options is recorded for book purposes due to the fact that an ISO does not
ordinarily result in a tax benefit unless there is a disqualifying
disposition. Stock option grants of non-qualified options result in
the creation of a deferred tax asset, which is a temporary difference, until the
time that the option is exercised. Due to the treatment of incentive
stock options for tax purposes, the Company’s effective tax rate from year to
year is subject to variability.
Stock-based
compensation expense is only recorded for those awards that are expected to
vest. Forfeiture estimates for determining appropriate stock-based
compensation expense are estimated at the time of grant based on historical
experience and demographic characteristics. Revisions are made to
those estimates in subsequent periods if actual forfeitures differ from
estimated forfeitures. A 9% annual forfeiture rate estimate was used
for the stock-based compensation expense recorded during 2008, 2007 and 2006
unless it was certain that the awards would vest (i.e. retirement eligible
employees, awards that immediately vest). In those instances, a 0%
forfeiture rate was used.
Summary
of Plans
The
Company’s 1997 Stock Option Plan (‘‘1997 Plan’’) authorized the issuance of up
to 480,000 shares of nonqualified and incentive stock options to purchase the
Company’s common stock, subject to the terms of the plan. The 1997
Plan has been frozen to any new stock option issuances.
The
Company’s 1998 Stock Option Plan (‘‘1998 Plan’’) authorized the issuance of up
to 1,220,000 shares of nonqualified and incentive stock options to purchase the
Company’s common stock, subject to the terms of the plan. The 1998
Plan has been frozen to any new stock option issuances.
The
Company’s 2002 Restricted Stock Plan (“2002 Plan”) authorized the issuance of
stock awards to employees. The number of shares that were reserved
for issuance under the plan could not exceed 200,000. The 2002 Plan
has been frozen to any new stock award issuances.
The
Company has a stock option plan that provides for the issuance of nonqualified
stock options to Non-Employee Directors (“Director Plan”). The
Director Plan authorized the issuance of up to 100,000 shares of nonqualified
stock options to purchase the Company’s common stock. The Director
Plan has been frozen to any new stock option issuances.
The
Company’s 2005 Stock Incentive Plan (“2005 Plan”), as amended, authorizes the
issuance of up to 2,450,000 shares of equity incentive awards including
nonqualified and incentive stock options, restricted stock, restricted stock
units, stock bonuses and stock appreciation rights subject to the terms of the
2005 Plan. The 2005 Plan has a sub-limit that limits the amount of
restricted stock, restricted stock units and stock bonuses that may be awarded
in the aggregate to 850,000 shares of the 2,450,000 shares authorized by the
2005 Plan.
As of
January 2, 2009, 436,050 shares were available for future grants of stock
options, stock appreciation rights, restricted stock, restricted stock units or
stock bonuses under the 2005 Plan.
Stock
Options
Stock
options granted generally vest over a four to five year period. The
stock options expire 10 years from the date of grant. Stock options
are granted at exercise prices equal to or greater than the fair value of the
Company’s common stock on the date of grant. Performance-based stock
options only vest if certain performance metrics are achieved. The
performance metrics generally cover a three-year performance period beginning in
the year of grant and include the achievement of revenue, adjusted operating
earnings and adjusted operating cash flow targets.
Intrinsic
value is calculated for in-the-money options (exercise price less than market
price) outstanding and/or exercisable as the difference between the market price
of our common shares as of January 2, 2009 ($26.72) and the weighted average
exercise price of the underlying options, multiplied by the number of options
outstanding and/or exercisable.
The
following tables summarize stock option activity related to the Company’s
time-vested and performance-vested stock options:
|
|
Number
of
time-vested
stock
options
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
life
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
(in
years)
|
|
(in
millions)
|
Outstanding
at December 30, 2005
|
|
|
1,211,350 |
|
|
$ |
23.09 |
|
|
|
|
Granted
|
|
|
299,617 |
|
|
|
24.86 |
|
|
|
|
Exercised
|
|
|
(153,339 |
) |
|
|
12.47 |
|
|
|
|
Forfeited
or Expired
|
|
|
(71,970 |
) |
|
|
25.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 29, 2006
|
|
|
1,285,658 |
|
|
|
24.64 |
|
|
|
|
Granted
|
|
|
230,477 |
|
|
|
25.11 |
|
|
|
|
Exercised
|
|
|
(138,667 |
) |
|
|
19.04 |
|
|
|
|
Forfeited
or Expired
|
|
|
(76,301 |
) |
|
|
29.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 28, 2007
|
|
|
1,301,167 |
|
|
|
25.04 |
|
|
|
|
Granted
|
|
|
452,964 |
|
|
|
20.21 |
|
|
|
|
Exercised
|
|
|
(131,100 |
) |
|
|
16.85 |
|
|
|
|
Forfeited
or Expired
|
|
|
(124,737 |
) |
|
|
25.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 2, 2009
|
|
|
1,498,294 |
|
|
$ |
24.28 |
|
6.8
|
|
$5.4
|
Expected
to Vest at January 2, 2009
|
|
|
1,425,373 |
|
|
$ |
24.30 |
|
6.8
|
|
$5.3
|
Exercisable
at January 2, 2009
|
|
|
1,068,582 |
|
|
$ |
25.09 |
|
6.1
|
|
$3.4
|
|
|
Number
of
performance-
vested
stock
options
|
|
|
Weighted
average
exercise
price
|
|
Weighted
average
remaining
contractual
life
|
|
Aggregate
intrinsic
value
|
|
|
|
|
|
|
|
(in
years)
|
|
(in
millions)
|
Outstanding
at December 30, 2005
|
|
|
185,810 |
|
|
$ |
23.60 |
|
|
|
|
Granted
|
|
|
183,648 |
|
|
|
22.38 |
|
|
|
|
Exercised
|
|
|
(7,266 |
) |
|
|
23.60 |
|
|
|
|
Forfeited
or Expired
|
|
|
(21,321 |
) |
|
|
22.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 29, 2006
|
|
|
340,871 |
|
|
|
22.98 |
|
|
|
|
Granted
|
|
|
146,231 |
|
|
|
29.65 |
|
|
|
|
Exercised
|
|
|
(2,635 |
) |
|
|
22.38 |
|
|
|
|
Forfeited
or Expired
|
|
|
(41,612 |
) |
|
|
24.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 28, 2007
|
|
|
442,855 |
|
|
|
25.08 |
|
|
|
|
Granted
|
|
|
417,888 |
|
|
|
21.88 |
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
Forfeited
or Expired
|
|
|
(62,179 |
) |
|
|
22.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 2, 2009
|
|
|
798,564 |
|
|
$ |
23.62 |
|
8.6
|
|
$2.9
|
Expected
to Vest at January 2, 2009
|
|
|
557,479 |
|
|
$ |
23.65 |
|
9.0
|
|
$2.1
|
Exercisable
at January 2, 2009
|
|
|
145,649 |
|
|
$ |
23.60 |
|
6.4
|
|
$0.5
|
The
following table provides certain information relating to the exercise of stock
options (in thousands):
|
|
Year
Ended
|
|
|
|
January
2,
|
|
|
December
28,
|
|
|
December
29,
|
|
|
|
2009
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic
value
|
|
$ |
974 |
|
|
$ |
1,338 |
|
|
$ |
2,120 |
|
Cash
received
|
|
|
2,210 |
|
|
|
2,699 |
|
|
|
2,082 |
|
Tax
benefit realized
|
|
|
313 |
|
|
|
292 |
|
|
|
236 |
|