

15.		COMMITMENTS AND CONTINGENCIES

Litigation – In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on 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 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.

In January 2015, Lake Region Medical was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of the NJDEP’s intent to revoke a no further action determination made by the NJDEP in favor of Lake Region Medical in 2002 pertaining to a property on which 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 vacated the facility in 2007. We are cooperating with the NJDEP and believe the NJDEP’s notice of intent to revoke is unwarranted. In December 2014, the current owner of the property commenced litigation against Lake Region Medical, one of its executive officers and other unrelated third parties, alleging that the 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.

The Company is a party to various other legal actions arising in the normal course of business. Other than what is discussed in this note, the Company does not expect that the ultimate resolution of any other 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. As 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.

Environmental Matters – The Company’s Collegeville, PA facility, which was acquired as part of the Lake Region Medical acquisition, is subject to two administrative consent orders entered into with the U.S. Environmental Protection Agency (the “EPA”), which require ongoing groundwater treatment and monitoring at the site as a result of historic leaks from underground storage tanks. Upon approval by the EPA of the Company’s proposed post remediation care plan, which requires a continuation of the groundwater treatment and monitoring process at the site, the Company expects that the consent orders will terminate. During the first half of 2016, the Company expects a decision from the EPA on whether the Company’s post remediation care plan has been approved. The groundwater treatment process at the Collegeville facility consists of a groundwater extraction and treatment system and the performance of annual sampling of a defined set of groundwater wells as a means to monitor containment within approved boundaries. As of January 1, 2016, there is $1.1 million recorded in Other Long-Term Liabilities in the Consolidated Balance Sheets in connection with this matter for the cost of on-going remediation.

License Agreements – 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 $2.4 million, $3.3 million, and $3.5 million, for 2015, 2014 and 2013, respectively, and are primarily included in Cost of Sales.

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):



	Year Ended
	January 1, 2016			January 2, 2015
Beginning 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

Operating Leases – The Company is a party to various operating lease agreements for buildings, machinery, equipment and software. The Company primarily leases buildings, which accounts for the majority of the future lease payments. Lease expense includes the effect of escalation clauses and leasehold improvement incentives which are accounted for ratably over the lease term. Operating lease expense was as follows (in thousands):



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Operating lease expense	$	6,516	$	4,281	$	4,379

Minimum future estimated annual operating lease expenses are as follows (in thousands):



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

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 January 1, 2016, the total contractual obligation related to such expenditures is approximately $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 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.

Self-Insured Medical Plan – The Company self-funds the medical insurance coverage provided to its U.S. based employees. The Company had specific stop loss coverage for claims incurred during 2015 exceeding $250 thousand per associate for legacy Greatbatch employees and exceeding $275 thousand per associate for legacy Lake Region Medical employees with no annual maximum aggregate stop loss coverage. As of January 1, 2016 and January 2, 2015, the Company had $4.0 million and $1.8 million accrued related to the self-insurance of its medical plans, respectively. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is primarily based upon claim history.

Foreign Currency Contracts – Historically, 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 Lake Region Medical acquisition, the Company terminated its 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.

The impact to the Company’s results of operations from its forward contracts was as follows (in thousands):



	Year Ended
	January 1, 2016		January 2, 2015			January 3, 2014
Increase (reduction) in Cost of Sales	$	1,948	$	(168	)	$	(1,154	)
Ineffective portion of change in fair value	—		—			—

Information regarding outstanding foreign currency contracts as of January 1, 2016 is as follows (dollars in thousands):

Instrument

Type of

Hedge

Aggregate
Notional

Amount

Start

Date

End

Date

$/Peso

Fair

Value

Balance Sheet

Location

FX Contract

Cash Flow

16,480

Jan 2016

Dec 2016

0.0584

(307

)

Accrued Expenses

Self-Insured Workers’ Compensation – 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”). 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 and January 2, 2015, the Company had $3.9 million and $0.0 million, respectively, accrued for workers’ compensation claims. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet and is primarily based upon claim history and assessments received.