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 December 29, 2006
Commission File Number 1-16137
GREATBATCH, INC.
(Exact name of Registrant as specified in its charter)
Delaware 16-1531026
(State of Incorporation) (I.R.S. Employer Identification No.)
9645 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:
Common Stock, Par Value $.001 Per Share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Exchange Act
Rule 12b-2).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 30, 2006, based on the last sale price of $23.60, as
reported on the New York Stock Exchange: $508.5 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 February 26, 2007: 22,113,022
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 Part
------------------------------------------------------ ------------------------------------------------------------------------
Proxy Statement for the 2007 Annual Meeting of Part III, Item 10
Stockholders "Directors, Executive Officers and Corporate Governance"
Part III, Item 11
"Executive Compensation"
Part III, Item 12
"Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters"
Part III, Item 13
"Certain Relationships and Related Transactions, and Director
Independence"
Part III, Item 14
"Principal Accounting Fees and Services"
TABLE OF CONTENTS
ITEM PAGE
NUMBER NUMBER
------ ------
PART I
1 Business.................................................................................................... 4
1A Risk Factors................................................................................................ 14
1B Unresolved Staff Comments................................................................................... 24
2 Properties.................................................................................................. 24
3 Legal Proceedings........................................................................................... 24
4 Submission of Matters to a Vote of Security Holders......................................................... 25
PART II
5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
25
6 Selected Financial Data..................................................................................... 27
7 Management's Discussion and Analysis of Financial Condition and Results of Operation........................ 28
7A Quantitative and Qualitative Disclosures About Market Risk.................................................. 50
8 Financial Statements and Supplementary Data................................................................. 50
9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........................ 89
9A Controls and Procedures..................................................................................... 90
9B Other Information........................................................................................... 90
PART III
10 Directors, Executive Officers and Corporate Governance...................................................... 90
11 Executive Compensation...................................................................................... 90
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.............. 91
13 Certain Relationships and Related Transactions, and Director Independence................................... 91
14 Principal Accounting Fees and Services...................................................................... 91
PART IV
15 Exhibits, Financial Statement Schedules..................................................................... 91
Signatures.................................................................................................. 96
3
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("IMDs") through our Implantable Medical Components ("IMC") business. We
offer technologically advanced, highly reliable and long lasting products and
services for IMDs and enable our customers to introduce IMDs that are
progressively smaller, longer lasting, more efficient and more functional. We
also leverage our core competencies in technology and manufacturing through our
Electrochem Commercial Power ("ECP") business to develop and produce cells and
battery packs for commercial applications that demand high performance and
reliability, including oil and gas exploration, pipeline inspection, telematics,
oceanographic equipment, seismic, communication, military and aerospace
applications. 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.
In 2005, we expanded our business into value-added assembly of products that
incorporate components. With this in mind, we designed and built a state of the
art manufacturing facility in Tijuana Mexico, incorporating two class 100,000
clean rooms, one class 10,000 clean room, 90,000 square feet of manufacturing
space, engineering, metrology and quality laboratories. This facility is led by
a management team with diverse medical device and contract manufacturing
backgrounds. We began operations at this facility in the 2nd quarter of 2005 and
in 2006 obtained ISO 13485 certification.
Our company, a Delaware corporation, was incorporated in 1997 and since that
time has completed the following acquisitions:
Acquisition date Acquired company Business at time of acquisition
---------------- ---------------- -------------------------------
July 10, 1997 Wilson Greatbatch Ltd. Founded in 1970, the company designed and manufactured
("WGL") batteries for IMDs and commercial applications including
oil and gas, aerospace, and oceanographic.
August 7, 1998 Hittman Materials and Founded in 1962, the company designed and manufactured
Medical Components, Inc. ceramic and glass feedthroughs and specialized porous
("Hittman") coatings for electrodes used in IMDs.
August 4, 2000 Battery Engineering, Inc. Founded in 1983, the company designed and manufactured
("BEI") high-energy density batteries for industrial, commercial,
military and medical applications.
4
Acquisition date Acquired company Business at time of acquisition
---------------- ---------------- -------------------------------
June 18, 2001 Sierra-KD Components Founded in 1986, the company designed and manufactured
division of Maxwell ceramic electromagnetic filtering capacitors and
Technologies, Inc. integrated them with wire feedthroughs for use in IMDs.
("Sierra") Sierra also designed and manufactured ceramic capacitors
for military, aerospace and commercial applications.
July 9, 2002 Globe Tool and Founded in 1954, the company designed and manufactured
Manufacturing Company, Inc. precision enclosures used in IMDs and commercial products
("Globe") used within the aerospace, electronic, and automotive
sectors.
March 16, 2004 NanoGram Devices Founded in 1996, the company developed nanoscale materials
Corporation ("NanoGram") for battery and medical device applications.
FINANCIAL STATEMENT YEAR END
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the
Friday nearest December 31st. Fiscal years 2006, 2005 and 2004 ended on December
29, December 30 and December 31, respectively.
SEGMENT INFORMATION
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 14 - Business Segment Information of
the Notes to the Consolidated Financial Statements contained at Item 8 of this
report.
IMPLANTABLE MEDICAL DEVICES
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 neurostimulation
("Neuro") market, which is comprised of pacemaker-type devices that stimulate
various nerves for the treatment of various conditions. Beyond pain control,
nerve stimulation for the treatment of movement disabilities such as Parkinson's
disease, epilepsy, migraines, obesity and depression has shown promising
results.
5
The following table sets forth the main categories of battery-powered IMDs and
the principal illness or symptom treated by each device:
Device Principal Illness or Symptom
------ ----------------------------
Pacemakers............................................. Abnormally slow heartbeat (Bradycardia)
ICDs................................................... Rapid and irregular heartbeat (Tachycardia)
CRT/CRT-Ds............................................. Congestive heart failure
Neurostimulators....................................... Chronic pain, movement disorders, epilepsy, obesity or
depression
Left ventricular assist devices (LVADs)................ Heart failure
Drug pumps............................................. Diabetes or chronic pain
We believe that the CRM and Neuro markets continue to exhibit strong underlying
growth fundamentals and that we are well positioned to participate in this
market growth. Increased demand is being driven by the following factors:
o Advances in medical technology - new therapies will allow physicians
to use IMDs to treat a wider range of heart diseases.
o New, more sophisticated implantable devices - device manufacturers are
developing new CRM devices and adding new features to existing
products.
o 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.
o Expansion of neurostimulator applications - therapies expected to
expand as new therapeutic applications for pulse generators are
identified.
o An aging population - the number of people in the United States that
are over age 65 is expected to double in the next 30 years.
o New indications for other devices - there is an increased use of
recently developed IMDs.
o New performance requirements - government regulators are increasingly
requiring that IMDs be protected from electro magnetic interference
("EMI").
o Global markets - increased market penetration worldwide.
COMMERCIAL BATTERY INDUSTRY
Commercial batteries are used in demanding applications such as oil and gas
exploration, pipeline inspection, telematics, oceanography equipment, seismic,
communication, military and aerospace. These applications use a variety of
battery-powered systems including measurement-while drilling tools, pipeline
inspection gauges, oceanography buoys, asset tracking devices, and hand-held
military communication equipment. Commercial batteries are used with these
systems because of extreme operating conditions. ECP commercial batteries are
capable of operating reliably and safely at extremely high and low temperatures,
as well as high shock and vibration.
The demand for commercial batteries is influenced by many factors. Oil and gas
exploration is expected to increase as oil companies attempt to satisfy the
escalating world demand for energy and natural gas. Pipeline inspection activity
is increasing due to legislation and increasing awareness of aging pipelines and
their impact on the economy and environment. More companies are likely to begin
tracking their assets as wireless tracking devices become more mature.
6
PRODUCTS
The following table provides information about our principal products:
IMPLANTABLE MEDICAL COMPONENTS:
-------------------------------
The following implantable medical products are used in IMDs unless otherwise
noted:
PRODUCT DESCRIPTION PRINCIPAL PRODUCT ATTRIBUTES
------- ----------- ----------------------------
Batteries Power sources include:
- Lithium iodine ("Li Iodine") High reliability and predictability
- Lithium silver vanadium oxide ("Li SVO") Long service life
- Lithium carbon monoflouride ("Li CFx") Customized configuration
- Lithium ion rechargeable ("Li Ion") Light weight
- Lithium SVO/CFx ("QHR" & "QMR") Compact and less intrusive
Capacitors Storage for energy generated by a Stores more energy per unit volume
battery before delivery to the heart. (energy density) than other existing
Used in ICDs and CRT-Ds. technologies
Customized configuration
EMI filters Filters electromagnetic interference to High reliability attenuation of EMI RF
limit undesirable response, over wide frequency ranges
malfunctioning or degradation in the Customized design
performance of electronic equipment
Feedthroughs Allow electrical signals to be brought Ceramic to metal seal is substantially
from inside hermetically sealed IMD to an more durable than traditional seals
electrode Multifunctional
Coated electrodes Deliver electric signal from the High quality coated surface
feedthrough to a body part undergoing Flexible in utilizing any combination
stimulation of biocompatible coating surfaces
Customized offering of surfaces and tips
Precision components - Machined High level of manufacturing precision
- Molded and over molded products Broad manufacturing flexibility
Enclosures and related - Titanium Precision manufacturing, flexibility in
components - Stainless steel configurations and materials.
Value-added assemblies Combination of multiple components in a Leveraging products and capabilities to
single package/unit provide subassemblies and assemblies
Provides synergies in component
technology and procurement systems
ELECTROCHEM COMMERCIAL POWER:
-----------------------------
The following commercial products are used in oil and gas exploration, military
and oceanographic equipment:
PRODUCT DESCRIPTION PRINCIPAL PRODUCT ATTRIBUTES
------- ----------- ----------------------------
Cells - Moderate-rate Optimized rate capability, shock and
vibration
- Spiral (high rate) High energy density
Battery packs Bundling of commercial batteries in a customer Increased power capabilities and ease
specific configuration of integration into customer
applications
7
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 at times engage outside research institutions for special projects.
In 2006, we announced a plan for consolidating our corporate and business unit
organization structure. This included an elimination of approximately 40
associates. A significant portion of the annual savings from these reductions is
planned to be reinvested into technology, sales and key corporate personnel.
This planned organization change will enable us to more aggressively invest in
our core product technologies and other business opportunities which will help
drive our future growth.
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patents, license, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
As of December 29, 2006, we had 329 active U.S. patents and 248 active foreign
patents. We also had 103 U.S. and 76 foreign pending patent applications at
various stages of approval. During the past three years, we have received 101
new U.S. patents, of which 37 were received in 2006. 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.
Our active battery patents relate to process improvements and design
modifications to the original technology that was developed either by our
Company or others. As part of our current technology strategy, we plan to expand
the purchased patents and licensed technology acquired with the NanoGram
acquisition through continued development of advanced cathode materials for our
implantable battery products lines. `Nano-SVO' cathode material is part of this
plan and is expected to become the standard technology broadly adopted by all
SVO battery applications.
We are also a party to several license agreements with third parties pursuant
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, which we license from another
Company. We have also granted rights in our own patents to others under license
agreements.
It is our policy to require our executive 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
our Company.
8
MANUFACTURING AND QUALITY CONTROL
We primarily manufacture small lot sizes, as most customer orders range from a
few hundred to thousands of 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 system is based upon an ISO documentation system and is driven by a
master validation plan that requires rigorous testing and validation of all new
processes or process changes that directly impact our products. Except for our
Tijuana Mexico facility, all of our existing manufacturing plants 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.
In 2006, our Tijuana, Mexico facility completed the ISO 13485 audit process and
received certification by the international standards organization. This gives
us the ability to serve as a manufacturing partner to medical device
manufacturers which we believe will improve our competitive position in both the
CRM and emerging neurostimulation market. We are currently working with several
neurostimulation 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 opportunities.
Our existing manufacturing plants are audited by the National Standards
Authority of Ireland, an independent auditing firm and notified body that
specializes in evaluating quality standards. To maintain certification, all
facilities must be reexamined routinely by this certifying body.
SALES AND MARKETING
Products from our IMC business are sold directly to our customers. In our ECP
business, we utilize a combination of direct and indirect sales methods,
depending on the particular product. In 2006, approximately 51% of our products
were sold in the United States. Sales to countries outside of the United States
are primarily to customers whose corporate offices are located and headquartered
in the United States. Information regarding our sales by geographic area is set
forth at Note 14 - 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 specific 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.
9
We sell our commercial cells and battery packs either 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 ECP products at various technical
trade meetings. We also place print advertisements in relevant trade
publications.
Firm backlog orders at December 31, 2006 and 2005 were approximately $76.6
million and $92.2 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 IMD manufacturers, in alphabetical order here
and throughout this report, such as Biotronik, Boston Scientific, Medtronic, the
Sorin Group and St. Jude Medical. In 2006, Boston Scientific, Medtronic and St.
Jude Medical collectively accounted for 67% of our total sales, compared to 70%
in 2005 and 2004. 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 continue to actively pursue our
corporate strategy to diversify our customer base and market concentration
through acquisitions. However, we are being extremely disciplined in our
approach to ensure that we find an acquisition that meets our financial targets
for growth and profitability.
Our ECP customers are primarily companies involved in oil and gas exploration,
pipeline inspection, telematics, oceanography equipment, seismic, communication,
military and aerospace applications including Halliburton Company, Weatherford
International, General Electric and PathFinder Energy Services.
We entered into an agreement with Boston Scientific in February 2005 pursuant to
which Boston Scientific will purchase a minimum quantity of filtered
feedthroughs at prices specified in the agreement. The period of the agreement
is February 10, 2005 to December 31, 2007. Our previously disclosed agreements
with Boston Scientific pursuant to which Boston Scientific purchased wet
tantalum capacitors and batteries have expired. We are negotiating a follow-on
agreement with targeted completion during the first quarter of 2007. Purchases
and shipments of wet tantalum capacitors and batteries continue during contract
negotiations.
We have a supply agreement with St. Jude Medical pursuant to which St. Jude
Medical purchases batteries, wet tantalum capacitors, filtered feedthroughs,
molded components and enclosures under specified price and volume terms. A
contract amendment effective January 1, 2005 extended the contract term to
December 31, 2008 and added QHR high rate, QMR medium rate, and Nano battery
technologies to the agreement. A contract amendment effective January 1, 2006
added molded header assemblies to the agreement. A contract amendment is
currently being negotiated to extend the contract term to December 31, 2013.
We have a supply agreement with Medtronic pursuant to which Medtronic will
purchase implantable device shield sub-assemblies and other products under
specified price and volume terms. The contract term is seven years, commencing
August 2, 2004 and ending August 2, 2011. In October 2005, we entered into a
license agreement which grants Medtronic the right to use certain of our
intellectual property relating to tantalum capacitors. The license is perpetual
and is exclusive to Medtronic, except for our right to make and sell tantalum
capacitors.
10
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, Medtronic, the Sorin Group
and St. Jude Medical 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 Eagle-Picher
packs Engineered Power
Saft
Tadiran
Tracer Technologies
Ultralife
Machined and molded Numerous
components
Value added assembly Numerous
11
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 involve the controlled use of, and our
products contain, 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 which 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 be subject to such environmental liabilities in the future
as a result of historic or current operations.
As a component manufacturer, our medical products are not subject to regulation
by the Food and Drug Administration ("FDA"). However, the FDA and related state
and foreign governmental agencies regulate many of our customers' products as
medical devices. In many cases, the FDA must approve those products prior to
commercialization. We believe that our existing medical manufacturing plants
comply with current Good Manufacturing Practices as applicable.
We have five "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 United States.
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.
12
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 December 29, 2006:
Manufacturing 1,158
General and administrative 91
Sales and marketing 21
Research and development 77
Engineering 51
Tijuana, Mexico facility 437
-----------
Total 1,835
===========
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. The positions at our Tijuana, Mexico
facility are primarily manufacturing in nature. We believe that we have a good
relationship with our employees.
AVAILABLE INFORMATION
We make available free of charge on or 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.
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.
13
They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and the IMD
industry;
o our ability to execute our business model and our business strategy;
o our ability to identify trends within the IMD, medical component, and
commercial power source industries and to offer products and services
that meet the changing needs of those markets;
o projected capital expenditures; and
o trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to successfully consummate and
integrate acquisitions, unsuccessful expansion into new markets, competition,
inability to obtain licenses to key technology, regulatory changes or
consolidation in the healthcare industry, and other risks and uncertainties that
arise from time to time and are described in the Company's periodic filings with
the Securities and Exchange Commission and in Item 1A of this report.
ITEM 1A. RISK FACTORS
Our business faces many risks. Any of the risks discussed below, or elsewhere in
this report or 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.
14
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.
A substantial portion of our business is conducted with a limited number of
customers, including Biotronik, Boston Scientific, Medtronic, the Sorin Group
and St. Jude Medical. In 2006, Boston Scientific, Medtronic and St. Jude Medical
collectively accounted for approximately 67% 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 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 pacemaker, ICD and CRT 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 revenues and operating results will be negatively affected.
15
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 pricing 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 raw materials.
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 December 29, 2006, we had $211.4 million of intangible assets, representing
39% of our total assets. These intangible assets consist primarily of goodwill,
trademarks, tradenames 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 $28.1 million of our net intangible
assets at December 29, 2006, will continue to be amortized. We incurred total
amortization expenses relating to these intangible assets of $3.8 million in
2006. These expenses will reduce our future earnings or increase our future
losses.
16
Quality problems with our products could harm our reputation for producing high
quality products, erode our competitive advantage and result in claims against
us.
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. Product quality or performance
issues may also result in product liability or other legal claims against us,
which could harm our operating results or financial condition.
Quality problems with our products could result in warranty claims and
additional costs.
We 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.
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.
17
We carry product liability insurance coverage that is limited in scope and
amount. We may not be able to maintain this insurance or to do so at a
reasonable cost or on reasonable terms. 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:
o the fixed nature of a substantial percentage of our costs, which
results in our operations being particularly sensitive to fluctuations
in revenue;
o 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;
o timing of orders placed by our principal customers who account for a
significant portion of our revenues; and
o 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 December 29, 2006, we held 329 active U.S. 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.
18
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 batteries and other components for IMDs, 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 power sources and other components for IMDs, 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. Infringement claims, even if not substantiated, could result in
significant legal and other costs and may be a distraction to management.
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.
19
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:
o inaccurate assessments of potential liabilities associated with the
acquired businesses;
o the existence of unknown and/or undisclosed liabilities associated
with the acquired businesses;
o diversion of our management's attention from our core businesses;
o potential loss of key employees or customers of the acquired
businesses;
o difficulties in integrating the operations and products of an acquired
business or in realizing projected revenue growth, efficiencies and
cost savings; and
o increases in our indebtedness and a limitation in our ability to
access additional capital when needed.
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 will 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.
20
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 cause our business to suffer. 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. We
may not be able to successfully manage expansion into new markets and products
and these efforts may harm our operating results. 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.
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. For example, the licensor could lose patent
protection for a number of reasons, including invalidity of the licensed patent.
21
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 49% of net
sales for the year ended December 29, 2006, and our Tijuana, Mexico operations
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:
o changes in foreign medical reimbursement programs and policies;
o changes in foreign regulatory requirements;
o local product preferences and product requirements;
o longer-term receivables than are typical in the U.S.;
o less protection of intellectual property in some countries outside of
the U.S.;
o trade protection measures and import and export licensing
requirements;
o work force instability;
o political and economic instability; and
o complex tax and cash management issues.
Our sales to countries outside of the U.S. are primarily to customers whose
corporate offices are located and headquartered in the U.S. All supply contracts
to customers outside the U.S. are denominated in U.S. dollars. We incur certain
expenses related to our Tijuana 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 if the volume of transactions denominated in
foreign currencies increases.
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.
22
Our business is subject to environmental regulations that could be costly for
our company 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.
Our healthcare 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 providers are
instituting, both in the U.S. and internationally, could reduce our revenues and
harm our operating results.
Our ECP 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 and, specifically, the exploration and production
expenditures of oil and gas companies, which comprise approximately 10% of
sales. 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 commercial products to suffer.
23
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our executive offices are located in Clarence, New York.
The following table sets forth information about all of our significant
facilities as of December 29, 2006:
Location Sq. Ft. Own/Lease Principal Use
-------- ------- --------- -------------
Alden, NY...................... 125,000 Own Medical battery and capacitor manufacturing
Clarence, NY................... 82,766 Own Research, development and engineering ("RD&E")
Clarence, NY................... 20,800 Own Machining and assembly of components
Clarence, NY................... 18,550 Lease Machining and assembly of components
Clarence, NY................... 45,306 Lease Executive offices and warehouse
Canton, MA..................... 32,000 Own Commercial battery manufacturing and RD&E
Columbia, MD................... 30,000 Lease Feedthrough and electrode manufacturing
Carson City, NV................ 23,840 Lease EMI filtering manufacturing
Minneapolis, MN................ 72,000 Own Enclosure manufacturing and engineering
Tijuana, Mexico................ 144,000 Lease Value-added assembly and EMI filtering manufacturing
We believe these facilities are suitable and adequate for our current business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal actions arising in the normal course of
business including actions brought by former employees who were terminated in
connection with our consolidation initiatives. 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.
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.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock trades on the New York Stock Exchange ("NYSE") under
the symbol "GB." The following table sets forth for the periods indicated the
high, low and closing sales prices per share for the common stock as reported on
the NYSE Composite Tape:
2005 High Low Close
---- ---- ----- -----
First Quarter $22.43 $15.76 $17.87
Second Quarter 25.19 17.30 24.01
Third Quarter 27.45 21.96 27.44
Fourth Quarter 30.40 24.03 26.01
2006
First Quarter $28.02 $20.49 $21.91
Second Quarter 24.92 19.10 23.60
Third Quarter 25.24 20.36 22.62
Fourth Quarter 27.78 21.40 26.92
As of February 26, 2007 there were 236 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
1,100 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.
During the fourth quarter of 2006, the Company repurchased 7,626 shares from
executives of the Company at an average cost of $26.92 per share to satisfy
minimum tax withholding requirements on vested restricted stock awards as
allowed under the Company's 2002 Restricted Stock Plan. The price of these
repurchases was based upon the closing market price of the Company's stock on
the date of vesting.
25
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information regarding the Company's equity
compensation plans as of December 29, 2006:
Number of securities to be
issued upon exercise of Weighted-average exercise
outstanding options, price of outstanding Number of securities remaining
warrants and rights or options, warrants and available for future issuance
upon vesting of shares rights; Weighted-average under equity compensation plans
granted under restricted share price of restricted (excluding securities reflected
Plan Category stock plan stock shares granted in column (a))
------------------------------- --------------------------- -------------------------- --------------------------------
( a ) ( b ) ( c )
Equity compensation plans
approved by security holders (1) 1,626,529 $ 24.27 478,189
Equity compensation plan approved
by security holders (2) 204,156 $ 23.32 334,745
Equity compensation plans not
approved by security holders - - -
------------------------ ------------------------
Total 1,830,685 $ 24.16 588,462
======================== ========================
(1) Consists of stock options that were issued under the Company's 1997 Stock
Option Plan, 1998 Stock Option Plan, Non-Employee Director Stock Incentive
Plan and the 2005 Stock Incentive Plan.
(2) Consists of shares of restricted stock granted pursuant to the Company's
2002 Restricted Stock Plan and 2005 Stock Incentive Plan.
PERFORMANCE GRAPH
The following graph compares for the five year period ended December 29, 2006,
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 December 29, 2001 and
assumes reinvestment of dividends. The stock price performance shown on the
following graph is not necessarily indicative of future price performance:
12/29/01 1/03/03 1/02/04 12/31/04 12/30/05 12/29/06
Greatbatch, Inc. 100 79 117 61 71 74
Hemscott Peer Group Index 100 91 118 138 148 150
S&P SmallCap 600 Index 100 85 118 145 156 180
[SEE SUPPLEMENTAL PDF]
26
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected financial data of our Company for the
periods indicated. You should read this data along with Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
Item 8, "Financial Statements and Supplementary Data" appearing elsewhere in
this report. The consolidated statement of operations data and the consolidated
balance sheet data for the fiscal years indicated have been derived from our
consolidated financial statements and related notes.
Dec. 29, Dec. 30, Dec. 31, Jan. 2, Jan. 3,
Years ended 2006 2005 2004 (2) 2004 2003 (1)
-----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
------------------------------------------
Sales $271,142 $241,097 $200,119 $216,365 $167,296
Income before income taxes $ 23,534 (4)(5) $ 15,464 (4) $ 23,732 $ 33,316 $ 20,965
Income per share
Basic $ 0.74 $ 0.47 $ 0.67 $ 1.10 $ 0.69
Diluted $ 0.73 (3) $ 0.46 (3) $ 0.66 (3) $ 1.05 (3) $ 0.68
------------------------------------------------------------- ------------- ------------- ------------- -------------
Consolidated Balance Sheet Data:
--------------------------------
Working capital $199,051 $151,958 $132,360 $170,455 $ 40,204
Total assets $547,827 $512,911 $476,166 $438,243 $312,251
Long-term obligations $205,859 $200,261 $193,948 $178,994 $ 77,040
(1) In July 2002, we acquired the capital stock of Globe. These amounts
include the results of operations of Globe subsequent to its
acquisition.
(2) In March 2004, we acquired the capital stock of NanoGram. These amounts
include the results of operations of NanoGram subsequent to its
acquisition.
(3) We adopted Emerging Issues Task Force (EITF) Issue 04-08, The Effect of
Contingently Convertible Instruments on Diluted Earnings Per Share, in
the fourth quarter of 2004. Under EITF 04-08, we must include the effect
of the conversion of our convertible subordinated notes in the
calculation of diluted earnings per share using the if-converted method
as long as the effect is dilutive. There was no impact on diluted
earnings per share for 2006, 2005 and 2004. The impact on 2003 was a
$0.03 reduction in earnings per share from $1.08 to $1.05. Diluted
earnings per share for 2003 are restated to reflect the adoption of EITF
04-08.
(4) During 2006 and 2005, we recorded charges in other operating expenses
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.
(5) 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. Compensation costs related to
share-based payments for 2006 totaled $6.4 million, $4.4 million net of
tax, or $0.17 per diluted share. The incremental cost of expensing stock
options under SFAS No. 123(R) for 2006 was $4.5 million, $3.1 million
net of tax or $0.12 per diluted share.
27
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.
INDEX
Our Business
------------
o Our business
o Our customers
o Our CEO's view
Cost Savings and Consolidation Efforts
--------------------------------------
o Severance
o Alden facility consolidation
o Carson City facility shutdown & Tijuana facility consolidation
No. 1
o Columbia facility and ARL shutdown, Tijuana facility
consolidation No. 2 and RD&E consolidation
Our Critical Accounting Estimates
---------------------------------
o Inventories
o Goodwill and other indefinite lived intangible assets
o Stock-based compensation
o Long-lived assets
o Provision for income taxes
Our Financial Results
---------------------
o Results of operations table
o Fiscal 2006 compared to fiscal 2005
o Fiscal 2005 compared to fiscal 2004
o Liquidity and capital resources
o Off-balance sheet arrangements
o Litigation
o Contractual obligations
o Inflation
o Impact of recently issued accounting standards
Our Business
------------
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("IMDs") through our Implantable Medical Components ("IMC") segment. We
offer technologically advanced, highly reliable and long lasting products for
IMDs and enable our customers to introduce IMDs that are progressively smaller,
longer lasting, more efficient and more functional. Additionally, in 2005, we
expanded our business into value-added assembly of products that incorporate
these components. With this in mind, we designed and built a state of the art
manufacturing facility in Tijuana Mexico, incorporating two class 100,000 clean
rooms, one class 10,000 clean room, 90,000 square feet of manufacturing space,
engineering, metrology and quality laboratories. This facility is led by a
management team with diverse medical device and contract manufacturing
backgrounds. We also leverage our core competencies in technology and
manufacturing through our Electrochem Commercial Power ("ECP") segment to
develop and produce cells and battery packs for commercial applications that
demand high performance and reliability, including oil and gas exploration,
pipeline inspection, telematics, oceanographic equipment, seismic,
communication, military and aerospace applications.
28
Most of the IMC products that we sell are utilized by customers in cardiac
rhythm management ("CRM") devices. The CRM market comprises devices utilizing
high-rate batteries and capacitors such as implantable cardioverter
defibrillators ("ICDs") and cardiac resynchronization therapy with backup
defibrillation devices ("CRT-D") and devices utilizing low or medium rate
batteries but no capacitors (pacemakers and CRTs). All CRM devices utilize other
components such as enclosures and feedthroughs, and certain CRM devices utilize
electromagnetic interference ("EMI") filtering technology.
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. Our medical customers include leading IMD manufacturers such as
Biotronik, Boston Scientific, Medtronic, the Sorin Group and St. Jude Medical. A
substantial part of our business is conducted with a limited number of
customers. In 2006, Boston Scientific, Medtronic and St. Jude Medical
collectively accounted for approximately 67% of our total sales, compared to 70%
in 2005 and 2004. The nature and extent of our selling relationships with each
CRM 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 entered into an agreement with Boston Scientific in February 2005 pursuant to
which Boston Scientific will purchase a minimum quantity of filtered
feedthroughs at prices specified in the agreement. The period of the agreement
is February 10, 2005 to December 31, 2007. Our previously disclosed agreements
with Boston Scientific pursuant to which Boston Scientific purchased wet
tantalum capacitors and batteries have expired. We are negotiating a follow-on
agreement with targeted completion during the first quarter of 2007. Purchases
and shipments of wet tantalum capacitors and batteries continue during contract
negotiations.
Our ECP customers are primarily companies involved in oil and gas exploration,
pipeline inspection, telematics, oceanographic equipment, seismic,
communication, military and aerospace applications. We have entered into
long-term supply agreements with some of our customers. For each of our
products, we recognize revenue when the products are shipped and title passes.
Our CEO's View
--------------
2006 was another successful year for our Company. We experienced double-digit
sales growth and achieved all of our financial goals--despite a down year in the
ICD medical market and while realigning our management, business unit and
manufacturing operations.
29
All of this was accomplished by maintaining our focus on producing the highest
quality and most reliable products on the market. Additionally, we progressed
our customer commitment and technological innovation to a new level. By
continuing to implement our strategic plan, which includes both efficiency
improvements and organic growth, in 2006 we drove sales growth and positioned
ourselves for even more success ahead.
In 2006, overall sales were up 12% and net income increased 60% from the prior
year. Specifically, our IMC sales were up 9%, primarily due to strong sales of
new assembly products and continued growth in feedthrough, coated electrodes and
molded components. In the commercial market, our ECP sales increased by 32% from
the prior year. Several factors contributed to this growth including investment
in sales and marketing, expansion into new emerging markets such as telematics,
and investment in engineering.
During 2006 we also facilitated a transition in our management team, which
included my appointment to Chief Executive Officer. In each of their respective
roles, our management team has been finding new ways to proactively invest in
competitive advantages for our customers. We are making significant advances in
technological progress and service to our customers, and continually re-proving
our distinctive value proposition. The diversity, flexibility and experience of
our management team will be leveraged as the Company continues to grow.
In 2006, we exploited our technical development expertise to deliver new,
innovative products into the market. For example, we believe our new "Q" battery
series is the most powerful and versatile high-rate implantable battery
portfolio to hit the cardiac rhythm management (CRM) market in many years--and
for many years ahead. I am pleased to report that we have already begun
manufacturing our Q battery series to customer specifications.
The ECP business unit significantly ramped up the manufacture of specialized
cells and battery packs to meet customer demand in 2006. The performance, long
life and high reliability of Electrochem products make them ideally suited for
extreme applications. We expect to continue to optimize and expand our ECP
business. A long-term facility expansion program is currently underway, which
should enable us to continue delivering the outstanding products and service
that our customers have come to expect from Electrochem.
Over the past year, we also continued to build our presence in emerging markets,
including components of neuromodulation devices that deliver a wide range of
neurostimulation and drug-delivery therapies, MRI-safe solutions that may
revolutionize patient screening options, and to enable value-added features and
functionalities.
In operations, we've made substantial progress in our second of three years of
integration and realignment activity that we believe will ultimately permit us
to realize our expected annual savings of $10 million per year. We intend to
invest these savings in additional R&D staff and proprietary technologies, and
to pursue and integrate new, complementary businesses and markets.
We launched the move of our manufacturing operations from our Columbia, Maryland
facility to our new state-of-the-art facility in Tijuana, Mexico. The final
closure of our Carson City, Nevada facility was delayed to accommodate a pending
customer regulatory approval.
30
In the meantime, our Tijuana, Mexico medical development and manufacturing
facility has attained ISO 13485 certification, the internationally recognized
quality standard. Both the Alden and Tijuana facilities are designed
specifically to offer our customers' world-class medical device manufacturing
and assembly, and thus moving us further up our customers' supply-chain.
At the close of 2006, we retained an independent firm to conduct a corporate
customer satisfaction survey and heard from 30 of our accounts. Greatbatch
product quality, performance, and reliability were rated very high. Because of
the critical nature of customer product applications, we are pleased to know
that our contributions are so strong. The value of our technology-enabling
designs and custom-engineering capabilities were also rated very high. We remain
fully dedicated to ongoing partnerships that produce custom device solutions,
from individual components to tailored assembly and sub-assembly.
This survey also noted areas for improvement in our customer service. While our
first priority is always to maintain product excellence, we do need to make it
easier for customers to do business with us. We already have begun to take
action to simplify points of contact, streamline our quotation process, and
identify ways to speed design and development without sacrificing quality.
Our goal is to deliver the highest-quality, most-reliable products in the
market, in an efficient, customer-focused manner. With the majority of surveyed
customers indicating they are satisfied with us, we believe we are well on our
way to achieving nearly 100% customer satisfaction.
As I look ahead to 2007, our major focus will continue to be directed to the
following objectives:
1. Completion of the plant consolidation initiatives at Carson City and
Columbia and to exit 2007 with a cumulative annual savings run rate of $10
million;
2. Execute our ECP plant expansion plan;
3. Streamline, optimize and expand current product offerings, operations and
business processes;
4. Introduce next generation implantable batteries, capacitors and coatings;
5. Expand our rechargeable battery portfolio in both medical and commercial
markets;
6. Further penetrate the neurostimulation market;
7. Develop components that enable patients to receive MRI scans without
complications; and
8. Maintain an active business development pipeline and evaluate and pursue
compelling new business opportunities.
We have an ambitious strategic agenda for 2007. I believe the leadership team is
in place that will enable the Company to achieve these objectives.
Cost Savings and Consolidation Efforts
--------------------------------------
During 2006 and 2005, we recorded charges in other operating expenses 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 at Item 8 of this report.
Severance. During the fourth quarter of 2006, we implemented a plan for
consolidating our corporate and business unit organization structure. As a
result, severance charges of $2.5 million were recorded in the fourth quarter of
2006. Expense of $1.5 million was recorded in our IMC segment, $0.03 million in
the ECP segment and $1.0 million was recorded in unallocated operating expenses.
Accrued severance related to this consolidation plan was $1.8 million as of
December 29, 2006.
31
During the first quarter of 2005, we implemented a 4% workforce reduction as a
continuation of cost containment efforts initiated mid-year 2004. As a result,
severance charges of $1.5 million were recorded and paid in 2005. Expense of
$0.9 million was recorded in our IMC segment, $0.2 million in our ECP segment
and $0.4 million was recorded in unallocated operating expenses.
Alden Facility Consolidation. 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 the
capacitor research, development and engineering operations from our Cheektowaga,
NY facility into our Technology Center in Clarence, NY.
The total expense for these consolidation efforts was $3.4 million, which was
below our original estimate of $3.5 million to $4.0 million. The expenses for
the Alden Facility consolidation are included in the IMC business segment. Of
these, $2.6 million were paid in cash and $0.8 million were for assets
written-off.
Carson City Facility Shutdown and Tijuana Facility Consolidation No. 1. On March
7, 2005, we announced our intent to close our Carson City, NV facility ("Carson
City facility") and consolidate the work performed at that facility into our
Tijuana, Mexico facility ("Tijuana facility consolidation No. 1").
We have delayed the anticipated final closing of the Carson City Facility until
the second quarter of 2007 in order to accommodate a customer's pending
regulatory approval. If this regulatory approval is delayed further, additional
costs could be incurred. The total revised estimate for this plan is anticipated
to be between $7.4 million and $7.6 million, of which $7.2 million has been
incurred through December 29, 2006. All categories of costs are considered to be
cash expenditures, except for $0.6 million of accelerated depreciation.
Once the moves are completed, we anticipate annual cost savings in the range of
$2.5 million to $3.1 million. The expenses for our Carson City Facility shutdown
and the Tijuana Facility consolidation No. 1 are included in our IMC business
segment.
Columbia Facility & ARL Shutdown, Tijuana Facility Consolidation No. 2, and RD&E
Consolidation. On November 16, 2005, we announced our intent to close both our
Columbia, MD facility ("Columbia facility") and our Fremont, CA Advanced
Research Laboratory ("ARL"). The manufacturing operations at our Columbia
facility will be moved into our Tijuana facility ("Tijuana facility
consolidation No. 2"). The research, development and engineering ("RD&E") and
product development functions at the Columbia facility and at ARL will be
relocated to our Technology Center in Clarence, NY.
The total estimated cost for this facility consolidation plan is anticipated to
be between $7.9 million and $8.3 million of which $6.3 million has been incurred
through December 29, 2006. The ARL move and closure portion of this
consolidation project is complete. We expect to incur and pay the remaining
costs of the consolidation project over the next two fiscal quarters through
June 2007. All categories of costs are considered to be cash expenditures,
except for $0.5 million of accelerated depreciation and asset write-offs. Once
the moves are completed, the Company anticipates annual cost savings in the
range of $5.0 million to $6.0 million. The expenses for the Columbia Facility
and ARL shutdowns, the Tijuana Facility consolidation No. 2 and the RD&E
consolidation are included in the IMC business segment.
32
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:
o It requires assumptions to be made that were uncertain at the time the
estimate was made; and
o 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 Effect of Variations of Key Assumptions
Critical Estimate Item Assumptions / Approach Used Used
--------------------------------------- ------------------------------------------------- ------------------------------------------
Goodwill and other indefinite lived We perform an annual review on the last day We make certain estimates and assumptions
intangible assets of each fiscal year, or more frequently if that affect the determination of the
indicators of potential impairment exist, to expected future cash flows from our
Goodwill is initially recorded when determine if the recorded goodwill and other reporting units. These estimates and
the purchase price paid for an indefinite lived intangible assets are assumptions include sales growth, cost of
acquisition exceeds the estimated impaired. We assess goodwill for impairment by capital, and other key projections of
fair value of the net identified comparing the fair value of our reporting units future cash flows. Significant changes in
tangible and intangible assets to their carrying value to determine if there these estimates and assumptions could
acquired. Other indefinite lived is potential impairment. If the fair value of create future impairment losses in our
intangible assets such as trademarks a reporting unit is less than its carrying reporting units.
and tradenames are considered value, an impairment loss is recorded to the
non-amortizing intangible assets as extent that the implied fair value of the For indefinite lived assets such as
they are expected to generate cash goodwill within the reporting unit is less than trademarks and tradenames, we make certain
flows indefinitely. These assets are its carrying value. Fair values for goodwill estimates of revenue streams, royalty
subject to estimation risks related are determined based primarily on discounted rates and other future benefits accruing
to the purchase price allocation cash flows, however where appropriate, market to us. Significant changes in these
conducted at acquisition. multiples or appraised values are also used. estimates could create future impairments
Indefinite lived intangible assets such as of these indefinite lived intangible
trademarks and tradenames are evaluated for assets.
impairment by using the income approach. This
method is used to estimate the value of
intangibles by considering the present worth of
the stream of future benefits accruing to the
owner of these assets. These future benefits
are quantified by assuming a "Relief from
Royalty." The concept underlying this method
is that the user realizes an enhanced earnings
capacity from ownership of the intangible asset
equal to the royalty they would have to pay a
third party for use of the name.
--------------------------------------- ------------------------------------------------- ------------------------------------------
33
--------------------------------------- ------------------------------------------------- ------------------------------------------
Balance Sheet Caption / Nature of Effect of Variations of Key Assumptions
Critical Estimate Item Assumptions / Approach Used Used
--------------------------------------- ------------------------------------------------- ------------------------------------------
Stock-based compensation We utilize the Black-Scholes Options Pricing Option pricing models were developed for
Model to determine the fair value of stock use in estimating the value of traded
Prior to fiscal year 2006, we options under SFAS No. 123(R), consistent with options that have no vesting restrictions
accounted for stock options following that used for pro forma disclosures in prior and are fully transferable. Because our
the requirements of Accounting years. We are required to make certain share-based payments have characteristics
Principles Board Opinion No. 25, assumptions with respect to selected model significantly different from those of
Accounting for Stock Issued to inputs, including anticipated changes in the freely traded options, and because changes
Employees, and related underlying stock price (i.e., expected in the subjective input assumptions can
interpretations, which did not volatility) and option exercise activity (i.e., materially affect our estimates of fair
require us to record compensation expected life). Expected volatility is based values, existing valuation models may not
expense for fixed stock options if on the historical volatility of our stock over provide reliable measures of the fair
the exercise price of the option the most recent period commensurate with the values of our share-based compensation.
equaled or exceeded the fair market estimated expected life of the stock options. Consequently, there is a risk that our
value of our stock at the grant date. The expected life of options granted, which estimates of the fair values of our
For restricted stock awards, the fair represents the period of time that the options share-based compensation awards may bear
market value of the award was are expected to be outstanding, is based, little resemblance to the actual values
recorded to compensation expense on a primarily, on historical data. The expected realized upon the exercise, expiration or
straight-line basis over the vesting dividend yield is based on our history and forfeiture of those share-based payments
period. expectation of dividend payouts. The risk-free in the future. Stock options may expire
rate is based on the U.S. Treasury yield curve worthless or otherwise result in zero
Beginning in fiscal year 2006, we in effect at the time of grant for a period intrinsic value as compared to the fair
adopted Financial Accounting commensurate with the estimated expected life. values originally estimated on the grant
Standards Board Statement of date and reported in our condensed
Financial Accounting Standards No. For restricted stock awards, the fair market consolidated financial statements.
123 (revised 2004), Share-Based value of the award is determined based upon the Alternatively, value may be realized from
Payment ("SFAS No. 123(R)"), and closing value of our stock price on the grant these instruments that is significantly in
related Securities and Exchange date. excess of the fair values originally
Commission rules included in Staff estimated on the grant date and reported
Accounting Bulletin No. 107. Under Compensation cost for performance-based stock in our condensed consolidated financial
SFAS No. 123(R) we are now required options and restricted stock units is statements. There are significant
to record compensation costs related reassessed each period and recognized based differences among valuation models. This
to all stock-based awards. upon the probability that the performance may result in a lack of comparability with
targets will be achieved. That assessment is other companies that use different models,
Compensation cost for service-based based upon our actual and expected future methods and assumptions. There is also a
stock options and restricted stock performance as well as that of the individuals possibility that we will adopt a different
awards is recognized ratably over the who have been granted performance-based awards. valuation model in the future. This may
applicable vesting period. result in a lack of consistency in future
Compensation cost for Stock-based compensation expense is only periods and may materially affect the fair
performance-based stock options and recorded for those awards that are expected to value estimate of share-based payments.
restricted stock units is reassessed vest. Forfeiture estimates for determining
each period and recognized based upon appropriate stock-based compensation expense There is a high degree of subjectivity
the probability that the performance are estimated at the time of grant based on involved in selecting fair value and
targets will be achieved. historical experience and demographic forfeiture assumptions. If factors change
characteristics. Revisions are made to and result in different assumptions in the
those estimates in subsequent periods if application of SFAS No. 123(R) in future
actual forfeitures differ from estimated periods, the expense that we record for
forfeitures. 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 theamount of
stock-based compensation expense
recognized.
--------------------------------------- ------------------------------------------------- ------------------------------------------
34
--------------------------------------- ------------------------------------------------- ------------------------------------------
Balance Sheet Caption / Nature of Effect of Variations of Key Assumptions
Critical Estimate Item Assumptions / Approach Used Used
--------------------------------------- ------------------------------------------------- ------------------------------------------
Inventories Inventory standard costing requires complex Variations in methods or assumptions could
calculations that include assumptions for have a material impact on our results. If
Inventories are stated at the lower overhead absorption, scrap, sample our demand forecast for specific products
of cost, determined using the calculations, manufacturing yield estimates and is greater than actual demand and we fail
first-in, first-out method, or the determination of which costs are to reduce manufacturing output
market. capitalizable. The valuation of inventory accordingly, we could be required to
requires us to estimate obsolete or excess record additional inventory reserves,
inventory as well as inventory that is not of which would have a negative impact on our
saleable quality. net income.
--------------------------------------- ------------------------------------------------- ------------------------------------------
Long-lived assets We assess the impairment of long-lived assets Estimation of the useful lives of assets
when events or changes in circumstances that are long-lived requires significant
Property, plant and equipment, indicate that the carrying value of the assets management judgment. Events could occur,
definite-lived intangible assets, and may not be recoverable. Factors that we including changes in cash flow that would
other long-lived assets are carried consider in deciding when to perform an materially affect our estimates and
at cost. This cost is charged to impairment review include significant assumptions related to depreciation.
depreciation or amortization expense under-performance of a business or product line Unforeseen changes in operations or
over the estimated life of the in relation to expectations, significant technology could substantially alter the
operating assets primarily using negative industry or economic trends, and assumptions regarding the ability to
straight-line rates. Long-lived significant changes or planned changes in our realize the return of our investment in
assets acquired through acquisition use of the assets. Recoverability potential is operating assets and therefore the amount
are subject to the estimation risks measured by comparing the carrying amount of of depreciation expense to charge against
related to the initial purchase price the asset group to the related total future both current and future sales. Also, as
allocation and the on-going undiscounted cash flows. If an asset group's we make manufacturing process conversions
impairment assessment. Long-lived carrying value is not recoverable through and other factory planning decisions, we
assets acquired in the ordinary related cash flows, the asset group is must make subjective judgments regarding
course of business are also subject considered to be impaired. Impairment is the remaining useful lives of our assets,
to impairment assessment. measured by comparing the asset group's primarily manufacturing equipment and
carrying amount to its fair value, based on the building improvements.
best information available, including market
prices or discounted cash flow analyses. 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.
--------------------------------------- ------------------------------------------------- ------------------------------------------
35
--------------------------------------- ------------------------------------------------- ------------------------------------------
Balance Sheet Caption / Nature of Effect of Variations of Key Assumptions
Critical Estimate Item Assumptions / Approach Used Used
--------------------------------------- ------------------------------------------------- ------------------------------------------
Provision for income taxes In relation to recording the provision for Changes could occur that would materially
income taxes, management must estimate the affect our estimates and assumptions
In accordance with the liability future tax rates applicable to the reversal of regarding deferred taxes. Changes in
method of accounting for income taxes temporary differences, make certain assumptions current tax laws and tax rates could
specified in Statement of Financial regarding whether book/tax differences are affect the valuation of deferred tax
Accounting Standards No. 109, permanent or temporary and if temporary, the assets and liabilities, thereby changing
Accounting for Income Taxes, the related timing of expected reversal. Also, the income tax provision. Also,
provision for income taxes is the sum estimates are made as to whether taxable significant declines in taxable income
of income taxes both currently operating income in future periods will be could materially impact the realizable
payable and deferred. The changes in sufficient to fully recognize any gross value of deferred tax assets. At December
deferred tax assets and liabilities deferred tax assets. If recovery is not 29, 2006, we had $13.6 million of deferred
are determined based upon the changes likely, we must increase our provision for tax assets on our balance sheet and a
in differences between the bases of taxes by recording a valuation allowance valuation allowance of $4.3 million
assets and liabilities for financial against the deferred tax assets that we against potential non-utilizable deferred
reporting purposes and the tax bases estimate will not ultimately be recoverable. tax assets. A 1% increase in the
of assets and liabilities as measured Alternatively, we may make estimates about the effective tax rate would increase the
by the enacted tax rates that potential usage of deferred tax assets that current year provision by $0.3 million,
management estimates will be in decrease our valuation allowances. reducing fully diluted earnings per share
effect when the differences reverse. by $0.01 based on shares outstanding at
The calculation of our tax liabilities involves December 29, 2006.
Beginning in 2007, we adopted dealing with uncertainties in the application
Financial Accounting Standards Board of complex tax regulations. We recognize
Interpretation No. 48, Accounting for liabilities for anticipated tax audit issues in
Uncertainty in Income Taxes--an the U.S. and other tax jurisdictions based on
interpretation of FASB Statement our estimate of whether, and the extent to
No. 109, to assess and record income which, additional income taxes will be due. If
tax uncertainties. The adoption of we ultimately determine that payment of these
this interpretation did not have a amounts is unnecessary, we reverse the
material impact on our financial liability and recognize a tax benefit during
statements. the period in which we determine that the
liability is no longer necessary. We
record an additional charge in our
provision for income taxes in the period
in which we determine that the recorded
tax liability under the criteria
established by Statement of Financial
Accounting Standard No. 5, Accounting
for Contingencies is less than we expect
the ultimate assessment to be.
--------------------------------------- ------------------------------------------------- ------------------------------------------
36
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 2006, 2005
and 2004 ended on December 29, December 30 and December 31, respectively.
Results of Operations Table
Year ended
---------------------------- 2006-2005 2005-2004
Dec. 29, Dec. 30, Dec. 31, --------------------- ---------------------
Dollars in thousands, except per share data 2006 2005 2004 $ Change % Change $ Change % Change
---------------------------------------------------------------------------- --------------------- ---------------------
IMC
ICD batteries $ 45,140 $ 45,803 $ 35,742 $ (663) -1% $ 10,061 28%
Pacemaker and other batteries 21,090 21,708 19,434 (618) -3% 2,274 12%
ICD capacitors 16,780 20,709 21,981 (3,929) -19% (1,272) -6%
Feedthroughs 64,578 59,210 47,387 5,368 9% 11,823 25%
Enclosures 23,904 23,866 21,709 38 0% 2,157 10%
Other 55,915 36,618 26,402 19,297 53% 10,216 39%
----------------------------- -------------------------------------------
Total IMC 227,407 207,914 172,655 19,493 9% 35,259 20%
ECP 43,735 33,183 27,464 10,552 32% 5,719 21%
----------------------------- -------------------------------------------
Total sales 271,142 241,097 200,119 30,045 12% 40,978 20%
Cost of sales - excluding amortization of
intangible assets 164,885 151,543 119,397 13,342 9% 32,146 27%
Cost of sales - amortization of intangible
assets 3,813 3,841 4,002 (28) -1% (161) -4%
----------------------------- -------------------------------------------
Total cost of sales 168,698 155,384 123,399 13,314 9% 31,985 26%
Cost of sales as a % of sales 62.2% 64.4% 61.7% -2.2% 2.7%
Selling, general, and administrative expenses 38,785 31,528 26,719 7,257 23% 4,809 18%
SG&A as a % of sales 14.3% 13.1% 13.4% 1.2% -0.3%
Research, development and engineering costs,
net 24,225 18,725 18,476 5,500 29% 249 1%
RD&E as a % of sales 8.9% 7.8% 9.2% 1.1% -1.4%
Other operating expense 17,058 18,574 4,585 (1,516) -8% 13,989 305%
----------------------------- -------------------------------------------
Operating income 22,376 16,886 26,940 5,490 33% (10,054) -37%
Operating margin 8.3% 7.0% 13.5% 1.3% -6.5%
Interest expense 4,605 4,613 4,535 (8) 0% 78 2%
Interest income (5,775) (3,113) (1,235) (2,662) 86% (1,878) 152%
Other (income) expense, net 12 (78) (92) 90 -115% 14 -15%
Provision for income taxes 7,408 5,357 9,514 2,051 38% (4,157) -44%
Effective tax rate 31.5% 34.6% 40.1% -3.1% -5.5%
----------------------------- -------------------------------------------
Net income $ 16,126 $ 10,107 $ 14,218 $ 6,019 60% $ (4,111) -29%
============================= ===========================================
Net margin 5.9% 4.2% 7.1% 1.7% -2.9%
Diluted earnings per share $ 0.73 $ 0.46 $ 0.66 $ 0.27 59% $ (0.20) -30%
37
Fiscal 2006 Compared with Fiscal 2005
Sales
We achieved sales growth of 12% in 2006 compared to 2005. This growth was
accomplished during a period in which the underlying CRM market, which
represents over 80% of our total sales, was in decline. This growth is even more
favorable considering that 2005 results include the favorable benefit of
approximately $10.0 million to $15.0 million in ICD marketplace field actions.
Another sales highlight for 2006 was our ECP business, which grew 32% through a
combination of increased market penetration, new product introductions and
greater value-added pack assembly.
IMC. The nature and extent of our selling relationship with each CRM customer is
different in terms of component 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 CRM device manufacturers changes periodically.
Consequently, these and other factors can significantly impact our sales in any
given period.
We achieved year-over-year growth of 9% from our medical business. This growth
was accomplished despite the underlying CRM market being down compared to the
prior year and an approximate 2% reduction in selling prices. Assembly products,
feedthroughs, coated electrodes and machined components were the primary growth
drivers. The assembly business was a new opportunity that was launched in the
second half of 2005. Growth in feedthroughs, coated products and machined
components represents market share penetration with both our domestic and
international customers. We believe these products will continue to represent a
near term growth opportunity for the Company as we continue to penetrate the
market and bring new technology to our customers.
Our ICD battery product line declined by 1% during 2006, commensurate with the
market and the market share shifts amongst our customers. The decline in sales
was primarily due to lower volume with U.S. based customers and the approximate
2% reduction in selling prices, partially offset by strong European customer
sales. This growth represents increased adoption of our high rate battery
technology. We expect pricing pressure from our larger customers to continue in
the future.
The capacitor business also experienced a decline in sales. Capacitor sales
declined by $4 million or 19%, primarily attributable to the actions taken by a
single customer in late 2005 to further vertically integrate its operations. We
believe the impact on our financial results of this customer's actions
stabilized in 2006. The capacitor product line represents a significant growth
opportunity and we continue to invest in advancing our technology to best
position our product in the marketplace.
ECP. 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.
38
ECP sales grew by 32% in 2006 through a combination of increased market
penetration, new product introductions and greater value-added pack assembly.
The oil and gas exploration market remains robust due to the increased demand
for products used in pipeline inspections, pressure monitoring and measurement
while drilling applications. In addition, our presence in the emerging
telematics market has provided incremental sales opportunities.
2007 Sales Outlook
We expect both IMC and ECP sales to increase by approximately 10% next year,
resulting in a full year sales range of $295 million to $305 million. We have
assumed an underlying medical market growth rate of 5% for next year. The
forecasted increase of 10% or nearly twice the growth of the underlying market
reflects our confidence that we will continue to increase our market share with
our existing customer base and penetrate new customer opportunities.
Cost of Sales
Changes from the prior year to cost of sales as a percentage of sales were
primarily due to the following:
Year Ended
December 29,
2006
----
Production efficiencies primarily associated with
higher volumes (a) -6.5%
Excess capacity at wet tantalum capacitor facility (b) -0.8%
Excess capacity at Tijuana, Mexico facility (c) 0.4%
Mix change (d) 4.2%
Other 0.5%
----
Total percentage point change to cost of sales as a
percentage of sales -2.2%
=====
a. This decrease in cost of sales was primarily due to the fact that as
production volumes increase, fixed costs such as plant overhead and
depreciation do not increase at the same rate. The production volume
increase was necessary to accommodate the increased sales and to replenish
safety stocks.
b. During 2005, the capacitor facility was not being utilized to its full
capacity. The cost associated with the excess capacity was eliminated in
2006 as capacitor manufacturing was consolidated into the Alden Facility.
In accordance with our inventory accounting policy, excess capacity costs
were expensed in 2005.
c. The Tijuana, Mexico facility was new in 2005 and its infrastructure and
floor space were coming on line during 2005 and therefore the full cost of
the capacity was not in place. In 2006, the Tijuana facility was on-line
for the entire year and excess capacity costs in 2006 exceeded those in
2005. In accordance with our inventory accounting policy, excess capacity
costs were expensed.
d. The revenue increase from 2005 was primarily in other IMC sales, which
generally have lower margins.
We expect cost of sales as a percentage of sales to decrease over the next
several years. This is a result of our consolidation efforts and the elimination
of excess capacity, partially offset by a continuing shift in product mix
towards lower margin products. Excess capacity for the Tijuana facility is not
expected to be eliminated until mid-2007 when the last announced consolidation
effort is anticipated to be completed (see the "Cost Savings and Consolidation
Efforts" section of this Item for additional information).
39
Cost of Sales - Amortization of Intangible Assets
Amortization expense for 2006 was consistent with 2005.
SG&A Expenses
Changes from the prior year to SG&A expenses were primarily due to the following
(in millions):
Year Ended
December 29,
2006
----
SFAS No. 123(R) stock-based compensation expense (a) $ 3.2
CEO transition and retirement expenses (b) 1.2
Information technology (c) 1.2
Increased sales and marketing workforce (d) 0.5
Director fees (e) 0.4
Other 0.8
---
Net increase in SG&A $ 7.3
=====
a. As a result of the adoption of SFAS No. 123(R), we began expensing stock
options in 2006, which had a material impact on SG&A costs. The increase in
stock-based compensation expense is expected to continue into the future as
additional stock-based awards are made.
b. Amounts relate to the additional stock-based compensation costs recorded in
connection with the retirement and replacement of our former CEO and former
Senior Vice President of Administration. These costs were recorded due to
acceleration provisions in our executive retirement guidelines as well as
costs associated with additional grants awarded to facilitate the
transition.
c. The increase in information technology costs was a result of our continuing
investment in the infrastructure of our Company in order to support our
growth. The increase in information technology expense is expected to
continue into the future as the Company continues to grow.
d. The increased workforce expense was primarily a result of the Company's
efforts to increase the marketing and sales of its products.
e. The increase in Director fees primarily relates to the adoption of a new
Director compensation program in 2006. This program was designed and
approved by the Corporate Governance Committee of the Board of Directors.
SG&A expenses are expected to decrease in 2007 by approximately 3% from 2006
levels. We expect the savings from our realignment plan announced in November to
partially offset any planned new hires or inflationary increases.
40
RD&E Expenses
Net research, development and engineering costs were as follows (in millions):
Year ended
----------------------------
December 29, December 30,
2006 2005
-------------- -------------
Research and development costs $ 16.1 $ 17.1
-------------- -------------
Engineering costs 9.9 5.5
Less cost reimbursements (1.8) (3.9)
-------------- -------------
Engineering costs, net 8.1 1.6
-------------- -------------
Total research and development and engineering costs, net $ 24.2 $ 18.7
============== =============
The increase in RD&E expenses for 2006 was primarily due to the planned
headcount increase in engineering personnel costs, as we continue to invest
substantial resources to develop new products. Reimbursement on product
development projects decreased compared to last year primarily due to the
achievement of significant milestones on one large project in 2005 that did not
reoccur in 2006. Reimbursements for achieving certain development milestones are
netted against gross spending.
In 2007 RD&E expenses are expected to be approximately 9% to 10% of sales,
reflecting our continued development of and investment in core product
technologies.
Other Operating Expenses
Other operating expenses are as follows (in millions):
Year Ended
-------------------------------
December 29, December 30,
2006 2005
--------------- -------------
Alden facility consolidation (a) $ 0.6 $ 2.8
Carson City facility shutdown and Tijuana
facility consolidation No. 1 (a) 2.7 4.5
Columbia facility shutdown, Tijuana facility
consolidation No. 2 and RD&E consolidation (a) 5.1 1.1
Tijuana facility start-up (b) - 1.4
Asset dispositions and other (c) 6.2 7.3
Severance (a) 2.5 1.5
--------------- -------------
$ 17.1 $ 18.6
=============== =============
(a) Refer to the "Cost Savings and Consolidation Efforts" section of this Item
for disclosure related to the timing and level of remaining expenditures
for these items as of December 29, 2006.
41
(b) Other Tijuana facility start-up expenses (not associated with the Carson
City facility or Columbia Facility consolidations) during 2005 amounted to
$1.4 million. These expenses are primarily related to the initial start-up
of the value-added assembly business.
(c) During 2006, the Company recorded a loss of $4.4 million related to the
write-off of a battery test system that was under development. Upon
completion of the Company's engineering and technical evaluation, it was
determined that the system could not meet the required specifications in a
cost effective manner. This charge was included in the IMC business
segment. The remaining expense for 2006 includes $1.0 million of various
asset dispositions and $0.8 million for professional fees related to a
potential acquisition that was no longer considered probable.
During 2005, a $2.8 million charge was recorded for the write-down of
automated cathode assembly equipment for the IMC segment. The remaining
expense for 2005 relates to various asset dispositions of approximately
$3.3 million and the cost to exit a development agreement of $1.2 million.
Prior year amounts have been conformed to the current year presentation.
In 2007 plant relocation and asset disposition expenses are expected to be
approximately $2.6 million to $3.4 million.
Interest Expense and Interest Income
Interest expense was consistent with 2005, and is primarily related to the
contingent convertible notes. Interest income increased during 2006 in
comparison to 2005 due to higher interest rates on higher cash and short-term
investment balances.
Provision for Income Taxes
Our effective tax rate is lower than the U.S. statutory rate due to the
allowable Extraterritorial Income Exclusion ("ETI"), the Qualified Production
Activities Deduction and the Federal Research and Development Credit. In 2006
the net ETI benefits had a greater impact on the effective tax rate than in
2005. As a result, our effective tax rate was reduced to 31.5% in 2006 compared
to 34.6% in 2005.
We expect our effective tax rate to be approximately 34% to 35% in 2007.
Fiscal 2005 Compared with Fiscal 2004
Sales
IMC. The 2005 results include the benefit of market place customer field actions
surrounding ICD products. We estimate that the favorable benefit of marketplace
field actions was approximately $10.0 million to $15.0 million in 2005.
Moving beyond the field actions, the increase in demand was not isolated to any
one customer. We saw strength across all of our products and our entire customer
base.
42
The increase in IMC sales of 20% for 2005 was primarily due to increased demand
for ICD batteries, filtered feedthroughs, coated components and medical
enclosures offset by an average 2% reduction in selling prices.
ECP. The ECP sales increase of 21% for 2005 was driven by the following factors:
First, an expanded commercial sales force. We aggressively pursued new business
opportunities and were successful on many of these fronts.
Second, we significantly reduced our manufacturing lead times at our Canton,
Massachusetts facility, which allowed us to be more responsive to our customers'
needs. Reduced lead times allowed us to win customer orders that would normally
have gone to other suppliers.
The third factor that contributed to our positive commercial results was
favorable market dynamics. The oil and gas exploration market was robust due to
the increased demand for products used in pipeline inspections, pressure
monitoring and measurement while drilling applications. In addition, we saw an
increase in demand for power sources used in wave monitoring and seismic
recording, due to increased Tsunami related concerns, mainly in the
international markets.
Cost of Sales
The 2005 impact on cost of sales as a percentage of sales was primarily due to
the following factors:
Year ended
December 30,
2005
-------------------
Production efficiencies primarily associated with higher volumes (a) -3.4%
Excess capacity at wet tantalum capacitor and Tijuana facilities (b) 2.2%
Lower IMC selling prices (c) 1.5%
Profit sharing accruals and incentive compensation (d) 0.3%
Warranty (e) 1.0%
Other 1.1%
-------------------
Total percentage point impact on cost of sales as a percentage of sales 2.7%
===================
a. This decrease in cost of sales was primarily due to the fact that as
production volumes increase, fixed costs such as plant overhead and
depreciation do not increase at the same rate.
b. During 2005, two facilities were not being utilized to their full capacity.
The capacitor facility was initially established to handle higher levels of
production quantities. The Tijuana facility was new for 2005 and as a
result its floor space and infrastructure were under utilized. See the
"cost savings and consolidation" section of this Item for additional
information.
c. Sales prices for IMC products are subject to pricing agreements with
customers. Many times these agreements allow for changes in price due to
customer specific levels of demand.
d. Based on several metrics, 2005's profit sharing and incentive calculations
were higher than in 2004.
e. We incurred incremental warranty costs in 2005 to settle customer claims
related to the IMC segment.
43
SG&A Expenses
The increase in SG&A expenses for 2005 was primarily due to the following
factors (in millions):
Year ended
December 30,
2005
------------------
Higher incentive compensation $ 3.4
Increase in sales and marketing workforce 1.0
Depreciation related to ERP system partially installed in 2004 1.5
Costs associated with Sarbanes-Oxley compliance (0.5)
Other, including costs associated with the new Tijuana Facility (0.6)
------------------
Net increase in SG&A $ 4.8
==================
RD&E Expenses
Net research, development and engineering costs were as follows (in millions):
Year ended
---------------------------
December 30, December 31,
2005 2004
------------- -------------
Research and development costs $ 17.1 $ 15.8
------------- -------------
Engineering costs 5.5 6.7
Less cost reimbursements (3.9) (4.0)
------------- -------------
Engineering costs, net 1.6 2.7
------------- -------------
Total research and development and engineering costs, net $ 18.7 $ 18.5
============= =============
Gross RD&E spending was slightly higher in 2005 compared to 2004. Expenses
increased during 2005 due to increased staffing in RD&E to support increased
research initiatives for IMC. These expenses were offset by the QHR battery
product line moving from the development stage into production ($1.3 million).
The gross costs in each year were offset by repayments for development efforts
for projects where the Company is reimbursed for achieving certain development
milestones. These reimbursements were 4% lower in 2005 compared to 2004,
resulting in the increase in net expense.
44
Other Operating Expenses
Other operating expenses for 2005 and 2004 comprised the following costs (in
millions):
Year ended
-------------------------------
December 30, December 31,
2005 2004
---------------- -------------
Carson City facility shutdown (a) $ 4.5 $ -
Alden facility consolidation (a) 2.8 -
Tijuana facility start-up (a) 1.4 0.9
Severance (a) 1.5 0.8
Columbia Facility and ARL shutdown (a) 1.1 -
Costs to exit development agreement (b) 1.2 -
Asset dispositions and other (c) 6.1 0.9
Patent acquisition (d) - 2.0
---------------- -------------
$ 18.6 $ 4.6
================ =============
a. Refer to "Cost Savings and Consolidation Efforts" portion of this Item
for disclosure related to the timing and level of remaining expenditures
for these items as of December 30, 2005. In 2004, the severance charge was
from a 7% mid-year reduction in workforce.
b. The $1.2 million charge was recorded in other operating expenses during the
second quarter of 2005 for charges associated with the discontinuation of a
drug pump development agreement, which was transferred back to the customer
for further development.
c. This caption includes a $2.8 million write-down of automated cathode
assembly equipment in 2005. This charge was primarily related to a decision
not to continue to use some battery production equipment. The manufacturing
process related to this equipment did not match our overall manufacturing
strategy. Remaining expenditures in 2005 and 2004 were primarily for asset
disposals of approximately $3.3 million and $0.9 million, respectively.
d. The charge is associated with patents acquired in the second quarter of
2004. These patents cover how capacitors are used in an ICD. Although
management believes the patents could have been successfully challenged in
court proceedings, a decision was made to acquire the patents and remove
this as a potential obstacle for existing customers to more fully adopt wet
tantalum technology and for potential customers to initially adopt the
technology.
2005 amounts have been conformed to the current year presentation.
Interest Expense and Interest Income
Interest expense in 2005 was consistent with 2004, and was primarily related to
the contingent convertible notes. Interest income increased during 2005 in
comparison to 2004 due to higher interest rates on higher cash and short-term
investment balances.
45
Provision for Income Taxes
Our effective tax rate is below the United States statutory rate primarily as a
result of federal research and development tax credits and the allowable ETI for
2005. The effective tax rate in 2004 was higher than in 2005 primarily due to
the recognition of a valuation allowance against state investment tax credits
that were no longer deemed more likely than not to be realized.
Liquidity and Capital Resources
As of
December 29, December 30,
(Dollars in millions) 2006 2005
----------------- --------------
Cash and cash equivalents and short-term investments (a) $ 142.6 $ 112.1
Working capital(b) $ 199.1 $ 152.0
Current ratio 5.7:1.0 4.5:1.0
a. Short-term investments consist of securities acquired with maturities that
exceed three months and are less than one year at the time of acquisition,
equity securities classified as available-for-sale, and auction rate
securities.
b. Working capital increased by approximately $47.1 million. Net cash provided
by operating activities of $39.2 million and $3.6 million, net of tax, of
unrealized gains on short-term investments available for sale during the
period are the primary drivers behind this increase.
We maintain a three-year $50.0 million revolving credit facility (the
"Revolver"), which contains a $10.0 million sub-limit for the issuance of
commercial or standby letters of credit. The Revolver is secured by our
non-realty assets including cash, accounts and notes receivable, and inventories
and has an expiration date of May 31, 2008. The Revolver requires us to comply
with two quarterly financial covenants, as defined. The first relates to the
ratio of consolidated net earnings or loss before interest, taxes, depreciation,
and amortization ("EBITDA") to fixed charges. The second is a leverage ratio,
which is calculated based on the ratio of consolidated funded debt less cash,
cash equivalent investments and short-term investments to consolidated EBITDA.
Interest rates under the Revolver vary with our leverage. We are required to pay
a commitment fee of between 0.125% and 0.250% per annum on the unused portion of
the Revolver based on our leverage. As of December 29, 2006, we had no balance
outstanding on the Revolver.
Our principal sources of liquidity are our operating cash flow combined with our
working capital of $199.1 million at December 29, 2006 and availability under
our Revolver. Historically we have generated cash from operations sufficient to
meet our capital expenditure and debt service needs, other than for
acquisitions. At December 29, 2006, our current ratio was 5.7:1.0.
We regularly engage in discussions relating to potential acquisitions and may
announce an acquisition transaction at any time. We continually assess our
financing facilities and capital structure to ensure liquidity and capital
levels are sufficient to meet our strategic objectives.
Given the significant growth in our ECP business, we will be initiating a
facility and equipment expansion project in 2007. This investment in a new
facility will enable us to maintain and grow existing business while capturing
new growth opportunities. The expected completion of this $28 million expansion
project is early 2008. Sufficient capacity is currently in place to meet our
planned growth objectives in 2007.
46
Operating Activities
In total, net cash flows provided by operating activities for 2006 decreased by
$4.1 million from 2005. Net income increased by $6.0 million while the
adjustments to reconcile net cash provided by operating activities decreased by
$10.1 million. Increased inventories in 2006 were primarily due to increased
sales and the replenishment of safety stocks. Cash flow from accrued expenses
declined as a result of a higher level of incentive compensation in 2005 and
2006 compared to 2004. Stock-based compensation expense increased primarily due
to the adoption of SFAS No. 123(R) in 2006.
Investing Activities
Cash used in investing activities decreased $15.0 million from 2005. The 2005
amounts include a higher level of capital expenditures ($28.2 million in 2005
compared to $15.4 million in 2006), primarily from the construction of the
medical power manufacturing plant in Alden, NY and the new assembly plant in
Tijuana, Mexico which were completed in the first half of 2006 and 2005,
respectively. These cash outflows were partially offset by cash proceeds of $5.2
million related to the sale of our Amherst, NY and Carson City, NV real estate
in 2005.
In March 2004, we purchased NanoGram for approximately $45.7 million
(subsequently renamed as Greatbatch Technologies Advanced Research Laboratories,
Inc.). The most significant elements of the purchase price allocation were to
patented and unpatented technology and goodwill.
Net short-term investments increased by approximately $5.7 million from 2005 to
2006. We intend to be able to use the majority of our short-term investments for
short-term cash needs, as their current maturities are primarily less than three
months.
Financing Activities
Payments on capital lease obligations and shares issued in connection with the
exercise of stock options and other stock-based awards are the primary financing
activities for 2006 and 2005.
Capital Structure
At December 29, 2006, our capital structure consisted of $170.0 million of
convertible subordinated notes and our 22.1 million shares of common stock
outstanding. We have $142.6 million in cash, cash equivalents and short-term
investments and are in a position to facilitate future acquisitions if
necessary. We are also authorized to issue 100 million shares of common stock
and 100 million shares of preferred stock. We believe that if needed we can
access public markets to sell additional common or preferred stock assuming
conditions are appropriate.
Our capital structure allows us to support our internal growth and provides
liquidity for corporate development initiatives. Our current expectation for
2007 is that capital spending will be in the range of $35.0 million to $45.0
million, of which approximately $20.0 million ($28.0 million in total between
2007 and 2008) is attributable to the expansion of our manufacturing capacity
and capabilities for our ECP business. The remainder will be used for the
completion of our consolidation initiatives as well as manufacturing
improvements and normal maintenance capital.
47
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
including actions brought by former employees who were terminated in connection
with our consolidation initiatives. 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.
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. We have meritorious defenses and are vigorously defending the matter.
The potential risk of loss is between $0.0 and $1.7 million.
Contractual Obligations
The following table summarizes our significant contractual obligations at
December 29, 2006, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods.
Payments due by period
--------------------------------------------
Less
than 1 1-3 3-5 More than
CONTRACTUAL OBLIGATIONS Total year years years 5 years
------------------------------------------------------------------------------------- -------- ------- ------- ---------
Long-Term Debt Obligations (a) $194,863 $ 3,825 $7,650 $7,650 $175,738
Operating Lease Obligations (b) 8,103 1,906 2,165 1,640 2,392
Purchase Obligations (c) 9,684 9,684 - - -
--------- -------- ------- ------- ---------
Total $212,650 $15,415 $9,815 $9,290 $178,130
========= ======== ======= ======= =========
a. The annual interest expense on the convertible debentures is 2.25%, or $3.8
million which is paid semi-annually. These amounts assume the 2010
conversion feature is not exercised. 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 to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase
orders are normally based on our current manufacturing needs and are
fulfilled by our vendors within short time horizons. We enter into blanket
orders with vendors that have preferred pricing and terms, however these
orders are normally cancelable by us without penalty.
48
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No 159, The Fair Value
Option for Financial Assets and Financial Liabilities--Including an amendment of
FASB Statement No. 115. This Statement provides entities with an option to
choose to measure eligible items at fair value at specified election dates. If
elected, an entity must report unrealized gains and losses on the item in
earnings at each subsequent reporting date. The fair value option: may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; is irrevocable (unless a new
election date occurs); and is applied only to entire instruments and not to
portions of instruments. We are still evaluating the impact of SFAS No. 159 on
our financial statements, which is effective beginning in fiscal year 2008.
In October 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans an amendment of FASB Statements
No. 87, 88, 106, and 132(R). This Statement requires companies to recognize the
overfunded or underfunded status of defined benefit postretirement plans as an
asset or liability in the statement of financial position and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. SFAS No. 158 was effective for us as of December 29, 2006
and did not have a material impact on our financial statements, as we currently
do not maintain any benefit plans that fall within the scope of SFAS No. 158.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
while applying generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS No. 157 establishes a fair value hierarchy
that distinguishes between (1) market participant assumptions based on market
data obtained from independent sources and (2) the reporting entity's own
assumptions developed based on unobservable inputs. We are still evaluating the
impact of SFAS No. 157 on our financial statements, which is effective beginning
in fiscal year 2008.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB No. 108 provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of determining whether
the current year's financial statements are materially misstated. SAB No. 108
was effective for us in fiscal year 2006 and did not have a material impact on
our financial statements.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48, Accounting for
Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized under SFAS
No. 109, Accounting for Income Taxes. FIN 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. FIN 48 was effective beginning in fiscal year 2007
and did not have a material effect on our consolidated financial position,
consolidated results of operations, or liquidity.
49
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
Accounting Research Bulletin ("ARB") No. 43, Chapter 4. SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, handling costs and
wasted material (spoilage). Among other provisions, the new rule requires that
such items be recognized as current-period charges, regardless of whether they
meet the criterion of "so abnormal" as stated in ARB No. 43. SFAS No. 151 was
effective beginning in fiscal year 2006 and did not have a material effect on
our consolidated financial position, consolidated results of operations, or
liquidity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Under our line of credit any borrowings bear interest at fluctuating market
rates. At December 29, 2006, we did not have any borrowings outstanding under
our line of credit and thus no interest rate sensitive financial instruments
other than short-term investments. We do not believe that the impact of
fluctuations in interest rates on our short-term investments will have a
material effect on our consolidated financial statements.
We incur certain expenses related to our Mexican operations that are denominated
in a foreign currency. We do not believe that the impact of foreign currency
fluctuations will have a material effect on our consolidated financial
statements.
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 December 29, 2006 and
December 30, 2005.
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 29, 2006, December 30, 2005 and
December 31, 2004.
Consolidated Statements of Cash Flows for the years ended
December 29, 2006, December 30, 2005 and December 31, 2004.
Consolidated Statements of Stockholders' Equity for the years
ended December 29, 2006, December 30, 2005 and December 31,
2004.
Notes to Consolidated Financial Statements.
50
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 December 29, 2006, 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 December 29, 2006 is effective.
Management's assessment of the effectiveness of internal control over financial
reporting as of December 29, 2006 has been audited by Deloitte & Touche LLP, the
Company's independent registered public accounting firm, whose unqualified
opinion on management's assessment of the effectiveness of internal control over
financial reporting as of December 29, 2006 is expressed in their report
included herein.
Dated: February 26, 2007
/s/ Thomas J. Hook /s/ Thomas J. Mazza
----------------------------------- -----------------------------------
Thomas J. Hook Thomas J. Mazza
President & Chief Executive Officer Senior Vice President &
Chief Financial Officer
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Greatbatch, Inc.
Clarence, New York
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that
Greatbatch, Inc. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 29, 2006, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of 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, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
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, management's assessment that the Company maintained effective
internal control over financial reporting as of December 29, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 29, 2006, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
52
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and consolidated financial statement schedule as of and for the year
ended December 29, 2006 of the Company and our report dated February 26, 2007,
expressed an unqualified opinion on those financial statements and financial
statement schedule and included an explanatory paragraph relating to a change in
the Company's method of accounting for stock-based compensation on January 1,
2006, to conform to Statement of Financial Accounting Standard No. 123 (revised
2004), Share-Based Payment.
/s/ Deloitte & Touche LLP
Buffalo, New York
February 26, 2007
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Greatbatch, Inc.
Clarence, New York
We have audited the accompanying consolidated balance sheets of Greatbatch, Inc.
and subsidiaries (the "Company") as of December 29, 2006 and December 30, 2005,
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 December 29, 2006. Our audits also included the consolidated financial
statement schedule listed in the Index at Item 15(a)(2). These financial
statements and 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 December 29, 2006
and December 30, 2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 29, 2006, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such consolidated financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
As discussed in Note 2 to the consolidated financial statements, on January 1,
2006, the Company changed its method of accounting for stock-based compensation
to conform to Statement of Financial Accounting Standard No. 123 (revised 2004),
Share-Based Payment.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 29, 2006, 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 February 26, 2007 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
Buffalo, New York
February 26, 2007
54
GREATBATCH, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
-----------------------------------------------------------------------------------------------------
December 29, December 30,
ASSETS 2006 2005
--------------- --------------
Current assets:
Cash and cash equivalents $ 71,147 $ 46,403
Short-term investments available for sale 71,416 65,746
Accounts receivable, net of allowance of $532 in 2006
and $450 in 2005 31,285 29,997
Inventories 57,667 45,184
Refundable income taxes 1,569 928
Deferred income taxes 5,899 6,257
Prepaid expenses and other current assets 2,343 1,488
--------------- --------------
Total current assets 241,326 196,003
Property, plant, and equipment, net 91,869 97,705
Amortizing intangible assets, net 28,078 31,891
Trademarks and tradenames 28,252 28,252
Goodwill 155,039 155,039
Other assets 3,263 4,021
--------------- --------------
Total assets $ 547,827 $ 512,911
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,657 $ 13,678
Accrued expenses and other current liabilities 29,618 29,903
Current portion of long-term debt - 464
--------------- --------------
Total current liabilities 42,275 44,045
Convertible subordinated notes 170,000 170,000
Deferred income taxes 35,859 30,261
--------------- --------------
Total liabilities 248,134 244,306
--------------- --------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, $0.001 par value, authorized 100,000,000
shares; no shares issued or outstanding in 2006 or 2005
Common stock, $0.001 par value, authorized 100,000,000
shares; 22,119,142 shares issued and 22,111,516 shares outstanding
in 2006 and 21,752,090 shares issued and outstanding in 2005 22 22
Additional paid-in capital 227,187 217,104
Deferred stock-based compensation - (1,490)
Treasury stock, at cost, 7,626 shares in 2006 and no shares in 2005 (205) -
Retained earnings 69,165 53,039
Accumulated other comprehensive income (loss) 3,524 (70)
--------------- --------------
Total stockholders' equity 299,693 268,605
--------------- --------------
Total liabilities and stockholders' equity $ 547,827 $ 512,911
=============== ==============
The accompanying notes are an integral part of these consolidated financial statements
55
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands except per share amounts)
-------------------------------------------------------------------------------------------------------------
Year Ended
--------------------------------------
December 29, December 30, December 31,
2006 2005 2004
------------ ------------ ------------
Sales $ 271,142 $ 241,097 $ 200,119
Costs and expenses:
Cost of sales - excluding amortization of
intangible assets 164,885 151,543 119,397
Cost of sales - amortization of intangible assets 3,813 3,841 4,002
Selling, general and administrative expenses 38,785 31,528 26,719
Research, development and engineering costs, net 24,225 18,725 18,476
Other operating expenses, net 17,058 18,574 4,585
------------ ------------ ------------
Operating income 22,376 16,886 26,940
Interest expense 4,605 4,613 4,535
Interest income (5,775) (3,113) (1,235)
Other (income) expense, net 12 (78) (92)
------------ ------------ ------------
Income before provision for income taxes 23,534 15,464 23,732
Provision for income taxes 7,408 5,357 9,514
------------ ------------ ------------
Net income $ 16,126 $ 10,107 $ 14,218
============ ============ ============
Earnings per share:
Basic $ 0.74 $ 0.47 $ 0.67
Diluted $ 0.73 $ 0.46 $ 0.66
Weighted average shares outstanding:
Basic 21,803 21,582 21,358
Diluted 26,334 21,810 21,540
Comprehensive income:
Net income $ 16,126 $ 10,107 $ 14,218
Net unrealized gain (loss) on short-term
investments available for sale, net of tax 3,594 (52) (18)
------------ ------------ ------------
Comprehensive income $ 19,720 $ 10,055 $ 14,200
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements
56
GREATBATCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
---------------------------------------------------------------------------------------------------------------
Year Ended
-----------------------------------------
December 29, December 30, December 31,
2006 2005 2004
------------- ------------ -------------
Cash flows from operating activities:
Net income $ 16,126 $ 10,107 $ 14,218
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 19,309 19,718 14,835
Stock-based compensation 9,717 3,327 3,312
Deferred income taxes 4,888 4,330 12,203
Loss on disposal of assets 5,379 5,851 1,177
Changes in operating assets and liabilities:
Accounts receivable (1,288) (5,709) (563)
Inventories (12,483) (11,157) (5,429)
Prepaid expenses and other current assets (855) (451) 2,780
Accounts payable 64 5,044 3,057
Accrued expenses and other current liabilities (1,011) 11,317 (1,149)
Income taxes (641) 958 (981)
------------- ------------ -------------
Net cash provided by operating activities 39,205 43,335 43,460
------------- ------------ -------------
Cash flows from investing activities:
Short-term investments
Purchases (54,800) (82,851) (175,089)
Proceeds from dispositions 53,808 74,743 224,737
Acquisition of property, plant and equipment (15,445) (28,183) (36,738)
Proceeds from sale of property, plant and equipment
and other assets 39 5,158 67
Decrease (increase) in other assets 25 (261) 282
Acquisition, net of cash acquired - - (45,716)
------------- ------------ -------------
Net cash used in investing activities (16,373) (31,394) (32,457)
------------- ------------ -------------
Cash flows from financing activities:
Principal payments of capital lease obligations (464) (1,188) (1,278)
Payment of debt issuance costs - (213) -
Issuance of common stock 2,082 1,068 1,205
Excess tax benefits from stock based awards 294 - -
Net repurchase of treasury stock - - (95)
------------- ------------ -------------
Net cash provided by (used in) financing activities 1,912 (333) (168)
------------- ------------ -------------
Net increase in cash and cash equivalents 24,744 11,608 10,835
Cash and cash equivalents, beginning of year 46,403 34,795 23,960
------------- ------------ -------------
Cash and cash equivalents, end of year $ 71,147 $ 46,403 $ 34,795
============= ============ =============
The accompanying notes are an integral part of these consolidated financial statements
57
GREATBATCH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
------------------------------------------------------------------------------------------------------------------------
Treasury Accumulated
Common Stock Additional Deferred Stock Other Total
-------------- Paid-In Stock-Based --------------- Retained Comprehensive Stockholders'
Shares Amount Capital Compensation Shares Amount Earnings Income (Loss) Equity
------- ------- ---------- -------------- ------- ------- --------- --------------- --------------
Balance, January 2,
2004 21,268 $ 21 $ 207,969 $ (1,185) 5 $ (179) $ 28,714 $ - $ 235,340
Stock-based
compensation - - 4 616 (1) 27 - - 647
Exercise of stock
options 100 - 1,200 - - - - - 1,200
Grant of restricted
stock 19 - 349 (349) - - - - -
Forfeitures of
restricted stock (2) - (85) 85 - - - - -
Repurchase of
shares to settle
employee tax
witholding on
vested
restricted stock - - - - 5 (95) - - (95)
Income tax benefit
from stock options
and
restricted stock - - 123 - - - - - 123
Shares contributed
to ESOP/401(k) 66 - 2,571 - (4) 152 - - 2,723
Net income - - - - - - 14,218 - 14,218
Unrealized losses
on available-for-
sale
securities, net of
tax - - - - - - - (18) (18)
------- ------ ---------- -------------- ------- ------- --------- --------------- --------------
Balance, December 31,
2004 21,451 21 212,131 (833) 5 (95) 42,932 (18) 254,138
Stock-based
compensation - - 3 333 (1) 27 - - 363
Exercise of stock
options 98 1 1,067 - - - - - 1,068
Grant of restricted
stock 68 - 1,260 (1,260) - - - - -
Forfeitures of
restricted stock (14) - (270) 270 - - - - -
Income tax benefit
from stock options - - 252 - - - - - 252
Shares contributed
to 401(k) 149 - 2,661 - (4) 68 - - 2,729
Net income - - - - - - 10,107 - 10,107
Unrealized losses
on available-for-
sale
securities, net of
tax - - - - - - - (52) (52)
------- ------ ---------- -------------- ------- ------- --------- --------------- --------------
Balance, December 30,
2005 21,752 22 217,104 (1,490) - - 53,039 (70) 268,605
Adoption of SFAS
No. 123(R) - - (1,490) 1,490 - - - - -
Stock-based
compensation 11 - 6,417 - - - - - 6,417
Exercise of stock
options 161 - 2,082 - - - - - 2,082
Grant of restricted
stock 94 - - - - - - - -
Forfeitures of
restricted stock (9) - - - - - - - -
Repurchase of
shares to settle
employee tax
witholding on
vested
restricted stock - - - - (8) (205) - - (205)
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
Unrealized gains on
available-for-sale
securities, net of
tax - - - - - - - 3,594 3,594
------- ------ ---------- -------------- ------- ------- --------- --------------- --------------
Balance, December 29,
2006 22,119 $ 22 $ 227,187 $ - (8) $ (205) $ 69,165 $ 3,524 $ 299,693
======= ====== ========== ============== ======= ======= ========= =============== ==============
The accompanying notes are an integral part of these consolidated financial statements
58
GREATBATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Company - The consolidated financial statements include the accounts of
Greatbatch, Inc. and its wholly owned subsidiaries (collectively, the
"Company"). All significant intercompany balances and transactions have
been eliminated in consolidation.
The Company has revised its presentation of the number of shares of common
stock outstanding in the Consolidated Balance Sheets and Consolidated
Statements of Stockholders' Equity to include shares of restricted stock.
Nature of Operations - The Company operates in two reportable
segments-Implantable Medical Components ("IMC") and Electrochem Commercial
Power ("ECP"). The IMC segment designs and manufactures batteries,
capacitors, filtered feedthroughs, engineered components and enclosures
used in Implantable Medical Devices ("IMDs"). Additionally, in 2005, the
Company expanded its IMC business to include value-added assembly of
products that incorporate IMD components. The ECP segment designs and
manufactures high performance batteries and battery packs for use in oil
and gas exploration, pipeline inspection, telematics, oceanography
equipment, seismic, communication, military and aerospace applications.
Financial Statement Year End - The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st.
Fiscal years 2006, 2005 and 2004 ended on December 29, December 30 and
December 31, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 - Short-term investments are comprised of municipal,
U.S. Government Agency and corporate notes and bonds acquired with
maturities that exceed three months and are less than one year at the time
of acquisition. Short-term investments also include auction rate securities
and equity securities. All short-term investments as of December 29, 2006
and December 30, 2005 are classified as available-for-sale.
Available-for-sale securities are carried at fair value with the unrealized
gain or loss, net of tax, reported in accumulated other comprehensive
income (loss) as a separate component of stockholders' equity. Fair value
is based on quoted market prices as of the end of the reporting period.
Realized gains and losses and investment income are included in net income.
Due to the short-term nature of the interest rate resets, the fair market
value of the auction rate securities approximates their recorded value. The
cost of securities sold is based on the specific identification method.
Unrealized losses considered to be other than temporary during the period
are recognized in net income.
59
Fair Value of Financial Instruments - The carrying amount of financial
instruments, including cash and cash equivalents, trade receivables and
accounts payable, approximated their fair value as of December 29, 2006 and
December 30, 2005 because of the relatively short maturity of these
instruments.
Inventories - Inventories are stated at the lower of cost, determined using
the first-in first-out method, or market.
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 3-10 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 are removed from the
accounts and any gain or loss is recorded in operating income or expense.
Amortizing Intangible Assets - Acquired intangible assets other than
goodwill and trademark and tradenames consist primarily of patented and
unpatented technology. The Company continues to amortize its definite-lived
intangible assets on a straight-line basis over their estimated useful
lives as follows: patented technology, 8-17 years; unpatented technology,
5-15 years; and other intangible assets, 3-10 years.
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, based on the best information available, including market
prices or discounted cash flow analyses. 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 trademark 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 trademark and tradenames are
assessed for impairment on an annual basis, 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 trademark and
tradenames has occurred.
60
Other Assets - Other assets includes deferred costs incurred in connection
with the Company's issuance of its convertible subordinated notes. These
costs totaled $4.5 million and are being amortized using the effective
yield method over a seven-year term. Total net deferred financing fees
amounted to $2.3 million at December 29, 2006.
Other assets also include long-term investments in equity securities that
do not have readily available market values and are accounted for using the
cost method. The Company assesses impairment of these securities at the end
of the reporting period. If impairment is considered other than temporary,
an impairment loss is recognized and the fair value of the investment
becomes its new cost basis. The aggregate recorded amount of cost method
investments at December 29, 2006 and December 30, 2005 was $0.8 million and
$1.1 million, respectively. The Company has determined that these
investments are variable interest entities for which the Company is not the
primary beneficiary. The Company's exposure related to these entities is
limited to its recorded investment. These investments are in research and
development companies where the fair value may be subject to future
fluctuations, which could be significant.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
trade receivables. A significant portion of the Company's sales are to
three 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
minimal due to the Company's stable customer base. The Company maintains
cash deposits with major banks, which from time to time may exceed
federally insured limits. Note 14 - Business Segment Information contains
information on sales and accounts receivable for the Company's significant
customers.
Allowance for Doubtful Accounts - The Company provides credit, in the
normal course of business, to its customers. The Company also maintains an
allowance for doubtful customer accounts and charges actual losses against
this allowance when incurred.
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 tax assets and
liabilities 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.
61
The Company and its domestic subsidiaries file a consolidated federal
income tax return. State tax returns are filed on a combined or separate
basis depending on the applicable laws relating to the Company and its
domestic subsidiaries.
Revenue Recognition - Revenue from the sale of products is recognized at
the time the product is shipped to customers and title passes. The Company
includes shipping and handling fees billed to customers in sales. Shipping
and handling costs associated with inbound 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. The cost of these customer supplied component parts amounted to
$18.8 million, $7.8 million and $0 in 2006, 2005 and 2004, respectively.
These amounts were excluded from sales and cost of sales recognized by the
Company.
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
-------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
------------- -------------- --------------
Research and development costs $ 16,096 $ 17,069 $ 15,760
------------- -------------- --------------
Engineering costs 9,888 5,500 6,729
Less: cost reimbursements (1,759) (3,844) (4,013)
------------- -------------- --------------
Engineering costs, net 8,129 1,656 2,716
------------- -------------- --------------
Total research, development and engineering costs, net $ 24,225 $ 18,725 $ 18,476
============= ============== ==============
Stock-Based Compensation - Beginning in fiscal year 2006, the Company
adopted 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
("SEC") rules included in Staff Accounting Bulletin ("SAB") No. 107. Under
SFAS No. 123(R) the Company is now required to record compensation costs
related to all stock-based awards.
62
Prior to fiscal year 2006, the Company accounted for stock options
following the requirements of Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations, which did not require the Company to record compensation
expense for fixed stock options if the exercise price of the option equaled
or exceeded the fair market value of the Company's stock at the grant date.
For restricted stock awards, the fair market value of the award, determined
based upon the closing value of the Company's stock price on the grant
date, was recorded to compensation expense on a straight-line basis over
the vesting period.
The Company applied the modified prospective approach in adopting SFAS No.
123(R), which allows the requirements of SFAS No. 123(R) to be applied to
new awards (stock options, restricted stock and restricted stock unit
awards) and to awards modified, repurchased, or cancelled beginning in
2006. Additionally, any unvested awards granted prior to 2006 are expensed
as service is performed based on the grant-date fair value calculated in
accordance with SFAS No. 123. Compensation cost for service-based stock
options and restricted stock awards is recognized ratably over the
applicable vesting period. 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.
The Company utilizes the Black-Scholes option pricing model to estimate the
fair value of stock options granted. For restricted stock awards, the fair
market value of the award, determined based upon the closing value of the
Company's stock price on the grant date, is recorded to compensation
expense on a straight-line basis over the vesting period.
The Company's net income and earnings per share as if the fair value based
method of SFAS No. 123 had been applied to all outstanding and unvested
awards is as follows (in thousands except per share data):
Year Ended
--------------------------------
December 30, December 31,
2005 2004
----------------- -------------
Net income as reported $ 10,107 $ 14,218
Add: stock-based compensation cost included in net income as reported,
net of related tax effects 2,176 1,968
Less: stock-based compensation cost determined using the fair value
based method, net of related tax effects 4,409 4,054
----------------- -------------
Pro forma net income $ 7,874 $ 12,132
================= =============
Net earnings per share:
Basic - as reported $ 0.47 $ 0.67
Basic - pro forma $ 0.36 $ 0.57
Diluted - as reported $ 0.46 $ 0.66
Diluted - pro forma $ 0.36 $ 0.56
63
Net earnings per diluted share for 2005 and 2004 exclude the effect of
4,219,000 shares related to the contingent convertible notes, as the effect
is anti-dilutive. Included in stock-based compensation is the
cost of company stock contributed to the 401(k) plan.
In November 2005, the FASB issued FASB Staff Position ("FSP") FAS 123(R)-3,
Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards. FSP FAS 123(R)-3 provides an alternative
transition method for establishing the beginning balance of the pool of
excess tax benefits available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS No. 123(R) (the "APIC Pool"). Effective
in the fourth quarter of 2006, the Company elected to adopt the alternative
transition method provided in FSP FAS 123(R)-3 for establishing the
beginning balance of the APIC Pool. The impact of this election on the
prior quarters of 2006 was immaterial. This method consists of a
computational component that establishes a beginning balance of the APIC
Pool related to employee compensation and a simplified method ("short-cut
method") to determine the subsequent impact on the APIC Pool of employee
awards that are fully vested and outstanding upon the adoption of SFAS No.
123(R).
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 contingently convertible instruments. Holders of our convertible notes
may convert them into shares of the Company's common stock under certain
circumstances (see Note 8 - Debt for a description of our convertible
subordinated notes).
The Company includes the effect of the conversion of its convertible
subordinated notes in the calculation of diluted earnings per share using
the if-converted method 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 deferred financing fees amortization recorded during the period.
64
The following table reflects the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
Year Ended
------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
--------------- ------------- ------------
Numerator for basic earnings per share:
Income from continuing operations $ 16,126 $ 10,107 $ 14,218
Effect of dilutive securities:
Interest expense on convertible notes and related deferred financing
fees, net of tax 3,064 - -
--------------- ------------- ------------
Numerator for diluted earnings per share $ 19,190 $ 10,107 $ 14,218
=============== ============= ============
Denominator for basic earnings per share:
Weighted average shares outstanding 21,803 21,582 21,358
Effect of dilutive securities:
Convertible notes 4,219 - -
Stock options and unvested restricted stock 312 228 182
--------------- ------------- ------------
Dilutive potential common shares 4,531 228 182
--------------- ------------- ------------
Denominator for diluted earnings per share 26,334 21,810 21,540
=============== ============= ============
Basic earnings per share $ 0.74 $ 0.47 $ 0.67
=============== ============= ============
Diluted earnings per share $ 0.73 $ 0.46 $ 0.66
=============== ============= ============
Net earnings per diluted share for 2005 and 2004 exclude the effect of
4,219,000 shares related to the contingent convertible notes, as the effect
is anti-dilutive. The diluted weighted average share calculations do not
include options for which the exercise price is less than the average
market price for the Company's stock for 2006, 2005 and 2004 of 1,084,000,
908,000, and 843,000, respectively.
Comprehensive Income - The Company's accumulated other comprehensive income
(loss) includes the unrealized gains (losses) on short-term investments
available-for-sale, net of applicable taxes. The effect of this item was an
increase in stockholders' equity on a cumulative basis by $3.5 million at
December 29, 2006 and decrease stockholders' equity by $0.07 million at
December 30, 2005. The $3.6 million change from 2005 to 2006 is primarily
due to the Company classifying one of its equity security investments as
available-for-sale as prescribed in SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, which was previously accounted
for under the cost method in accordance with APB No. 18, The Equity Method
of Accounting for Investments in Common Stock, as the investment now has a
readily determinable fair value due to the associated company's stock
offering. The Company's gain (loss) on available for sale securities is
included in accumulated other comprehensive income (loss) net of deferred
taxes of $1.1 million and benefit of $0.004 million at December 29, 2006
and December 30, 2005, respectively.
65
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.
Supplemental Cash Flow Information (in thousands):
Year Ended
-----------------------------------------
December 29, December 30, December 31,
2006 2005 2004
-------------- ------------- ------------
Cash paid during the year for:
Interest $ 3,888 $ 3,971 $ 4,586
Income taxes 2,867 52 318
Noncash investing and financing activities:
Acquisition of property utilizing capitalized leases $ - $ - $ 1,159
Net unrealized gain (loss) on available-for-sale securities 3,594 (52) (18)
Common stock contributed to 401(k) Plan 2,780 2,729 2,723
Property, plant and equipment purchases included in accounts payable 808 1,893 2,230
Unsettled purchase of treasury stock 205 - -
Recent Accounting Pronouncements -- In February 2007, the FASB issued SFAS
No 159, The Fair Value Option for Financial Assets and Financial
Liabilities--Including an amendment of FASB Statement No. 115. This
Statement provides entities with an option to choose to measure eligible
items at fair value at specified election dates. If elected, an entity must
report unrealized gains and losses on the item in earnings at each
subsequent reporting date. The fair value option: may be applied instrument
by instrument, with a few exceptions, such as investments otherwise
accounted for by the equity method; is irrevocable (unless a new election
date occurs); and is applied only to entire instruments and not to portions
of instruments. The Company is still evaluating the impact of SFAS No. 159
on its financial statements, which is effective beginning in fiscal year
2008.
In October 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R). This Statement requires companies
to recognize the overfunded or underfunded status of defined benefit
postretirement plans as an asset or liability in the statement of financial
position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. SFAS No. 158 was
effective for the Company as of December 29, 2006 and did not have a
material impact on its financial statements, as the Company currently does
not maintain any benefit plans that fall within the scope of SFAS No. 158.
66
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring
fair value while applying generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 establishes
a fair value hierarchy that distinguishes between (1) market participant
assumptions based on market data obtained from independent sources and (2)
the reporting entity's own assumptions developed based on unobservable
inputs. The Company is still evaluating the impact of SFAS No. 157 on its
financial statements, which is effective beginning in fiscal year 2008.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. SAB No. 108 provides guidance on the consideration of
the effects of prior year misstatements in quantifying current year
misstatements for the purpose of determining whether the current year's
financial statements are materially misstated. SAB No. 108 was effective
for the Company in fiscal year 2006 and did not have a material impact on
its financial statements.
In June 2006, the FASB issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertainty in Income Taxes--an interpretation of FASB
Statement No. 109. FIN 48 clarifies the accounting for uncertainty in
income taxes recognized under SFAS No. 109, Accounting for Income Taxes.
FIN 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. FIN 48 was effective beginning in fiscal year 2007 and did not
have a material effect on the Company's consolidated financial position,
consolidated results of operations, or liquidity.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4. SFAS
No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing,"
to clarify the accounting for abnormal amounts of idle facility expense,
handling costs and wasted material (spoilage). Among other provisions, the
new rule requires that such items be recognized as current-period charges,
regardless of whether they meet the criterion of "so abnormal" as stated in
ARB No. 43. SFAS No. 151 was effective beginning in fiscal year 2006 and
did not have a material effect on the Company's consolidated financial
position, consolidated results of operations, or liquidity.
67
3. SHORT-TERM INVESTMENTS
Short-term investments available for sale are comprised of the following
(in thousands):
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
------------ ----------- ----------- ---------
December 29, 2006
-----------------
Equity Securities $ 291 $ 4,588 $ - $ 4,879
Auction Rate Securities and Other 66,537 4 (4) 66,537
------------ ----------- ----------- ---------
Total available-for-sale securities $ 66,828 $ 4,592 $ (4) $ 71,416
============ =========== =========== =========
December 30, 2005
-----------------
Equity Security $ 276 $ - $ (74) $ 202
Auction Rate Securities and Other 65,544 - - 65,544
------------ ----------- ----------- ---------
Total available-for-sale securities $ 65,820 $ - $ (74) $ 65,746
============ =========== =========== =========
The equity securities are investments in start-up companies in related
medical fields. These equity investments are subject to significant
fluctuations in fair value due to the volatility of the industry.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
December 29, December 30,
2006 2005
------------------------ ---------------------
Raw material $ 28,568 $ 24,864
Work-in-process 13,528 11,266
Finished goods 15,571 9,054
------------------------ ---------------------
Total $ 57,667 $ 45,184
======================== =====================
68
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following (in thousands):
December 29, December 30,
2006 2005
------------------ ------------------
Manufacturing machinery and equipment $ 69,453 $ 62,681
Buildings and building improvements 32,793 31,653
Information technology hardware and software 19,787 15,342
Leasehold improvements 12,142 12,356
Land and land improvements 5,328 5,328
Furniture and fixtures 4,230 3,655
Property under capital leases - 3,391
Construction work in process 11,295 13,778
Other 129 176
------------------ ------------------
155,157 148,360
Accumulated depreciation (63,288) (50,655)
------------------ ------------------
Total $ 91,869 $ 97,705
================== ==================
Depreciation expense for property, plant and equipment, including property
under capital leases, during 2006, 2005 and 2004 was approximately $14.8
million, $15.1 million and $10.1 million, respectively.
6. AMORTIZING INTANGIBLE ASSETS
Amortizing intangible assets are comprised of the following (in thousands):
Gross carrying Accumulated Net carrying
amount amortization amount
---------------- ----------------- ---------------
December 29, 2006
Patented technology $ 21,462 $ (13,320) $ 8,142
Unpatented technology 30,886 (10,975) 19,911
Other 1,340 (1,315) 25
--------------- ---------------- ---------------
Total amortizing intangible assets $ 53,688 $ (25,610) $ 28,078
=============== ================ ===============
December 30, 2005
Patented technology $ 21,462 $ (11,738) $ 9,724
Unpatented technology 30,886 (8,750) 22,136
Other 1,340 (1,309) 31
--------------- ---------------- ---------------
Total amortizing intangible assets $ 53,688 $ (21,797) $ 31,891
=============== ================ ===============
Annual intangible amortization expense is estimated to be $3.8 million for
2007 and 2008, $3.2 million for 2009 and $2.7 million in 2010 and 2011.
69
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following (in thousands):
December 29, December 30,
2006 2005
---------------- ----------------
Salaries and benefits $ 11,055 $ 8,718
Profit sharing and bonuses 13,928 13,052
Warranty 1,993 2,443
Other 2,642 5,690
---------------- ----------------
Total $ 29,618 $ 29,903
================ ================
8. DEBT
Long-term debt is comprised of the following (in thousands):
December 29, December 30,
2006 2005
------------------- -------------------
2.25% convertible subordinated notes, due 2013 $ 170,000 $ 170,000
Capital lease obligations - 464
------------------- -------------------
170,000 170,464
Less current portion - (464)
------------------- -------------------
Total long-term debt $ 170,000 $ 170,000
=================== ===================
Convertible Subordinated Notes - In May 2003, the Company completed a
private placement of contingent convertible subordinated notes ("CSN")
totaling $170.0 million, due 2013. In November 2003 the Company had a
Registration Statement with the Securities and Exchange Commission declared
effective with respect to these notes and the underlying common stock. The
notes bear interest at 2.25 percent per annum, payable semiannually.
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.
Holders may convert the notes into shares of the Company's common stock at
a conversion rate of 24.8219 shares per $1,000 principal amount of notes,
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 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 principal amount of the notes 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 principal amount of the notes; (3) if the notes have
been called for redemption; or (4) upon the occurrence of certain corporate
events.
70
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
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.
Concurrent with the issuance of the notes, the Company used approximately
$72.5 million of the proceeds from this private placement to pay off a
previously existing bank term loan. Debt issuance expenses totaled $4.5
million and are being amortized using the effective yield method over a
seven-year term. Total net deferred financing fees amounted to $2.3 million
at December 29, 2006.
The fair-value of the convertible subordinated notes based on quoted market
prices as of December 29, 2006 and December 30, 2005 was $159.8 million and
$149.0 million, respectively.
Revolving Line of Credit
On May 31, 2005, the Company amended its Senior Secured Credit Facility,
which included changes to the underlying covenants. The amended facility
replaced the old $20.0 million revolving credit facility with a new
three-year $50.0 million Revolving Credit Facility ("new revolver"), which
contains a $10.0 million sub-limit for the issuance of commercial or
standby letters of credit. The new revolver is secured by the Company's
non-realty assets including cash, accounts and notes receivable, and
inventories. The new revolver requires the Company to comply with two
quarterly financial covenants, as defined. The first relates to the ratio
of consolidated net earnings or loss before interest, taxes, depreciation,
and amortization ("EBITDA") to fixed charges. The second is a leverage
ratio, which is calculated based on the ratio of consolidated funded debt
less cash, cash equivalent investments and short-term investments to
consolidated EBITDA, as defined in the Senior Secured Credit Facility
agreement. Interest rates under the new revolver vary with the Company's
leverage. The Company is required to pay a commitment fee of between .125%
and 0.250% per annum on the unused portion of the new revolver based on the
Company's leverage. As of December 29, 2006 and December 30, 2005, the
Company had no balance outstanding on the new revolver.
Debt issuance expenses for the new revolver totaled $0.2 million and are
being amortized over a three-year term. The revolver refinancing
transaction resulted in the write-off of $0.1 million of existing deferred
financing fees associated with the prior revolving line of credit.
71
9. EMPLOYEE BENEFIT PLANS
Savings Plan - The Company sponsors a defined contribution 401(k) plan,
which covers substantially all of its employees. The plan provides for the
deferral of employee compensation under Section 401(k) and a discretionary
Company match. In 2006, 2005 and 2004, 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 $0.9
million in 2006, 2005 and 2004.
Employee Stock Ownership Plan - The Company sponsored a non-leveraged
Employee Stock Ownership Plan ("ESOP") and related trust prior to June 29,
2004. Effective June 29, 2004 the ESOP was merged into the 401(k) plan.
Under the terms of the amended 401(k) plan document there is an annual
discretionary defined contribution 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 $3.3 million in 2006, $2.8 million in 2005
and $2.7 million in 2004. As of December 29, 2006, the 401(k) Plan held
501,278 shares of Company stock and there were 109,822 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 December 29, 2006 of $26.92. The final number of shares
contributed to the plan was 110,108, computed based on the closing market
price of the Company's stock on the actual contribution date of February
20, 2007 of $26.85.
Education Assistance Program - The Company reimburses tuition, textbooks
and laboratory fees for college or other job related programs for all of
its employees. The Company also reimburses college tuition for the
dependent children of its full-time 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 $1.2 million, $0.9 million and $0.8 million in 2006, 2005 and
2004, respectively.
10. STOCK-BASED COMPENSATION
Compensation costs related to share-based payments for 2006 totaled $6.4
million, $4.4 million net of tax, or $0.17 per diluted share and $0.20 per
basic share. This amount included $2.4 million for accelerated vesting for
certain retirement-eligible employees and $0.3 million for modifications.
This modification expense relates to the Company's adoption of executive
retirement guidelines in 2005 for approximately twenty-five 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. The incremental cost of expensing stock options under SFAS No. 123(R)
for 2006 was $4.5 million, $3.1 million net of tax or $0.12 per diluted
share and $0.14 per basic share. 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.
72
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 in 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.
During 2006, the Board of Directors approved the grant of 183,648 shares of
performance based non-qualified stock options. The performance metrics for
these awards cover a three-year performance period beginning in 2006 and
include the achievement of revenue, operating earnings per share and
operating cash flow targets. Compensation expense related to these awards
amounted to $0.2 million during 2006.
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 2006 unless it was
certain that the awards would vest (i.e. retirement eligible employees). In
those instances, a 0% forfeiture rate was used.
Stock Options
Summary of Plans
----------------
The Company's 1997 Stock Option Plan ("1997 Plan") authorizes 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
stock options granted under the 1997 Plan generally vest over a five-year
period and may vary depending upon the achievement of certain performance
targets as determined by the Board of Directors. The stock options expire
10 years from the date of the grant. Stock options are granted at exercise
prices equal to or greater than the fair market value of the Company's
common stock on the date of grant.
The Company's 1998 Stock Option Plan ("1998 Plan") authorizes 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
stock options granted under the 1998 Plan vest over a three to five year
period and may vary depending upon the achievement of certain performance
targets as determined by the Board of Directors. 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.
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 authorizes the issuance of up to 100,000 shares of
nonqualified stock options to purchase the Company's common stock from its
treasury, subject to the terms of the plan. The stock options granted under
the Director Plan vest immediately. 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.
73
The Company's 2005 Stock Incentive Plan ("2005 Plan") authorizes the
issuance of up to 1,000,000 shares of equity incentive awards including
nonqualified and incentive stock options to purchase the Company's common
stock, subject to the terms of the plan. The stock options granted under
the 2005 Plan generally vest over a four to five year period and may vary
depending upon the achievement of certain performance targets as determined
by the Board of Directors and the terms of each specific grant. 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.
As of December 29, 2006, 478,189 shares were available for future grants of
options under the above plans.
The following table summarizes stock option activity related to the
Company's plans:
Weighted
average Aggregate
Weighted remaining intrinsic
Number of average contractual value(1)
stock exercise life (in (in
options price years) millions)
---------- --------- ------------ ----------
Outstanding at January 2, 2004 1,152,900 $ 22.50
Granted 288,516 25.97
Exercised (99,774) 12.51
Forfeited or Expired (91,788) 28.65
----------
Outstanding at December 31, 2004 1,249,854 23.68
Granted 477,906 20.95
Exercised (97,888) 10.91
Forfeited or Expired (232,712) 26.90
----------
Outstanding at December 30, 2005 1,397,160 23.16
Granted(2) 483,265 23.92
Exercised (160,605) 12.97
Forfeited or Expired (93,291) 24.94
----------
Outstanding at December 29, 2006 1,626,529 $ 24.27 7.4 $ 6.4
========== ========= ============ ==========
Expected to Vest at December 29, 2006 1,514,502 $ 24.35 7.3 $ 6.0
========== ========= ============ ==========
Exercisable at December 29, 2006 902,613 $ 25.33 6.2 $ 3.4
========== ========= ============ ==========
(1) Intrinsic value is calculated for in-the-money options (exercise price
less than market price) outstanding and/or exercisable as the
difference between the market price of our common shares as of December
29, 2006 ($26.92) and the weighted average exercise price of the
underlying options, multiplied by the number of options outstanding
and/or exercisable.
(2) Includes 183,648 performance based stock options which had a weighted
average exercise price of $22.38 per share.
74
The following table provides certain information relating to the exercise
of stock options (in thousands):
Year Ended
---------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
--------------- ------------- ---------------
Stock Options Exercised
Intrinsic value $ 2,120 $ 1,209 $ 2,143
Cash received 2,082 1,068 1,205
Tax benefit realized 236 252 177
As of December 29, 2006, $4.0 million of unrecognized compensation cost
related to non-vested stock options is expected to be recognized over a
weighted-average period of approximately 3 years. Shares are distributed
from the Company's authorized but unissued reserve upon the exercise of
stock options or treasury stock if available. The Company does not intend
to purchase treasury shares to fund the future exercises of stock options.
Fair Value
----------
The Company utilizes the Black-Scholes Option Pricing Model to determine
the fair value of stock options under SFAS No. 123(R), consistent with that
used for pro forma disclosures in prior years. Management is required to
make certain assumptions with respect to selected model inputs, including
anticipated changes in the underlying stock price (i.e., expected
volatility) and option exercise activity (i.e., expected life). Expected
volatility is based on the historical volatility of the Company's stock
over the most recent period commensurate with the estimated expected life
of the stock options. The expected life of options granted, which
represents the period of time that the options are expected to be
outstanding, is based primarily on historical data. The expected dividend
yield is based on the Company's history and expectation of dividend
payouts. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant for a period commensurate with the estimated
expected life. If factors change and result in different assumptions in the
application of SFAS No. 123(R) in future periods, the stock option expense
that the Company records for future grants may differ significantly from
what the Company has recorded in the current period.
The weighted-average fair value and assumptions used to value options
granted are as follows:
Year Ended
----------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
--------------- -------------- ---------------
Weighted-average fair value $ 10.85 $ 9.89 $ 12.62
Risk-free interest rate 4.74% 3.95% 3.62%
Expected volatility 42% 46% 52%
Expected life (in years) 5 5 5
Expected dividend yield 0% 0% 0%
75
Restricted Stock and Restricted Stock Units
Summary of Plans
----------------
The Company's 2002 Restricted Stock Plan authorizes the issuance of stock
awards to employees. The number of shares that are reserved and may be
issued under the plan cannot exceed 200,000. Restricted stock awards are
either time-vested or performance-vested based on the terms of each
individual award agreement. Time-vested restricted stock vests 50% on the
second anniversary of the date of the award and 25% on the third and fourth
anniversaries of the date of the award. Performance-vested restricted stock
vests upon the achievement of certain annual diluted earnings per share
targets by the company, or the seventh anniversary date of the award.
The Company's 2005 Plan authorizes the issuance of restricted stock,
restricted stock units and stock bonuses of up to 400,000 shares, subject
to the terms of the plan with an overall limit on awards of 1,000,000
shares. Time-vested restricted stock granted under the 2005 Plan generally
vest 50% on the second anniversary of the date of the award and 25% on the
third and fourth anniversaries of the date of the award. Performance-vested
restricted stock granted under the 2005 Plan vests upon the achievement of
certain annual diluted earnings per share targets by the company, or the
seventh anniversary date of the award. Performance-vested restricted stock
units granted under the 2005 Plan vest upon the completion of Board
approved strategic initiatives.
As of December 29, 2006, there were 334,745 shares available for future
grants of restricted stock, restricted stock units or stock bonuses under
the 2002 and 2005 plans, subject to the overall limit imposed by the 2005
Plan.
Restricted Stock and Restricted Stock Unit Activity
---------------------------------------------------
The following table summarizes restricted stock and restricted stock unit
activity related to the Company's plans:
Weighted average
Activity fair value
--------------------- ---------------------
Nonvested at January 2, 2004 36,900 $ 35.56
Shares granted 19,100 18.29
Shares vested (13,500) 33.78
Shares forfeited (2,200) 38.75
---------------------
Nonvested at December 31, 2004 40,300 27.79
Shares granted 67,891 19.75
Shares vested - -
Shares forfeited (14,235) 24.66
---------------------
Nonvested at December 30, 2005 93,956 22.46
Shares granted 145,126 23.25
Shares vested (25,911) 20.00
Shares forfeited (9,015) 22.63
---------------------
Nonvested at December 29, 2006 204,156 $ 23.32
=====================
76
The fair value of restricted sock and restricted stock units is equal to
the fair value of the Company's stock on the date of grant. The realized
tax benefit (expense) from the vesting of restricted stock was $0.05
million, $0 and ($0.05 million) for 2006, 2005 and 2004, respectively. As
of December 29, 2006, there was $2.7 million of total unrecognized
compensation cost related to the restricted stock and restricted stock unit
awards. That cost is expected to be recognized over a weighted-average
period of approximately 3 years.
11. OTHER OPERATING EXPENSES
The following charges were recorded in other operating expenses in the
Company's Consolidated Statement of Operations and Comprehensive Income (in
thousands).
Year Ended
--------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
--------------- --------------- ------------------
(a) Alden facility consolidation $ 623 $ 2,806 $ -
(b) Carson City facility shutdown and Tijuana
facility consolidation No. 1 2,743 4,440 -
(c) Columbia facility shutdown, Tijuana facility
consolidation No. 2 and RD&E consolidation 5,125 1,134 -
(d) Tijuana facility start-up - 1,402 900
(e) Asset dispositions and other 6,073 7,287 2,885
(f) Severance 2,494 1,505 800
--------------- --------------- ------------------
$ 17,058 $ 18,574 $ 4,585
=============== =============== ==================
(a) Alden Facility consolidation - Beginning in the first quarter of 2005
and ending in the second quarter of 2006 the Company consolidated the
medical capacitor manufacturing operations in Cheektowaga, NY, and the
implantable medical battery manufacturing operations in Clarence, NY, into
the advanced power source manufacturing facility in Alden, NY ("Alden
Facility"). The Company also consolidated the capacitor research,
development and engineering operations from the Cheektowaga, NY, facility
into the Technology Center in Clarence, NY.
The total cost for these consolidation efforts was $3.4 million, which was
below the Company's original estimate of $3.5 to $4.0 million. The expenses
for the Alden Facility consolidation are included in the IMC business
segment and included the following:
o Production inefficiencies and revalidation - $0.3 million;
o Moving and facility closures - $2.7 million; and
o Other - $0.4 million.
77
Accrued liabilities related to the Alden Facility consolidation are
comprised of the following (in thousands):
Production
inefficiencies Moving and
and facility
revalidation Training closures Other Total
Restructuring charges $ 230 $ 23 $ 2,180 $ 373 $ 2,806
Cash payments (230) (23) (1,144) (373) (1,770)
Accelerated depreciation/
asset write-offs - - (838) - (838)
--------------- ----------- ------------ ----------- --------------
Balance, December 30, 2005 $ - $ - $ 198 $ - $ 198
Restructuring charges 99 - 524 - 623
Cash payments (99) - (722) - (821)
Accelerated depreciation/
asset write-offs - - - - -
--------------- ----------- ------------ ----------- --------------
Balance, December 29, 2006 $ - $ - $ - $ - $ -
=============== =========== ============ =========== ==============
(b) Carson City Facility shutdown and Tijuana Facility consolidation No. 1.
On March 7, 2005, the Company announced its intent to close the Carson
City, NV facility ("Carson City Facility") and consolidate the work
performed at that facility into the Tijuana, Mexico facility ("Tijuana
Facility consolidation No. 1").
The Company has delayed the anticipated final closing of the Carson City
Facility until the second quarter of 2007 in order to accommodate a
customer's pending regulatory approval. If this regulatory approval is
delayed further, additional costs could be incurred. The total revised
estimate for this plan is anticipated to be between $7.4 million and $7.6
million of which $7.2 million has been incurred through December 29, 2006.
The major categories of costs include the following:
o Costs related to the shutdown of the Carson City Facility:
a. Severance and retention - $3.7 million;
b. Accelerated depreciation - $0.6 million; and
c. Other - $0.5 million.
o Costs related to the Tijuana Facility consolidation No. 1:
a. Production inefficiencies and revalidation - $0.4 million;
b. Relocation and moving - $0.2 million;
c. Personnel (including travel, training and duplicate wages) - $1.5
to $1.7 million; and
d. Other - $0.5 million.
All categories of costs are considered to be cash expenditures, except
accelerated depreciation. Once the moves are completed, the Company
anticipates annual cost savings in the range of $2.5 million to $3.1
million. The expenses for the Carson City Facility shutdown and the Tijuana
Facility consolidation No. 1 is included in the IMC business segment.
78
Accrued liabilities related to the Carson City Facility shutdown are
comprised of the following (in thousands):
Severance and Accelerated Other Total
retention depreciation
Restructuring charges $ 2,096 $ 595 $ 221 $ 2,912
Cash payments - - (221) (221)
Write-offs - (595) - (595)
----------------- -------------- ------------ ------------
Balance, December 30, 2005 $ 2,096 $ - $ - $ 2,096
Restructuring charges 1,455 5 57 1,517
Cash payments (2,394) - (57) (2,451)
Write-offs - (5) - (5)
----------------- -------------- ------------ ------------
Balance, December 29, 2006 $ 1,157 $ - $ - $ 1,157
================= ============== ============ ============
Accrued liabilities related to the Tijuana Facility consolidation
No. 1 are comprised of the following (in thousands):
Production
inefficiencies
and Relocation
revalidation and moving Personnel Other Total
Restructuring charges $ 5 $ 123 $ 1,050 $ 350 $ 1,528
Cash payments (5) (123) (1,050) (350) (1,528)
Write-offs - - - - -
--------------- ------------ ------------- ------------ -----------
Balance, December 30, 2005 $ - $ - $ - $ - $ -
Restructuring charges 288 1 651 286 1,226
Cash payments (288) (1) (651) (286) (1,226)
Write-offs - - - - -
--------------- ------------ ------------- ------------ -----------
Balance, December 29, 2006 $ - $ - $ - $ - $ -
=============== ============ ============= ============ ===========
(c) Columbia Facility shutdown, Tijuana Facility consolidation No. 2 and
RD&E consolidation. On November 16, 2005, the Company announced its intent
to close both the Columbia, MD facility ("Columbia Facility") and the
Fremont, CA Advanced Research Laboratory ("ARL"). The manufacturing
operations at the Columbia Facility will be moved into the Tijuana Facility
("Tijuana Facility consolidation No. 2"). The research, development and
engineering ("RD&E") and product development functions at the Columbia
Facility and at ARL will relocate to the Technology Center in Clarence, NY.
The total estimated cost for this facility consolidation plan is
anticipated to be between $7.9 million and $8.3 million of which $6.3
million has been incurred through December 29, 2006. The ARL move and
closure portion of this consolidation project is complete. The Company
expects to incur and pay the remaining cost for the other portions of the
consolidation project over the next two fiscal quarters through June 2007.
79
The major categories of costs include the following:
o Costs related to the shutdown of the Columbia Facility and ARL and the
move and consolidation of the RD&E functions to Clarence, NY:
a. Severance and retention - $2.7 to $2.8 million;
b. Personnel (including travel, training and duplicate wages) - $1.5
million
c. Accelerated depreciation/asset write-offs - $0.7 million; and
d. Other - $0.3 to $0.4 million.
o Costs related to Tijuana Facility consolidation No. 2:
a. Production inefficiencies and revalidation - $0.4 to $0.5
million;
b. Relocation and moving - $0.2 million;
c. Personnel (including travel, training and duplicate wages) - $2.0
to $2.1 million; and
d. Other (including asset write-offs) - $0.1 million.
All categories of costs are considered to be cash expenditures, except for
accelerated depreciation and asset write-offs. Once the moves are
completed, the Company anticipates annual cost savings in the range of $5.0
million to $6.0 million. The expenses for the Columbia Facility and ARL
shutdowns, the Tijuana Facility consolidation No. 2 and the RD&E
consolidation are included in the IMC business segment.
Accrued liabilities related to the Columbia Facility and ARL shutdowns and
the RD&E consolidation are comprised of the following (in thousands):
Accelerated
Severance depreciation
and / asset
retention Personnel write-offs Other Total
Restructuring charges $ 379 $ - $ 435 $ 310 $ 1,124
Cash payments - - - - -
Write-offs - - (435) - (435)
------------ ------------ ------------- ----------- -------------
Balance, December 30, 2005 $ 379 $ - $ - $ 310 $ 689
Restructuring charges 1,918 701 74 118 2,811
Cash payments (550) (701) - (428) (1,679)
Write-offs - - (74) - (74)
------------ ------------ ------------- ----------- -------------
Balance, December 29, 2006 $ 1,747 $ - $ - $ - $ 1,747
============ ============ ============= =========== =============
80
Accrued liabilities related to Tijuana Facility consolidation No. 2 are
comprised of the following (in thousands):
Production
inefficiencies
and Relocation
revalidation and moving Personnel Other Total
Restructuring charges $ - $ - $ 10 $ - $ 10
Cash payments - - (10) - (10)
--------------- ----------- ----------- ---------- ----------
Balance, December 30, 2005 $ - $ - $ - $ - $ -
Restructuring charges 264 149 1,584 317 2,314
Cash payments (264) (149) (1,584) (317) (2,314)
--------------- ----------- ----------- ---------- ----------
Balance, December 29, 2006 $ - $ - $ - $ - $ -
=============== =========== =========== ========== ==========
(d) Tijuana start-up. Other Tijuana start-up expenses (not associated with
the Carson City Facility or Columbia Facility consolidation) during 2005
and 2004 amounted to $1.4 million and $0.9 million, respectively. These
expenses are primarily related to the initial start-up of the value-added
assembly business.
(e) Asset dispositions and other. During 2006, the Company recorded a loss
of $4.4 million related to the write-off of a battery test system that was
under development. Upon completion of the Company's engineering and
technical evaluation, it was determined that the system could not meet the
required specifications in a cost effective manner. This charge was
included in the IMC business segment. The remaining expense for 2006
includes various asset dispositions of approximately $1.0 million and $0.8
million for professional fees related to a potential acquisition that was
no longer considered probable.
During 2005, a $2.8 million charge was recorded for the write-down of
automated cathode assembly equipment for the IMC segment. The remaining
expense for 2005 relates to various asset dispositions of approximately
$3.3 million and the cost to exit a development agreement of $1.2 million.
During 2004, the Company recorded a $2.0 million pre-tax charge associated
with the acquisition of certain patents during the second quarter of 2004.
The acquired patents cover how wet tantalum capacitors are used in an
Implantable Cardioverter Defibrillator. A decision was made to acquire the
patents and remove this as a potential obstacle for existing customers to
more fully adopt wet tantalum technology and for potential customers to
initially adopt the technology. The Company had a prior legal opinion that
in effect concluded the patents were not valid, therefore the Company
believed it was appropriate to record the $2.0 million acquisition cost in
accordance with its economic substance as a period expense. This expense is
related to the IMC business segment. The remaining expense for 2004 relates
to various asset dispositions of approximately $0.9 million.
81
(f) Severance charges. During the fourth quarter of 2006, the Company
implemented a plan for consolidating its corporate and business unit
organization structure. As a result, severance charges of $2.5 million were
recorded in 2006. Expense of $1.5 million was recorded in the IMC segment,
$0.03 million in the ECP segment and $1.0 million was recorded in
unallocated operating expenses under business segment information. Accrued
severance related to this consolidation plan was $1.8 million as of
December 29, 2006 which is expected to be paid throughout 2007.
During the first quarter of 2005, the Company implemented a 4% workforce
reduction as a continuation of cost containment efforts initiated mid-year
2004. As a result, severance charges of $1.5 million were recorded and paid
in 2005. Expense of $0.9 million was recorded in the IMC segment, $0.2
million in the ECP segment and $0.4 million was recorded in unallocated
operating expenses under business segment information.
In response to a reduction in sales for the 2004 year, the Company
implemented a 7% workforce reduction during June 2004, which resulted in a
severance charge of $0.8 million during the second quarter. The severance
charges during the second quarter 2004 were $0.6 million and $0.1 million
for IMC and ECP, respectively. The remaining $0.1 million related to
corporate employees and is included in unallocated operating expenses.
Prior year amounts have been conformed to the current year presentation.
12. INCOME TAXES
The provision for income taxes was comprised of the following (in
thousands):
Year Ended
-------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
---------------- ---------------- --------------
Current:
Federal $ 2,378 $ 931 $ (2,581)
State 142 96 (125)
---------------- ---------------- --------------
2,520 1,027 (2,706)
---------------- ---------------- --------------
Deferred:
Federal 4,831 4,243 8,818
State 57 87 3,402
---------------- ---------------- --------------
4,888 4,330 12,220
---------------- ---------------- --------------
Provision for income taxes $ 7,408 $ 5,357 $ 9,514
================ ================ ==============
82
The provision for income taxes differs from the federal statutory rate due
to the following:
Year Ended
------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
--------------- --------------- ---------------
Statutory rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit 0.5 0.8 (1.5)
Extraterritorial income exclusion (3.8) (0.9) (4.2)
Permanent items 1.9 0.4 0.3
Federal and state tax credits (2.4) (9.5) (3.3)
Valuation allowance 0.7 7.4 13.2
Other (0.4) 1.4 0.6
--------------- --------------- ---------------
Effective tax rate 31.5 % 34.6 % 40.1 %
=============== =============== ===============
In 2006, 2005 and 2004, 92,693, 75,887, and 43,911 shares of common stock,
respectively, were issued through the exercise of non-qualified stock
options or through the disqualifying disposition of incentive stock
options. The total tax benefit to the Company from these transactions,
which is credited to additional paid-in capital rather than recognized as a
reduction of income tax expense, was $0.2 million, $0.3 million, and $0.2
million in 2006, 2005 and 2004, respectively. These tax benefits have also
been recognized in the consolidated balance sheet as a reduction of current
income taxes payable.
Deferred tax assets (liabilities) consist of the following (in thousands):
December 29, December 30,
2006 2005
------------------- ------------------
Property, plant and equipment depreciation $ (3,574) $ (4,857)
Investments (1,064) -
Contingent interest on convertible notes (15,269) (11,428)
Intangible assets (19,317) (16,028)
Other (19) (12)
------------------- ------------------
Gross deferred tax liabilities (39,243) (32,325)
------------------- ------------------
Tax credits 4,372 4,656
Accrued expenses and deferred compensation 3,340 3,404
Inventories 3,824 3,312
Stock-based compensation 1,992 217
Investments - 542
Net operating loss carryforwards 97 1,033
------------------- ------------------
Gross deferred tax assets 13,625 13,164
Less valuation allowance (4,342) (4,843)
------------------- ------------------
9,283 8,321
------------------- ------------------
Net deferred tax liability $ (29,960) $ (24,004)
=================== ==================
Net current deferred tax asset 5,899 6,257
Net noncurrent deferred tax liability (35,859) (30,261)
------------------- ------------------
Total net deferred tax liability $ (29,960) $ (24,004)
=================== ==================
83
As of December 29, 2006, the Company has available $0.1 million of state
net operating loss carryforwards and $4.4 million of state tax credit
carryforwards that begin expiring in 2013.
In assessing the realizability of deferred tax assets, management
considers, within each taxing jurisdiction, whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based on the consideration of the weight of both
positive and negative evidence, management has determined that it is more
likely than not that a portion of the deferred tax asset as of December 29,
2006 related to certain state investment tax credits and net operating
losses will not be realized. The valuation allowance decrease in 2006 was
primarily due to the removal of the allowance on investments as the book
basis exceeds the tax basis resulting from changes in market value, which
was recorded in other comprehensive income.
During the second quarter 2006, the Internal Revenue Service ("IRS")
completed its audit of the Company's 2003-2004 federal consolidated income
tax returns. As a result of the audit, the Company agreed to an adjustment
to reduce the rate of deductible interest on its convertible subordinated
notes. The Company had previously established a deferred income tax
liability for the difference between the amount of interest deducted for
income taxes and the amount recorded as expense for book purposes. This
adjustment (and its prospective impact on the deferred income taxes
recorded in 2005) resulted in a decrease of approximately $1.0 million in
the net deferred tax liability and a cash payment of $0.6 million was made
in 2006.
13. COMMITMENTS AND CONTINGENCIES
Litigation - The Company is a party to various legal actions arising in the
normal course of business including actions brought by former employees who
were terminated in connection with our consolidation initiatives. While the
Company does not believe that the ultimate resolution of any such pending
activities will have a material adverse effect on its 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.
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. We have meritorious defenses and are vigorously
defending the matter. The potential risk of loss is between $0.0 and $1.7
million.
License agreements - The Company is a party to various license agreements
through 2018 for technology that is utilized in certain of its products.
The most significant of these is an agreement to license the basic
technology used for wet tantalum capacitors in the IMC segment. The Company
is required to pay royalties based on agreed upon terms through August
2014. Expenses related to license agreements were $1.5 million, $1.6
million and $1.3 million, for 2006, 2005, and 2004, respectively.
84
Product Warranties - The change in the aggregate product warranty liability
was comprised of the following (in thousands):
Year Ended
-------------------------------------
December 29, December 30,
2006 2005
------------------- -----------------
Beginning balance $ 2,443 $ 926
Additions to warranty reserve 1,744 3,184
Warranty claims paid (2,194) (1,667)
------------------- -----------------
Ending balance $ 1,993 $ 2,443
=================== =================
Operating Leases - The Company is a party to various operating lease
agreements for buildings, equipment and software. The Company incurred
operating lease expense of $2.3 million, $2.7 million, and $2.2 million, in
2006, 2005 and 2004, respectively. Minimum future annual operating lease
payments are $1.9 million in 2007; $1.2 million in 2008; $1.0 million in
2009; $0.8 million in 2010; $0.8 million in 2011 and $2.4 million
thereafter. The Company primarily leases buildings which account for the
majority of the future lease payments. Lease expense includes the effect of
escalation clauses and leasehold improvement incentives which are accounted
for ratably over the lease term.
Workers' Compensation Trust - In Western New York, the Company is a member
of a group self-insurance trust that provides workers' compensation
benefits to eligible employees of the Company and other group member
employers. For locations outside of Western New York, the Company utilizes
traditional insurance relationships to provide workers' compensation
benefits. Under the terms of the Trust, the Company makes annual
contributions to the Trust based on reported salaries paid to the employees
using a rate based formula. Based on actual experience, the Company could
receive a refund or be assessed additional contributions. For financial
statement purposes, no amounts have been recorded for any refund or
additional assessment since the Trust has not informed the Company of any
such adjustments. Under the trust agreement, each participating
organization has joint and several liability for trust obligations if the
assets of the trust are not sufficient to cover its obligation. The Company
does not believe that it has any current obligations under the joint and
several liability.
Purchase Commitments - Contractual obligations for purchase of goods or
services are defined as agreements that are enforceable and legally binding
on the Company and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase
orders are normally based on our current manufacturing needs and are
fulfilled by our vendors within short time horizons. We enter into blanket
orders with vendors that have preferred pricing and terms, however these
orders are normally cancelable by us without penalty. As of December 29,
2006, the total contractual obligation related to such expenditures is $9.7
million and will be financed by existing cash, short-term investments or
cash generated from operations. We also enter into contracts for outsourced
services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty.
85
14. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: Implantable
Medical Components ("IMC") and Electrochem Commercial Power ("ECP"). The
IMC segment designs and manufactures critical components used in
implantable medical devices. The principal components are batteries,
capacitors, filtered feedthroughs, enclosures and precision components.
Additionally, in 2005, the Company expanded its IMC business to include
value-added assembly of products that incorporate these components. The
principal medical devices are pacemakers, defibrillators and
neurostimulators. The ECP segment designs and manufactures high performance
batteries and battery packs; principal markets for these products are for
oil and gas exploration, pipeline inspection, telematics, oceanography
equipment, seismic, communication, military and aerospace applications.
The Company defines segment income from operations as sales less cost of
sales including amortization and expenses attributable to segment-specific
selling, general and administrative, research, development and engineering
expenses, and other operating expenses. Segment income also includes a
portion of non-segment specific selling, general and administrative, and
research, development and engineering expenses based on allocations
appropriate to the expense categories. The remaining unallocated operating
expenses are primarily corporate headquarters and administrative function
expenses. The unallocated operating expenses along with other income and
expense are not allocated to reportable segments. Transactions between the
two segments are not significant. Segment assets are intended to correlate
with invested capital. The amounts include accounts receivable,
inventories, net property, plant and equipment, intangible assets,
trademark and tradenames, and goodwill. Corporate assets consist primarily
of cash, short-term investments available for sale, deferred income taxes
and net property, plant and equipment for corporate headquarters. The
accounting policies of the segments are the same as those described and
referenced in Note 2. Sales by geographic area are presented by attributing
sales from external customers based on where the products are shipped. An
analysis and reconciliation of the Company's business segment information
to the respective information in the consolidated financial statements is
as follows (in thousands):
Year Ended
-----------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
---------------- -------------- ---------------
Sales:
IMC
Medical batteries:
ICD batteries $ 45,140 $ 45,803 $ 35,742
Pacemakers and other batteries 21,090 21,708 19,434
ICD capacitors 16,780 20,709 21,981
Feedthroughs 64,578 59,210 47,387
Enclosures 23,904 23,866 21,709
Other 55,915 36,618 26,402
---------------- -------------- ---------------
Total IMC sales 227,407 207,914 172,655
ECP 43,735 33,183 27,464
---------------- -------------- ---------------
Total sales $ 271,142 $ 241,097 $ 200,119
================ ============== ===============
86
Year Ended
-----------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
------------------ --------------- ------------------
Segment income from operations:
IMC $ 27,860 $ 23,136 $ 28,950
ECP 12,359 7,303 8,005
------------------ --------------- ------------------
Total segment income from operations 40,219 30,439 36,955
Unallocated operating expenses (17,843) (13,553) (10,015)
------------------ --------------- ------------------
Operating income as reported 22,376 16,886 26,940
Unallocated other income and expense 1,158 (1,422) (3,208)
------------------ --------------- ------------------
Income before provision for income
taxes as reported $ 23,534 $ 15,464 $ 23,732
================== =============== ==================
Depreciation and amortization:
IMC $ 15,068 $ 15,749 $ 11,683
ECP 833 851 877
------------------ --------------- ------------------
Total depreciation and amortization included
in segment income from operations 15,901 16,600 12,560
Unallocated depreciation and amortization 3,408 3,118 2,275
------------------ --------------- ------------------
Total depreciation and amortization $ 19,309 $ 19,718 $ 14,835
================== =============== ==================
The changes in the carrying amount of goodwill:
IMC ECP Total
----------------- --------------- ----------------
Balance at December 30, 2005 $ 152,473 $ 2,566 $ 155,039
Goodwill recorded during the year - - -
----------------- --------------- ----------------
Balance at December 29, 2006 $ 152,473 $ 2,566 $ 155,039
================= =============== ================
87
Year Ended
--------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
-------------------- --------------- -------------
Expenditures for tangible long-lived assets,
excluding acquisitions:
IMC $ 12,154 $ 25,259 $ 33,537
ECP 1,351 183 664
-------------------- --------------- -------------
Total reportable segments 13,505 25,442 34,201
Unallocated long-lived tangible assets 855 2,404 5,403
-------------------- --------------- -------------
Total expenditures $ 14,360 $ 27,846 $ 39,604
==================== =============== =============
As of
--------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
-------------------- --------------- -------------
Identifiable assets, net:
IMC $ 379,250 $ 355,568 $ 333,647
ECP 25,061 21,881 20,690
-------------------- --------------- -------------
Total reportable segments 404,311 377,449 354,337
Unallocated assets 143,516 135,462 121,829
-------------------- --------------- -------------
Total assets $ 547,827 $ 512,911 $ 476,166
==================== =============== =============
Year Ended
--------------------------------------------------
December 29, December 30, December 31,
2006 2005 2004
------------------- ---------------- -------------
Sales by geographic area:
United States $ 137,138 $ 126,832 $ 129,166
Foreign countries:
Ireland 57,208 53,399 36,958
All other 76,796 60,866 33,995
------------------- ---------------- -------------
Consolidated sales $ 271,142 $ 241,097 $ 200,119
=================== ================ =============
December 29, December 30,
2006 2005
--------------------- --------------------
Long-lived tangible assets:
United States $ 76,440 $ 87,340
Foreign countries 18,692 14,386
--------------------- --------------------
Consolidated long-lived assets $ 95,132 $ 101,726
===================== ====================
88
Three customers accounted for a significant portion of the Company's sales
and accounts receivable as follows:
Sales Accounts Receivable
--------------------------------------------------- ----------------------------
Year Ended As of
--------------------------------------------------- ----------------------------
December 29, December 30, December 31, December 29, December 30,
2006 2005 2004 2006 2005
-------------------- --------------- ------------- -------------- -------------
Customer A 25% 35% 36% 18% 24%
Customer B 26% 23% 24% 16% 18%
Customer C 16% 12% 10% 16% 19%
-------------------- --------------- ------------- -------------- -------------
Total 67% 70% 70% 50% 61%
==================== =============== ============= ============== =============
We entered into an agreement with Boston Scientific in February 2005
pursuant to which Boston Scientific will purchase a minimum quantity of
filtered feedthroughs at prices specified in the agreement. The period of
the agreement is February 10, 2005 to December 31, 2007. Our previously
disclosed agreements with Boston Scientific pursuant to which Boston
Scientific purchased wet tantalum capacitors and batteries have expired.
Both parties are negotiating follow-on agreements with targeted completion
during the first quarter of 2007. Purchases and shipments of wet tantalum
capacitors and batteries continue during contract negotiations.
15. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
------------------ --------------------- ------------------------- ---------------------
2006 (in thousands, except per share data)
----
Sales $ 63,143 $ 69,294 $ 70,598 $ 68,107
Gross profit (1) 22,396 25,637 26,777 27,634
Net income 1,394 3,239 4,843 6,650
Earnings per share -
basic 0.06 0.15 0.22 0.31
Earnings per share -
diluted 0.06 0.15 0.21 0.28
2005
----
Sales $ 58,857 $ 62,358 $ 63,524 $ 56,358
Gross profit (1) 18,510 23,213 24,161 19,829
Net income 68 756 5,280 4,003
Earnings per share -
basic 0.00 0.03 0.24 0.19
Earnings per share -
diluted 0.00 0.03 0.23 0.19
(1) Gross profit equals total sales minus cost of sales including amortization of intangibles.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
89
ITEM 9A. CONTROLS AND PROCEDURES
Management's Report on Internal Control Over Financial Reporting - Appears
under Part II, Item 8, "Financial Statements and Supplementary Data."
a. Evaluation of Disclosure Controls and Procedures.
-------------------------------------------------
Our management, including the principal executive officer and principal
financial officer, evaluated our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) related to the recording, processing, summarization and reporting
of information in our reports that we file with the SEC. These disclosure
controls and procedures have been designed to provide reasonable assurance
that material information relating to us, including our subsidiaries, is
made known to our management, including these officers, by other of our
employees, and that this information is recorded, processed, summarized,
evaluated and reported, as applicable, within the time periods specified in
the SEC's rules and forms.
Based on their evaluation, as of December 29, 2006, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures are effective.
b. Changes in Internal Control Over Financial Reporting.
-----------------------------------------------------
There have been no changes in our internal control over financial reporting
that occurred during our last fiscal quarter to which this Annual Report on
Form 10-K relates that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE
REGISTRANT
Information regarding directors, executive officers and corporate governance
in the Proxy Statement for the 2007 Annual Meeting of Stockholders is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation in the Proxy Statement for the
2007 Annual Meeting of Stockholders is incorporated herein by reference.
90
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding security ownership of certain beneficial owners in the
Proxy Statement for the 2007 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information regarding certain relationships and related transactions, and
director independence in the Proxy Statement for the 2007 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding the fees paid to and services provided by Deloitte &
Touche LLP, the Company's independent registered public accounting firm, in
the Proxy Statement for the 2007 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
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 December 29, 2006 and
December 30, 2005.
Consolidated Statements of Operations and Comprehensive Income
for the years ended December 29, 2006, December 30, 2005 and
December 31, 2004.
Consolidated Statements of Cash Flows for the years ended
December 29, 2006, December 30, 2005 and December 31, 2004.
Consolidated Statements of Stockholders' Equity for the years
ended December 29, 2006, December 30, 2005 and December 31,
2004.
Notes to Consolidated Financial Statements.
91
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in this report
on Form 10-K: Schedule II - Valuation and Qualifying Accounts.
Schedule II - Valuation and Qualifying Accounts
Additions
----------------------------------
Col. B Col. E
Balance at Charged to Col. D Balance at
Col. A Beginning Charged to Other Accounts- Deductions - End of
Description of Period Costs & Expenses Describe Describe Period
(in thousands)
December 29, 2006
Allowance for $ 450 $ 179 $ - $ (97)(2) $ 532
doubtful accounts
Valuation allowance
for deferred income
tax assets $ 4,843 $ 40 (1) $ - $ (541)(3) $ 4,342
December 30, 2005
Allowance for
doubtful accounts $ 405 $ 66 $ - $ (21)(2) $ 450
Valuation allowance
for deferred income
tax assets $ 3,701 $ 1,142 (1) $ - $ - $ 4,843
December 31, 2004
Allowance for
doubtful accounts $ 426 $ 5 $ - $ (26)(2) $ 405
Valuation allowance
for deferred income
tax assets $ 565 $ 3,136 (1) $ - $ - $ 3,701
(1) Valuation allowance recorded in the provision for income taxes for certain net operating losses and tax
credits.
(2) Accounts written off, net of collections on accounts receivable previously written off.
(3) Reversal of valuation allowance related to available for sale investments.
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
92
(3) EXHIBITS
EXHIBIT DESCRIPTION
NUMBER -----------
-------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to our Registration Statement on Form S-1
(File No. 333-37554)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to our Quarterly Report on Form 10-Q for the quarterly period
ended March 29, 2002).
4.1 Indenture for 2 1/4 % Convertible Subordinated Debentures Due
2013 dated May 28, 2003 (incorporated by reference to Exhibit 4.2
to our Registration Statement on Form S-3 (File No. 333-107667)
filed on August 5, 2003).
4.2 Registration Rights Agreement dated May 28, 2003 by among us and
the initial purchasers of the Debentures described above
(incorporated by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 (File No. 333-107667) filed on August 5,
2003).
10.1# 1997 Stock Option Plan (including form of "standard" option
agreement and form of "special" option agreement) (incorporated
by reference to Exhibit 10.1 to our Registration Statement on
Form S-1 (File No. 333-37554)).
10.2# 1998 Stock Option Plan (including form of "standard" option
agreement, form of "special" option agreement and form of "non-
standard" option agreement) (incorporated by reference to Exhibit
10.2 to our Registration Statement on Form S-1 (File No. 333-
37554)).
10.3# Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan
(incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form S-1 (File No. 333-37554)).
10.4# Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan
(incorporated by reference to Exhibit 10.4 to our Registration
Statement on Form S-1 (File No. 333-37554)).
10.5# Non-Employee Director Stock Incentive Plan (incorporated by
reference to Exhibit A to our Definitive Proxy Statement on
Schedule 14-A filed on April 22, 2002).
10.6# Amended and Restated Employment Agreement dated June 30, 2006
between Greatbatch, Inc. and Edward F. Voboril (incorporated by
reference to Exhibit 10 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2006).
93
10.7 Second Amended and Restated Credit Agreement dated as of May 31,
2005 by and among Greatbatch Ltd., the lenders party thereto and
Manufacturers and Traders Trust Company, as administrative agent
(incorporated by reference to Exhibit 10 of our Quarterly Report
on Form 10-Q for the quarter ended July 1, 2005).
10.8# 2002 Restricted Stock Plan (incorporated by reference to Appendix
B to our Definitive Proxy Statement on Schedule 14A filed on
April 9, 2003).
10.9+ Supply Agreement dated April 10, 2003, between Greatbatch, Inc.
and Boston Scientific/CRM (incorporated by reference to our
Quarterly Report on Form 10-Q for the quarter ended April 4,
2003).
10.10+ Amendment No.1, dated October 8, 2004, to Supply Agreement dated
April 10, 2003, between Greatbatch, Inc. and Boston
Scientific/CRM (incorporated by reference to Exhibit 10.10 to our
Annual Report on Form 10-K for the fiscal year ended December 31,
2004).
10.11 License Agreement, dated August 8, 1996, between Wilson Greatbatch
Ltd. and Evans Capacitor Company (incorporated by reference to
Exhibit 10.23 to our Registration Statement on Form S-1 (File No.
333-37554)).
10.12+ Amendment No. 2, dated December 6, 2002, between Wilson Greatbatch
Technologies, Ltd. and Evans Capacitor Company (incorporated by
reference to Exhibit 10.18 to our Annual Report on Form 10-K for
the year ended January 3, 2003).
10.13+ Supplier Partnering Agreement dated as of October 23, 2003,
between Greatbatch, Inc. and Pacesetter, Inc., a St. Jude Medical
Company (incorporated by reference to Exhibit 10.20 to our Annual
Report on Form 10-K for the year ended January 2, 2004).
10.14+ Amendment No. 1, dated October 8, 2004, to Supplier Partnering
Agreement dated as of October 23, 2003, between Greatbatch, Inc.
and Pacesetter, Inc., d/b/a St. Jude Medical CRMD (incorporated
by reference to Exhibit 10.14 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2004).
10.15+ Purchase Order for wet tantalum capacitors dated December 17,
2004, between Greatbatch, Inc. and Boston Scientific Corporation
and related documents (incorporated by reference to Exhibit 10.15
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004).
10.16+ License Agreement dated October 25, 2005 between Greatbatch, Inc.
and Medtronic, Inc. (incorporated by reference to Exhibit 10.16
to our Annual Report on Form 10-K for the fiscal year ended
December 30, 2005).
94
10.17#* Form of Change of Control Agreement, dated August 14, 2006,
between Greatbatch, Inc. and our executive officers (Thomas J.
Hook, Thomas J. Mazza, Mauricio Arellano, Susan M. Bratton, Susan
Campbell, Barbara Davis, Timothy McEvoy, Marco F. Benedetti,
Edward F. Voboril and Larry T. DeAngelo).
10.18# Employment Agreement dated November 3, 2006 between Greatbatch,
Inc. and Larry T. DeAngelo (incorporated by reference to Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarterly
period ended September 29, 2006).
10.19# Employment Agreement dated August 8, 2006 between Greatbatch, Inc.
and Thomas J. Hook (incorporated by reference to Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarterly period ended
September 29, 2006).
10.20# Greatbatch, Inc. Directors Compensation Policy (incorporated by
reference to Exhibit 10.20 to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2004 as amended by Item 1.01
of Form 8-K filed on February 16, 2006).
10.21 2005 Stock Incentive Plan (incorporated by reference to Exhibit A
to our Definitive Proxy Statement on Schedule 14A filed on April
29, 2005).
10.22 Form of Restricted Stock Award Letter (incorporated by reference
to Exhibit 10.22 to our Annual Report on Form 10-K for the fiscal
year ended December 30, 2005).
10.23 Form of Incentive Stock Option Award Letter (incorporated by
reference to Exhibit 10.23 to our Annual Report on Form 10-K for
the fiscal year ended December 30, 2005).
10.24 Form of Nonqualified Option Award Letter (incorporated by
reference to Exhibit 10.24 to our Annual Report on Form 10-K for
the fiscal year ended December 30, 2005).
10.25 Form of Stock Option Award Letter (incorporated by reference to
Exhibit 10.25 to our Annual Report on Form 10-K for the fiscal
year ended December 30, 2005).
10.26+ Supply Agreement for medical device components dated March 31,
2006, between Greatbatch, Inc. and SORIN/ELA BIOMEDICA CRM and
ELA MEDICAL SAS (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2006).
12.1* Ratio of Earnings to Fixed Charges - Unaudited.
95
21.1* List of subsidiaries.
23.1* Consent of Deloitte & Touche LLP.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) of the Securities Exchange Act.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) of the Securities Exchange Act.
32.1* Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Portions of those exhibits marked "+" have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
* Filed herewith.
# Indicates exhibits that are management contracts or compensation plans or
arrangements required to be filed pursuant to Item 14(c) of Form 10-K.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 27, 2007 GREATBATCH, INC.
By /s/ Thomas J. Hook
------------------------------------------------
Thomas J. Hook
President & Chief Executive Officer
(Principal Executive Officer)
By /s/ Thomas J. Mazza
------------------------------------------------
Thomas J. Mazza
Senior Vice President & Chief Financial Officer
(Principal Financial Officer)
By /s/ Marco F. Benedetti
------------------------------------------------
Marco F. Benedetti
Corporate Controller
(Principal Accounting Officer)
96
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
By /s/ Thomas J. Hook President & Chief Executive February 27, 2007
------------------------- Officer & Director
Thomas J. Hook
/s/ Edward F. Voboril Chairman & Director February 27, 2007
----------------------------
Edward F. Voboril
/s/ Pamela G. Bailey Director February 27, 2007
----------------------------
Pamela G. Bailey
/s/Dr. Joseph A. Miller, Jr. Director February 27, 2007
----------------------------
Dr. Joseph A. Miller, Jr.
/s/ Bill R. Sanford Director February 27, 2007
----------------------------
Bill R. Sanford
Director
----------------------------
Peter H. Soderberg
/s/ Thomas S. Summer Director February 27, 2007
----------------------------
Thomas S. Summer
/s/ William B. Summers, Jr. Director February 27, 2007
----------------------------
William B. Summers, Jr.
/s/ John P. Wareham Director February 27, 2007
----------------------------
John P. Wareham
97
EXHIBIT INDEX
EXHIBIT DESCRIPTION
NUMBER -----------
-------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to our Registration Statement on Form S-1
(File No. 333-37554)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to our Quarterly Report on Form 10-Q for the quarterly period
ended March 29, 2002).
4.1 Indenture for 2 1/4 % Convertible Subordinated Debentures Due
2013 dated May 28, 2003 (incorporated by reference to Exhibit 4.2
to our Registration Statement on Form S-3 (File No. 333-107667)
filed on August 5, 2003).
4.2 Registration Rights Agreement dated May 28, 2003 by among us and
the initial purchasers of the Debentures described above
(incorporated by reference to Exhibit 4.2 to our Registration
Statement on Form S-3 (File No. 333-107667) filed on August 5,
2003).
10.1# 1997 Stock Option Plan (including form of "standard" option
agreement and form of "special" option agreement) (incorporated
by reference to Exhibit 10.1 to our Registration Statement on
Form S-1 (File No. 333-37554)).
10.2# 1998 Stock Option Plan (including form of "standard" option
agreement, form of "special" option agreement and form of "non-
standard" option agreement) (incorporated by reference to Exhibit
10.2 to our Registration Statement on Form S-1 (File No. 333-
37554)).
10.3# Wilson Greatbatch Ltd. Equity Plus Plan Money Purchase Plan
(incorporated by reference to Exhibit 10.3 to our Registration
Statement on Form S-1 (File No. 333-37554)).
10.4# Wilson Greatbatch Ltd. Equity Plus Plan Stock Bonus Plan
(incorporated by reference to Exhibit 10.4 to our Registration
Statement on Form S-1 (File No. 333-37554)).
10.5# Non-Employee Director Stock Incentive Plan (incorporated by
reference to Exhibit A to our Definitive Proxy Statement on
Schedule 14-A filed on April 22, 2002).
10.6# Amended and Restated Employment Agreement dated June 30, 2006
between Greatbatch, Inc. and Edward F. Voboril (incorporated by
reference to Exhibit 10 to our Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2006).
98
10.7 Second Amended and Restated Credit Agreement dated as of May 31,
2005 by and among Greatbatch Ltd., the lenders party thereto and
Manufacturers and Traders Trust Company, as administrative agent
(incorporated by reference to Exhibit 10 of our Quarterly Report
on Form 10-Q for the quarter ended July 1, 2005).
10.8# 2002 Restricted Stock Plan (incorporated by reference to Appendix
B to our Definitive Proxy Statement on Schedule 14A filed on
April 9, 2003).
10.9+ Supply Agreement dated April 10, 2003, between Greatbatch, Inc.
and Boston Scientific/CRM (incorporated by reference to our
Quarterly Report on Form 10-Q for the quarter ended April 4,
2003).
10.10+ Amendment No.1, dated October 8, 2004, to Supply Agreement dated
April 10, 2003, between Greatbatch, Inc. and Boston
Scientific/CRM (incorporated by reference to Exhibit 10.10 to our
Annual Report on Form 10-K for the fiscal year ended December 31,
2004).
10.11 License Agreement, dated August 8, 1996, between Wilson Greatbatch
Ltd. and Evans Capacitor Company (incorporated by reference to
Exhibit 10.23 to our Registration Statement on Form S-1 (File No.
333-37554)).
10.12+ Amendment No. 2, dated December 6, 2002, between Wilson Greatbatch
Technologies, Ltd. and Evans Capacitor Company (incorporated by
reference to Exhibit 10.18 to our Annual Report on Form 10-K for
the year ended January 3, 2003).
10.13+ Supplier Partnering Agreement dated as of October 23, 2003,
between Greatbatch, Inc. and Pacesetter, Inc., a St. Jude Medical
Company (incorporated by reference to Exhibit 10.20 to our Annual
Report on Form 10-K for the year ended January 2, 2004).
10.14+ Amendment No. 1, dated October 8, 2004, to Supplier Partnering
Agreement dated as of October 23, 2003, between Greatbatch, Inc.
and Pacesetter, Inc., d/b/a St. Jude Medical CRMD (incorporated
by reference to Exhibit 10.14 to our Annual Report on Form 10-K
for the fiscal year ended December 31, 2004).
10.15+ Purchase Order for wet tantalum capacitors dated December 17,
2004, between Greatbatch, Inc. and Boston Scientific Corporation
and related documents (incorporated by reference to Exhibit 10.15
to our Annual Report on Form 10-K for the fiscal year ended
December 31, 2004).
10.16+ License Agreement dated October 25, 2005 between Greatbatch, Inc.
and Medtronic, Inc. (incorporated by reference to Exhibit 10.16
to our Annual Report on Form 10-K for the fiscal year ended
December 30, 2005).
99
10.17#* Form of Change of Control Agreement, dated August 14, 2006,
between Greatbatch, Inc. and our executive officers (Thomas J.
Hook, Thomas J. Mazza, Mauricio Arellano, Susan M. Bratton, Susan
Campbell, Barbara Davis, Timothy McEvoy, Marco F. Benedetti,
Edward F. Voboril and Larry T. DeAngelo).
10.18# Employment Agreement dated November 3, 2006 between Greatbatch,
Inc. and Larry T. DeAngelo (incorporated by reference to Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarterly
period ended September 29, 2006).
10.19# Employment Agreement dated August 8, 2006 between Greatbatch, Inc.
and Thomas J. Hook (incorporated by reference to Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarterly period ended
September 29, 2006).
10.20# Greatbatch, Inc. Directors Compensation Policy (incorporated by
reference to Exhibit 10.20 to our Annual Report on Form 10-K for
the fiscal year ended December 31, 2004 as amended by Item 1.01
of Form 8-K filed on February 16, 2006).
10.21 2005 Stock Incentive Plan (incorporated by reference to Exhibit A
to our Definitive Proxy Statement on Schedule 14A filed on April
29, 2005).
10.22 Form of Restricted Stock Award Letter (incorporated by reference
to Exhibit 10.22 to our Annual Report on Form 10-K for the fiscal
year ended December 30, 2005).
10.23 Form of Incentive Stock Option Award Letter (incorporated by
reference to Exhibit 10.23 to our Annual Report on Form 10-K for
the fiscal year ended December 30, 2005).
10.24 Form of Nonqualified Option Award Letter (incorporated by
reference to Exhibit 10.24 to our Annual Report on Form 10-K for
the fiscal year ended December 30, 2005).
10.25 Form of Stock Option Award Letter (incorporated by reference to
Exhibit 10.25 to our Annual Report on Form 10-K for the fiscal
year ended December 30, 2005).
10.26+ Supply Agreement for medical device components dated March 31,
2006, between Greatbatch, Inc. and SORIN/ELA BIOMEDICA CRM and
ELA MEDICAL SAS (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2006).
12.1* Ratio of Earnings to Fixed Charges - Unaudited.
100
21.1* List of subsidiaries.
23.1* Consent of Deloitte & Touche LLP.
31.1* Certification of Chief Executive Officer pursuant to Rule 13a-
14(a) of the Securities Exchange Act.
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-
14(a) of the Securities Exchange Act.
32.1* Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Portions of those exhibits marked "+" have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
* Filed herewith.
# Indicates exhibits that are management contracts or compensation plans or
arrangements required to be filed pursuant to Item 14(c) of Form 10-K.
101