8. Business Segment Information
| | The company operates its business in two reportable segments: the medical segment and the commercial power sources segment. The medical segment designs and manufactures power sources, capacitors and components used in implantable medical devices, which are instruments that are surgically inserted into the body to provide diagnosis or therapy. The commercial power sources segment designs and manufactures non-medical power sources for use in aerospace, oil and gas exploration and oceanographic equipment. |
| | The Company’s medical segment includes three product lines that have been aggregated because they share similar economic characteristics and similarities in the areas of products, production processes, types of customers, methods of distribution and regulatory environment. The three product lines are implantable power sources, capacitors and medical components. |
| | The reportable segments are separately managed, and their performance is evaluated based on income from operations. Management defines segment income from operations as gross profit less costs and expenses attributable to segment specific selling, general and administrative, and research, development and engineering expenses. Non-segment specific selling, general and administrative, research, development and engineering expenses, interest expense, intangible amortization and non-recurring items are not allocated to reportable segments. Revenues from transactions between the two segments are not significant. The accounting policies of the segments are the same as those described and referenced in Note 1. All dollars are in thousands. |
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 28, September 29, September 28, September 29,
2001 2000 2001 2000
---------------- ----------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues:
Medical $ 31,870 $ 19,224 $ 80,384 $ 60,970
Commercial power sources 6,455 4,032 20,499 8,870
---------------- ----------------- ----------------- -----------------
Total revenues $ 38,325 $ 23,256 $100,883 $ 69,840
================ ================= ================= =================
Segment income from
operations:
Medical $ 11,184 $ 6,546 $ 28,610 $ 21,243
Commercial power sources 1,942 840 6,870 2,091
---------------- ----------------- ----------------- -----------------
Total segment income from
operations 13,126 7,386 35,480 23,334
Unallocated (7,790) (8,614) (21,272) (25,666)
---------------- ----------------- ----------------- -----------------
Income (loss) before income
taxes and extraordinary loss $ 5,336 ($ 1,228) $ 14,208 ($ 2,332)
================ ================= ================= =================
9. Impact of Recently Issued Accounting Standards
| | Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective December 30, 2000, which was the first day of fiscal 2001. The adoption of SFAS No. 133 did not have a significant impact on the consolidated financial position, results of operations, or cash flows of the Company.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB No. 16 "Business Combinations." Effective July 1, 2001, all business combinations in the scope of this new Statement are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment-only approach. |
| | The Company has not completed an analysis of the potential impact upon adoption of the impairment test of goodwill, however amortization of existing goodwill which was approximately $0.7 million and $1.4 million for the three and nine months ended September 28, 2001, will cease upon adoption (December 29, 2001). |
| | Under provisions of SFAS No. 141, we will be required to reclassify our assembled workforce to goodwill. At September 28, 2001, assembled workforce approximated $4.8 million. Amortization of our assembled workforce of approximately $0.2 million and $0.5 million for the three and nine months ended September 28, 2001, will also cease upon adoption. The Company has not completed the analysis of the effect of the Statement on the amortization of its trademark and trade names. Amortization of our other identifiable intangible assets will continue. |
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with our condensed consolidated financial statements (including the notes thereto) included elsewhere herein.
Introduction
We are a leading developer and manufacturer of power sources and components used in pacemakers and other implantable medical devices and specialty batteries for non-medical applications.
Results of Operations
Revenues
Total revenues for the quarter ended September 28, 2001 were $38.3 million, a $15.0 million, or 65%, increase from $23.3 million for the third quarter of 2000. Total revenues for the first nine months of 2001 were $100.9 million, a $31.0 million, or 44%, increase from the $69.8 million for the nine months ended September 29, 2000. The increase included revenues in the third quarter and first nine months of 2001 of Battery Engineering, Inc., or BEI, which we acquired in August 2000 and Sierra, which we acquired in June 2001.
Medical. Total medical revenues for the three months ended September 28, 2001 were $31.9 million, a $12.7 million, or 66%, increase from the $19.2 million for the third quarter of 2000. Implantable power source revenues for the third quarter of 2001 were $12.1 million, an increase of $2.6 million, or 28%, from $9.5 million for the quarter ended September 29, 2000. This increase was primarily due to sales of both pacemaker and implantable cardioverter defibrillators, or ICD, batteries to satisfy current demand at our customers. Partially off-setting this increase was a $0.1 million decline in royalty revenues and other battery sales in the third quarter of 2001 as compared to the prior year’s third quarter. Capacitor revenues for the quarter ended September 28, 2001 were $6.4 million, an increase of $3.6 million, or 128%, from $2.8 million in the third quarter of 2000. The increase is attributable to the inclusion of our capacitors in more device models, as we replace the prior generation of capacitor technology. Sales of medical components were $13.4 million for the third quarter of 2001, an increase of $6.4 million, or 92%, from $7.0 million in the quarter ended September 29, 2000. The increase was primarily due to the inclusion of revenues from Sierra since its acquisition on June 18, 2001.
Total medical revenues for the nine months ended September 28, 2001 were $80.4 million, a $19.4 million, or 32%, increase from $61.0 million for the nine months ended September 29, 2000. Implantable power source revenues for the nine months ended September 28, 2001 were $35.4 million, an increase of $5.4 million, or 18%, from $30.0 million for the nine months ended September 29, 2000. This increase is primarily due to sales of both pacemaker and ICD batteries to satisfy demand. The increase was partially off-set by a reduction of $1.1 million in royalty revenues for the nine months ended September 28, 2001 as compared to the nine months ended September 29, 2000. Capacitor revenues for the nine months ended September 28, 2001 were $14.2 million, an increase of $4.5 million, or 47%, from $9.7 million for the nine months ended September 29, 2000. Growth in capacitor revenues during the nine months of 2001 was due to an increasing percentage of customer devices that use our capacitor. Sales of medical components were $30.7 million during the nine months ended September 28, 2001, an increase of $9.5 million, or 44%, from $21.3 million for the nine months ended September 29, 2000.
Commercial. Commercial power sources revenues for the quarter ended September 28, 2001 were $6.5 million, an increase of $2.4 million, or 60%, from $4.0 million for the third quarter of 2000. Commercial power sources revenues for the nine months ended September 28, 2001 were $20.5 million, an increase of $11.6 million, or 131%, from $8.9 million for the nine months ended September 29, 2000. For both the quarter and year to date periods, the increase was primarily due to the inclusion of BEI sales and the continuing recovery in the oil and gas exploration business.
Gross profit
Gross profit for the third quarter ended September 28, 2001 was $16.7 million, an increase of $6.9 million, or 71%, from $9.7 million for the third quarter of 2000. Gross profit as a percentage of total revenues for the third quarter of 2001 increased to 43% from 42% for the third quarter of 2000. Gross profit as a percentage of total revenues in the third quarter of 2001 benefited from higher rates of manufacturing activity relative to the third quarter of 2000.
Gross profit for the nine months ended September 28, 2001 was $45.3 million, an increase of $15.3 million, or 51%, from $29.9 million for the nine months ended September 29, 2000. Gross profit as a percentage of total revenues through third quarter 2001 increased to 45% from 43% for the same period in 2000. This gain is primarily attributable to the increased volumes in 2001. In addition, we incurred significant start-up costs at our new line of implantable capacitors in 2000.
Selling, general and administrative expenses
Selling, general and administrative expenses for the quarter ended September 28, 2001 were $4.7 million, an increase of $1.6 million, or 53%, from $3.1 million for the third quarter of 2000. As a percentage of total revenues, selling, general and administrative expenses for the third quarter of 2001 were 12%, as compared to 13% for the third quarter of 2000. The increase in selling, general and administrative expenses was primarily due to the inclusion of costs associated with BEI and Sierra in 2001, the administrative costs associated with our status as a public company, and costs associated with our business development activities.
Selling, general and administrative expenses for the nine months ended September 28, 2001 were $13.0 million, an increase of $4.8 million, or 59%, from $8.2 million for the nine months ended September 29, 2000. As a percentage of total revenues, selling, general and administrative expenses through the third quarter of 2001 were 13%, as compared to 12% for the same period in 2000. The reasons discussed above for the quarterly increase are also true for the nine month increase.
Research, development and engineering expenses
Research, development and engineering expenses for the quarter ended September 28, 2001 were $3.2 million, an increase of $0.7 million, or 32%, from $2.5 million in the third quarter of 2000. As a percentage of total revenues, research, development and engineering expenses were 8% in the third quarter of 2001 as compared to 11% for the third quarter of 2000. The significant increase (65%) in sales in the third quarter of 2001 over the same period in 2000 accounts for this relative decline.
Research, development and engineering expenses for the nine months ended September 28, 2001 were $9.8 million, an increase of $2.3 million, or 31%, from $7.5 million for the nine months ended September 29, 2000. As a percentage of total revenues, research, development and engineering expenses were 10% through the third quarter of 2001 and 11% through the third quarter of 2000. We are committed to maintaining our spending on research, development and engineering at a level that will support the new technologies demanded by the implantable medical device markets.
Other expenses
Intangible amortization for the third quarter of 2001 was $2.2 million as compared to $1.6 million for the three months ended September 29, 2000. For the nine months ended September 28, 2001, intangible amortization was $5.5 million as compared to $4.9 million for the nine months ended September 29, 2000. For 2001, intangible amortization for Sierra has been included since its acquisition as of June 18, 2001.
Interest expense was $1.2 million for the quarter ended September 28, 2001, a decrease of $2.7 million, or 70%, from $3.9 million in the third quarter of 2000. For the nine months ended September 28, 2001, interest expense was $2.6 million, a decline of $9.1 million, or 78%, from the $11.7 million for the nine months ended September 29, 2000. The decrease in both periods was primarily attributable to the use of $84.0 million in net proceeds from our September 2000 initial public offering to pay down debt, lower interest rates in the third quarter and first nine months of 2001 as compared to the third quarter and first nine months of 2000, and a more favorable interest rate structure in our new and amended credit agreements consummated in January and June 2001.
Provision for income taxes
Our effective tax rate for the third quarter of 2001 was 37.9% and was 37.5% for the nine month period ended September 28, 2001, as compared to 30.0% and 29.8% for the third quarter of 2000 and the nine month period ended September 29, 2000, respectively. Our effective tax rate in 2001 relative to 2000 has increased due to the depletion of net loss carryforwards, the decrease in utilizable New York State tax credits in 2001 as compared to 2000, and the acquisition of BEI, a Massachusetts taxpayer.
Income (loss) before extraordinary loss
Income from continuing operations was $3.3 million for the third quarter of 2001 versus a loss of ($0.9) million for the third quarter of 2000. For the nine months ended September 28, 2001, income from continuing operations was $8.9 million as compared to a loss of ($1.6) million for the nine months ended September 29, 2000. The increase for both periods was primarily due to the increase in operating income and the decrease in interest expense in 2001 as compared to 2000. Diluted earnings (loss) per share from continuing operations for the third quarter of 2001 were $0.16 versus ($0.07) for the third quarter of 2000. Diluted earnings (loss) per share from continuing operations were $0.45 and ($0.13) for the nine months ended September 28, 2001 and September 29, 2000, respectively.
Extraordinary loss
The extraordinary loss of $3.0 million, net of taxes, for the nine months ended September 28, 2001 has no such comparable amount for the nine months ended September 29, 2000. The extraordinary loss in 2001 was associated with the restructuring of our long-term debt in the first quarter of 2001 and the related write-off of deferred financing fees and loan discounts associated with the previous long-term debt. Also included in the loss was the payment of $1.7 million, before taxes, as a call premium to the holders of our subordinated debt.
Net income (loss)
Net income for the three months ended September 28, 2001 was $3.3 million as compared to a net loss of ($0.9) million for the third quarter of 2000. The change from net loss in the third quarter of 2000 to net income in 2001 was due to the reduction in interest expense and the increase in operating income in 2001 relative to 2000. Diluted earnings per share for the third quarter of 2001 were $0.16 versus a loss of ($0.07) per diluted share for the third quarter of 2000.
Net income for the nine month period ended September 28, 2001 was $5.9 million as compared to a net loss of ($1.6) million for the nine months ended September 29, 2000. The change from net loss in 2000 to net income in 2001 was primarily due to the reduction in interest expense and the increase in operating income in 2001 relative to 2000. Diluted earnings per share for the nine month period ended September 28, 2001 were $0.30 as compared to a loss of ($0.13) per diluted share for the nine month period ended September 29, 2000.
Liquidity and Capital Resources
Overview
In January 2001 we restructured our long-term borrowings to eliminate our previous senior and subordinated debt. In June 2001 we amended our credit facility to provide for the financing necessary to consummate the acquisition of Sierra.
Liquidity
At September 28, 2001 we had $43.6 million of cash and cash equivalents. Most of this cash was provided by our second public offering of common stock as discussed in “Capital Structure” below. Cash provided by operating activities for the nine month period ended September 28, 2001 was $10.6 million as compared to $9.0 million for the nine month period ended September 29, 2000. An increase in cash provided by net income in 2001 relative to a net loss in 2000 was off-set by an increase in accounts receivable and inventories, net of increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $54.6 million for the nine months ended September 28, 2001 as compared to a use of $2.5 million for the nine months ended September 29, 2000. The acquisition of Sierra in June 2001 accounted for most of this year's cash use.
Cash provided by financing activities for the nine month period ending September 28, 2001 was $87.6 million, compared with cash used in financing activities of $7.1 million for the nine month period ended September 29, 2000. In the first nine months of 2000, substantially all of the cash used in financing activities was used for debt repayment. In January 2001, we used the $40.0 million of proceeds from a new term loan (discussed in detail below) and cash generated by operating activities to pay off the remaining senior debt and 13% senior subordinated notes. In June 2001, we amended our credit facility to borrow an additional $47.0 million in order to finance the acquisition of Sierra.
We believe that cash generated from operations will be sufficient to meet our working capital needs and planned capital expenditures for the near term. Capital expenditures for 2001 are expected to be approximately $8.0 - 9.0 million, of which approximately $2.9 million will be for capital supporting new product development. Should additional, suitable investment opportunities arise during fiscal 2001, we believe that our earnings, cash flows and balance sheet will permit us to obtain additional debt or equity capital, if necessary. There can be no assurance, however, that additional financing will be available to us or, if available, that it can be obtained on a timely basis or on terms acceptable to us.
Capital Structure
Our capital structure consists of equity and interest-bearing debt. Interest-bearing debt as a percentage of our total capitalization increased to 30% at September 28, 2001 compared to 20% at December 29, 2000. Our long-term debt at September 28, 2001 consisted of an $80.0 million term loan.
During the 2001 third quarter, the Company completed an additional stock offering of 7.8 million shares comprised of 5.8 million shares sold by existing shareholders and 2.0 million newly issued shares. The Company received $43.6 million in net proceeds to be used for general corporate purposes including acquisitions and debt reduction.
In January 2001, we entered into a $60.0 million credit facility consisting of a $40.0 million term loan and a $20.0 million revolving line of credit. In June 2001, we amended our credit facility. The amendment provided for a $100.0 million facility consisting of an $80.0 million term loan and a $20.0 million revolving line of credit. Both the term loan and revolving line of credit have a term of five years, maturing in July 2006. The amended credit facility is secured by our accounts receivable and inventories and requires us to comply with various quarterly financial covenants related to EBITDA, as defined in the credit agreement, and ratios of leverage, interest and fixed charges as they relate to EBITDA. Both the term loan and revolving line of credit bear interest at a rate that varies with our degree of leverage.
At September 28, 2001, there was $80.0 million outstanding on the term loan and no amounts outstanding under the revolving line of credit. The weighted average interest rate for the term loan was 6.0%.
Inflation
We do not believe that inflation has had a significant effect on our operations to date.
Impact of Recently Issued Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective December 30, 2000, which was the first day of fiscal 2001. The adoption of SFAS No. 133 did not have a significant impact on the consolidated financial position, results of operations, or cash flows of the Company.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes APB No. 16 "Business Combinations." Effective July 1, 2001, all business combinations in the scope of this new Statement are to be accounted for using one method, the purchase method. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB No. 17, "Intangible Assets." It changes the accounting for goodwill from an amortization method to an impairment-only approach.
The Company has not completed an analysis of the potential impact upon adoption of the impairment test of goodwill, however amortization of existing goodwill which was approximately $0.7 million and $1.4 million for the three and nine months ended September 28, 2001, will cease upon adoption (December 29, 2001).
Under provisions of SFAS No. 141, we will be required to reclassify our assembled workforce to goodwill. At September 28, 2001, assembled workforce approximated $4.8 million. Amortization of our assembled workforce of approximately $0.2 million and $0.5 million for the three and nine months ended September 28, 2001, will also cease upon adoption. The Company has not completed the analysis of the effect of the Statement on the amortization of its trademark and trade names. Amortization of our other identifiable intangible assets will continue.
Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q and other written and oral statements made from time to time by us and our representatives, are not statements of historical or current fact. As such, they are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include, but are not limited to, statements relating to:
| | • | future revenues, expenses and profitability; |
| | • | the future development and expected growth of our business and the implantable medical device industry; |
| | • | our ability to successfully execute our business model and our business strategy; |
| | • | our ability to identify trends within the industries for implantable medical devices, medical components and commercial power sources and to offer products and services that meet the changing needs of those markets; |
| | • | projected capital expenditures; and |
| | • | trends in government regulation. |
You can identify forward-looking statements by terminology such as “may”, “will”, “should”, “could”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those suggested by these forward-looking statements. In evaluating these statements and our prospects generally, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this report. We are under no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors include the following: dependence upon a limited number of customers, product obsolescence, inability to market current or future products, pricing pressure from customers, reliance on third party suppliers for raw materials, products and subcomponents, fluctuating operating results, inability to maintain high quality standards for our products, challenges to our intellectual property rights, product liability claims, inability to successfully consummate and integrate acquisitions, unsuccessful expansion into new markets, competition, inability to obtain licenses to key technology, regulatory changes or consolidation in the healthcare industry, and other risks and uncertainties described in the Company’s Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Under the new credit facility, both the term loan and any borrowings under the line of credit bear interest at fluctuating market rates. An analysis of the impact on our interest rate sensitive financial instruments of a hypothetical 10% change in short-term interest rates shows an impact on expected 2001 earnings of approximately $0.5 million of higher or lower earnings, depending on whether short-term rates rise or fall by 10%. We use foreign currency forward contracts on a limited basis, and do not have any material foreign currency exposure. In order to minimize our foreign exchange risk, substantially all of our sales are made in U.S. dollars. We do not hedge against price fluctuation in the commodities used in the manufacturing of our products. The discussion and the estimated amounts referred to above include forward-looking statements of market risk which involve certain assumptions as to market interest rates. Actual future market conditions may differ materially from such assumptions. Accordingly, the forward-looking statements should not be considered projections of future events by the Company.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
| | (a) | Exhibits
See the Exhibit Index for a list of those exhibits filed herewith.
|
| | (b) | Reports on Form 8-K
None |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | WILSON GREATBATCH TECHNOLOGIES, INC.
(Registrant) |
| Date November 13, 2001 | By: /s/ Edward F. Voboril
Edward F. Voboril
President, Chief Executive Officer and
Chairman of the Board
By: /s/ Frank J. Forkl, Jr.
Frank J. Forkl, Jr.
Controller
(Principal Accounting Officer) |
EXHIBIT INDEX
| Exhibit No. | Description |
| 3.1 | Amended and Restated Certificate of Incorporation Filed as Exhibit 3.1 to our Registration Statement on Form S-1 (No. 333- 37554) filed May 22, 2000, and incorporated by reference herein. |
| 3.2 | Amended and Restated Bylaws Filed as Exhibit 3.2 to our Registration Statement on Form S-1 (No. 333-37554) filed May 22, 2000, and incorporated by reference herein. |
