-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T5TzsdIrjq1dMmWCfdmkNZwr1Y6M6RGOhSF0LVL1y0kwGb/+IO2lkscNh6kuxWmH Eh4hUpOr8UD4Z76Y/Grj4w== 0001157523-07-008039.txt : 20070808 0001157523-07-008039.hdr.sgml : 20070808 20070808115252 ACCESSION NUMBER: 0001157523-07-008039 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070629 FILED AS OF DATE: 20070808 DATE AS OF CHANGE: 20070808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREATBATCH, INC. CENTRAL INDEX KEY: 0001114483 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 161531026 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16137 FILM NUMBER: 071034349 BUSINESS ADDRESS: STREET 1: 9645 WEHRLE DRIVE CITY: CLARENCE STATE: NY ZIP: 14031 BUSINESS PHONE: 716-759-5600 MAIL ADDRESS: STREET 1: 9645 WEHRLE DRIVE CITY: CLARENCE STATE: NY ZIP: 14031 FORMER COMPANY: FORMER CONFORMED NAME: WILSON GREATBATCH TECHNOLOGIES INC DATE OF NAME CHANGE: 20000511 10-Q 1 a5464179.txt GREATBATCH, INC. 10-Q U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended June 29, 2007 Commission File Number 1-16137 GREATBATCH, INC. (Exact name of Registrant as specified in its charter) Delaware (State of incorporation) 16-1531026 (I.R.S. employer identification no.) 9645 Wehrle Drive Clarence, New York 14031 (Address of principal executive offices) (716) 759-5600 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Exchange Act Rule 12b-2 (check one): - -------------------------------------------------------------------------------- Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] - -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ] The number of shares outstanding of the Company's common stock, $0.001 par value per share, as of August 7, 2007 was: 22,464,150 shares.
GREATBATCH, INC. TABLE OF CONTENTS FOR FORM 10-Q AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 29, 2007 Page COVER PAGE 1 TABLE OF CONTENTS 2 PART I - FINANCIAL INFORMATION (unaudited) ITEM 1. Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 42 ITEM 4. Controls and Procedures 42 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 43 ITEM 1A. Risk Factors 43 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 44 ITEM 3. Defaults Upon Senior Securities 44 ITEM 4. Submission of Matters to a Vote of Security Holders 44 ITEM 5. Other Information 45 ITEM 6. Exhibits 45 SIGNATURES 45 EXHIBIT INDEX 46
PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GREATBATCH, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - Unaudited (in thousands except share and per share data) - --------------------------------------------------------------------------------------- As of ------------------------- June 29, December 29, ASSETS 2007 2006 ------------ ------------ Current assets: Cash and cash equivalents $ 81,509 $ 71,147 Short-term investments available for sale 39,290 71,416 Accounts receivable, net of allowance of $624 in 2007 and $532 in 2006 34,980 31,285 Inventories 63,953 57,667 Refundable income taxes - 1,569 Deferred income taxes 6,948 5,899 Prepaid expenses and other current assets 3,473 2,343 ------------ ------------ Total current assets 230,153 241,326 Property, plant and equipment, net 101,003 91,869 Amortizing intangible assets, net 48,710 28,078 Trademarks and tradenames 32,582 28,252 Goodwill 207,378 155,039 Other assets 13,671 3,263 ------------ ------------ Total assets $ 633,497 $ 547,827 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 22,898 $ 12,657 Accrued expenses and other current liabilities 27,658 29,618 ------------ ------------ Total current liabilities 50,556 42,275 Convertible subordinated notes 240,506 170,000 Deferred income taxes 30,193 35,859 Other long-term liabilities 141 - ------------ ------------ Total liabilities 321,396 248,134 ------------ ------------ Stockholders' equity: Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding in 2007 or 2006 - - Common stock, $0.001 par value, authorized 100,000,000 shares; 22,463,758 shares issued and outstanding in 2007 and 22,119,142 shares issued and 22,111,516 shares outstanding in 2006 22 22 Additional paid-in capital 235,644 227,187 Treasury stock, at cost, no shares in 2007 and 7,626 shares in 2006 - (205) Retained earnings 76,435 69,165 Accumulated other comprehensive income - 3,524 ------------ ------------ Total stockholders' equity 312,101 299,693 ------------ ------------ Total liabilities and stockholders' equity $ 633,497 $ 547,827 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements - 3 -
GREATBATCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) - Unaudited (in thousands except per share data) - --------------------------------------------------------------------------------------------------------- Three months ended Six months ended --------------------- --------------------- June 29, June 30, June 29, June 30, 2007 2006 2007 2006 ---------- ---------- ---------- ---------- Sales $ 78,462 $ 70,598 $ 155,322 $ 138,705 Costs and expenses: Cost of sales - excluding amortization of intangible assets 45,762 42,863 93,050 82,378 Cost of sales - amortization of intangible assets 994 958 1,942 1,916 Selling, general and administrative expenses 10,735 9,865 20,768 18,880 Research, development and engineering costs, net 6,981 6,142 13,433 12,040 Acquired in-process research and development 18,353 - 18,353 - Other operating expense, net 1,988 3,643 3,521 6,312 ---------- ---------- ---------- ---------- Operating income (loss) (6,351) 7,127 4,255 17,179 Interest expense 2,089 1,163 3,233 2,298 Interest income (2,586) (1,353) (4,442) (2,545) Gain on sale of investment security (4,001) - (4,001) - Gain on extinguishment of debt - - (4,473) - Other (income) expense, net 102 (76) 86 (120) ---------- ---------- ---------- ---------- Income (loss) before provision for income taxes (1,955) 7,393 13,852 17,546 Provision for income taxes 1,444 2,550 6,582 6,053 ---------- ---------- ---------- ---------- Net income (loss) $ (3,399) $ 4,843 $ 7,270 $ 11,493 ========== ========== ========== ========== Earnings (loss) per share: Basic $ (0.15) $ 0.22 $ 0.33 $ 0.53 Diluted $ (0.15) $ 0.21 $ 0.33 $ 0.50 Weighted average shares outstanding: Basic 22,160 21,809 22,087 21,774 Diluted 22,160 26,178 22,367 26,160 Comprehensive income: Net income (loss) $ (3,399) $ 4,843 $ 7,270 $ 11,493 Net unrealized gain (loss) on short-term investments available for sale, net of tax (643) 2,796 (869) 2,822 Less: reclassification adjustment for net realized gain on short-term investments available for sale, net of tax (2,601) - (2,601) - ---------- ---------- ========== ========== Comprehensive income (loss) $ (6,643) $ 7,639 $ 3,800 $ 14,315 ========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements - 4 - GREATBATCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited (in thousands) - ---------------------------------------------------------------------- Six months ended -------------------- June 29, June 30, 2007 2006 ---------- --------- Cash flows from operating activities: - ------------------------------------- Net income $ 7,270 $ 11,493 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,878 9,748 Stock-based compensation 4,877 4,201 Gain on sale of investment security (4,001) - Gain on extinguishment of debt (4,473) - Acquired in-process research and development 18,353 - Deferred income taxes (9,841) 2,329 (Gain) loss on disposal of assets (82) 532 Changes in operating assets and liabilities: Accounts receivable 1,225 (10,857) Inventories 798 (6,428) Prepaid expenses and other current assets (1,020) (1,441) Accounts payable 6,818 2,763 Accrued expenses and other current liabilities (7,070) (6,582) Income taxes 5,158 2,507 ---------- --------- Net cash provided by operating activities 28,890 8,265 ---------- --------- Cash flows from investing activities: - ------------------------------------- Purchase of short-term investments (47,713) (21,589) Proceeds from maturity/disposition of short- term investments 78,960 19,182 Acquisition of property, plant and equipment (5,183) (8,006) Proceeds from sale of property, plant and equipment 7 28 Purchase of cost method investment (2,000) - Insurance proceeds for replacement of assets 300 - Acquisitions, net of cash acquired (108,054) - Increase in other assets 8 12 ---------- --------- Net cash used in investing activities (83,675) (10,373) ---------- --------- Cash flows from financing activities: - ------------------------------------- Repayments under line of credit (1,000) - Principal payments of long-term debt (6,093) (464) Proceeds from issuance of long-term debt 76,000 - Debt issuance costs (6,445) - Issuance of common stock 2,550 349 Excess tax benefits from stock-based awards 340 - Repurchase of treasury stock (205) - ---------- --------- Net cash provided by (used in) financing activities 65,147 (115) ---------- --------- Net increase (decrease) in cash and cash equivalents 10,362 (2,223) Cash and cash equivalents, beginning of year 71,147 46,403 ---------- --------- Cash and cash equivalents, end of period $ 81,509 $ 44,180 ========== ========= The accompanying notes are an integral part of these condensed consolidated financial statements - 5 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Principles Board Opinion ("APB") No. 28, Interim Financial Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Greatbatch, Inc. and its indirect wholly-owned subsidiary Greatbatch, Ltd. (collectively "Greatbatch" or the "Company") for the periods presented. 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, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. The December 29, 2006 condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 29, 2006. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. The second quarter of 2007 and 2006 each contained 13 weeks and ended on June 29 and June 30, respectively. 2. ACQUISITIONS BIOMEC, Inc. - On April 3, 2007, the Company acquired substantially all of the assets of BIOMEC, Inc. ("BIOMEC"), a biomedical device company based in Cleveland, OH with the objective of accelerating technology from major medical and academic institutions, national laboratories, and from internally developed proprietary products. With the BIOMEC acquisition, we acquired an engineering team with diverse capabilities in medical device development, including mechanical design, software engineering, biocompatible coatings, and electronics. As a result, we can now offer our customers device engineering expertise along with full device assembly utilizing our proprietary components. This will also enable us to work in conjunction with our customers' design teams to build more sophisticated devices. This transaction was accounted for under the purchase method of accounting in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141 Business Combinations. Accordingly, the results of BIOMEC's operations were included in our condensed consolidated financial statements from the date of acquisition. The aggregate purchase price was $11.4 million, which was paid in cash. This purchase price is preliminary and is subject to change based upon the final resolution of the post-closing adjustment as defined in the purchase agreement. Any adjustment to the purchase price is not expected to be material and will be allocated to goodwill which totaled $5.2 million. - 6 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- Various factors contributed to the establishment of goodwill, including: the value of BIOMEC's highly trained assembled work force; the expected revenue growth over time and the incremental value to the Company's Implantable Medical Components ("IMC") business from having device engineering capabilities; and the strategic partnership established with IntElect Medical, Inc. ("IntElect") an early stage neurostimulation device company that works in conjunction with the Cleveland Clinic. Goodwill resulting from the BIOMEC acquisition was allocated to the Company's IMC segment and is deductible for tax purposes. Approximately $2.3 million of the purchase price represents the estimated fair value of acquired in-process research and development ("IPR&D") projects that had not yet reached technological feasibility and had no alternative future use as of the acquisition date. Accordingly, the amount was immediately expensed after the acquisition date. The value assigned to IPR&D relates to projects that incorporate BIOMEC's novel-polymer coating (biomimetic) technology that mimics the surface of endothelial cells of blood vessels. The estimated fair value of these projects was determined using a discounted cash flow model. This model utilized discount rates that took into consideration the stage of completion and the risks surrounding the successful development and commercialization of each of the IPR&D projects of approximately 40%, which is consistent with the early development stage of these projects. The Company expects various products that utilize the biomimetic coatings technology to be commercially launched by original equipment manufacturers ("OEM") in 2009 once Food and Drug Administration ("FDA") approval is received. With BIOMEC the Company acquired grants that will fund the remaining development costs for these products. The Company believes that the estimated acquired IPR&D amounts represent their fair value at the date of acquisition and do not exceed the amount an independent third party would pay for the projects. Pro forma amounts are not presented as, excluding the IPR&D charge, BIOMEC did not materially impact our results of operations. Approximately $3.7 million of the purchase price was allocated to BIOMEC's investment in IntElect. Subsequent to the acquisition, the Company made an additional $2.0 million investment in IntElect, which increased its ownership percentage to approximately 19%. The IntElect investment is being accounted for under the cost method of accounting and is included in other assets. Enpath Medical, Inc. - On June 15, 2007, the Company completed its acquisition of Enpath Medical, Inc. ("Enpath"). Enpath is a medical products company engaged in designing, developing, manufacturing and marketing single use medical device products for the cardiac rhythm management, neuromodulation and interventional radiology markets. We believe that the acquisition will further expand our product and service offerings to the cardiac rhythm management ("CRM") and neurostimulation marketplaces, broaden our market reach into the vascular segment through Enpath's introducer product lines, as well as add several new OEM customers. This transaction was accounted for under the purchase method of accounting in accordance with SFAS No. 141. Accordingly, the results of Enpath's operations were included in our condensed consolidated financial statements from the date of acquisition. The aggregate purchase price was $98.2 million, consisting of the cash issued at closing to Enpath shareholders ($91.7 million), the consideration paid to employees in exchange for the cancellation of their Enpath stock options and restricted stock ($3.9 million) and other direct acquisition-related costs, including financial advisory, legal and accounting services ($2.6 million). Subsequent to the acquisition date, the Company repaid the line of credit and term loans assumed from Enpath of approximately $7.1 million. - 7 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- In accordance with SFAS No. 141, the cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed from Enpath based on their fair values as of the close of the acquisition, with the amount exceeding the fair value recorded as goodwill. As the values of certain assets and liabilities are preliminary in nature, they are subject to adjustment as additional information is obtained, including, but not limited to, the finalization of our intangible asset valuation and the resolution of pre-acquisition tax positions. The valuations will be finalized within 12 months of the close of the acquisition. When the valuations are finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in material adjustments to the fair value of the identifiable tangible and intangible assets acquired, including IPR&D, as well as goodwill. The following table summarizes the preliminary allocation of the cost of the acquisition to the assets acquired and liabilities assumed as of the close of the acquisition (in thousands): As of (in thousands) June 15, 2007 ------------------------------------ -------------------- Assets acquired Current assets $ 10,966 Property, plant and equipment 11,737 Acquired IPR&D 16,100 Amortizing intangible assets 22,634 Tradenames 4,330 Goodwill 47,114 -------------------- Total assets acquired 112,881 Liabilities assumed Current liabilities 6,015 Notes payable 4,379 Deferred income taxes 4,175 Other non-current liabilities 145 -------------------- Total liabilities assumed 14,714 -------------------- Purchase price $ 98,167 ==================== The fair values of the assets acquired and liabilities assumed were preliminarily determined using one or more of three valuation approaches: market, income and cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations. The market approach, which indicates value for a subject asset based on available market pricing for comparable assets, was utilized for certain acquired personal property. The income approach, which indicates value for a subject asset based on the present value of risk adjusted cash flows projected to be generated by the asset, was used for certain intangible assets such as core and developed technology, acquired IPR&D, customer relationships, corporate tradenames and for noncompete agreements with employees. The risk adjusted projected cash flows were discounted at a required rate of return that reflects the relative risk of the Enpath transaction and the time value of money. The risk adjusted projected cash flows for each asset considered multiple factors, including current revenue from existing customers; distinct analysis of expected price, volume, and attrition trends; reasonable contract renewal assumptions from the perspective of a marketplace participant; and expected profit margins giving consideration to historical and expected margins. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used for the majority of personal property. The cost to replace a given asset reflects the estimated - 8 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. Inventory - The fair value of the inventory acquired was estimated by applying a version of the cost approach called the net realizable value method. This approach estimates the fair value of the asset by calculating the potential sales generated from selling the inventory and subtracting from it the costs related to the disposal of that inventory and a reasonable profit allowance for our completing and selling effort. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $1.3 million. During the second quarter of 2007, the Company expensed $0.2 million of the step-up value relating to the acquired Enpath inventory sold during the quarter. As of June 29, 2007, the Company had approximately $1.1 million of inventory step-up value remaining and expects to recognize this step-up value as cost of sales during the third quarter of 2007. Intangible assets - The purchase price was allocated to specific intangible assets on a preliminary basis as follows (dollars in thousands): Weighted average Probability Amount amortization assigned to Discount assigned period (years) revenues rate ---------- -------------- ------------- -------- Amortizable intangible assets Technology - core $ 6,938 11 100% 10% Technology - developed 2,683 6 100% 10% Customer relationships 12,703 11 100% 11% Noncompete agreements 310 1 50% 10% ---------- -------------- $ 22,634 10 Tradenames 4,330 indefinite 100% 10% Acquired IPR&D - Introducers $ 14,280 - 60% - 90% 10% Acquired IPR&D - Catheters $ 1,820 - 70% - 75% 10% Core technology - Core technology consists of technical processes, patented and unpatented technology, manufacturing know-how and the understanding with respect to products or processes that have been developed by Enpath and that will be leveraged in future products or processes and will be carried forward from one product generation to the next. Approximately 85 percent of the preliminary value assigned to core technology is associated with Enpath's introducer products. The Company determined that the estimated useful life of the core technology is 11 years. This life is based upon management's estimate of the product life cycle associated with core technology before they will be replaced by new technologies. The expected cash flows associated with core technology was nominal after 11 years. Developed technology - Developed technology acquired from Enpath represents the preliminary value associated with currently marketed products that have received FDA approval as of the acquisition date. Enpath's currently marketed products include: - 9 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- o Venous vessel introducers and valved introducers that enable physicians to create a conduit through which they can insert infusion catheters, implantable ports and pacemaker leads into a blood vessel; o Advanced delivery catheters that have a "fixed curve" or articulating distal tip section that can be manipulated to enable the health care professional to access parts of the patient's anatomy that cannot be reached by traditional introducers; and o Implantable stimulation leads, adaptors and delivery systems for the cardiac and neuromodulation markets. The Company determined that the estimated useful life of the developed technology is 6 years. This life is based upon management's estimate of the life cycle associated with the above products before they will be replaced by new technologies or the next generation of products. The expected cash flows associated with developed technology was nominal after 6 years. Customer relationships - Customer relationships represent the preliminary estimated fair value of both the contractual and non-contractual customer relationships Enpath has with OEMs as of the acquisition date. The primary customers of Enpath include C.R. Bard, Boston Scientific, Medtronic and St. Jude Medical, some of which are also customers of Greatbatch. These relationships were valued separately from goodwill at the amount which an independent third party would be willing to pay for these OEM relationships. The Company determined that the estimated useful life of the intangible assets associated with the existing customer relationships is 11 years. This life was based upon historical customer attrition and management's understanding of the industry. Acquired IPR&D - Approximately $16.1 million of the purchase price represents the preliminary estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, the amount was immediately expensed on the acquisition date. The preliminary value assigned to IPR&D related to introducer projects ($14.3 million) and catheter projects ($1.8 million). These projects primarily represent the next generation of products already being sold by Enpath which incorporate new enhancements and customer modifications. The Company expects to commercially launch various introducer products in 2008 and 2009 and various catheter products in 2009 which will replace existing products. For purposes of valuing the acquired research and development, the Company estimated total costs to complete the introducer projects to be approximately $0.3 million and $0.5 million to complete the catheter projects. If we are not successful in completing these projects on a timely basis, our future sales from introducers and catheters may be adversely affected resulting in erosion of our market share. The preliminary fair value of these projects was determined based on the excess earnings method. This model utilized discount rates that took into consideration the internal rate of return expected from the Enpath transaction and applied that rate to risk adjusted revenues. The risk adjustment assigned to the revenues was based upon the stage of completion and the risks surrounding the successful development and commercialization of each of the IPR&D projects. The Company believes that the estimated acquired IPR&D amounts represent the fair value at the date of acquisition and do not exceed the amount an independent third party would pay for the projects. - 10 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- Goodwill - The excess of the purchase price over the preliminary fair value of net tangible and intangible assets acquired of $47.1 million was allocated to goodwill. Various factors contributed to the establishment of goodwill, including: the strategic benefit of entering the neurostimulation and interventional markets; the value of Enpath's highly trained assembled work force; the expected revenue growth over time that is attributable to increased market penetration from future products and customers; and the incremental value to the Company's IMC business from having a leads platform. The goodwill acquired in connection with the Enpath acquisition was allocated to the Company's IMC business segment and is not deductible for tax purposes. Pro Forma Results - The following unaudited pro forma information presents the consolidated results of operations of the Company and Enpath as if the acquisition of Enpath had occurred as of the beginning of each of the fiscal periods presented (in thousands, except per share amounts): Three months ended Six months ended --------------------- --------------------- (Unaudited) June 29, June 30, June 29, June 30, 2007 2006 2007 2006 --------------------- --------------------- Sales $86,386 $79,877 $172,940 $156,902 Net income 9,441 4,242 19,448 10,586 Earnings per share: Basic $0.43 $0.19 $0.88 $0.49 Diluted $0.41 $0.19 $0.81 $0.46 The unaudited pro forma information presents the combined operating results of Greatbatch and Enpath, with the results prior to the acquisition date adjusted to include the pro forma impact of: the adjustment of amortization of acquired intangible assets and depreciation of fixed assets based on the preliminary purchase price allocation; the elimination of acquisition expenses incurred by Enpath ($5.9 million); the elimination of the non-recurring IPR&D charge and inventory step-up adjustment related to the Enpath acquisition recorded by Greatbatch in the second quarter of 2007 ($16.3 million); the adjustment to interest income reflecting the cash paid in connection with the acquisition, including acquisition-related expenses, at Greatbatch's weighted average interest income rate; and the impact of income taxes on the pro forma adjustments utilizing the federal statutory tax rate of 35%. The unaudited pro forma consolidated basic and diluted earnings per share are based on the consolidated basic and diluted weighted average shares of Greatbatch. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain cost savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of the beginning of each of the periods presented, nor does the pro forma data intend to be a projection of results that may be obtained in the future. - 11 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- 3. SUPPLEMENTAL CASH FLOW INFORMATION Six months ended ---------------------- June 29, June 30, 2007 2006 ----------- ---------- Noncash investing and financing activities: (in thousands) Net unrealized gain (loss) on available-for- sale securities $ (869) $ 2,822 Common stock contributed to 401(k) Plan 2,956 2,780 Property, plant and equipment purchases included in accounts payable 1,016 931 Deferred acquisition costs included in accounts payable 2,023 - Exchange of convertible subordinated notes (Note 7) 117,782 - Cash paid during the period for: Interest $ 2,354 $ 1,944 Income taxes 11,003 1,247 Acquisition of noncash assets and liabilities: Assets acquired $ 120,363 $ - Liabilities assumed 15,294 - 4. SHORT-TERM INVESTMENTS Short-term investments available for sale at June 29, 2007 and December 29, 2006 are comprised of the following (in thousands):
Gross Gross unrealized unrealized Estimated Cost gains losses fair value ---- ----- ------ ---------- June 29, 2007 - ------------- Auction rate securities and other $ 39,290 $ - $ - $ 39,290 ----------- ----------- ----------- ----------- Total available for sale securities $ 39,290 $ - $ - $ 39,290 =========== =========== =========== =========== 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 =========== =========== =========== ===========
In the second quarter of 2007, the Company sold an equity security investment which resulted in a pre-tax gain of $4.0 million ($2.6 million net of tax) or $0.12 per diluted share. - 12 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 5. INVENTORIES Inventories are comprised of the following (in thousands): June 29, December 29, 2007 2006 ------------ ------------ Raw materials $ 33,053 $ 28,568 Work-in-process 16,309 13,528 Finished goods 14,591 15,571 ------------ ------------ Total $ 63,953 $ 57,667 ============ ============ 6. INTANGIBLE ASSETS Amortizing intangible assets are comprised of the following (in thousands): Gross carrying Accumulated Net carrying amount amortization amount ------------- ------------- ------------- June 29, 2007 - ------------- Customer lists $ 12,703 $ (48) $ 12,655 Patented technology 21,462 (14,101) 7,361 Unpatented technology 40,507 (12,132) 28,375 Other 1,650 (1,331) 319 ------------- ------------- ------------- Total amortizing intangible assets $ 76,322 $ (27,612) $ 48,710 ============= ============= ============= 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 ============= ============= ============= Aggregate amortization expense for the second quarter of 2007 and 2006 was $1.1 million and $1.0 million, respectively. Aggregate amortization expense for the six months ended June 29, 2007 and June 30, 2006 was $2.0 million and $1.9 million, respectively. As of June 29, 2007, annual amortization expense is estimated to be $3.2 million for the remainder of 2007, $6.2 million for 2008, $5.5 million for 2009 and $4.9 million for each of 2010, 2011 and 2012. The change in the carrying amount of goodwill during 2007 is as follows (in thousands): IMC ECP Total --- --- ----- Balance at December 29, 2006 $ 152,473 $ 2,566 $ 155,039 Goodwill recorded for BIOMEC 5,225 - 5,225 Goodwill recorded for Enpath 47,114 - 47,114 ---------- ---------- ---------- Balance at June 29, 2007 $ 204,812 $ 2,566 $ 207,378 ========== ========== ========== - 13 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 7. DEBT Long-term debt is comprised of the following (in thousands): June 29, December 29, 2007 2006 ------------- ------------- 2.25% convertible subordinated notes I, due 2013 $ 52,218 $ 170,000 2.25% convertible subordinated notes II, due 2013 197,782 - Unamortized discount (9,494) - ------------- ------------- Total long-term debt $ 240,506 $ 170,000 ============= ============= Convertible Subordinated Notes - In May 2003, the Company completed a private placement of $170 million of 2.25% convertible subordinated notes, due 2013 ("CSN I"). In November 2003 the Company had a registration statement with the Securities and Exchange Commission ("SEC") declared effective with respect to these notes and the underlying common stock. In March 2007, the Company entered into separate, privately negotiated agreements to exchange $117.8 million of CSN I for an equivalent principal amount of a new series of 2.25% convertible subordinated notes due 2013 ("CSN II") (collectively the "Exchange"). The primary purpose of the Exchange was to eliminate the June 15, 2010 call and put option that is included in the terms of CSN I. In connection with the Exchange, the Company issued an additional $80 million aggregate principal amount of CSN II at a price of $950 per $1,000 of principal. In June 2007, the Company had a registration statement with the SEC declared effective with respect to these notes and the underlying common stock. The Exchange was accounted for as an extinguishment of debt and resulted in a pre-tax gain of $4.5 million ($2.9 million net of tax) or $0.13 per diluted share. As a result of the extinguishment, the Company had to recapture the tax interest expense that was previously deducted on the extinguished debentures. This resulted in an additional current income tax liability of approximately $11.3 million, which will be paid by the end of 2007. This amount was previously recorded as a non-current deferred tax liability on the balance sheet. The following is a summary of the significant terms of CSN I and CSN II: CSN I - The notes bear interest at 2.25% per annum, payable semi-annually. Holders may convert the notes into shares of the Company's common stock at a conversion rate of 24.8219 shares per $1,000 of principal, subject to adjustment, before the close of business on June 15, 2013 only under the following circumstances: (1) during any fiscal quarter commencing after July 4, 2003, if the closing sale price of the Company's common stock exceeds 120% of the $40.29 conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (2) subject to certain exceptions, during the five business days after any five consecutive trading day period in which the trading price per $1,000 of principal for each day of such period was less than 98% of the product of the closing sale price of the Company's common stock and the number of shares issuable upon conversion of $1,000 of principal; (3) if the notes have been called for redemption; or (4) upon the occurrence of certain corporate events. - 14 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- Beginning June 20, 2010, the Company may redeem any of the notes at a redemption price of 100% of their principal amount, plus accrued interest. Note holders may require the Company to repurchase their notes on June 15, 2010 or at any time prior to their maturity following a fundamental change, as defined in the agreement, at a repurchase price of 100% of their principal amount, plus accrued interest. The notes are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all debts and other liabilities of the Company's subsidiaries. Beginning with the six-month interest period commencing June 15, 2010, the Company will pay additional contingent interest during any six-month interest period if the trading price of the notes for each of the five trading days immediately preceding the first day of the interest period equals or exceeds 120% of the principal amount of the notes. CSN II - The notes bear interest at 2.25% per annum, payable semi-annually. The holders may convert the notes into shares of the Company's common stock at a conversion price of $34.70 per share, which is equivalent to a conversion ratio of 28.8219 shares per $1,000 of principal. The conversion price and the conversion ratio will adjust automatically upon certain changes to the Company's capitalization. The notes are convertible at the option of the holders at such time as: (i) the closing price of the Company's common stock exceeds 150% of the conversion price of the notes for 20 out of 30 consecutive trading days; (ii) the trading price per $1,000 of principal is less than 98% of the product of the closing sale price of common stock for each day during any five consecutive trading day period and the conversion rate per $1,000 of principal; (iii) the notes have been called for redemption; (iv) the Company distributes to all holders of common stock rights or warrants entitling them to purchase additional shares of common stock at less than the average closing price of common stock for the ten trading days immediately preceding the announcement of the distribution; (v) the Company distributes to all holders of common stock any form of dividend which has a per share value exceeding 5% of the price of the common stock on the day prior to such date of distribution; (vi) the Company affects a consolidation, merger, share exchange or sale of assets pursuant to which its common stock is converted to cash or other property; (vii) the period beginning 60 days prior to but excluding June 15, 2013; and (viii) certain fundamental changes, as defined in the agreement, occur or are approved by the Board of Directors. Conversions in connection with corporate transactions that constitute a fundamental change require the Company to pay a premium make-whole amount whereby the conversion ratio on the notes may be increased by up to 8.2 shares per $1,000 of principal. The premium make-whole amount will be paid in shares of common stock upon any such conversion, subject to the net share settlement feature of the notes described below. The notes contain a net share settlement feature that requires the Company to pay cash for each $1,000 of principal. Any amounts in excess of $1,000 will be settled in shares of the Company's common stock, or at the Company's option, cash. The Company has a one-time irrevocable election to pay the holders in shares of its common stock, which it currently does not plan to exercise. The notes are redeemable by the Company at any time on or after June 20, 2012, or at the option of a holder upon the occurrence of certain fundamental changes, as defined in the agreement, affecting the Company. The notes are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all debts and other liabilities of the Company's subsidiaries. - 15 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- Revolving Line of Credit - In May 2007, the Company entered into a new senior credit facility (the "New Credit Facility") consisting of a $235 million revolving credit facility, which can be increased to $335 million upon the Company's request. The New Credit Facility also contains a $15 million letter of credit subfacility and a $15 million swingline subfacility. This New Credit Facility replaced the Company's previous $50 million revolving credit facility. The New Credit Facility is secured by the Company's non-realty assets including cash, accounts and notes receivable, and inventories, and has an expiration date of May 22, 2012 with a one-time option to extend to April 1, 2013 if no default has occurred. Interest rates under the New Credit Facility are, at the Company's option, based upon the current prime rate or the LIBOR rate plus a margin that varies with the Company's leverage ratio. If interest is paid based upon the prime rate, the applicable margin is between minus 1.25% and 0.00%. If interest is paid based upon the LIBOR rate, the applicable margin is between 1.00% and 2.00%. The Company is required to pay a commitment fee between 0.125% and 0.250% per annum on the unused portion of the New Credit Facility based on the Company's leverage ratio. The New Credit Facility contains limitations on the incurrence of indebtedness, limitations on the incurrence of liens and licensing of intellectual property, limitations on investments and restrictions on certain payments. Except to the extent paid for by common equity of Greatbatch or paid for out of cash on hand, the New Credit Facility limits the amount paid for acquisitions to $100 million. The restrictions on payments, among other things, limit repurchases of Greatbatch's stock to $60 million and limits the ability of the Company to make cash payments upon conversion of CSN II. In addition, the New Credit Facility requires the Company to maintain a ratio of adjusted EBITDA, as defined in the agreement, to interest expense of at least 3.00 to 1.00, and a total leverage ratio, as defined in the agreement, of not greater than 5.00 to 1.00 from May 22, 2007 through September 29, 2009 and not greater than 4.50 to 1.00 from September 30, 2009 and thereafter. The New Credit Facility contains customary events of default. Upon the occurrence and during the continuance of an event of default, a majority of the lenders may declare the outstanding advances and all other obligations under the New Credit Facility immediately due and payable. There were no borrowings outstanding under the New Credit Facility as of June 29, 2007. Deferred Financing Fees - The following is a reconciliation of deferred financing fees for the second quarter of 2007, which are included in other assets (in thousands): Balance at March 30, 2007 $ 5,040 Financing costs deferred 2,283 Write-off during the period (14) Amortization during the period (278) ----------- Balance at June 29, 2007 $ 7,031 =========== - 16 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 8. STOCK-BASED COMPENSATION Compensation costs related to share-based payments for the three and six months ended June 29, 2007 totaled $1.2 million, $0.8 million net of tax, or $0.03 per diluted share and $2.9 million, $1.9 million net of tax, or $0.08 per diluted share, respectively. This compares to $1.2 million, $0.8 million net of tax, or $0.03 per diluted share and $2.6 million, $1.7 million net of tax, or $0.07 per diluted share for the three and six months ended June 30, 2006, respectively. The following table summarizes stock option activity related to the Company's stock-based incentive plans:
Weighted average Weighted remaining Aggregate average contractual intrinsic Number of exercise life value(1) stock options price (in years) (in millions) ----------------------------------------------------- Outstanding at January 1, 2006 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 Granted(3) 327,359 27.52 Exercised (132,260) 19.28 Forfeited or Expired (44,167) 29.93 -------------- Outstanding at June 29, 2007 1,777,461 $ 25.10 7.6 $ 13.7 ===================================================== Exercisable at June 29, 2007 805,252 $ 26.01 6.0 $ 5.9 =====================================================
(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 June 29, 2007 ($32.40) 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. (3) Includes 146,231 performance based stock options which had a weighted average exercise price of $29.65 per share. The weighted-average fair value and assumptions used to value options granted are as follows: Six months ended -------------------- June 29, June 30, 2007 2006 -------- -------- Weighted-average fair value $12.34 $10.45 Risk-free interest rate 4.62% 4.65% Expected volatility 41% 40% Expected life (in years) 5.4 4.9 Expected dividend yield 0% 0% - 17 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 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 1, 2006 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 Shares granted 113,531 27.33 Shares vested (9,436) 25.50 Shares forfeited (3,658) 21.76 ----------- Nonvested at June 29, 2007 304,593 $ 24.77 =========== At the Company's 2007 Annual Meeting of Stockholders held on May 22, 2007, an amendment to the Company's 2005 Stock Incentive Plan was approved by stockholders which increased the number of shares available for grant by 1,450,000 shares. 9. OTHER OPERATING EXPENSE The following were recorded in other operating expense, net in the Company's Consolidated Statements of Operations and Comprehensive Income (in thousands):
Three months ended Six months ended -------------------- -------------------- June 29, June 30, June 29, June 30, 2007 2006 2007 2006 --------- --------- --------- --------- (a) Alden facility consolidation $ - $ 52 $ - $ 567 (b) Carson City facility shutdown and Tijuana facility consolidation No. 1 188 850 574 2,078 (c) Columbia facility shutdown, Tijuana facility consolidation No. 2 and RD&E consolidation 1,372 1,410 2,675 2,333 (d) ECP expansion 145 - 282 - (e) Asset dispositions and other 283 1,331 (10) 1,334 --------- --------- --------- --------- $ 1,988 $ 3,643 $ 3,521 $ 6,312 ========= ========= ========= =========
(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. - 18 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 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. (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 ceased operating at the Carson City Facility on July 15, 2007. The total cost for this consolidation effort was $7.8 million, which has been incurred through June 29, 2007. The major categories of costs include the following: o Costs related to the shutdown of the Carson City Facility: a. Severance and retention - $4.0 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 million; and d. Other - $0.6 million. All categories of costs are considered to be cash expenditures, except accelerated depreciation. 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 are included in the IMC business segment. - 19 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- Accrued liabilities related to the Carson City Facility shutdown are comprised of the following (in thousands):
Severance and Accelerated retention depreciation Other Total -------------- -------------- -------------- -------------- Restructuring charges $ 3,551 $ 600 $ 278 $ 4,429 Cash payments (2,394) - (278) (2,672) Write-offs - (600) - (600) -------------- -------------- -------------- -------------- Balance, December 29, 2006 $ 1,157 $ - $ - $ 1,157 Restructuring charges 338 - 16 354 Cash payments (406) - (16) (422) -------------- -------------- -------------- -------------- Balance, June 29, 2007 $ 1,089 $ - $ - $ 1,089 ============== ============== ============== ==============
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 $ 293 $ 124 $ 1,701 $ 636 $ 2,754 Cash payments (293) (124) (1,701) (636) (2,754) ------------------ --------------- -------------- -------------- -------------- Balance, December 29, 2006 $ - $ - $ - $ - $ - Restructuring charges 220 - - - 220 Cash payments (220) - - - (220) ------------------ --------------- -------------- -------------- -------------- Balance, June 29, 2007 $ - $ - $ - $ - $ - ================== =============== ============== ============== ==============
(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 Company also announced that the manufacturing operations at the Columbia Facility will be moved into the Tijuana Facility ("Tijuana Facility consolidation No. 2") and that 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 $10.6 million and $11.1 million of which $8.9 million has been incurred through June 29, 2007. The ARL move and closure portion of this consolidation project is complete. The Company expects to incur the remaining cost for the other portions of the consolidation project in 2007, with cash payments being made through the second quarter of 2008. - 20 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 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 - $3.5 to $3.7 million; b. Personnel (including travel, training and duplicate wages) - $1.7 million; c. Accelerated depreciation/asset write-offs - $0.5 million; and d. Other - $0.3 to $0.4 million. o Costs related to Tijuana Facility consolidation No. 2: a. Production inefficiencies and revalidation - $0.9 to $1.0 million; b. Relocation and moving - $0.2 million; c. Personnel (including travel, training and duplicate wages) - $2.9 to $3.0 million; and d. Other (including asset write-offs) - $0.6 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):
Severance Accelerated and depreciation / retention Personnel asset write-offs Other Total ----------- ----------- ------------------ ---------- ---------- Restructuring charges $ 2,297 $ 701 $ 509 $ 428 $ 3,935 Cash payments (550) (701) - (428) (1,679) Write-offs - - (509) - (509) ----------- ----------- ------------------ ---------- ---------- Balance, December 29, 2006 $ 1,747 $ - $ - $ - $ 1,747 Restructuring charges 807 248 - 15 1,070 Cash payments (671) (248) - (15) (934) ----------- ----------- ------------------ ---------- ---------- Balance, June 29, 2007 $ 1,883 $ - $ - $ - $ 1,883 =========== =========== ================== ========== ==========
- 21 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 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 $ 264 $ 149 $ 1,594 $ 317 $ 2,324 Cash payments (264) (149) (1,594) (317) (2,324) -------------------- ------------- ------------- ------------- ------------- Balance, December 29, 2006 $ - $ - $ - $ - $ - Restructuring charges 283 6 880 436 1,605 Cash payments (283) (6) (880) (436) (1,605) -------------------- ------------- ------------- ------------- ------------- Balance, June 29, 2007 $ - $ - $ - $ - $ - ==================== ============= ============= ============= =============
(d) Electrochem Commercial Power ("ECP") expansion. In February 2007, the Company announced that it will close its current manufacturing facility in Canton, MA and construct a new 80,000 square foot replacement facility in the Massachusetts area. The expected completion of this $28 million expansion project is mid-2008. The total expense to be recognized for this relocation is estimated to be $2.2 million to $2.4 million, of which $0.3 million has been incurred primarily related to accelerated depreciation. Costs related to this move are included in the ECP business segment and include the following: o Production inefficiencies and revalidation - $0.6 million; o Moving and facility closure - $0.9 million to $1.0 million; o Accelerated depreciation - $0.4 million; and o Other - $0.3 million to $0.4 million. (e) Asset dispositions and other. During the second quarter of 2007, the Company had various asset dispositions and wrote-off professional fees in connection with an unsuccessful acquisition. During the first quarter of 2007, the Company received $0.3 million of insurance proceeds related to equipment damaged during transportation to the Tijuana Facility in the second quarter of 2006. During the second quarter of 2006, the Company recorded a loss of $0.5 million related to this equipment damaged (included in the IMC business segment) and an expense of $0.8 million for professional fees related to a potential acquisition that we no longer considered probable. 10. INCOME TAXES Effective in the first quarter of 2007, the Company adopted the provisions of Financial Standards Accounting Board ("FASB") Interpretation ("FIN") No. 48 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109. FIN No. 48, clarifies the accounting for uncertainty in income taxes recognized under SFAS No. 109. Additionally, in May 2007, the FASB published FASB Staff Position ("FSP") No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As of our adoption date of FIN 48, our accounting is consistent with the guidance in FSP FIN 48-1. - 22 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- Upon adoption of FIN No. 48, the Company did not recognize any adjustment to its $1.8 million of unrecognized tax benefits, all of which would favorably impact the effective tax rate (net of federal benefit on state issues), if recognized. The Company's unrecognized tax benefits consist of refund claims which did not meet the more likely than not threshold under FIN No. 48. At the end of the first quarter, there was no change in the balance of unrecognized tax benefits. During the second quarter of 2007, the balance of unrecognized tax benefits decreased approximately $0.2 million as a result of a state refund claim being withdrawn, offset by additional unrecognized tax benefits acquired as part of the Enpath acquisition. As of June 29, 2007, approximately $0.3 million of unrecognized tax benefits would impact goodwill if recognized. The remaining approximately $1.3 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal benefit on state issues), if recognized. The Company anticipates that the total unrecognized tax benefits could significantly change within the next twelve months due to the settlement of audits/appeals currently in process, however, quantification of an estimated range cannot be made at this time. The Company will recognize interest expense related to uncertain tax positions as Interest Expense. Penalties, if incurred, would be recognized as a component of Selling, General and Administrative Expenses. At the end of the second quarter, the interest or penalties related to uncertain tax positions was not material. The tax years 2003-2006 remain open to examination by the major taxing jurisdictions to which we are subject. The 2001 and 2002 tax years remain open in certain jurisdictions as a result of audits/appeals currently in process. The effective tax rate for 2007 includes the impact of the $18.4 million of acquired IPR&D written off during the quarter, $16.1 million of which is not deductible for tax purposes. Excluding the impact of this expense, the effective tax rate for the three and six months ended June 29, 2007 would have been 32.5% compared to 34.5% for the same periods of 2006. This decrease was primarily a result of the estimated increase in research and development tax credits and the Qualified Production Activities Deduction for 2007. 11. COMMITMENTS AND CONTINGENCIES Litigation - The Company is a party to various legal actions arising in the normal course of business. While the Company does not believe 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 Greatbatch had used proprietary information of the customer to develop certain products. We have meritorious defenses and are vigorously defending the matter. The potential risk of loss is between $0.0 and $1.7 million. - 23 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- In connection with our acquisition of Enpath Medical, Inc. ("Enpath"), we assumed liability in connection with the following proceeding: On June 12, 2006, Enpath was named as defendant in a patent infringement action filed by Pressure Products Medical Supplies, Inc. and venued in the United States District Court in the Eastern District of Texas. On October 2, 2006, Enpath was officially served. Enpath has filed an answer denying liability and has filed counterclaims against the plaintiff alleging antitrust violations and patent misuse. The plaintiff has alleged that Enpath's FlowGuard(TM) valved introducer, which has been on the market for more than three years, infringes claims in the plaintiff's patents and is seeking damages and injunctive relief. Enpath believes that the plaintiff's claims are without merit and intends to pursue its defenses vigorously. Revenues from products sold that include the FlowGuard valved introducer were approximately 5% of Enpath's total revenue for 2006 ($36.8 million) and 2005 ($29.4 million). The lawsuit is currently in the discovery stage. We anticipate that the Court will hold a hearing to construe the claims of the plaintiff's patents in August 2007. It is not possible to predict the timing or outcome of this litigation at this time, including whether it will affect the Company's ability to sell its FlowGuard products, or to estimate the amount or range of potential loss. Product Warranties - The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company accrues its estimated exposure to warranty claims based upon recent historical experience and other specific information as it becomes available. The change in aggregate product warranty liability for the quarter ended June 29, 2007 is as follows (in thousands): Beginning balance at March 30, 2007 $ 1,724 Warranty reserve acquired 54 Additions to warranty reserve 428 Warranty claims paid (389) ---------- Ending balance at June 29, 2007 $ 1,817 ========== 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 June 29, 2007, the total contractual obligation related to such expenditures is approximately $9.5 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. - 24 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 12. EARNINGS PER SHARE The following table reflects the calculation of basic and diluted earnings per share (in thousands, except per share amounts):
Three months ended Six months ended --------------------- --------------------- June 29, June 30, June 29, June 30, 2007 2006 2007 2006 ---------- ---------- ---------- ---------- Numerator for basic earnings per share: Net income (loss) $ (3,399) $ 4,843 $ 7,270 $ 11,493 Effect of dilutive securities: Interest expense on convertible notes and related deferred financing fees, net of tax - 732 - 1,465 ---------- ---------- ---------- ---------- Numerator for diluted earnings per share $ (3,399) $ 5,575 $ 7,270 $ 12,958 ========== ========== ========== ========== Denominator for basic earnings per share: Weighted average shares outstanding 22,160 21,809 22,087 21,774 Effect of dilutive securities: Convertible subordinated notes - 4,219 - 4,219 Stock options and unvested restricted stock - 150 280 167 ---------- ---------- ---------- ---------- Dilutive potential common shares - 4,369 280 4,386 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share 22,160 26,178 22,367 26,160 ========== ========== ========== ========== Basic earnings (loss) per share $ (0.15) $ 0.22 $ 0.33 $ 0.53 ========== ========== ========== ========== Diluted earnings (loss) per share $ (0.15) $ 0.21 $ 0.33 $ 0.50 ========== ========== ========== ==========
The diluted weighted average share calculations do not include stock options and restricted stock of 1,720,000 and 513,000 for the three and six months ended June 29, 2007, respectively, as they are not dilutive to the earnings per share calculations. Additionally, the calculations for the three and six month periods ended June 29, 2007 do not include 1,296,000 and 2,758,000 shares, respectively, related to the Company's convertible subordinated notes (see Note 7) outstanding as they are not dilutive to the earnings per share calculations. The calculations for the three and six months ended June 29, 2007 also do not include 362,000 shares of performance based stock options and restricted stock units as the performance criteria for these awards has not been met as of June 29, 2007. The diluted weighted average share calculations for the three and six months ended June 30, 2006 do not include 1,400,000 stock options as they are not dilutive to the earnings per share calculations. 13. COMPREHENSIVE INCOME (LOSS) The Company's comprehensive income (loss) includes net income (loss) and the net unrealized gain (loss) on its short-term investments available for sale adjusted for any realized gains/losses realized. The net unrealized gain (loss) on short-term investments available for sale reported on the Condensed Consolidated Statements of Operations and Comprehensive Income are shown net of a income tax benefit of $0.3 million and $0.5 million for the three and six month periods ended June 29, 2007, respectively, and tax expense of $0.7 million for the three and six month periods ended June 30, 2006. - 25 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 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, the IMC business includes value-added assembly of products that incorporate these components. The principal medical devices are pacemakers, defibrillators and neurostimulators. The IMC business segment also includes the operations acquired from Enpath and BIOMEC in the second quarter of 2007 (see Note 2), from the date of acquisition. The Enpath operations include revenue from designing, developing, manufacturing and marketing single use medical device products for the CRM, neuromodulation and interventional radiology markets including venous vessel and valved introducers, advanced delivery catheters that have a "fixed curve" or articulating distal tip section and implantable stimulation leads, adaptors and delivery systems for the cardiac and neuromodulation markets. 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, administrative, research, development, engineering and other operating expenses. Segment income also includes a portion of non-segment specific selling, general, administrative, 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. The 2007 results for the IMC segment includes the $18.4 million IPR&D charge related to the BIOMEC and Enpath acquisitions. - 26 - GREATBATCH, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited - -------------------------------------------------------------------------------- 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):
Three months ended Six months ended ------------------- ------------------- June 29, June 30, June 29, June 30, Sales: 2007 2006 2007 2006 --------- --------- --------- --------- IMC ICD batteries $ 13,741 $ 10,994 $ 25,392 $ 23,673 Pacemaker and other batteries 5,903 5,930 11,748 11,717 ICD capacitors 7,892 5,339 16,406 8,907 Feedthroughs 17,010 14,301 35,403 30,589 Enclosures 5,994 7,105 11,700 13,445 Introducers, catheters and leads 1,585 - 1,585 - Other medical 15,467 16,087 30,554 29,006 --------- --------- --------- --------- Total IMC 67,592 59,756 132,788 117,337 ECP 10,870 10,842 22,534 21,368 --------- --------- --------- --------- Total sales $ 78,462 $ 70,598 $ 155,322 $ 138,705 ========= ========= ========= ========= Segment income (loss) from operations: IMC $ (4,504) $ 8,768 $ 7,217 $ 19,668 ECP 2,410 3,242 5,132 6,085 --------- --------- --------- --------- Total segment income (loss) from operations (2,094) 12,010 12,349 25,753 Unallocated operating expenses (4,257) (4,883) (8,094) (8,574) --------- --------- --------- --------- Operating income (loss) as reported (6,351) 7,127 4,255 17,179 Unallocated other income 4,396 266 9,597 367 --------- --------- --------- --------- Income (loss) before provision for income taxes as reported $ (1,955) $ 7,393 $ 13,852 $ 17,546 ========= ========= ========= =========
15. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS 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 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. - 27 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 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") business. We offer technologically advanced, highly reliable and long lasting products that enable our customers to introduce IMDs that are progressively smaller, longer lasting, more efficient and more functional. Additionally, through our manufacturing facility in Tijuana Mexico, our IMC business includes value-added assembly of products that incorporates the components we manufacture. 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. 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 ("CRT") 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. With the acquisition of Enpath Medical, Inc. ("Enpath") in the second quarter of 2007, we now develop and manufacture vascular access devices used primarily in the CRM market. These include venous vessel and valved introducers, advanced delivery catheters that have a "fixed curve" or articulating distal tip section, and implantable stimulation leads, adaptors and delivery systems for the cardiac and neuromodulation markets. 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 Boston Scientific, St. Jude Medical, Medtronic, Biotronik, Cyberonics and the Sorin Group. A substantial part of our business is conducted with a limited number of customers. For the first six months of 2007, Boston Scientific, Medtronic and St. Jude Medical collectively accounted for approximately 69% of our total sales. With the acquisition of Enpath in the second quarter of 2007, we were able to deepen our relationships with many of our larger customers while at the same time broadening both our market and product reach. 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. Our ECP customers are primarily companies involved in oil and gas exploration, pipeline inspection, telematics, oceanographic equipment, seismic, communication, military and aerospace applications industries. 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. - 28 - Business Highlights - ------------------- o Total Company - sales of $78.5 million in the second quarter of 2007, an increase of 11% compared to $70.6 million in 2006. o IMC - sales of $67.6 million, an increase of 13% compared to $59.8 million in 2006, driven by growth of ICD batteries, ICD capacitors and feedthroughs. o ECP - sales of $10.9 million, which were consistent with last year. o Acquired BIOMEC, Inc. ("BIOMEC") for $11.4 million. o BIOMEC is a medical device design and engineering company, located in Cleveland, Ohio. o Acquired Enpath for approximately $98.2 million in cash and assumed $7.1 million of long-term debt. o Enpath is a medical products company engaged in designing, developing, manufacturing and marketing single use medical device products for the CRM, neuromodulation and interventional radiology markets. Annual sales for 2006 were approximately $37 million. o Carson City, Nevada plant ceased operations on July 15, 2007. o Columbia, Maryland shutdown scheduled to be completed by the end of 2007. o ECP facility expansion initiated and scheduled for completion in mid - 2008. o Realized pretax gain of $4.0 million on sale of non-strategic investment. o Finalized Boston Scientific supply agreement for batteries, capacitors and enclosures through 2010. Our CEO's View - -------------- I'm very pleased with the results for the first half of 2007. We had two consecutive quarters of record sales. This increased sales volume combined with our manufacturing initiatives have led to increased operating margins. On a strategic front, we completed two key acquisitions in the quarter. The BIOMEC acquisition gives us design capabilities and establishes some key clinical relationships in the emerging neurostimulation market. Enpath represents an exciting opportunity that further expands our product and service offerings to the CRM and neurostimulation marketplaces. This acquisition broadens our market reach into the vascular segment with the introducer product lines as well as adding several new OEM customers. These acquisitions are key steps in our long-term growth strategy. Product Development - ------------------- Currently, the company is developing a series of new products for customer applications in the CRM, neurostimulation and commercial markets. Some of the key development initiatives are as follows: 1. Continue the evolution of our Q series high rate ICD batteries. 2. Complete the development of a high voltage and high energy density capacitor system. 3. Develop Q series medium rate battery for neurostimulation and pacemaker applications. 4. Augment our existing rechargeable battery with a new rechargeable battery offering for use in neurostimulation applications. 5. Develop rechargeable battery packs for use in commercial applications. 6. Continue development of the batteries and capacitors used in intravascular ICD devices. - 29 - IMC. Our near term focus for growth in the medical battery market, a portion of our IMC business, is the introduction of our Q-Series batteries. Initially they will be available in two configurations - QHR (High Rate) and QMR (Medium Rate). These batteries hold the promise of unparalleled performance in a wide range of implantable device and neurostimulation applications and allow our customers to incorporate advanced power-hungry features into these devices. It delivers advanced performance criteria to an industry that historically embraces new products. We believe the Q-Series will represent a major breakthrough by combining a smaller size with greater energy density (more power). The first ICD device implant with our new QHR technology occurred in the third quarter of 2006. We expect a second customer to begin implanting our QHR technology in the near term. We also released a new, non-proprietary model of medium-rate implantable "Q" series battery. Our rechargeable battery program also continues to make progress in qualification and is receiving tremendous interest from neurostimulation customers. In addition to our battery programs, we continue to advance our ICD capacitor technology with the development of a higher energy capacitor expected for release in 2008. Furthermore, we continue to develop the technology for a next generation higher voltage capacitor. Finally, enabling safe MRI device interaction continues to remain a key focus and represents a potential growth opportunity for the company. We anticipate unveiling a series of new technologies in this area in the near future. With the acquisition of BIOMEC, we can now offer our customers device engineering expertise along with full device assembly utilizing our proprietary components. This will enable us to work in conjunction with our customer's design teams to build more sophisticated devices. Approximately $2.3 million of the BIOMEC purchase price was allocated to the estimated fair value of acquired in-process research and development ("IPR&D") projects that had not yet reached technological feasibility and had no alternative future use as of the acquisition date. The value assigned to IPR&D relates to projects that incorporate BIOMEC's novel-polymer coating (biomimetic) technology that mimics the surface of endothelial cells of blood vessels. The estimated fair value of these projects was determined using a discounted cash flow model. This model utilized discount rates that took into consideration the stage of completion and the risks surrounding the successful development and commercialization of each of the IPR&D projects of approximately 40% which is consistent with these projects being in the early development stage. The Company expects various products that utilize the biomimetic coatings technology to be commercially launched by original equipment manufacturers ("OEM") in 2009 once Food and Drug Administration ("FDA") approval is received. With BIOMEC the Company acquired grants that will fund the remaining development costs for these products. With the acquisition of Enpath we have added a complementary business that further expands our product and service offerings to the CRM and neurostimulation marketplaces. This acquisition also broadened our market reach into the vascular segment as well as added several new customers. These factors support our long-term objective of customer and market diversification. Enpath's currently marketed products include: o Venous vessel introducers and valved introducers that enable physicians to create a conduit through which they can insert infusion catheters, implantable ports and pacemaker leads into a blood vessel; o Advanced delivery catheters that have a "fixed curve" or articulating distal tip section that can be manipulated to enable the health care professional to access parts of the patient's anatomy that cannot be reached by traditional introducers; and o Implantable stimulation leads, adaptors and delivery systems for the cardiac and neuromodulation markets. - 30 - Approximately $16.1 million of the Enpath purchase price was allocated to the preliminary estimated fair value of acquired IPR&D projects that had not yet reached technological feasibility and had no alternative future use. These projects primarily represent the next generation of products already being sold by Enpath which incorporate new enhancements and customer modifications. The Company expects to commercially launch various introducer products in 2008 and 2009 and various catheter products in 2009 which will replace existing products. For purposes of valuing the acquired purchased research and development, the Company estimated total costs to complete the introducer projects to be approximately $0.3 million and $0.5 million to complete the catheter projects. If we are not successful in completing these projects on a timely basis, our future sales from introducers and catheters may be adversely affected resulting in erosion of our market share. ECP. ECP continues to develop new and innovative power solutions for the world's most demanding commercial applications. ECP has developed a new high energy lithium cell for a customer in the telematics market. Due to their exceptional high energy, two of these new cells are capable of providing power for the entire 10-year life of the telematics device. ECP also has developed a battery pack capable of withstanding the customer's harsh operating conditions such as high vibration, high shock, salt spray, high temperature, low temperature, and high humidity. Finally, ECP has developed a modular battery pack for a customer's fleet of underwater sonabuoys which measure water characteristics. The long life of ECP cells, coupled with their ability to withstand harsh conditions, make them ideally suited for buoys. The customer's expense of commissioning a ship to replace the batteries in each buoy is reduced when using ECP batteries due to their long life. Cost Savings and Consolidation Efforts - -------------------------------------- During 2005, we initiated several significant cost savings and consolidation efforts, the implementation of which continued during 2006 and the first six months of 2007. 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 our capacitor research, development and engineering operations from our Cheektowaga, NY facility into our 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. Expenses of $0.6 million were incurred during the first two quarters of 2006. In total, $0.8 million was paid in cash during 2006. The expenses for the Alden Facility consolidation were included in the IMC business segment. Carson City Facility shutdown and Tijuana Facility consolidation No. 1. On March 7, 2005, we announced our intent to close the Carson City, NV facility ("Carson City Facility") and consolidate the work performed at our Carson City Facility into our Tijuana, Mexico facility ("Tijuana Facility consolidation No. 1"). The Company ceased operating at the Carson City Facility on July 15, 2007. The total cost for this consolidation effort was $7.8 million. The Company anticipates that the $1.1 million of severance accrued as of June 29, 2007 related to this consolidation project will be paid out over the next two quarters. The major categories of costs include the following: - 31 - o Costs related to the shutdown of the Carson City Facility: - Severance and retention - $4.0 million; - Accelerated depreciation - $0.6 million; and - Other - $0.5 million. o Costs related to the Tijuana Facility consolidation No. 1: - Production inefficiencies and revalidation - $0.4 million; - Relocation and moving - $0.2 million; - Personnel (including travel, training and duplicate wages) - $1.5 million; and - Other - $0.6 million. All categories of costs are considered to be cash expenditures, except accelerated depreciation. 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 are included in the 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 our Columbia Facility have begun to relocate to the Technology Center in Clarence, NY. The ARL relocation to the Technology Center in Clarence, NY is complete. The total revised estimated cost for this facility consolidation plan is anticipated to be between $10.6 million and $11.1 million. To date, we have expensed $8.9 million related to these projects and expect to incur the remaining costs in 2007, with cash payments being made through the second quarter of 2008. All categories of costs are considered to be future cash expenditures, except for accelerated depreciation and asset write-offs. Approximately $3.9 million of the Columbia Facility and ARL shutdown costs were incurred in 2005 and 2006 ($0.5 million for assets written-off), and $1.1 million were incurred in the first two quarters of 2007. Approximately $0.9 million was paid in cash during the first six months of 2007. Tijuana Facility consolidation plan No. 2 expenses of $2.3 million were incurred and paid in cash in 2006 and $1.6 million in the first two quarters of 2007. Once the moves are completed, the Company anticipates annual cost savings in the range of $5.0 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. ECP Expansion. In February 2007, the Company announced that it will close its current manufacturing facility in Canton, MA and construct a new 80,000 square foot replacement facility in the Massachusetts area. The expected completion of this $28 million expansion project is mid-2008. The total expense to be recognized for this relocation is estimated to be $2.2 million to $2.4 million. During the first six months of 2007, $0.3 million of costs were incurred related to this project, which were primarily non-cash items. Costs related to this move are included in the ECP business segment. - 32 - Our Financial Results - --------------------- We utilize a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. The second quarter of 2007 and 2006 each contained 13 weeks and ended on June 29, and June 30, respectively. The commentary that follows should be read in conjunction with our condensed consolidated financial statements and related notes and with the Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the fiscal year ended December 29, 2006.
Results of Operation Three months ended Six months ended --------------------- --------------------- June 29, June 30, $ % June 29, June 30, $ % In thousands, except per share data 2007 2006 Change Change 2007 2006 Change Change - ------------------------------------------------------------------------------------------------------------------------------------ IMC ICD batteries $ 13,741 $ 10,994 2,747 25% $ 25,392 $ 23,673 1,719 7% Pacemaker and other batteries 5,903 5,930 (27) 0% 11,748 11,717 31 0% ICD capacitors 7,892 5,339 2,553 48% 16,406 8,907 7,499 84% Feedthroughs 17,010 14,301 2,709 19% 35,403 30,589 4,814 16% Enclosures 5,994 7,105 (1,111) -16% 11,700 13,445 (1,745) -13% Introducers, catheters and leads 1,585 - 1,585 N/A 1,585 - 1,585 N/A Other medical 15,467 16,087 (620) -4% 30,554 29,006 1,548 5% --------------------------------------------------------------------------------------- Total IMC 67,592 59,756 7,836 13% 132,788 117,337 15,451 13% ECP 10,870 10,842 28 0% 22,534 21,368 1,166 5% --------------------------------------------------------------------------------------- Total sales 78,462 70,598 7,864 11% 155,322 138,705 16,617 12% Cost of sales - excluding amortization of intangible assets 45,762 42,863 2,899 7% 93,050 82,378 10,672 13% Cost of sales - amortization of intangible assets 994 958 36 4% 1,942 1,916 26 1% --------------------------------------------------------------------------------------- Total Cost of sales 46,756 43,821 2,935 7% 94,992 84,294 10,698 13% Cost of sales as a % of sales 59.6% 62.1% -2.5% 61.2% 60.8% 0.4% Selling, general, and administrative expenses (SG&A) 10,735 9,865 870 9% 20,768 18,880 1,888 10% SG&A as a % of sales 13.7% 14.0% -0.3% 13.4% 13.6% -0.2% Research, development and engineering costs, net (RD&E) 6,981 6,142 839 14% 13,433 12,040 1,393 12% RD&E as a % of sales 8.9% 8.7% 0.2% 8.6% 8.7% -0.1% Other operating expense, net 20,341 3,643 16,698 458% 21,874 6,312 15,562 247% --------------------------------------------------------------------------------------- Operating income (loss) (6,351) 7,127 (13,478) -189% 4,255 17,179 (12,924) -75% Operating margin -8.1% 10.1% -18.2% 2.7% 12.4% -9.7% Interest expense 2,089 1,163 926 80% 3,233 2,298 935 41% Interest income (2,586) (1,353) (1,233) -91% (4,442) (2,545) (1,897) 75% Other (income) expense, net (3,899) (76) (3,823) N/A (8,388) (120) (8,268) N/A Provision for income taxes 1,444 2,550 (1,106) -43% 6,582 6,053 529 9% Effective tax rate N/A 34.5% N/A 47.5% 34.5% 13.0% --------------------------------------------------------------------------------------- Net income (loss) $ (3,399) $ 4,843 $ (8,242) -170% $ 7,270 $ 11,493 $ (4,223) -37% ======================================================================================= Net margin -4.3% 6.9% -11.2% 4.7% 8.3% -3.6% Diluted earnings (loss) per share $ (0.15) $ 0.21 $ (0.36) -171% $ 0.33 $ 0.50 $ (0.17) -34%
- 33 - Sales 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. Our customers may initiate field actions with respect to market-released products. These actions may include product recalls or communications with a significant number of physicians about a product or labeling issue. The scope of such actions can range from very minor issues affecting a small number of units to more significant actions. There are a number of factors, both short-term and long-term related to these field actions that may impact our results. In the short-term, if product has to be replaced, or customer inventory levels have to be restored, this will result in increased component demand. Also, changing customer order patterns due to market share shifts or accelerated device replacements may also have a positive impact on our sales results in the near-term. These same factors may have longer-term implications as well. Customer inventory levels may ultimately have to be rebalanced to match demand. On June 29, 2007, the Company entered into a supply agreement with Cardiac Pacemakers, Inc., a subsidiary of Boston Scientific Corporation ("BSC"). Under the terms of the supply agreement, BSC has agreed to purchase a certain percentage of the batteries, capacitors, and case halves it uses in its implantable medical devices at prices stated in the supply agreement. The supply agreement is effective as of July 1, 2007, and the initial term of the supply agreement ends on December 31, 2010. The agreement may be renewed for one or more four year renewal terms upon mutual agreement of the parties. The prices stated in the supply agreement are subject to adjustment for changes in cost, and the prices of certain batteries and capacitors stated in the supply agreement are subject to adjustment for changes in volume. The increase in IMC sales of 13% for the three and six month periods ended June 29, 2007 was driven by growth of ICD capacitors, feedthroughs and ICD batteries. Additionally, the acquisition of Enpath added $1.6 million to sales. The increase in ICD capacitor sales was primarily the result of a customer supply issue, which we anticipate will subside over the next three months. We also experienced growth in our feedthrough business, which is primarily being driven by the continued acceptance of filtered feedthrough technology and domestic market share penetration. ICD battery sales increased by 25% over the prior year second quarter. ICD battery sales softened through the balance of 2006 reflecting the general slowdown in the ICD market but began to rebound in the first two quarters of 2007. 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. ECP sales were consistent with the prior year second quarter and increased 5% for the six month period. The growth primarily came from oil and gas, pipeline inspection and military markets. Oil and gas drilling activity remains strong and continues to drive the core growth of the business. - 34 - Cost of sales Changes from the prior year to cost of sales as a percentage of sales were primarily due to the following:
June 29, 2007 Three months ended Six months ended -------------------- -------------------- Production efficiencies primarily associated with higher volumes (a) -0.8% -0.1% Excess capacity at Tijuana Facility (b) -2.2% -1.0% Mix change (c) 0.9% 1.0% Other -0.4% 0.5% -------------------- -------------------- Total percentage point change to cost of sales as a percentage of sales -2.5% 0.4% ==================== ====================
(a) This decrease in cost of sales is primarily due to increased sales volume which leverages the fixed cost structure of our manufacturing facilities. (b) The Tijuana Facility was fully operational in 2006 but was not being fully utilized as it was only producing sub-assemblies. In 2007, primarily in the second quarter, the facility is producing increased volumes of sub-assemblies and the majority of our filtered feedthroughs, thus reducing excess capacity. In accordance with the Company's inventory accounting policy, excess capacity costs are expensed. (c) The revenue increase from 2006 was primarily in lower margin products, which included capacitors as well as the addition of the lower margin introducer, catheter and leads operations acquired with Enpath. As the results from Enpath were only included in our financial statements from the date of acquisition (June 15, 2007), we would expect pressure on our cost of sales percentage for the remainder of 2007. However, we expect cost of sales as a percentage of sales to decrease over the next several years as a result of our consolidation efforts and the elimination of excess capacity. Excess capacity for the Tijuana Facility is not expected to be fully eliminated until the end of 2007 when the last announced consolidation effort is anticipated to be completed (see "Cost Savings and Consolidation Efforts" section). SG&A expenses Changes from the prior year to SG&A expenses were due to the following (in thousands): June 29, 2007 Three months Six months ended ended -------------- -------------- Stock-based compensation expense (a) $ 75 $ 325 Increased workforce (b) 520 750 Director fees (c) 15 165 Legal fees (d) 110 240 Other 150 408 -------------- -------------- Net increase in SG&A $ 870 $ 1,888 ============== ============== (a) Increase in stock-based compensation for the six month period is related to leadership transition costs incurred in the first quarter of 2007. Stock-based compensation is expected to continue to increase which is consistent with the growth in the Company's workforce. (b) Increase in workforce is a result of our planned increase in marketing and sales personnel as well as costs related to finance personnel additions in 2006 who were hired in order to help facilitate our acquisition strategy. (c) Increase in director fees is consistent with our amended director compensation plan as discussed in our 2006 proxy statement. (d) Increase in legal fees is due to customer contract negotiations and our various financing transactions. - 35 - We expect SG&A costs will increase in the third quarter of 2007 given the inclusion of Enpath's operating results for a full quarter versus two weeks in the second quarter of 2007. RD&E expenses Net research, development and engineering costs are as follows (in thousands):
Three months ended Six months ended ------------------------- ------------------------ June 29, June 30, June 29, June 30, 2007 2006 2007 2006 ------------ ------------ ------------ ----------- Research and development costs $ 3,911 $ 3,975 $ 7,542 $ 7,948 ------------ ------------ ------------ ----------- Engineering costs 3,991 2,821 7,122 5,177 Less cost reimbursements (921) (654) (1,231) (1,085) ------------ ------------ ------------ ----------- Engineering costs, net 3,070 2,167 5,891 4,092 ------------ ------------ ------------ ----------- Total research and development and engineering costs, net $ 6,981 $ 6,142 $ 13,433 $ 12,040 ============ ============ ============ ===========
The increase in RD&E expenses for the three and six month periods ended June 29, 2007 is primarily due to the planned increase in engineering personnel costs (headcount), as we continue to invest substantial resources to develop new products. In terms of the development costs billed, reimbursements were higher due to the timing of reimbursable development projects as well as the acquisition of Enpath and BIOMEC. Reimbursements for achieving certain development milestones are netted against gross spending. Acquired in-process research and development Approximately $2.3 million and $16.1 million of the BIOMEC and Enpath purchase price, respectively, represents the estimated fair value of IPR&D projects acquired from those companies. These projects had not yet reached technological feasibility and had no alternative future use as of the acquisition date, thus were immediately expensed on the date of acquisition. - 36 - Other operating expense Other operating expense for 2007 and 2006 are comprised of the following costs (in thousands):
Three months ended Six months ended ------------------------- ------------------------- June 29, June 30, June 29, June 30, 2007 2006 2007 2006 ------------ ------------ ------------ ------------ (a) Alden facility consolidation $ - $ 52 $ - $ 567 (a) Carson City facility shutdown and Tijuana facility consolidation No. 1 188 850 574 2,078 (a) Columbia facility shutdown, Tijuana facility consolidation No. 2 and RD&E consolidation 1,372 1,410 2,675 2,333 (a) ECP expansion 145 - 282 - (b) Asset dispositions and other 283 1,331 (10) 1,334 ------------ ------------ ------------ ------------ $ 1,988 $ 3,643 $ 3,521 $ 6,312 ============ ============ ============ ============
(a) Refer to the "Cost Savings and Consolidation Efforts" discussion for disclosure related to the timing and level of remaining expenditures for these items as of June 29, 2007. (b) During the second quarter of 2007, the Company had various asset dispositions and wrote-off professional fees in connection with an unsuccessful acquisition. During the first quarter of 2007, the Company received $0.3 million of insurance proceeds related to equipment damaged during transportation to the Tijuana Facility in the second quarter of 2006. During the second quarter of 2006, the Company recorded a loss of $0.5 million related to this equipment damaged (included in the IMC business segment) and an expense of $0.8 million for professional fees related to a potential acquisition that we no longer considered probable. Interest expense and interest income Interest expense for the three and six month periods ended June 29, 2007 is higher than the prior year periods primarily due to the additional $80 million of 2.25% convertible notes issued at the end of the first quarter of 2007 and additional amortization of deferred fees and discounts associated with these notes and the notes exchanged during the first quarter (See "Gain on extinguishment of debt"). Interest income for the three and six months ended June 29, 2007 increased in comparison to the same periods of 2006 primarily due to increased cash, cash equivalents and short-term investment balances. Interest income is expected to be lower for the remainder of the year as a result of the $108 million of cash deployed for the BIOMEC and Enpath acquisitions near the end of the second quarter of 2007. Gain on sale of investment security In the second quarter of 2007, the Company sold an available-for-sale equity security investment which resulted in a pre-tax gain of $4.0 million ($2.6 million net of tax) or $0.12 per diluted share. Gain on extinguishment of debt In March 2007, the Company entered into separate, privately negotiated agreements to exchange $117.8 million of the original $170.0 million of 2.25% convertible subordinated notes due 2013 ("CSN I") for an equivalent principal amount of a new series of 2.25% convertible subordinated notes due 2013. The primary purpose of this transaction was to eliminate the June 15, 2010 call and put option that is included in the terms of CSN I. This exchange was accounted for as an extinguishment of debt and resulted in a net pre-tax gain of $4.5 million ($2.9 million net of tax) or $0.13 per diluted share. - 37 - Provision for income taxes Our effective tax rate for 2007 includes the impact of the $18.4 million of acquired IPR&D written off during the quarter, $16.1 million of which is not deductible for tax purposes. Excluding the impact of this expense, our effective tax rate for the three and six months ended June 29, 2007 would have been 32.5% compared to 34.5% for the same periods of 2006. This decrease was primarily a result of our estimated increase in research and development tax credits and the Qualified Production Activities Deduction for 2007. We expect our effective tax rate to be approximately 47.5% for 2007. Liquidity and Capital Resources - -------------------------------
June 29, December 29, (Dollars in millions) 2007 2006 ---- ---- Cash and cash equivalents and short-term investments (a)(b) $ 120.8 $ 142.6 Working capital (b) $ 179.6 $ 199.1 Current ratio 4.6:1.0 5.7:1.0
(a) Short-term investments consist of investments acquired with maturities that exceed three months and are less than one year at the time of acquisition, equity securities classified as available-for-sale and auction rate securities. (b) Cash and cash equivalents and short-term investments, working capital and our current ratio decreased primarily due to the $108.1 million of cash used to acquire BIOMEC and Enpath partially offset by $76.0 million of net cash received from the issuance of additional 2.25% convertible subordinated notes due 2013 in March 2007. Revolving line of credit In May 2007, the Company entered into a new senior credit facility (the "New Credit Facility") consisting of a $235 million revolving credit facility, which can be increased to $335 million upon the Company's request. The New Credit Facility also contains a $15 million letter of credit subfacility and a $15 million swingline subfacility. This New Credit Facility replaced the Company's prior $50 million revolving credit facility. The New Credit Facility is secured by the Company's non-realty assets including cash, accounts and notes receivable, and inventories and has an expiration date of May 22, 2012 with a one-time option to extend to April 1, 2013 if no default has occurred. Interest rates under the New Credit Facility are, at the Company's option, based upon the current prime rate or the LIBOR rate plus a margin that varies with the Company's leverage ratio. If interest is paid based upon the prime rate, the applicable margin is between minus 1.25% and 0.00%. If interest is paid based upon the LIBOR rate, the applicable margin is between 1.00% and 2.00%. The Company is required to pay a commitment fee between 0.125% and 0.250% per annum on the unused portion of the New Credit Facility based on the Company's leverage ratio. The New Credit Facility contains limitations on the incurrence of indebtedness, limitations on the incurrence of liens and licensing of intellectual property, limitations on investments and restrictions on certain payments. Except to the extent paid for by common equity of Greatbatch or paid for out of cash on hand, the New Credit Facility limits the amount paid for acquisitions to $100 million. The restrictions on payments, among other things, limit repurchases of Greatbatch's stock to $60 million and limits the ability of the Company to make payments upon conversion of our convertible subordinated notes. In addition, the New Credit Facility requires the Company to maintain a ratio of adjusted EBITDA, as defined in the agreement, to interest expense of at least 3.00 to 1.00, and a total leverage ratio, as defined in the agreement, of not greater than 5.00 to 1.00 from May 22, 2007 through September 29, 2009 and not greater than 4.50 to 1.00 from September 30, 2009 and thereafter. The New Credit Facility contains customary events of default. Upon the occurrence of an event of default, a majority of the lenders may declare the outstanding advances and all other obligations under the New Credit Facility immediately due and payable. - 38 - Operating activities Net cash flows from operating activities for the six months ended June 29, 2007 increased $20.6 million over the comparable period in 2006. This was primarily the result of a decrease in accounts receivable and inventory during the first two quarters of 2007, compared to an increase in 2006, due to management efforts to reduce receivable and safety stock levels. The gain on the extinguishment of debt recorded during the first quarter of 2007 resulted in a reclassification of approximately $11.3 million of income tax liability, which will be paid by the end of 2007. This amount was previously recorded as a non-current deferred tax liability on the balance sheet. Investing activities Net cash used in investing activities for the six months ended June 29, 2007 increased over the comparable period in 2006. This was primarily the result of the acquisitions of BIOMEC and Enpath during the second quarter of 2007 which were funded with both short-term investments and cash on hand. The majority of the acquisition of property, plant and equipment for the first six months of 2007 was related to routine purchases made in order to support our internal growth and to maintain our technology leadership. We expect these purchases to increase in the future as we begin construction of a new 80,000 square foot manufacturing facility in the Massachusetts area. In addition to a new facility, we will also be investing in semi-automation equipment. The expected completion of this $28 million expansion project is mid-2008. In addition to the above, in the second quarter of 2007 we made a $2.0 million investment in IntElect Medical, Inc., an early stage neurostimulation device company that works in conjunction with the Cleveland Clinic. Financing activities Cash flow from financing activities for the first six months of 2007 was primarily related to the issuance of $80.0 million of additional 2.25% convertible subordinated notes due 2013 at a price of $950 per $1,000 of principal during the first quarter. The Company has paid approximately $6.4 million of financing fees related to this transaction as well as the new revolving credit agreement discussed above. Cash flows from financing activities also includes cash received from non-qualified stock option exercises for both 2007 and 2006. Capital Structure At June 29, 2007, our capital structure consisted of $240.5 million of convertible subordinated notes and our 22.5 million shares of common stock outstanding. We have $120.8 million in cash, cash equivalents and short-term investments and are in a position to finance our future acquisitions. We are also authorized to issue 100 million shares of common stock and 100 million shares of preferred stock. The market value of our outstanding common stock since our IPO has exceeded our book value; accordingly, 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 $20.0 million is attributable to the ECP expansion. Off-Balance Sheet Arrangements - ------------------------------ We have no off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K. - 39 - Contractual Obligations - ----------------------- In the normal course of business, the Company makes routine purchase commitments (primarily equipment and raw material purchases) in order to maintain the technological leadership of its manufacturing facilities and meet the needs of its customers. As of June 29, 2007, total contractual obligations related to such expenditures are approximately $9.5 million and will be financed by existing cash, short-term investments, or cash generated from operations. 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. The Company is still evaluating the impact of SFAS No. 159 on its financial statements, which is effective beginning in fiscal year 2008. 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. Application of Critical Accounting Estimates - -------------------------------------------- Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that some of the more critical estimates and related assumptions that affect our financial condition and results of operations are in the areas of inventories, goodwill and other indefinite lived intangible assets, long-lived assets, share-based compensation and income taxes. For further information, refer to Item 7 "Managements Discussion and Analysis of Financial Condition and Results of Operations" and Item 8 "Financial Statements and Supplementary Data" in the Company's Annual Report on Form 10-K for the year ended December 29, 2006. During the three months ended June 29, 2007, we did not change or adopt new accounting policies that had a material effect on our consolidated financial condition and results of operations. Effective in the first quarter of 2007, the Company adopted the provisions of FASB Interpretation ("FIN") No. 48 Accounting for Uncertainty in Income Taxes, an interpretation of FASB SFAS No. 109. FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized under SFAS 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on various related matters such as derecognition, interest and penalties, and disclosure. - 40 - Additionally, in May 2007, the FASB published FASB Staff Position No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As of our adoption date of FIN 48, our accounting is consistent with the guidance in FSP FIN 48-1. Forward-Looking Statements - -------------------------- Some of the statements contained in this Quarterly Report on Form 10-Q and other written and oral statements made from time to time by us and our representatives are not statements of historical or current fact. As such, they are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include statements relating to: o future sales, expenses and profitability; o the future development and expected growth of our business and the industries we operate in; o our ability to successfully execute our business model and our business strategy; o our ability to identify trends within the implantable medical devices, medical components, and commercial power sources 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 as described in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission. - 41 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Under our line of credit any borrowings bear interest at fluctuating market rates. At June 29, 2007, 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 condensed consolidated financial statements. The company incurs certain expenses related to its Tijuana Mexico 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 condensed consolidated financial statements. ITEM 4. CONTROLS AND PROCEDURES. a. Evaluation of Disclosure Controls and Procedures. ------------------------------------------------- Our management, including the principal executive officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) related to the recording, processing, summarization and reporting of information in our reports that we file with the SEC as of June 29, 2007. 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 June 29, 2007, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective. b. Changes in Internal Control Over Financial Reporting. ----------------------------------------------------- We completed the acquisition of Enpath on June 15, 2007, at which time Enpath became a subsidiary of Greatbatch. We believe that the internal controls and procedures of Enpath are reasonably likely to materially affect our internal control over financial reporting. We are currently in the process of incorporating the internal controls and procedures of the former Enpath into our internal controls over financial reporting. The Company has extended its Section 404 compliance program under the Sarbanes-Oxley Act of 2002 (the "Act") and the applicable rules and regulations under such Act to include the former Enpath. The Company will report on its assessment of the internal controls of its combined operations within the time period provided by the Act and the applicable SEC rules and regulations concerning business combinations. There were no other changes in the registrant's internal control over financial reporting during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting, other than the acquisition of Enpath. - 42 - PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. In connection with our acquisition of Enpath Medical, Inc. ("Enpath"), we assumed liability in connection with the following proceeding: On June 12, 2006, Enpath was named as defendant in a patent infringement action filed by Pressure Products Medical Supplies, Inc, and venued in the United States District Court in the Eastern District of Texas. On October 2, 2006, Enpath was officially served. Enpath has filed an answer denying liability and has filed counterclaims against the plaintiff alleging antitrust violations and patent misuse. The plaintiff has alleged that Enpath's FlowGuard(TM) valved introducer, which has been on the market for more than three years, infringes claims in the plaintiff's patents and is seeking damages and injunctive relief. Enpath believes that the plaintiff's claims are without merit and intends to pursue its defenses vigorously. Revenues from products sold that include the FlowGuard valved introducer were approximately 5% of Enpath's total revenue for 2006 ($36.8 million) and 2005 ($29.4 million). The lawsuit is currently in the discovery stage. We anticipate that the Court will hold a hearing to construe the claims of the plaintiff's patents in August 2007. It is not possible to predict the timing or outcome of this litigation at this time, including whether it will affect the Company's ability to sell its FlowGuard products, or to estimate the amount or range of potential loss. There have been no other material changes to those legal proceedings as previously disclosed in the Company's Form 10-K for the year ended December 29, 2006. ITEM 1A. RISK FACTORS. There have been no material changes in risk factors as previously disclosed in the Company's Form 10-K for the year ended December 29, 2006, except as follows: We face risks associated with our acquisition of Enpath Medical, Inc. Our acquisition of Enpath Medical, Inc. ("Enpath") presents several risks and uncertainties, including the following: o The allocation of the purchase price to Enpath's assets, the amortization of intangible assets resulting from that allocation and the impact of fair value purchase accounting adjustments may adversely affect our earnings; o We may be unsuccessful in integrating Enpath's business; o Integrating Enpath's business may be distractive to our management and disruptive to our business and the costs of integration may be significant; and o We may assume liabilities in the Enpath acquisition that we did not anticipate that could have a material adverse effect on our operating results. Enpath's products are subject to regulatory oversight. The medical products that Enpath sells and proposes to sell are subject to regulation by the Food and Drug Administration ("FDA") and by comparable agencies in certain states and foreign countries. The process of complying with requirements of the FDA and other agencies can be costly and time consuming. Enpath has received clearance from the FDA to market its vessel introducer products, safety needle, steerable catheter, and epicardial lead and implant tool. There is no assurance that any future additional clearance can be obtained. In addition, once obtained, these clearances are subject to review and later discovery of problems may result in restrictions on the marketing of a product or withdrawal of the product from the market. Enpath was also subject to - 43 - certain FDA regulations governing manufacturing practices, packaging and labeling. Non-compliance with these regulations can result in product recalls or other sanctions which could have a material adverse effect on our business and financial condition. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. At the Company's Annual Meeting of Stockholders held on May 22, 2007, the stockholders approved the following: 1. A proposal to elect nine directors of the Company to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified as follows: Votes For Authority For Individual Withheld ---------- --------------------------------- Thomas J. Hook 18,632,217 2,459,792 Edward F. Voboril 18,541,343 2,550,666 Pamela G. Bailey 18,627,106 2,464,903 Joseph A. Miller, Jr. 18,636,429 2,455,580 Bill R. Sanford 18,636,529 2,455,480 Peter H. Soderberg 18,478,613 2,613,396 Thomas S. Summer 18,485,200 2,606,809 William B. Summers, Jr. 17,171,763 3,920,246 John P. Wareham 18,637,129 2,454,880 2. A proposal for the adoption of the Greatbatch, Inc. Executive Short-Term Incentive Compensation Plan. The proposal received at least 19,674,757 shares voted in favor of the resolution, 1,364,159 shares voted against, and 53,093 shares abstained from voting. 3. A proposal for the amendment to Greatbatch, Inc. 2005 Stock Incentive Plan. The proposal received at least 15,870,141 shares voted in favor of the resolution, 3,539,585 shares voted against, and 486,906 shares abstained from voting. - 44 - 4. A proposal for the ratification of the Appointment of Deloitte and Touche LLP as our Independent Registered Public Accounting Firm. The proposal received at least 20,992,591 shares voted in favor of the resolution, 34,944 shares voted against, and 64,474 shares abstained from voting. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. See the Exhibit Index for a list of those exhibits filed herewith. 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: August 7, 2007 GREATBATCH, INC. By /s/ Thomas J. Hook ---------------------------------- Thomas J. Hook President and Chief Executive Officer (Principal Executive Officer) By /s/ Thomas J. Mazza ---------------------------------- Thomas J. Mazza Senior Vice President and Chief Financial Officer (Principal Financial Officer) By /s/ Marco F. Benedetti ------------------------------------- Marco F. Benedetti Corporate Controller (Principal Accounting Officer) - 45 - EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our quarterly report on Form 10-Q ended July 1, 2005). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our quarterly report on Form 10-Q ended March 29, 2002). 10.1*+ Supply Agreement between Cardiac Pacemakers, Inc. (d/b/a Boston Scientific) and Greatbatch Ltd. 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* 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. * - Filed herewith. + - Portions of this exhibit has been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment. - 46 - EX-10.1 2 a5464179ex10_1.txt EXHIBIT 10.1 Exhibit 10.1 THE CONFIDENTIAL PORTIONS OF THIS EXHIBIT, WHICH HAVE BEEN REMOVED AND REPLACED WITH AN ASTERISK, HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AN EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT UNDER RULE 405 PROMULGATED UNDER THE SECURITIES ACT OF 1933 AND RULE 24b-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934. SUPPLY AGREEMENT between Cardiac Pacemakers, Inc. (d/b/a Boston Scientific) and Greatbatch Ltd. 2007 - 2010 - 1 - TABLE OF CONTENTS 1.0 INTRODUCTION............................................................3 2.0 DEFINITIONS.............................................................4 3.0 CONTRACT TERM...........................................................6 4.0 FORECASTS, ORDERS AND SAFETY STOCK......................................7 5.0 PRICING.................................................................8 6.0 PRODUCT PURCHASE AND SALE...............................................9 7.0 DELIVERY...............................................................10 8.0 PRODUCT QUALITY AND INSPECTION.........................................10 9.0 INVOICES AND PAYMENT...................................................13 10.0 WARRANTY AND LIMITATION OF LIABILITY...................................13 11.0 PROCESS AND/OR DESIGN CHANGE...........................................17 12.0 BUSINESS REVIEWS AND CERTIFICATIONS....................................17 13.0 BUSINESS EXIT AND TERMINATION..........................................18 14.0 CONFIDENTIAL INFORMATION...............................................19 15.0 INTELLECTUAL PROPERTY..................................................21 16.0 FORCE MAJEURE..........................................................22 17.0 MISCELLANEOUS..........................................................24 EXHIBIT A - LOW AND MEDIUM RATE BATTERIES.....................................27 EXHIBIT B - HIGH RATE BATTERIES...............................................30 EXHIBIT C - WET TANTALUM CAPACITORS...........................................33 EXHIBIT D - CASE HALVES.......................................................37 EXHIBIT E - FILTERED FEEDTHROUGHS.............................................40 EXHIBIT F - BATTERY AND CAPACITOR PRICING ADJUSTMENTS FOR INCREASED COMMITMENT.........................................................41 EXHIBIT G - *.................................................................42 EXHIBIT H - BSC-DESIGNATED THIRD PARTY SUPPLIERS..............................44 - 2 - Supplier Partnering Agreement THIS AGREEMENT is effective 01 July 2007 and is by and between GREATBATCH LTD., a New York corporation located at 9645 Wehrle Drive, Clarence, New York 14031 ("GB") and CARDIAC PACEMAKERS, INC., a Minnesota corporation and subsidiary of BOSTON SCIENTIFIC CORPORATION ("BSC"), located at 4100 Hamline Avenue North, St. Paul, Minnesota 55112-5798 ("BSC"). GB and BSC are also each referred to as a "Party" and collectively as the "Parties". Whereas, BSC purchases certain Products for use in medical devices; and Whereas, GB agrees to manufacture/provide and sell such Products to BSC and its Affiliates in accordance with, and subject to, BSC's specifications and other terms and conditions set forth in the Agreement. Whereas, the Parties desire to continue and expand their relationship based on a philosophy of continuous improvement geared toward world-class benchmarks in quality, cost, inventory levels, delivery, technology and service. NOW, THEREFORE, incorporating the above recitals and in consideration of the mutual covenants below, GB and BSC hereby agree as follows: 1.0 INTRODUCTION 1.1 BSC and GB wish to enter into this Supplier Partnering Agreement. The Parties desire to terminate: 1.1.1 The Battery Supply Agreement between Wilson Greatbatch Ltd. and Cardiac Pacemakers Inc. dba Guidant entered into April 10, 2003 including the 1st Amendment to Battery Supply Agreement entered into August 16, 2004 and the 2nd Amendment to Battery Supply Agreement entered into December 12, 2006; 1.1.2 The Capacitor Supply Agreement between Wilson Greatbatch Technologies, Inc. and Guidant/CRM entered into September 15, 2001 as amended by the Wet Tantalum Capacitor 2005 Pricing Proposal dated November 4, 2004, the Supplement to Wet Tantalum Capacitor 04 November 2004 Pricing Proposal dated November 8, 2004, Wet Tantalum Capacitor Pricing Agreement dated April 6, 2005, and Amendment No. 1 to the Wet Tantalum Capacitor Pricing Agreement effective December 12, 2006; 1.1.3 The * dated January 29, 2007, effective February 1, 2007 and later extended by a revised * dated April 16,2007; and - 3 - 1.2 BSC and GB wish to continue the existing Filtered Feedthrough Supply Agreement entered into February 10, 2005 as amended by the Fourth Amendment to Filtered Feedthrough Supply Agreement effective October 1, 2006 until such time as Parties can agree to the detail of Exhibit E of this Agreement or the expiration of the existing agreement. 1.3 Any financial and other obligations owing by one Party to the other under the foregoing agreements, and any obligations therein with respect to warranty, limitation of liability, and confidentiality, will not be terminated by virtue of Article 1.1 2.0 DEFINITIONS 2.1 As used in this Agreement, the following defined terms will have the meanings provided for in this Article 2.0: 2.2 "Affiliate" means: 2.2.1 any other entity/person of which the securities or other ownership interests representing 50% (fifty percent) or more of the equity or 50% (fifty percent) or more of the ordinary voting power or 50% (fifty percent) or more of the general partnership interests are, at the time of such determination, owned, controlled or held, directly or indirectly, by such entity/person; or 2.2.2 any other entity/person, which at the time of such determination, is controlling, controlled by or under common control with, such entity/person. 2.2.3 As used herein, the term "control," whether used as a noun or verb, refers to the possession, directly or indirectly, of the power to direct, or cause the direction of, the management or policies of a entity/person, whether through the ownership of voting securities, by contract or otherwise. 2.3 "Agreement" means this Agreement and all attached and incorporated Exhibits. 2.4 "Batteries" means lithium iodine low rate batteries, lithium silver vanadium oxide high rate batteries, QMR/QHR silver vanadium oxide/carbon monofluoride batteries medium and high rate batteries, lithium ion batteries and other similar power sources. 2.5 "Buyer-Managed Purchase Order" means BSC's purchase order for Products not managed via Kanban. - 4 - 2.6 "Capacitors" means a capacitor for use in an Implantible Cardioverter Defibrillator ("ICD"). 2.7 "Case Half" means the drawn titanium, aluminum, and/or stainless steel enclosures used in medical devices, medical device components and similar or related products as listed on attached Exhibit D. 2.8 "Confidential Information" is defined in Article 14.0. 2.9 "Contract Year" means each calendar year during the Term, with the initial Contract Year being the portion of calendar year 2007 remaining after the Effective Date. 2.10 "Effective Date" means 01 July 2007. 2.11 "Feedthroughs (FT)" means a subassembly consisting of: (a) an outer electrically conductive member (usually referred to as a flange or ferrule), (b) an inner electrically conductive member or members (usually represented as a metallic wire or pin, or multiple wires or pins), and (c) a nonconductive material fused or brazed between the inner and outer members (usually a glass or ceramic material) such that they are electrically insulated and hermetically sealed as listed on attached Exhibit E. 2.12 "Filtered Feedthrough (FFT)" means an assembly consisting of (a) Feedthrough and (b) feedthrough type capacitor composed of ground electrodes interleaved with conductive active electrodes, one for each active feedthrough pin as listed on attached Exhibit E. 2.13 "Force Majeure" is defined in Article 16.0. 2.14 "High Rate Battery" means a battery for use in an ICD. 2.15 "Intellectual Property" means U.S. and foreign Patent Rights, trademarks, service marks and registrations thereof and applications therefore, copyrights and copyright registrations and applications, mask works and registrations thereof, know-how, trade secrets, inventions, discoveries, ideas, technology, data, information, processes, drawings, designs, licenses, computer programs and software, and technical information including but not limited to information embodied in material specifications, processing instructions, equipment specifications, product specifications, confidential data, electronic files, research notebooks, invention disclosures, research and development reports and the like related thereto, all amendments, modifications, and improvements to any of the foregoing. "Patent Rights" means in addition to the above items protectable under U.S. and foreign patent laws, all reissues, reexaminations, divisionals, continuations, substitutions, extensions, and applications with respect thereto. - 5 - 2.16 "Kanban Purchase Order" means BSC Purchase Orders set-up for Products on an as needed basis. 2.17 "Non-Recurring Engineering Charges (NRE)" means tooling, engineering and qualification testing costs associated with the development of Products by GB for BSC including but not limited to Products included in the Agreement in Exhibits A, B, C, D, and E. 2.18 "Product" means Batteries, Capacitors, Case Halves, and Feedthroughs (including Filtered Feedthroughs) as listed on the attached Exhibits A, B, C, D, and E. 2.19 "Purchase Order" means both Buyer-Managed Purchase Orders and Kanban Purchase Orders. 2.20 "Qualification" means Product performance testing conducted according to an approved and controlled protocol to ensure that the Products meet Specifications. Products used to perform the Qualification must be manufactured using validated equipment and processes per GB procedures. 2.21 "Qualified" means the Product has fully met the Specifications through Qualification. 2.22 "Renewal Term" means a period of four (4) years. 2.23 "Specifications" means with respect to Products listed on Exhibits A, B, C, D, and E the requirements and protocols developed by GB or provided to GB by BSC prior to the date of this Agreement, relative to the design, physical characteristics, function, performance, manufacture, packaging and quality of such Products. 2.24 "WIP" or "Work In Process" means materials for the manufacture of a Product that is currently being processed in an operation, or inventory that has been processed through one operation and is awaiting another operation. WIP represents the value of materials, labor, and overhead that has been issued to manufacturing but has not yet produced a stockable item and may include finished products awaiting final inspection. 3.0 CONTRACT TERM - 6 - 3.1 The Term of this Agreement commences on the Effective Date and ends on December 31, 2010 (the "Initial Term"). It may be extended pursuant to Article 3.2 or earlier terminated pursuant to Article 13.2. Pricing is set forth in Exhibits A, B, C, D, and E is in effect as of the Effective Date. 3.2 The Term of this Agreement may be extended for one or more Renewal Terms (each a "Renewal Term"); provided that the Products and pricing for each Renewal Term will be subject to the mutual written agreement of the Parties reached no later than * prior to the last day of the Initial Term or then current Renewal Term (whichever is applicable). 3.3 Parties agree to begin agreement review and negotiations at least * prior to the last day of the Initial Term or then current Renewal Term (whichever is applicable). 4.0 FORECASTS, ORDERS AND SAFETY STOCK 4.1 Purchase Orders for Products and Forecasts 4.1.1 By * of each Contract Year, BSC will provide GB with a non-binding forecast indicating BSC's forecasted purchases of Products from GB for the next *, which will include an identification of Products, and anticipated quantities and delivery dates. 4.1.2 By * of each Contract Year, BSC will provide GB with a revised non-binding forecast and * for the following *. Greatbatch will acknowledge these Purchase Orders within * days or prior to BSC's holiday shutdown whichever comes first. 4.1.3 All Purchase Orders will set forth at a minimum: (i) an identification of Products ordered, (ii) quantities ordered, (iii) proposed delivery dates (Buyer-Managed Purchase Orders only), and (iv) shipping instructions. 4.1.4 On or about the *, BSC will submit to GB in writing a rolling * forecast of anticipated needs. The first * of the * rolling forecast will be considered binding and the last * of the * rolling forecast will be considered non-binding. Upon completion of * of a *, BSC will provide a non-binding * forecast for the * in the subsequent forecast. 4.2 Modification of Orders. The delivery dates and quantities within a Buyer-Managed Purchase Order by BSC cannot be modified or canceled within * of scheduled completion except upon the written mutual agreement of the Parties. Mutually agreed change orders will be subject to all provisions of this Agreement, whether or not the change order so states. - 7 - 4.3 Notwithstanding the foregoing, BSC may in its sole discretion by written notice to GB cancel orders for and deliveries of any Products against Buyer-Managed Purchase Orders which are not shipped within * following the shipping date set forth in the applicable Greatbatch Purchase Order Acknowledgement and in the event of such cancellation by BSC, BSC may then make such appropriate adjustments to any outstanding orders and forecasts as it deems advisable in light of any shortfalls in supply which relate to such cancellation. 4.4 Standard Lead Time. The standard lead time for production quantities of fully qualified Products is defined in the Exhibit appropriate to that Product. GB will use all commercially viable means to meet BSC's delivery requirements. GB will notify BSC, in writing, of any changes to these standard lead times. 4.5 Safety Stock. GB agrees to maintain a minimum of * inventory as Safety Stock based on the most recent * submission. This Safety Stock is the amount of Product and components required to enable GB to process the Products to completion, ship to BSC within * of receipt of BSC Kanban release, and replenish Safety Stock Product. All Safety Stock requirements above the minimum level will be requested by the BSC buyer in the forecast for that particular Product and approved by GB in writing. 4.5.1 Greatbatch will use best commercial effort to increase Safety Stock within * of said change in Safety Stock requirement. 4.5.2 BSC and GB agree to work together to minimize inventory obsolescence costs for Products under Kanban Purchase Orders. BSC will be responsible for all finished goods inventory, WIP, Product-specific, non-returnable purchased material and any non-cancelable purchase orders outstanding with GB's suppliers necessary to sustain the Safety Stock levels provided for in this Article 4.5. GB will be responsible for billing BSC for obsolescence costs no later than three (3) months after written notification from BSC that a part is obsolete. 5.0 PRICING 5.1 Pricing. The pricing for Products are set forth on Exhibits A, B, C, D, and E. 5.2 Price Adjustments for Increased Commitment. For those Products priced in Exhibit B (High Rate Batteries) and Exhibit C (Wet Tantalum Capacitors), BSC may choose to increase business commitment to realize improved pricing from GB as outlined in those Exhibits and in Exhibit G. 5.3 Price Adjustments for Significant Cost Impact. - 8 - 5.3.1 The price for any Product may be adjusted up or down as of the * of each * during the Term of this Agreement, by mutual consent, if there is significant impact to GB's final cost to manufacture the Product as contemplated within the Product Exhibits. If GB determines that a price increase or decrease under this Article 5.3 is required or permissible, GB will deliver written notice to BSC setting forth the basis for such determination by * of each Contract Year. 5.3.2 The price for any Product may be adjusted up or down in the event that a Product redesign results in a change in the cost of the Product. 5.3.3 If Specification changes occur BSC and GB will work in good faith to minimize obsolescence costs. 5.3.3.1 * 5.3.3.2 * 5.3.3.3 * 6.0 PRODUCT PURCHASE AND SALE 6.1 Manufacture and Supply. On and subject to the terms and conditions of this Agreement, during the Term: (a) GB will deliver and sell Products to BSC in the quantities ordered by BSC from time to time by delivery to GB of BSC's purchase order and delivery instructions and (b) BSC will purchase not less than the percentage of its requirements for each of the Products as set forth in the Exhibits to this Agreement pending the Food and Drug Administration's (FDA) approval and the market release of the finished ICD and/or pacemaker. 6.1.1 BSC Tooling. Any tooling supplied by BSC to or purchased by BSC from GB is and remains the property of BSC. Clearly visible asset tags will be assigned and applied to all such tooling specifying Boston Scientific as the owner of that tooling. GB will (a) store and maintain all BSC tooling in good working condition, (b) insure it at full replacement value under an all-risk policy of property insurance endorsed to name BSC as an additional insured with respect to such tooling, and (c) not relocate said tooling without the express written permission of BSC. All direct charges for maintenance, repair or replacement after expiration of useful life of any BSC tooling by GB or any third party, other than that which may be caused by misuse of any tooling or breach hereof by GB, will be the sole financial responsibility of BSC. GB will use BSC tooling only in the manufacture of Products pursuant to this Agreement and will return said tooling without cost other than freight and packaging charges to BSC at any time upon the written request of BSC. - 9 - 6.1.2 Subcontracting. GB is not permitted to subcontract or delegate any of its obligations under this Agreement without the prior written consent of BSC. 7.0 DELIVERY 7.1 BSC will give GB written instructions as to the method of shipment and carrier, which GB must follow. If BSC does not give specific instructions, GB may select the method of shipment and the carrier for the respective purchase order, and GB will prepay transportation and similar charges upon shipment (which payments will be added to the invoice). 7.2 Title to all Products conforming to BSC'S purchase order will pass, free and clear of all encumbrances, at the FOB shipping point, which is * . BSC will bear all risk of damage or loss to those items after delivery by GB to the carrier at the FOB shipping point, and BSC releases GB from any and all claims and liability with respect to any such in-transit damages or losses to those items. The acceptance of title of the items does not constitute acceptance as conforming to applicable Specifications. 7.3 GB will ship Product under Buyer Managed Purchase Orders to BSC * of GB's Sales Order Acknowledgement commit date. GB will ship Product under Kanban Purchase Orders to BSC within * of GB's confirmation of Kanban release receipt. GB will acknowledge receipt of Kanban release in *. 7.4 In the event of any shortage, damage or discrepancy in or to a shipment of Products, BSC will promptly notify GB of the shortage, damage or discrepancy. GB will promptly ship the quantities of any missing Products to remedy any such shortage. 7.5 Failure to Ship. If GB fails for any reason, other than Force Majeure or breach of this Agreement by BSC, to ship to BSC sufficient quantities of Products meeting BSC's Purchase Orders and Forecasts within *, GB agrees to provide BSC with * the committed purchase requirement for that Product for the *. The remedies provided to BSC in Article 4.2 and 4.3 (order cancellation), in this Article 7.5 (reduction of volume commitments) and in Article 13.2 (termination) shall constitute BSC's sole remedies for any late shipments or failures to ship Product as provided for in this Agreement. 8.0 PRODUCT QUALITY AND INSPECTION 8.1 Testing and Inspection. - 10 - 8.1.1 GB will perform testing to ensure that all Products delivered to BSC meet all applicable Specifications. BSC inspection of incoming Products will rely upon GB testing and may consist of an examination of GB's testing documentation as well as independent testing by BSC. 8.1.2 BSC will conduct any incoming inspection tests not later than * from the date of BSC'S receipt of the Products. Products not rejected by BSC by written notice to GB within such period will be deemed accepted. 8.1.2.1 For Products shipped that fail to meet the Specifications, BSC will deliver to GB, as appropriate, a request for change to remedy the nonconformance of the shipped Products and/or future Products. GB will, upon receipt of BSC's documentation, ship promptly at GB's expense, replacement items of the Product that are in conformance with the Specifications. 8.1.2.2 Prior to returning any Product to GB, BSC will first contact its GB customer service representative and obtain a Return Material Authorization (RMA) number. BSC will only return the items and quantities approved through the RMA. 8.2 Manufacturing Location. Should GB wish to manufacture BSC Product at any other location other than the approved site, GB will provide written notice to BSC before the site change to allow for product qualification. GB agrees to provide BSC with transfer plans, site specifications, on-site inspection and audit opportunities and any reasonable documentation as requested by BSC to ensure GB's ability to continue production of acceptable Products that meet all Specifications. Should GB manufacturing move outside the U.S., BSC reserves the right to review and approve any additional charges that result from the move outside the U.S. The Parties acknowledge GB's Quality Performance Rating (as determined by BSC) and delivery performance as of the Effective Date as the desired performance to be achieved and maintained by GB. BSC is entering into this Agreement in reliance upon and conditioned on GB's quality and delivery ratings remaining consistent with the levels that exist as the Effective Date, regardless of the location at which Products are manufactured. BSC will qualify each Product before production components can be shipped to BSC and share in cost increases or decreases realized from such move. 8.3 Quality Control. GB will follow strict quality control standards with respect to the production and transport of Products sold under this Agreement and consistent in all material respects with the standard of care and science applicable to the specified use of these Products and such requirements, policies, and procedures as provided for in Article 8.4. BSC agrees to follow strict quality control standards with respect to the storage, preservation and use of Products purchased under this Agreement and consistent in all material respects with such guidelines as GB may from time to time deliver to BSC. - 11 - 8.4 Quality Management 8.4.1 Quality Management System. GB has established and maintains a certified quality management system in accordance with ISO 9001-2000 or ISO 13485 and other relevant quality management standards and legal provisions applicable to its business (the "GBQMS"). GB represents and warrants that the actual production of the Products takes place under such GBQMS. 8.4.2 Except to the extent in conflict with this Agreement, GB agrees to comply with the following quality assurance requirements, policies and procedures of BSC: 8.4.2.1 *. If BSC determines that it is necessary or desirable to make changes to BSC's quality standards, BSC will so notify GB in writing. GB will work to comply with all updates and revisions to BSC's quality standards that GB agrees to in writing. The requirements specified in, or subsequently approved pursuant to this Article 8.4.2 are referred to herein as the "BSC Supplier Quality Requirements". 8.4.3 Audits and Inspections. BSC will have reasonable access to the portion of GB's premises in which Products are manufactured for BSC, and its relevant documentation, during regular business hours in order to verify that the production and inspection of the Products occur in accordance with all relevant provisions of the GBQMS, BSC's Supplier Quality System Assessment, and in compliance with the Specifications. GB will also fully support and permit any inspection or audit by any conformity assessment body, which is legally entitled to inspect or audit BSC, as the legal manufacturer of a medical device (which includes a Product), and GB, as the manufacturer of such Product. 8.4.4 Compliance Inspection. GB will inspect and test Products prior to delivery to BSC to ensure compliance with the Specifications and quality management standards per this Article 8.4. 8.4.5 Traceability. In accordance with the GBQMS standards and internal GB procedures, traceability of critical or major components, processes, manufacturing and release inspection results will be maintained by GB, per GB documentation retention standards, for a minimum of ten years, to the level of the individual item of each Product identified by serial or lot number. - 12 - 8.4.6 Compliance Notification. It is * responsibility to file required Medical Device Reports or Vigilance Reports to any legal authority for the medical devices which contain a Product in order to comply with the applicable laws and regulations. 8.4.7 Survival. The provisions of this Article 8.4 will survive the termination of the Agreement. 8.5 Standard Forms Not Applicable. The terms and conditions of sale for Products sold by GB to BSC hereunder are exclusively set forth in this Agreement. The Parties expressly agree that none of the terms and conditions of any written or electronic standard or other preprinted forms used by either GB or BSC in executing the purchase and sale transactions contemplated by this Agreement (including, but not limited to, purchase orders, acknowledgements and acceptance forms, invoices, labels and shipping documents) which are inconsistent with, or in addition to, those contained in this Agreement will have any force or effect. 8.6 Continuous Improvement. The Parties recognize the need for continuous improvement driven changes focused on quality improvement and cost reduction. BSC and GB agree to work together to ensure such changes are reviewed and approved. Pricing in this Agreement is based on GB's ability to execute these changes in *. 9.0 INVOICES AND PAYMENT 9.1 Payment Terms. Payment terms are net * from date of receipt of invoice and terms are * or the location of such other * the Product ("FCA" per INCOTERMS 2000). Remittances are to be made per the following: Please direct all Wire Transfer Payments to: Account Name: * Account Number: * ABA: * Bank Name: * Swift Code (if needed): * 9.2 U.S. Funds. All amounts referenced in or to be paid under this Agreement will be in U.S. funds. 10.0 WARRANTY AND LIMITATION OF LIABILITY 10.1 Warranty. GB warrants to BSC that Products sold by GB to BSC under this Agreement are in conformance with applicable Specifications, are manufactured in accordance with the GBQMS as described in Article 8.4.1 and are free from defects in material and workmanship at the time of delivery of said Products. - 13 - 10.2 Limited Warranty. THE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, WHICH ARE HEREBY DISCLAIMED AND EXCLUDED BY GB, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY OF MERCHANTABILITY, OR OF FITNESS FOR A PARTICULAR PURPOSE OR USE. 10.3 Remedies for Breach of Warranty. In the event that any Product manufactured or sold by GB to BSC under this Agreement fails to comply with the limited warranty provided for in this Article 10.0 and BSC delivers notice of such noncompliance to GB, within * of the delivery of that Product to BSC, GB will, upon substantiation that the Product has been stored, preserved and used in accordance with Article 8.3, correct such failure by *. GB agrees that it will promptly inform BSC in writing of any actual or potential problems of which GB becomes aware relating to the performance or safety of any Product design manufactured for BSC relative to the Specifications for such design. 10.4 LIMITATION OF LIABILITY. *, IN THE MANNER PROVIDED ABOVE, CONSTITUTES THE FULL EXTENT OF GB'S LIABILITY TO BSC WITH RESPECT TO PRODUCTS SOLD HEREUNDER. IN NO EVENT WILL GB BE LIABLE UNDER THIS AGREEMENT FOR INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING, BUT NOT LIMITED TO, LOSS OF SALES, PROFITS OR REVENUES OR COSTS OF ANY PARTIAL OR TOTAL RECALL OF DEVICES IN WHICH PRODUCTS MAY HAVE BEEN INCORPORATED, AND IN NO EVENT WILL GB BE LIABLE *, WHETHER A RESULT OF BREACH OF WARRANTY OR BREACH OF CONTRACT. THE PROVISIONS OF THIS ARTICLE 10.4 WILL SURVIVE THE EXPIRATION OR TERMINATION OF THIS AGREEMENT. 10.5 Third Parties. BSC hereby agrees to indemnify, defend and hold GB, its Affiliates and each of their officers, directors and employees harmless from any damage, costs or liabilities, including, without limitation, any reasonable costs or legal fees thereby incurred by GB and payable to Third Parties (collectively, "damages") arising out of any claim to the extent that such claim arises from or results from the marketing, distribution or sale of medical devices by BSC *. Such indemnification will include, without limitation, damages resulting from: 10.5.1 * 10.5.2 * 10.5.3 * - 14 - unless the damage is *. GB is responsible to complete incoming inspection requirements. BSC's obligation under this Article 10.5 is subject to the following conditions: GB must give BSC prompt written notification of any such claim so as not to prejudice BSC's performance, and GB must cooperate in the defense of such claim at BSC's expense. Further, GB agrees that BSC has sole control over the defense or settlement of any such claim, action or proceedings, including, but not limited to, the right to select defense counsel. GB and its officers, directors, employees, agents, or contractors will not enter into any agreement with respect to such claim, action or proceeding for which indemnification is or may be sought without receipt of BSC's prior written approval. GB will have the right to retain separate counsel at its sole expense. Such separate counsel will function solely to advise GB and will have no right to control the defense of any lawsuit or to effect any settlement, other than at GB's sole expense. 10.6 Product Liability Insurance. 10.6.1 GB has and will maintain product liability insurance in such amounts as ordinary good business practice for its type of business would make advisable and will provide BSC with evidence of this coverage; provided, however, that in no case will the limits of such coverage be less than the following (but subject to any deductible or self-insured retention (SIR) which will not exceed *): Bodily Injury: * Each Occurrence * General Aggregate Property Damage: * Each Occurrence * General Aggregate 10.6.1.1 GB will provide BSC with an insurance certificate * specifying the amounts stated in this Article 10.6.1 including the SIR. 10.6.2 BSC has and will maintain product liability insurance in such amounts as ordinary good business practice for its type of business would make advisable and will provide GB with evidence of this coverage; provided, however, that in no case will the limits of such coverage be less than the following (but subject to any deductible or self-insured retention (SIR) which will not exceed *): Bodily Injury: * Each Occurrence * General Aggregate - 15 - Property Damage: * Each Occurrence * General Aggregate 10.6.2.1 BSC will provide GB with an insurance certificate * specifying the amounts stated in this Article 10.6.2 including the SIR. 10.7 Indemnification 10.7.1 Indemnification by BSC. BSC hereby agrees to indemnify, defend and hold GB, its Affiliates and each of their officers, directors and employees harmless from any damage, costs or liabilities, including, without limitation, any reasonable costs or legal fees thereby incurred by GB and payable to third parties (collectively, "damages") arising out of any claim to the extent that such claim arises from or results out of the marketing, distribution or sale of medical devices by BSC which contain a Product, including, without limitation: 10.7.1.1 * 10.7.1.2 * unless the damage is * 10.7.2 BSC's Indemnification Procedure. BSC's obligation under Article 10.7.1 is subject to the following conditions: GB must give BSC prompt written notification of any such claim so as not to prejudice BSC's performance, and GB must cooperate in the defense of such claim at BSC's expense. Further, GB agrees that BSC has sole control over the defense or settlement of any such claim, action or proceedings, including, but not limited to, the right to select defense counsel. GB and its officers, directors, employees, agents, or contractors will not enter into any agreement with respect to such claim, action or proceeding for which indemnification is or may be sought without receipt of BSC's prior written approval. GB will have the right to retain separate counsel at its sole expense. Such separate counsel will function solely to advise GB and will have no right to control the defense of any lawsuit or to effect any settlement, other than at GB's sole expense. 10.7.3 Indemnification by GB. GB hereby agrees to indemnify, defend and hold BSC, its Affiliates and each of their officers, directors and employees harmless from any damage, costs or liabilities, including, without limitation, any reasonable costs or legal fees thereby incurred by BSC and payable to third parties (collectively, "damages") arising out of any claim to the extent that such claim arises from or results out of: (a) personal injury or death resulting from the use of the Product and caused by GB's negligence or willful misconduct; and (b) personal injury or death resulting from alleged defects of the Product caused by GB's negligence or willful misconduct. - 16 - 10.7.4 GB's Indemnification Procedure. GB's obligation under Article 10.7.3 is subject to the following conditions: BSC must give GB prompt written notification of any such claim so as not to prejudice GB's performance, and BSC must cooperate in the defense of such claim at GB's expense. Further, BSC agrees that GB has sole control over the defense or settlement of any such claim, action or proceedings, including, but not limited to, the right to select defense counsel. BSC and its officers, directors, employees, agents, or contractors will not enter into any agreement with respect to such claim, action or proceeding for which indemnification is or may be sought without receipt of GB's prior written approval. BSC will have the right to retain separate counsel at its sole expense. Such separate counsel will function solely to advise BSC and will have no right to control the defense of any lawsuit or to effect any settlement, other than at BSC's sole expense. 11.0 PROCESS AND/OR DESIGN CHANGE 11.1 Specifications. All Products supplied by GB to BSC will be in accordance with the Specifications and supplied after GB Qualification thereof. Any changes to Specifications for Products to be sold under this Agreement will be agreed upon by both Parties in writing. 11.1.1 If GB determines that it is necessary or desirable to make any change in process, material or design affecting the form, fit, function, or performance of any Product, GB will immediately notify BSC in writing. GB will not implement any such change without BSC'S prior consent. 11.1.2 If BSC determines that it is necessary or desirable to make any change to the Specification(s) for a Product, then BSC will so notify GB in writing. GB will respond identifying (a) GB's suggestions, if any, for modifying BSC's proposed Specification change; (b) the lead time necessary to implement such change; and (c) the amount and nature of any price change, if any, estimated to result from implementing such change. The Parties agree to negotiate in good faith with respect to an adjustment to the Specifications and pricing set forth in the pricing tables of the Agreement. 12.0 BUSINESS REVIEWS AND CERTIFICATIONS 12.1 * Business Review. The Parties agree to meet on a * basis for purposes of a * Business Review focused on *. Meetings will be coordinated by BSC's Commodity Manager and GB's Global Account Manager. Agenda items should include: - 17 - o A review of GB's performance in meeting BSC's quality and delivery requirements o Ongoing * projects o *. o Review of options to improve * as well as and opportunities to * through *. * both Parties should be in attendance. 12.2 *: 12.2.1 *. 12.2.2 *. 12.2.3 *. 12.2.4 * 12.3 BSC will send a letter to GB on *, certifying BSC's compliance with the terms and conditions of this Agreement during the prior Contract Year, including the Purchase Requirements specified in Exhibits A, B, C, D, and E. 13.0 BUSINESS EXIT AND TERMINATION 13.1 GB must give BSC * written notice of any intent to discontinue supply of any Product to BSC ("Article 13.0 Notice"), but GB will not be bound after the expiration of this Agreement to the pricing set forth in Article 5.0. If GB so informs BSC of its intent to discontinue, BSC has the right to make a last order, * prior to the date of discontinuation as set forth by GB in the Article 13.0 Notice, which will be fulfilled by GB provided that (a) units of Product covered by the last order for any Product, not exceed * the number of units of such Product delivered to BSC in the * immediately preceding the date of such Article 13.0 Notice; and (b) GB will deliver Product in accordance with a reasonable production and delivery schedule, but in any event the full order will be completed prior to the date of discontinuance. Further, GB will assist BSC in identification of a replacement supplier. 13.2 Termination. Notwithstanding the provisions of Articles 3.1. and 3.2 above, this Agreement may be terminated in accordance with the following provisions: 13.2.1 A Party may terminate this Agreement by giving notice in writing to the other Party in the event the other Party is in breach of any material representation, warranty or covenant of this Agreement and shall have failed to cure such breach within * of receipt of written notice thereof from the first Party. - 18 - 13.2.2 A Party may terminate this Agreement at any time by giving notice in writing to the other Party, which notice will be effective upon delivery, should the other Party file a petition of any type as to its bankruptcy, be declared bankrupt, become insolvent, make an assignment for the benefit of creditors, go into liquidation or receivership; or 13.2.3 A Party may terminate this Agreement by giving notice in writing to the other Party should an event of Force Majeure continue for more than * as provided in Article 16.0 below. 13.3 Rights and Obligations on Termination. Termination of this Agreement will not release either Party from the obligation to make payment of all amounts previously due and payable, or which become due and payable due to termination of this Agreement. In addition: 13.3.1 Upon expiration or termination of this Agreement or if BSC changes the model mix of, or discontinues, any Products, resulting in the cancellation of Purchase Orders inside the standard lead times, BSC will be responsible for all finished goods inventory, WIP, Product-specific, non-returnable purchased material and any non-cancelable purchase orders outstanding with GB's suppliers. In the event that BSC cancels a Buyer-Managed Purchase Order outside of agreed upon lead-time, BSC and GB will negotiate resulting costs. 14.0 CONFIDENTIAL INFORMATION 14.1 Treatment of Proprietary Information. Each of GB and BSC (each a "receiving party" agrees to maintain all proprietary information disclosed by the other Party (each a "disclosing party") pursuant to or in the performance of this Agreement ("Proprietary Information") in strict secrecy and confidence, and not to disclose said Proprietary Information to any third party, nor make use of said Proprietary Information for any purpose other than in carrying out its efforts under this Agreement. The receiving party agrees to have its employees sign agreements, or to have an appropriate corporate policy in effect, which requires them to keep confidential any Proprietary Information they learn in their positions at the receiving party; including the Proprietary Information of the disclosing party. The receiving party further agrees that no proprietary information or materials will be supplied to any other corporation, partnership, laboratory, or individuals other than those approved in writing by the disclosing party, with the exception of disclosure to the FDA and similar regulatory agencies of information relative to obtaining regulatory approval. - 19 - 14.2 Limited Release. The receiving party is released from the obligations of Article 14.1 to the extent that any of the disclosed Proprietary Information: (a) was already part of the public domain at the time of the disclosure by the disclosing party; (b) becomes part of the public domain through no fault of the receiving party (but only after and only to the extent that it is published or otherwise becomes part of the public domain); (c) was in the receiving party's possession prior to the disclosure by the disclosing party and was not acquired, directly, or indirectly, from the disclosing party or from a third party who was under continuing obligation of confidence to the disclosing party; (d) is received (after the disclosure by the disclosing party) by the receiving party from a third party who did not require the receiving party to hold it in confidence and did not acquire it directly or indirectly, from the disclosing party under a continuing obligation of confidence; or (e) is disclosed by the receiving party pursuant to judicial compulsion, provided that the disclosing party is notified at the time such judicial action is initiated. In addition, notwithstanding Article 14.1, only to the extent necessary to carry out the terms of this Agreement, GB may provide proprietary information of BSC to its subcontractors and vendors without BSC's prior approval provided that GB first requires each subcontractor or vendor to sign a confidentiality agreement which requires them to keep confidential such BSC Proprietary Information and not to use it except for the purpose of performing their obligations to GB. 14.3 Term of Obligation. The obligation of the receiving party to receive and hold information disclosed by the disclosing party in confidence, as required by this Article 14.0, will terminate five (5) years from the date of the disclosure of the information hereunder and will survive the termination or expiration of this Agreement. 14.4 Disposal upon Termination. Upon the termination or expiration of this Agreement, any samples, sketches, or other proprietary material provided by the disclosing party to the receiving party will be destroyed or returned to the disclosing party, unless and to the extent such materials are necessary to the receiving party to provide continuing support. 14.5 Public Statements. (a) Neither Party will initiate or make any public announcement or other disclosure concerning any previously non-disclosed terms and conditions or the subject matter of this Agreement, assuming all previously disclosed terms and conditions were disclosed lawfully ("Confidential Information") to any third party without the prior written approval of the other Party. Nothing herein however, precludes a Party from disclosing Confidential Information that the Party is compelled, based on advice of legal counsel, to disclose under an applicable legal requirement, stock exchange rule or similar rule, provided that the Party uses commercially reasonable efforts to provide the other Party with at least five (5) business days but in any event prompt advance written notice thereof and cooperates with the other Party, to the extent the other Party requests, so that such other Party may seek a protective order or other appropriate remedy. If such protective order or other remedy is not available or is not obtained, then the Party required to disclose such Confidential Information will use commercially reasonable efforts to limit the disclosure, furnish only that portion of such Confidential Information that is legally required to be furnished and will cooperate with the other Party to obtain a protective order, agency ruling, or other assurance that Confidential Information will be accorded such confidential treatment to the extent permissible under the applicable legal requirement or rule. - 20 - (b) With regard to any required filing of this Agreement with the Securities and Exchange Commission (the "SEC"), the disclosing Party will seek Confidential Treatment pursuant to Rule 24b-2 of Securities Exchange Act of 1934, as amended , with respect to the Confidential Information. The Party required to disclose such Confidential Information shall give the other Party a reasonable opportunity to review and provide suggestions to limit disclosure of all Confidential Information to be made public. 14.6 Mutual Non-Disclosure Agreements. The provisions of this Article 14.0 are not intended to replace, supersede, amend or modify all non-disclosure agreements between the Parties, including the Mutual Confidential Disclosure Agreement effective June 20, 2005, and the Mutual Non-Disclosure Agreement effective August 1, 2005, except that the requirements to maintain the confidentiality of Confidential Information under those agreements will continue in full force and effect for 5 years following the expiration or termination of this Agreement. 15.0 INTELLECTUAL PROPERTY 15.1 Ownership of Product Technology 15.1.1 All Intellectual Property of GB in existence on the date of this Agreement shall remain the exclusive property of GB (hereinafter "GB Product Technology"). All Intellectual Property of BSC in existence on the date of this Agreement shall remain the exclusive property of BSC (hereinafter "BSC Product Technology"). Nothing in this Agreement will give BSC any license, claim, right, title or interest in any GB Product Technology, nor will it give GB any license, claim, right, title or interest in any BSC Product Technology. 15.1.2 All inventions, additions and/or improvements relating to the Products or their use in implantable medical devices developed, conceived, or invented solely by GB during the Term is the sole property of GB. 15.1.3 All inventions, additions and/or improvements relating to the Products or their use in implantable medical devices developed, conceived, or invented solely by BSC during the Term is the sole property of BSC. - 21 - 15.1.4 All inventions, additions and/or improvements relating to the Products, their use in implantable medical devices or in respect of either the GB Product Technology or BSC Product Technology developed, conceived, or invented jointly by GB and BSC during the Term will be Joint Intellectual Property ("Joint IP"). 15.1.5 All Joint IP will be jointly owned by the Parties and each Party's joint ownership in the Joint IP will be an equal and undivided interest therein. 15.1.6 Joint IP is otherwise subject to all of the terms and conditions of this Agreement. 15.2 This Article 15.0 will survive expiration or termination of this Agreement. 16.0 FORCE MAJEURE 16.1 "Force Majeure" shall mean storm, earthquake, embargoes, and acts of God, war and/or public enemy that prevents in whole or in material part the performance by a Party of its obligations under this Agreement. 16.2 Upon giving notice to the other Party, a Party affected by an event of Force Majeure will be released without any liability on its part from the performance of its obligations under this Agreement, except with respect to Product delivered and accepted prior to the date of the event of Force Majeure, the obligations under Article 9.0, Article 10.0, Article 13.1, Article 14.0, and Article 15.0, but only to the extent and only for the period that its performance of such obligations is prevented by the event of Force Majeure. 16.3 During the period that the performance of a Party of its obligations under this Agreement has been suspended by reason of an event of Force Majeure, the other Party may likewise suspend the performance of all or part of its obligations hereunder to the extent that such suspension is commercially reasonable. 17.0 MISCELLANEOUS 17.1 Governing Law. This Agreement will be interpreted, construed and governed by and in accordance with the laws of the State of New York. The Parties expressly agree that the United Nations Convention on the International Sale of Goods does not apply to this Agreement on any transaction pursuant hereto. 17.2 Assignment. Either Party may assign this Agreement to an entity that acquires, directly or indirectly, substantially all of the assets or shares of such Party or merges with it. Except as set forth herein, neither this Agreement nor any rights here under, in whole or in part, will be assignable or otherwise transferable by either Party without the express written consent of the other Party. Subject to the above, this Agreement will be binding upon and inure to the benefit of the successors and assigns to the Parties here to. - 22 - 17.3 Integration. This Agreement constitutes the entire agreement of the Parties with respect to the subject matter hereof and supersedes all previous agreements or proposals, oral or written, and all negotiations, conversations or discussions between the Parties related to the subject matter of this Agreement, but excluding any confidentiality agreements between the Parties or their Affiliates which will remain in full force and effect. 17.4 Survival. All of the representations, warranties, covenants and indemnifications made in this Agreement, and all terms and provisions hereof intended to be observed and performed by the Parties after the termination or expiration of this Agreement, will survive the termination or expiration and continue thereafter in full force and effect, subject to applicable statute of limitations. 17.5 Amendment; Waiver. This Agreement is not to be released, discharged, abandoned, changed or modified in any manner, except by an instrument in writing signed on behalf of each of the Parties to this Agreement by their duly authorized representatives. The failure of either Party to enforce at any time any of the provisions of this Agreement will not be construed to be a waiver of that provision, nor in any way to affect the validity of this Agreement or any part of it or the right of either Party after any such failure to enforce each and every such provision. No waiver of any breach of this Agreement will be held to be a waiver of any other or subsequent breach. 17.6 Counterparts. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement, and become a binding agreement when one or more counterparts have been signed by each Party and delivered to the other Party. 17.7 Headings. The titles and headings to the Articles herein are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. This Agreement is to be construed without regard to any presumption or other rule requiring construction hereof against the Party causing this Agreement to be drafted. All references to Articles, Section and Exhibits means Articles and Sections of, and Exhibits to, this Agreement. 17.8 No Third Party Beneficiaries. Nothing in this Agreement, expressed or implied, is intended to confer on any person other than the Parties and their Affiliates, or their respective successors or assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement. 17.9 Notices. Any notice or other communication hereunder must be given in writing and either (a) delivered in person, (b) transmitted by telex, facsimile or telecopy mechanism, provided that any notice so given is also mailed as provided in clause (c), or (c) mailed, postage prepaid, receipt requested as follows: If to GB: If to BSC: 9645 Wehrle Drive 4100 Hamline Avenue North Clarence, New York 14031 St. Paul , MN 55112-5798 Facsimile: 716.759.5664 Facsimile: (sent to the Buyer) Attention: President Attention: President CC: General Counsel CC: General Counsel - 23 - or to such other address or to such other person as either Party designates by such notice to the other Party. Each such notice or other communication will be effective (i) if given by telecommunication, when transmitted to the applicable number so specified in (or pursuant to) this Article 17.9 and an appropriate receipt is received, (ii) if given by mail, three (3) days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iii) if given by any other means, when actually received at such address. 17.10 Severability. If any provision of this Agreement is held invalid by a court of competent jurisdiction, the remaining provisions will nonetheless be enforceable according to their terms. Further, if any provision is held to be overbroad as written, that provision will be deemed amended to narrow its application to the extent necessary to make the provision enforceable according to applicable law and will be enforced as amended. 17.11 Disputes; Enforceability 17.11.1 Confidentiality. The Parties agree that a violation of the covenants set forth in Article 14.0 and Article 15.0 of the Agreement will cause damages to the other Party that are significant, material and difficult or impossible to adequately measure and the injured Party will be entitled to seek and obtain injunctive relief compelling compliance in terms of this Agreement. 17.11.2 Arbitration. Except as set forth in Article 17.11.1 above, all disputes and controversies arising out of or relating to this Agreement or any of the other documents to be delivered hereunder, or the performance, breach, validity, interpretation or enforcement thereof that are not resolved through negotiation, mediation other forms of alternative dispute resolution, will be resolved by binding arbitration in accordance with the commercial arbitration rules of the American Arbitration Association (the "Rules"), and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. A Party may initiate arbitration by sending written notice of its intention to arbitrate to the other Party and to the AAA office located in New York, New York (the "Arbitration Notice"). The Arbitration Notice will contain a description of the dispute and the remedy sought. The arbitration will be conducted at the offices of the AAA in New York, New York before an independent and impartial arbitrator experienced in legal matters related to the medical device industry. In no event may the demand for arbitration be made after the date when the initiation of a legal or equitable proceeding based on such claim, dispute or other matter in question would be barred by New York law. The arbitrator will deliver his or her decision in writing, together with the summary of the reasons for the decision, including citations to legal authority to the extent appropriate. The decision of the arbitrator will be final and binding on both Parties and their successors and permitted assignees. The parties agree that, notwithstanding anything to the contrary in this Article 17.11.2, any award made by the arbitrator will be consistent with the terms of this Agreement and that any award will be restricted to a remedy that would be available to a party under this Agreement. - 24 - IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed by their authorized representatives. CARDIAC PACEMAKERS, INC. GREATBATCH LTD. By: /s/ Helge Batz By: /s/ Susan Campbell ------------------------------ --------------------------------- HELGE BATZ SUSAN CAMPBELL Title: Director, Materials Management Title: Sr. Vice President, Medical Power Date: Date: ------------------------------ --------------------------------- - 25 - EXHIBIT A - LOW AND MEDIUM RATE BATTERIES 1.0 Purchase Requirements: a minimum of * % of BSC's Low and Medium rate battery demand for * devices to be purchased from Seller. 2.0 Lithium Iodine Low Rate Battery Pricing 2.1 Volumes below are based on BSC * Lithium Iodine volume. * 3.0 *Medium Rate Battery Pricing * 4.0 Lead Time for GB Low and Medium Rate Batteries is * as of the Effective Date of this Agreement. 5.0 Pricing Adjustments 5.1 Pricing shown in tables above valid for GB Low and Medium Rate battery models shown in the table below in production as of the Effective Date of this Agreement. * 5.2 * 5.2.1 *. 5.2.2 *. 5.3 A price premium will apply for * enclosures, non-standard shapes, and for terminal modification complexity. 5.4 A price premium will apply for other value added options (e.g., *) requested by BSC. 5.5 Significant material cost change. The price for any Low or Medium Rate Battery may be adjusted up or down as of the * of each Contract Year during the Term of this Agreement, by mutual consent, if there is a material cost change which has a significant impact to a Product's final cost. Any price modification will be determined * of each year and will be effective for shipments delivered beginning * the following Contract Year. - 26 - 5.5.1 In the case of Low and Medium Rate Batteries containing *, if the Reference Price for * below has changed by more than * compared to the Reference Price used for the current Contract Year, a price adjustment (either up or down) will be allowed for those products. 5.5.1.1 The "Reference Price for *" is based upon the * of each Contract Year. 5.5.1.2 The Reference Price for * used as the basis to establish 2007 pricing in this Exhibit A of the Agreement is * per Troy Ounce. 5.5.2 Price adjustment per unit resulting from changes in materials cost * 6.0 NRE charges for new, custom designed cells will be no more than * per development program. - 27 - EXHIBIT B - HIGH RATE BATTERIES 1.0 Purchase Requirements, Volumes and Prices. 1.1 *. 1.2 * 1.3 *. 2.0 * Battery Pricing * 3.0 * High Rate Battery Pricing * 4.0 Lead Time for GB High Rate Batteries * as of the Effective Date of this Agreement. 5.0 Pricing Adjustments 5.1 Pricing shown in tables above valid for GB High Rate Battery models shown in the table below in production as of the Effective Date of this Agreement. * 5.2 Price adjustment for increased commitment 5.2.1 Upon receipt of written commitment from BSC to procure no less than * of GB's * batteries * for the remainder of the Term of this Agreement, BSC will receive the following price adjustments for High Rate Batteries: 5.2.1.1 * 5.2.1.2 * 5.2.2 Upon receipt of written commitment from BSC to procure no less than * of GB's * batteries * for the remainder of the Term of this Agreement, BSC will receive the following price adjustments for High Rate Batteries: - 28 - 5.2.2.1 * 5.2.2.2 * These price adjustments for increased commitment are further described in the flow chart included in Exhibit F of this Agreement. 5.2.3 All price adjustments will be made for future purchases only. No retroactive price reductions will be allowed. 5.3 A price premium will apply for * enclosures, non-standard shapes, and for terminal modification complexity. 5.4 A price premium will apply for other value added options (e.g., *) requested by Buyer. 5.5 A price premium will apply for each additional * configurations. 6.0 NRE charges for new custom designed cells will be no more than * per development program 6.1 NRE charges for development of * for application in any of the * models identified in this Exhibit B Article 5.1 will be * per program. - 29 - EXHIBIT C - WET TANTALUM CAPACITORS 1.0 Purchase Requirements: BSC will purchase GB Wet Tantalum Capacitors for use in BSC's * devices for the minimum annual percentage of BSC hybrids per the pricing table below. 2.0 Wet Tantalum Capacitor Pricing * 3.0 Lead Time for GB Wet Tantalum Capacitors is * as of the Effective Date of this Agreement. 4.0 Pricing Adjustments 4.1 Pricing shown in the table above valid for GB Wet Tantalum Capacitor models shown in the table below in production as of the Effective Date of this Agreement. * 4.2 Price adjustment for increased commitment 4.2.1 Upon receipt of written commitment from BSC to * BSC will receive the following price adjustments: 4.2.1.1 In the case of Wet Tantalum Capacitors, BSC will receive a * to the then current price and * for Wet Tantalum Capacitors purchased in subsequent Contract Years. 4.2.2 Upon completion of activities defined in this Exhibit C, Article 4.2.1 and * of the GB Wet Tantalum Capacitor specified for the * device, BSC will receive the following price adjustments: 4.2.2.1 In the case of Wet Tantalum Capacitors, BSC will receive a * to the then-current price and * for Wet Tantalum Capacitors purchased in subsequent Contract Years. These price reductions are in addition to the price reductions defined in Article 4.2.1.1 above. 4.2.3 Upon completion of activities defined in this Exhibit C, Articles 4.2.1 and 4.2.2 and * of the GB Wet Tantalum Capacitor specified for the * device, BSC will receive the following price adjustments: - 30 - 4.2.3.1 In the case of Wet Tantalum Capacitors, BSC will receive a * to the then-current price and * for Wet Tantalum Capacitors purchased in subsequent Contract Years. These price reductions are in addition to the price reductions defined in Articles 4.2.1.1 and 4.2.2.1. above. 4.2.4 Should BSC increase commitments as defined in this Exhibit C Articles 4.2.1, 4.2.2, and 4.2.3 and Exhibit B, Article 5.2.1 and 5.2.2, BSC will receive the following additional price reductions: 4.2.4.1 In the case of Wet Tantalum Capacitors, BSC will receive a * to the then-current price. 4.2.4.2 In the case of * High Rate Batteries, BSC will receive * for SVO batteries purchased in subsequent Contract Years. 4.2.4.3 In the case of * High Rate Batteries, BSC will receive a *. These price adjustments for increased commitment are further described in the flow chart included in Exhibit F of this Agreement. 4.2.5 All Price Adjustments will be made on future purchases only. No retroactive price reductions will be provided. 4.3 A price premium will apply for * enclosed designs 4.4 A price premium will apply for * modification complexity 4.5 A price premium will apply for other value added options (e.g., *) requested by Buyer. 4.6 Significant material cost change. The price for any Wet Tantalum Capacitor may be adjusted up or down as of the * of each Contract Year during the Term of this Agreement, by mutual consent, if there is a material cost change which has a significant impact to a Product's final cost. Any price modification will be determined by * of each year and will be effective for shipments delivered beginning * of the following Contract Year. 4.6.1 In the case of Capacitors containing *, if the Reference Price for * below has changed by more than * compared to Reference Price for * used for the current Contract Year, a price adjustment (either up or down) will be allowed for those products. - 31 - 4.6.1.1 The "Reference Price of *" is based upon the * of each Contract Year. 4.6.1.2 The Reference Price for * used as the basis to establish 2007 prices in this Exhibit C of the Agreement *. 4.6.2 In the case of Capacitors containing *, if the Reference Price for * below has changed by more than * compared to Reference Price for * used for the current Contract Year, a price adjustment (either up or down) will be allowed for those products. 4.6.2.1 The "Reference Price for *" is based upon the * of each Contract Year. 4.6.2.2 The Reference Price for * used as the basis to establish 2007 prices in this Exhibit C of the Agreement is *. 4.6.3 In the case of Capacitors containing *, if the Reference Price for * below has changed by more than * compared to Reference Price for * used for the current Contract Year, a price adjustment (either up or down) will be allowed for those products. 4.6.3.1 The "Reference Price for *" is based upon the * of each Contract Year. 4.6.3.2 The Reference Price for * used as the basis to establish 2007 prices in this Exhibit C of the Agreement is *. 4.6.4 Price adjustment per unit resulting from change in materials cost * 5.0 NRE charges for new custom designed capacitors will be no greater than * per development program. 5.1 NRE charges for Future Program Commitments defined in Article 5.0 above will be rebated * at a rate of * for the *, which ever comes first. - 32 - 5.2 NRE charges for a * capacitor development program will be rebated *, which ever comes first. - 33 - EXHIBIT D - CASE HALVES 1.0 Purchase Requirements: * of BSC's demand for Case Halves will be purchased from GB 2.0 Case Half Pricing * - 34 - 3.0 Lead Time for GB Case Halves is * as of the Effective Date of this Agreement. 4.0 Pricing Adjustments 4.1 Annual PPV 4.1.1 In the case of Case Halves listed in this Exhibit D, Article 2.0, BSC will receive * in the subsequent Contract Years compared to the then-current year's pricing. 4.2 Significant material cost change. The price for any Case Half may be adjusted up or down as of the * of each Contract Year during the Term of this Agreement, by mutual consent, if there is a material cost change which has a significant impact to a Product's final cost. Any price modification will be determined by * of each year and will be effective for shipments delivered beginning * of the following Contract Year. 4.2.1 In the case of Case Halves containing *, if the Reference Price for * below has changed by more than * compared to the Reference Price for * used for the current Contract Year, a price adjustment (either up or down) will be allowed for those products. 4.2.1.1 The "Reference Price for *" is based upon the * of each Contract Year. 4.2.1.2 The Reference Price for * used as the basis to establish 2007 prices in this Exhibit D of the Agreement is *. 4.2.2 In the case of Case Halves containing *, if the Reference Price for * below has changed by more than * compared to the Reference Price for * used for the current Contract Year, a price adjustment (either up or down) will be allowed for those products. 4.2.2.1 The "Reference Price for *" is based upon the * of each Contract Year. 4.2.2.2 The Reference Price for * used as the basis to establish 2007 pricing in this Exhibit D of the Agreement is *. - 35 - EXHIBIT E - FILTERED FEEDTHROUGHS Exhibit E intentionally blank - 36 - EXHIBIT F - BATTERY AND CAPACITOR PRICING ADJUSTMENTS FOR INCREASED COMMITMENT 1.0 The flow chart included below provides a visual depiction of paths available for BSC to realize improved pricing as a result if increased business commitment to GB as described in Exhibit B Article 5.2 and Exhibit C Article 4.2. * 1.1 Pricing adjustments described in the flow chart above will apply only to future purchases after completion of all elements described in the relative Exhibit and Article. No retroactive price adjustments will be allowed. - 37 - EXHIBIT G - * *. 1.0 * *. 2.0 * * 2.1 * * - 38 - 2.2 * * 3.0 * *. - 39 - EXHIBIT H - BSC-DESIGNATED THIRD PARTY SUPPLIERS Exhibit H intentionally blank - 40 - EX-31.1 3 a5464179ex31_1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION I, Thomas J. Hook, certify that: 1. I have reviewed this report on Form 10-Q for the fiscal quarter ended June 29, 2007 of Greatbatch, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent functions): - 1 - a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2007 /s/ Thomas J. Hook ---------------------------------------- Thomas J. Hook President and Chief Executive Officer (Principal Executive Officer) - 2 - EX-31.2 4 a5464179ex31_2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION ------------- I, Thomas J. Mazza, certify that: 1. I have reviewed this report on Form 10-Q for the fiscal quarter ended June 29, 2007 of Greatbatch, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by the report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditor and the audit committee of registrant's board of directors (or persons performing the equivalent functions): - 1 - a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2007 /s/ Thomas J. Mazza -------------------------------------------- Thomas J. Mazza Senior Vice President and Chief Financial Officer (Principal Financial Officer) - 2 - EX-32 5 a5464179ex32.txt EXHIBIT 32 Exhibit 32 CERTIFICATION ------------- Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Greatbatch, Inc. (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 29, 2007 (the "Form 10-Q ") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 7, 2007 /s/ Thomas J. Hook -------------------------------------------- Thomas J. Hook President and Chief Executive Officer (Principal Executive Officer) Dated: August 7, 2007 /s/ Thomas J. Mazza ------------------------------------ Thomas J. Mazza Senior Vice President and Chief Financial Officer (Principal Financial Officer) This certification is being furnished solely to accompany this Form 10-Q pursuant to 18 U.S.C. Section 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise, and is not to be deemed incorporated by reference into any filing of the Company except to the extent the company specifically incorporates it by reference therein. - 1 - -----END PRIVACY-ENHANCED MESSAGE-----