| Delaware | 16-1531026 | |
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Title of Each Class: | Name of Each Exchange on Which Registered: | |
| Common Stock, Par Value $0.001 Per Share | New York Stock Exchange | |
| Large accelerated filer | Accelerated filer | |||||
| Non-accelerated filer | ¨ | Smaller reporting company | ¨ | |||
March 1, 2016: 30,778,835
Document | Part | |
| Proxy Statement for the | Part III, Item 10 “Directors, Executive Officers and Corporate Governance” | |
Part III, Item 11 “Executive Compensation” | ||
Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” | ||
Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence” | ||
Part III, Item 14 “Principal Accountant Fees and Services” | ||
markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management to its customers, who are located worldwide. This segment is dedicated to providing our customers with reliable, high-quality, cost-efficient, integrated outsourced solutions in the medical device space. Acquisition Date Business at Time of Acquisition NeuroNexus As a result of the Lake Region Medical acquisition and the pending Spin-off, we are reevaluating our operating and reporting segments, which is expected to be finalized in 2016 once our corporate and management reporting structure realignment is completed. Cardiac and Device Principal Illness or Symptom diagnostic platforms. pockets or brackets. buoys. represents a strong opportunity despite cost pressure from healthcare reform. Product Description Principal Product Attributes Low-rate specified restrictions, rights in certain intellectual property underlying Nuvectra’s neurostimulation technology platform. Under the terms of the unrestricted license agreement, Nuvectra will grant us a perpetual, non-exclusive, worldwide license to use, make, have made, offer to sell, sell, distribute and import certain patents, patent applications and other intellectual property rights underlying Nuvectra’s neurostimulation technology platform for applications within the other international regulatory bodies. With the acquisition of CCC in 2014, QiG customers also include various research companies and institutes and early stage medical device companies. shipment. Pressure Products respectively. The following table provides a breakdown of Manufacturing – U.S. General and administrative – U.S. Sales and marketing – U.S. Research, development and engineering – U.S. Total Timothy G. McEvoy, age future sales, expenses and profitability; future development and expected growth of our business and industry; our ability to execute our business model and our business strategy; our ability to identify trends within our industries and to offer products and services that meet the changing needs of those markets; and projected capital expenditures. a substantial percentage of our costs are fixed in nature, which results in our operations being particularly sensitive to fluctuations in production volumes; changes in the timing of orders placed by our principal customers who account for a significant portion of our revenues; and increased costs of raw materials or supplies. harmed. business. may not be able to meet all of our debt obligations. changes in foreign economic conditions and/or regulatory requirements; local product preferences and product requirements; difficulties in enforcing agreements through foreign legal systems; less protection of intellectual property in some countries outside of the U.S.; trade protection measures and import and export licensing requirements; work force instability; political and economic instability; and complex tax and cash management issues. without merit. 2011 First Quarter Second Quarter Third Quarter Fourth Quarter 2012 First Quarter Second Quarter Third Quarter Fourth Quarter Statement of Operations Data: Sales Net income (loss) Earnings (loss) per share Basic Diluted Balance Sheet Data: Working capital Total assets Long-term obligations Our business Our acquisitions Our customers Use of non-GAAP financial information Cost savings and consolidation efforts Product development Government regulation Stock-based compensation Inventories Tangible long-lived assets Provision for income taxes Fiscal Liquidity and capital resources Off-balance sheet arrangements Litigation Contractual obligations Inflation Impact of recently issued accounting standards revenue and increased our net income by $1.2 million. evaluate certain acquisition opportunities to either enhance our top and bottom line growth trajectory, and/or expand our pipeline technologies. Our strategic criteria for these acquisitions is that they should drive expansion in our core markets, allow us to enter adjacent growth markets, are focused on proprietary technology, can be tightly integrated into our operating base, and will enhance our return on invested capital. we are confident that we will be able to leverage the combined expertise to accelerate our growth over the long term. Total sales Operating income (loss) as reported Adjustments: Inventory step-up amortization (COS) Medical device DVT expenses (RD&E) Consolidation and optimization costs Integration expenses Asset dispositions, severance and other Adjusted operating income (loss) Adjusted operating margin Medical device related adjusted expenses (excluding DVT) Adjusted operating income excluding medical device initiatives Adjusted operating margin excluding medical device initiatives Total sales Operating income (loss) as reported Adjustments: Inventory step-up amortization (COS) Executive death benefits (SG&A) Medical device DVT expenses (RD&E) Electrochem litigation gain Consolidation and optimization costs Integration expenses Asset dispositions, severance and other Adjusted operating income (loss) Adjusted operating margin Medical device related adjusted expenses (excluding DVT) Adjusted operating income excluding medical device initiatives Adjusted operating margin excluding medical device initiatives Net income (loss) as reported Adjustments:(a) Inventory step-up amortization (COS) Executive death benefits (SG&A) Medical device DVT expenses (RD&E) Electrochem litigation gain Consolidation and optimization costs Integration expenses Asset dispositions, severance and other (Gain) loss on cost and equity method investments, net(b ) CSN conversion option discount amortization(c ) Swiss tax impact(d) Adjusted net income and diluted EPS(e) Adjusted diluted weighted average shares(f) return on invested capital. device innovation efforts. monitor containment within approved boundaries. an impairment of goodwill are as follows: for Greatbatch Medical and Lake Region Medical, the loss of one or more significant customers, technology obsolescence, product liability claims or significant manufacturing disruption, among others. For QiG, regulatory non-approval of new medical device systems, lack of market acceptance, discontinuation of significant development projects, technology obsolescence or failure of technology, among others. Dollars in thousands, except per share data Implantable Medical Sales Cardiac/Neuromodulation Vascular Orthopaedic Total Implantable Medical Electrochem Sales Portable medical Energy/Environmental Other Total Electrochem Total sales Cost of sales Gross profit Gross profit as a % of sales Selling, general and administrative expenses (SG&A) SG&A as a % of sales Research, development and engineering costs, net (RD&E) RD&E as a % of sales Electrochem litigation gain Other operating expenses, net Operating income Operating margin Interest expense Interest income (Gain) loss on cost and equity method investments, net Other expense, net Provision for income taxes Effective tax rate Net income (loss) Net margin Diluted earnings (loss) per share Fiscal Changes to sales by major product lines were as follows Sales: Implantable Medical Cardiac/Neuromodulation Vascular Orthopaedic Total Implantable Medical Portable Medical Energy/Environmental Other Electrochem Total sales Total percentage point change to gross profit as a percentage of sales Impact of acquisitions(a) Professional and consulting expense(b) Medical device strategy communication(c) Other(d) Net increase in SG&A Research and development costs Engineering costs Less cost reimbursements Total RD&E, net projects. various customer cost reimbursement projects, partially offset by the expiration of certain government grants acquired from our acquisition of NeuroNexus in 2012. Orthopaedic facility optimization(a) Medical device facility optimization(a) ERP system upgrade(a) Integration costs(b) Asset dispositions, severance and other(c) Total other operating expenses, net investments. $0.1 million for 2013, primarily due to the strengthening of the U.S. dollar relative to the Euro. Income (loss) before provision for income taxes Provision at statutory rate Foreign rate differential Change in tax rate—loss of Swiss tax holiday Uncertain tax positions State taxes, net of federal benefit Valuation allowance Other Provision (benefit) for income taxes/effective tax rate than U.S. income. Sales: Implantable Medical Cardiac/Neuromodulation Vascular Orthopaedic Total Implantable Medical Portable Medical Energy/Environmental Other Electrochem Total sales Performance-based compensation(a) Professional and consulting expense(b) Litigation related fees and charges(c) Executive death benefits(d) Micro Power SG&A costs(e) Other Net increase in SG&A Research and development costs Engineering costs Less cost reimbursements Total RD&E, net Orthopaedic facility optimization(a) 2007 & 2008 facility shutdowns and consolidations(b) Integration costs(c) Asset dispositions, severance and other(d) Total other operating expenses, net benefit. Cash and cash equivalents Working capital Current ratio subsidiaries and is considered permanently reinvested. report for a more detailed description of the Revolving Credit Facility. are not currently being rated. levels primarily due to the timing of receivable collections. For the year ended January 1, 2016, after giving pro forma effect to the completion of the Lake Region Medical acquisition and Nuvectra Spin-off, the non-Guarantors of our credit facilities represented approximately 26% and 37% of our revenue and EBITDA, respectively. In addition, as of January 1, 2016, after giving pro forma effect to the completion of the Nuvectra Spin-off, the non-Guarantors of our credit facilities held approximately 25% of our total tangible assets and 3% of our total tangible liabilities. Tangible assets consist of total assets less intangible assets, intercompany receivables, and deferred taxes. Tangible liabilities consist of total liabilities less intercompany payables and deferred taxes. CONTRACTUAL OBLIGATIONS Debt obligations(a) Operating lease obligations(b) Purchase obligations(b) Foreign currency contracts(b) Defined benefit plan obligations(c) Total contractual obligations benefits. hedge. As of January 1, 2016. expense by approximately $7 million. /s/ Thomas J. Hook /s/ Michael Dinkins schedule, and included explanatory paragraphs regarding the Company’s changes in method of accounting for its debt issuance costs and deferred income taxes. ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $2.4 million in 2012 and $1.9 million in 2011 Inventories Refundable income taxes Deferred income taxes Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Amortizing intangible assets, net Indefinite-lived intangible assets Goodwill Deferred income taxes Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable Income taxes payable Deferred income taxes Accrued expenses Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Total liabilities Commitments and contingencies (Note 15) Stockholders’ equity: Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding in 2012 or 2011 Common stock, $0.001 par value, authorized 100,000,000 shares; 23,731,570 shares issued and 23,711,838 shares outstanding in 2012 23,466,128 shares issued and 23,406,023 shares outstanding in 2011 Additional paid-in capital Treasury stock, at cost, 19,732 shares in 2012 and 60,105 shares in 2011 Retained earnings Accumulated other comprehensive income Total stockholders’ equity Total liabilities and stockholders’ equity Sales Cost of sales Gross profit Operating expenses: Selling, general and administrative expenses Research, development and engineering costs, net Electrochem litigation gain (Note 15) Other operating expenses, net (Note 13) Total operating expenses Operating income Interest expense Interest income (Gain) loss on cost and equity method investments, net Other expense, net Income before provision for income taxes Provision for income taxes Net income (loss) Earnings (loss) per share: Basic Diluted Weighted average shares outstanding: Basic Diluted Comprehensive Income (Loss) Net income (loss) Other comprehensive income (loss): Foreign currency translation gain (loss) Net change in cash flow hedges, net of tax Defined benefit plan liability adjustment, net of tax Other comprehensive income (loss) Comprehensive income (loss) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization Debt related amortization included in interest expense Stock-based compensation (Gain) loss on cost and equity method investments, net Electrochem litigation gain Electrochem litigation settlement payment Other non-cash (gains) losses Deferred income taxes Changes in operating assets and liabilities, net of effect of acquisitions: Accounts receivable Inventories Prepaid expenses and other assets Accounts payable Accrued expenses Income taxes payable Net cash provided by operating activities Cash flows from investing activities: Acquisition of property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from (purchase of) cost and equity method investments, net Acquisitions, net of cash acquired Other investing activities Net cash used in investing activities Cash flows from financing activities: Principal payments of long-term debt Proceeds from issuance of long-term debt Issuance of common stock Payment of debt issuance costs Other financing activities Net cash provided by (used in) financing activities Effect of foreign currency exchange rates on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year At January 1, 2010 Stock-based compensation Net shares issued (acquired) under stock incentive plans Income tax liability from stock options, restricted stock and restricted stock units Net income Total other comprehensive income, net At December 31, 2010 Stock-based compensation Net shares issued under stock incentive plans Income tax liability from stock options, restricted stock and restricted stock units Net income Total other comprehensive loss, net At December 30, 2011 Stock-based compensation Net shares issued under stock incentive plans Income tax liability from stock options, restricted stock and restricted stock units Shares contributed to 401(k) Plan Net loss Total other comprehensive income, net At December 28, 2012 device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management to its customers. Level 3 Impairment of Long-Lived Assets – The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: – Other long-term assets also include investments in equity securities of entities that are not publicly traded and which do not have readily determinable fair values. The carrying amount of the conversion option was recorded in Additional Paid-In Capital with an offset to Long-Term Debt and – Environmental expenditures that relate to an existing condition caused by past operations and that do not provide future benefits are expensed as incurred. Liabilities are recorded when environmental assessments are made, the requirement for remedial efforts is probable and the amount of the liability can be reasonably estimated. Liabilities are recorded generally no later than the completion of feasibility studies. The Company has an ongoing monitoring and identification process to assess how the activities, with respect to known exposures, are progressing against the recorded liabilities, as well as to identify other potential remediation sites that are presently unknown. Research, Development and Engineering Costs, Net (“RD&E”) – RD&E costs are expensed as incurred. The primary costs are salary and benefits for personnel, material costs used in development projects and subcontracting costs. Cost reimbursements for certain engineering services from customers for whom the Company designs products are recorded as an offset to engineering costs upon achieving development milestones specified in the contracts. These reimbursements do not cover the complete cost of the development projects. Additionally, the technology developed under these cost reimbursement projects is owned by the Company and is utilized for future products developed for other customers. 2013. Comprehensive Income (Loss) – The Company’s comprehensive income (loss) as reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) includes net income (loss), foreign currency translation adjustments, the net change in cash flow hedges, and defined benefit plan liability adjustments. The Consolidated Statements of Operations and Comprehensive Income (Loss) and Note 17 “Accumulated Other Comprehensive Income” contains additional information on the computation of the Company’s comprehensive income (loss). Statements. In On the repayment of Lake Region Medical’s debt was primarily funded through a new senior secured credit facility and the issuance of senior notes. See Note 9 “Debt” for additional information regarding the Company’s debt. The Company believes that the combination of Greatbatch and Lake Region Medical brings together two highly complementary organizations that can provide a new level of industry leading capabilities and services to original equipment manufacturer customers while building value for shareholders. Through this acquisition, the Company believes that it will be at the forefront of innovating technologies and products that help change the face of healthcare, providing its customers with a distinct advantage as they bring complete systems and solutions to market. In turn, Greatbatch’s customers will be able to accelerate patient access to life enhancing therapies. The transaction is consistent with Greatbatch's strategy of achieving profitable growth and continuous improvement to drive margin expansion. adjustments. Assets acquired Current assets Property, plant and equipment Amortizing intangible assets Indefinite-lived intangible assets Goodwill Other assets Total assets acquired Liabilities assumed Current liabilities Deferred income taxes Total liabilities assumed Amortizing Intangible Assets Technology and patents Customer lists Indefinite-lived Intangible Assets In-process research and development Assets acquired Current assets Property, plant and equipment Amortizing intangible assets Goodwill Other assets Total assets acquired Liabilities assumed Current liabilities Long-term liabilities Total liabilities assumed – The fair value of PP&E acquired was estimated by applying the cost approach for personal property, buildings and building improvements and the market approach for land. The cost approach was applied by developing a replacement cost and adjusting for depreciation and obsolescence. The value of the land acquired was derived from market prices for comparable properties. Amortizing Intangible Assets Technology and patents Customer lists Noncompete agreement Trademarks and tradenames – Technology Pro Forma Results (Unaudited) Sales Net (loss) income Earnings (loss) per share: Basic Diluted Noncash investing and financing activities: Common stock contributed to 401(k) Plan Property, plant and equipment purchases included in accounts payable Cash paid during the year for: Interest Income taxes Acquisition of noncash assets Liabilities assumed Raw materials Work-in-process Finished goods Total Asset Group Segment Inventory Technology Inventory PP&E Technology Net” for additional information regarding this transaction and Note 18 “Fair Value Measurements” for information regarding the fair value of the assets. Manufacturing machinery and equipment Buildings and building improvements Information technology hardware and software Leasehold improvements Furniture and fixtures Land and land improvements Construction work in process Other Accumulated depreciation Total Depreciation expense At December 28, 2012 Purchased technology and patents Customer lists Other Total amortizing intangible assets At December 30, 2011 Purchased technology and patents Customer lists Other Total amortizing intangible assets Cost of sales SG&A RD&E Total intangible asset amortization expense 2013 2014 2015 2016 2017 Thereafter Total estimated amortization expense At December 30, 2011 Indefinite-lived assets acquired At December 28, 2012 At December 30, 2011 Goodwill acquired Foreign currency translation At December 28, 2012 Salaries and benefits Profit sharing and bonuses Warranty Swiss orthopaedic consolidation severance Micro Power purchase price payable Other Total Revolving line of credit 2.25% convertible subordinated notes Unamortized discount Total long-term debt does not exceed 4.25:1.00. financial and negative covenants under the Senior Secured Credit Facilities. The Senior Secured Credit The Senior Secured Credit Facilities are guaranteed by the Company, as a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries (other than Greatbatch Ltd., non-wholly owned joint ventures and certain other excluded subsidiaries). The Senior Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; 1) the present and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except the Company); 2) sixty-six percent (66%) of all present and future shares of voting capital stock of each specified first-tier foreign subsidiary; 3) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal property; and 4) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other guarantors. follows (in thousands): Instrument Location Interest rate swap annum. The effective interest rate of CSN, which The contractual interest and discount amortization for CSN were as follows (in thousands): Contractual interest Discount amortization related credit facilities. At December 31, 2010 Financing costs deferred Write-off during the period Amortization during the period At December 30, 2011 Amortization during the period At December 28, 2012 2015. Defined Benefit Plans – The Company is required to provide its employees located in Switzerland, Mexico, France, and remaining employees at that location. Change in projected benefit obligation: Projected benefit obligation at beginning of year Service cost Interest cost Prior service cost and plan amendments Plan participants’ contribution Actuarial loss Benefits paid Settlements/curtailments Foreign currency translation Projected benefit obligation at end of year Change in fair value of plan assets: Fair value of plan assets at beginning of year Employer contributions Plan participants’ contributions Actual gain (loss) on plan assets Benefits paid Settlements Foreign currency translation Fair value of plan assets at end of year Projected benefit obligation in excess of plan assets at end of year Defined benefit liability classified as other current liabilities Defined benefit liability classified as long-term liabilities Accumulated benefit obligation at end of year Amounts recognized in Accumulated Other Comprehensive Income are as follows (in thousands): Net loss occurring during the year Amortization of losses Prior service cost Amortization of prior service cost Foreign currency translation Pre-tax adjustment Taxes Net (gain) loss Amortization of net prior service credit Amortization of net loss Service cost Interest cost Expected return on assets Recognized net actuarial loss Net pension cost Discount rate Salary growth Expected rate of return on assets assets. Cash Total Cash Equity securities: U.S. companies International companies Emerging markets Fixed income: Government & government agencies Corporate Real-estate Other Total 2013 2014 2015 2016 2017 2018-2022 Stock options Restricted stock and units 401(k) stock contribution Total stock-based compensation expense Cost of sales Selling, general and administrative Research, development and engineering Total stock-based compensation expense these initiatives. this plan. have not been granted since 2010. The weighted-average fair value and assumptions used are as follows: Weighted average grant date fair value Risk-free interest rate Expected volatility Expected life (in years) Expected dividend yield Annual prevesting forfeiture rate Outstanding at January 1, 2010 Granted Exercised Forfeited or expired Outstanding at December 31, 2010 Granted Exercised Forfeited or expired Outstanding at December 30, 2011 Granted Exercised Forfeited or expired Outstanding at December 28, 2012 Expected to vest at December 28, 2012 Exercisable at December 28, 2012 Outstanding at January 1, 2010 Forfeited or expired Outstanding at December 31, 2010 Exercised Forfeited or expired Outstanding at December 30, 2011 Exercised Forfeited or expired Outstanding at December 28, 2012 Expected to vest at December 28, 2012 Exercisable at December 28, 2012 The following table provides certain information relating to the exercise of stock options (in thousands): Intrinsic value Cash received Tax expense realized Nonvested at January 1, 2010 Granted Vested Forfeited Nonvested at December 31, 2010 Granted Vested Forfeited Nonvested at December 30, 2011 Granted Vested Forfeited Nonvested at December 28, 2012 Nonvested at January 1, 2010 Granted Vested Forfeited Nonvested at December 31, 2010 Granted Vested Forfeited Nonvested at December 30, 2011 Granted Vested Forfeited Nonvested at December 28, 2012 Research and development costs Engineering costs Less: cost reimbursements Total research, development and engineering costs, net Orthopaedic facility optimization Medical device facility optimization ERP system upgrade 2007 & 2008 facility shutdowns and consolidations Integration costs Asset dispositions, severance and other additional information. Severance and Accelerated depreciation and asset The change in accrued liabilities related to the At December 30, 2011 Restructuring charges Write-offs Cash payments At December 28, 2012 At December 30, 2011 Restructuring charges Cash payments At December 28, 2012 At December 30, 2011 Charges Write-offs Cash payments At December 28, 2012 $0.7 million in 2014 and 2013, respectively, and was categorized in Level 3 of the fair value hierarchy. U.S. International The provision (benefit) for income taxes was comprised of the following (in thousands): Current: Federal State International Deferred: Federal State International Statutory rate Change in tax rate—loss of Swiss tax holiday Federal tax credits Foreign rate differential Uncertain tax positions State taxes, net of federal benefit Valuation allowance Other Effective tax rate Tax credits Net operating loss carryforwards Inventories Accrued expenses Stock-based compensation Other Gross deferred tax assets Less valuation allowance Net deferred tax assets Property, plant and equipment Intangible assets Convertible subordinated notes Gross deferred tax liabilities Net deferred tax liability Presented as follows: Current deferred tax asset Current deferred tax liability Noncurrent deferred tax asset Noncurrent deferred tax liability The increase in the valuation allowance during 2015 is primarily attributable to the acquisition of Lake Region Medical. Balance, beginning of year Additions based upon tax positions related to the current year Additions recorded as part of business combinations Additions related to prior period tax positions, net Reductions relating to settlements with tax authorities Reductions as a result of a lapse of applicable statute of limitations Balance, end of year defendants caused or contributed to alleged groundwater contamination beneath the property. The Company believes these allegations are without merit and has concluded that any potential loss related to these allegations is not probable, and as such, no liability has been recorded as of January 1, 2016. Product Warranties– The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The change in product warranty liability was comprised of the following (in thousands): Beginning balance Warranty reserves acquired Additions to warranty reserve Warranty claims paid Foreign currency effect Ending balance Operating lease expense was as follows (in thousands): Operating lease expense 2013 2014 2015 2016 2017 Thereafter Total estimated operating lease expense Purchase Commitments – Contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Company’s purchase orders are normally based on its current manufacturing needs and are fulfilled by its vendors within short time horizons. The Company enters into blanket orders with vendors that have preferred pricing and terms, however these orders are normally cancelable by us without penalty. As of Reduction in Cost of Sales Ineffective portion of change in fair value Instrument FX Contract FX Contract Numerator for basic EPS: Net income (loss) Effect of dilutive securities: Interest expense and deferred financing fees on convertible notes, net of tax Numerator for diluted EPS Denominator for basic EPS: Weighted average shares outstanding Effect of dilutive securities: Convertible notes Stock options, restricted stock and restricted stock units Denominator for diluted EPS Basic EPS Diluted EPS Time-vested stock options, restricted stock and restricted stock units Performance-vested stock options and restricted stock units At December 30, 2011 Unrealized gain on cash flow hedges Realized gain on cash flow hedges Net defined benefit plan liability adjustments Foreign currency translation gain At December 28, 2012 At December 30, 2011 Contingent consideration liability recorded Fair value adjustments At December 28, 2012 Contingent Consideration Liability Valuation Technique Unobservable Inputs Financial milestones Development milestones The following tables provide information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands): Description Assets Foreign currency contracts (Note 15) Liabilities Accrued contingent consideration Interest rate swap Description Liabilities Foreign currency contracts $3.2 million. During 2013, the Company wrote off $0.5 million of IPR&D allocated to its QiG segment as these projects were discontinued prior to reaching technological feasibility. Additionally, during 2013, the Company wrote off $0.9 million of inventory and technology related to Greatbatch Medical’s wireless sensing product line held for sale, as an agreement could not be reached with potential buyers. The above impairment charges were recorded in Other Operating Expenses, Net. Refer to Note 13 “Other Operating Expenses, Net” for further discussion. The following table provides information regarding assets and liabilities recorded at fair value on a nonrecurring basis as of January 1, 2016 and January 2, 2015 respectively (in thousands): Description Assets Assets Held for Sale—Swiss orthopaedic disposal group (Note 5) Cost method investment Pension down hole drilling tools. Implantable Medical Cardiac/Neuromodulation Vascular Orthopaedic Total Implantable Medical Electrochem Portable Medical Energy/Environmental Other Total Electrochem Total sales Segment income from operations: Implantable Medical Electrochem Total segment income from operations Unallocated operating expenses Operating income as reported Unallocated other expense Income before provision for income taxes as reported Depreciation and Amortization: Implantable Medical Electrochem Total depreciation and amortization included in segment income from operations Unallocated depreciation and amortization Total depreciation and amortization Expenditures for tangible long-lived assets, excluding acquisitions: Implantable Medical Electrochem Total reportable segments Unallocated long-lived tangible assets Total expenditures Identifiable assets: Implantable Medical Electrochem Total reportable segments Unallocated assets Total assets Sales by geographic area: United States Non-Domestic locations: Puerto Rico Belgium United Kingdom & Ireland Rest of world Total sales Long-lived tangible assets: United States Rest of world Total Customer A Customer B Customer C Customer D 2012 Sales Gross profit Net income (loss) EPS—basic EPS—diluted 2011 Sales Gross profit Net income EPS—basic EPS—diluted Col. A Description December 28, 2012 Allowance for doubtful accounts Valuation allowance for deferred income tax assets December 30, 2011 Allowance for doubtful accounts Valuation allowance for deferred income tax assets December 31, 2010 Allowance for doubtful accounts Valuation allowance for deferred income tax assets Valuation allowance recorded in the provision for income taxes for certain net operating losses and tax credits. The Accounts written Includes foreign currency translation effect. Primarily relates to return to provision adjustments for prior years. /s/ Thomas J. Hook Signature Title Date /s/ Thomas J. Hook ITEMNUMBERPAGENUMBERPART I3 21 31 31 32 32 PART II 32 34 35 65 67 128 129 130 130 130 130 130 130 was foundedmanufactures and develops high-quality medical devices and components primarily for large original equipment manufacturers (“OEMs”), which depend on us to design, develop and produce reliable, long-lasting, intellectual property protected medical device technologies. During the fourth quarter of 2015, Greatbatch, Inc. acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake Region Medical”) creating one of the largest medical device outsource (“MDO”) manufacturers in 1970the world serving the cardiac, neuromodulation, orthopaedics, cardio and vascular, advanced surgical, portable medical, energy, environmental and military markets. Simultaneous with the close of the Lake Region Medical acquisition, Greatbatch, Inc. also announced its intention to rename the combined entity Integer Holdings Corporation. Integer is a Delaware corporation incorporated in 1997.defined as complete, whole, and comprehensive, and represents the joining of Greatbatch, Inc. and Lake Region Medical as well as the combined company's product and service offerings provided to customers. The new name is subject to Greatbatch shareholder approval at the May 2016 annual meeting. When used in this report, the terms “Greatbatch,” “we,” “us,” “our” and the “Company” mean Greatbatch, Inc. and its subsidiaries.conductedis reevaluating its initial public offeringoperating and reporting segments, which is expected to be finalized in 2000.We2016 once the corporate and management reporting structure realignment is completed. As of the end of our 2015 fiscal year, we operate our business in two reportablethree segments – Implantable Medical and Electrochem Solutions (“Electrochem”). The Company’s customers include large multi-national original equipment manufacturers (“OEMs”). The Implantable Medical segment is comprised of our Greatbatch Medical, QiG and QiG Group brands andLake Region Medical.medical devicesproducts where Greatbatch either owns or licenses the intellectual property or has unique manufacturing and componentsassembly expertise, primarily for the cardiac, neuromodulation, orthopaedic, portable medical, vascular, energy, environmental and orthopaedicmilitary markets. The Implantable Medical segment offers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution, which is facilitated through the QiG Group and leverages the component technology of Greatbatch Medical. The devices designed and developed by the QiG Group are manufactured by Greatbatch Medical. The Implantable Medical segment also offers value-added assembly and design engineering services for its component products.Electrochem provides industry-leading total power solutions for rechargeablemedical devices using, in many cases, our proprietary technologies.non-rechargeable battery powerdevelopment of medical device systems charging and docking stations,components through a network of research and power supplies, fordevelopment professionals who drive a diverse portfolio of new and innovative medical product opportunities. QiG seeks to assist customers in accelerating the velocity of innovation while delivering an optimized supply chain and critical applicationscost efficiencies. QiG’s neurostimulation technology platform, which will be owned by Nuvectra after the completion of the Spin-off, has the capability to provide treatment to patients in several established neurostimulation markets such as spinal cord stimulation (“SCS”), sacral nerve stimulation (“SNS”), deep brain stimulation (“DBS”), and other emerging neurostimulation markets. The QiG segment is comprised of QiG Group, NeuroNexus Technologies, Inc. (“NeuroNexus”), and Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”). The entities included in the portable medicalpending Spin-off consist of QiG Group and energy markets, where safety, reliability, qualityits subsidiaries Algostim LLC (“Algostim”) and innovation are critical. Electrochem’s product lines cover a numberPelviStim, LLC (“PelviStim”) and NeuroNexus. As an independent publicly traded company after the completion of highly-customized battery-powered applications in remotethe Spin-off, Nuvectra will be focused on the development and demanding environments, including down hole drilling toolscommercialization of its neurostimulation technology platform and, in life-savingparticular, its Algovita® SCS system for the treatment of chronic pain of the trunk and life-enhancing applications, including automated external defibrillators, portable oxygen concentrators, ventilatorslimbs (“Algovita”). The operations of CCC and poweredcertain other existing QiG research and development capabilities will be retained by Greatbatch and are not included as part of the Spin-off.tools, among others. Inc. was incorporated, it has completed the following acquisitions either directly or indirectly through one of its subsidiaries:Acquired Company Acquired CompanyJuly 1997 Wilson Greatbatch Ltd. Founded in 1970, designed and manufactured batteries for implantable medical and commercial applications. August 1998 Hittman Materials and Medical Components, Inc. Founded in 1962, designed and manufactured ceramic and glass feedthroughs and specialized porous coatings for electrodes used in implantable medical devices (“IMDs”). August 2000 Battery Engineering, Inc. Founded in 1983, designed and manufactured high-energy density batteries for industrial, commercial, military and medical applications. - 3 -Acquisition Date Acquired Company Business at Time of AcquisitionJune 2001 Sierra-KD Components division of Maxwell Technologies, Inc. Founded in 1986, designed and manufactured ceramic electromagnetic filtering capacitors and integrated them with wire feedthroughs for use in IMDs as well as military, aerospace and commercial applications. July 2002 Globe Tool and Manufacturing Company, Inc. Founded in 1954, designed and manufactured precision enclosures used in IMDs and commercial products used in the aerospace, electronics and automotive sectors. March 2004 NanoGram Devices Corporation Founded in 1996, developed nanoscale materials for battery and medical device applications. April 2007 BIOMEC, Inc. Established in 1998, provided medical device design and component integration to early-stage and established customers. June 2007 Enpath Medical, Inc. Founded in 1981, designed, developed, and manufactured venous introducers and dilators, implantable leadwires, steerable sheaths and steerable catheters. October 2007 IntelliSensing LLC Founded in 2005, designed and manufactured battery-powered wireless sensing solutions for commercial applications. November 2007 Quan Emerteq LLC Founded in 1998, designed, developed, and manufactured catheters, stimulation leadwires, microcomponents and assemblies. November 2007 Engineered Assemblies Corporation Founded in 1984, designed and integrated custom battery solutions and electronics focused on rechargeable systems for industrial, commercial, military and portable medical applications. January 2008 P Medical Holding SA Founded in 1994, designed, manufactured and supplied delivery systems, instruments and implants for the orthopaedicorthopaedics industry.February 2008 DePuy Orthopaedics’ Chaumont, France manufacturing facility Manufactured hip and shoulder implants for DePuy Orthopaedics. December 2011 Micro Power Electronics, Inc. (“Micro Power”) Founded in 1990, designed custom battery packs, smart chargers and power supplies for industrial, military and portable medical applications. February 2012 Technologies, Inc.(“NeuroNexus”) Founded in 2004, medical device design firm specializing in developing neural interface technology, components and systems. Acquisition Date Acquired Company Business at Time of Acquisition August 2014 CCC Founded in 1969, an active implantable neuromodulation medical device systems developer and manufacturer that produces a range of medical devices including implantable pulse generators, programmer systems, battery chargers, patient wands and leads. October 2015 Lake Region Medical Founded in the 1940s, offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management within the cardio, vascular and advanced surgical markets. 31st.31. Fiscal years 2012, 20112015, 2014 and 20102013 ended on December 28, 2012, December 30, 2011January 1, 2016, January 2, 2015, and December 31, 2010,January 3, 2014, respectively. Fiscal years 2012, 2011year 2015 and 20102014 contained fifty-two weeks and fiscal year 2013 contained fifty-three weeks.businessCompany in twothree reportable segments – Implantablesegments: Greatbatch Medical, QiG, and Electrochem.Lake Region Medical. Segment information including sales from external customers, profit or loss, and assets by segment as well as sales from external customers and long-lived assets by geographic area are set forth atin Note 19 “Business Segment, Geographic and Concentration Risk Information” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.IMPLANTABLE MEDICALneuromodulationNeuromodulation – Component productsProducts include batteries, capacitors, filtered and unfiltered feedthroughs, engineered components, implantable stimulation leads and enclosures used in IMDs. Additionally, we offer value-added assembly for these IMDs. An IMD is an instrument that is surgically inserted into the body to provide diagnosis and/or therapy. One sector of the IMD market is cardiac, which is comprised of devices such as implantable pacemakers, implantable cardioverter defibrillators (“ICD”), cardiac resynchronization therapy (“CRT”) devices, and cardiac resynchronization therapy with backup defibrillation devices (“CRT-D”). Another sector of the IMD market is neuromodulation, which is comprised of pacemaker-type devices that stimulate nerves for the treatment of various conditions. Beyond established therapies offor pain control, incontinence, and movement disorders (Parkinson’s disease, essential tremor and epilepsy),dystonia) and epilepsy, nerve stimulation for the treatment of other disabilities such as sleep apnea, migraines, obesity and depression has shown promising results. Pacemakers Abnormally slow heartbeat (Bradycardia) ICDs Rapid and irregular heartbeat (Tachycardia) CRT/CRT-Ds Congestive heart failure Neurostimulators Chronic pain, incontinence, movement disorders, epilepsy, obesity or depression Cochlear hearing devices Hearing loss to includeincluding complete lead systems. Our investments in research and development havehas generated proprietary products such as the QHR®, QMR®, and QCapacitorCAPS®TM primary battery and capacitor lines, which have enabledXcellion™XcellionTM line of Lithium-Ion rechargeable batteries leverages decades of implantable battery research, development and manufacturing expertise. This line of battery cells now includes the optional CoreGuard™CoreGuardTM feature, which enables batteries to discharge to zero volts without performance degradation.- 5 -Despite the current global market challenges for this industry, weposition this product line for growth, which will be driven by the following factors:•Growing patient population –Implantable pacemakers and ICDs remain primary therapies for a number of critical clinical conditions, most of which are non-elective in nature. As the prevalence of many of these clinical conditions increase with age, underlying population demographics in developed countries will provide an engine for procedure growth.•Focus on emerging markets—OEM’s have increased their focus and investment to expand physicians awareness of these life changing therapies, which we believe will result in increased utilization to improve quality of life for more patients globally. These growth initiatives will drive increased utilization of existing cardiac technologies and provide an avenue for new device and technology development as device manufacturers look to develop unique products for these markets.•Trends in device features – IMD evolution continues to favor the development of smaller, longer lasting devices with increased functionality and more physiologic shapes. Innovative battery, capacitor, enclosure, and filtering solutions such as those provided by Greatbatch Medical are critical to the realization of these market needs.•Growth within neuromodulation– Neuromodulation applications continue to grow at a faster pace than traditional markets, and are expected to continue to expand as new therapeutic applications are identified. The 2012 fiscal year experienced continued growth in clinical data supporting new applications and a growing focus and excitement from clinicians looking for treatment alternatives for challenging patient conditions. Additionally, core neuromodulation markets—like spinal cord stimulation—that rely significantly on patients for co-pays, are positioned to see stronger growth as global economic markets strengthen. Many cardiac OEM companies are also OEMs in the neuromodulation market, which positions us to capitalize on both drivers of market growth.Vascular – Products include introducers, specialty medical coatings, steerable sheaths and catheters that deliver therapies for many end-user markets including coronary and neurovascular disease, peripheral vascular disease, interventional radiology, vascular access, atrial fibrillation, and interventional cardiology, as well as products for medical imaging and drug and pharmaceutical delivery. Several ofare impacting these markets are as follows:experience significant globalcontinue to expand as new therapeutic applications are identified. There continues to be growth overin clinical data supporting new applications and a growing focus and excitement from clinicians looking for treatment alternatives for challenging patient conditions that have not been traditionally served by implantable stimulation devices. As many cardiac OEM companies also operate as OEMs in the next few years. Introducers enable physicians to create a conduit through which they can insert infusion catheters, implantable ports, pacemaker leads and other therapeutic devices into a blood vessel. A catheterneuromodulation market, we believe Greatbatch is a tube that can be inserted into a blood vessel to allow drainage, injection of fluids, or access by surgical instruments.Our products seekwell positioned to capitalize on these drivers of market growth based on the strength of our existing relationships. Additionally, early stage neuromodulation OEMs have begun to receive CE mark and FDA approvals for their novel device systems and therapies, further fueling incremental growth in the cardiac, neurologymarket and vascular markets, especially since manyproviding new potential partners for Greatbatch technologies.large cardiac OEMs are also in the vascular markets. This gives us an opportunity to develop close strategic partnerships that can be leveraged across markets, an opportunity that will grow in significance as OEMs continue to consolidate their operating divisions. In addition to those factors that are driving the cardiacadvancement of these new therapy and neuromodulation markets, increased demand is also being driven by continued focus on minimally invasive procedures. Patients and healthcare providers are looking for minimally invasive technologies to treat disease. They are expanding the use of catheter based procedures and associated vascular therapies. We also continue to see strong growth in the vascular markets because of peripheral-vascular disease therapies and new indications for tissue extraction or ablation.- 6 -OrthopaedicOrthopaedics – Products include hip and shoulder joint reconstruction implants, bone plates, screws and spinal devices, andas well as instruments and delivery systems used in hip and knee replacement, trauma fixation, extremity and spine surgeries. Orthopaedic implants are used in reconstructive surgeries to replace or repair hips, knees and other joints, such as shoulders, ankles and elbows that have deteriorated as a result of disease or injury. Trauma implant systems are used primarily to reattach or stabilize damaged bone or tissue while the body heals. Spinal implant systems are used by orthopaedic surgeons and neurosurgeons in the treatment of degenerative diseases, deformities and injuries in various regions of the spine.CasesOrthopaedic trays are generally designed to allow for sterilization and re-use after an implant or other surgical procedure is performed. The majority of cases are tailored for specific implant procedures so that the instruments, implants and other devices are arranged within the case to match the order of use in the procedure and are securely held in clearly labeled, custom-formed pockets.orthopaedicorthopaedics market segment are similar to the cardiac and vascularneuromodulation markets and include:•Aging population in developed markets- in the 65+ population, along with an increased desire to remain active, will provide a driver for procedural growth.•Rates of obesity—Rates of obesity globally have continued to rise, and are expected to do so for the foreseeable future. Excess weight carriage exacerbates wear on joints and will drive the need for replacement and revision procedures.•New implant and surgical technology- The orthopaedic market continues to see a growing focus on minimally invasive procedures across a number of sectors including joint reconstruction and spinal fusion, potentially expanding the use of these therapeutic approaches.•Growth in emerging markets—Growing affluence in emerging markets has provided an opportunity for global growth of a number of orthopaedic procedures. Patient populations outside of developed markets continue to be underpenetrated, and investment from large device manufacturers in these markets will provide for procedural growth of established therapies.The following table summarizes information about our Implantable Medical component products:ProductDescriptionPrincipal Product AttributesBatteriesLithium iodine (“Li Iodine”)Lithium silver vanadium oxide (“Li SVO”)Lithium carbon monoflouride (“Li CFx”)Lithium ion rechargeable (“Li Ion”)Lithium SVO/CFx (“QHR” & “QMR”)High reliability and predictabilityLong service lifeCustomized configurationLight weightHigh energy density, small size- 7 -ProductDescriptionPrincipal Product AttributesCapacitorsStorage for energy generated by a battery before delivery to the heart. Used in ICDs and CRT-Ds.Stores more energy per unit volume (energy density) than other existing technologies Customized configurationEMI filtersFilters electromagnetic interference to limit undesirable response, malfunctioning or degradation in the performance of electronic equipmentHigh reliability attenuation of EMI RF over wide frequency ranges Customized designFeedthroughsAllow electrical signals to be brought from inside hermetically sealed IMD to an electrodeCeramic to metal seal is substantially more durable than traditional seals MultifunctionalCoated electrodesDeliver electric signal from the feedthrough to a body part undergoing stimulationHigh quality coated surface Flexible in utilizing any combination of biocompatible coating surfaces Customized offering of surfaces and tipsPrecision componentsMachinedMolded and over molded productsHigh level of manufacturing precisionBroad manufacturing flexibilityEnclosures and related componentsTitaniumStainless steelPrecision manufacturing, flexibility in configurations and materialsValue-added assembliesCombination of multiple components in a single package/unitLeveraging products and capabilities to provide subassemblies and assembliesProvides synergies in component technology and procurement systemsStimulation leadsCardiac, neuromodulation and hearing restoration stimulation leadsCustom and unique configurations that increase therapy effectiveness, provide finished device design and manufacturingIntroducersCreates a conduit to insert infusion catheters, guidewires, implantable ports, pacemaker leads and other therapeutic devices into a blood vesselVariety of sizes and materials that facilitate problem-free access in a variety of clinical applications- 8 -ProductDescriptionPrincipal Product AttributesCathetersDelivers therapeutic devices to specific sites in the bodyEnable safe, simple delivery of therapeutic and diagnostic devices, soft tip and steerabilityProvide regulatory clearance and finished deviceCases and traysDelivery systems for cleaning and sterilizing orthopaedic instruments and implantsHigh degree of customizationShort, predictable development and production timelinesImplantsOrthopaedic implants for reconstructive hip, knee, shoulder, trauma and spine proceduresPrecision manufacturing, leveraging capabilities and productsComplete processes including sterile packaging and coatingsInstrumentsOrthopaedic instruments for reconstructive and trauma proceduresDesigned to improve surgical techniques, reduce surgery time, increase surgical precision and decrease risk of contaminationA majority of the componentsminimally invasive therapy markets by offering off-the-shelf access devices such as introducers and devices Implantable Medical sells incorporate proprietary technologies. These proprietary technologies provide an entry barrier for new competitors, and further limit existing competitors from duplicating our products. In addition to these proprietary technologies, our proprietary “know-how” in the manufacture of these products provides further barriers to competition.QiG Group – QiG Group is the research and development arm of our Implantable Medical segment that was assembled in 2008 to facilitate the development of complete medical devices for our Implantable Medical customers. Within QiG resides tremendous talent, resources and capacity for innovation within our organization. Today QiG encompasses 120 research and development professionals working in facilities in seven states and currently focused on two compelling therapeutic areas: cardiovascular and neuromodulation. In the long-term will be the addition of orthopaedics. Additionally, QiG has established relationships with nearly a dozen key physicians who are highly specialized in these areas. These partnerships are helping us to design medical devices from the ground up with features that will meet the needs of today’s practicing clinicians.Within the QiG Group, we are utilizing a disciplined and diversified portfolio approach with three investment modes— market driven medical devices to be sold or licensed to an OEM partner, OEM driven medical device initiatives, and strategic equity investments in start-up companies. The QiG Group employs a disciplined and thorough process for evaluating these opportunities. A scorecard process is utilized to review and select the most strategically valuable ideas to pursue, taking into account a host of variables including the market opportunity, regulatory pathway and reimbursement; market need and market potential; intellectual property and projected financial return.As a result of the investments we have made, we are able to provide our Implantable Medical customers with complete medical devices. This includes development through regulatory submissions,steerable sheaths as well as design and manufacturing services for specialty catheter components that enable the delivery and supporting worldwide distribution. These medical devices are full product solutions that complement our OEM customers’ productsadministration of predominantly cardiovascular, neurovascular and utilizeendovascular therapies. Our broad portfolio of peelable, valved and non-valved introducers have gained strong adoption with OEMs in both the component expertise and capabilities residing within Greatbatch Medical. The benefits to our OEM customers include shortening the time tocardiac rhythm management (“CRM”) market, for the placement of leads, as well as the vascular access space where our introducers are used to place dialysis catheters, PICCs, CVCs and ports. We service these markets by providing OEMs with customizable sterile kits or non-sterile product for inclusion in OEMs device kits. Our steerable sheaths have gained significant traction in the electrophysiology market where market-leading OEMs utilize our steerable devices by acceleratingfor the velocitydelivery of innovation, optimizing their supply chaindiagnostic and ultimately providing themablation devices. Our specialty catheter shaft components provide OEMs with cost efficiencies. Oncecustom design, prototyping, and manufacturing of the QiG Group designshigh performance catheter assemblies required to support the most demanding minimally invasive catheter-based surgical procedures.develops a medical device, it is manufactured byEnvironmental – Greatbatch Medical.- 9 -ELECTROCHEMElectrochemMedical also provides customized battery power and management systems, charging and docking stations, and power supplies to markets where safety, reliability, quality and durability are critical.supplies. We design customized primary (non-rechargeable) and secondary (rechargeable) battery solutions, which are used in the portable medical, energy, military and environmental markets. Electrochem’sOur primary and secondary power solutions are used where failure is not an option.Electrochem’sElectrochem’sOur product designs incorporate protective circuitry, glass-to-metal hermetic seals, fuses and diodes to help ensure safe, durable and reliable power as devices are subjected to these harsh conditions. Our primary batteries are often used in remote and demanding environments, including down hole drilling tools, military communication devices and oceanographic buoys and more.ElectrochemGreatbatch Medical offers customized secondary or rechargeable battery packs, in a diverse range of chemistries for critical applications requiring rechargeable solutions. Rechargeable chemistries include lithium ion, lithium ion polymer, nickel metal hydride, nickel cadmium, lithium iron phosphate and sealed lead acid. Electrochem’sGreatbatch Medical’s rechargeable battery packs include advanced electronics, smart charging and battery management systems and are used in critical and life-saving applications, including automated external defibrillators, ventilators, powered surgical instruments and portable oxygen concentrators, among others.In 2012, Electrochem significantly grew its market position, particularly in the portable medical space. After acquiring Micro Power Electronics, Inc. in late 2011, Electrochem broadened its technical capabilities, expanded its geographic locations and expanded its market penetration with customers who require specialized portable power solutions for use in critical applications.Gaining better access to thewas one of the main drivers behind our acquisition of Micro Power as it provides ustrends continue to be favorable with a significant opportunity for growth given its $400 million market size. Additionally, this market is benefiting from favorable market trends as patient care shifts from clinical settings to the home and as an aging population drivesand the needshift from clinical to home settings for lightweightportable equipment to monitor and portable devices for patients and caregivers. These favorable trends are expected to allow thisprovide therapy. This market to grow over 6% annually for the next several years, which is well above our legacy market growth rates. Finally, this market is also attractive to us given that it has long product life cycles that will provide stability and diversification to our revenue base.- 10 -ElectrochemGreatbatch Medical products: PrimaryBatteriesProduct Description Principal Product Attributes Capacitors Storage for energy generated by a battery before delivery to the heart. Used in ICDs and CRT-Ds. Stores more energy per unit volume (energy density) than other existing technologies; Customized configuration EMI filters Filters electromagnetic interference to limit undesirable response, malfunctioning or degradation in the performance of electronic equipment High reliability attenuation of EMI RF over wide frequency ranges; Customized design Feedthroughs Allow electrical signals to be brought from inside hermetically sealed IMD to an electrode Ceramic to metal seal is substantially more durable than traditional seals; Multifunctional Coated electrodes Deliver electric signal from the feedthrough to a body part undergoing stimulation High quality coated surface; Flexible in utilizing any combination of biocompatible coating surfaces; Customized offering of surfaces and tips Precision components Enclosures and related components Precision manufacturing, flexibility in configurations and materials Value-added assemblies Combination of multiple components in a single package/unit Stimulation leads Cardiac, neuromodulation and hearing restoration stimulation leads Custom and unique configurations that increase therapy effectiveness, provide finished device design and manufacturing Introducers Conduit to deliver CRM leads or placement of dialysis catheters, CVCs, PICCs, and ports Variety of sizes and configurations that facilitate reliable access in vascular access and CRM applications Steerable sheaths Steerable guide sheath for the delivery of diagnostic and ablation catheters Configurations to enable effective delivery of diagnostic and therapeutic devices in electrophysiology procedures. Specialty catheter shaft components High performance catheter shafts designed to meet intended clinical performance characteristics Deep catheter design expertise and state-of-the-art manufacturing services Cases and trays Delivery systems for cleaning and sterilizing orthopaedic instruments and implants High degree of customization;
Short, predictable development and production timelinesImplants Orthopaedic implants for large joint, spine, extremity and trauma procedures Precision manufacturing, leveraging capabilities and product processes including sterile packaging and coatings Product Description Principal Product Attributes Instruments Reusable and single use orthopaedic instruments for large joint, spine, extremity and trauma procedures Designed to improve surgical techniques, reduce surgery time, and increase surgical precision Manufactured primary cells
Moderate-rate
High rate (spiral) Optimized rate capability, shock and vibration resistant, high and low temperature tolerant, high energy densitydensity; Ability to operate in low and high temp applicationsPrimaryAssembled primary and secondary battery packs Highly-customized pack solutions Diverse portfolio of cells in various sizes, temperature ranges and rate capabilities, custom-engineered and designed, value-add charging and battery management systems for secondary packs Product Description Principal Product Attributes Access and infusion therapy guidewires Guidewires for vascular access and placement of dialysis catheters, central venous catheters, peripherally inserted central catheters and implantable ports Wide variety of custom and standard configurations available in both full-length coil and mandrel wire designs Angiographic guidewires Guidewires for delivery of angiography and guide catheters Polytetrafluoroethylene (“PTFE”) pre-coated guidewires available in a wide variety of custom & standard configurations Introducer sheaths and dilators Facilitate subcutaneous access and delivery of a variety of diagnostic and interventional devices Generally consist of a kit that includes a guidewire, sheath, dilator, and needle Size, configuration & coating depend on the clinical and anatomical requirements Interventional guidewires Facilitate access and delivery of diagnostic and therapeutic catheter-based devices across a wide range of interventional procedures Advanced core, coatings & distal tips designs based on procedure and application specific needs Structural heart guidewires Pre-curved guidewires used in a variety of transcatheter approaches for treating structural heart disease Range of stiffness profiles, tip shape configurations and transition zones to fit procedural and safety needs Steerable sheaths Used to gain access and deliver therapeutic devices to the inner chambers of the heart; primarily diagnostic catheters, ablation catheters and structural heart therapies Diverse range of configurations designed to achieve accurate positioning and deliver devices during electrophysiology and structural heart procedures Embolic protection devices Baskets and filters employed to protect distal arteries from embolization during angioplasty, stenting, and atherectomy procedures that can cause emboli to lodge in smaller arteries leading to reduced or loss of blood flow Range of basket designs, pore sizes and construction materials for capturing emboli in different parts of the body Delivery systems Guidewires, catheters, and sub-assemblies used to deploy therapies, including coil pushers that deploy embolization coils; stent delivery wires and catheters used to place stents; and embolic protection delivery and retrieval systems Broad range of custom wire and catheter-based systems incorporating different stiffness profiles, tip shapes, and lengths to fit procedural and safety needs Microcatheters Catheters with small inner lumens used to deliver embolization therapies including coils, particles, glues, and other embolization products during cancer, peripheral and neurovascular procedures where occluding blood flow is desired Range of catheters with differing lengths, stiffness profiles, and small lumen diameters Electrical and optical devices Guidewire and catheter-based devices that provide diagnostic information (e.g. arterial pressure, imaging) when planning and optimizing interventional treatments Guidewires and catheters that incorporate various mechanical, electrical / optical and connectivity technologies Orthopaedic implants Orthopaedic implants for large joint, spine, extremity and trauma procedures Product Description Principal Product Attributes Orthopaedic instruments Reusable and single use orthopaedic instruments for large joint, spine, extremity and trauma procedures Designed to improve surgical techniques, reduce surgery time, and increase surgical precision Cases and trays Delivery systems for cleaning and sterilizing orthopaedic instruments and implants Laparoscopic surgery devices Devices which include access devices, such as trocars and cannulas; imaging devices, such as endoscopes; energy based devices, such as vessel cutters and sealers and; endomechanical devices, such as endocutters, tissue staplers and other hand instruments Precision manufacturing of tubing, machined components, plastics and finished device assembly Arthroscopic surgery devices Devices which include shavers and burrs, devices for soft tissue ablation, and tissue anchoring and suturing instruments Precision manufacturing of tubing, machined components, plastics and finished device assembly Biopsy and drug delivery devices Devices used for minimally invasive access of the body for retrieval of tissue or delivery of drug therapy such as forceps, breast biopsy probes, and other interventional surgical instruments Precision manufacturing of tubing, machined components, plastics and finished device assembly components for IMDsmedical devices and Electrochem batteriescomponents is largely the result of our long history of technological innovation. We invest substantial resources in research, development and engineering. Our scientists, engineers and technicians focus on improving existing products, expanding the use of our products and developing new products and enhancements to our existing products. In addition to our internal technology and product development efforts, we also engage outside research institutions for unique technology projects. In order to facilitate the development of new and improved medical devices systems, starting in 2008, we significantly increased our investments in research and development. InvestmentsNet investments in medical device products,systems (including SG&A), which are being facilitated through theour QiG Group,segment, totaled $33.9$25.8 million, $27.3$23.3 million and $21.9$30.5 million for 2012, 20112015, 2014 and 2010,2013, respectively. After the completion of the pending Spin-off, we will continue to invest substantial resources in research, development and engineering to expand the use of our products and develop new products within the markets we serve. After the pending Spin-off is completed, the Company’s design and development of complete medical device systems will be completed by our combined teams in Greatbatch Medical, Lake Region Medical, and CCC. Further information regarding our research and development activities can be found in the QiG Group is set forth under the Implantable Medical segment description of this Item 1 and “Product Development” section of Item 7 of this report.December 28, 2012,January 1, 2016, we have 5411,209 active U.S.issued patents, and 367 active foreign patents.of which 94 were acquired with the Lake Region Medical acquisition. We also have 307 U.S. and 286 foreign484 pending patent applications at various stages of approval. During 2015, there were 101 patent applications filed and 92 patents issued. Of the past three years, we have been granted 181 new U.S.1,693 patents 77filed and pending, approximately 378 of which were granted in 2012. As a resultthese relate to complete medical device systems.QiG Group’s efforts to develop complete medical devices, the amount of intellectual property being generated by the Company has accelerated. We currently have 159Spin-off, Nuvectra, as an independent publicly-traded company, will own 153 patents and 119 pending patent applications that are included within the patent figures above, including the patents and 57 patents have been grantedpatent applications that embody the intellectual property underlying Algovita and Nuvectra’s neurostimulation technology platform.relatingsubject to our medical devices. also a party to several other license agreements with third parties under which we have obtained, on varying terms, exclusive or non-exclusive rights to patents held by them. An exampleExamples of these agreements is for the license of basic technology used in our wet tantalum capacitors, filtered feedthroughs, biomimetic coatings, safety needleswireless charging technology, and MRI compatible lead systems. We have also granted rights to our patents to others under license agreements.primarily manufacture small lot sizes,leverage our strength as most customer orders range from a few hundredan innovative designer and manufacturer of finished devices and components to a few thousand units. As a result,the medical device industry. Our manufacturing and engineering services include: design, testing, component production, and device assembly. We have integrated our ability to remain flexible is an important factorproprietary technologies in maintaining high levels of productivity. Eachour own products and those of our production teams receives assistance from representatives fromcustomers throughout the medical device industry. Our flexible, high productivity manufacturing capabilities span sites across the United States, Mexico, Uruguay, Europe, and Asia.quality, engineering, manufacturing, materials and procurement departments. Our quality systemssites are compliant with and certified to various recognized international standards, requirements, and directives.Our facilities in Alden, NY, and Minneapolis, MN are Each site’s quality system is certified under thean applicable International Organization for Standardization (“ISO”): 9001 quality system standard, which requires compliance with regulations regarding product design (where applicable), supplier control, manufacturing processes and component quality.such as ISO 13485 or ISO 9001. This certification can only be achieved after completion of an audit conducted by an independent authority followed by periodic inspections to maintain this certification.- 12 -The quality systems of our manufacturing facilities in Tijuana, Mexico, Plymouth, MN, Clarence, NY, Chaumont, France, Orvin, Switzerland, Ft. Wayne, IN, Indianapolis, IN, Beaverton, OR and Raynham, MA are certified under the ISO: 13485 quality system standard, which requires, among other things, an implemented quality system that applies (where applicable) to the design (where applicable) and manufacture of components, assemblies and finished medical devices, including component quality and supplier control. Maintenance of these certifications for each facility requires periodic re-examination from an independent notified body.ISO:ISO 13485, the facilities (where applicable)producing finished medical devices are subject to extensive and rigorous regulation by numerous government bodies, including the Food and Drug Administration (“FDA”)FDA and comparable international regulatory agencies in order to ship product worldwide.At certain For these facilities, we are requiredmaintain FDA registration and compliance to register with the FDAall applicable domestic and as a result, we are subject to periodic inspection by the FDA for compliance with their Quality System Regulation (“QSR”) requirements.international regulations. Compliance with applicable regulatory requirements is subject to continual review and is monitored through periodic inspections by the FDA. In the European Community, we are required to maintain certain ISO certifications in order to sell products,FDA and we undergo periodic inspections by notified bodies to obtain and maintain these certifications. Maintaining these certifications gives us the ability to serve as a manufacturing partner to medical device manufacturers, which we believe will improve our competitive position. Our Plymouth, MN, Ft. Wayne, IN, Indianapolis, IN, Warsaw, IN, Orvin, Switzerland, Chaumont, France, Tijuana, Mexico, and Beaverton, OR facilities are registered with the FDA.Products fromImplantable Medical business are soldproducts directly to our customers. In our Electrochem business, we utilize a combination of direct and indirect sales methods, depending on the particular product. In 2012,2015, approximately 51%50% of our products were sold in the U.S. Sales outside the U.S. are primarily to customers whose corporate offices are located and headquartered in the U.S. Information regarding our sales by geographic area is set forth atin Note 19 “Business Segment, Geographic and Concentration Risk Information” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. medical customers contract with us to develop custom components and assemblies to fit their product specifications, we also provide system and device solutions ready for market distribution by OEMs. As a result, we have established close working relationships between our internal program managers and our customers. We market our products and technologies at industry meetings and trade shows domestically and internationally.Electrochem utilizes a direct and indirect selling model to OEMs. We have a small number of strategic partner organizations, which enable us to sell into markets where language or geographical barriers are present. strategic account managersexecutives with appropriate support from engineeringour engineers to design and sell product solutions into our targeted markets. Our strategic account managers and account executives are trained to assist our customers in selecting appropriate chemistries and configurations. We market our products and services through well-defined selling strategies and marketing campaigns that are customized for each of the industries we target.- 13 -December 28, 2012January 1, 2016 and December 30, 2011January 2, 2015 were approximately $160$355 million and $191$174 million, respectively. The majority of the orders outstanding at December 28, 2012January 1, 2016 are expected to be shipped within one year.ImplantableGreatbatch Medical and Lake Region Medical customers include large multi-national OEMs and their affiliated subsidiaries such as, in alphabetical order here and throughout this report, Abbott Labs, Biotronik, Boehringer Ingelheim, Boston Scientific, Cyberonics, Halliburton Company, Johnson & Johnson, Medtronic, Nevro Corp., Philips Healthcare, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker, and Zimmer.Zimmer Biomet. During 2012, 2011,2015, 2014, and 2010, Boston Scientific,2013, Biotronik, Johnson & Johnson, Medtronic, and St. Jude Medical collectively accounted for 52%, 59%54% and 62%56% of our total sales, respectively. We have been successful in leveraging our diversified product line to further penetrateenhance our relationships with these customers and selling intoto more of their operating divisions, which cover the cardiac, neuromodulation, orthopaedic and vascular markets. QiG customers include numerous scientists, hospitals and orthopaedicuniversities throughout the world who perform research for the neuroscience and clinical markets.timepoint of shipment when title passes.tointo customer ordering patterns is over a relatively short period of time. Our customers may have inventory management programs, vertical integration plans and/or alternate supply arrangements whichthat we are unaware of. Additionally, the relative market share among the OEM manufacturers changes periodically. Consequently, these and other factors can significantly impact our sales in any given period. Our customers may initiate field actions with respect to market-released products. These actions may include product recalls or communications with a significant number of physicians about a product or labeling issue. The scope of such actions can range from very minor issues affecting a small number of units to more significant actions. There are a number of factors, both short-term and long-term, related to these field actions that may impact our results. In the short-term, if a product has to be replaced, or customer inventory levels have to be restored, demand will increase. Also, changing customer order patterns due to market share shifts or accelerated device replacements may also have a positive or negative impact on our sales results in the near-term. These same factors may have longer-term implications as well. Customer inventory levels may ultimately have to be rebalanced to match new demand.Our Electrochem customers are primarily companies involved in demanding markets where highly sophisticated power solutions needs exist, such as energy, portable medical, military and environmental. Some of our larger OEM customers include General Electric, Halliburton Company, Scripps Institution of Oceanography, Thales, Weatherford International and Zoll Medical Corp. certain critical raw materials from a limited number of suppliers due to the technically challenging requirements of the supplied product and/or the lengthy process required to qualify these materials both internally and with our customers. We cannot quickly establish additional or replacement suppliers for these materials because of these rigid requirements. For these critical raw materials, we maintain minimum safety stock levels and contractually partner with suppliers through contract to help ensure the continuity of supply. Historically, we have not experienced any significant interruptions or delays in obtaining critical raw materials.- 14 -Factors,”Factors” of this report, our business depends on a continuous supply of raw materials from a limited number of suppliers. If an unforeseen interruption of supply were to occur, we may be unable to obtain substitute sources for these raw materials on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our products profitably or on time. Additionally, we may be unable to quickly establish additional or replacement suppliers for these materials as there are a limited number of worldwide suppliers.COMPETITIONExistingOur existing and potential competitors ininclude our Implantable Medical segment include leading IMD manufacturers such as Biotronik, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker and ZimmerOEM customers that currently have vertically integrated operations and may expand their vertical integration capability in the future. Competitors also include independent suppliers who typically specialize in one type of component. Competition for Electrochem varies and is dependent on the targeted industry. Our known non-vertically integrated competitors include the following:Product LineCompetitorsImplantable MedicalMedical batteriesEagle-PicherQuallionCapacitorsProduct LineCompetitors Medical batteries Capacitors AVX (subsidiary of Kyocera) Critical Medical Components Feedthroughs Alberox (subsidiary of The Morgan Crucible Co. PLC) EMI filtering Enclosures Machined and molded components NumerousTeam VantageValue added assembly Numerous Catheters - 15 -
Vention medicalProduct Line CompetitorsIntroducers
Theragenics (Galt)
Merit MedicalStimulation leads Oscor Orthopaedic trays, instruments and implants Avalign Technologies
IMDS
Micropulse, Inc.
Juno
Orchid
Sandvik
Paragon
Tecomet AccelentAvalignManufactured primary cells Tracer Technologies IMDSMicropulse, Inc.Norwood MedicalOrchidSandvikSymmetryParagonTecomet
Engineered Power
Saft
Ultralife
VitzrocellAssembled primary and secondary battery packs Totex
Palladium
ICC/Nexergy
BMZ
Ultralife
SaftElectrochemProduct LineCompetitors Implantable medical devices Primary Power SolutionsMedical device design and developmentTracer TechnologiesEngineered PowerSaftUltralifeSecondary Power SolutionsProduct LineCompetitors Access and infusion therapy guidewires TotexPalladiumICCNexergyUltralifeSaftIntroducer sheaths and dilators Interventional guidewires Structural heart guidewires Steerable sheaths Embolic protection devices Product Line Competitors Delivery systems Microcatheters Electrical and optical devices Orthopaedic implants, instruments, cases and trays Laparoscopic surgery devices Except asnot subject to direct governmental regulation, other thanincluding the laws and regulations generally applicable to all businesses in the jurisdictions in which we operate. We are subject to federal, state and local environmental laws and regulations governing the emission, discharge, use, storage and disposal of hazardous materials and the remediation of contamination associated with the release of these materials at our facilities and at off-site disposal locations. Our manufacturing and research, development and engineering activities may involve the controlled use of small amounts of hazardous materials. Liabilities associated with hazardous material releases arise principally under the Federal Comprehensive Environmental Response, Compensation and Liability Act and analogous state laws that impose strict, joint and several liabilitiesliability on owners and operators of contaminated facilities and parties that arrange for the off-site disposal of hazardous materials. WeExcept as described below, we are not aware of any material noncompliance with the environmental laws currently applicable to our business and we are not subject to any material claim for liability with respect to contamination at any Company facilityof our facilities or any off-site location. We may, however, become subject to these environmental liabilities in the future as a result of our historic or current operations.1618 -for devices may be used by device manufacturers to support their premarket approval application (“PMA”),PMA, investigational device exemption application (“IDE”) or premarket notification (“510(k)”).the design, manufacturing processes, materials, bench testing, and animal testing, and typically requiring human clinical data. Some of our products that we are developing are Class III medical devices that require a PMA or, in the European Union, premarket approval through submission of a Design Dossier.RequirementsRegulations and the applicable notified body in the European Union to ensure conformity to the Medical Device Directives and Active Implantable Medical Device Directives. We believe that our quality controls, development, testing, manufacturing, labeling, marketing and distribution of our medical devices conform to the requirements of all pertinent regulations.health carehealthcare system that could significantly impact our business operations and financial results, including higher or lower revenue, as well as higher employee medical costs and taxes. Health Care Reform imposes significant new taxes on medical device OEMs, which will result in a significant increase in the tax burden on our industry and which could have a material negative impact on our financial condition, results of operations and our cash flows. Beginning on January 1, 2016, the medical device excise tax was suspended through December 31, 2017, but if this suspension is not continued or made permanent thereafter, the medical device excise tax will be automatically reinstated starting on January 1, 2018. Other elements of Health Care Reform such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business, results of operations and financial condition. Many significant parts of Health Care Reform will be phased in over the next several years and require further guidance and clarification in the form of regulations. Management is currently evaluating the impact that the newThe medical device tax will have onincreased our results from operations beginningcost of sales by $0.6 million, $0.7 million, and $0.5 million in 2015, 2014 and 2013, and has preliminarily estimated that it will reduce gross profit by $1.5 million to $2.5 million. This amount assumes that this tax applies to the first medical device sale in the U.S. and is based upon a wholesale price.- 17 -On August 22, 2012, the U.S. Securities and Exchange Commission (“SEC”) issued a rule under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring companies to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country. Under the adopted rule, issuers are required to conduct a “reasonable” due-diligence process to ascertain the source of conflict minerals, defined as tantalum, tin, gold or tungsten, that are necessary to the functionality or production of their manufactured or contracted to be manufactured products. Companies are required to provide this disclosure on a new form to be filed with the SEC called Form SD. Companies are required to file Form SD on May 31, 2014 for the 2013 calendar period and annually on May 31 every year thereafter. We anticipate additional, new compliance costs to be incurred since our Implantable Medical business utilizes all of the minerals specified in the rule, which we are unable to quantify at this time.RECRUITING AND TRAININGWe invest substantial resources in our recruiting efforts to focus on a quality workforce that will support our business objectives. Our goal is to provide our associates with growth opportunities by attempting to fill more than half of our open employment positions internally. We further meet our hiring needs through outside sources, as required. We have an active succession planning process including a comprehensive development program in place for senior management in order to ensure we are able to implement our strategic plan.We provide training for our associates designed to educate them on safety, quality, business strategy, and our culture. Our safety training programs educate associates on basic industrial safety practices while emphasizing the importance of knowing emergency response procedures. Our training programs focus on the methodologies and technical competencies required to support current and future business needs with a strong focus on quality and continuous improvement.Supporting our commitment to learning, we offer our associates tuition reimbursement and encourage them to continue their education at accredited colleges and universities. We have established a number of programs designed to challenge and motivate our associates specifically encouraging continuous improvement, supervisory and leadership skills. We believe ongoing development is necessary to ensure our associates utilize best practices, and share a common understanding of work practices and performance expectations.- 18 -EMPLOYEESemployees as of December 28, 2012:4,330 1,662294 143186 57646 264Chaumont, France facility2,130 231Switzerland facilities1,595 157Tijuana, Mexico facility236 796Asia 142 9,559 3,310a number ofapproximately 800 temporary employees worldwide to assist us with various projects and service functions and address peaks in staff requirements. Our employees at our Chaumont, France, and Tijuana, Mexico, and Aura, Germany facilities are represented by a union. Approximately 128 and 226Nearly all of the positions at our Switzerland and France locations, respectively,foreign facilities are manufacturing in nature. The positions at our Tijuana, Mexico facility are primarily manufacturing. Approximately 25 positions were added as a result of our NeuroNexus acquisition of which approximately 9 positions are manufacturing and 9 positions are research, development and engineering in nature.related. We believe that we have a good relationship with our employees.February 27, 2013.March 1, 2016. The officers’ terms of office run from year to year until the first meeting of the Board of Directors after our Annual Meeting of Stockholders, which meeting takes placeoccurring immediately following our Annual Meeting of Stockholders, and until their successors are elected and qualified, except in the case of earlier death, retirement, resignation or removal.46,49, is Executive Vice President of Greatbatch Medicalfor Global Operations and has served in that office since June 2013. From December 2010. He2010 to June 2013, he was President of Greatbatch Medical. Mr. Arellano served as Senior Vice President and Business Leader of our Cardiac and Neurology Group from October 2008 until December 2010, Senior Vice President and Business Leader of our CRMCardiac Rhythm Management (“CRM”) and Neuromodulation Group from January 2008 to October 2008, Senior Vice President and Business Leader of our Medical Solutions Group from November 2006 to January 2008, and as Vice President of Greatbatch Mexico from January 2005 to November 2006. Mr. Arellano joined our Company in October 2003 as the Plant Manager of our former Carson City, NV facility. Prior to joining our Company, he served in a variety of human resources and operational roles with Tyco Healthcare –- Especialidades Medicas Kenmex and with Sony de Tijuana Este.SusanJennifer M. Bratton, Bolt, age 56,47, is President, of Electrochem, and has served in that office since December 2012. She had served as SeniorOctober 2015. From June 2013 to October 2015 she was Vice President, Supply Chain and Business LeaderOperational Excellence for Greatbatch. Ms. Bolt held the position of Electrochem since January 2005. Ms. Bratton served as Vice President, of Corporate Quality from March 2001 to January 2005, as General Manager ofOperations for Electrochem from July 1998May 2012 to March 2001,June 2013, and prior to that served as Director of ProcurementOperations of our Raynham, MA facility from June 1991September 2007 to July 1998. She has held various other positions withMay 2012. Ms. Bolt joined our Company sincein May 2005 as the Manufacturing Engineering Manager for our Alden, NY facility. Prior to joining usour company, she served in 1976.a variety of engineering and operational roles at General Motors/Delphi and Eastman Kodak.58,61, is SeniorExecutive Vice President & Chief Financial Officer, and has served in that office since joining our Company in May 2012. From 2008 until May 2012, he was Executive Vice President and Chief Financial Officer of USI Insurance Services, an insurance intermediary company. From 2005 until 2008, he was Executive Vice President and Chief Financial Officer of Hilb Rogal & Hobbs Co., an insurance and risk management services company. Prior to that, Mr. Dinkins held senior positions at Guidant Corporation, Access Worldwide Communications, Cadmus Communications Group and General Electric Company.- 19 -Michelle GrahamJeremy Friedman, age 46,62, is President, Cardio & Vascular, an office he has held since the Company’s acquisition of Lake Region Medical in October 2015. Prior to that acquisition, he was Executive Vice President of Lake Region Medical and President and Chief Operating Officer of Lake Region Medical’s Cardio and Vascular Division from August 2013 to October 2015. From September 2007 to August 2013, he was Executive Vice President and Chief Financial Officer of Accellent, Inc. From January 2001 until September 2007, Mr. Friedman held a number of leadership positions at Flextronics, a global contract manufacturing services firm, including Chief Operating Officer of Flextronics Network Services in Stockholm, Sweden and Senior Vice President for Human Resources,of Finance and Operations, Components Division. From June 1994 until January 2001, he was President and Chief Operating Officer of We’re Entertainment Inc., a specialty retailer of apparel and hard goods. Prior to 1994, Mr. Friedman held a number of finance and operations positions with Phillips-Van Heusen Corporation and KPMG.December 2010.a variety of finance, operations, supply chain and customer management roles with Sanmina-SCI, BellSouth Telecommunications, HSBC and ING Bank.2005June 2013 until December 2010, she held a number of senior human resources positions at BauschOctober 2015, he served as Executive Vice President, Global Sales & Lomb, most recentlyMarketing - Greatbatch Medical. He joined Greatbatch in April 2012 as Vice President of Human ResourcesSales and Marketing for itsGreatbatch Medical. From October 2011 until joining Greatbatch, Mr. Holman was a consultant with HarQuinn, LLC. From September 2009 to October 2011, he served as Executive Vice President, Sales & Marketing for DJO Global, Vision Care division.Inc., and from October 2005 to June 2009, he served as President of the Americas for the Orthopaedics business unit of Smith & Nephew, Inc. Mr. Holman previously held various sales and marketing leadership positions at Johnson & Johnson, Inc., Boston Scientific Corporation and Xerox Corporation.50,53, has served as our President & Chief Executive Officer since August 2006. Prior to August 2006, he was our Chief Operating Officer, a position he assumed upon joining our Company in September 2004. From August 2002 until September 2004, Mr. Hook was employed by CTI Molecular Imaging where he had served as President, CTI Solutions Group.Daniel R. Kaiser, age 43, is Vice President & Chief Technology Officer. He was appointed to that position in March 2012. From December 2008 until March 2012, Mr. Kaiser held senior management roles in marketing and product development for both QiG Group and Greatbatch Medical. Prior to joining the Company in 2008, he held positions of progressive responsibility developing and commercializing technology as an adjunct faculty member at the University of Minnesota and with Medtronic, Inc. and Guidant Corporation.55,58, is Senior Vice President, General Counsel & Secretary, and has served in that office since joining our Company in February 2007. From 1992 until January 2007, he was employed in a variety of legal roles by Manufacturers and Traders Trust Company.- 20 -2012, Boston Scientific,2015, Biotronik, Johnson & Johnson, Medtronic and St. Jude Medical collectively accounted for approximately 52% of our revenues. Our supply agreements with these customers may not be renewed. Furthermore, many of our supply agreements do not contain minimum purchase level requirements and therefore there is no guaranteed source of revenue that we can depend upon under these agreements. The loss of any large customer, or a reduction of business with that customer, for any reasonor a delay or failure by that customer to make payments due to us, would harm our business, financial condition and results of operations.In addition, other new products introduced by our customers may require fewer of our components. We dedicate a significant amount of resources to the development of our products and technologiestechnologies. Our product development efforts may be affected by a number of factors, including our ability to anticipate customer needs, develop new products, secure intellectual property protection for our product, and wemanufacture products in a cost effective manner. We would be harmed if we did not meet customer requirements and expectations. Our inability, for technological or other reasons, to successfully develop and introduce new and innovative products and enhancements could result in a loss of customers and lower revenues.- 21 -marketmarkets for our medical and commercial products hashave been growing in recent years. If the marketmarkets for our products doesdo not grow as forecasted by industry experts, our revenues could be less than expected. In addition, it is difficult to predict the rate at which the marketmarkets for our products will grow or at which new and increased competition will result in market saturation. Slower growth in the cardiac, and neuromodulation, advanced surgical, orthopaedic, vascular, portable medical, cardio and vascular, environmental, military or energy markets in particular would negatively impact our revenues. In addition, we face the risk that our products will lose widespread market acceptance. Our customers may not continue to utilize the products we offer and a market may not develop for our future products.negativelyadversely affected.reductionsconcessions to some of our largelarger customers in recent years and we expect customer pressure for price reductionsconcessions will continue. Price concessions or reductions may cause our operating results to suffer. In addition, any delay or failure by a large customer to make payments due to us would harm our operating results and financial condition.andand/or subcomponents on a timely basis or on terms acceptable to us, our ability to manufacture products will suffer.tantalum pellets, vanadium pentoxide,oxide, iridium, titanium and titanium.plastics. The supply and price of these raw materials are susceptible to fluctuations due to transportation issues, government regulations, price controls, foreign civil unrest, worldwide economic climateconditions or other unforeseen circumstances. Increasing global demand for these raw materials has caused prices of these materials to increase significantly. In addition, there are a limited number of worldwide suppliers of several raw materials needed to manufacture our products. WeIn addition, for reasons of quality, cost effectiveness or availability, we obtain some raw materials from a sole supplier. Although we work closely with our suppliers to ensure continuity of supply, we may not be able to continue to procure raw materials critical to our business at all or to procure them at acceptable price levels.- 22 -December 28, 2012,January 1, 2016, we had $457.2 million$2.0 billion of intangible assets, representing 51%67% of our total assets. These intangible assets consist primarily of goodwill, trademarks, tradenames, customer lists and patented technology arising from our acquisitions. Goodwill and other intangible assets with indefinite lives are not amortized, but are tested annually or upon the occurrence of certain events whichthat indicate that the assets may be impaired. Definite lived intangible assets are amortized over their estimated useful lives and are tested for impairment upon the occurrence of certain events whichthat indicate that the assets may be impaired. We may not receive the recorded value for our intangible assets if we sell or liquidate our business or assets. In addition, thethis significant amount of intangible assets increases the risk of a large charge to earnings in the event that the recoverability of these intangible assets is impaired. In the event of such a charge to earnings, the market price of our common stock could be affected. In addition, intangible assets with definite lives, which represent $87.3$894.0 million of our net intangible assets at December 28, 2012,January 1, 2016, will continue to be amortized. We incurred total amortization expenses relating to these intangible assets of $14.3$17.5 million in 2012.These2015. These expenses will reduce our future earnings or increase our future losses.for producing high quality products and erode our competitive advantage.Ourdamageerode our competitive advantage causeover competitors, causing us to lose customers and resultresulting in lower revenues.whichthat may be impacted by warranty claims. We reserve for our exposure to warranty claims based upon recent historical experience and other specific information as it becomes available. However, these reserves may not be adequate to cover future warranty claims andclaims. If these reserves are inadequate, additional warranty costs or inventory write-offs may need to be incurred in the future, which could harm our operating results. all applicable regulations and standards. However, a product complaint, recall or negative regulatory audit may cause our products to be removed from the market and harm our operating results or financial condition. In addition, during the period in which corrective action is being taken by us to remedy a complaint, recall or negative audit, regulators may not allow our new products to be cleared for marketing and sale.- 23 -The manufacturing and sale of our products exposeproduct recalls,sales of our products. Product failures, including those that arise from the failure to meet product specifications, misuse or malfunction, or design flaws, or the use of our products with components or systems not manufactured or sold by us.us could result in product liability claims or a recall. Many of our products are components and function in interaction with our customers’ medical devices. For example, our batteries are produced to meet electrical performance, longevity and other specifications, but the actual performance of those products is dependent on how they are utilized as part of theour customers’ devices over the lifetime of thetheir products. Product performance and device interaction from time to time have been, and may in the future be, different than expected for a number of reasons. Consequently, it is possible that customers may experience problems with their medical devices that could require device recall or other corrective action, where our batteries met the specification at delivery, and for reasons that are not related primarily or at all to any failure by our product to perform in accordance with specifications. It is possible that our customers (or end-users) may in the future assert that our products caused or contributed to device failure. Even if these assertions do not lead to product liability or contract claims, they could harm our reputation and our customer relationships.relative portionmix of our revenue represented by our various products and customers which could result in reductions in our profits if the relative portionmix of our revenue represented by lower margin products increases;affected.December 28, 2012,January 1, 2016, we held 541have 1,209 active U.S. patents and 367 active foreign patents.filed. However, the steps we have taken and will take in the future to protect the intellectual property rights to our rightstechnologies and products may not be adequate to deter misappropriation of our intellectual property. In addition to seeking formal patent protection whenever possible, we attempt to protect our proprietary rights and trade secrets by entering into confidentiality and non-compete agreements with employees,- 24 -on our proprietary rights.technology.technology, which could negatively impact our business. We may not be able to locate or employ suchthese qualified personnel on acceptable terms.business or results of operations.efforts.initiatives. These initiatives were undertaken to improve our operational effectiveness, efficiencies and profitability. Additional informationInformation regarding some of these initiatives is discussed in Note 13 “Other Operating Expenses, Net” of the “Cost Savings and Consolidation Efforts” sectionNotes to Consolidated Financial Statements contained in Item 8 of Item 7 to this report. Cost reduction efforts under these initiatives include various cost and efficiency improvement measures, such as headcount reductions, the relocation of certain resources as well asand administrative and functional activities, the closure of certain facilities, the transfer of certain production lines, the sale of certain non-strategic assets and other efforts to streamline our business, among other actions. These measures could yield unintended consequences, such as distraction of our management and employees, business disruption, disputes with customers, attrition beyond our planned reduction in workforce and reduced employee productivity. If any of these unintended consequences were to occur, they could negatively affect our business, sales, financial condition and results of operations. In addition, headcount reductions and customer disputes may subject us to the risk of litigation, which could result in substantial cost. Moreover, our expensecost reduction programsefforts result in charges and expenses that impact our operating results. We cannot guarantee that these measures,Our cost savings and consolidation initiatives, or other expense reduction measures we take in the future, willmay not result in the expected cost savings.Wemake acquisitions that could subjectexperience declines in customer demand and/or the entrance of new competitors. Customers, suppliers and other third parties with business relationships with us or Lake Region Medical may decide not to renew or may decide to seek to terminate, change or renegotiate their relationships with us and/or Lake Region Medical as a result of the Lake Region Medical acquisition, whether pursuant to the terms of their existing agreements with us, Lake Region Medical or otherwise.numberlarge extent, on our ability to integrate the legacy businesses. Integrating and coordinating aspects of operational risks and we may not be successful in integrating companies we acquire into our existing operations.We have made and expect to make in the future acquisitions that complement our core competencies in technology and manufacturing to enable us to manufacture and sell additional products to our existing customers and to expand our business into related markets. Implementation of our acquisition strategy entails a number of risks, including:inaccurate assessments of potential liabilities associated with the acquired businesses;the existence of unknown or undisclosed liabilities associated with the acquired businesses;diversion of our management’s attention from our core businesses;potential loss of key employees or customers of the acquired businesses;difficulties in integrating the operations and productspersonnel of an acquired business orLake Region Medical with ours involves complex operational, technological and personnel-related challenges. This process is time-consuming and expensive, disrupts the businesses of both companies and may not result in realizing projected revenue growth,the full benefits expected by us, including cost synergies expected to arise from supply chain efficiencies and cost savings;overlapping general andincreasesThe potential difficulties, and resulting costs and delays, include:indebtednessintegrating manufacturing, warehouse and limitationdistribution facilities, research and development and sales forces;our abilityintegrating information technology, communications and other systems;access capital if needed.Our acquisitions have increased the size and scopeacquisition or Lake Region Medical’s business.strainsignificant burden on management and other internal resources. The attention of our managerial, operationalmanagement may be directed towards integration considerations and financialmay be diverted from our day-to-day business operations, and matters related to the integration may require commitments of time and resources that could otherwise have been devoted to other opportunities that might have been beneficial to us and systems. Any failure by us to manage this growthour business. The diversion of management’s attention, and successfully integrate these acquisitionsany difficulties encountered in the transition and integration process, could harm our business, financial condition and operating results.results.2627 -Accidentsfacilitiesmanufacturing operations could delay production and affect our operations.We may face competition that could harm our business and we may be unable to compete successfully against new entrants and established companies with greater resources.Competition in connection with the manufacturing of our medical products may intensify in the future. One or more of our medical customers may undertake additional vertical integration initiatives and begin to manufacture some or all of their components that we currently supply them which could cause our operating results to suffer. The market for commercial power sources is competitive, fragmented and subject to rapid technological change. Many other commercial power source suppliers are larger and have greater financial, operational, personnel, sales, technical and marketing resources than us. These and other companies may develop products that are superior to ours, which could result in lower revenues and operating results.We intend to develop new products and expand into new markets, which may not be successful and could harm our operating results.We intend to expand into new markets and develop new and modified products based on our existing technologies and engineering capabilities, including the development of complete medical devices. These efforts have required and will continue to require us to make substantial investments, including significant research, development and engineering expenditures and capital expenditures for new, expanded or improved manufacturing facilities. Additionally, many of the new products we are working on take longer and more resources to develop and commercialize, including obtaining regulatory approval.Specific risks in connection with expanding into new products and markets include: longer product development cycles, the inability to transfer our quality standards and technology into new products, the failure to receive or delay in receipt of regulatory approval for new products or modifications to existing products, and the failure of our customers to accept the new or modified products.Our failure to obtain licenses from third parties for new technologies or the loss of these licenses could impair our ability to design and manufacture new products and reduce our revenues.We occasionally license technologies from third parties rather than depending exclusively on our own proprietary technology and developments. Our ability to license new technologies from third parties is and will continue to be critical to our ability to offer new and improved products. We may not be able to continue to identify new technologies developed by others and even if we are able to identify new technologies, we may not be able to negotiate licenses on favorable terms, or at all. Additionally, we could lose rights granted under licenses for reasons beyond our control.- 27 -49%50% of sales for 2012,2015, and our operations in Mexico, SwitzerlandEurope, Asia, and France,Central and South America are and will continue to be subject to a number of risks and potential costs, including:longer-termoutstanding accounts receivables that take longer to collect than areis typical in the U.S.;consolidatednet financial statements.results. However, fluctuations in foreign currency exchange rates could have a significant negative impact on our profitability and operating results.The current economic environmentfinancial results in the future.Current domestic and international economic conditions could adversely affect our results of operations.The global economic slowdown, including the European sovereign debt crisis, has caused extreme disruption in the financial markets, including severely diminished liquidity and credit availability. Our customers may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact their ability or decision to purchase our products, or to pay for our products they do purchase on a timely basis, if at all. The strength and timing of any economic recovery remains uncertain, and we cannot predict to what extent the global economic slowdown and European sovereign debt crisis may negatively impact our selling prices, our net sales and our profit margins. In addition, current economic conditions may adversely affect our suppliers, leading them to experience financial difficulties or to be unable to borrow money to fund their operations, which could cause disruptions in our ability to produce our products.- 28 - produced by our customers are subject to regulation by the FDA and similar governmental agencies. These regulations cover a wide variety of product activities from design and development to labeling, manufacturing, promotion, sales and distribution. Compliance with these regulations may be time consuming, burdensome and expensive and could negatively affect our customers’ abilities to sell their products, which in turn would affect our ability to sell our products. This may result in higher than anticipated costs or lower than anticipated revenues.health carehealthcare costs in recent years, there have been and continue to be proposals by the Obama administration, members of Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. Health Care Reform imposes significant new taxes on medical device manufacturers, whichmanufacturers. In 2015, the medical device tax increased our cost of sales by $0.6 million. Beginning on January 1, 2016, the medical device excise tax will be suspended through December 31, 2017, but if this suspension is not continued or made permanent thereafter, the medical device excise tax will be automatically reinstated starting on January 1, 2018 and would result in a significant increase in the tax burden on our industry and which could have a material negative impact on our financial condition, results of operations and our cash flows. Other elements of Health Care Reform such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially adversely impact numerous aspects of our business, results of operations and financial condition. Management is currently evaluating the impact that the new medical device tax will have on our results from operations beginning in 2013, and has preliminarily estimated that it will reduce gross profit by $1.5 million to $2.5 million.- 29 -Electrochemenergy market revenues are dependent on conditions in the oil and natural gas industry, which historically have been volatile.Electrochem products dependinto the energy market depends upon the condition of the oil and gas industry. In the past,Currently, oil and natural gas prices have been volatilesubject to significant fluctuation and the oil and gas exploration and production industry has historically been cyclical, and it is likely that oil and natural gas prices will continue to fluctuate in the future. The current and anticipated prices of oil and natural gas influence the oil and gas exploration and production business and are affected by a variety of political and economic factors, including worldwide demand for oil and natural gas, worldwide and domestic supplies of oil and natural gas, the ability of the Organization of Petroleum Exporting Countries (“OPEC”) to set and maintain production levels and pricing, the level of production of non-OPEC countries, the price and availability of alternative fuels, political stability in oil producing regions and the policies of the various governments regarding exploration and development of their oil and natural gas reserves. A change in the oil and gas exploration and production industry or a reduction in the exploration and production expenditures of oil and gas companies, such as has occurred during 2015, could cause our Electrochemenergy market revenues to decline.ITEM 1B.UNRESOLVED STAFF COMMENTSNone.ITEM 2.PROPERTIESThe following table sets forth information about our principal facilities as of December 28, 2012:Location Sq. Ft.UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIES Own/LeaseITEM 3. Principal UseAlden, NY125,000OwnMedical battery and capacitor manufacturingAnn Arbor, MI9,970LeaseOffice and lab space for design engineering teamBeaverton, OR62,200LeaseCommercial battery manufacturingBlaine, MN32,400OwnMedical device engineeringChaumont, France59,200OwnManufacturing of orthopaedic implantsClarence, NY117,800OwnCorporate offices and RD&EClarence, NY20,800OwnMachining and assembly of componentsClarence, NY18,600LeaseMachining and assembly of componentsCleveland, OH16,900LeaseOffice and lab space for design engineering teamCorgemont, Switzerland34,400LeaseManufacturing of orthopaedic instrumentsFort Wayne, IN81,000OwnManufacturing of orthopaedic instrumentsFrisco, TX9,241LeaseGlobal headquarters – principal executive officeIndianapolis, IN82,600OwnManufacturing of orthopaedic cases and traysMinneapolis, MN72,000OwnEnclosure manufacturing and engineeringOrvin, Switzerland40,400OwnManufacturing of orthopaedic instrumentsPlymouth, MN122,821LeaseIntroducers, catheters and leads manufacturingRaynham, MA81,000OwnCommercial battery manufacturing and RD&ETijuana, Mexico190,800LeaseFeedthrough, catheters and orthopaedic instrument manufacturing and value-added assemblyWarsaw, IN3,000LeaseOrthopaedic rapid prototyping design centerLEGAL PROCEEDINGS2012,April 2013, the Company completed constructioncommenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. On January 26, 2016, a jury in the United States District Court for the District of an orthopaedicDelaware returned a verdict finding that AVX infringed two Greatbatch patents and awarded Greatbatch $37.5 million in damages. The finding is subject to post-trial proceedings, including a possible appeal by AVX.Fort Wayne, INSouth Plainfield, New Jersey beginning in 1971. Lake Region Medical sold the property in 2004 and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. During 2012,vacated the Company also transferred most major functions performed at its facilitiesfacility in Orvin2007. We are cooperating with the NJDEP and Corgemont, Switzerland into its Fort Wayne, IN and Tijuana, Mexico facilities. Additionally, during 2012,believe the Company relocated its global headquartersNJDEP’s notice of intent to Frisco, TX.revoke is unwarranted. In December 2014, the first quartercurrent owner of 2013, the Company’s Corgemont, Switzerland facility lease was assumed by a third party in connection with its purchase of certain non-core orthopaedic product lines.Near the end of 2011, the Company initiated plans to upgrade and expand its manufacturing infrastructure in order to support its medical device strategy. This includes the transfer of certain product lines to create additional capacity for the manufacture of medical devices, expansionproperty commenced litigation against Lake Region Medical, one of its Plymouth, MNexecutive officers and Tijuana, Mexico facilities, as well asother unrelated third parties, alleging that the purchase of equipmentdefendants caused or contributed to enablealleged groundwater contamination beneath the production of medical devices. These initiativesproperty. The Company believes these allegations are expected to be completed over the next year. Total capital investment under these initiatives is expected to be between $15 million and $20 million of which approximately $9.9 million has been expended to date.- 31 -ITEM 3.LEGAL PROCEEDINGSOn December 21, 2012, our Electrochem subsidiary and several other unaffiliated parties were named as defendants in a personal injury and wrongful death action filed in the 113th Judicial District Court of Harris County, Texas. The complaint seeks damages alleging marketing defects and failure to warn, negligence and gross negligence relating to a product Electrochem manufactured and sold to a customer, one of the other named defendants, which, in turn, incorporated the Electrochem product into its own product which it sold to its customer, another named defendant. The cost of defense in this matter is the responsibility of Electrochem’s customer. Electrochem also has product liability insurance coverage. Electrochem has meritorious defenses and intends to vigorously defend the matter.atin Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. WeOther than as discussed in Note 15, we do not believe that the ultimate resolution of any pending legal actions will have a material effect on our consolidated results of operations, financial position or cash flows. However, litigation is subject to inherent uncertainties and there can be no assurance that any pending legal action, which we currently believe to be immaterial, does not become material in the future.ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.SECURITIES High Low Close $ 26.92 $ 22.91 $ 26.12 29.06 25.20 27.23 28.33 18.55 20.01 23.10 18.78 22.10 $ 27.22 $ 21.35 $ 24.52 24.82 20.29 22.71 25.64 22.05 24.33 25.33 21.08 22.89 High Low Close 2014 First Quarter $ 47.78 $ 40.02 $ 44.85 Second Quarter 50.65 43.65 49.58 Third Quarter 51.64 42.23 43.56 Fourth Quarter 50.69 43.42 48.66 2015 First Quarter $ 58.18 $ 47.36 $ 56.72 Second Quarter 56.86 50.57 53.50 Third Quarter 63.19 47.85 58.43 Fourth Quarter 61.06 49.00 52.50 February 27, 2013,March 1, 2016, there were approximately 130168 record holders of the Company’s common stock. The Company stock account included inwithin our 401(k) plan is considered one record holder for the purposes of this calculation. There is approximately 1,900 active and former employees’ holding Company stock in the 401(k) plan. We have not paid cash dividends and currently intend to retain any earnings to further develop and grow our business.December 28, 2012,January 1, 2016, the cumulative total stockholder return for Greatbatch, Inc., the S&P SmallCap 600 Index, and the Hemscott Peer Group Index. The Hemscott Peer Group Index includes approximately 110133 comparable companies included in the Hemscott Industry Group 520Medical Instruments & Supplies and 521Medical Appliances & Equipment. The graph assumes that $100 was invested on December 28, 200731, 2010 and assumes reinvestment of dividends. The stock price performance shown on the following graph is not necessarily indicative of future price performance:performance.
Company/Index 12/31/2010 12/30/2011 12/28/2012 1/3/2014 1/2/2015 1/1/2016 Greatbatch, Inc. $ 100.00 $ 91.51 $ 94.78 $ 181.37 $ 201.49 $ 217.39 S&P Smallcap 600 100.00 101.02 117.51 166.05 175.61 172.14 Hemscott Peer Group Index 100.00 103.76 119.22 156.42 187.48 200.34 Operations,”Operations” and Item 8 “Financial Statements and Supplementary Data” appearing elsewhere in this report. The consolidated statement of operations data and the consolidated balance sheet data for the fiscal years indicated have been derived from our consolidated financial statements and related notes (in thousands, except per share amounts): Years Ended Dec. 28, Dec. 30, Dec. 31, Jan. 1, Jan. 2, 2012 (1)(2) 2011 (1)(2) 2010 (2)(3) 2010 (2)(3) 2009 (2)(4) $ 646,177 $ 568,822 $ 533,425 $ 521,821 $ 546,644 (4,799 ) 33,122 33,138 (9,001 ) 14,148 $ (0.20 ) $ 1.42 $ 1.44 $ (0.39 ) $ 0.63 (0.20 ) 1.40 1.40 (0.39 ) 0.62 $ 176,376 $ 170,907 $ 150,922 $ 119,926 $ 142,219 889,875 881,347 776,976 830,543 848,033 317,258 320,015 289,560 317,575 379,890 Years Ended Statement of Operations Data: Sales $ 800,414 $ 687,787 $ 663,945 $ 646,177 $ 568,822 Net income (loss) (7,594 ) 55,458 36,267 (4,799 ) 33,122 Earnings (loss) per share Basic $ (0.29 ) $ 2.23 $ 1.51 $ (0.20 ) $ 1.42 Diluted (0.29 ) 2.14 1.43 (0.20 ) �� 1.40 Balance Sheet Data: Working capital $ 360,764 $ 242,022 $ 190,731 $ 176,376 $ 170,907 2,982,136 955,122 889,629 889,611 880,502 1,917,671 233,099 255,772 316,994 319,170 (1)(1) From 2011 to 2015, we recorded material charges in Other Operating Expenses, Net, primarily related to our cost savings and consolidation initiatives and our acquisitions. Additional information is set forth in Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. (2) On October 27, 2015, August 12, 2014, February 16, 2012, and on December 15, 2011, we acquired Lake Region Medical Holdings, Inc., Centro de Construcción de Cardioestimuladores del Uruguay, NeuroNexus Technologies, Inc., and Micro Power Electronics, Inc., respectively. This data includes the results of operations of these companies subsequent to their acquisition. Additional information is set forth in Note 2 “Acquisitions���“Acquisitions” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. In 2011, the Company sold its cost method investmentAdditionally, in IntElectconnection with our acquisition of Lake Region Medical Inc. This transaction resulted in a pre-tax gainwe issued approximately $1.8 billion of $4.5 million.(2)From 2008 to 2012, we recorded material charges in Other Operating Expenses, Net, primarily related to our cost savings and consolidation initiatives.long-term debt. Additional information is set forth in Note 13 “Other Operating Expenses, Net”9 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.(3)(3) In 2009, we recordedApril 2015, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” This ASU requires that debt issuance costs be presented as a $34.5 milliondirect reduction to the carrying amount of the related debt in the balance sheet rather than as a deferred charge, consistent with the presentation of discounts on debt. ASU 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs associated with Line-of-Credit Arrangements,” was issued in August 2015 to clarify that the U.S. Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs related to litigation involving Electrochema line-of-credit arrangement as an asset and a $15.9 million write-down of trademarks and tradenames. In 2010, we settledsubsequently amortizing the Electrochem litigation which resulted in a $9.5 million gain. Additional information is set forth in Note 15 “Commitments and Contingencies”deferred debt issuance costs ratably over the term of the Notes to Consolidated Financial Statements contained in Item 8line-of-credit arrangement, regardless of this report.whether there are any outstanding borrowings on the line-of-credit arrangement.(4)During 2008, we acquired P Medical Holding, SA (January 2008) and DePuy Orthopaedics’ Chaumont, France facility (February 2008). This data includes the results of operations of these companies subsequent to their acquisition. In connection with these acquisitions, we recorded charges in 2008 of $8.7 million related to inventory step-up amortization and the write-off of in-process research and development.ELSEWHERE IN PART II, ITEM 8 “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA” OF THIS REPORT.2013 financial guidanceValuation of goodwillBusiness acquisitions and other identifiable intangible assetsResults of operations table20122015 compared with fiscal 201120112014 compared with fiscal 20102013We operatebusiness in two reportable segments – Implantable Medical and Electrochem Solutions (“Electrochem”Board of Directors has approved the spin-off of a portion of our QiG segment (the “Spin-off”). The Company’s customers include large multi-national original equipment manufacturersSpin-off is expected to be completed in March 2016. As a result of the Lake Region Medical acquisition and the pending Spin-off, we are reevaluating our operating and reporting segments, which is expected to be finalized in 2016 once our corporate and management reporting structure realignment is completed. Additional information is set forth in Note 19 “Business Segment, Geographic and Concentration Risk Information” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.OEMs”Integer”). Integer is defined as complete, whole, and comprehensive, and represents the joining of Greatbatch and Lake Region Medical as well as the combined company’s product and service offerings provided to customers. The Implantable Medical segmentnew name is comprised ofsubject to Greatbatch stockholder approval at our May 2016 annual meeting. and QiG Group brands and designs and manufactures products where we either own the intellectual property or have unique manufacturing and assembly expertise. These products include medical devices and components for the cardiac, neuromodulation, orthopaedics, portable medical, vascular and orthopaedic markets.energy markets among others. The Implantable Medical segment offers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution, which is facilitated through the QiG Group and leverages the component technology of Greatbatch Medical. The devices designed and developed by the QiG Group are manufactured by Greatbatch Medical. The Implantable Medical segment also offers value-added assembly and design engineering services for medical devices that utilize its component products.Electrochem provides industry-leading total power solutions for rechargeablenon-rechargeable battery power systems, charging and docking stations, and power supplies, for critical applicationscommercialization of its Algovita SCS system (“Algovita”), the first application of its neurostimulation technology platform, which received PMA approval in the portable medicalfourth quarter of 2015. QiG’s PelviStim LLC (“PelviStim”) subsidiary is focused on the commercialization of QiG’s neurostimulation technology platform for SNS. The QiG segment also includes NeuroNexus Technologies, Inc. (“NeuroNexus”), and energy markets, where safety, reliability, qualityCentro de Construcción de Cardioestimuladores del Uruguay (“CCC”). The Spin-off is expected to consist of QiG Group LLC and innovation are critical. Electrochem’s product lines cover a numberits subsidiaries Algostim, PelviStim and NeuroNexus. The operations of highly-customized battery-powered applications in remoteCCC and demanding environments, including down hole drilling toolscertain other existing QiG research and in life-savingdevelopment capabilities will be retained and life-enhancing applications, including automated external defibrillators, portable oxygen concentrators, ventilators and powered surgical tools, among others.Our AcquisitionsOn December 15, 2011, Electrochem acquired allnot included as part of the outstanding stockSpin-off.Micro Power Electronics, Inc. (“Micro Power”) headquarteredneural interface technology, components and systems to the neuroscience and clinical markets from NeuroNexus, a limited release of Algovita in Beaverton, OR. Micro PowerEurope, and CCC sales of various medical device products such as implantable pulse generators, programmer systems, battery chargers, patient wands and leads to medical device companies. Once the medical devices developed by CCC reach significant production levels, the responsibility for manufacturing these products may be transferred to Greatbatch Medical. After the pending Spin-off is completed, our design and development of complete medical device systems will be completed by our combined teams in Greatbatch Medical, Lake Region Medical, and CCC. leading suppliersegment for Greatbatch since it was acquired during the fourth quarter of custom battery solutions,2015. This segment specializes in the design, development, and manufacturing of products across the medical component and device spectrum, primarily serving the portablecardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management to its customers, who are located worldwide. This segment is dedicated to providing our customers with reliable, high-quality, cost-efficient, integrated outsourced solutions in the medical military and handheld automatic identification and data collection markets. Micro Power’s commercial portfolio is highly complementary to the products and services offered by Electrochem. The results of Micro Power were included in our Electrochem segment from the date of acquisition. The aggregate purchase price of Micro Power was $71.8 million, whichdevice space.funded with cash on hand and $45 million borrowed under our revolving credit facility. Total assets acquired from Micro Power were $88.2 million. Total liabilities assumed from Micro Power were $16.4 million. For 2012, Micro Power added approximately $82.4 million to our revenue.On February 16, 2012, Greatbatch purchased all of the outstanding common stock of NeuroNexus Technologies, Inc. (“NeuroNexus”)Lake Region Medical, headquartered in Ann Arbor, MI. NeuroNexusWilmington, MA. Lake Region Medical is an active implantablea manufacturer of interventional and diagnostic wire-formed medical device design firmdevices and components specializing in developingminimally invasive devices for cardiovascular, endovascular, and commercializing neural interface technology, componentsneurovascular applications. This acquisition has added scale and systems for neurosciencediversification to enhance customer access and clinical markets. NeuroNexus has an extensive intellectual propertyexperience by providing a comprehensive portfolio core technologies and capabilities to support the development and manufacturing of innovative neural interface devices across a wide range of functions including neuromodulation, sensing, optical stimulation and targeted drug delivery applications.technologies. The operating results of NeuroNexusLake Region Medical were included in our ImplantableLake Region Medical segment from the date of acquisition. The aggregate purchase price of NeuroNexusLake Region Medical including debt assumed was $13.2$1.77 billion, which was funded primarily through a new senior secured credit facility and the issuance of senior notes. Total assets acquired from Lake Region Medical were $2.1 billion. Total liabilities assumed from Lake Region Medical were $1.3 billion. For 2015, Lake Region Medical added approximately $138.6 million to our revenue and increased our net loss by $17.4 million.hand and $10 million borrowed under our revolving credit facility.hand. Total assets acquired from NeuroNexusCCC were $14.6$26.2 million. Total liabilities assumed from NeuroNexusCCC were $1.4$6.4 million. For 2012, NeuroNexus2014, CCC added approximately $2.5$5.8 million to our revenue.pursue potential acquisitions.customers and the end users of their products.customers. The nature and extent of our selling relationships with each customer are different in terms of breadth of products purchased, purchased product volumes, length of contractual commitment, ordering patterns, inventory management, and selling prices.ImplantableGreatbatch Medical and Lake Region Medical customers include large multi-national OEMs,original equipment manufacturers (“OEMs”) and their subsidiaries such as Abbott Labs, Biotronik, Boehringer Ingelheim, Boston Scientific, Cyberonics, Halliburton Company, Johnson & Johnson, Medtronic, Nevro Corp., Philips Healthcare, Smith & Nephew, Sorin Group, St. Jude Medical, Stryker, and Zimmer.Zimmer Biomet. During 2012, Boston Scientific,2015, Biotronik, Johnson & Johnson, Medtronic, and St. Jude Medical collectively accounted for 52% of our total sales.Our Electrochemprimarilyoutside the normal benefit received for the period. Adjusted earnings per diluted share are calculated by dividing adjusted net income by diluted weighted average shares outstanding. Adjusted EBITDA consists of GAAP net income (loss) plus (i) the same adjustments as listed above except for items (x), and (xi), (ii) GAAP stock-based compensation, interest expense, and depreciation, (iii) GAAP provision (benefit) for income taxes and (iv) cash gains received from cost and equity method investments. To calculate organic constant currency sales growth rates, which exclude the impact of changes in foreign currency exchange rates, as well as the impact of any acquisitions or divestitures of product lines on sales growth rates, we convert current period sales from local currency to U.S. dollars using the previous periods’ foreign currency exchange rates and exclude the amount of sales acquired/divested during the period from the current/previous period amounts, respectively. We believe that the presentation of adjusted net income, adjusted diluted earnings per share, EBITDA, adjusted EBITDA and organic constant currency sales growth rates provides important supplemental information to management and investors seeking to understand the financial and business trends relating to our financial condition and results of operations.involved in demanding markets where highly sophisticated power solutions needs exist, suchunder the new Integer brand establishes the Company as energy, portable medical, militarythe premier global Medical Device Outsource partner, with the scale and environmental. Somebreadth of capabilities to meet the demands of our larger OEM customers include General Electric, Halliburton Company, Scripps Institutionand the patients they serve. Our primary focus in 2016 will be to integrate our cultures and operations into one single integrated entity. Thus far the merger of Oceanography, Thales, Weatherford Internationalthe two organizations has gone extremely well and Zoll Medical Corp.- 36 -Since 2007,implementing a strategyoperating under are centered on continually strengthening three aspectsaround four strategic imperatives: 1) Organic Growth; 2) Margin Expansion; 3) Medical Device Systems; and 4) Targeted Acquisitions.business that can most affect profitable growth:overriding long-term strategic objectives is to profitably grow our top line, our bottom line and our pipeline. This strategycompany organically. Fiscal year 2015 sales of $800.4 million increased 16% in comparison to the prior year period. 2015 revenue includes three facets; growth in our core business, growth through acquisitions and growth through the development and commercializationtwo months of complete medical devices. As a result of this strategy, sales increased 14% for 2012 and 7% for 2011. Sales growth for 2012 and 2011 included the benefitoperations from our acquisitions of $84.8Lake Region Medical, which added $138.6 million and $2.5 million, respectively.to sales. Additionally, sales includefor the impact fromyear were impacted by foreign currency exchange rate fluctuations, which decreased 2012reduced sales by $6approximately $14.5 million in comparisoncompared to 2011 and increased 2011 sales by $8 million in comparison to 2010.the prior year. On aan organic constant currency basis, 2015 sales decreased 2% over the prior year primarily due to a decline in Electrochem sales caused by the slowdown in the energy markets. Despite this decline in legacy Greatbatch sales, we were able to improve our adjusted diluted EPS by 1% through lower performance-based compensation as well as on-going continuous improvement projects.basis sales were consistent from 2011 to 2012 and increased 5% from 2010 to 2011 asconstant currency growth from our orthopaedic (12%) and vascular (22%) product lines due to increased sales force productivity, marketing efforts, and market growth. Partially offsettingmore than offset the impact the declining cardiac rhythm management (“CRM”) market had ondue to our cardiac and neuromodulation product line. Ourstrategic shift in 2013 to refocus our portable medical product line is benefitingofferings to products that have higher profitability, and the impact of several customer inventory reduction initiatives and the end of life impact of legacy products in our cardiac product line. Similar to our revenue growth, our adjusted diluted EPS grew 16% from new product introductions2013 to 2014 due to our increased sales and market shiftoperational leverage.patient care from clinical settings to the home, and an aging population, which is driving the need for lightweight and portable devices for patients and caregivers. Our vascularour cardiac/neuromodulation product line growth is being drivenwill continue to be negatively impacted by growth in the underlying market, market share gains and the commercializationend of our medical devices. Despite the declining CRM market, we were able to grow our cardiac business faster than the underlying market through innovationlife on legacy products, as well as deepeningcontinued pressure from our customer’s diversification and cost reduction initiatives. We also expect our Electrochem product line will continue to be negatively impacted by the downturn in the energy markets through the end of 2016.relationships.cost reimbursements partially offset by lower performance-based compensation. For 2014, RD&E expenses decreased 8% compared to 2013 we expect revenue, after adjusting for the saleas a result of a portionlower level of design verification testing (“DVT”) costs incurred in connection with the development of our orthopaedic product line,SCS system.organically grow 5-8% drivendrive organic growth and profitability. This strategy was evident during 2015 and 2014 as we announced several initiatives to invest in capacity and capabilities and consolidate our manufacturing footprint. As a result, other operating expenses, net (“OOE”) totaled $66.5 million, $15.3 million and $15.8 million for 2015, 2014 and 2013, respectively. OOE for 2015 also included $38.3 million of transaction, professional and consulting fees incurred in connection with the Lake Region Medical acquisition and the Spin-off. As we move forward, investing in our operations will continue to be critical to the success of our strategic imperative to drive margin expansion and attain the stated synergy goals in connection with the Lake Region Medical acquisition. See “Cost Savings and Consolidation Efforts” contained in this item for further details on these initiatives.byCRM components company to a $1.4 billion fully integrated medical device company. We acquired 10 companies over this period and successfully integrated these businesses into one unified company. With our portable medical, vascular and orthopaedic product linesproven track record of integrating organizations, we are confident that our new Integer leadership team, along with above market growth in cardiacour 10,000 associates, have the drive and neuromodulation.Simultaneousskill-set to advance our medical device strategy and create long term value for our shareholders. Year Ended January 1,
2016 January 2,
2015 January 3,
2014 Net income (loss) as reported $ (7,594 ) $ (0.29 ) $ 55,458 $ 2.14 $ 36,267 $ 1.43 Adjustments: 12,273 0.45 9,637 0.37 9,105 0.36 15,605 0.57 195 0.01 — — 2,871 0.11 1,626 0.06 179 0.01 — — — — 3,765 0.15 21,158 0.77 6,567 0.25 10,602 0.42 25,885 0.95 61 — (326 ) (0.01 ) 5,099 0.19 3,463 0.13 997 0.04 6,151 0.23 — — — — (2,177 ) (0.08 ) (2,841 ) (0.11 ) 451 0.02 — — — — 3,007 0.12 — — — — (1,600 ) (0.06 ) $ 79,271 $ 2.90 $ 74,166 $ 2.86 $ 62,447 $ 2.47 27,304 25,975 25,323 (a) Given our acquisition of Lake Region Medical in the fourth quarter of 2015 and in order to present our financial results in a form more comparable to other medical device companies and less acquisitive companies, we began excluding intangible asset amortization for purposes of calculating adjusted net income and adjusted diluted EPS. Prior period adjusted amounts have been recalculated to exclude intangible amortization for all periods presented. (b) In 2013, we filed suit against AVX Corporation alleging they were infringing on our intellectual property. Given the complexity and significant costs incurred pursuing this litigation, during the second quarter of 2015, we began excluding these litigation expenses from adjusted amounts. Total costs incurred in connection with this litigation in 2015 was $4.4 million pre-tax. This matter proceeded to trial during the first quarter of 2016 and a federal jury awarded Greatbatch $37.5 million in damages. Prior period adjusted amounts have been recalculated to exclude these costs for all periods presented. (c) Net of tax amounts computed using a 35% U.S., Mexico, and France statutory tax rate, a 25% Uruguay statutory tax rate, and a 12.5% Ireland statutory tax rate. Expenses that are not deductible for tax purposes (i.e. permanent tax differences) are added back at 100%. (d) As a result of our premarket approval (“PMA”) submission to the Food and Drug Administration (“FDA”) for Algovita in December 2013, we no longer exclude DVT costs associated with this system from adjusted operating income and adjusted diluted EPS. (e) During 2015 and 2014, we incurred costs primarily related to the transfer of our Beaverton, OR portable medical and Plymouth, MN vascular manufacturing operations to Tijuana, Mexico. Additionally, with the acquisition of Lake Region Medical, these costs now include expenses incurred in connection with the closure of Lake Region Medical’s Arvada, Colorado site and the consolidation of its two Galway, Ireland sites initiated by Lake Region Medical in 2014. During 2013, we incurred costs related to the rationalization of our orthopaedic footprint as well as in connection with our operating unit realignment. (f) During 2015, we incurred $33.1 million pre-tax in costs related to the acquisition of Lake Region Medical and the integration of CCC Medical Devices. During 2014, we incurred costs related to the integration of CCC Medical Devices. During 2013, we realized income related to the contingent consideration recorded in connection with the acquisition of NeuroNexus. (g) 2015 costs primarily include $6.0 million pre-tax in legal and professional fees incurred in connection with the pending spin-off of Nuvectra. 2014 costs primarily include costs in connection with our business reorganization to realign our contract manufacturing operations. (h) We recorded $9.5 million pre-tax for 2015 in transaction costs (i.e. debt commitment fees, interest rate swap termination costs, debt extinguishment charges) in connection with our acquisition of Lake Region Medical. (i) Pre-tax amount is gain of $3.4 million for 2015, a gain of $4.4 million for 2014, and a loss of $0.7 million for 2013. (j) The 2015 Federal R&D tax credit was enacted during the fourth quarter of 2015 and the 2014 Federal R&D tax credit was enacted in the fourth quarter of 2014. Amounts assume that the tax credit was effective at the beginning of the year for 2015 and 2014. The 2013 and 2012 Federal R&D tax credit was enacted and recognized in 2013. The 2012 Federal R&D tax credit amount is excluded for adjusted diluted EPS purposes. (k) The per share data in this table have been rounded to the nearest $0.01 and therefore may not sum to the total. (l) Full year 2015 adjusted diluted weighted average shares includes 941,000 shares of dilution related to outstanding equity awards that were not dilutive for GAAP EPS purposes. initiationLake Region Medical acquisition, we incurred $1.8 billion of additional indebtedness. As of January 1, 2016, our debt service obligations, comprised of principal and interest, for 2016 are estimated to be approximately $130 million. As a result of this increase in our outstanding indebtedness, demands on our cash resources have increased significantly. Accordingly, during 2015 we began presenting EBITDA and adjusted EBITDA in our SEC reports in order to present a measure of our growth strategy,cash generation, which is important to holders of our public debt, and to be more consistent with how other medical device companies report results. These measures are generally consistent with how we calculate adjusted EBITDA for our debt covenant ratios. Year Ended January 1, January 2, January 3, (dollars in thousands) 2016 2015 2014 Net income (loss) as reported $ (7,594 ) $ 55,458 $ 36,267 Interest expense 33,513 4,252 11,261 Provision (benefit) for income taxes (8,106 ) 21,121 12,571 Depreciation 27,136 23,320 22,799 Amortization 17,496 13,877 13,167 EBITDA 62,445 118,028 96,065 Inventory step-up amortization 22,986 260 — IP related litigation 4,417 2,502 276 Stock-based compensation expense 9,287 12,893 12,965 Medical device DVT expenses — — 5,793 Consolidation and optimization expenses 26,393 11,188 14,758 Acquisition and integration expenses (income) 33,449 3 (502 ) Asset dispositions, severance and other 6,622 4,106 1,534 Noncash (gain) loss on cost and equity method investments 275 (1,190 ) 694 Adjusted EBITDA $ 165,874 $ 147,790 $ 131,583 Adjusted EBITDA as a % of sales 20.7 % 21.5 % 19.8 % devicesdevice systems in order to raise the growth and profitability profile of theour Company. This medical device systems strategy is being facilitated through our QiG Group and leverages the component technology of Greatbatch Medical. More specifically, this strategy includes the development of a neuromodulation platform that can be used to support several devices most notablymultiple devices. Algovita, the first application of whichQiG’s neurostimulation technology platform, is our spinal cord stimulatorindicated for the treatment of chronic pain inof the trunk and limbs, which we call Algostim. We currently expect to submit this device to regulatory authoritieslimbs.second half of 2013. Incremental investments in all of our medical device products, including Algostim, totaled $33.9 million, $27.3 million and $21.9 million for 2012, 2011 and 2010, respectively, and included charges to selling, general and administrative expenses (“SG&A”) and research, development and engineering, net (“RD&E”). As a result of this strategy, as well as our acquisitions, SG&A increased 12%United States during both 2012 and 2011 while RD&E increased 15% and 1%, respectively, for the same periods.During the second half of 2012, we began a process to more fully optimize our research and development efforts. This included the reallocation of research and development resources to higher priority projects, the postponement of some research and development projects, and the decision to pursue various alternatives to monetize our existing non-core intellectual property and entering into more co-development arrangements with our customers. As a result, RD&E for the second half of 2012 was $3.7 million lower than the first half of 2012. These reductions are also expected to benefit 2013.- 37 -We have a longstanding history of operational excellence, which is one of our core competencies. As we move forward, investing in our operations will continue to be critical to the success of our growth and2016. Net medical device strategies. Since 2007, we have invested substantial resources in integrating our acquisitionscosts incurred by QiG were $25.9 for 2015 compared to $23.3 million for 2014 and streamlining our operations. This strategy continued during 2012 as we worked diligently to resolve the operational issues we were experiencing at our Swiss orthopaedic facilities, expanded our manufacturing infrastructure to support the commercialization of our medical devices and upgraded our global ERP system in order to support our future growth. As a result of these initiatives, our other operating expense totaled $47.5$30.5 million over the last three years, $42.3for 2013. Medical device costs for 2013 include $5.8 million of which was incurred during 2012. These expenses are expected to be reduced significantly in 2013 and to range from $6.7 million to $8.2 million, which will improve the overall earnings of Greatbatch. While we continually identify and implement cost improvement initiatives, we have now completed all of our major plant consolidations, which began in 2007, so our leadership team can focus on achieving sustainable organic growth to leverage our available capacity.We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Additionally, we consistently report and discuss in our quarterly earnings releases and investor presentations adjusted operating income and margin, adjusted net income and adjusted earnings per diluted share, which are non-GAAP measures. These adjusted amounts consist of GAAP amounts and, to the extent occurring during a period, excludes (i) acquisition-related charges, (ii) facility consolidation, optimization, manufacturing transfer and system integration charges, (iii) asset write-down and disposition charges, (iv) severance charges in connection with corporate realignments or a reduction in force (v) litigation charges and gains, (vi) the impact of non-cash charges to interest expense due to the accounting change governing convertible debt, (vii) unusual or infrequently occurring items, (viii) certain RD&E expenditures, such as design verification testing (“DVT”) expensesDVT costs incurred in connection with the development of Algovita. After the pending Spin-off is completed, our neuromodulation platform, (ix) gain/loss on the sale of investments, (x) the income tax (benefit) related to these adjustmentsdesign and (xi) certain tax charges related to the consolidation of our Swiss Orthopaedic facility. We believe that reporting these amounts provides important supplemental information to our investors and creditors seeking to understand the financial and business trends relating to our financial condition and results of operations. Additionally, the performance based compensation of our executive management is determined utilizing these adjusted amounts.A reconciliation of GAAP operating income (loss) to adjusted amounts is as follows (dollars in thousands): Implantable Medical Electrochem Unallocated Total Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 28, Dec. 30, Dec. 28, Dec. 30, 2012 2011 2012 2011 2012 2011 2012 2011 $ 483,165 $ 489,065 $ 163,012 $ 79,757 $ — $ — $ 646,177 $ 568,822 $ 24,908 $ 62,461 $ 21,631 $ 14,965 $ (20,718 ) $ (15,727 ) $ 25,821 $ 61,699 — — 532 177 — — 532 177 5,190 5,133 — — — — 5,190 5,133 34,378 425 — — 4,670 — 39,048 425 167 — 1,287 — 6 — 1,460 — 247 51 883 117 708 — 1,838 168 $ 64,890 $ 68,070 $ 24,333 $ 15,259 $ (15,334 ) $ (15,727 ) $ 73,889 $ 67,602 13.4 % 13.9 % 14.9 % 19.1 % N/A N/A 11.4 % 11.9 % $ 28,453 $ 22,080 $ — $ — $ — $ — $ 28,453 $ 22,080 $ 93,343 $ 90,150 $ 24,333 $ 15,259 $ (15,334 ) $ (15,727 ) $ 102,342 $ 89,682 19.3 % 18.4 % 14.9 % 19.1 % N/A N/A 15.8 % 15.8 % - 38 - Implantable Medical Electrochem Unallocated Total Dec. 30, Dec. 31, Dec. 30, Dec. 31, Dec. 30, Dec. 31, Dec. 30, Dec. 31, 2011 2010 2011 2010 2011 2010 2011 2010 $ 489,065 $ 460,269 $ 79,757 $ 73,156 $ — $ — $ 568,822 $ 533,425 $ 62,461 $ 62,477 $ 14,965 $ 22,195 $ (15,727 ) $ (15,678 ) $ 61,699 $ 68,994 — — 177 — — — 177 — — 885 — — — — — 885 5,133 — — — — — 5,133 — — — — (9,500 ) — — — (9,500 ) 425 573 — 1,000 — — 425 1,573 — (4 ) — — — 46 — 42 51 2,517 117 100 — 326 168 2,943 $ 68,070 $ 66,448 $ 15,259 $ 13,795 $ (15,727 ) $ (15,306 ) $ 67,602 $ 64,937 13.9 % 14.4 % 19.1 % 18.9 % N/A N/A 11.9 % 12.2 % $ 22,080 $ 21,878 $ — $ — $ — $ — $ 22,080 $ 21,878 $ 90,150 $ 88,326 $ 15,259 $ 13,795 $ (15,727 ) $ (15,306 ) $ 89,682 $ 86,815 18.4 % 19.2 % 19.1 % 18.9 % N/A N/A 15.8 % 16.3 % GAAP operating income for 2012 was $25.8 million compared to $61.7 million for 2011 and $69.0 million for 2010. These decreases were primarily due to the costs incurred in connection with our medical device and consolidation and productivity initiatives discussed above, as well as the litigation settlement gain recorded in 2010. Adjusted operating income, which excludes these items, was $73.9 million for 2012, compared to $67.6 million for 2011 and $64.9 million for 2010. This represents an increase of 9% for 2012 and 4% for 2011 as the Company continues to leverage its operating infrastructure and is beginning to see the benefits of its productivity and consolidation initiatives.Beginning in 2012, we are showing adjusted operating income excluding the incremental costs from our medical device initiatives. This information is provided in order to enhance the reader’s understanding of our core business, which is being impacted by these medical device investments and has not meaningfully impacted our revenue or gross margins. Salesdevelopment of complete medical devices developed underdevice systems will be completed by the combined teams in Greatbatch name were $6.6 million during 2012 compared to $4.5 millionMedical, Lake Region Medical, and CCC. 2011, an increase of 47%.- 39 -A reconciliation of GAAP net income (loss)2015, 2014 and diluted earnings (loss) per share (“EPS”) to adjusted amounts is as follows (in thousands, except per share amounts): Year Ended December 28,
2012 December 30,
2011 December 31,
2010 Net
Income
(Loss) Impact
Per
Diluted
Share Net
Income
(Loss) Impact
Per
Diluted
Share Net
Income
(Loss) Impact
Per
Diluted
Share $ (4,799 ) $ (0.20 ) $ 33,122 $ 1.40 $ 33,138 $ 1.40 346 0.01 115 — — — — — — — 575 0.02 3,374 0.14 3,336 0.14 — — — — — — (6,175 ) (0.26 ) 28,934 1.21 276 0.01 1,022 0.04 949 0.04 — — 27 — 1,186 0.05 109 — 1,913 0.08 69 — (2,751 ) (0.12 ) 98 — 6,234 0.26 5,515 0.23 5,119 0.22 6,190 0.26 — — — — $ 42,483 $ 1.77 $ 39,722 $ 1.68 $ 35,718 $ 1.51 23,947 23,636 23,802 (a)Net of tax amounts computed using the applicable U.S. and foreign statutory tax rates of 35% and 22.5%, respectively, for items incurred in those geographic locations.(b)Pre-tax amount is a loss of $106 thousand, gain of $4.2 million and loss of $150 thousand for 2012, 2011 and 2010, respectively.(c)Pre-tax amount is $9.6 million, $8.5 million and $7.9 million for 2012, 2011 and 2010, respectively.(d)Relates to the loss of our Swiss tax holiday due to our decision to transfer manufacturing out of Switzerland, as well as the establishment of a valuation allowance on our Swiss deferred tax assets as it is more likely than not that they will not be fully realized.(e)The per share data in this table has been rounded to the nearest $0.01 and therefore may not sum to the total.(f)Adjusted diluted weighted average shares for 2012 include 363 thousand shares of dilution related to outstanding stock incentive awards that were not dilutive for GAAP diluted EPS purposes.GAAP net income (loss) and diluted EPS2013 include the impact of costs incurredour acquisition of Lake Region Medical in connection withOctober 2015, CCC in August 2014, and NeuroNexus in February 2012. Going forward, we will continue to evaluate certain acquisition opportunities to either enhance our medical devicetop and consolidation and productivity initiatives, as well as the litigation settlement gain recorded in 2010. Excludingbottom line growth trajectory, and/or expand our pipeline technologies. Our strategic criteria for these items, adjusted diluted EPS increased 5% in 2012 and 11% in 2011. In aggregate we estimateacquisitions is that our Swiss operational issues had a negative $0.16 per share of adjusted diluted earnings impact for 2012.- 40 -For 2013, we expect our performance to improve as we progress through the year, as the first quarter of 2013 will be impacted by the startup of our recently transferred orthopaedic production lines. The second half of the year is expected to improve as the orthopaedic backlog is relieved and new product introductionsthey should drive expansion in our portable medical business commercialize. As a result ofcore markets, allow us to enter adjacent growth markets, focus on proprietary technology, can be tightly integrated into our consolidation initiativesoperating base, and refocused medical device RD&E investment, we expect improved performance each quarter when compared to the prior year and expect to achieve adjusted diluted EPS growth of 7-13% for 2013.2013 Financial GuidanceFor 2013, we estimate annual revenue growth rates forenhance our product lines as follows:Product LineEstimated 2013 AnnualGrowth Rate (%)2013 Estimated Revenue(millions)Cardiac & Neuromodulation0% - 2%$309 - $315Vascular7% - 13%$55 - $59Orthopaedic(1)(5%) - 0%$116 - $122Portable Medical15% - 20%$94 - $98Energy & Other6%$86 - $86Total Sales(1)2% - 5%$660 - $680(1)Organic revenue growth for orthopaedic product line is 8%—14% due to disposition of approximately $15 million of non-core product lines at the end of 2012. Total consolidated organic revenue growth is expected to be 5%—8%.Adjusted Operating Income as a % of Sales12.0% - 12.5%Adjusted Diluted EPS$1.90 - $2.00Adjusted operating income for 2013 is expected to consist of GAAP operating income minus non-recurring, unusual or infrequently occurring items such as acquisition, consolidation and integration charges, certain RD&E expenditures and asset disposition/write-down charges, totaling approximately $11.5 million to $14.0 million. This range has been significantly reduced from the 2012 level as we have essentially completed our current productivity and consolidation initiatives. Included in the above range are residual DVT costs in the range of $4.8 to $5.8 million to complete our Algostim project.2012, 20112015, 2014, and 2010,2013, we recorded charges in Other Operating Expenses, NetOOE related to various cost savings and consolidation efforts.initiatives. These initiatives were undertaken to improve our operational efficiencies and profitability. Additionalprofitability the most significant of which are as follows (dollars in millions):Initiative Expected Expense Expected Capital Expected Annual Cost Savings Expected Completion Date 2014 investments in capacity and capabilities $34 - $39 $25 - $28 > $20 2016 Orthopaedic facilities optimization $45 - $48 $30 - $35 $10 - $15 2016 Legacy Lake Region Medical consolidations $13 - $15 $4 - $5 $8 - $9 2016 regardingabout the timing, cash flow impact, and amount of future expenditures is set forth in Note 13 “Other Operating Expenses, Net” of the Notes to the Consolidated Financial Statements contained in Item 8 of this report, as well as the “Liquidity and Capital Resources” section of this Item.- 41 -Over the last two years, we have been implementing a multi-faceted plan to further enhance, optimize and leverage our orthopaedics operations. This plan includes the construction of an orthopaedic manufacturing facility in Fort Wayne, IN, updating our Indianapolis, IN facility to streamline operations, increase capacity, and further expand capabilities, and the transfer of most major functions currently performed at our facilities in Orvin and Corgemont, Switzerland into our Fort Wayne, IN and Tijuana, Mexico facilities. The total capital investment expected for these initiatives is between $25 million and $35 million, of which $21 million has been expended to date. Total expense expected to be incurred for these initiatives is between $30 million and $36 million, of which $33.1 million has been incurred to date.Near the end of 2011, we initiated plans to optimize and expandinitiatives. We continually evaluate our manufacturing infrastructureoperating structure in order to support our medical device strategy. This included the transfer of certain product lines to lower cost facilities, expansion of two of our existing facilities, as well as the purchase of equipment to create additional capacity for the manufacture of medical devicesmaximize efficiencies and create additional cost savings. Total capital investment under these initiativesdrive margin expansion. In 2016, OOE is expected to be between $15comparable to the 2015 levels primarily due to the integration and consolidation efforts in connection with the Lake Region Medical acquisition. We expect to achieve $25 million to $20in annual savings for 2016 from the Lake Region Medical acquisition and have a long-term goal of at least $60 million ofin annual savings, which approximately $9.9 million has been expended to date. Total expenses expected to be incurred on these projects is between $2 million to $3 million of which $1.5 million has been incurred to date.These orthopaedic and medical device initiatives are expected to be completed over the next year and are expected to generate approximately $10 million to $15 million of annual cost savings and increase our capacity in order to support our growth and the manufacturing of complete medical devices.In 2011, we initiated plans to upgrade our existing global ERP system. This initiative is expected to be completedachieved over the next year. Total capital investment underthree years.initiative is expectedtransformative deal, we are at the forefront of innovating technologies and products that help change the face of healthcare, providing our customers with a distinct advantage as they bring complete systems and solutions to market. In turn, our customers will be approximately $4 millionable to $5 millionaccelerate patient access to life enhancing therapies. The newly combined company will be able to offer a substantially more comprehensive portfolio for customers utilizing the best technologies, providing a single point of which approximately $3.0 million has been expended to date. Total expenses expected to be incurred on this initiative is between $5 million to $7 million of which $5.0 million has been incurred to date.Product DevelopmentImplantable Medical—As a resultsupport, and driving optimal outcomes. Some of the investmentsmore significant product development opportunities Greatbatch Medical and Lake Region Medical are pursuing are as follows:Product Line Product Development Opportunities Advanced Surgical, Orthopaedics, and Portable Medical Developing a portfolio of single use products and instruments for the orthopaedics market. Developing a portfolio of wireless products for the portable medical and orthopaedic markets. Cardio and Vascular Developing a portfolio of catheter, wire-based, sensor and coating products for the cardio and vascular markets. Cardiac/Neuromodulation Electrochem Developing power solutions to advance performance and reliability of battery packs in critical environments. have made, we are ablecan develop or assist our customers to provide our Implantable Medical customers withdevelop complete medical devices. This medical device strategy is being facilitated through the QiG Group and includes strategic equity investments and medical devices developed independently as well as in conjunction withAlgovita, our OEM partners. Today we have four medical devices that we are independently working on that are in various stages of development. While we do not intend to discuss each of these projects individually each quarter, we will discuss significant milestones as they occur. Some of the medical device projects that we currently are working on include:Cardiovascular portfolio—Venous and arterial introducers, anti-microbial coatings, steerable delivery systems, and MRI conditional brady, gastric stimulation and sleep apnea leads. During 2012, we received U.S. Food and Drug Administration (“FDA”) 510(k) clearance on our transradial catheter sheath introducer and steerable delivery sheath for atrial fibrillation ablation and received the CE mark for distribution of our transseptal needle that supports access and delivery of ablation therapies for atrial fibrillation.During 2012, Greatbatch Medical observed manufacturing irregularities during inspection of its bi-directional guiding sheath. This problem was identified after implementing a new inspection tool for use in performing inspections. As a result, Greatbatch Medical decided to perform a field action on this product in late 2012. Revenue on this product, which totaled $3.0 million in 2012, is expected to be temporarily delayed until the second half of 2013.- 42 -Neuromodulation portfolio – With regards to Algostim, our spinal cord stimulatorSCS system for the treatment of chronic pain inof the trunk and limbs, we continueis the first application of QiG’s neurostimulation technology platform that was designed to make strong technical progresstarget unmet clinical needs with a focus on safety and product differentiation for all user groups. This product received CE Mark approval in 2014, was approved by the United States Food and Drug Administration during 2015, and is expected to commercially launch in the United States during the first half of 2016.thiscomplete medical device systems will be completed by our combined teams in Greatbatch Medical, Lake Region Medical, and continueCCC. We are now able to retire critical milestones needed for program completion and the ultimate submission to regulatory authorities, which we expect in the second half of 2013. Additionally, we continue to receive strong interest from numerous world-classmore broadly partner with medical device companies, who appreciateleveraging Greatbatch Medical’s core components discrete technology, the unique opportunity to marketdesign and distribute Algostim to interventional pain physicians, neurosurgeonsmanufacturing expertise of Lake Region Medical, and orthopaedic spine surgeons around the world. We believe Algostim’s unique features and benefitsfull device capabilities of CCC which will allow the right commercial partner to capture significant market share in today’s $1.3 billion spinal cord stimulation market, which continues to see double digit market growth. We look forward to sharing more details regarding Algostim andenhance our commercial partner progress at our next investor day in March 2013.Approximately $0.5 million of the NeuroNexus purchase price in February 2012 was allocated to the estimated fair value of acquired in process research and development (“IPR&D”). These projects are expected to generate cash flows but have not yet reached technological feasibility, and thus were classified as an indefinite-lived intangible asset until the completion or abandonment of the associated projects. The value assigned to IPR&D related to the development of micro-electrodes for deep brain mapping and electrocorticography. There have been no significant changes from our original estimates with regards to these projects.Electrochem—Electrochem continues to win new customers, new applications and next generation products. Our core competencies enable us to be well-positioned to win existing share and additional new product introductions based on our experience in packaging solutions, our customer relationships, our investment in technology and facilities, our capacity to service our customers, and our legacy of delivering highly reliable and innovative solutions to the medical marketplace.The growth in Electrochem is being driven by successful product launches into the higher growth, higher value portable medical market. Gaining better access to this attractive market was one of the main drivers behind our acquisition of Micro Power as it provides us with a significant opportunity for growth given its $400 million market size.Additionally, this market is benefiting from favorable market trends as patient care shifts from clinical settings to the home and as an aging population drives the need for lightweight and portable devices for patients and caregivers. These favorable trends are expected to allow this market to grow faster than our legacy markets over the next several years. Finally, this market is also attractive to us given that it has long product life cycles that should provide stability and diversification to our revenue base.health carehealthcare system that could significantly impact our business operations and financial results, including higher or lower revenue, as well as higher employee medical costs and taxes. Health Care Reform imposes significant new taxes on medical device OEMs, which will result in a significant increase in the tax burden on our industry and which could have a material negative impact on our financial condition, results of operations and our cash flows. Beginning on January 1, 2016, the medical device excise tax was suspended through December 31, 2017, but if this suspension is not continued or made permanent thereafter, the medical device excise tax will be automatically reinstated starting on January 1, 2018. Other elements of Health Care Reform such as comparative effectiveness research, an independent payment advisory board, payment system reforms including shared savings pilots and other provisions could meaningfully change the way healthcare is developed and delivered, and may materially impact numerous aspects of our business, results of operations and financial condition. Many significant parts of Health Care Reform will be phased in over the next several years and require further guidance and clarification in the form of regulations. Management is currently evaluating the impact that the newThe medical device tax increased our cost of sales by $0.6 million, $0.7 million, and $0.5 million in 2015, 2014 and 2013, respectively.have on our results from operations beginning in 2013, and has preliminarily estimated that it will reduce gross profit by $1.5 million to $2.5 million. This amount assumes that this tax applies toterminate. During the first medical device sale inhalf of 2016, we expect a decision from the U.S.EPA on whether our post remediation care plan has been approved. The groundwater treatment process at our Collegeville facility consists of a groundwater extraction and is based upontreatment system and the performance of annual sampling of a wholesale price.- 43 -On August 22, 2012, the U.S. Securities and Exchange Commission (“SEC”) issueddefined set of groundwater wells as a rule under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act requiring companiesmeans to publicly disclose their use of conflict minerals that originated in the Democratic Republic of the Congo (“DRC”) or an adjoining country. Under the adopted rule, issuers are required to conduct a “reasonable” due-diligence process to ascertain the source of conflict minerals, defined as tantalum, tin, gold or tungsten, that are necessary to the functionality or production of their manufactured or contracted to be manufactured products. Companies are required to provide this disclosure on a new form to be filed with the SEC called Form SD. Companies are required to file Form SD on May 31, 2014 for the 2013 calendar period and annually on May 31 every year thereafter. We anticipate additional, new compliance costs to be incurred since our Implantable Medical business utilizes all of the minerals specified in the rule, which we are unable to quantify at this time.Valuationgoodwillaccounting, which requires that the assets acquired and other identifiable intangible assetsWhen weliabilities assumed be recorded at the date of acquisition at their respective estimated fair values. The cost to acquire a company we allocate the purchase priceis allocated to the tangible and intangible assets we acquireof the acquired company and liabilities we assume based on estimates of their respective fair valuevalues at the date of acquisition. SomeAny excess of the purchase price over the estimated fair values of the net identified tangible and intangible assets acquired is recorded as goodwill. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact our results of operations. Additionally, these estimates also form the basis of whether or not an impairment charge should be recorded. For these reasons, these estimates are considered to be critical accounting estimates.is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and indefinite-lived intangible assets acquired. Indefinite-lived intangibles and goodwill are not amortized but are required to be assessed for impairment on an annual basis or more frequentfrequently if certain indicators are present. Goodwill is evaluated for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment. Definite-lived intangible assets are amortized over their estimated useful lives and are assessed for impairment if certain indicators are present.theintangible assets acquired are determined using one of three valuation approaches: market, income or cost. The selection of a particular method depends on the reliability of available data and the nature of the asset. The market approach values the asset based on available market pricing for comparable assets. The income approach values the asset based on the present value of risk adjusted cash flows projected to be generated by that asset. The projected cash flows for each asset considers multiple factors from the perspective of a marketplace participant, including current revenue from existing customers, attrition trends, pricing, reasonable contract renewal assumptions, from the perspective of a marketplace participant,new product launches, cost synergies, royalty rates and expected profit margins giving consideration to historical and expected margins. The cost approach values the asset by determining the current cost of replacing that asset with another of equivalent economic utility. The cost to replace the asset reflects the estimated reproduction or replacement cost, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated.- 44 -indefinite-lived intangible assets orlegacy Greatbatch goodwill allocated to our ImplantableGreatbatch Medical or Electrochemand QiG segments are at risk of failing step one of future annual impairment tests unless operating conditions significantly deteriorate, given the results of our 2015 step zero qualitative analysis as well as the significant amount that our estimated fair value for these assets was in excess of their respective book values as of December 28, 2012, January 3, 2014, the date of our last step one goodwill impairment test. The goodwill allocated to our Lake Region Medical segment may be subject to future impairment if their actual operating results deteriorate from the results from that were expected when we performed the initial purchase price allocation. Examples of a significant deterioration in operating conditions, which could impact the valuation and/or if there is a changeresult in our reporting units.different purchase price allocations. Significantsignificant changes to our intangible asset fair value estimates. These changes in thesefair value estimates and assumptions could impact the value of the assets and liabilities recorded, which would change the amount and timing of future intangible asset amortization expense.We make certain estimates and assumptions that affect the expected future cash flowsexpense and/or result in impairment losses.units for our goodwill impairment testing. These include discount rates, terminal values andunits. We also make assumptions involving the projections of future revenues and expenses.expenses that impact the results of our step-zero impairment analysis. Significant changes in these estimates and assumptions could create future impairment losses to our goodwill. The assumptions used in our 20122015 impairment testanalysis incorporate the information disclosed in “2013 Financial Guidance” of this section as well as other forward-looking statements made in this ManagementManagement’s Discussion and Analysis of Financial Condition and Results of Operations section.rates.rates ranging from 9.5% to 11.5%. Significant changes in these estimates could create future impairments of these assets.the Company’s management allocateswe allocate resources and evaluates itsevaluate our businesses determines the reporting unit level which goodwill is tested for impairment. Significant changes to these reporting units could create future impairments of goodwill.- 45 -December 28, 2012,January 1, 2016, we have $457.2 million$2.0 billion of intangible assets recorded on our consolidated balance sheet representing 51%67% of total assets. This includes $87.3$894.0 million of amortizing intangible assets, $20.8$90.3 million of indefinite-lived intangible assets and $349.0 million$1.0 billion of goodwill. A 1% change in the amortization of our intangible assets would change 20122015 net income (loss) by approximately $0.09$0.1 million, or approximately $0.004 per diluted share.- 46 -20122015 net income (loss) by approximately $0.07$0.06 million, or approximately $0.003$0.002 per diluted share.December 28, 2012,January 1, 2016, we have $106.6$252.2 million of inventory recorded on our consolidated balance sheet representing 12%8% of total assets. A 1% write-down of our inventory would change 20122015 net income (loss) by approximately $0.7$1.6 million, or approximately $0.03$0.06 per diluted share.- 47 - acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); or a current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Recoverability potential is measured by comparing the carrying amount of the asset (asset group) to the related total future undiscounted cash flows. The projected cash flows for each asset (asset group) considers multiple factors, including current revenue from existing customers, proceeds from the sale of the asset (asset group), reasonable contract renewal assumptions, and expected profit margins giving consideration to historical and expected margins. If an asset’s (assets group’s) carrying value is not recoverable through related undiscounted cash flows, the asset (asset group) is considered to be impaired. Impairment is measured by comparing the asset’s (asset group’s) carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and there are sufficient cash flows to support the carrying value of the assets, we accelerate the rate of depreciation in order to fully depreciate the assets over their shorter useful lives.December 28, 2012January 1, 2016, we have $150.9$379.5 million of tangible long-lived assets recorded on our consolidated balance sheet representing 17%13% of total assets. A 1% write-down in our tangible long-lived assets would change 20122015 net income (loss) by approximately $1.0$2.5 million, or approximately $0.04$0.09 per diluted share.4846 -December 28, 2012,January 1, 2016, we had $38.5$205.4 million of gross deferred tax assets on our consolidated balance sheet and a valuation allowance of $12.8$39.2 million has been established for certain deferred tax assets as it is more likely than not that they will not be realized. As January 1, 2016, the Company has federal net operating loss (“NOL”) carryforwards of approximately $386.2 million expiring at various dates through 2035. If not utilized, these carryforwards will begin to expire in 2019. In assessing the realizability of the deferred tax asset associated with the NOLs, management relied on the reversal of deferred tax liabilities within the U.S taxing jurisdictions of approximately $866.3 million. A 1% change in the effective tax rate would impact the current year provisionbenefit for income taxes by $0.07$0.2 million, and 20122015 diluted earnings (loss) per share by $0.003$0.006 per diluted share.31st.31. Fiscal years 2012, 20112015, 2014 and 20102013 ended on December 28, 2012, December 30, 2011January 1, 2016, January 2, 2015 and December 31, 2010,January 3, 2014, respectively. Fiscal years 2012, 20112015 and 2010 all2014 contained fifty-two weeks and fiscal year 2013 contained fifty-three weeks. Year Ended 2015 vs. 2014 2014 vs. 2013 January 1,
2016 January 2,
2015 January 3,
2014 Dollars in thousands, except per share data Product Line Sales: Advanced Surgical, Orthopaedics, and Portable Medical $ 243,385 $ 216,339 $ 208,990 $ 27,046 13 % $ 7,349 4 % Cardio and Vascular 143,260 58,770 48,357 84,490 144 % 10,413 22 % Cardiac/Neuromodulation 356,064 330,921 328,455 25,143 8 % 2,466 1 % Electrochem 59,449 81,757 78,143 (22,308 ) (27 )% 3,614 5 % Elimination of interproduct line sales (1,744 ) — — (1,744 ) NA — — % Total sales 800,414 687,787 663,945 112,627 16 % 23,842 4 % Cost of sales 565,279 456,389 444,632 108,890 24 % 11,757 3 % Gross profit 235,135 231,398 219,313 3,737 2 % 12,085 6 % Gross profit as a % of sales 29.4 % 33.6 % 33.0 % Selling, general and administrative expenses (SG&A) 102,530 90,602 88,107 11,928 13 % 2,495 3 % SG&A as a % of sales 12.8 % 13.2 % 13.3 % Research, development and engineering costs, net (RD&E) 52,995 49,845 54,077 3,150 6 % (4,232 ) (8 )% RD&E as a % of sales 6.6 % 7.2 % 8.1 % Other operating expenses, net 66,464 15,297 15,790 51,167 334 % (493 ) (3 )% Operating income 13,146 75,654 61,339 (62,508 ) (83 )% 14,315 23 % Operating margin 1.6 % 11.0 % 9.2 % Interest expense 33,513 4,252 11,261 29,261 688 % (7,009 ) (62 )% (Gain) loss on cost and equity method investments, net (3,350 ) (4,370 ) 694 1,020 (23 )% (5,064 ) NA Other (income) expense, net (1,317 ) (807 ) 546 (510 ) 63% (1,353 ) NA Provision (benefit) for income taxes (8,106 ) 21,121 12,571 (29,227 ) NA 8,550 68 % Effective tax rate 51.6 % 27.6 % 25.7 % Net income (loss) $ (7,594 ) $ 55,458 $ 36,267 $ (63,052 ) (114 )% $ 19,191 53% Net margin (0.9 )% 8.1 % 5.5 % Diluted earnings (loss) per share $ (0.29 ) $ 2.14 $ 1.43 $ (2.43 ) (114 )% $ 0.71 50% 4948 -Results of Operations Table Year Ended 2012 vs. 2011 2011 vs. 2010 Dec. 28, Dec. 30, Dec. 31, $ % $ % 2012 2011 2010 Change Change Change Change $ 309,124 $ 303,690 $ 303,521 $ 5,434 2 % $ 169 0 % 51,980 45,098 38,000 6,882 15 % 7,098 19 % 122,061 140,277 118,748 (18,216 ) -13 % 21,529 18 % 483,165 489,065 460,269 (5,900 ) -1 % 28,796 6 % 81,659 9,609 8,432 72,050 NA 1,177 14 % 67,046 58,934 54,668 8,112 14 % 4,266 8 % 14,307 11,214 10,056 3,093 28 % 1,158 12 % 163,012 79,757 73,156 83,255 104 % 6,601 9 % 646,177 568,822 533,425 77,355 14 % 35,397 7 % 444,528 388,469 359,844 56,059 14 % 28,625 8 % 201,649 180,353 173,581 21,296 12 % 6,772 4 % 31.2 % 31.7 % 32.5 % 80,992 72,548 64,510 8,444 12 % 8,038 12 % 12.5 % 12.8 % 12.1 % 52,490 45,513 45,019 6,977 15 % 494 1 % 8.1 % 8.0 % 8.4 % — — (9,500 ) — NA 9,500 -100 % 42,346 593 4,558 41,753 NA (3,965 ) -87 % 25,821 61,699 68,994 (35,878 ) -58 % (7,295 ) -11 % 4.0 % 10.8 % 12.9 % 18,055 16,928 18,519 1,127 7 % (1,591 ) -9 % (1 ) (21 ) (10 ) 20 -95 % (11 ) 110 % 106 (4,232 ) 150 4,338 -103 % (4,382 ) NA 931 632 1,010 299 47 % (378 ) -37 % 11,529 15,270 16,187 (3,741 ) -24 % (917 ) -6 % 171.3 % 31.6 % 32.8 % $ (4,799 ) $ 33,122 $ 33,138 $ (37,921 ) -114 % $ (16 ) 0 % -0.7 % 5.8 % 6.2 % $ (0.20 ) $ 1.40 $ 1.40 $ (2 ) -114 % $ — 0 % - 50 -20122015 Compared with Fiscal 20112014Sales(in(dollars in thousands): Year Ended 2012 vs. 2011 December 28, December 30, $ % 2012 2011 Change Change $ 309,124 $ 303,690 $ 5,434 2 % 51,980 45,098 6,882 15 % 122,061 140,277 (18,216 ) -13 % 483,165 489,065 (5,900 ) -1 % 81,659 9,609 72,050 N/A 67,046 58,934 8,112 14 % 14,307 11,214 3,093 28 % 163,012 79,757 83,255 104 % $ 646,177 $ 568,822 $ 77,355 14 % Implantable Year Ended 2015 vs. 2014 January 1,
2016 January 2,
2015 Sales: Advanced Surgical, Orthopaedics, and Portable Medical $ 243,385 $ 216,339 $ 27,046 13 % Cardio and Vascular 143,260 58,770 84,490 144 % Cardiac/Neuromodulation 356,064 330,921 25,143 8 % Electrochem 59,449 81,757 (22,308 ) (27 )% Elimination of interproduct line sales (1,744 ) — (1,744 ) NA Total sales $ 800,414 $ 687,787 $ 112,627 16 % Year Ended 2015 vs. 2014 January 1,
2016 January 2,
2015 Sales: Greatbatch Medical $ 649,977 $ 678,285 $ (28,308 ) (4 )% QiG 13,571 9,502 4,069 43 % Lake Region Medical 139,819 — 139,819 100 % Elimination of intersegment sales (2,953 ) — (2,953 ) NA Total sales $ 800,414 $ 687,787 $ 112,627 16 % – For 2012, we have recast our cardiac/neuromodulation sales increased 2% to $309.1 million which exceeded our expectations. During 2012, cardiac and neuromodulation sales benefited from further adoption of our Q series batteries partially offsetrevenue by the timing of customer inventory builds and product launches between 2011 and 2012. Management remains cautiously optimistic over the short-term prospects of this product line giveninto the continued ongoing challenges surrounding some of our key cardiac customers. It is important to note that our visibility to customer ordering patterns is over a short period of timefollowing four categories:that any significant customer field actions or relative market share shifts among OEM manufacturers could impact our results. We believe that the impact of these factors is somewhat muted by the fact that we have business with all of the key cardiac OEMsPortable Medical– Includes legacy Greatbatch Orthopaedics and have significantly diversified our revenue base. Additionally, we continue to see an increased pace of product development opportunities from our customers. Management believes that this, combined with our increased focus on sales and marketing, will allow the Company to grow this product line faster than the underlying market.For 2012, our vascularPortable Medical product line sales increased 15% to $52.0 million. This increase was primarily attributable to growth inplus the underlying marketlegacy Lake Region Medical Advanced Surgical product line sales.market share gains. Additionally, vascular revenue forVascular– Includes the year included $6.6 million from sales of medical devices that were developed under thelegacy Greatbatch name compared to $4.5 million for 2011, an increase of 47%.OrthopaedicVascular product line sales for 2012 declinedplus the legacy Lake Region Medical Cardio and Vascular product line sales less the legacy Lake Region Medical Cardiac/Neuromodulation sales.2011. On a constant currency basis, orthopaedic2014 and includes $37.9 million of sales declined 8% for 2012 as foreign currency exchange rate fluctuations decreased orthopaedic revenuefrom the former Lake Region Medical since the date of acquisition. During 2015, this product line continued to be negatively impacted by the weakening Euro, which reduced sales by approximately $6 million. The remaining decline in 2012 orthopaedic sales was a result of price concessions provided to customers, as well as fewer customer product launches and development opportunities due to operational issues at our Swiss orthopaedic facilities, which were aggressively addressed in 2012. In addition to the consolidation of manufacturing, during 2012, we also streamlined our Swiss orthopaedic product line offerings. This included the sale of several non-core product lines to an independent third party near the end of the year, which closed in early 2013. Our current estimate is that the sale of these products will reduce our 2013 orthopaedic revenue by approximately $15$14.5 million in comparison to 2012. For 2013, we expectthe prior year. On an organic constant currency basis, our performanceAdvanced Surgical, Orthopaedics, and Portable Medical sales increased 2% in comparison to improve2014 primarily due to orthopaedics market growth and new customer wins partially offset by lower portable medical sales due to our refocusing this product line’s product offerings to products that have higher profitability.we progress through the year, asour customers built safety stock in anticipation of our product line transfers to our Tijuana, Mexico facility in the first quarter of 20132016. We expect our product line transfer to Mexico will position us to be impacted by the startup of these recently transferred orthopaedic production lines. The second half of the year is expectedmore competitive in both new and existing markets.improve as this orthopaedic backlog is relieved.- 51 -Our Implantable Medical customers have various inventory management, dual sourcing,2014 and vertical integration initiatives in place, and the relative market share among OEM manufacturers’ changes continuously. Additionally, we face pricing pressures from our customers and in particular our four largest OEM customers upon which a significant portion of our sales is dependent. These pressures have increased over the last several years due to the downturn in the global economy, and more specifically, the contracting CRM market. Consequently, these and other factors will continue to significantly impact our sales.Electrochem –2012 sales for Electrochem increased $83.3 million to $163.0 million. 2012 Electrochem sales included $82.4includes $13.7 million of incremental revenue related tosales from the acquisitionformer Lake Region Medical since the date of Micro Power in December 2011.acquisition. On an organic constant currency basis, Electrochem revenue was consistent withour Cardiac/Neuromodulation sales increased 2% in comparison to the prior year. During 2012,year primarily due to a neuromodulation customer product launch, which was partially offset by the Micro Power acquisition exceeded our expectations, which is benefitting from successful product launches into the higher growth, higher value portable medical market. The market shift in patient care from clinical settings to the home, and an aging population, is driving the need for lightweight and portable devices for patients and caregivers. Electrochem’s technology, customer relationships, and legacyrunoff of delivering highly reliable and innovative solutions has enabled it to win in this evolving market and continues to position Electrochem to capture market share. Electrochem continues to secure long-term agreements in this space and our funnelend of portable medicallife products from this acquisition continues to be full, which is expected to drive revenue growth for this product line for the next several years.Gross ProfitChanges to gross profit as a percentage ofour legacy cardiac customers.weredeclined 27%. This decrease was primarily due to the slowdown in the energy markets, which has caused customers to reduce drilling and exploration volumes. We expect the slowdown in the energy markets to continue to be a headwind to Electrochem sales through the end of 2016. 2012-20112015-2014
% Point ChangeImpact of acquisitions(a)-1.2% Excess capacity & Swiss production inefficiencies(b)-1.6% Volume and productivity(c)2.2% (d)(a)0.9 0.4% Selling priceProduction efficiencies, volume and mix(e)(b)0.1 -0.5% Other(5.1 0.2)% Other (0.1 )% (4.2 -0.5)% (a)Our gross profit percentage was impacted by the acquisition of Micro Power in December 2011, which had a lower gross margin percentage due to its higher percentage of material costs in comparison to our legacy businesses. Additionally, during 2012 we recognized $0.5 million of inventory step-up amortization in connection with this acquisition, which will not recur in subsequent periods.- 52 -(b) Our gross profitGross Margin percentage was negatively impacted during 2012 due to production inefficiencies at our Swiss orthopaedic facilities. Additionally, as a result of the addition of our Fort Wayne facility in the second quarter of 2012, we experienced excess capacity costs in comparison to 2011. In accordance with our inventory accounting policy, excess capacity costs are expensed in the period they occur. In 2012, we aggressively right-sized our orthopaedic cost structure, which is expected to help improve our gross margin percentage starting in the first quarter of 2013.(c)Our gross profit percentage benefittedbenefited from higher sales volumes, primarily cardiac and vascular, as well as production efficiencies gained at our manufacturing facilities as a result of our various lean and supply chain initiatives.initiatives, which was partially offset by a higher sales mix of lower margin products.(d)(c) Amount represents the impact to our gross profit percentage related to the acquisition of Lake Region Medical in October 2015 and includes $23.0 million of inventory step-up amortization. $ (4,051 ) 1,569 14,823 Other (413 ) Net increase in SG&A $ 11,928 (a) Amount represents the change in performance-based compensation expenseversus the prior year and is recorded based upon the actual results for 2012 compared to 2011. Performance-based compensation is accrued based upon the level of performance achieved relative to targets set at the beginning of the year.achieved.(e)(b) Amount represents an increase in legal costs compared to the prior year and includes higher intellectual property (“IP”) related defense costs, as well as other corporate initiatives. In 2013, we filed suit against one of our cardiac/neuromodulation competitors alleging they were infringing on our IP. Costs associated with this litigation accounted for $1.9 million of the increase in SG&A expenses from 2014 to 2015. (c) Amount represents the incremental SG&A expenses related to the acquisition of Lake Region Medical in October 2015 and CCC acquired in August 2014. Year Ended January 1,
2016 January 2,
2015 Change Research, development and engineering costs $ 59,767 $ 58,974 $ 793 Less: cost reimbursements (6,772 ) (9,129 ) 2,357 Total RD&E, net $ 52,995 $ 49,845 $ 3,150 Year Ended January 1,
2016 January 2,
2015 Change $ 23,037 $ 8,925 $ 14,112 1,395 1,317 78 — 1,017 (1,017 ) 1,961 — 1,961 — (71 ) 71 33,449 3 33,446 6,622 4,106 2,516 Total other operating expenses, net $ 66,464 $ 15,297 $ 51,167 (a) Refer to the “Cost Savings and Consolidation Efforts” section of this Item and Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for disclosures related to the timing and level of remaining expenditures for these initiatives. (b) During 2015, we incurred $23.7 million in transaction costs related to the acquisition of Lake Region Medical. These costs primarily relate to professional and consulting fees incurred in connection with the due diligence efforts of this acquisition. Additionally, during 2015, we incurred $8.6 million in Lake Region Medical integration costs, which primarily included change-in-control payments to former Lake Region Medical executives, professional and consulting fees, and travel costs. (c) During 2015 and 2014, we recorded losses in connection with various asset disposals and write-downs. During 2015, we incurred $6.0 million in legal and professional costs in connection with the pending Spin-off of Nuvectra. During 2014, we incurred $0.9 million of expense related to the separation of our Senior Vice President, Human Resources. Additionally, during 2014, Greatbatch Medical recorded charges in connection with its business reorganization to align its contract manufacturing operations. Costs incurred primarily related to consulting and IT development. U.S. International Combined $ % $ % $ % Income (loss) before provision for income taxes $ (42,166 ) $ 26,466 $ (15,700 ) Provision (benefit) at statutory rate $ (14,758 ) 35.0 % $ 9,263 35.0 % $ (5,495 ) 35.0 % Federal tax credits (1,850 ) 4.4 — — (1,850 ) 11.8 Foreign rate differential (331 ) 0.8 (2,849 ) (10.8 ) (3,180 ) 20.2 Uncertain tax positions (531 ) 1.3 — — (531 ) 3.4 State taxes, net of federal benefit (1,490 ) 3.5 — — (1,490 ) 9.5 Change in foreign tax rates — — (91 ) (0.3 ) (91 ) 0.6 Non-deductible transaction costs 4,867 (11.5 ) — — 4,867 (31.0 ) Valuation allowance 943 (2.2 ) (317 ) (1.2 ) 626 (4.0 ) Other 6 — (968 ) (3.7 ) (962 ) 6.1 Provision (benefit) for income taxes $ (13,144 ) 31.2 % $ 5,038 19.0 % $ (8,106 ) 51.6 % Year Ended 2014 vs. 2013 January 2,
2015 January 3,
2014 Sales: Advanced Surgical, Orthopaedics, and Portable Medical $ 216,339 $ 208,990 $ 7,349 4 % Cardio and Vascular 58,770 48,357 10,413 22 % Cardiac/Neuromodulation 330,921 328,455 2,466 1 % Electrochem 81,757 78,143 3,614 5 % Elimination of interproduct line sales — — — — % Total sales $ 687,787 $ 663,945 $ 23,842 4 % Year Ended 2014 vs. 2013 January 2,
2015 January 3,
2014 Sales: Greatbatch Medical $ 678,285 $ 660,902 $ 17,383 3 % QiG 9,502 3,043 6,459 212 % Elimination of Intersegment sales — — — — % Total sales $ 687,787 $ 663,945 $ 23,842 4 % 0.1 % 1.9 % 0.1 % (1.2 )% Other (0.3 )% Total percentage point change to gross profit as a percentage of sales 0.6 % (b) Our gross profit percentage has beenbenefited from production efficiencies gained at our manufacturing facilities as a result of our various lean and supply chain initiatives, as well as higher production volumes due to increased sales. Partially offsetting(c) Amounts represent the impact to our gross profit percentage related to the acquisition of CCC in August 2014. (d) Our gross profit percentage was negatively impacted in comparison to the prior year by contractual price concessions made to our larger OEM customers, which were given in exchange for long-term contracts.contracts and volume commitments.Over the long-term, we expect to see gross margin improvements as a result of the consolidation of our orthopaedic operations and from various other productivity improvement initiatives that are being implemented (See “Cost Savings and Consolidation Efforts” section of this item). Additionally, we expect our gross profit margin to improve as more system and device level products are introduced, which typically earn a higher margin. Management is currently evaluating the impact that the new medical device tax will have on our results from operations beginning in 2013, and has preliminarily estimated that it will reduce gross profit by $1.5 million to $2.5 million. This amount assumes that this tax applies to the first medical device sale in the U.S. and is based upon a wholesale price. 2012-2011 $ Change $ 9,552 743 (501 ) (1,350 ) $ 8,444 $ 3,408 (991 ) 2,555 (3,096 ) 911 Other (292 ) Net increase in SG&A $ 2,495 (a) Amount represents the incremental costs related to our strategic initiative to increase selling and marketing resources to drive core business growth and sustain a pipeline of revenue generating opportunities. (b) Amount represents the change in performance-based compensation versus the prior year and is recorded based upon the actual results achieved. (c) Amount represents an increase in legal costs compared to the prior year and includes higher IP related defense costs, as well as other corporate initiatives. In 2013, we filed suit against one of our cardiac/neuromodulation competitors alleging they were infringing on our IP. (d) Amount represents lower G&A personnel costs in comparison to the prior year and is primarily the result of our various consolidation initiatives including our operating unit realignment that occurred during the second half of 2013. (e) Amount represents the incremental SG&A expenses in 2012 versus 2011 related to the acquisition of Micro Power and NeuroNexus.CCC in August 2014.(b)Amount represents the change in professional and consulting expense from 2011 and reflects a higher level of costs incurred in connection with our medical device strategy and our increased investment in sales and marketing to drive core business growth.(c)Amount represents the costs incurred during 2011 in connection with the communication of our medical device strategy to shareholders, customers and associates including costs incurred for our Investor Day held in the first quarter of 2011, which did not recur in 2012.(d)Amount represents various decreases in SG&A expenses during 2012 and reflects the cost control initiatives being implemented by the Company including cost reductions in connection with our Swiss orthopaedic consolidations.- 53 - Year Ended December 28, December 30, 2012 2011 Change $ 24,071 $ 19,014 $ 5,057 38,777 35,472 3,305 (10,358 ) (8,973 ) (1,385 ) $ 52,490 $ 45,513 $ 6,977 Year Ended January 2,
2015 January 3,
2014 Change Research, development, and engineering costs $ 58,974 $ 62,652 $ (3,678 ) Less cost reimbursements (9,129 ) (8,575 ) (554 ) Total RD&E, net $ 49,845 $ 54,077 $ (4,232 ) 2012 increased $7.02014 decreased $4.2 million to $52.5$49.8 million. Approximately $2.6 million of this increase was a result of the operations from our recent acquisitions. Additionally, $3.2 million of this increase can be attributed to the investment in the development of completeNet medical devices, which totaled $24.8device costs incurred by QiG were $23.3 million for 20122014 compared to $21.6$30.5 million for 2011. These amounts2013. Medical device costs for 2014 include $5.2$4.2 million and $5.1 million, respectively, ofless DVT costs in connection with our developmentcomparison to 2013 as most of a neuromodulation platform. When combined with SG&A expenses, totalthe testing was completed by the end of 2013. The decrease in DVT costs was partially offset by higher costs incurred in connection with the development of our next generation cardiac products (i.e. batteries, capacitors, filtered feedthroughs), higher performance-based compensation, which was accrued based upon the achievement of certain Algovita milestones, and a higher rate of spend on other QiG medical device initiatives totaled $33.9 million for 2012 versus $27.3 million for 2011.During the second half of 2012, we began to implement an initiative to optimize our RD&E investment. This included the reallocation of RD&E resources to higher priority projects, the postponement of some RD&E projects, as well as the decision to pursue various alternatives to monetize some of our existing intellectual property that are outside our core business. As a result of this initiative, RD&E for the second half of 2012 was $3.7 million lower than the first half of 2012. These reductions are also expected to benefit 2013.2012 was a result of our NeuroNexus acquisition. These cost reimbursements can vary significantly from year to year due2014 primarily relates to the timing of the achievement of milestones on development projects.Other operating expenses, net were Year Ended December 28, December 30, 2012 2011 Change $ 32,482 $ 425 $ 32,057 1,525 — 1,525 5,041 — 5,041 1,460 — 1,460 1,838 168 1,670 $ 42,346 $ 593 $ 41,753 Year Ended January 2,
2015 January 3,
2014 Change $ 8,925 $ — $ 8,925 1,017 5,625 (4,608 ) 1,317 8,038 (6,721 ) (71 ) 1,095 (1,166 ) 3 (502 ) 505 4,106 1,534 2,572 Total other operating expenses, net $ 15,297 $ 15,790 $ (493 ) (a) Refer to “Cost Savings and Consolidation Efforts” section of this Item and Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for disclosures related to the timing and level of remaining expenditures for these initiatives. - 54 -(b) During 2012,2014 and 2013, we incurredrecognized costs (income) related to the integration of Micro Power Electronics, Inc., NeuroNexus, and NeuroNexus.CCC. These expenses (income) were primarily for retention bonuses, travel costs in connection with integration efforts, training, severance, and severance, which will not be requiredthe change in 2013 as these integrations are completed.fair value of the contingent consideration recorded in connection with the NeuroNexus acquisition. Refer to Note 13 “Other Operating Expenses, Net” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for disclosures related to the change in fair value of the contingent consideration.(c) During 20122014 and 2011,2013, we recorded write-downslosses in connection with various asset disposals net of insurance proceeds received, if any. Additionally, during 2012,and write-downs. During 2014, we incurred $1.2$0.9 million of costsexpense related to the relocationseparation of our global headquarters to Frisco, Texas. During 2011, we incurred $0.6 million of acquisition related costsSenior Vice President, Human Resources. Additionally, during 2014, Greatbatch Medical recorded charges in connection with our purchaseits business reorganization to align its contract manufacturing operations. Costs incurred primarily related to consulting and IT development. During 2013, Greatbatch Medical recorded a $0.9 million write-off related to its wireless sensing product line and QiG recorded a $0.5 million write-off of Micro Power.NeuroNexus’s in-process research and development “IPR&D”.Other operating expenses will be reduced significantly in 2013 and are expected to range from $6.7 million—$8.2 million, which will improve the overall earnings of Greatbatch. While we continually identify and implement cost improvement initiatives, we have now completed all of our major plant consolidations, so our leadership team can focus on achieving sustainable organic growth and leverage our available capacity. and Interest Income2012 increased $1.12014 decreased $7.0 million over 20112013 primarily due to the increased discount amortization related to ourrepayment of $198 million of convertible subordinated notes during the first quarter of 2013, which is being amortized utilizing thehad an effective interest method.rate of 8.5%. The weighted average interest rate on our long-term debt as of January 2, 2015 was 1.79%. Additionally, interest expense was lower in 2014 due to lower outstanding Credit Facility balances. During 2014 and 2013, we made net repayments of $10 million and $33.3 million on long-term debt, respectively. See Note 9 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report. Interest income for 2012 was relatively consistent with 2011.Gain (Loss) NetIn 2011,investment in IntElect Medical, Inc. (“IntElect”) in conjunction with Boston Scientific’s acquisition of IntElect. We obtained our ownership interest in IntElect through our acquisition of BIOMEC, Inc. in 2007 and two subsequent additional investments. This transactioninvestments, which resulted in a pre-tax gain of $4.5 million. During 2012$3.2 million and 2011, we recognized impairment charges relatedcontributed to ourthe overall gain on cost and equity method investments of $0.1 million and $0.3 million, respectively. The aggregate recorded amountfor the year. During 2013, we incurred losses due to the writedown of our cost and equity method investments at December 28, 2012 was $9.1 million. These investments are in start-up research and development companies whose fair value is highly subjective in nature and subject to future fluctuations, which could be significant. Our exposure related to these entities is limited to our recorded investment.We generally do not expectIn 2014, we recognized $1.3 million of foreign currency exchange rate fluctuationsgains compared to have a material impact on our resultsloss of operations.the year ended December 28, 20122014 was 171.3%,27.6% versus 31.6%25.7% for 2011.2013. The stand-alone U.S. component of the effective tax rate for the2014 was 32.6% versus 30.0% for 2013. The year ended December 28, 2012 was 33.1% versus 31.5% for 2011.- 55 -The provision for income taxes for 2012 differs from the U.S. statutory rate due to the following (dollars in thousands): U.S. International Combined $ % $ % $ % $ 36,057 $ (29,327 ) $ 6,730 $ 12,620 35.0 % $ (10,265 ) 35.0 % $ 2,355 35.0 % — — 3,414 (11.6 ) 3,414 50.7 — — 1,721 (5.9 ) 1,721 25.6 (681 ) (1.9 ) — — (681 ) (10.1 ) 329 0.9 — — 329 4.9 — — 4,552 (15.5 ) 4,552 67.6 (350 ) (0.9 ) 189 (0.6 ) (161 ) (2.4 ) $ 11,918 33.1 % $ (389 ) 1.4 % $ 11,529 171.3 % The fluctuation between the overall rate of 171.3% in 2012 and the 31.6% in 2011over year increase is primarily attributable to approximately $6.2a decrease in federal tax credits recorded in 2014. $3.7 million of federal tax charges (approximately 92% increase in our effective tax rate)credits were recorded in connection with our Swiss orthopaedic restructuring. These charges relate to the loss of our Swiss tax holiday, due to our 2012 decision to transfer manufacturing out of Switzerland,2013 as well as the establishment of a valuation allowance on a portion of our Swiss deferred tax assets as it is more likely than not that they will not be fully realized. Additionally, our 2012 effective tax rate reflects the impact of approximately $31.3 million of losses resulting from our Swiss restructuring, the benefit of which are recorded at the lower Swiss effective tax rate, thus giving rise to an approximate 57% increase in the overall effective tax rateresult of the Company.The fluctuationretroactive reinstatement of the effective tax rate for the U.S. between 2012 (33.1%) and 2011 (31.5%) is primarily attributable to the expiration of the U.S. R&D tax credit at the end of 2011.Tax Credit versus $1.6 million in 2014. On January 2, 2013, the President signed into law the American Taxpayer Relief Act of 2012 (the “Act”), which includesincluded a retroactive extension of the section 41 R&D tax credit that had expired on December 31, 2011. Under the American Taxpayer Relief Act, of 2012, the tax R&D credit iswas extended for two years retroactively from January 1, 2012 through December 31, 2013. AsR&D tax creditAct was signed into law on January 2, 2013, as required by GAAP, the effects of the change in the tax law were recognized in 2013. As such, a benefit for the R&D tax credits earned both in 2012 will be recognized in the first quarter of fiscal 2013. R&D tax credits earned inand 2013 will bewere recorded through the fiscal 2013 effective tax rate. We estimate that the benefit related to the 2012 R&D tax credits will be approximately $1.5 million.There is a potential for volatility of theThe 2014 effective tax rate due to several factors, including changesappropriately reflects only the 2014 tax credits.mixreduction in recognized tax credits was partially offset by the impact of pre-taxan increase in foreign source income and the jurisdictions to which it relates, business acquisitions, settlements with taxing authorities andrecognized in 2014. The foreign currency exchange rate fluctuations.We believe it is reasonably possible thatsource income carries a reduction of up to $0.1 million of the balance of our unrecognized tax benefits may occur within the next twelve months as a result of the expiration of applicable statutes of limitation and potential audit settlements, which would positively impact thelower overall effective tax rate in the period of reduction.- 56 -Fiscal 2011 Compared with Fiscal 2010SalesChanges to sales by major product lines were as follows (in thousands): Year Ended 2011 vs. 2010 December 30, December 31, $ % 2011 2010 Change Change $ 303,690 $ 303,521 $ 169 0 % 45,098 38,000 7,098 19 % 140,277 118,748 21,529 18 % 489,065 460,269 28,796 6 % 9,609 8,432 1,177 14 % 58,934 54,668 4,266 8 % 11,214 10,056 1,158 12 % 79,757 73,156 6,601 9 % $ 568,822 $ 533,425 $ 35,397 7 % Implantable Medical –For the year, cardiac/neuromodulation sales were consistent with 2010. During the first half of 2011, cardiac revenue included the benefit of customer inventory builds and product launches, which did not recur in the second half of 2011. Additionally, cardiac/neuromodulation sales were impacted by pricing pressures and a slowdown in the underlying market.Full year 2011 vascular sales increased 19% over 2010. This increase was primarily attributable to growth in the underlying market and market share gains. Additionally, vascular revenueThe provision for 2011 included approximately $4.5 million from sales of medical devices that were developed under the Greatbatch name, including sales of our OptiSeal Valved Peelable Introducer which received FDA clearance in 2010.Orthopaedic sales of $140.3 millionincome taxes for 2011 were 18% above 2010, and included approximately $8 million of favorable foreign currency exchange rate benefit. Excluding this benefit, sales increased 11% organically over 2010 despite slower than expected underlying market growth. These increases occurred across all of our orthopaedic products, which benefitted from customer product launches, as well as from market share gains during 2011.Electrochem –For 2011, sales for the Electrochem business segment increased 9% in comparison to 2010. Fourth quarter 2011 sales for Electrochem included $2.5 million of additional revenue2014 differs from the Micro Power acquisition. Excluding the additional revenue provided by Micro Power, sales for 2011 increased 6% on an organic basis. During 2011, Electrochem revenue varied from quarter to quarter due to the timing of various customer inventory pulls. For the full year, the increase in Electrochem revenue was a result of an increased investment in sales and marketing, which resulted in market share gains and several new customer contracts, as well as continued strength in the energy markets.- 57 -Gross ProfitChanges to gross profit as a percentage of sales were primarily due to the following:2011-2010% Point ChangeCapacity & productivity(a)0.9% Performance-based compensation(b)-0.9% Mix change(c)-0.5% Selling price(d)-0.8% Other0.5% Total percentage point change to gross profit as a percentage of sales-0.8% (a)Our gross profit percentage for 2011 benefitted from higher sales volumes, which absorbed excess capacity, as well as productivity gains from our various lean initiatives.(b)Amount represents higher performance-based compensation expense recorded based upon the results for 2011 compared to 2010. Performance-based compensation is accrued based upon the level of performance achieved relative to targets set at the beginning of the year.(c)Our gross profit percentage for 2011 was negatively impacted by a lower mix of higher-margin cardiac/neuromodulation sales as a percentage of total sales compared to 2010.(d)Our gross profit percentage throughout 2011 was negatively impacted, in comparison to 2010, by price concessions made to our larger OEM customers near the end of 2010, which were given in exchange for long-term contracts.SG&A ExpensesChanges to SG&A expenses were primarilyU.S. statutory rate due to the following (in(dollars in thousands): 2011-2010 $ Change $ 3,935 5,224 (808 ) (885 ) 358 214 $ 8,038 U.S. International Combined $ % $ % $ % Income before provision for income taxes $ 56,801 $ 19,778 $ 76,579 Provision at statutory rate $ 19,881 35.0 % $ 6,922 35.0 % $ 26,803 35.0 % Federal tax credits (1,600 ) (2.8 ) — — (1,600 ) (2.1 ) — — (3,276 ) (16.6 ) (3,276 ) (4.3 ) Uncertain tax positions 412 0.7 — — 412 0.6 State taxes, net of federal benefit 507 0.9 — — 507 0.7 — — (446 ) (2.3 ) (446 ) (0.6 ) Valuation allowance 135 0.2 (434 ) (2.2 ) (299 ) (0.4 ) Other (842 ) (1.5 ) (138 ) (0.7 ) (980 ) (1.3 ) Provision for income taxes/effective tax rate $ 18,493 32.6 % $ 2,628 13.3 % $ 21,121 27.6 % (a) SG&A costs for 2011 includeThe tax rate reflects the impact of an increase in foreign source income, which carries a higher level of performance-based compensation expense due to achieving a higher percentage of our targets in 2011 in comparison to 2010. Performance-based compensation is accrued based upon management’s expectation of performance relative to targets set.lower overall effective tax rate than U.S. income.(b)Amount represents the change in professional and consulting expense from 2010 and reflects a higher level of costs incurred in connection with our medical device strategy, which impacted SG&A by $4.0 million. These costs included consulting fees paid to outside contractors who are providing technical expertise on our device projects, as well as legal fees incurred in connection with the numerous patent filings that we are making.- 58 -(c)During 2010, the Company incurred fees and charges in connection with two litigation matters that were subsequently settled near the end of 2010. Accordingly, litigation related fees and charges were lower during 2011 in comparison to the prior year.(d)SG&A expenses for 2010 include death benefits provided to the family of the Company’s former Senior Vice President—Orthopaedics.(e)Amount represents the SG&A costs related to the operations of Micro Power, which was acquired on December 15, 2011.RD&E Expenses, NetNet RD&E costs were as follows (in thousands): Year Ended December 30, December 31, 2011 2010 Change $ 19,014 $ 17,378 $ 1,636 35,472 34,208 1,264 (8,973 ) (6,567 ) (2,406 ) $ 45,513 $ 45,019 $ 494 Net RD&E costs for 2011 totaled $45.5 million, or 8.0% of sales, versus $45.0 million, or 8.4% of sales for 2010. During 2011, we continued to invest resources in developing complete medical devices for our OEM customers. Total RD&E costs incurred in connection with our medical device initiatives were $21.6 million during 2011 compared to $20.3 million in 2010. This included $5.1 million of design verification testing costs expensed in 2011 relatedQiG Group’s developmenttax benefit resulting from a favorable Swiss tax ruling received in 2014. During 2014, our Swiss subsidiary filed for a tax ruling requesting a reduced income tax rate in Switzerland. We received an approved ruling in December 2014 effectively reducing the Swiss tax rate from 9.3% to approximately 6.5% depending on the jurisdictional mix of a neuromodulation platform. When combined withrevenues and expenditures. As such, the SG&A expenses discussed above, total costs incurred in connection with our medical device initiatives totaled $27.3 million in 2011 versus $21.9 million in 2010.Partially offsetting these RD&E increases was a higher level of customer cost reimbursements of $2.4 million for 2011. These cost reimbursements can vary significantly from period to period due to the timingcarrying value of the achievement of milestones on development projects.Electrochem Litigation Charge (Gain)In 2009,deferred taxes, which reflected a Louisiana jury found in favor of a former Electrochem customer on their claims made in connection with a failed business transaction dating back to 1997. During 2009, we accrued $34.5 million in connection with this litigation after the unfavorable jury verdict. In the fourth quarter of 2010, we settled this litigation for $25 million and accordingly recognized a $9.5 million gain. See Note 15 “Commitments and Contingencies”net deferred tax liability position as of the Notesdate of enactment, have been adjusted to Consolidated Financial Statements contained in Item 8 of this report.- 59 -Other Operating Expenses, NetOther operating expenses, net were comprised ofreflect the following (in thousands): Year Ended December 30, December 31, 2011 2010 Change $ 425 $ 225 $ 200 — 1,348 (1,348 ) — 42 (42 ) 168 2,943 (2,775 ) $ 593 $ 4,558 $ (3,965 ) (a)During the third quarter of 2010, we began to incur costs in connection with the optimization of our orthopaedic operations in order to increase capacity, further expand our capabilities and reduce dependence on outside suppliers.(b)In 2010, we recorded charges related to our various cost savings and consolidation efforts initiated in 2007 and 2008.(c)During 2010, we incurred costs related to the integration of the companies acquired in 2007 and 2008.(d)During 2011 and 2010, we recorded write-downs in connection with various asset disposals, net of insurance proceeds received, if any. Additionally, during 2011 we incurred $0.6 million of acquisition related costs in connection with our purchase of Micro Power. During 2010, we consolidated our Implantable Medical segment, which included the elimination of certain positions globally. Severance charges associated with this realignment were $2.3 million.Interest Expense and Interest IncomeInterest expense for 2011 decreased $1.6 million from 2010 primarily due to the repayment of $118.5 million of long-term debt during 2011 and 2010 as well as the impact of lower interest rates, partially offset by increased discount amortization on our convertible notes. Interest income for 2011 was relatively consistent with 2010.Gain (Loss) on Cost and Equity Method InvestmentsIn 2011, we sold our cost method investment in IntElect in conjunction with Boston Scientific’s acquisition of IntElect. This transactionrate reduction. The adjusted carrying value resulted in a pre-tax gain of $4.5 million. During 2011 and 2010, we recognized impairment charges related to our cost method investments of $0.3 million and $0.2 million, respectively, based upon recent stock offerings by those companies.Other Expense, NetOther expense, net primarily includes the impact of foreign currency exchange rate fluctuations on transactions denominated in foreign currencies.- 60 -Provision for Income TaxesThe effective tax rate for 2011 was 31.6% versus 32.8% for 2010. The effective tax rates for 2011 and 2010 are lower than the U.S. statutory rate primarily duereduction to the R&Ddeferred tax credit, as well as the favorable impact of the resolution ofliability and a corresponding deferred tax audits and the lapse of statutes of limitation on certain tax items. See Note 14 “Income Taxes” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for a reconciliation of the U.S. statutory rate to our effective tax rate. At December 28, December 30, (Dollars in thousands) 2012 2011 $ 20,284 $ 36,508 $ 176,376 $ 170,907 2.92 2.82 At (dollars in thousands) January 1, 2016 January 2, 2015 Cash and cash equivalents $ 82,478 $ 76,824 Working capital $ 360,764 $ 242,022 Current ratio 2.69 3.23 decreaseincrease in cash and cash equivalents from the end of 2011January 2, 2015 was primarily due to $467.9 in net cash provided by financing activities and $12.5 million in net cash provided by operating activities. This increase was partially offset by the $423.4 net cash usedpaid for the Lake Region Medical acquisition and $44.6 million of capital expenditures. Additionally, working capital balances increased $118.7 million from the end of 2014, primarily due to the $167.3 million of working capital acquired from Lake Region Medical partially offset by the net cash outflow in connection with our acquisitions ($17.2 million), the purchaseacquisition of property, plant and equipment ($41.1 million) in connection with our various cost savings and consolidation initiatives, and the net repayment of long-term debt ($22 million) during the year partially offset by cash flows from operations ($64.8 million). Our working capital and current ratio remained consistent with the prior year.Lake Region Medical. Of the $20.3$82.5 million of cash on hand as of December 28, 2012, $4.5January 1, 2016, $31.0 million is being held at our foreign subsidiaries.Revolving LineCredit Facilities – In connection with the acquisition of Credit – We haveLake Region Medical, during the fourth quarter of 2015, we replaced our existing credit facility and term loan with new senior secured credit facilities and completed a senior notes offering.“Credit“Revolving Credit Facility”) consisting, (ii) a $375 million term loan A facility (the “TLA Facility”), and (iii) a $1,025 million term loan B facility (the “TLB Facility”). We also completed a private offering of a $400$360 million revolving lineaggregate principal amount of credit, which can be increased9.125% senior notes due on November 1, 2023 (the “Senior Notes”). The TLA Facility and TLB Facility were funded in full on$600 million upon our request and approval by a majorityfund the cash portion of the lenders.purchase price, to repay the outstanding debt of Lake Region Medical at closing, and to repay our term loan. The Revolving Credit Facility also containswill mature on October 27, 2020, the TLA Facility will mature on October 27, 2021, and the TLB Facility will mature on October 27, 2022. The TLB facility was issued at a $15 million letter of credit subfacility and a $15 million swingline subfacility. 1% discount.hasand the TLA Facility contain covenants requiring (A) a maturity datemaximum total net leverage ratio (as defined in the Senior Secured Credit Facilities) of June 24, 2016; provided, however, if our convertible subordinated notes (“CSN”) are not repaid in full, modified or refinanced before March 1, 2013, the maturity date of the Credit Facility is March 1, 2013. On February 20, 2013, we redeemed all outstanding CSN, which was funded with availability under the Credit Facility.The Credit Facility is supported by6.5:1.00, subject to step downs and (B) a consortium of fourteen banks with no bank controlling more than 19% of the facility. As of December 28, 2012, each bank supporting the Credit Facility has an S&P credit rating of at least BBB or better, which is considered investment grade.The Credit Facility requires us to maintain a rolling four quarterminimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of at least 3.0not less than 3.00:1.00. As of January 1, 2016, our total net leverage ratio, calculated in accordance with our credit agreement, was approximately 5.2 to 1.0.1.00. For the twelve month period ended December 28, 2012,January 1, 2016, our ratio of adjusted EBITDA to interest expense, calculated in accordance with our credit agreement, was 17.3approximately 4.8 to 1.00, well above the required limit.1.00. The Senior Secured Credit Facility also requires us to maintain a total leverage ratioFacilities include mandatory prepayments customary for credit facilities of not greater than 4.0 to 1.0. As of December 28, 2012, our total leverage ratio, calculated in accordance with our credit agreement, was 2.2 to 1.00, well below the required limit.The Credit Facility contains customary events of default. Upon the occurrence and during the continuance of an event of default, a majority of the lenders may declare the outstanding advances and all other obligations under the Credit Facility immediately due and payable.its nature. See Note 9 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.- 61 -December 28, 2012, we had $367 millionJanuary 1, 2016, the banks supporting 88% of borrowing capacity available under the Credit Facility. As of February 27, 2013, we had available $174 million of borrowing capacity available under theRevolving Credit Facility as a resulteach had an S&P credit rating of at least BBB or better, which is considered investment grade. The banks which support the remaining 12% of the redemption of all CSN in February 2013. This amount may vary from period to period based upon our debt and EBITDA levels, which impacts the covenant calculations discussed above. We believe that our cash flow from operations and theRevolving Credit Facility provide adequate liquidity to meet our short and long term funding needs.activitiesActivities –Cash flows from operating activities for 20122015 were $64.8$12.5 million compared to $89.9$81.3 million for 2011. The2014. This decrease was primarily due to $28.0 million of lower cash net income in comparison to the prior year as well as $40.8 million higher working capital balances, primarily accrued expenses in connection with the acquisition of Lake Region Medical and the Spin-off, and higher inventory levels in anticipation of higher sales volumes, which fell short of expectations. We expect inventory will decrease to more normalized levels by the end of 2016. Immediately prior to the completion of the pending Spin-off, we expect to make a cash capital contribution of $75.0 million to Nuvectra, which is expected to be funded with cash on hand and/or availability under our Revolving Credit Facility.fromfor 2014 were slightly below 2013 as the prior year is primarily due to our lower netincreased level of cash operating income as well as a slightwas more than offset by an increase in working capital balances.activitiesActivities – Net cash used in investing activities for 20122015 was $59.8$473.6 million compared to $80.4$35.9 million for 2011.2014. This decreaseincrease was primarily related to the$423.4 million of net cash payments made in 2011used for the acquisition of Micro Power of $66.5 million, partially offset by $18.6Lake Region Medical as well as $44.6 million of additional investments made in property, plant and equipment primarily in connection with the consolidation and optimization initiatives discussed in the “Cost Savings and Consolidation Efforts” section of this Item (primarilyItem.constructionacquisition of CCC as well as $24.8 million of cash used for the purchase of property, plant and equipment. These transactions were partially offset by a $2.7 million contingent payment received in 2014 in connection with the sale of certain non-core Swiss orthopaedic product lines, which closed during the first quarter of 2013, as well as $2.2 million of net proceeds received from our Fort Wayne facility which was completed in 2012)cost and routine capital expenditures. equity method investments.20132016 will be in the range of $20$60.0 million to $30$70.0 million, of which approximately half is discretionary in nature. We anticipate that cash on hand, cash flowflows from operations, and availabilityavailable borrowing capacity under our Revolving Credit Facility will be sufficient to fund these capital expenditures. As partour growth strategy,$2.4 million for the prior year period. The net cash inflow for 2015 included $1.75 billion in borrowings to fund the acquisition of Lake Region Medical and $6.6 million of cash received from the exercise of stock options, which was partially offset by $1.2 billion in long-term debt repayments and $45.9 million in debt issuance costs paid in connection with the Lake Region Medical acquisition. Additionally, during 2015, we havepaid $9.9 million to purchase the non-controlling interests in QiG’s Algostim and will continue to consider targeted and opportunistic acquisitions.PelviStim subsidiaries.Financing activities –20122014 of $2.4 million was $21.5$21.0 million compared toless than the cash providedused in financing activities in 2013. This cash outflow is the result of $3.7 million for the prior year period. During 2012, we repaid $32$10.0 million of principal payments on long-term debt which was partially offset by $10$8.3 million borrowed atof cash received from the beginningexercise of stock options during 2014.year to help fund the NeuroNexus acquisition. On February 20, 2013, we redeemed allacquisition of our outstanding CSN, which was funded with availability under the Credit Facility. See Note 9 “Debt” of the Notes to the Consolidated Financial Statements contained at Item 8 of this report for further discussion. Going forward, we expect excess cash flow from operations to primarily be used to pay down outstanding debt as well as to fund our various capital projects.Capital Structure –As of December 28, 2012,Lake Region Medical, our capital structure consistedconsists of $197.8 million of convertible subordinated notes, $33.0 million$1.7 billion of debt underoutstanding on our revolving line of creditSenior Secured Credit Facilities and 23.7Senior Notes and 30.6 million shares of common stock outstanding. Additionally,outstanding as of January 1, 2016. As of January 1, 2016, we had $20.3$186.6 million inof borrowing capacity available under the Revolving Credit Facility. This amount may vary from period to period based upon our debt and EBITDA levels, which impacts the cash equivalents, which we believe is sufficient to meet our short-term operating cash needs. If necessary, we have available borrowing capacity under ourthe Revolving Credit Facility provide adequate liquidity to meet our short- and long-term funding needs. We have clear line of sight to the committed Lake Region Medical acquisition synergies and believe we will be able to de-lever the company to 3.5X to 3X over the next two to three years. If necessary, we are authorized to issue 100 million shares of common stock and 100 million shares of preferred stock. As of February 27, 2013, we had available $174 million of borrowing capacity available under the Credit Facility as a result of the redemption of all CSN in February 2013. We believe that, if needed, we can access public markets to raise additional capital. We believe that our capital structure provides adequate funding to meet our growth objectives. We continuously evaluate our capital structure as it relates to our anticipated long-term funding needs. Changes to our capital structure may occur as a result of this analysis or changes in market conditions.- 62 -atin Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained at Item 8 of this report. WeOther than as discussed in Note 15, we do not believe that the ultimate resolution of any individual pending legal action will have a material effect on our consolidated results of operations, financial position or cash flows. However, litigation is subject to inherent uncertainties and there can be no assurance that any pending legal action, which we currently believe to be immaterial, does not become material in the future.- 63 -December 28, 2012: Payments due by period Total Less than 1
year 1-3 years 3-5 years More than 5
years $ 270,469 $ 229,676 $ 3,800 $ 35,776 $ 1,217 19,044 4,601 8,134 4,379 1,930 24,710 12,914 5,378 6,298 120 12,000 12,000 — — — 11,783 8,813 561 671 1,738 $ 338,006 $ 268,004 $ 17,873 $ 47,124 $ 5,005 Payments due by period CONTRACTUAL OBLIGATIONS Total 1-3 years 3-5 years $ 2,459,312 $ 130,325 $ 271,002 $ 285,531 $ 1,772,454 78,597 14,118 20,901 15,904 27,674 63,653 61,867 1,347 439 — 16,480 16,480 — — — 2,757 166 430 542 1,619 Total contractual obligations $ 2,620,799 $ 222,956 $ 293,680 $ 302,416 $ 1,801,747 (a) Includes the annual interest expense on our convertible subordinated notes of 2.25%, which is paid semi-annually, and the $33.0 million$1.7 billion outstanding on our Senior Secured Credit FacilityFacilities and Senior Notes based upon the period end weighted average interest rate of 2.07%5.69%. Also includes $36.6$3.7 million of deferred federal and state taxes on the Company’sour convertible subordinated notes that will be due between 20132016 and 2018. This table does not reflect the redemption of all outstanding CSN on February 20, 2013, which was funded with availability under the Credit Facility. CSN were classified as long-term in the December 28, 2012 Consolidated Balance Sheet in accordance with ASC 470. See Note 9 “Debt” of the Notes to Consolidated Financial Statements contained in Item 8 of this report.(b) See Note 15 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about our operating leases, purchase obligations and foreign currency contracts. (c) See Note 10 “Defined Benefit“Benefit Plans” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about our defined benefit plan obligations. During 2012, we transferred most major functions performed at our facilities in Switzerland into existing facilities. As a result, we curtailed our defined benefit plan provided to employees at those facilities in 2012. As nearly all of the Swiss pension liability is expected to be paid off in the next year, the Company moved all Swiss pension plan investments into cash accounts during the quarter. Plan assets are expected to be sufficient to cover plan liabilities.$1.0$9.3 million of unrecognized tax benefits, as we are uncertain as to if or when such amounts may be settled. Refer to Note 14 “Income Taxes” of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information about these unrecognized tax benefits.December 28, 2012,January 1, 2016, we had $1.4$4.0 million accrued related to our self-insurance obligations under our medical plan. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is primarily based upon claim history. For 2013, we have specific stop loss coverage per associate for claims in the year exceeding $225 thousand per associate with no annual maximum aggregate stop loss coverage. This table does not reflect any potential future payments for self-insured medical claims.6459 -Weour employees of the Company in Western New York (the “Trust”). Based on actual experience,Prior to being acquired by Greatbatch, Lake Region Medical self-insured the workers’ compensation benefits provided to its employees. As of January 1, 2016, the Company utilized a traditional insurance provider for workers’ compensation coverage for all associates. During 2015, the Company received an additional assessment from the Trust of $0.9 million. As of January 1, 2016, we could receive a refund or be assessed additional contributionshad $3.9 million accrued for workers’ compensation claims. UnderThis accrual is recorded in Accrued Expenses in the Trust agreement, each participating organization has jointConsolidated Balance Sheet and several liabilityis primarily based upon claim history and assessments received.This table does not reflect any potential future payments for Trust obligations if the assets of the Trust are not sufficient to cover those obligations. During 2011, we were notified by the Trust of its intention to cease operations at the end of 2011 and were assessed $0.6 million as an estimate of our pro-rata share of future costs related to the Trust. This amount was accrued and paid in 2011. Beginning in 2012, we utilized traditional insurance to provide workers’ compensation benefits to our employees.SEC,Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting bodybodies to determine the potential impact they may have on our Consolidated Financial Statements. See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for additional information about these recently issued accounting standards and their potential impact on our financial condition or results of operations.significantforeign operations in Ireland, Germany, France, Switzerland, Mexico, Uruguay, and Switzerland,Malaysia which expose the Companyus to foreign currency exchange rate fluctuations due to transactions denominated in Euros, Swiss francs, Mexican pesos, Uruguayan pesos, and Swiss francs, respectively.Malaysian ringgits. We continuously evaluate our foreign currency risk, and will take action from time to time in order to best mitigate these risks, which includes thewe use of various derivative instruments suchoperational hedges, as well as forward currency exchange rate contracts.contracts, to manage the impact of currency exchange rate fluctuations on earnings and cash flows. We do not enter into currency exchange rate derivative instruments for speculative purposes. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency exposures would have had an impact of approximately $8 million on our 2015 annual sales. This amount is not indicative of the hypothetical net earnings impact due to the partially offsetting impacts on cost of sales and operating expenses in those currencies. The impact of foreign currency exposures will be more significant to our consolidated results in 2016 due to the inclusion of a full year Lake Region Medical results. We estimate that foreign currency exchange rate fluctuations during 20122015 decreased sales in comparison to 20112014 by approximately $6$14.5 million.In September 2011, two forward contracts to purchase 6.5 million and 4.9 million Mexican pesos per month beginning in January 2012 through December 2012 at an exchange rate of $0.0767 and $0.0713 per peso, respectively. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with our operations in Mexico. In connection with the Lake Region Medical acquisition, we terminated our outstanding forward contracts resulting in a portion$2.4 million payment to the foreign currency contract counterparty during 2015. During the fourth quarter of the operations at our Tijuana, Mexico facility for 2012 and are being accounted for as cash flow hedges.In May 2012,2015, we entered into twoa new forward contractscontract to purchase 6.9 million and 7.223.5 million Mexican pesos per month beginning in January 20132016 through December 20132016 at an exchange rate of $0.0727 and $0.0693$0.0584 per peso, respectively. These contracts were entered into in order to hedge the risk of peso-denominated payments associated with a portion of the operations at our Tijuana, Mexico facility for 2013 and arepeso. This contract is being accounted for as a cash flow hedges.- 65 -December 28, 2012, these contracts hadJanuary 1, 2016, this contract has a positivenegative fair value of $0.8 million, which is recorded within Prepaid Expenses and Other Current Assets in the Consolidated Balance Sheet. The amount recorded as a reduction of Cost of Sales during 2012 related to these forward contracts was $0.08$0.3 million. No portion of the change in fair value of our foreign currency contracts during 2012 was considered ineffective.20122015 was a $1.9$7.8 million gain.loss. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in our foreign subsidiaries. Net foreign currency transaction gains and losses included in Other (Income) Expense, Net amounted to a lossgain of $0.3$1.3 million for 2012.2015. A hypothetical 10% change in the value of the U.S. dollar in relation to our most significant foreign currency net assets would have had an impact of approximately $8$53 million on our foreign net assets as of December 28, 2012.CreditTLA Facility and TLB Facility, reset, at our option, based upon the prime rate or LIBOR rate, thus subjecting us to interest rate risk. To help offset this risk, from time to time, we enter into receive floating-pay fixedWe are currently evaluating our interest rate swaps indexedrisk exposures and may take steps to the same applicable index ratemitigate these exposures as the debt it is hedging. The objective of these swaps isappropriate. Refer to hedge against potential changes in cash flows on our outstanding revolving line of credit. No credit risk is hedged. Our interest rate swaps are accounted for as cash flow hedges. As of December 28, 2012, we had $33 million outstanding on our Credit Facility, none of which is being hedged. See Note 9 “Debt” of the Notes to the Consolidated Financial Statements contained atin Item 8 of this report for additional information about our outstanding debt. A hypothetical one percentage point change(100 basis points) increase in the primeLIBOR rate on the $33 million$1.4 billion of floatingunhedged variable rate revolving line of credit debt outstanding at December 28, 2012January 1, 2016 would have an impact of approximately $0.3 million onincrease our interest expense.In October 2012 we entered into a three-year $150 million interest rate swap, which amortizes $50 million per year. Under terms of the contract, we will receive a floating interest rate indexed to the one-month LIBOR rate and pay a fixed interest rate of 0.573%. The swap will be effective in February 2013. This swap was entered into in order to hedge against potential changes in cash flows on the outstanding debt on the Credit Facility from the repayment of our CSN in February 2013 and indexed to the one-month LIBOR rate. The receive variable leg of the interest rate swap and the variable rate paid on the debt bear the same rate of interest, excluding the credit spread, and reset and pay interest on the same dates. This swap will be accounted for as a cash flow hedge.6661 - 68 69 72 73 74 75 766762 -December 28, 2012,January 1, 2016, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 28, 2012January 1, 2016 is effective.December 28, 2012,January 1, 2016, as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission, management excluded the following subsidiary acquired in 2012:2015:NeuroNexus Technologies,3%66% of total assets, 17% of revenues, and 2%229% of net and total assets, respectively, and 0.4% of revenuesloss of the consolidated financial statement amounts as of and for the year ended December 28, 2012.January 1, 2016. See Note 2 – “Acquisitions” of the Notes to Consolidated Financial Statements contained in Item 8 of this report for a discussion of this acquisition and its impact on the Company’s Consolidated Financial Statements.December 28, 2012January 1, 2016 has been audited by Deloitte & Touche LLP, the Company’s independent registered public accounting firm.February 27, 2013March 1, 2016 Thomas J. Hook Michael Dinkins President & Chief Executive Officer SeniorExecutive Vice President & Chief Financial Officer6863 -subsidiarysubsidiaries (the “Company”) as of December 28, 2012,January 1, 2016, based on criteria established inInternal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at NeuroNexus Technologies,Lake Region Medical Holdings, Inc., which was acquired on February 16, 2012October 27, 2015 and whose consolidated financial statements constitute 3%66% of total assets, 17% of revenues, and 2%229% of net and total assets, respectively, and 0.4% of revenuesloss of the consolidated financial statement amounts as of and for the year ended December 28, 2012.January 1, 2016. Accordingly, our audit did not include the internal control over financial reporting at NeuroNexus Technologies,Lake Region Medical Holdings, Inc. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.- 69 -December 28, 2012,January 1, 2016, based on the criteria established inInternal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.December 28, 2012January 1, 2016 of the Company and our report dated February 27, 2013March 1, 2016 expressed an unqualified opinion on those consolidated financial statements and consolidated financial statement schedule.February 27, 20137064 -subsidiarysubsidiaries (the “Company”) as of December 28, 2012January 1, 2016 and December 30, 2011,January 2, 2015, and the related consolidated statements of operations and comprehensive income (loss), cash flows, and stockholders’ equity for each of the three years in the period ended December 28, 2012.January 1, 2016. Our audits also included the consolidated financial statement schedule listed in the Index at Item 15. These consolidated financial statements and consolidated financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and consolidated financial statement schedule based on our audits.auditaudits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.December 28, 2012January 1, 2016 and December 30, 2011,January 2, 2015, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 28, 2012,January 1, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.December 28, 2012,January 1, 2016, based on the criteria established inInternal Control —– Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2013March 1, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.February 27, 20137165 - At (in thousands except share and per share data) December 28,
2012 December 30,
2011 $ 20,284 $ 36,508 120,923 101,946 106,612 109,913 — 1,292 7,678 7,828 12,636 7,469 268,133 264,956 150,893 145,806 87,345 100,258 20,828 20,288 349,035 338,653 2,534 2,450 11,107 8,936 $ 889,875 $ 881,347 $ 45,274 $ 40,665 94 — 874 845 45,515 52,539 91,757 94,049 225,414 235,950 82,462 75,203 9,382 8,862 409,015 414,064 — — 24 23 320,618 307,196 (452 ) (1,387 ) 147,723 152,522 12,947 8,929 480,860 467,283 $ 889,875 $ 881,347 At (in thousands except share and per share data) January 1,
2016 January 2,
2015ASSETS Current assets: Cash and cash equivalents $ 82,478 $ 76,824 Accounts receivable, net of allowance for doubtful accounts of $1.0 million in 2015 and $1.4 million in 2014 207,342 124,953 Inventories 252,166 129,242 Refundable income taxes 11,730 1,716 Deferred income taxes — 6,168 Prepaid expenses and other current assets 20,888 11,780 Total current assets 574,604 350,683 Property, plant and equipment, net 379,492 144,925 Amortizing intangible assets, net 893,977 65,337 Indefinite-lived intangible assets 90,288 20,288 Goodwill 1,013,570 354,393 Deferred income taxes 3,587 2,626 Other assets 26,618 16,870 Total assets $ 2,982,136 $ 955,122 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of long-term debt $ 29,000 $ 11,250 Accounts payable 84,362 46,436 Income taxes payable 3,221 2,003 Deferred income taxes — 588 Accrued expenses 97,257 48,384 Total current liabilities 213,840 108,661 Long-term debt 1,685,053 175,363 Deferred income taxes 221,804 53,195 Other long-term liabilities 10,814 4,541 Total liabilities 2,131,511 341,760 Commitments and contingencies (Note 15) Stockholders’ equity: Preferred stock, $0.001 par value, authorized 100,000,000 shares; no shares issued or outstanding in 2015 or 2014 — — Common stock, $0.001 par value, authorized 100,000,000 shares; 30,664,119 shares issued and 30,601,167 shares outstanding in 2015; 25,099,293 shares issued and 25,070,931 shares outstanding in 2014 31 25 Additional paid-in capital 620,470 366,073 Treasury stock, at cost, 62,952 shares in 2015 and 28,362 shares in 2014 (3,100 ) (1,307 ) Retained earnings 231,854 239,448 Accumulated other comprehensive income 1,370 9,123 Total stockholders’ equity 850,625 613,362 Total liabilities and stockholders’ equity $ 2,982,136 $ 955,122 7266 - Year Ended December 28, December 30, December 31, (in thousands except per share data) 2012 2011 2010 $ 646,177 $ 568,822 $ 533,425 444,528 388,469 359,844 201,649 180,353 173,581 80,992 72,548 64,510 52,490 45,513 45,019 — — (9,500 ) 42,346 593 4,558 175,828 118,654 104,587 25,821 61,699 68,994 18,055 16,928 18,519 (1 ) (21 ) (10 ) 106 (4,232 ) 150 931 632 1,010 6,730 48,392 49,325 11,529 15,270 16,187 $ (4,799 ) $ 33,122 $ 33,138 $ (0.20 ) $ 1.42 $ 1.44 $ (0.20 ) $ 1.40 $ 1.40 23,584 23,258 23,070 23,584 23,636 23,802 $ (4,799 ) $ 33,122 $ 33,138 1,905 (704 ) 7,896 428 (271 ) 1,027 1,685 (566 ) (601 ) 4,018 (1,541 ) 8,322 $ (781 ) $ 31,581 $ 41,460 Year Ended (in thousands except per share data) January 1,
2016 January 2,
2015 January 3,
2014Sales $ 800,414 $ 687,787 $ 663,945 Cost of sales 565,279 456,389 444,632 Gross profit 235,135 231,398 219,313 Operating expenses: Selling, general and administrative expenses 102,530 90,602 88,107 Research, development and engineering costs, net 52,995 49,845 54,077 Other operating expenses, net 66,464 15,297 15,790 Total operating expenses 221,989 155,744 157,974 Operating income 13,146 75,654 61,339 Interest expense 33,513 4,252 11,261 (Gain) loss on cost and equity method investments, net (3,350 ) (4,370 ) 694 Other (income) expense, net (1,317 ) (807 ) 546 Income (loss) before provision for income taxes (15,700 ) 76,579 48,838 Provision (benefit) for income taxes (8,106 ) 21,121 12,571 Net income (loss) $ (7,594 ) $ 55,458 $ 36,267 Earnings (loss) per share: Basic $ (0.29 ) $ 2.23 $ 1.51 Diluted $ (0.29 ) $ 2.14 $ 1.43 Weighted average shares outstanding: Basic 26,363 24,825 23,991 Diluted 26,363 25,975 25,323 Comprehensive Income (Loss) Net income (loss) $ (7,594 ) $ 55,458 $ 36,267 Other comprehensive income (loss): Foreign currency translation gain (loss) (7,841 ) (3,502 ) 1,521 Net change in cash flow hedges, net of tax 108 (1,359 ) (382 ) Defined benefit plan liability adjustment, net of tax (20 ) (374 ) 272 Other comprehensive income (loss) (7,753 ) (5,235 ) 1,411 Comprehensive income (loss) $ (15,347 ) $ 50,223 $ 37,678 7367 - Year Ended December 28, December 30, December 31, (in thousands) 2012 2011 2010 $ (4,799 ) $ 33,122 $ 33,138 46,368 36,306 35,767 12,557 11,389 10,680 10,904 12,082 6,884 106 (4,232 ) 150 — — (9,500 ) — — (25,000 ) 10,788 (676 ) 743 5,733 8,776 15,419 (18,834 ) (13,477 ) 10,922 (7,481 ) (2,139 ) 7,406 1,253 (590 ) 2,111 5,757 4,236 (7,568 ) 1,459 3,678 (1,472 ) 1,020 1,446 (2,795 ) 64,831 89,921 76,885 (41,069 ) (22,489 ) (16,140 ) 396 212 2,537 (1,887 ) 10,315 — (17,224 ) (66,493 ) — (3 ) (1,934 ) (321 ) (59,787 ) (80,389 ) (13,924 ) (32,000 ) (40,000 ) (78,450 ) 10,000 45,000 — 1,263 2,401 659 — (2,213 ) — (717 ) (1,500 ) (1,030 ) (21,454 ) 3,688 (78,821 ) 186 405 879 (16,224 ) 13,625 (14,981 ) 36,508 22,883 37,864 $ 20,284 $ 36,508 $ 22,883 Year Ended (in thousands) January 1, 2016 January 2, 2015 January 3, 2014 Cash flows from operating activities: Net income (loss) $ (7,594 ) $ 55,458 $ 36,267 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 44,632 37,197 35,966 Debt related charges included in interest expense 11,320 773 6,366 Inventory step-up amortization 22,986 260 — Stock-based compensation 9,376 13,186 14,101 Non-cash (gain) loss on cost and equity method investments, net 275 (4,370 ) 694 Other non-cash (gains) losses, net 1,093 (3,214 ) 255 Deferred income taxes (10,298 ) 531 (29,856 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 3,684 (11,731 ) 7,379 Inventories (25,752 ) (6,726 ) (11,508 ) Prepaid expenses and other assets (1,861 ) (3,281 ) (353 ) Accounts payable 3,129 (970 ) 1,307 Accrued expenses (28,605 ) 1,214 (1,176 ) Income taxes payable (9,906 ) 2,949 (2,687 ) Net cash provided by operating activities 12,479 81,276 56,755 Cash flows from investing activities: Proceeds from sale of orthopaedic product lines — 2,655 4,746 Acquisition of property, plant and equipment (44,616 ) (24,827 ) (18,858 ) Proceeds from sale of property, plant and equipment 746 4 300 Proceeds from sale (purchase of) cost and equity method investments, net (6,300 ) 2,248 (3,732 ) Acquisitions, net of cash acquired (423,389 ) (16,002 ) — Other investing activities, net — — (740 ) Net cash used in investing activities (473,559 ) (35,922 ) (18,284 ) Cash flows from financing activities: Principal payments of long-term debt (1,232,175 ) (10,000 ) (458,282 ) Proceeds from issuance of long-term debt, net of discount 1,749,750 — 425,000 Issuance of common stock 6,583 8,278 12,807 Payment of debt issuance costs (45,933 ) — (2,802 ) Purchase of non-controlling interests (9,875 ) — — Other financing activities, net (440 ) (655 ) (81 ) Net cash provided by (used in) financing activities 467,910 (2,377 ) (23,358 ) Effect of foreign currency exchange rates on cash and cash equivalents (1,176 ) (1,618 ) 68 Net increase in cash and cash equivalents 5,654 41,359 15,181 Cash and cash equivalents, beginning of year 76,824 35,465 20,284 Cash and cash equivalents, end of year $ 82,478 $ 76,824 $ 35,465 7468 - Accumulated Additional Treasury Other Total Common Stock Paid-In Stock Retained Comprehensive Stockholders’ (in thousands) Shares Amount Capital Shares Amount Earnings Income (Loss) Equity 23,190 $ 23 $ 291,926 (33 ) $ (635 ) $ 86,262 $ 2,148 $ 379,724 — — 6,884 — — — — 6,884 129 — 179 (30 ) (834 ) — — (655 ) — — (584 ) — — — — (584 ) — — — — — 33,138 — 33,138 — — — — — — 8,322 8,322 23,319 23 298,405 (63 ) (1,469 ) 119,400 10,470 426,829 — — 7,037 — — — — 7,037 147 — 1,891 3 82 — — 1,973 — — (137 ) — — — — (137 ) — — — — — 33,122 — 33,122 — — — — — — (1,541 ) (1,541 ) 23,466 23 307,196 (60 ) (1,387 ) 152,522 8,929 467,283 — — 9,019 — — — — 9,019 103 — 663 1 24 — — 687 — — (141 ) — — — — (141 ) 163 1 3,881 39 911 — — 4,793 — — — — — (4,799 ) — (4,799 ) — — — — — — 4,018 4,018 23,732 $ 24 $ 320,618 (20 ) $ (452 ) $ 147,723 $ 12,947 $ 480,860 Common Stock
Paid-In
Other
Comprehensive
Stockholders’(in thousands) Shares Amount Shares Amount At December 28, 2012 23,732 $ 24 $ 320,618 (20 ) $ (452 ) $ 147,723 $ 12,947 $ 480,860 Stock-based compensation — — 9,333 — — — — 9,333 Net shares issued (acquired) under stock incentive plans 636 — 12,245 (17 ) (780 ) — — 11,465 Income tax benefit from stock options, restricted stock and restricted stock units — — 242 — — — — 242 Shares contributed to 401(k) Plan 91 — 2,477 — — — — 2,477 Net income — — — — — 36,267 — 36,267 Total other comprehensive income, net — — — — — — 1,411 1,411 At January 3, 2014 24,459 24 344,915 (37 ) (1,232 ) 183,990 14,358 542,055 Stock-based compensation — — 8,921 — — — — 8,921 Net shares issued (acquired) under stock incentive plans 640 1 7,754 (86 ) (4,290 ) — — 3,465 Income tax benefit from stock options, restricted stock and restricted stock units — — 4,357 — — — — 4,357 Shares contributed to 401(k) Plan — — 126 95 4,215 — — 4,341 Net income — — — — — 55,458 — 55,458 Total other comprehensive loss, net — — — — — — (5,235 ) (5,235 ) At January 2, 2015 25,099 25 366,073 (28 ) (1,307 ) 239,448 9,123 613,362 Stock-based compensation — — 9,364 — — — — 9,364 Net shares issued (acquired) under stock incentive plans 585 1 5,764 (107 ) (5,261 ) — — 504 Income tax benefit from stock options, restricted stock and restricted stock units — — 5,639 — — — — 5,639 Shares contributed to 401(k) Plan — — 452 72 3,468 — — 3,920 Issuance of shares in connection with acquisition 4,980 5 245,363 — — — — 245,368 Issuance of roll-over options in connection with acquisition — — 4,508 — — — — 4,508 Purchase of non-controlling interests in subsidiaries — — (16,693 ) — — — — (16,693 ) Net loss — — — — — (7,594 ) — (7,594 ) Total other comprehensive loss, net — — — — — — (7,753 ) (7,753 ) At January 1, 2016 30,664 $ 31 $ 620,470 (63 ) $ (3,100 ) $ 231,854 $ 1,370 $ 850,625 7569 -1.1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES subsidiary Greatbatch Ltd.subsidiaries (collectively, the “Company” or “Greatbatch”). All intercompany balances and transactions have been eliminated in consolidation.TheOn October 27, 2015, the Company operatesacquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake Region Medical”) for a total purchase price including debt assumed of approximately $1.77 billion. As a result, the Company now has three reportable segments: Greatbatch Medical, QiG Group (“QiG”), and Lake Region Medical. In February 2016, Greatbatch announced that its business in two reportable segments – Implantable MedicalBoard of Directors has approved the spin-off of a portion of its QiG segment through a tax-free distribution of its QiG Group LLC subsidiary to the stockholders of Greatbatch on a pro rata basis (the “Spin-off”). Immediately prior to completion of the Spin-off, QiG Group LLC will be converted into a corporation organized under the laws of Delaware and Electrochem Solutionschange its name to Nuvectra Corporation (“Electrochem”Nuvectra”). The Company’s customers include large multi-national original equipment manufacturers (“OEMs”).Spin-off is expected to be completed in March 2016. As a result of the Lake Region Medical acquisition and the pending Spin-off, the Company is reevaluating its operating and reporting segments, which is expected to be finalized in 2016 once the corporate and management reporting structure realignment is completed. Note 19 “Business Segment, Geographic and Concentration Risk Information” contains additional information on our reporting segments.Implantable Medical segmentnew name is comprised of our subject to Greatbatch shareholder approval at the May 2016 annual meeting. and QiG Group brands and designs and manufactures products where Greatbatch either owns the intellectual property or has unique manufacturing and assembly expertise. These products include medical devices and components for the cardiac, neuromodulation, orthopaedics, portable medical, vascular and orthopaedic markets.energy markets among others. The Implantable Medical segment offers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution, which is facilitated through the QiG Group and leverages the component technology of Greatbatch Medical. The devices designed and developed by the QiG Group are manufactured by Greatbatch Medical. The Implantable Medical segment also offers value-added assembly and design engineering services for medical devices that utilize its component products.Electrochem designs, manufacturesdistributes primarydevelopment of medical device systems and rechargeable batteries, and battery packs for demanding applicationscomponents. QiG is in the portableprocess of developing applications for its neurostimulation technology platform for emerging indications such as spinal cord stimulation (“SCS”), sacral nerve stimulation (“SNS”), and deep brain stimulation (“DBS”), among others. QiG’s Algostim, LLC (“Algostim”) subsidiary is focused on the development and commercialization of its Algovita SCS system (“Algovita”), the first application of its neurostimulation technology platform and received PMA approval in the fourth quarter of 2015. QiG’s PelviStim LLC (“PelviStim”) subsidiary is focused on the commercialization of QiG’s neurostimulation technology platform for SNS. The QiG segment also includes NeuroNexus Technologies, Inc. (“NeuroNexus”), and Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”). The Spin-off is expected to consist of QiG Group LLC and its subsidiaries Algostim, PelviStim and NeuroNexus. The operations of CCC and certain other existing QiG research and development capabilities will be retained and not included as part of the Spin-off.energy, environmental monitoringcomponent and security markets among others.31st.31. Fiscal years 2012, 20112015, 2014 and 20102013 ended on December 28, 2012, December 30, 2011January 1, 2016, January 2, 2015 and December 31, 2010, respectively.January 3, 2014. Fiscal years 2012, 20112015 and 2010 all2014 each contained fifty-two weeks, while fiscal year 2013 contained fifty-three weeks.— – Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 valuations do not entail a significant degree of judgment.— – Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.- 76 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— – Valuation is based on unobservable inputs that are significant to the overall fair value measurement. The degree of judgment in determining fair value is greatest for Level 3 valuations.December 28, 2012January 1, 2016 and December 30, 2011January 2, 2015 based upon the short-term nature of these instruments.December 28, 2012January 1, 2016 and January 2, 2015 based upon the short-term nature of these assets.- 77 -GREATBATCH, INC.InventoriesNOTES TO CONSOLIDATED FINANCIAL STATEMENTSInventories – Inventories are stated at the lower of cost, determined using the first-in first-out method, or market. Write-downs for excess, obsolete or expired inventory are based primarily on how long the inventory has been held as well as our estimates of forecasted net sales of that product. A significant change in the timing or level of demand for our products may result in recording additional write-downs for excess, obsolete or expired inventory in the future. Note 4 “Inventories” contains additional information on the Company’s inventory.3-83-10 years; office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term, if less. The cost of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related See Note 18 “Fair Value Measurements” for additional information. Note 2 “Acquisitions” contains additional information on the Company’s acquisitions. distribution of cash flows used to fair value those intangible assets at the time of acquisition. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure that recognition of amortization expense corresponds with the distribution of expected cash flows. The amortization period for the Company’s amortizing intangible assets are as follows: purchased technology and patents 5-15 years; customer lists 7-20 years and other intangible assets 1-10 years. Refer to Note 7 “Intangible Assets” containsfor additional information on the Company’s amortizing intangible assets.- 78 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAa significant decrease in the market price of the asset or asset group; Aa significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; Aa significant change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group),or asset group, including an action or assessment by a regulator; Anan accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; Aa current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.by comparing the fair value of its reporting units to their carrying amounts on the last day of each fiscal year, or more frequently if certain events occur as described above. Goodwill is evaluated for impairment through the comparison of the fair value of the reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. This qualitative assessment is referred to as a “step zero” approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a step zero assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, the Company must perform a two-step impairment test, and calculate the estimated fair value of the reporting unit. If, based upon the two-step impairment test, it is determined that the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. FairUnder the two-step approach, fair values for reporting units are determined based on discounted cash flows and market multiples.Assets –Debt in the Consolidated Balance Sheets. Deferred debt issuance costs associated with the Company’s revolving credit facility of $4.8 million and $2.2 million as of January 1, 2016 and January 2, 2015, respectively, are classified within Other long-term assets includes deferred financing feesAssets.convertible subordinated notesrevolving credit facility are amortized to Interest Expense on a straight-line basis over the contractual term of the credit facility. Unamortized debt issuance costs and revolving lineunamortized debt discounts related to the Company’s term-debt are recorded as a reduction of credit.the carrying value of the related debt. These feesdebt issuance costs and discounts are amortized to Interest Expense using the effective interest method over the period from the date of issuance to the put option date (if applicable) or the maturity date, whichever is earlier. The amortization of deferred fees isdebt issuance costs and discounts are included in Debt Related Amortization Included in Interest Expense in the Consolidated Statements of Cash Flows. Note 9 “Debt” contains additional information on the Company’s deferred financing fees.debt issuance costs and discounts.- 79 -GREATBATCH, INC.Other Long-Term AssetsNOTES TO CONSOLIDATED FINANCIAL STATEMENTSWe accountThe Company accounts for investments in these entities under the cost or equity method depending on the type of ownership interest, as well as the Company’s ability to exercise influence over these entities. Equity method investments are initially recorded at cost, and are subsequently adjusted to reflect the Company’s share of earnings or losses of the investee. Cost method investments are recorded at historical cost. Each reporting period, management evaluates these cost and equity method investments to determine if there are any events or circumstances that are likely to have a significant effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to: a recent sale or offering of similar shares of the investment at a price below the Company’s cost basis; a significant deterioration in earnings performance; a significant change in the regulatory, economic or technological environment of the investee; or a significant doubt about an investee’s ability to continue as a going concern. If an impairment indicator is identified, management will estimate the fair value of the investment and compare it to its carrying value. The estimation of fair value considers all available financial information related to the investee, including, but not limited to, valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and a determination as to whether the impairment is other-than-temporary is made. Impairment is deemed to be other-than-temporary unless the Company has the ability and intent to hold the investment for a period sufficient for a market recovery up to the carrying value of the investment. Further, evidence must indicate that the carrying value of the investment is recoverable within a reasonable period. For other-than-temporary impairments, an impairment loss is recognized equal to the difference between the investment’s carrying value and its fair value. The Company has determined that these investments are not considered variable interest entities. The Company’s exposure related to thesesubsidiarysubsidiaries file a consolidated U.S. federal income tax return. State tax returns are filed on a combined or separate basis depending on the applicable laws in the jurisdictions where the tax returns are filed. The Company also files foreign tax returns on a separate company basis in the countries in which it operates.- 80 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSis being amortized using the effective interest method over the period from the date of issuance to the maturity date. Deferred financing fees incurred in connection with the issuance of CSN, were allocated proportionally to the proceeds of the liability and equity components. The deferred financing fees allocated to the debt component are beingwas amortized using the effective interest method over the period from the date of issuance to the maturity date. The deferred financing fees allocated to the equity component were recorded as an offset to Additional Paid-In Capital. The amortization of discount and deferred fees related to the Company’s convertible debt instruments is included in Depreciation andDebt Related Amortization Included in Interest Expense in the Consolidated Statements of Cash Flows. See Note 9 “Debt” for additional information.designatesdesignated its interest rate swaps (See Note 9 “Debt”) and foreign currency contracts (See Note 15 “Commitments and Contingencies”) entered into as cash flow hedges. The effective portion of the changes in fair value of these cash flow hedges is recorded each period, net of tax, in Accumulated Other Comprehensive Income until the related hedged transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges is recorded in earnings. In the event the hedged cash flow for forecasted transactions does not occur, or it becomes probable that they will not occur, the Company would reclassifyreclassifies the amount of any gain or loss on the related cash flow hedge to income (expense) at that time. Cash flows related to these derivative financial instruments are included in cash flows from operating activities. The cash flows from the termination of interest rate swap agreements are reported as operating activities in the consolidated statements of cash flows.timepoint of shipment when title passes.shipment. Currently, the revenue recognition policy is the same for Greatbatch Medical, Lake Region Medical and QiG. In general, for customers with long-term contracts, we have negotiated fixed pricing arrangements. During new contract negotiations, price level decreases (concessions) for future for sub-assemblies from its customers that are included in the final product sold back to the same customer. These amounts are excluded from Sales and Cost of Sales recognized by the Company. The cost of these customer supplied component parts amounted to $32.6$44.3 million, $27.9$48.1 million and $29.9$45.3 million in 2012, 2011fiscal years 2015, 2014 and 2010,2013, respectively.- 81 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSwould determinedetermines the useful life of the IPR&D and beginbegins amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, the remaining carrying amount of the associated IPR&D would beis written-off. The Company tests the IPR&D acquired for impairment at least annually, and more frequently if events or changes in circumstances indicate that the assets may be impaired. The impairment test consists of a comparison of the fair value of the intangible assets with their carrying amount. If the carrying amount exceeds its fair value, the Company would record an impairment loss in an amount equal to the excess.and Note 7 “Intangible Assets” contains additional information on the Company’s RD&E activities.- 82 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSlossgain of $0.3$1.3 million for 2012,2015, a gain of $1.3 million for 2014 and a loss of $0.1 million for 2011 and $0.9 million for 2010.France.Germany. This asset or liability is measured as the difference between the fair value of plan assets, if any, and the benefit obligation of those plans. For these plans, the benefit obligation is the projected benefit obligation, which is calculated based on actuarial computations of current and future benefits for employees. Actuarial gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense, are recognized as a component of Accumulated Other Comprehensive Income. Defined benefit expenses are charged to Cost of Sales, SG&A and RD&E expenses as applicable. Note 10 “Defined Benefit“Benefit Plans” contains additional information on these costs.whichif dilutive to the EPS calculation and consist of stock options, unvested restricted stock and restricted stock units and, if applicable, contingently convertible instruments.Holders of the Company’s CSN may convert them into shares of the Company’s common stock under certain circumstances – See Note 9 “Debt.” The Company includes the effect of the conversion of theseinstruments such as convertible notes in the calculation of diluted EPS using the if-converted method or the treasury method for instruments that may be settled in cash at the Company’s election and which the Company has the ability and intent to settle them in cash, as long as the effect is dilutive. For computation of EPS under conversion conditions, the number of diluted shares outstanding increases by the amount of shares that are potentially convertible during that period. Also, Net Income (Loss) is adjusted for the calculation to add back interest expense on the convertible notes as well as unamortized discount and deferred financing fee amortization recorded during the period.debt. Note 16 “Earnings (Loss) Per Share” contains additional information on the computation of the Company’s EPS.- 83 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSperiod.periods. Actual results could differ materially from those estimates.Managementmanagement evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”),FASB, SEC, Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Consolidated Financial Statements. Based upon this review, except as noted below, Managementmanagement does not expect any of the recentlyOn5, 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU adds new disclosure requirements either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income (“AOCI”) based on its source and the income statement line items affected by the reclassification. This ASU gives companies the flexibility to present the information either in the notes or parenthetically on the face of the financial statements provided that all of the required information is presented in a single location. This ASU is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. When adopted, this ASU will not have a material impact on the Company’s Consolidated Financial Statements as it only changes the disclosures surrounding AOCI.In July 2012,2016, the FASB issued ASU No. 2012-02, Intangibles—Goodwill2016-02, “Leases (Topic 842),” which requires companies to recognize all leases as assets and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.liabilities on the consolidated balance sheet. This ASU simplifiesretains a distinction between finance leases and operating leases, and the guidanceclassification criteria for testingdistinguishing between finance leases and operating leases are substantially similar to the declineclassification criteria for distinguishing between capital leases and operating leases in the realizable value (impairment)current accounting literature. The result of indefinite-lived intangible assets other than goodwill. The amendments allow an organizationretaining a distinction between finance leases and operating leases is that under the option to first assess qualitative factors to determine whether itlessee accounting model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired.largely unchanged from previous GAAP. The amendments in this ASU are effective for annualfiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Consolidated Financial Statements.interim impairment tests performedMeasurement of Financial Assets and Financial Liabilities.” This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset and requires entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option. The new ASU is effective for public companies for fiscal years beginning after SeptemberDecember 15, 2012.2017. Early adoption of the own credit provision is permitted. When adopted,The Company is currently evaluating the impact that the adoption of this ASU will not have a material impact on the Company’sits Consolidated Financial Statements as it only impacts the timing of when the Company is required to perform the two-step impairment tests of its indefinite-lived intangible assets other than goodwill.- 84 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 2011,September 2015, the FASB issued ASU No. 2011-11 “Balance Sheet2015-16, “Business Combinations (Topic 210)805): Disclosures about Offsetting AssetsSimplifying the Accounting for Measurement-Period Adjustments,” which amends the guidance for measurement-period adjustments related to business combinations. The amended ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustments are determined. The acquirer will be required to record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and Liabilities.”disclose what the amounts in the previous periods would have been if those changes were made as of the acquisition date. This ASU requires companiesis effective for adjustments to provisional amounts that occur in annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company is currently assessing the impact of adopting this ASU on its Consolidated Financial Statements.tradingdisposal transactions under U.S. GAAP. This ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in financial instruments and related derivatives in expanded disclosures, creates new disclosure requirements about the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after December 15, 2014. This ASU is applicable for disposal transactions, if any, that the Company enters into after January 1, 2013, and interim periods therein, with retrospective application required. When adopted, this2, 2015. This ASU willdid not have a materialmaterially impact on the Company’s Consolidated Financial Statements as it only changes the disclosures surrounding the Company’s offsetting assets and liabilities.Statements.2.2. ACQUISITIONS NeuroNexus Technologies, Inc.February 16, 2012,October 27, 2015, the Company purchasedacquired all of the outstanding common stock of NeuroNexus Technologies,Lake Region Medical Holdings, Inc. (“NeuroNexus”) headquarteredfor a total purchase price including debt assumed of approximately $1.77 billion. Lake Region Medical specializes in Ann Arbor, MI. NeuroNexus is an active implantable medical devicethe design, firm specializing in developing and commercializing neural interface technology, components and systems for neuroscience and clinical markets. NeuroNexus has an extensive intellectual property portfolio, core technologies and capabilities to support the development, and manufacturing of neural interface devicesproducts across the medical component and device spectrum primarily serving the cardio, vascular and advanced surgical markets. Cash consideration paid to Lake Region Medical stockholders and equity award holders $ 478,490 Fair value of shares of Greatbatch common stock issued to Lake Region Medical stockholders 245,368 Fair value of replacement stock options attributable to pre-acquisition service 4,508 Total purchase consideration $ 728,366 wide rangeBlack-Scholes option pricing model as of applications including neuromodulation, sensing, optical stimulationthe acquisition date. Concurrently with the closing of the acquisition, the Company repaid all of the outstanding debt of Lake Region Medical of approximately $1.0 billion. The cash portion of the purchase price and targeted drug delivery.operating results of NeuroNexus have been included in the Company’s Implantable Medical segment from the date of acquisition. For 2012, NeuroNexus added approximately $2.5 million to the Company’s revenue and decreased the Company’s net loss by $0.2 million. The purchase price of NeuroNexus consisted of cash payments of $11.7 million and potential future payments of up to an additional $2 million. These future payments are contingent upon the achievement of certain financial and development-based milestones and had an estimated fair value of $1.5 million as of the acquisition date.The cost of the acquisition was preliminarily allocated to the Lake Region Medical assets acquired and liabilities assumed from NeuroNexus based on their fair values as of the closeclosing date of the acquisition, with the amount exceeding the fair value of the net assets acquired being recorded as goodwill. The value assigned to certain assets and liabilities are preliminary and are subject to adjustmentrevision as more detailed analyses are completed and additional information is obtained, including, but not limited to,about the finalizationfair value of pre-acquisition tax positions.assets acquired and liabilities assumed become available. The valuation is expected to be finalized during the first quarter of 2013. When the valuation is finalized, anyfinal allocation may include changes to the preliminary valuationacquisition date fair value of intangible assets, acquired orgoodwill, deferred taxes, as well as operating assets and liabilities, assumedsome of which may result in material adjustments to the fair value of the intangible assets acquired, as well as goodwill.8578 -the NeuroNexusLake Region Medical purchase price to the assets acquired and liabilities assumed as of the acquisition date (in thousands): $ 618 35 2,927 540 8,875 1,576 14,571 420 940 1,360 $ 13,211 Assets acquired Current assets $ 269,815 Property, plant and equipment 216,473 Amortizing intangible assets 849,000 Indefinite-lived intangible assets 70,000 Goodwill 661,788 Other non-current assets 1,629 Total assets acquired 2,068,705 Liabilities assumed Current liabilities 102,485 Debt assumed 1,044,675 Other long-term liabilities 193,179 Total liabilities assumed 1,340,339 Net assets acquired $ 728,366 andor 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.producttechnology life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.assetsAssets and liabilities—Liabilities – The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.- 86 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSIntangible assets—The purchase price was preliminarily allocated to specific intangible assets as follows (dollars in thousands): Weighted Weighted Fair Average Estimated Average Value Amortization Useful Discount Assigned Period (Years) Life (Years) Rate $ 1,058 6 10 14 % 1,869 7 15 13 % 2,927 7 13 13 % 540 N/A 12 26 % The weighted average amortization period is less than the estimated useful life due to the Company using an accelerated amortization method, which approximates the projected cash flows used to determine the fair value of those intangible assets.Technology and patents—Technology and patents consists of technical processes, patented and unpatented technology, manufacturing know-how, trade secrets and the understanding with respect to products or processes that have been developed by NeuroNexus and that will be leveraged in current and future products. The fair value of technology and patents acquired was determined utilizing the relief from royalty method, a form of the income approach, with royalty rates that ranged from 2% to 6%. The estimated useful life of the technology and patents is based upon management’s estimate of the product life cycle associated with technology and patents before they will be replaced by new technologies.Customer lists – Customer lists represent the estimated fair value of non-contractual customer relationships NeuroNexus has as of the acquisition date. The primary customers of NeuroNexus include numerous scientists and researchers from various geographic locations around the world. These relationships were valued separately from goodwill at the amount which an independent third party would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer was based upon historical customer attrition as well as management’s understanding of the industry and product life cycles.IPR&D – IPR&D represents research projects which are expected to generate cash flows but have not yet reached technological feasibility. The Company used the income approach to determine the fair value of the IPR&D acquired. In arriving at the value of the IPR&D, management considered, among other factors: the projects’ stage of completion; the complexity of the work to be completed as of the acquisition date; the projected costs to complete the projects; the contribution of other acquired assets; and the estimated useful life of the technology. The Company applied a market-participant risk-adjusted discount rate to arrive at a present value as of the date of acquisition. The value assigned to IPR&D related to the development of micro-electrodes for deep brain mapping and electrocorticography, and is expected to be commercialized by 2014. For purposes of valuing the IPR&D, the Company estimated total costs to complete the projects to be approximately $1.5 million. If the projects are not successful or completed in a timely manner, the Company may not realize the financial benefits expected for these projects.- 87 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSGoodwill—The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including: the value of NeuroNexus’s highly trained assembled work force and management team; the incremental value that NeuroNexus’s technology will bring to the Company’s neuromodulation platform currently in development; and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. The goodwill acquired in connection with the NeuroNexus acquisition was allocated to the Implantable Medical business segment and is not deductible for tax purposes.Micro Power Electronics, Inc.On December 15, 2011, Electrochem acquired all of the outstanding common and preferred stock of Micro Power Electronics, Inc. (“Micro Power”) headquartered in Beaverton, OR. Micro Power is a leading supplier of custom battery solutions, serving the portable medical, military and handheld automatic identification and data collection markets. The aggregate purchase price consisted of the amount paid to Micro Power shareholders ($57.6 million), payments to Micro Power’s creditors at closing ($6.6 million) and certain Micro Power transaction-related expenses ($7.6 million). The Company financed this acquisition with cash on hand and borrowed $45 million under its revolving credit facility. As of December 30, 2011, the Company had accrued $5.7 million of Micro Power transaction-related expenses, which were paid during 2012. During 2012, the Company completed the valuation and made adjustments to the Micro Power opening balance sheet based upon the receipt of information that was needed in order to complete the valuation of certain assets and liabilities. As a result, the Company reduced the fair value recorded for the Micro Power amortizing intangible assets acquired by $0.4 million and increased the amount of goodwill recorded by $0.4 million. The impact of these adjustments, individually and in the aggregate, was not considered material and therefore has not been reflected as a retrospective adjustment of the historical financial statements.This transaction was accounted for under the acquisition method of accounting. Accordingly, the operating results of Micro Power have been included in the Company’s Electrochem segment from the date of acquisition and the cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition, with the amount exceeding the fair value of net assets acquired being recorded as goodwill. For 2011, the Micro Power acquisition added approximately $2.5 million to revenue and was neutral to net income.- 88 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe following table summarizes the allocation of the Micro Power purchase price to the assets acquired and liabilities assumed as of the acquisition date (in thousands): $ 25,620 1,650 28,914 31,891 94 88,169 13,679 2,688 16,367 $ 71,802 Current assets and liabilities—The fair value of current assets (excluding inventory) and current liabilities was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities. $0.7$23.0 million.assetsAssets – The purchase price was allocated to specific intangible assets as follows (dollars in thousands): Weighted Weighted Fair Average Estimated Average Value Amortization Useful Discount Assigned Period (Years) Life (Years) Rate $ 8,051 4 10 14 % 19,569 5 14 12 % 915 4 8 14 % 379 2 2 13 % $ 28,914 4 13 13 % Amortizing Intangible Assets Fair Value Assigned Weighted Average Amortization Period (Years) Estimated Useful Life (Years) Weighted Average Discount Rate Technology $ 160,000 7 19 11.5% Customer lists 689,000 14 29 11.5% $ 849,000 13 27 11.5% Indefinite-lived Intangible Assets Trademarks and tradenames $ 70,000 N/A N/A 11.5% due toas the Company is using an accelerated amortization method, which approximates the projecteddistribution of cash flows used to determine the fair value those intangible assets.- 89 -GREATBATCH, INC.TechnologyNOTES TO CONSOLIDATED FINANCIAL STATEMENTS and patents—Technology and patents consists of technical processes, patented and unpatented technology, manufacturing know-how, trade secrets and the understanding with respect to products or processes that have been developed by Micro PowerLake Region Medical and that will be leveraged in current and future products. The fair value of technology and patents acquired was determined utilizing the relief from royalty method, a form of the income approach, with a royalty ratesrate that ranged from 2%0.5% to 4%7%. The estimated useful life of the technology and patents wasis based upon management’s estimate of the product life cycle associated with the technology and patents before they will be replaced by new technologies.listsLists – Customer lists represent the estimated fair value of both the contractual and non-contractual customer relationships Micro PowerLake Region Medical has as of the acquisition date. The primary customers of Lake Region Medical include large original equipment manufacturers in various geographic locations around the world. These relationships were valued separately from goodwill at the amount whichthat an independent third party would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of 5%, as well as management’s understanding of the industry and product life cycles.Assets acquired Current assets $ 10,670 Property, plant and equipment 1,131 Amortizing intangible assets 6,100 Goodwill 8,296 Total assets acquired 26,197 Liabilities assumed Current liabilities 4,842 Deferred income taxes 1,590 Total liabilities assumed 6,432 Net assets acquired $ 19,765 Amortizing Intangible Assets Technology $ 1,400 10 18% Customer lists 4,600 10 18% Trademarks and tradenames 100 2 18% $ 6,100 10 18% Micro Power.CCC. These tradenames were valued separately from goodwill at the amount whichthat an independent third party would be willing to pay for use of these names. The fair value of the trademarks and tradenames was determined by utilizing the relief from royalty method, a form of the income approach, with a 0.5% royalty rate.— – The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including: the value of Micro Power’sCCC’s highly trained assembled work force and management team; the incremental value that CCC’s technology will bring to QiG’s medical devices; and the expected revenue growth over time that is attributable to increased market penetration from future products and customers; and the incremental value to the Company’s Electrochem business from expanding and diversifying its revenues.customers. The goodwill acquired in connection with the Micro PowerCCC acquisition was allocated to the ElectrochemQiG business segment and is not deductible for tax purposes.- 90 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS— – The following unaudited pro forma information presents the consolidated results of operations of the Company, NeuroNexusLake Region Medical, and Micro PowerCCC as if those acquisitions occurred as of the beginning of fiscal years 2011 (NeuroNexus)2014 (Lake Region Medical) and 2010 (Micro Power)2013 (CCC) (in thousands, except per share amounts): Year Ended December 28, December 30, 2012 2011 $ 646,617 $ 636,502 (4,973 ) 32,306 $ (0.21 ) $ 1.39 $ (0.21 ) $ 1.37 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Sales $ 1,445,689 $ 1,441,782 $ 677,657 Net income (loss) 2,405 (25,865 ) 37,612 Earnings (loss) per share: Basic $ 0.08 $ (0.87 ) $ 1.57 Diluted $ 0.08 $ (0.87 ) $ 1.49 NeuroNexusLake Region Medical, and Micro Power,CCC, with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisitions at Greatbatch’s interest rate, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate. Fiscal year 2015 pro forma earnings were adjusted to exclude $32.3 million of acquisition-related costs (change-in-control payments, investment banking fees, professional fees), $9.5 million of debt related charges (commitment fees, swap termination fees, debt extinguishment fees) and $23.0 million of nonrecurring amortization expense related to the fair value step-up of inventory incurred in 2015 as a result of the acquisition of Lake Region Medical. Fiscal year 2014 supplemental pro forma earnings were adjusted to include these charges. The unaudited pro forma consolidated basic and diluted earnings (loss) per share calculations are based on the consolidated basic and diluted weighted average shares of Greatbatch. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future.3.SUPPLEMENTAL CASH FLOW INFORMATION Year Ended December 28, December 30, December 31, (in thousands) 2012 2011 2010 $ 4,793 $ — $ — 2,522 4,455 2,614 6,230 6,148 8,498 4,909 5,259 3,826 14,396 87,766 350 1,244 �� 16,483 — 9182 -4.INVENTORIES3. SUPPLEMENTAL CASH FLOW INFORMATION Year Ended January 1,
2016 January 2,
2015 January 3,
2014(in thousands) Noncash investing and financing activities: Common stock contributed to 401(k) Plan $ 3,920 $ 4,341 $ 2,477 Property, plant and equipment purchases included in accounts payable 7,401 2,926 2,103 Common stock issued in connection with Lake Region Medical acquisition 245,368 — — Replacement stock options issued in connection with Lake Region Medical acquisition 4,508 — — Purchase of non-controlling interests in subsidiaries included in accrued expenses 6,818 — — Cash paid during the year for: Interest 13,057 3,521 4,989 Income taxes 6,312 13,565 44,165 Acquisition of noncash assets 2,013,604 22,434 — Liabilities assumed 1,340,339 6,432 — 4. INVENTORIES At December 28, December 30, 2012 2011 $ 58,204 $ 49,773 30,022 36,603 18,386 23,537 $ 106,612 $ 109,913 At January 1,
2016 January 2,
2015Raw materials $ 107,296 $ 73,354 Work-in-process 93,729 38,930 Finished goods 51,141 16,958 Total $ 252,166 $ 129,242 5.5. ASSETS HELD FOR SALE which are included in Prepaid Expenses and Other Current Assets, is comprised of the following (in thousands): At Disposal Business December 28, December 30, 2012 2011 Wireless sensing Electrochem $ 288 $ — Wireless sensing Electrochem 655 — Swiss orthopaedic product line Implantable Medical 2,552 — Swiss orthopaedic product line Implantable Medical 1,471 — Swiss orthopaedic product line Implantable Medical 476 — $ 5,442 $ — At Asset January 1,
2016 January 2,
2015Building and building improvements Greatbatch Medical $ 996 $ 1,635 2012,2014, the Company transferred inventory and technology related to Electrochem’s wireless sensing product line to held for sale. These assets are expected to be sold within the next year.In connection with the sale of certain non-core Swiss orthopaedic product lines to an independent third party in the first quarter of 2013, during 2012, the Company transferred certain inventory, PP&E and technology to held for sale. Additionally, as the disposal group was considered a business, $2.9$2.1 million of goodwill was allocatedassets relating to the disposal group in the first quarter of 2013 when the transaction closed. In connection with the transfer of these orthopaedic product linesCompany’s Orvin, Switzerland property to assets held for sale the Companyand recognized a $3.6$0.4 million lossimpairment charge that was recorded in Other Operating Expenses, Net in 2012 based upon the sales price to the third party. As this disposal group did not have cash flows that were clearly distinguishable, both operationally and for financial reporting purposes, from the rest ofNet. During 2015, the Company they were not considered discontinued operations in accordancesold $0.6 million of these assets held for sale with ASC 205. Seeno additional gain or loss recognized. Refer to Note 13 “Other Operating Expenses, Net.”9283 -6.6. PROPERTY, PLANT AND EQUIPMENT, NET At December 28, December 30, 2012 2011 $ 150,344 $ 149,136 87,357 75,229 29,823 33,881 20,520 17,426 13,414 11,282 12,499 11,075 15,441 13,302 676 993 330,074 312,324 (179,181 ) (166,518 ) $ 150,893 $ 145,806 At January 1,
2016 January 2,
2015Manufacturing machinery and equipment $ 285,068 $ 167,173 Buildings and building improvements 130,184 89,258 Information technology hardware and software 43,947 31,725 Leasehold improvements 36,745 31,170 Furniture and fixtures 16,243 14,045 Land and land improvements 21,774 10,816 Construction work in process 76,835 14,129 Other 852 629 611,648 358,945 Accumulated depreciation (232,156 ) (214,020 ) Total $ 379,492 $ 144,925 Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 31,575 $ 25,672 $ 26,104 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Depreciation expense $ 27,136 $ 23,320 $ 22,799 December 28, 2012January 1, 2016 and December 30, 2011 primarilyJanuary 2, 2015 includes asset purchases related to the Company’s 2014 investment in capacity and capabilities initiatives. Additionally, construction work in process also relates to the transferroutine purchases of the Company’s orthopaedic operations performed at the Orvinmachinery, equipment, and Corgemont, Switzerland facilities to existing facilities located in Fort Wayne, IN and Tijuana, Mexico; the expansion of the Company’s manufacturing infrastructure in orderinformation technology assets to support its medical device strategy; and the relocation of the Company’s global headquartersnormal recurring operations. Refer to Frisco, Texas. See Note 13 “Other Operating Expenses, Net” for a description of the Company’s significant capital investment projects.- 93 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS7.7. INTANGIBLE ASSETS Gross
Carrying
Amount Accumulated
Amortization Foreign
Currency
Translation Net
Carrying
Amount $ 95,576 $ (61,659 ) $ 1,932 $ 35,849 68,257 (18,929 ) 1,270 50,598 4,434 (4,341 ) 805 898 $ 168,267 $ (84,929 ) $ 4,007 $ 87,345 $ 97,324 $ (54,054 ) $ 842 $ 44,112 66,388 (14,009 ) 1,807 54,186 5,174 (4,019 ) 805 1,960 $ 168,886 $ (72,082 ) $ 3,454 $ 100,258 At January 1, 2016 Purchased technology and patents $ 255,776 $ (83,708 ) 1,444 $ 173,512 Customer lists 761,857 (40,815 ) (986 ) 720,056 Other 4,534 (4,946 ) 821 409 Total amortizing intangible assets $ 1,022,167 $ (129,469 ) $ 1,279 $ 893,977 At January 2, 2015 Purchased technology and patents $ 95,776 $ (75,894 ) $ 1,966 $ 21,848 Customer lists 72,857 (31,460 ) 1,374 42,771 Other 4,534 (4,619 ) 803 718 Total amortizing intangible assets $ 173,167 $ (111,973 ) $ 4,143 $ 65,337 Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 7,489 $ 6,163 $ 5,897 6,227 3,926 3,765 545 367 — $ 14,261 $ 10,456 $ 9,662 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Cost of sales $ 7,403 $ 6,201 $ 6,822 SG&A 9,681 7,009 5,800 RD&E 412 667 545 Total intangible asset amortization expense $ 17,496 $ 13,877 $ 13,167 Estimated Amortization Expense $ 13,189 13,424 12,373 10,078 8,956 29,325 $ 87,345 - 94 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDuring 2011, the Company made various asset purchases of technology and patents totaling $6.3 million, which is being amortized over a weighted average period of approximately 11 years. In connection with these purchases, the Company recorded a $3.0 million contingent liability, which will only be paid if certain sales targets for products that utilize that technology are achieved. This contingent liability is currently classified in Other Long-Term Liabilities. 2016 $ 37,854 2017 43,991 2018 44,894 2019 44,960 2020 45,467 Thereafter 676,811 Total estimated amortization expense $ 893,977 20122015 is as follows (in thousands): Trademarks
and
Tradenames IPR&D Total $ 20,288 $ — $ 20,288 — 540 540 $ 20,288 $ 540 $ 20,828 At January 2, 2015 $ 20,288 Indefinite-lived intangible assets acquired 70,000 At January 1, 2016 $ 90,288 20122015 is as follows (in thousands): Implantable
Medical Electrochem Total $ 297,232 $ 41,421 $ 338,653 8,875 413 9,288 1,094 — 1,094 $ 307,201 $ 41,834 $ 349,035 QiG Lake Region Medical Total At January 2, 2015 $ 304,297 $ 50,096 $ — $ 354,393 Goodwill acquired (Note 2) — — 661,788 661,788 Foreign currency translation (368 ) — (2,243 ) (2,611 ) At January 1, 2016 $ 303,929 $ 50,096 $ 659,545 $ 1,013,570 December 28, 2012,January 1, 2016, no accumulated impairment loss has been recognized for the goodwill allocated to the Company’s ImplantableGreatbatch Medical, QiG or ElectrochemLake Region Medical segments.8.8. ACCRUED EXPENSES At December 28, December 30, 2012 2011 $ 12,704 $ 13,618 12,488 19,971 2,626 2,013 9,567 — — 5,690 8,130 11,247 $ 45,515 $ 52,539 - 95 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At January 1,
2016 January 2,
2015Salaries and benefits $ 37,579 $ 20,770 Profit sharing and bonuses 6,781 18,524 Accrued interest 9,378 195 Purchase of non-controlling interest in subsidiaries 6,818 — Severance and change in control payments 11,969 1,878 Warranty and customer rebates 7,205 660 Other 17,527 6,357 Total $ 97,257 $ 48,384 9.9. DEBT At December 28, December 30, 2012 2011 $ 33,000 $ 55,000 197,782 197,782 (5,368 ) (16,832 ) $ 225,414 $ 235,950 At January 1,
2016 January 2,
2015Senior secured term loan A $ 375,000 $ — Senior secured term loan B 1,025,000 — 9.125% senior notes, due 2023 360,000 — Variable rate term loan — 187,500 Revolving line of credit — — Less unamortized discount on term loan B and debt issuance costs (45,947 ) (887 ) Total debt 1,714,053 186,613 Less current portion of long-term debt 29,000 11,250 Total long-term debt $ 1,685,053 $ 175,363 Revolving LineSenior Secured Credit Facilities – In connection with the Lake Region Medical acquisition, on October 27, 2015, the Company replaced its existing credit facility with new senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of Credit– The Company has(i) a $200 million revolving credit facility (the “Credit“Revolving Credit Facility”), which provides(ii) a $400$375 million secured revolving creditterm loan A facility (the “TLA Facility”), and can be increased by $200(iii) a $1,025 million uponterm loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the Company’s request“Term Loan Facilities.” The TLB facility was issued at a 1% discount.approval by a majority of the lenders. The CreditTLB Facility also contains a $15 million letter of credit subfacilitymature on October 27, 2021 and a $15 million swingline subfacility. The Credit Facility has a maturity date of June 24, 2016; provided, however, if CSN are not repaid in full, modified or refinanced before March 1, 2013, the maturity date of the Credit Facility is March 1, 2013. On February 20, 2013, the Company redeemed all outstanding CSN, which was funded with availability under the Credit Facility.The Credit Facility is secured by the Company’s non-realty assets including cash, accounts receivable and inventories.October 27, 2022, respectively. Interest rates underon the TLA Facility, as well as the Revolving Credit Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which rangeswill range between 0.0%0.75% and 1.0%2.25%, based on the Company’s total leverage ratioTotal Net Leverage Ratio, as defined in the Senior Secured Credit Facilities agreement or (ii) the applicable LIBOR rate plus the applicable margin, which rangeswill range between 1.5%1.75% and 3.0%3.25%, based on the Company’s total leverage ratio. Loans underTotal Net Leverage Ratio. Interest rates on the swingline subfacility will bear interestTLB Facility are, at the Company’s option, either at: (i) the prime rate plus 3.25% or (ii) the applicable margin, which ranges between 0.0% and 1.0%LIBOR rate plus 4.25%, with LIBOR subject to a 1.00% floor.Company’s total leverage ratio.debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. The par amount of TLA approximated its fair value as of January 1, 2016 based upon the debt being variable rate in nature. also required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which varieswill range between 0.175% and 0.25%, depending on the Company’s total leverage ratio.TheTotal Net Leverage Ratio. As of January 1, 2016, there were no borrowings on the Revolving Credit Facility, contains limitations onbut available borrowing capacity was $186.6 million after giving effect to $13.4 million of outstanding standby letters of credit.incurrence of indebtedness, liens and licensing of intellectual property, investments and certain payments. TheRevolving Credit Facility permitsmay be increased through an incremental revolving facility so long as, on a pro forma basis, the Company to engage in the following activities up to an aggregate amount of $250 million: 1) engage in permitted acquisitions in the aggregate not to exceed $250 million; 2) make other investments in the aggregate not to exceed $60 million; 3) make stock repurchases not to exceed $60 million in the aggregate; and 4) retire up to $198 million of CSN. At any time that the totalCompany’s first lien net leverage ratio of the Company for the two most recently ended fiscal quarters is less than 2.75 to 1.0, the Company may make an election to reset each of the amounts specified above. Additionally, these limitations can be waived upon the Company’s request and approval of a majority of the lenders. As of December 28, 2012, the Company had available to it 100% of the above limits as the Company reset these limits during 2012, except for the aggregate limit and other investments limit which are now $248 million and $58 million, respectively.requiresand the CompanyTLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 6.50:1.00, subject to maintainstep downs and (B) a rolling four quarterminimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of at least 3.0not less than 3.00:1.00. The TLB Facility does not contain any financial maintenance covenants.1.0,(i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts to Greatbatch Ltd. from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a total leverage rationumber of not greater than 4.0 to 1.0. The calculation of adjusted EBITDAlimitations and total leverage ratio excludes non-cash charges, extraordinary, unusual, or non-recurring expenses or losses, non-cash stock-based compensation, and non-recurring expenses or charges incurredexceptions that are described in connection with permitted acquisitions.the Senior Secured Credit Facilities agreement. As of December 28, 2012,January 1, 2016, the Company was in compliance with all covenants.- 96 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFacility containsFacilities provide for 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 Senior Secured Credit FacilityFacilities become immediately due and payable.underis 5.69%.Credit FacilityCompany’s debt facilities for the next five years and thereafter, excluding any discounts or premiums, as of December 28, 2012, was 2.07%. As of December 28, 2012, the Company had $367 million of borrowing capacity available under the Credit Facility. This amount may vary from period to period based upon the debt levels of the CompanyJanuary 1, 2016 are as well as the level of EBITDA, which impacts the covenant calculations as described above.2016 $ 29,000 2017 31,344 2018 40,719 2019 47,750 2020 47,750 Thereafter 1,563,437 Total $ 1,760,000 theits outstanding debt on the Credit Facility. The receive variable leg of the interest rate swaps and the variable rate paid on the debt have the same rate of interest, excluding the credit spread, and resets and pays interest on the same date. In 2008, the Company entered into three receive floating-pay fixed interest rate swaps indexed to the six-month LIBOR rate, in order to hedge against potential changes in cash flows on the Company’s outstanding debt, which was also indexed to the six-month LIBOR rate. As of December 28, 2012, none of these interest rate swaps remain outstanding.debt. During 2012, the Company entered into a three-year $150 million interest rate swap, which amortizesamortized $50 million per yearyear. During 2014, the Company entered into an additional interest rate swap. The first $45 million of notional amount of the swap was effective February 20, 2015, and willthe second $45 million of notional amount was scheduled to be effective in February 2013. For22, 2016. These swaps were accounted for as cash flow hedges. As a result of the outstanding debt being hedged,Lake Region Medical acquisition, the forecasted cash flows that the Company’s interest rate swaps were hedging were no longer expected to occur. Accordingly, during 2015, the Company intendsrecognized an additional $2.8 million charge in Interest Expense relating to continue electing the one-month LIBOR as the benchmark interest rate. Information regarding the Company’s outstanding interest rate swap as of December 28, 2012 is as follows (dollars in thousands): Current Fair Pay Receive Value Balance Type of Notional Start End Fixed Floating December 28, Sheet Hedge Amount Date Date Rate Rate 2012 Cash flow $ 150,000 Feb-13 Feb-16 0.573 % $ N/A $ (638 ) Other Long-Term Liabilities The estimated fair valuetermination of the interest rate swap agreement represents the amountcontracts. On October 27, 2015, the Company expects to receive (pay) to terminate the contract. The Company accounts forterminated its outstanding interest rate swaps as cash flow hedges.swap agreements resulting in a $2.8 million payment to the interest rate swap counterparty. As of January 1, 2016, the Company has no interest rate swap agreements outstanding. No portion of the change in fair value of the Company’s interest rate swaps during 2012, 20112015, 2014, or 2010 was2013 were considered ineffective. The amount recorded as Interest Expense in 2012, 2011during 2015, 2014, and 20102013 related to the Company’s interest rate swaps was $0.0$3.5 million, $0.4$0.5 million and $1.7$0.5 million, respectively.completed a private placement ofissued $197.8 million of convertible subordinated notes (“CSN”)CSN at a 5% discount. CSN bearaccrued interest at 2.25% per annum, payable semi-annually, are due on June 15, 2013. The Company redeemed all outstanding CSN on February 20, 2013, which was funded with availability under the Credit Facility. As such, CSN is classified as long-term in the December 28, 2012 Consolidated Balance Sheet in accordance with ASC 470.- 97 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe holders of CSN were able to convert the notes into shares of the Company’s common stock at a conversion price of $34.70 per share, which was equivalent to a conversion ratio of 28.8219 shares per $1,000 of principal. The conversion price and the conversion ratio adjusted automatically upon certain changes to the Company’s capitalization. The fair value of CSN as of December 28, 2012 was approximately $197.8 million and is based on recent sales prices.takestook into consideration the amortization of the discount and deferred fees related to the issuance of these notes, iswas 8.5%. The discount on CSN was being amortized toOn February 20, 2013, the call date utilizing the effective interest method. As of December 28, 2012, the carrying amount of the discount related to the CSN conversion option was $4.6 million. As of December 28, 2012, the if-converted value of the CSN notes does not exceed their principal amount as the Company’s closing stock price of $22.89 per share did not exceed the conversion price ofCompany redeemed all outstanding CSN. Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 4,450 $ 4,450 $ 4,450 11,464 10,320 9,657 CSN were convertible at Year Ended January 1,
2016 January 2,
2015 January 3,
2014Contractual interest $ — $ — $ 634 Discount amortization — — 5,368 optionissuance of the holders at such time as: (i)Senior Secured Credit Facilities and the closing priceSenior Notes, the Company incurred $45.9 million of debt issuance costs. As stated in Note 1, the Company has elected to early-adopt ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Following this ASU, unamortized debt issuance costs of $35.9 million and $0.9 million have been recorded as a reduction of the Company’s common stock exceeds 150%carrying value of the conversion pricerelated debt as of January 1, 2016 and January 2, 2015, respectively. Additionally, as of January 1, 2016 and January 2, 2015, $4.8 million and $2.2 million, respectively, of debt issuance costs attributable to the Company’s revolving credit facilities remain recorded as a component of Other Assets on the Consolidated Balance Sheets. These costs will amortize into Interest Expense over the terms of the 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) CSN have been called for redemption; (iv) the Company distributes to all holders of common stock rights or warrants entitling them to purchase additional shares of common stock at less than the average closing price of common stock for the ten trading days immediately preceding the announcement of the distribution; (v) the Company distributes to all holders of common stock any form of dividend which has a per share value exceeding 5% of the price of the common stock on the day prior to such date of distribution; (vi) the Company effects a consolidation, merger, share exchange or sale of assets pursuant to which its common stock is converted to cash or other property; (vii) the occurrence of the period beginning 60 days prior to but excluding June 15, 2013; and (viii) certain fundamental changes, as defined in the indenture governing the notes, occur or are approved by the Board of Directors.Conversions in connection with corporate transactions that constitute a fundamental change required the Company to pay a premium make-whole amount, based upon a predetermined table as set forth in the indenture agreement, whereby the conversion ratio on the notes would be increased by up to 6.3 shares per $1,000 of principal. The premium make-whole amount would have been paid in shares of common stock upon any such conversion, subject to the net share settlement feature of the notes described below.9888 -CSN contained a net share settlement feature that required the Company to pay cash for each $1,000 of principal to be converted. Any amounts in excess of $1,000 would be settled in shares of the Company’s common stock, or at the Company’s option, cash. The Company had a one-time irrevocable election to pay the holders in shares of its common stock, which it did not exercise.CSN were redeemable by the Company at any time on or after June 20, 2012, or at the option of a holder upon the occurrence of certain fundamental changes, as defined in the indenture, affecting the Company. CSN were 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.Deferred Financing Fees—financing feesdebt issuance costs related to the Company’s revolving credit facilities is as follows (in thousands):At January 3, 2014 $ 2,786 Amortization during the period (586 ) At January 2, 2015 2,200 Financing costs deferred 4,152 Write-off during the period (907 ) Amortization during the period (654 ) At January 1, 2016 $ 4,791 $ 2,005 2,213 (51 ) (1,018 ) 3,149 (1,093 ) $ 2,056 Debt Issuance Costs Unamortized Discount on TLB Facility Total At January 3, 2014 $ 1,074 $ — $ 1,074 Amortization during the period (187 ) — (187 ) At January 2, 2015 887 — 887 Financing costs incurred 41,781 10,250 52,031 Write-off during the period (732 ) — (732 ) Amortization during the period (6,028 ) (211 ) (6,239 ) At January 1, 2016 $ 35,908 $ 10,039 $ 45,947 10.DEFINED 10. BENEFIT PLANS which covers substantially all offor its U.S. based employees. The plan provides for the deferral of employee compensation under Section 401(k) and a discretionary Company match. In 2012, 2011,2015, 2014, and 2010,2013, this match was 35% per dollar of participant deferral, up to 6% of the total compensation for each participant.legacy Greatbatch associates. Net costs related to this defined contribution plan were $2.3 million in 2015, $2.2 million in 2014, and $2.0 million in 2012, $1.6 million in 2011, and $1.5 million in 2010.2013.$1.9$0.0 million, and $5.1$4.2 million, $4.8 million in 20122015, 2014, and 2011,2013, respectively. No discretionary contribution was made for fiscal year 2010 as the Company did not achieve the applicable performance targets for that year. As of December 28, 2012,January 1, 2016, the 401(k) Plan held 653,455approximately 580,000 shares of Company stock.Education Assistance Program –reimburses tuition, textbooks and laboratory fees for college or other job related programs for allmatches 50% of its U.S. based employees. The Company also reimburses college tuitionan employee’s contributions for the dependent childrenfirst 6% of certain full-time U.S. based employees hired priorthe employee’s gross salary at a maximum contribution rate per employee of 3% of the employee’s gross salary. The employee’s contributions vest immediately, while the Company’s contributions vest over a five-year period. Net costs related to 2012, which vests on a straight-line basis over ten years, up tothis defined contribution plan since the applicable local state university tuition rate. For certain employees and executives, the dependent children benefit is not limited. Minimum academic achievement is required in order to receive reimbursement under both programs. Aggregate expenses under the programs were $2.2 million, $1.5 million and $1.3date of acquisition was $0.8 million in 2012, 2011 and 2010, respectively.- 99 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSFranceGermany certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan provided to the Company’s employees located in Switzerland is a funded contributory plan, while the plans that provide benefits to the Company’s employees located in Mexico, France, and FranceGermany are unfunded and noncontributory. The liability and corresponding expense related to these benefit plans is based on actuarial computations of current and future benefits for employees.The Company has estimated that a net curtailment gain will be recognized as a result of this curtailment. In accordance with ASC 715, this gain will bewas recognized in Other Operating Expenses, Net as the related employees arewere terminated. Additionally, as nearlySince Swiss plan assets were sufficient to cover all plan liabilities, during 2012 the plan assets were transferred into cash. During 2013, the plan assets that remained after settlement payments were made were transferred to an AA- rated insurance carrier who bears the pension risk and longevity risk, and will be used to cover the pension liability for the remaining retirees of the Swiss pension liability is expected to be paid off inplan, as well as the next year, the Company moved all Swiss pension plan assets into cash accounts during 2012. Swiss Plan assets are expected to be sufficient to cover plan liabilities.- 100 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 28, 2012January 1, 2016 and December 30, 2011January 2, 2015 were as follows (in thousands): Year Ended December 28, December 30, 2012 2011 $ 17,053 $ 15,961 1,115 1,127 409 483 — (457 ) 976 999 958 393 229 (1,396 ) (4,934 ) — 409 (57 ) 16,215 17,053 11,484 11,314 1,050 1,041 976 999 644 (443 ) 229 (1,380 ) (2,424 ) — 310 (47 ) 12,269 11,484 $ 3,946 $ 5,569 $ 23 $ 21 $ 3,923 $ 5,548 $ 14,606 $ 14,962 - 101 - Year Ended January 1,
2016 January 2,
2015Change in projected benefit obligation: Projected benefit obligation at beginning of year $ 2,843 $ 2,422 Projected benefit obligation acquired 4,316 — Service cost 439 203 Interest cost 165 75 Plan participants’ contribution 61 36 Actuarial loss 235 630 Benefits transferred in, net 258 155 Settlement/curtailment gain — (337 ) Foreign currency translation (325 ) (341 ) Projected benefit obligation at end of year 7,992 2,843 Change in fair value of plan assets: Fair value of plan assets at beginning of year 437 731 Employer contributions (refund) 69 (39 ) Plan participants’ contributions 61 36 Actual loss on plan assets (39 ) (101 ) Benefits transferred in, net 362 198 Settlements — (337 ) Foreign currency translation (19 ) (51 ) Fair value of plan assets at end of year 871 437 Projected benefit obligation in excess of plan assets at end of year $ 7,121 $ 2,406 Defined benefit liability classified as other current liabilities $ 46 $ 25 Defined benefit liability classified as long-term liabilities $ 7,075 $ 2,381 Accumulated benefit obligation at end of year $ 6,299 $ 1,938 GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 28, December 30, 2012 2011 $ 740 $ 1,306 (3,064 ) (59 ) 342 (459 ) (10 ) (137 ) 294 (5 ) (1,698 ) 646 13 (80 ) $ (1,685 ) $ 566 Year Ended January 1,
2016 January 2,
2015Net loss occurring during the year $ 164 $ 736 Amortization of losses (156 ) (138 ) Prior service cost (1 ) (2 ) Amortization of prior service cost (9 ) (11 ) Foreign currency translation — (76 ) Pre-tax adjustment (2 ) 509 Taxes 22 (135 ) Net loss $ 20 $ 374 20132016 are as follows (in thousands): $ 31 7 Amortization of net prior service cost $ 10 Amortization of net loss 172 Year Ended December 28, December 30, 2012 2011 $ 1,115 $ 1,127 409 483 (425 ) (470 ) 222 200 $ 1,321 $ 1,340 Year Ended January 1, 2016 January 2, 2015 Service cost $ 439 $ 203 Interest cost 165 75 Settlements loss — 105 Expected return on assets (11 ) (3 ) Recognized net actuarial loss 164 45 Net pension cost $ 757 $ 425 Projected Benefit Obligation Net Pension Cost December 28, December 30, 2012 2011 2012 2011 2010 2.1 % 2.5 % 2.5 % 2.9 % 3.0 % 2.4 % 2.3 % 2.3 % 2.5 % 2.5 % 0.0 % 3.5 % 3.5 % 3.8 % 4.0 % - 102 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Projected Benefit Obligation Net Pension Cost January 1,
2016 January 2,
2015 2015 2014 2013 Discount rate 2.2 % 2.3 % 2.3 % 3.4 % 2.1 % Salary growth 2.9 % 3.0 % 3.0 % 3.1 % 2.4 % Expected rate of return on assets 2.0 % 2.3 % 2.3 % 2.5 % — % Switzerland AA bonds with a duration matching the duration of the liabilities plus approximately 50 basis points to reflect the risk of investing in corporate bonds. The expected rate of return on plan assets reflects earnings expectations on existing plan assets, which as a result of the Swiss pension plan curtailment, were all in cash as of the end of the current plan year. Fair Value Measurements Using December 28, Quoted
Prices in
Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs 2012 (Level 1) (Level 2) (Level 3) $ 12,269 $ 12,269 $ — $ — $ 12,269 $ 12,269 $ — $ — Fair Value Measurements Using December 30, Quoted
Prices in
Active
Markets for
Identical
Assets Significant
Other
Observable
Inputs Significant
Unobservable
Inputs 2011 (Level 1) (Level 2) (Level 3) $ 179 $ 179 $ — $ — 1,019 1,019 — — 2,155 2,155 — — 415 415 — — 4,057 4,057 — — 1,860 1,860 — — 1,064 — 1,064 — 735 735 — — $ 11,484 $ 10,420 $ 1,064 $ — The fair value of Level 1 plan assets are obtained by reference to the last quoted price of the identical security on the active market which it trades. Fair Value Measurements Using January 1, 2016 Insurance contract $ 871 $ — $ 871 $ — Total $ 871 $ — $ 871 $ — Fair Value Measurements Using January 2,
2015 Insurance contract $ 437 $ — $ 437 $ — Total $ 437 $ — $ 437 $ — 10391 - $ 8,813 272 289 307 364 1,738 2016 $ 166 2017 205 2018 225 2019 277 2020 265 2020-2024 1,619 11.11. STOCK-BASED COMPENSATION Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 2,786 $ 2,511 $ 2,617 6,233 4,526 4,267 1,885 5,045 — $ 10,904 $ 12,082 $ 6,884 $ 2,620 $ 4,184 $ 509 7,684 6,630 5,982 600 1,268 393 $ 10,904 $ 12,082 $ 6,884 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Stock options $ 2,708 $ 2,523 $ 3,490 Restricted stock and units 6,668 6,417 5,843 401(k) stock contribution — 4,246 4,768 Total stock-based compensation expense $ 9,376 $ 13,186 $ 14,101 Cost of sales $ 795 $ 3,530 $ 3,864 Selling, general and administrative expenses 7,510 7,923 7,907 Research, development and engineering costs, net 982 1,440 1,194 Other operating expenses, net (Note 13) 89 293 1,136 Total stock-based compensation expense $ 9,376 $ 13,186 $ 14,101 2010,2014 and 2013, the Company recorded $0.7 million of stock-based compensationstock modification expense related to the accelerated vestingemployee separation costs incurred during 2014 and 2013 in connection with realignment initiatives. This modification expense was included within Other Operating Expenses, Net. Refer to Note 13 “Other Operating Expenses, Net” for further discussion of equity awards issued to the Company’s former Senior Vice President—Orthopaedics, who died during the year.19982005 Stock OptionIncentive Plan 2002 Restricted Stock Plan and Non-Employee Directors Plan have(“2005 Plan”) has been frozen to any new award issuances. Stock option and restricted stock awardsoptions remain outstanding under these plans.The Company’s 2005 Stock Incentive Plan (“2005 Plan”), as amended, authorizes the issuance of up to 2,450,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject to the terms of the 2005 Plan. The 2005 Plan limits the amount of restricted stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 850,000 shares of the 2,450,000 shares authorized by the 2005 Plan.- 104 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS1,000,0001,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2011 Plan. The 2011 Plan does not limit the amount of restricted stock, restricted stock units or stock bonuses that may be awarded.December 28, 2012,January 1, 2016, there were 508,233, 789,262289,734 and 59,42675,361 shares available for future grants under the 2011 Plan 2009 Plan and 20052009 Plan, respectively. Due to plan sub-limits, of the shares available for grant, only 731 shares and 54,3079,728 shares may be awarded under the 2009 Plan and the 2005 Plan, respectively, in the form of restricted stock, restricted stock units or stock bonuses. or four year period, expire 10 years from the date of grant, and are granted at exercise prices equal to or greater than the fair value of the Company’s common stock on the date of grant. Performance-based stock options only vest if certain performance metrics are achieved. The performance metrics generally cover a three-year performance period beginning in the year of grant and include the achievement of revenue, adjusted operating earnings and adjusted operating cash flow targets. In 2010, the Company began issuing all performance stock-based awards in the form of restricted stock units.- 105 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 8.20 $ 9.37 $ 8.24 0.83 % 2.02 % 2.62 % 40 % 40 % 40 % 5.3 5.3 5.4 0 % 0 % 0 % 9 % 9 % 9 % Year Ended January 1,
2016 January 2,
2015 January 3,
2014Weighted average grant date fair value $ 12.18 $ 16.43 $ 8.38 Risk-free interest rate 1.55 % 1.73 % 0.73 % Expected volatility 26 % 39 % 39 % Expected life (in years) 4.7 5.3 5.3 Expected dividend yield 0 % 0 % 0 % Annual prevesting forfeiture rate 9 % 9 % 9 % time-vested stock option activity: Number of
Time-Vested
Stock
Options Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life
(In Years) Aggregate
Intrinsic
Value
(In Millions) 1,362,123 $ 23.94 243,155 20.57 (34,196 ) 19.26 (107,526 ) 24.43 1,463,556 23.46 306,449 23.98 (84,237 ) 21.41 (126,997 ) 26.47 1,558,771 23.42 395,978 22.19 (52,683 ) 20.77 (126,219 ) 24.21 1,775,847 $ 23.17 6.0 $ 2.2 1,725,786 $ 23.22 6.0 $ 2.1 1,458,885 $ 23.32 5.4 $ 1.9 - 106 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe following table summarizestime and performance-vested stock option activity: Number of
Performance-
Vested Stock
Options Weighted
Average
Exercise
Price Weighted
Average
Remaining
Contractual
Life
(In Years) Aggregate
Intrinsic
Value
(In Millions) 1,001,984 $ 24.48 (257,461 ) 26.81 744,523 23.68 (26,478 ) 22.53 (239,681 ) 22.29 478,364 24.44 (7,657 ) 22.04 (185,782 ) 26.35 284,925 $ 23.26 4.3 $ 0.1 284,925 $ 23.26 4.3 $ 0.1 284,925 $ 23.26 4.3 $ 0.1 Outstanding at December 28, 2012 2,060,772 $ 23.18 Granted 372,676 23.33 Exercised (551,092 ) 23.24 Forfeited or expired (88,686 ) 28.05 Outstanding at January 3, 2014 1,793,670 22.96 Granted 183,571 43.84 Exercised (353,625 ) 23.41 Forfeited or expired (33,279 ) 27.82 Outstanding at January 2, 2015 1,590,337 25.17 Granted 301,547 49.20 Replacement options granted in connection with the Lake Region Medical acquisition 119,900 12.41 Exercised (280,701 ) 23.45 Forfeited or expired (52,183 ) 42.45 Outstanding at January 1, 2016 1,678,900 $ 28.32 6.1 $ 40.6 Expected to vest at January 1, 2016 1,643,386 $ 27.90 6.1 $ 40.4 Exercisable at January 1, 2016 1,467,256 $ 25.50 5.8 $ 39.6 outstanding and/or exercisable as the difference between the market price of the Company’s common shares as of December 28, 2012January 1, 2016 ($22.89)52.50) and the weighted average exercise price of the underlying stock options, multiplied by the number of options outstanding and/or exercisable. As of December 28, 2012,January 1, 2016, $2.3 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 2 years. Shares are distributed from the Company’s authorized but- 107 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 148 $ 501 $ 112 1,263 2,401 659 (132 ) (146 ) (41 ) Year Ended January 1,
2016 January 2,
2015 January 3,
2014Intrinsic value $ 8,231 $ 7,997 $ 6,807 Cash received 6,583 8,278 12,807 Tax benefit realized 1,954 1,704 727 Time-Vested
Activity Weighted
Average
Fair Value 160,998 $ 24.82 124,747 21.11 (147,434 ) 23.05 (14,925 ) 23.45 123,386 22.57 31,625 23.49 (80,825 ) 22.80 (4,244 ) 22.98 69,942 22.69 92,265 23.49 (74,901 ) 22.83 (7,037 ) 22.56 80,269 $ 23.48 Performance-vested restricted stock granted prior to 2010 vests upon the achievement of certain annual diluted EPS targets by the Company, or the seventh anniversary date of the award.- 108 - Nonvested at December 28, 2012 80,269 $ 23.48 Granted 67,230 26.76 Vested (74,062 ) 23.93 Forfeited (5,862 ) 22.26 Nonvested at January 3, 2014 67,575 26.37 Granted 63,817 44.78 Vested (53,568 ) 34.16 Forfeited (9,992 ) 35.30 Nonvested at January 2, 2015 67,832 36.22 Granted 44,629 49.84 Vested (56,119 ) 37.93 Forfeited (17,107 ) 40.48 Nonvested at January 1, 2016 39,235 $ 47.40 GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSThe performance-basedPerformance-based restricted stock units granted only vest if certain market-based performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 781,446577,825 shares based upon the total shareholder return of the Company relative to the Company’s compensation peer group over a three year performance period beginning in the year of grant. The fair value of the restricted stock units waswere determined by utilizing a Monte Carlo simulation model, which projects the value of Greatbatch stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes. The following table summarizes performance-vested restricted stock and stock unit activity related to the Company’s plans: Performance-
Vested
Activity Weighted
Average
Fair Value 24,000 $ 23.07 289,654 14.43 (21,558 ) 15.12 (8,299 ) 14.56 283,797 15.10 279,415 18.21 (6,600 ) 17.94 (26,869 ) 15.85 529,743 16.68 332,918 15.30 (15,500 ) 24.64 (64,715 ) 15.72 782,446 $ 16.02 Nonvested at December 28, 2012 782,446 $ 16.02 Granted 318,169 15.86 Vested (49,139 ) 14.68 Forfeited (271,798 ) 14.94 Nonvested at January 3, 2014 779,678 16.41 Granted 186,825 31.33 Vested (221,470 ) 18.51 Forfeited (28,870 ) 18.42 Nonvested at January 2, 2015 716,163 19.57 Granted 179,940 32.92 Vested (270,198 ) 15.30 Forfeited (48,080 ) 26.96 Nonvested at January 1, 2016 577,825 $ 25.11 ($0.02 million), $0.008$3.4 million, $2.3 million and $0.01$(0.4) million for 2012, 2011 and 2010,2015, 2014, 2013, respectively. As of December 28, 2012,January 1, 2016, there was $6.2$7.2 million of total unrecognized compensation cost related to the restricted stock and restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of approximately 2 years. The fair value of shares vested in 2012, 2011 and 20102015, 2014, 2013 was $1.5$16.1 million, $1.9$12.5 million and $4.1$4.0 million, respectively.12.12. RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 24,071 $ 19,014 $ 17,378 38,777 35,472 34,208 (10,358 ) (8,973 ) (6,567 ) $ 52,490 $ 45,513 $ 45,019 - 109 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended January 1,
2016 January 2,
2015 January 3,
2014Research, development and engineering costs $ 59,767 $ 58,974 $ 62,652 Less: cost reimbursements (6,772 ) (9,129 ) (8,575 ) Total research, development and engineering costs, net $ 52,995 $ 49,845 $ 54,077 13.13. OTHER OPERATING EXPENSES, NET Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 32,482 $ 425 $ 225 1,525 — — 5,041 — — — — 1,348 1,460 — 42 1,838 168 2,943 $ 42,346 $ 593 $ 4,558 Year Ended January 1,
2016 January 2,
2015 January 3,
20142014 investments in capacity and capabilities $ 23,037 $ 8,925 $ — Orthopaedic facilities optimization 1,395 1,317 8,038 2013 operating unit realignment — 1,017 5,625 Legacy Lake Region Medical consolidations 1,961 — — Other consolidation and optimization costs (income) — (71 ) 1,095 Acquisition and integration costs (income) 33,449 3 (502 ) Asset dispositions, severance and other 6,622 4,106 1,534 Total other operating expenses, net $ 66,464 $ 15,297 $ 15,790 Severance and Retention Other Total At January 2, 2015 $ 1,163 $ — $ 1,066 $ 2,229 Restructuring charges 2,729 235 20,073 23,037 Write-offs — (235 ) — (235 ) Cash payments (2,463 ) — (19,544 ) (22,007 ) At January 1, 2016 $ 1,429 $ — $ 1,595 $ 3,024 facilityfacilities optimization.In 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate two buildings, increase capacity, further expand capabilities and reduce dependence on outside suppliers. This initiative was completed in 2011.onof an orthopaedic manufacturing facility in Fort Wayne, IN and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was completed in 2012.most major functionsmanufacturing and development operations performed at its facilities in Orvin and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. In connection with this consolidation, in 2012,2013, the Company entered into an agreementsold assets related to sell certain non-core Swiss orthopaedic product lines to an independent third party includingparty. The purchase agreement provided the Company with an earn out payment based upon the amount of inventory PP&Econsumed by the purchaser within one year after the close of the transaction. As a result of this earn out, a gain of $2.7 million was recorded in Other Operating Expenses, Net during 2014. During 2014, the Company transferred $2.1 million of assets relating to the Company’s Orvin, Switzerland property to held for sale and technology on hand relatedrecognized a $0.4 million impairment charge. During 2015, the Company sold $0.6 million of these assets held for sale with no additional gain or loss recognized. Refer to these product lines. This transaction closed in the first quarter of 2013. See Note 5 “Assets Held For Sale” for Sale.”$25$30.0 million and $35$35.0 million, of which $20.9$28.4 million has been expended to date.through January 1, 2016. Total expense expected to be incurred for these initiatives is between $30$45.0 million and $36$48.0 million, of which $33.1$43.9 million has been incurred to date.through January 1, 2016. All expenses have been and will be recorded within the ImplantableGreatbatch Medical segment and are expected to include the following:retention—$9 million—$11retention: approximately $11.0 million;write-offs—$13 million—$15write-offs: approximately $13.0 million;Other—$8 million—$10 million.- 110 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSOrthopaedic facilityorthopaedic facilities optimizations is as follows (in thousands): Severance
and
Retention Accelerated
Depreciation/Asset
Write-offs Other Total $ — $ — $ — $ — 10,049 14,759 7,674 32,482 — (14,759 ) — (14,759 ) (482 ) — (7,674 ) (8,156 ) $ 9,567 $ — $ — $ 9,567 Other Total At January 2, 2015 $ — $ — $ 287 $ 287 Restructuring charges — 88 1,307 1,395 Write-offs — (88 ) — (88 ) Cash payments — — (1,594 ) (1,594 ) At January 1, 2016 $ — $ — $ — $ — Medical device facility optimization.Near the end of 2011,2013 operating unit realignment.In 2013, the Company initiated plansa plan to upgrade and expandrealign its manufacturing infrastructureoperating structure in order to supportoptimize its medical device strategy.continued focus on profitable growth. As part of this initiative, the sales and marketing and operations groups of its former Implantable Medical and Electrochem Solutions reportable segments were combined into one sales and marketing group and one operations group each serving Greatbatch Medical. This includesinitiative was completed during 2014. Total restructuring charges incurred in connection with this realignment were $6.6 million. Expenses related to this initiative were recorded within the transferapplicable segment that the expenditures relate to and included the following:product lines to create additional capacity for the manufacture of medical devices, expansion of two existing facilities, as well as the purchase of equipment to enable the production of medical devices. These initiatives are expected to be completed over the next two to three years. Total capital investment under these initiativeslocations. This initiative is expected to be substantially completed by the end of 2016. The total capital investment expected for this initiative since the acquisition date is between $15$4.0 million to $20and $5.0 million, of which approximately $9.9$0.9 million has been expended to date.through January 1, 2016. Total expensesexpense expected to be incurred on these projectsfor this initiative since the acquisition date is between $2$13.0 million to $3and $15.0 million, of which $1.5$2.0 million has been incurred to date.through January 1, 2016. All expenses have been and will be recorded withinwith the ImplantableLake Region Medical segment and are expected to include the following:ProductionEmployee costs: $5.0 million - $6.0 million; andrevalidation: $0.5 million—$1 million;travel costs associated with these consolidation projects. All expenses are cash expenditures and are being recorded in the Lake Region Medical segment.Personnel: $1 million—$1.5 million; andOther: $1.0 million.the medical device facility optimizationthese legacy Lake Region Medical consolidation initiatives is as follows (in thousands): Production
Inefficiencies,
Moving and
Revalidation Personnel Other Total $ — $ — $ — $ — 652 630 243 1,525 (652 ) (630 ) (243 ) (1,525 ) $ — $ — $ — $ — - 111 - Other Exit Costs Total At October 27, 2015 $ 3,392 $ 653 $ 4,045 Restructuring charges 557 1,404 1,961 Write-offs — — — Cash payments (282 ) (1,461 ) (1,743 ) At January 1, 2016 $ 3,667 $ 596 $ 4,263 GREATBATCH, INC.Acquisition and integration costs (income).NOTES TO CONSOLIDATED FINANCIAL STATEMENTSERP system upgrade.In 2011, During 2015, the Company initiated plansincurred $23.7 million in transaction costs related to upgrade its existing global ERP system. This initiative is expectedthe acquisition of Lake Region Medical. These costs primarily relate to be completed over the next year. Total capital investment underprofessional and consulting fees incurred in connection with due diligence efforts of this acquisition, of which $0.7 million are accrued as of January 1, 2016. Expenses related to this initiative is expectedwere recorded to be between $4corporate unallocated expenses. Additionally, during 2015, the Company incurred $8.6 million in Lake Region Medical integration costs, which consisted primarily of change-in-control payments to $5 millionformer Lake Region Medical executives, professional and consulting fees, and travel costs, of which approximately $3.0$6.2 million has been expended to date.are accrued as of January 1, 2016 in the Lake Region Medical segment. Total expensesexpense expected to be incurred on this initiativethe integration of Lake Region Medical is between $5$40.0 million and $50.0 million and total capital expenditures are expected to be between $20.0 million to $7 million of which $5.0 million has been incurred to date. All expenses are cash expenditures, except accelerated depreciation$25.0 million.asset write-offs. Expenses related to this initiative are recorded within the corporate cost center and include the following:Training and consulting costs: $3 million—$4.5 million; andAccelerated depreciation and asset write-offs: $2 million – $2.5 million.The change in accrued liabilities related to the ERP system upgrade is as follows (in thousands): Training &
Consulting
Costs Accelerated
Depreciation/
Asset Write-offs Total $ — $ — $ — 2,875 2,166 5,041 — (2,166 ) (2,166 ) (2,706 ) — (2,706 ) $ 169 $ — $ 169 2007 & 2008 facility shutdowns and consolidations.From 2007 to 2010,2013, the Company completed the following facility shutdowns and consolidation initiatives:Consolidated its Electrochem manufacturing facilities in Canton, MA, Teterboro, NJ and Suzhou, China, into a newly constructed facility in Raynham, MA;Consolidated its corporate offices in Clarence, NY into its technology center also in Clarence, NY;Reorganized and consolidated various general and administrative and research and development functions throughout the organization in order to optimize those resources;Consolidated its Orchard Park, NY (Electrochem manufacturing), Exton, PA (Orthopaedic corporate office) and Saignelegier, Switzerland (Orthopaedic manufacturing) facilities into existing facilities that had excess capacity; andConsolidated its manufacturing operations in Blaine, MN into its Plymouth, MN facility.The total expenses incurred for these facility shutdowns and consolidations was $17.3 million and included the following:Severance and retention—$4.4 million;Production inefficiencies, moving and revalidation—$5.2 million;Accelerated depreciation and asset write-offs—$5.3 million;Personnel—$0.7 million; andOther—$1.7 million.- 112 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAll categories of costs are considered to be cash expenditures, except accelerated depreciation and asset write-offs. For 2010, costs relating to these initiatives of $0.3 million and $1.0 million were included in the Implantable Medical and Electrochem business segments, respectively.As a result of these consolidation initiatives, one Implantable Medical and one Electrochem facility were sold in 2010, which resulted in net cash proceeds of $2.4 million. For 2010, write-downs of $1.0 million were recorded relating to these facilities and were included in Other Operating Expenses, Net.Integration costs.During 2012, the Company incurred costs (income) related to the integration of Micro PowerCCC and NeuroNexus.NeuroNexus Technologies, Inc. (“NeuroNexus”). These expenses were primarily for retention bonuses, travel costcosts in connection with integration efforts, training, severance, and severance, which will not be required or incurred after the integrations are completed. During 2010, the Company incurred costs related to the integrationchange in fair value of the companies acquiredcontingent consideration recorded in 2007connection with the NeuroNexus acquisition, which resulted in a gain of $0.8 million and 2008.2012, 20112015, 2014, and 2010,2013, the Company recorded write-downslosses in connection with various asset disposals net of insurance proceeds received, if any. Additionally,and/or write-downs. In addition, during 20122015, the Company incurred $1.2 million of costs related to the relocation of its global headquarters to Frisco, Texas. During 2011, the Company incurred $0.6 million of due diligence relatedlegal and professional costs in connection with the expected Spin-off of Nuvectra of $6.0 million, of which $0.5 million are accrued as of January 1, 2016. Expenses related to the expected Spin-off were recorded within the applicable segment and corporate cost centers to which the expenditures relate. The transaction is expected to be completed in March 2016. Deal related costs for the Spin-off are estimated to be between $10.0 million and $12.0 million. Refer to Note 19 “Business Segment, Geographic and Concentration Risk Information” for additional information on the expected Spin-off.purchasebusiness reorganization to align its contract manufacturing operations. Costs incurred primarily related to consulting and IT development and were completed in 2014.Micro Power. During 2010, we realigned resources within Implantable Medical, which included the elimination of certain positions globally. Severance charges associated with this realignment were $2.3 million.IPR&D. Refer to Note 18 “Fair Value Measurements” for additional information.14.14. INCOME TAXES Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 36,057 $ 43,610 $ 46,217 (29,327 ) 4,782 3,108 $ 6,730 $ 48,392 $ 49,325 - 113 - Year Ended January 1,
2016 January 2,
2015 January 3,
2014U.S. $ (42,166 ) $ 56,801 $ 42,392 International 26,466 19,778 6,446 Total income (loss) before provision for income taxes $ (15,700 ) $ 76,579 $ 48,838 GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 4,747 $ 5,150 $ (671 ) 381 (40 ) 179 668 1,384 1,260 5,796 6,494 768 6,615 8,028 15,409 175 599 300 (1,057 ) 149 (290 ) 5,733 8,776 15,419 $ 11,529 $ 15,270 $ 16,187 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Current: Federal $ (3,753 ) $ 16,293 $ 39,353 State (367 ) 1,299 1,604 International 6,312 2,998 1,470 2,192 20,590 42,427 Deferred: Federal (8,144 ) 1,211 (28,678 ) State (880 ) (310 ) 427 International (1,274 ) (370 ) (1,605 ) (10,298 ) 531 (29,856 ) Total provision (benefit) for income taxes $ (8,106 ) $ 21,121 $ 12,571 Year Ended December 28, December 30, December 31, 2012 2011 2010 35.0 % 35.0 % 35.0 % 25.6 — — — (3.7 ) (2.6 ) 50.7 0.3 (0.8 ) (10.1 ) (1.3 ) (1.3 ) 4.9 0.3 (0.3 ) 67.6 0.1 1.7 (2.4 ) 0.9 1.1 171.3 % 31.6 % 32.8 % Year Ended January 1,
2016 January 2,
2015 January 3,
2014Statutory rate $ (5,495 ) 35.0 % $ 26,803 35.0 % $ 17,093 35.0 % Federal tax credits (1,850 ) 11.8 (1,600 ) (2.1 ) (3,651 ) (7.5 ) Foreign rate differential (3,180 ) 20.2 (3,276 ) (4.3 ) (348 ) (0.7 ) Uncertain tax positions (531 ) 3.4 412 0.6 831 1.7 State taxes, net of federal benefit (1,490 ) 9.5 507 0.7 1,148 2.3 Change in foreign tax rates (91 ) 0.6 (446 ) (0.6 ) (1,806 ) (3.7 ) Non-deductible transaction costs 4,867 (31.0 ) — — — — Valuation allowance 626 (4.0 ) (299 ) (0.4 ) 186 0.4 Other (962 ) 6.1 (980 ) (1.3 ) (882 ) (1.8 ) Effective tax rate $ (8,106 ) 51.6 % $ 21,121 27.6 % $ 12,571 25.7 % 11499 - At December 28, December 30, 2012 2011 $ 6,884 $ 7,362 14,637 11,106 3,911 4,441 4,129 2,961 8,502 6,378 465 1,052 38,528 33,300 (12,768 ) (7,775 ) 25,760 25,525 (2,648 ) (2,572 ) (59,774 ) (54,874 ) (36,462 ) (33,849 ) (98,884 ) (91,295 ) $ (73,124 ) $ (65,770 ) $ 7,678 $ 7,828 (874 ) (845 ) 2,534 2,450 (82,462 ) (75,203 ) $ (73,124 ) $ (65,770 ) At January 1,
2016 January 2,
2015Tax credits $ 22,196 $ 5,828 Net operating loss carryforwards 153,949 6,721 Inventories 6,543 3,335 Accrued expenses 13,138 4,338 Stock-based compensation 9,512 9,341 Other 38 1,659 Gross deferred tax assets 205,376 31,222 Less valuation allowance (39,171 ) (10,709 ) Net deferred tax assets 166,205 20,513 Property, plant and equipment (32,772 ) (2,646 ) Intangible assets (347,896 ) (57,850 ) Convertible subordinated notes (3,754 ) (5,006 ) Gross deferred tax liabilities (384,422 ) (65,502 ) Net deferred tax liability $ (218,217 ) $ (44,989 ) Presented as follows: Current deferred tax asset $ — $ 6,168 Current deferred tax liability — (588 ) Noncurrent deferred tax asset 3,587 2,626 Noncurrent deferred tax liability (221,804 ) (53,195 ) Net deferred tax liability $ (218,217 ) $ (44,989 ) December 28, 2012,January 1, 2016, the Company has the following carryforwards available:TaxAmountBegin toJurisdictionAttribute(in millions)ExpireU.S.Net Operating Loss$11.2(1)2025InternationalNet Operating Loss38.1(1)2013StateNet Operating Loss29.5(1)VariousU.S. and StateR&D Tax Credit1.7(1)VariousStateInvestment Tax Credit5.4Various(1)The utilization of certain net operating losses and credits is subject to an annual limitation under Internal Revenue Code Section 382.Jurisdiction Federal Net Operating Loss $ 386.2 2019 International Net Operating Loss 42.2 2016 State Net Operating Loss 298.7 2016 Federal Foreign Tax Credit 17.0 2019 U.S. and State R&D Tax Credit 2.6 2018 State Investment Tax Credit 5.3 2016 filedits income tax returns included uncertain tax positions taken in prior years. Due to the application of the accounting for uncertain tax positions, the actual tax attributes are larger than the tax creditsamounts for which a deferred tax asset is recognized for financial statement purposes.- 115 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 28, 2012January 1, 2016 and December 30, 2011January 2, 2015 related to certain foreign tax credits, state investment tax credits, and foreign and state net operating losses will not be realized.a matter couldan uncertain tax position, if recognized, would be recognizedrecorded as an adjustment to the Provision (Benefit) for Income Taxes and the effective tax rate in the period of resolution. Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 1,580 $ 2,756 $ 3,418 — 300 300 — 260 — 210 — 222 (522 ) — — (298 ) (1,736 ) (1,184 ) $ 970 $ 1,580 $ 2,756 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Balance, beginning of year $ 2,411 $ 1,858 $ 970 Additions relating to business combinations 7,443 — — Additions based upon tax positions related to the current year 274 268 325 Additions related to prior period tax positions 163 510 651 Reductions relating to settlements with tax authorities (550 ) (225 ) (88 ) Reductions as a result of a lapse of applicable statute of limitations (470 ) — — Balance, end of year $ 9,271 $ 2,411 $ 1,858 AnThe Internal Revenue Service finalized an audit of the consolidated federal 20092012 and 20102013 U.S. Federal income tax returns were completed during 2012. of the Company in the first quarter of 2015. The impact to the income tax expense was not material. The U.S. subsidiary of the former Lake Region Medical is still subject to U.S. federal, state, and local examinations for the taxable years 2006 to 2014.12twelve months as a result of the lapse of the statute of limitations and potentialand/or audit settlements. As of December 28, 2012,January 1, 2016, approximately $0.8$8.5 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized.116101 -The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act retroactively restored several expired business tax provisions, including the Section 41 research and experimentation credit that had expired on December 31, 2011. Under the American Taxpayer Relief Act of 2012, the section 41 research tax credit is extended for two years retroactively from January 1, 2012 through December 31, 2013. As the Act was signed into law on January 2, 2013, Greatbatch will record a benefit for the section 41 research tax credits earned in 2012 as a discrete item in the first quarter of fiscal 2013 and credits earned in 2013 will be recognized through the fiscal 2013 effective rate.15.15. COMMITMENTS AND CONTINGENCIES On December 21, 2012, Electrochem and several other unaffiliated parties were named as defendants in a personal injury and wrongful death action filed in In April 2013, the 113th Judicial District Court of Harris County, Texas. The complaint seeks damages alleging marketing defects and failure to warn, negligence and gross negligence relating to a product Electrochem manufactured and sold to a customer, one of the other named defendants, which, in turn, incorporated the Electrochem product into its own product which it sold to its customer, another named defendant. The cost of defense in this matter is the responsibility of Electrochem’s customer. Electrochem also has product liability insurance coverage. Electrochem has meritorious defenses and intends to vigorously defend the matter. Given the early stages of this action, the amount of loss or range of possible loss cannot be reasonably estimated at this time.As previously reported, in 2002, a former Electrochem customer, Input/Output, Inc., now known as ION Geophysical Corporation (“Input/Output”),Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company. After trialCompany’s patents by manufacturing and selling filtered feedthrough assemblies used in September 2009,implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. On January 26, 2016, a jury foundin the U.S. District Court for the District of Delaware returned a verdict finding that AVX infringed on two Greatbatch patents and awarded Greatbatch $37.5 million in damages. The finding is subject to post-trial proceedings, including a possible appeal by AVX. The Company has recorded no gains in connection with this litigation as no cash has been received.Input/OutputLake Region Medical in 2002 pertaining to a property on fraud, unfair trade practiceswhich a subsidiary of Lake Region Medical operated a manufacturing facility in South Plainfield, New Jersey beginning in 1971. Lake Region Medical sold the property in 2004 and breach of contract claims. The final judgmentvacated the facility in the matter included an award of prejudgment interest bringing the total judgment to approximately $33 million. During 2009, the Company accrued $34.5 million in connection2007. We are cooperating with the Electrochem Litigation. The Company’s post-trial motion for a new trial was denied,NJDEP and believe the Company appealed the judgmentNJDEP’s notice of intent to the Louisiana Court of Appeal.revoke is unwarranted. In December 2010,2014, the Company entered into a settlement agreement with Input/Output. Under terms of this agreement, Input/Output released the Company of any liability in connection with the jury verdict and in return for that release, the Company paid Input/Output $25 million. In the fourth quarter of 2010, the Company recognized a gain for the remaining $9.5 millioncurrent owner of the previous accrual which was recognized withinproperty commenced litigation against Lake Region Medical, one of its executive officers and other unrelated third parties, alleging that the Electrochem segment.WhileOther than what is discussed in this note, the Company does not expect that the ultimate resolution of any of theseother pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows, litigation is subject to inherent uncertainties. However, litigation is subject to inherent uncertainties andAs such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, does not become material in the future.agreementsAgreements– The Company is a party to various license agreements for technology that is utilized in certain of its products. The most significant of these agreements are the licenses for basic technology used in the production of wet tantalum capacitors, filtered feedthroughs and MRI compatible lead systems. Expenses related to license agreements were $3.1$2.4 million, $2.8$3.3 million, and $2.5$3.5 million, for 2012, 20112015, 2014 and 2010,2013, respectively, and are primarily included in Cost of Sales.- 117 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Year Ended December 28, December 30, 2012 2011 $ 2,013 $ 2,313 — 210 1,681 375 (1,068 ) (887 ) — 2 $ 2,626 $ 2,013 Year Ended January 1,
2016 January 2,
2015Beginning balance $ 660 $ 1,819 Additions to warranty reserve 1,274 953 Liabilities assumed from acquisition 2,521 — Warranty claims paid (1,139 ) (2,112 ) Ending balance $ 3,316 $ 660 Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 4,024 $ 2,704 $ 3,114 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Operating lease expense $ 6,516 $ 4,281 $ 4,379 expenseexpenses are as follows (in thousands): $ 4,601 4,368 3,766 3,176 1,203 1,930 $ 19,044 2016 $ 14,118 2017 10,951 2018 9,950 2019 8,979 2020 6,925 Thereafter 27,674 Total estimated operating lease expense $ 78,597 Self-Insured Medical Plan–The Company self-funds the medical insurance coverage provided to its U.S. based employees. For 2012, the risk to the Company was limited through the use of stop loss insurance, which had an annual maximum aggregate loss of $13.5 million with a maximum benefit of $1.0 million. For 2013, the Company has specific stop loss coverage per associate for claims in the year exceeding $225 thousand per associate with no annual maximum aggregate stop loss coverage. As of December 28, 2012 and December 30, 2011, the Company had $1.4 million and $1.6 million accrued related to the self-insurance of its medical plan, respectively. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet, and is primarily based upon claim history.- 118 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDecember 28, 2012,January 1, 2016, the total contractual obligation related to such expenditures is approximately $24.7$63.7 million and will primarily be financed by existing cash and cash equivalents, cash generated from operations, or the Company’s Senior Secured Credit Facility.Facilities. The Company also enters into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.TheHistorically, the Company has entered into forward contracts to purchase Mexican pesos in order to hedge the risk of peso-denominated payments associated with its operations in Tijuana, Mexico. In connection with the operations atLake Region Medical acquisition, the Company terminated its Tijuana, Mexico facility.outstanding forward contracts resulting in a $2.4 million payment to the foreign currency contract counterparty during 2015. As of the date the contracts were terminated, the Company had $1.6 million recorded in Accumulated Other Comprehensive Income related to these contracts, which will be amortized to Cost of Sales as the inventory, which the contracts were hedging the cash flows to produce, is sold.theseits forward contracts was as follows (in thousands): Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 79 $ 556 $ 483 — — — Year Ended January 1,
2016 January 2,
2015 January 3,
2014Increase (reduction) in Cost of Sales $ 1,948 $ (168 ) $ (1,154 ) Ineffective portion of change in fair value — — — the Company’s outstanding foreign currency contracts as of December 28, 2012January 1, 2016 is as follows (dollars in thousands): Aggregate Type of Notional Start End Fair Balance Sheet Hedge Amount Date Date $/Peso Value Location Cash flow 6,000 Jan-13 Dec-13 0.0727 222 Current Assets Cash flow 6,000 Jan-13 Dec-13 0.0693 535 Current Assets $ 757 Instrument
Notional $/Peso FX Contract Cash Flow $ 16,480 Jan 2016 Dec 2016 0.0584 $ (307 ) Accrued Expenses Trust–The Prior to 2011, the Company was a member of a group self-insurance trust that provided workers’ compensation benefits to employees of the Company in Western New York (the “Trust”). UnderPrior to being acquired by Greatbatch, Lake Region Medical self-insured the Trust agreement, each participating organization has joint and several liability for Trust obligations if the assetsworkers’ compensation benefits provided to its employees. As of the Trust are not sufficient to cover those obligations. During 2011,January 1, 2016, the Company was notified byutilized a traditional insurance provider for workers’ compensation coverage for all associates. During 2015, the Company received an additional assessment from the Trust of its intentions to cease operations at the end$0.9 million. As of 2011January 1, 2016 and was assessed $0.6 million as an estimate of its pro-rata share of future costs related to the Trust. This amount was accrued and paid in 2011. Based on actual experience,January 2, 2015, the Company could receive a refund or be assessed additional contributionshad $3.9 million and $0.0 million, respectively, accrued for workers’ compensation claims. In 2012,This accrual is recorded in Accrued Expenses in the Company utilized traditional insurance to provide workers’ compensation benefits.Consolidated Balance Sheet and is primarily based upon claim history and assessments received.- 119 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS16.16. EARNINGS (LOSS) PER SHARE Year Ended December 28, December 30, December 31, 2012 2011 2010 $ (4,799 ) $ 33,122 $ 33,138 — — 241 $ (4,799 ) $ 33,122 $ 33,379 23,584 23,258 23,070 — — 347 — 378 385 23,584 23,636 23,802 $ (0.20 ) $ 1.42 $ 1.44 $ (0.20 ) $ 1.40 $ 1.40 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Numerator for basic EPS: Net income (loss) $ (7,594 ) $ 55,458 $ 36,267 Denominator for basic EPS: Weighted average shares outstanding 26,363 24,825 23,991 Effect of dilutive securities: Stock options, restricted stock and restricted stock units — 1,150 1,332 Denominator for diluted EPS 26,363 25,975 25,323 Basic EPS $ (0.29 ) $ 2.23 $ 1.51 Diluted EPS $ (0.29 ) $ 2.14 $ 1.43 Year Ended December 28, December 30, December 31, 2012 2011 2010 2,142,000 909,000 1,061,000 781,000 649,000 609,000 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Time-vested stock options, restricted stock and restricted stock units 1,718,135 175,549 18,480 Performance-vested stock options and restricted stock units 577,825 — — all periods presented,the 2013 period, no shares related to CSN were included in the diluted EPS calculationscalculation as the average share price of the Company’s common stock for those periodsthat period did not exceed CSN’s conversion price per share.120104 -17.17. ACCUMULATED OTHER COMPREHENSIVE INCOME Defined
Benefit
Plan
Liability Cash
Flow
Hedges Foreign
Currency
Translation
Adjustment Total
Pre-Tax
Amount Tax Net-of-Tax
Amount $ (2,660 ) $ (538 ) $ 11,526 $ 8,328 $ 601 $ 8,929 — 737 — 737 (258 ) 479 — (79 ) — (79 ) 28 (51 ) 1,698 — — 1,698 (13 ) 1,685 — — 1,905 1,905 — 1,905 $ (962 ) $ 120 $ 13,431 $ 12,589 $ 358 $ 12,947 Tax At January 2, 2015 $ (1,181 ) $ (2,558 ) $ 11,450 $ 7,711 $ 1,412 $ 9,123 Unrealized loss on cash flow hedges — (4,413 ) — (4,413 ) 1,545 (2,868 ) Realized loss on foreign currency hedges — 1,948 — 1,948 (682 ) 1,266 Realized loss on interest rate swap hedges — 2,631 — 2,631 (921 ) 1,710 Net defined benefit plan liability adjustments 2 — — 2 (22 ) (20 ) Foreign currency translation loss — — (7,841 ) (7,841 ) — (7,841 ) At January 1, 2016 $ (1,179 ) $ (2,392 ) $ 3,609 $ 38 $ 1,332 $ 1,370 Tax At January 3, 2014 $ (672 ) $ (468 ) $ 14,952 $ 13,812 $ 546 $ 14,358 Unrealized loss on cash flow hedges — (2,372 ) — (2,372 ) 829 (1,543 ) Realized gain on foreign currency hedges — (168 ) — (168 ) 59 (109 ) Realized loss on interest rate swap hedges — 450 — 450 (157 ) 293 Net defined benefit plan liability adjustments (509 ) — — (509 ) 135 (374 ) Foreign currency translation loss — — (3,502 ) (3,502 ) — (3,502 ) At January 2, 2015 $ (1,181 ) $ (2,558 ) $ 11,450 $ 7,711 $ 1,412 $ 9,123 18.18. FAIR VALUE MEASUREMENTS instruments and accrued contingent consideration.instruments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.currency contracts—Currency Contracts – The fair value of foreign currency contracts are determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs include foreign exchange rate and credit spread curves. In addition to the above, the Company received fair value estimates from the foreign currency contract counterparty to verify the reasonableness of the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair value hierarchy. The fair value of the Company’s foreign currency contracts will be realized as Cost of Sales as the inventory, which the contracts are hedging the cash flows to produce, is sold, of which approximately $0.8sold. Approximately $2.4 million is expected to be realized withinas additional Cost of Sales over the next twelve months.rate swap—Rate Swaps – The fair value of the Company’s interest rate swapswaps outstanding at December 28, 2012January 2, 2015 was determined through the use of a cash flow model that utilizesutilized observable market data inputs. These observable market data inputs includeincluded LIBOR, swap rates, and credit spread curves. In addition to the above, the Company received a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company’s estimate. This fair value calculation was categorized in Level 2 of the fair value hierarchy.- 121 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSAccrued contingent consideration – The fair value of accrued contingent consideration recorded by the Company represents the estimated fair value of the contingent consideration the Company expects to pay to the former shareholders of NeuroNexus based upon the achievement of certain financial and development-based milestones. The fair value of the contingent consideration liability was estimated by discounting to present value, contingent payments expected to be made. The Company used risk-adjusted discount rates to derive the fair value of the expected obligations as of the acquisition date, which the Company believes are representative of market participant assumptions. Changes in accrued contingent consideration were as follows (in thousands): $ — 1,500 30 $ 1,530 The recurring Level 3 fair value measurements of the Company’s contingent consideration liability include the following significant unobservable inputs (dollars in thousands): Fair Value at
December 28,
2012 $ 870 Discounted cash flow Discount rate 12 % Projected year of payment 2014 $ 660 Discounted cash flow Discount rate 20 % Projected year of payment 2015 Fair Value Measurements Using Quoted Prices in Significant Active Markets Other Significant At for Identical Observable Unobservable December 28, Assets Inputs Inputs 2012 (Level 1) (Level 2) (Level 3) $ 757 $ — $ 757 $ — $ 1,530 $ — $ — $ 1,530 638 — 638 — - 122 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value Measurements Using Quoted Prices in Significant Active Markets Other Significant At for Identical Observable Unobservable December 30, Assets Inputs Inputs 2011 (Level 1) (Level 2) (Level 3) $ 538 $ — $ 538 $ — Fair Value Measurements Using Description At January 1, 2016
Assets Liabilities Foreign currency contracts (Note 15) $ 307 $ — $ 307 $ — Fair Value Measurements Using Description At January 2,
2015 Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)Liabilities Foreign currency contracts $ 1,568 $ — $ 1,568 $ — Interest rate swaps 990 — 990 — equity method investments—Equity Method Investments – The Company holds investments in equity and other securities that are accounted for as either cost or equity method investments, which are classified asin Other Assets.Assets on the Consolidated Balance Sheets. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost or equity method investments is not adjusted if there are no identified events or changes in circumstances that may have a material effect on the fair value of the investments. Gains and losses realized on cost and equity method investments are recorded in Other (Income) Expense, Net, unless separately stated. The aggregate recorded amount of cost and equity method investments at December 28, 2012January 1, 2016 and December 30, 2011January 2, 2015 was $9.1$20.6 million and $5.7$14.5 million, respectively. The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change. As of January 1, 2016, the Company owned 6.7% of this fund.2012, 20112015, 2014 and 2010,2013, the Company recognized impairment charges related to its cost and equity method investments of $0.1$1.4 million, $0.3$0.0 million and $0.2$0.5 million, respectively. The fair value of these investments waswere determined by reference to recent sales data of similar shares to independent parties in an inactive market. This fair value calculation wasis categorized in Level 2 of the fair value hierarchy. On January 5, 2011,During 2015, 2014, and 2013, the Company recognized a net gain (loss) on equity method investments of $4.7 million, $1.2 million, and $(0.2) million, respectively. During 2015, the Company recorded a gain and received a $3.6 million cash distribution from its equity method investment, which was classified as a cash flow from operating activities in the Consolidated Statement of Cash Flows as it represented a return on investment. During 2014, the Company sold one of its cost method investment in IntElect Medical, Inc. (“IntElect”) in conjunction with Boston Scientific’s acquisition of IntElect. This transactioninvestments, which resulted in a pre-tax gain of $4.5 million in the first quarter of 2011 and an additional $0.4 million during the third quarter of 2012. Cost and equity method investment impairment charges, gains and losses are included in (Gain) Loss on Cost and Equity Method Investments, Net in the Consolidated Statement of Operations.Long-lived assetsLong-Lived Assets – The Company reviews the carrying amount of its long-lived assets to be held and used for potential impairment whenever certain indicators are present as described in Note 1 “Summary of Significant AccountingIn connection withThere were no impairment charges recorded during 2015 related to the sale of certain non-core Swiss orthopaedic product lines, during 2012,Company’s long-lived assets. During 2014, the Company transferred long-lived assetsrecorded a $0.4 million impairment charge related to its Orvin, Switzerland property held for sale. Refer to Note 5 “Assets Held for Sale” for further discussion. The fair value of this asset group wasthese assets were determined based upon therecent sales price for the long-liveddata of similar assets and discussions with potential buyers, and was categorized in Level 2 of the fair value hierarchy.- 123 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Fair Value Measurements Using Quoted Prices in Significant Active Markets Other Significant At for Identical Observable Unobservable December 28, Assets Inputs Inputs 2012 (Level 1) (Level 2) (Level 3) $ 4,499 $ — $ 4,499 $ — 86 — 86 — Fair Value Measurements Using Description At January 1, 2016 Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)Assets Cost method investment $ 1,100 $ — $ 1,100 $ — Fair Value Measurements Using Description At January 2, 2015 Quoted
Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)Assets Assets Held for Sale $ 1,635 $ — $ 1,635 $ — Convertible subordinated notes—The fair value of the Company’s convertible subordinated notes disclosed in Note 9 “Debt” was determined based upon recent third-party transactions for the Company’s notes in an inactive market. The Company’s convertible subordinated notes are valued for disclosure purposes utilizing Level 2 measurements of the fair value hierarchy.plan assetsPlan Assets – The fair value of the Company’s pension plan assets disclosed in Note 10 “Defined Benefit“Benefit Plans” are determined based upon quoted market prices in active markets, quoted market prices in inactive markets or multidimensional relationalvaluation models with observable market data inputs to estimate fair value. These observable market data inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. The Company’s pension plan assets are categorized in Level 1 or Level 2 of the fair value hierarchy.- 124 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS19.19. BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION Theoperates its business in two reportable segments – Implantable Medical and Electrochem. The Implantable Medical segment is comprisedacquired all of the outstanding common stock of Lake Region Medical. As a result, the Company now has three reportable segments: Greatbatch Medical, QiG and Lake Region Medical. In February 2016, Greatbatch announced that its Board of Directors approved the spin-off of a portion of its QiG segment through a tax-free distribution of its QiG Group brandsLLC subsidiary to the stockholders of Greatbatch on a pro rata basis. The portion of the QiG segment being spun-off will consist of QiG Group LLC and its subsidiaries: (i) Algostim, (ii) PelviStim, and (iii) Greatbatch’s NeuroNexus subsidiary. It is expected that Greatbatch stockholders will receive one share of Nuvectra common stock for every three shares of Greatbatch common stock held as of the record date. Upon completion of the pending Spin-off, Nuvectra will be an independent, publicly-traded company and Greatbatch will not own any shares of Nuvectra common stock. The operations of CCC and certain other existing QiG research and development capabilities will be retained by Greatbatch and not included as part of the Spin-off. The Spin-off is expected to be completed in March 2016. As a result of the Lake Region Medical acquisition and pending Spin-off, the Company is reevaluating its operating and reporting segments, which is expected to be finalized in 2016 once the corporate and management reporting structure realignment is completed.forwhere Greatbatch either owns the intellectual property or has unique manufacturing and assembly expertise. Greatbatch Medical provides medical devices and components to the cardiac, neuromodulation, orthopaedics, portable medical, vascular and orthopaedic markets. The Implantableenergy markets among others. Greatbatch Medical segment offers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution, which is facilitated through the QiG Group and leverages the component technology of Greatbatch Medical. The devices designed and developed by the QiG Group are manufactured by Greatbatch Medical. The Implantable Medical segment also offers value-added assembly and design engineering services for medical devices that utilize its component products.Electrochem designs, manufacturesdistributes customizeddevelopment of medical device systems and components. QiG is in the process of developing applications for its neurostimulation technology platform for emerging indications such as SCS, SNS, and DBS, among others. The QiG segment is comprised of the QiG Group, LLC, NeuroNexus, and CCC. QiG facilitates the development of medical device systems through the establishment of limited liability companies (“LLCs”). These LLCs do not own, but have the exclusive right to use the technology of Greatbatch in specific fields of use and have an exclusive manufacturing agreement with Greatbatch Medical. As of January 2, 2015, QiG Group LLC owned 89% of two LLCs, Algostim and PelviStim, but was responsible for 100% of the expenses incurred by these LLCs. However, no distributions were to be made to the minority holders of the LLCs until QiG was reimbursed for all expenses paid. Minority interests in these LLCs were held by key opinion leaders and clinicians. During 2015, the Company purchased the non-controlling interest in these LLCs for $16.7 million. Of this amount, $6.8 million remained payable as of January 1, 2016 and was recorded in Accrued Expenses in the Consolidated Balance Sheet. For purposes of the Consolidated Statement of Cash Flows for the year ended January 1, 2016, this liability was treated as a non-cash financing transaction. As of January 1, 2016, QiG Group LLC now owns 100% of Algostim and PelviStim.(non-rechargeable) and secondary (rechargeable)rechargeable batteries and battery packs for demanding applications in the portable medical, energy, environmental monitoring and security markets among others. Portable medical product line sales were primarily obtained through the Micro Power acquisition.The Company defines segment income from operationssuch as sales less cost of sales including amortization and expenses attributable to segment-specific selling, general, administrative, research, development, engineering and other operating activities. Segment income also includes a portion of non-segment specific selling, general, and administrative expenses based on allocations appropriate to the expense categories. The remaining unallocated operating and other expenses are primarily administrative corporate headquarter expenses and capital costs that are not allocated to reportable segments. Transactions between the two segments are not significant.segment,segments, product linelines and geographic information to the respective information in the Consolidated Financial Statements follows. Intersegment sales between Greatbatch Medical and QiG were not material for 2014 or 2013. Approximately $1.8 million of intersegment sales are included in Greatbatch Medical and $1.2 million intersegment sales are included in Lake Region Medical. Sales by geographic area are presented by allocating sales from external customers based on where the products are shipped to (in thousands): Year Ended December 28, December 30, December 31, Sales: 2012 2011 2010 $ 309,124 $ 303,690 $ 303,521 51,980 45,098 38,000 122,061 140,277 118,748 483,165 489,065 460,269 81,659 9,609 8,432 67,046 58,934 54,668 14,307 11,214 10,056 163,012 79,757 73,156 $ 646,177 $ 568,822 $ 533,425 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Product line sales: Advanced Surgical, Orthopaedics, and Portable Medical $ 243,385 $ 216,339 $ 208,990 Cardio and Vascular 143,260 58,770 48,357 Cardiac/Neuromodulation 356,064 330,921 328,455 Electrochem 59,449 81,757 78,143 Elimination of interproduct line sales (1,744 ) — — Total sales $ 800,414 $ 687,787 $ 663,945 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Business segment sales: Greatbatch Medical $ 649,977 $ 678,285 $ 660,902 QiG 13,571 9,502 3,043 Lake Region Medical 139,819 — — Elimination of intersegment sales (2,953 ) — — Total sales $ 800,414 $ 687,787 $ 663,945 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Segment income (loss) from operations: Greatbatch Medical $ 109,737 $ 126,312 $ 111,805 QiG (25,855 ) (23,256 ) (30,484 ) Lake Region Medical (16,416 ) — — Total segment income from operations 67,466 103,056 81,321 Unallocated operating expenses (54,320 ) (27,402 ) (19,982 ) Operating income 13,146 75,654 61,339 Unallocated other income (expense), net (28,846 ) 925 (12,501 ) Income (loss) before provision for income taxes $ (15,700 ) $ 76,579 $ 48,838 125109 - Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 24,908 $ 62,461 $ 62,477 21,631 14,965 22,195 46,539 77,426 84,672 (20,718 ) (15,727 ) (15,678 ) 25,821 61,699 68,994 (19,091 ) (13,307 ) (19,669 ) $ 6,730 $ 48,392 $ 49,325 Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 32,928 $ 28,571 $ 28,117 7,522 2,965 2,660 40,450 31,536 30,777 18,475 16,159 15,670 $ 58,925 $ 47,695 $ 46,447 Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 32,130 $ 22,509 $ 15,088 4,327 1,072 763 36,457 23,581 15,851 4,709 741 1,120 $ 41,166 $ 24,322 $ 16,971 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Depreciation and amortization: Greatbatch Medical $ 30,160 $ 31,906 $ 31,112 QiG 1,862 2,101 1,539 Lake Region Medical 32,249 — — Total depreciation and amortization included in segment income from operations 64,271 34,007 32,651 Unallocated depreciation and amortization 3,347 3,450 3,315 Total depreciation and amortization $ 67,618 $ 37,457 $ 35,966 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Expenditures for tangible long-lived assets, excluding acquisitions: Greatbatch Medical $ 32,921 $ 19,006 $ 13,242 QiG 1,160 1,453 2,134 Lake Region Medical 7,525 — — Total reportable segments 41,606 20,459 15,376 Unallocated long-lived tangible assets 6,448 5,187 2,798 Total expenditures $ 48,054 $ 25,646 $ 18,174 At January 1,
2016 January 2,
2015 January 3,
2014Identifiable assets: Greatbatch Medical $ 798,609 $ 761,225 $ 758,369 QiG 68,637 76,529 56,245 Lake Region Medical 1,971,071 — — Total reportable segments 2,838,317 837,754 814,614 Unallocated assets 143,819 117,368 75,015 Total assets $ 2,982,136 $ 955,122 $ 889,629 Year Ended January 1,
2016 January 2,
2015 January 3,
2014Sales by geographic area: United States $ 401,380 $ 312,539 $ 325,090 Non-Domestic locations: Puerto Rico 136,898 127,702 117,961 Belgium 62,546 65,308 67,155 Rest of world 199,590 182,238 153,739 Total sales $ 800,414 $ 687,787 $ 663,945 126110 - At December 28, December 30, 2012 2011 $ 670,135 $ 653,628 167,505 161,904 837,640 815,532 52,235 65,815 $ 889,875 $ 881,347 Year Ended December 28, December 30, December 31, 2012 2011 2010 $ 330,537 $ 256,987 $ 243,827 105,731 94,059 88,369 58,043 62,978 58,014 43,938 54,029 56,903 107,928 100,769 86,312 $ 646,177 $ 568,822 $ 533,425 At December 28, December 30, 2012 2011 $ 123,104 $ 113,693 27,789 32,113 $ 150,893 $ 145,806 At January 1,
2016 January 2,
2015 January 3,
2014Long-lived tangible assets: United States $ 264,556 $ 113,851 $ 116,484 Rest of world 114,936 31,074 29,289 Total $ 379,492 $ 144,925 $ 145,773 Sales Accounts Receivable Year Ended At December 28, December 30, December 31, December 28, December 30, 2012 2011 2010 2012 2011 19 % 19 % 21 % 7 % 7 % 16 % 19 % 19 % 21 % 23 % 11 % 13 % 12 % 6 % 6 % 6 % 8 % 10 % 6 % 6 % 52 % 59 % 62 % 40 % 42 % - 127 -GREATBATCH, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Sales Accounts Receivable Year Ended At January 1,
2016 January 2,
2015 January 3,
2014 January 1,
2016 January 2,
2015Customer A 18 % 18 % 16 % 23 % 23 % Customer B 17 % 18 % 20 % 8 % 4 % Customer C 12 % 12 % 13 % 6 % 8 % Customer D 5 % 6 % 7 % 7 % 12 % 52 % 54 % 56 % 44 % 47 % 20.20. QUARTERLY SALES AND EARNINGS DATA—UNAUDITED 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. (in thousands, except per share data) $ 159,186 $ 161,340 $ 166,548 $ 159,103 51,874 50,954 51,933 46,888 (5,556 ) (7,561 ) 3,851 4,467 (0.23 ) (0.32 ) 0.16 0.19 (0.23 ) (0.32 ) 0.16 0.19 $ 141,746 $ 131,718 $ 146,524 $ 148,834 44,672 41,907 46,604 47,170 5,639 6,989 8,550 11,944 0.24 0.30 0.37 0.51 0.24 0.30 0.36 0.51 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. (in thousands, except per share data) 2015 Sales $ 317,567 $ 146,637 $ 174,890 $ 161,320 Gross profit 73,140 51,646 57,951 52,398 Net income (loss) (24,907 ) 22 9,283 8,008 EPS—basic (0.85 ) — 0.36 0.32 EPS—diluted (0.85 ) — 0.35 0.31 2014 Sales $ 169,726 $ 171,699 $ 172,081 $ 174,281 Gross profit 57,214 58,118 58,470 57,596 Net income 14,176 14,012 12,348 14,922 EPS—basic 0.57 0.56 0.50 0.61 EPS—diluted 0.54 0.54 0.48 0.58 2012 was impacted by2015 include $13.0 million and $57.1 million, respectively, of charges incurred in connection with the consolidationLake Region Medical acquisition (transaction and integration, inventory step-up amortization, debt related charges) and Spin-off of Nuvectra (professional and consulting fees). Sales for the Company’s Swiss orthopaedic facilities. Seefourth quarter of 2015 include $138.6 million from the acquisition of Lake Region Medical. Refer to Note 13 “Other Operating Expenses, Net.2 “Acquisitions.”Net income in the 2011 first quarter includes the impact of the gain on sale of a cost method investment. See Note 18 “Fair Value Measurements.”- 128 -a.Evaluation of Disclosure Controls and Procedures.a. Evaluation of Disclosure Controls and Procedures December 28, 2012.January 1, 2016. These disclosure controls and procedures have been designed to provide reasonable assurance that material information relating to us, including our subsidiaries, is made known to our management, including these officers, by our employees, and that this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based on their evaluation, as of December 28, 2012,January 1, 2016, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective..2012:2015:NeuroNexus Technologies,Lake Region Medical Holdings, Inc.thethis subsidiary listed above from management’s assessment of the effectiveness of internal control over financial reporting as of December 28, 2012,January 1, 2016, as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission. This subsidiary represented approximately 3%66% of total assets, 17% of revenues, and 2%229% of net and total assets, respectively, and 0.4% of revenuesloss of the consolidated financial statement amounts as of and for the year ended December 28, 2012.January 1, 2016. The Company will report on its assessment of the internal controls of its combined operations within the time period provided by the Act and the applicable Securities and Exchange Commission rules and regulations concerning business combinations.reporting, other than the above mentioned acquisition.- 129 -
reporting.20132016 Annual Meeting of Stockholders is incorporated herein by reference.20132016 Annual Meeting of Stockholders.20132016 Annual Meeting of Stockholders is incorporated herein by reference.ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 20132016 Annual Meeting of Stockholders is incorporated herein by reference.20132016 Annual Meeting of Stockholders is incorporated herein by reference.20132016 Annual Meeting of Stockholders is incorporated herein by reference.130113 -(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT (1)1. Financial statements and financial statement schedules filed as part of this Annual Report on Form 10-K. See Part II, Item 8. “Financial Statements and Supplementary Data.” (2)2. The following financial statement schedule is included in this reportAnnual Report on Form 10-K (in thousands): Col. C—Additions Col. B Charged to Col. E Balance at Charged to Other Col. D Balance at Beginning
of Period Costs &
Expenses Accounts—
Describe Deductions
- Describe End of
Period $ 1,930 $ 484 $ 71 (3)(4) $ (113 )(2)(4) $ 2,372 $ 7,775 $ 5,145 (1) $ 124 (4) $ (276 )(5) $ 12,768 $ 1,830 $ 288 $ 170 (3)(4) $ (358 )(2) $ 1,930 $ 6,482 $ 702 (1) $ 591 (3)(4) $ — $ 7,775 $ 2,452 $ (64 ) $ 35 (4) $ (593 )(2) $ 1,830 $ 5,656 $ 761 (1) $ 65 (4) $ — $ 6,482 Col. C—Additions Charged to Other Accounts- Describe January 1, 2016 Allowance for doubtful accounts $ 1,411 $ (70 ) $ 459 $ (846 ) $ 954 Valuation allowance for deferred income tax assets $ 10,709 $ 788 $ 27,836 $ (162 ) $ 39,171 January 2, 2015 Allowance for doubtful accounts $ 2,001 $ 98 $ 14 $ (702 ) $ 1,411 Valuation allowance for deferred income tax assets $ 11,661 $ (729 ) $ — $ (223 ) $ 10,709 January 3, 2014 Allowance for doubtful accounts $ 2,372 $ (93 ) $ (15 ) $ (263 ) $ 2,001 Valuation allowance for deferred income tax assets $ 12,768 $ (1,263 ) $ 32 $ 124 $ 11,661 expense recordednet decrease in 2012allowance in 2014 and 2013 primarily relates to the use of net operating losses incurred by our Switzerland operations.off, net of collections on accounts receivable previously written off.BalancesBalance recorded as a part of our 20122015 acquisition of NeuroNexus Technologies, Inc.Lake Region Medical and 2011our 2014 acquisition of Micro Power Electronics, Inc.- 131 -(3)3. Exhibits required by Item 601 of Regulation S-K. The exhibits listed on the Exhibit Index of this Annual Report on Form 10-K have been previously filed, are filed herewith or are incorporated herein by reference to other filings. Dated: February 27, 2013March 1, 2016 By Thomas J. Hook (Principal Executive Officer) President &and Chief Executive Officer- 132 - Thomas J. Hook & Chief Executive&and Director February 27, 2013March 1, 2016Thomas J. Hook /s/ Michael Dinkins Michael Dinkins SeniorExecutive Vice President &and Chief Financial Officer (Principal Financial Officer) February 27, 2013March 1, 2016Michael Dinkins /s/ Thomas J. Mazza Thomas J. Mazza Vice President and Corporate Controller (Principal Accounting Officer) February 27, 2013March 1, 2016Thomas J. Mazza /s/ Bill R. Sanford Chairman March 1, 2016 Bill R. Sanford /s/ Pamela G. Bailey Director March 1, 2016 Pamela G. Bailey /s/ Anthony P. Bihl III Director March 1, 2016 Anthony P. Bihl III /s/ Joseph W. Dziedzic Director March 1, 2016 Joseph W. Dziedzic /s/ Jean Hobby Director March 1, 2016 Jean Hobby /s/ M. Craig Maxwell Director March 1, 2016 M. Craig Maxwell /s/ Dr. Joseph A. Miller, Jr. Director March 1, 2016 Dr. Joseph A. Miller, Jr. /s/ Filippo Passerini Director March 1, 2016 Filippo Passerini /s/ Peter H. Soderberg Director March 1, 2016 Peter H. Soderberg /s/ William B. Summers, Jr. Director March 1, 2016 William B. Summers, Jr. /s/ Bill R. SanfordBill R. Sanford ChairmanDESCRIPTION February 27, 2013/s/ Pamela G. BaileyPamela G. Bailey DirectorAgreement and Plan of Merger, dated as of August 27, 2015, by and among Lake Region Medical Holdings, Inc., Greatbatch, Inc. and Provenance Merger Sub Inc. (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on August 31, 2015). February 27, 2013/s/ Anthony P. Bihl IIIAnthony P. Bihl IIIDirectorFebruary 27, 2013/s/ Rudy A. MazzocchiRudy A. MazzocchiDirectorFebruary 27, 2013/s/ Kevin C. MeliaKevin C. MeliaDirectorFebruary 27, 2013/s/ Dr. Joseph A. Miller, Jr.Dr. Joseph A. Miller, Jr.DirectorFebruary 27, 2013/s/ Peter H. SoderbergPeter H. SoderbergDirectorFebruary 27, 2013/s/ William B. Summers, Jr.William B. Summers, Jr.DirectorFebruary 27, 2013- 133 -EXHIBIT INDEXEXHIBITNUMBERDESCRIPTION3.1 Amended and Restated Certificate of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to our quarterly reportQuarterly Report on Form 10-Q for the period ended June 27, 2008).3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our annual reportAnnual Report on Form 10-K for the periodyear ended January 1, 2010).4.1 Indenture for 2 1/4% Convertible Subordinated Debentures Due 2013(including from Note), dated as of March 28, 2007 (incorporatedOctober 27, 2015, by and among Greatbatch Ltd., the guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee(incorporated by reference to Exhibit 10.34.1 to our Current Report on Form 8-K filed on March 29, 2007)October 28, 2015).4.2 First Supplemental IndentureStockholders Agreement, dated April 2, 2007as of October 27, 2015, by and among Greatbatch, Inc., Kohlberg Kravis Roberts & Co. L.P., Bain Capital Investors, LLC and each other stockholder party thereto (incorporated by reference to Exhibit 10.34.2 to our Current Report on Form 8-K filed on April 4, 2007)October 28, 2015).4.3 Registration Rights Agreement dated as of March 28, 2007 by and among us and the initial purchasers of the Debentures described above (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on March 29, 2007).10.1# 1998 Stock Option Plan (including form of “standard” option agreement, form of “special” option agreement and form of “non-standard” option agreement) (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-1 filed on May 22, 2000 (File No. 333-37554)). 10.2# Amendment to Greatbatch, Inc. 1998 Stock Option Plan (incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for the period ended January 3, 2014). 10.3# Non-Employee Director Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule 14-A filed on April 22, 2002). 10.3#10.4# Greatbatch, Inc. Executive Short Term Incentive Compensation Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule 14-A filed on April 20, 2012). 10.4# 2002 Restricted Stock Plan (incorporated by reference to Appendix B to our Definitive Proxy Statement on Schedule 14-A filed on April 9, 2003).10.5 License Agreement dated August 8, 1996, between Greatbatch Ltd. and Evans Capacitor Company (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1 filed on May 22, 2000 (File No. 333-37554)). 10.6+ Amendment No. 2 dated December 6, 2002, between Greatbatch Technologies, Ltd. and Evans Capacitor Company (incorporated by reference to Exhibit 10.18 to our Annual Report on Form 10-K for the year ended January 3, 2003).10.7#10.6# Form of Change of Control Agreement between Greatbatch, Inc. and its executive officers (Thomas J. Hook, Thomas J. Mazza, Mauricio Arellano, Susan M. Bratton, Michelle Graham and Timothy G. McEvoy) (incorporated by reference to Exhibit 10.1 to our quarterly reportQuarterly Report on Form 10-Q for the period ended July 1, 2011).- 134 -10.8*10.7# Form of Change of Control Agreement between Greatbatch, Inc. and its executive officers (Michael Dinkins, Andrew P. Holman, Jennifer M. Bolt, Jeremy Friedman, Antonio Gonzalez, Declan Smyth, and Daniel R. Kaiser)Kristin Trecker) (incorporated by reference to Exhibit 10.8 to our Annual Report on Form 10-K for the year ended December 28, 2012).10.910.8 Credit agreementAgreement, dated June 24, 2011as of October 27, 2015, by and among Greatbatch Ltd., as the lendersborrower, Greatbatch, Inc., as parent, the financial institutions party thereto and Manufacturers and Traders Trust Company, as administrative agent Bank of America, N.A., as syndication agent, and PNC Bank, N.A. and RBS Citizens, NA, as co-documentation agents (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on June 29, 2011)October 28, 2015).10.10#10.9# Employment Agreement dated April 10, 2010August 5, 2013 between Greatbatch, Inc. and Thomas J. Hook (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 13, 2010).10.11#Extension of Employment Agreement dated December 29, 2012 between Greatbatch, Inc. and Thomas J. Hook (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on January 4,August 9, 2013).10.12#10.10# 2005 Stock Incentive Plan (incorporated by reference to Exhibit B to our Definitive Proxy Statement on Schedule 14-A14A filed on April 20, 2007).10.13#10.11# 2009 Stock Incentive Plan (incorporated by reference to Exhibit A to our Definitive Proxy Statement on Schedule 14-A14A filed on April 13, 2009).10.14#10.12# 2011 Stock Incentive Plan (as amended December 7, 2011) (incorporated by reference to Exhibit 10.12A to our Definitive Proxy Statement on Schedule 14A filed on April 14, 2014).10.13# Amendment to Greatbatch, Inc. 2011 Stock Incentive Plan, Greatbatch, Inc. 2009 Stock Incentive Plan, Greatbatch, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 10.14 to our Annual Report on Form 10-K for the year ended December 30, 2011)January 3, 2014).10.15#DESCRIPTION 10.14# Form of Restricted Stock Award Letter (incorporated by reference to Exhibit 10.2210.15 to our Annual Report on Form 10-K for the year ended December 30, 2005)January 3, 2014).10.16#10.15# Form of IncentivePerformance-Based Restricted Stock OptionUnits Award Letter (incorporated by reference to Exhibit 10.2310.16 to our Annual Report on Form 10-K for the year ended December 30, 2005)January 3, 2014).10.17#10.16# Form of Nonqualified Option Award Letter (incorporated by reference to Exhibit 10.2410.17 to our Annual Report on Form 10-K for the year ended December 30, 2005)January 3, 2014).10.18#10.17# Form of Time-Based Restricted Stock OptionUnits Award Letter (incorporated by reference to Exhibit 10.2510.18 to our Annual Report on Form 10-K for the year ended December 30, 2005)January 3, 2014).10.19+ Supply Agreement for medical device components dated March 31, 2006, between Greatbatch, Inc. and SORIN/ELA BIOMEDICA CRM and ELA MEDICAL SAS (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006).12.1* Ratio of Earnings to Fixed Charges (Unaudited) 21.1* Subsidiaries of Greatbatch, Inc. 23.1* Consent of Independent Registered Public Accounting Firm - 135 -31.1* Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act. 32.1** Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS101.INS* XBRL Instance Document 101.SCH101.SCH* XRBL Taxonomy Extension Schema Document 101.CAL101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB101.LAB* XBRL Taxonomy Extension Labels Linkbase Document 101.PRE101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF101.DEF* XBRL Taxonomy Extension Definition Linkbase Document * — -Filed herewith. ** — -Furnished herewith. #—# - Indicates exhibits that are management contracts or compensation plans or arrangements required to be filed pursuant to Item 14(c)15(b) of Form 10-K.136117 -