U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter ended October 3, 2003 Commission File Number 1-16137 WILSON GREATBATCH TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Delaware (State of incorporation) 16-1531026 (I.R.S. employer identification no.) 9645 Wehrle Drive Clarence, New York 14031 (Address of principal executive offices) (716) 759-6901 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ] The number of shares outstanding of the Company's common stock, $.001 par value per share, as of November 10, 2003 was: 21,178,510 WILSON GREATBATCH TECHNOLOGIES, INC. TABLE OF CONTENTS FOR FORM 10-Q QUARTER AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003 Page COVER PAGE 1 TABLE OF CONTENTS 2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Operations 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 20 ITEM 4. Controls and Procedures 20 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings 21 ITEM 2. Changes in Securities and Use of Proceeds 21 ITEM 3. Defaults Upon Senior Securities 21 ITEM 4. Submission of Matters to a Vote of Security Holders 21 ITEM 5. Other Information 21 ITEM 6. Exhibits and Reports on Form 8-K 21 EXHIBIT INDEX 22 SIGNATURES 23 -2- PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WILSON GREATBATCH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEET - Unaudited (IN THOUSANDS) - -------------------------------------------------------------------------------- ASSETS September 30, December 31, 2003 2002 Current assets: Cash and cash equivalents $ 112,756 $ 4,608 Short-term investments 9,447 -- Accounts receivable, net 26,997 19,310 Inventories 30,739 34,908 Prepaid expenses and other current assets 716 3,339 Refundable income taxes 624 3,038 Deferred income taxes 3,349 3,349 --------- --------- Total current assets 184,628 68,552 Property, plant, and equipment, net 65,604 64,699 Intangible assets, net 52,241 55,804 Goodwill 119,521 119,407 Other assets 6,966 3,789 --------- --------- Total assets $ 428,960 $ 312,251 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,371 $ 5,726 Accrued expenses and other current liabilities 22,017 13,872 Current portion of long-term debt 679 8,750 --------- --------- Total current liabilities 27,067 28,348 Long-term debt, net of current portion 170,906 76,250 Other long-term liabilities 813 790 --------- --------- Total liabilities 198,786 105,388 --------- --------- Stockholders' equity: Preferred stock -- -- Common stock 21 21 Additional paid-in capital 206,845 202,279 Deferred stock-based compensation (883) -- Retained earnings 24,191 5,426 Treasury stock, at cost -- (863) --------- --------- Total stockholders' equity 230,174 206,863 --------- --------- Total liabilities and stockholders' equity $ 428,960 $ 312,251 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements -3- WILSON GREATBATCH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - Unaudited (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- Three months ended Nine months ended September 30, September 30, 2003 2002 2003 2002 Sales $ 56,335 $ 45,350 $ 166,994 $ 119,981 Cost of sales 32,462 26,478 97,137 69,558 -------- -------- --------- --------- Gross profit 23,873 18,872 69,857 50,423 Selling, general and administrative expenses 7,336 6,300 23,204 17,310 Research, development and engineering costs, net 3,960 3,470 13,155 10,514 Amortization of intangible assets 796 1,037 2,424 2,809 Write-off of noncompete agreement -- 1,723 -- 1,723 -------- -------- --------- --------- Operating income 11,781 6,342 31,074 18,067 Interest expense 1,154 1,098 2,952 2,702 Interest income (253) (34) (384) (314) Early extinguishment of debt -- -- 1,603 -- Write-off of investment in unrelated company -- 1,547 -- 1,547 Other (income) expense, net (40) 34 (58) 99 -------- -------- --------- --------- Income before income taxes 10,920 3,697 26,961 14,033 Provision for income taxes 3,144 1,220 8,196 4,631 -------- -------- --------- --------- Net income $ 7,776 $ 2,477 $ 18,765 $ 9,402 ======== ======== ========= ========= Earnings per share: Basic $ 0.37 $ 0.12 $ 0.89 $ 0.45 Diluted $ 0.36 $ 0.12 $ 0.87 $ 0.44 Weighted average shares outstanding: Basic 21,168 20,966 21,132 20,922 Diluted 21,623 21,265 21,507 21,263 The accompanying notes are an integral part of these condensed consolidated financial statements -4- WILSON GREATBATCH TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - Unaudited (IN THOUSANDS) - -------------------------------------------------------------------------------- Nine Months Ended September 30, 2003 2002 Cash flows from operating activities: Net income $ 18,765 $ 9,402 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,305 9,438 Stock-based compensation 1,966 1,485 Early extinguishment of debt 1,487 -- Write-off of noncompete agreement -- 1,723 Write-off of investment in unrelated company -- 1,547 Deferred income taxes (468) -- Loss on disposal of assets 411 40 Changes in operating assets and liabilities: Accounts receivable (7,687) (3,378) Inventories 3,681 (151) Prepaid expenses and other current assets 2,623 (76) Accounts payable (1,355) (2,601) Accrued expenses and other current liabilities 6,596 (1,961) Income taxes 5,764 373 --------- -------- Net cash provided by operating activities 42,088 15,841 --------- -------- Cash flows from investing activities: Purchase of short-term investments (9,447) -- Acquisition of property, plant and equipment (7,724) (11,726) Proceeds from sale of assets 2,458 13 Increase in intangible assets -- (344) Decrease (increase) in other assets 107 (92) Acquisition of subsidiary, net -- (46,972) --------- -------- Net cash used in investing activities (14,606) (59,121) --------- -------- Cash flows from financing activities: Proceeds from issuance of long-term debt 170,000 32,000 Principal payments of long-term debt (85,000) (29,130) Principal payments of capital lease obligations (240) -- Payment of debt issue costs (4,535) -- Costs related to public offering of stock -- (39) Issuance of common stock 441 502 --------- -------- Net cash provided by financing activities 80,666 3,333 --------- -------- Net increase (decrease) in cash and cash equivalents 108,148 (39,947) Cash and cash equivalents, beginning of year 4,608 43,272 --------- -------- Cash and cash equivalents, end of period $ 112,756 $ 3,325 ========= ======== The accompanying notes are an integral part of these condensed consolidated financial statements -5- WILSON GREATBATCH TECHNOLOGIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a fair presentation of financial position, results of operations, and cash flows in conformity with generally accepted accounting principles. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Wilson Greatbatch Technologies, Inc. (the "Company") for the periods presented. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ from these estimates. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended January 3, 2003. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. For 53-week years, the first, second and third quarters each have 13 weeks, and the fourth quarter has 14 weeks. For clarity of presentation, the Company describes all periods as if each quarter end is March 31st, June 30th and September 30th and as if the year-end is December 31st. 2. STOCK-BASED COMPENSATION In 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This standard provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, the standard also requires prominent disclosures in the Company's financial statements about the method of accounting used for stock-based employee compensation, and the effect of the method used when reporting financial results. The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). As permitted in that standard, the Company has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company has determined the pro forma information as if the Company had accounted for stock options granted under the fair value method of SFAS No. 123. The Black-Scholes -6- option-pricing model was used with the following weighted average assumptions. These pro forma calculations assume the common stock is freely tradable for all periods presented and, as such, the impact is not necessarily indicative of the effects on reported net income of future years. Three months Nine months ended September 30, ended September 30, 2003 2002 2003 2002 Risk-free interest rate 2.61% 3.79% 2.68% 3.79% Expected volatility 55% 55% 55% 55% Expected life (in years) 5 5 5 5 Expected dividend yield 0% 0% 0% 0% The Company's net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each year is as follows (in thousands except per share data): Three months Nine months ended September 30, ended September 30, 2003 2002 2003 2002 Net income as reported $ 7,776 $ 2,477 $ 18,765 $ 9,402 Stock-based employee compensation cost included in net income as reported, net of related tax effects $ 606 $ 282 $ 1,368 $ 995 Stock-based employee compensation cost determined using the fair value based method, net of related tax effects $ 1,134 $ 521 $ 2,576 $ 1,570 Pro forma net income $ 7,248 $ 2,238 $ 17,557 $ 8,827 Earnings per share: Basic - as reported $ 0.37 $ 0.12 $ 0.89 $ 0.45 Basic - pro forma $ 0.34 $ 0.11 $ 0.83 $ 0.42 Diluted - as reported $ 0.36 $ 0.12 $ 0.87 $ 0.44 Diluted - pro forma $ 0.34 $ 0.11 $ 0.82 $ 0.42 -7- 3. SUPPLEMENTAL CASH FLOW INFORMATION Nine Months Ended September 30, 2003 2002 Noncash investing and financing activities (in thousands): Acquisition of property utilizing capitalized leases 1,585 $ -- Common stock contributed to ESOP 3,668 3,022 4. SHORT-TERM INVESTMENTS Short-term investments at September 30, 2003 consist of investments acquired with maturities that exceed three months and are less than six months at the time of acquisition. Securities that the Company has the ability and positive intent to hold to maturity are accounted for as held-to-maturity securities and are carried at amortized cost. The cost of securities sold is based on the specific identification method. Held-to-maturity securities consist of (in thousands): As of September 30, 2003 Gross Gross unrealized Unrealized Estimated Cost gains losses Fair Value Municipal Bonds $9,447 $ -- $ (3) $9,444 ------ ------ ------ ------ Short-term investments $9,447 $ -- $ (3) $9,444 ====== ====== ====== ====== The municipal bonds have maturity dates ranging from October 2003 to February 2004. There were no short-term investments as of December 31, 2002. 5. DEBT September 30, December 31, 2003 2002 2.25% convertible subordinated notes, due 2013 $ 170,000 $ -- Capital lease obligations 1,585 -- Term loan -- 85,000 --------- -------- 171,585 85,000 Less current portion (679) (8,750) --------- -------- Total long-term debt $ 170,906 $ 76,250 ========= ======== Convertible Debentures In May 2003, the Company completed a private placement of contingent convertible subordinated notes totaling $170.0 million, due 2013. The notes bear interest at 2.25 percent per annum, payable semiannually. Beginning with the six-month interest period -8- commencing June 15, 2010, the Company will pay additional contingent interest during any six-month interest period if the trading price of the debentures for each of the five trading days immediately preceding the first day of the interest period equals or exceeds 120% of the principal amount of the debentures. Holders may convert the debentures into shares of the Company's common stock at a conversion rate of 24.8219 shares per $1,000 principal amount of debentures, subject to adjustment, before the close of business on June 15, 2013 only under the following circumstances: (1) during any fiscal quarter commencing after July 4, 2003, if the closing sale price of the Company's common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding fiscal quarter; (2) subject to certain exceptions, during the five business days after any five consecutive trading day period in which the trading price per $1,000 principal amount of the debentures for each day of such period was less than 98% of the product of the closing sale price of the Company's common stock and the number of shares issuable upon conversion of $1,000 principal amount of the debentures; (3) if the debentures have been called for redemption; or (4) upon the occurrence of certain corporate events. Beginning June 20, 2010, the Company may redeem any of the debentures at a redemption price of 100% of their principal amount, plus accrued interest. Note holders may require the Company to repurchase their debentures on June 15, 2010 or at any time prior to their maturity following a fundamental change at a repurchase price of 100% of their principal amount, plus accrued interest. The debentures are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all debts and other liabilities of our subsidiaries. Concurrent with the issuance of the notes, the Company used approximately $72.5 million of the proceeds from this private placement to pay off the term loan. Debt issuance expenses totaled $4.5 million at September 30, 2003 and will be amortized using the straight-line method over a seven-year term. On August 5, 2003 the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission in satisfaction of certain registration rights granted to the holders of the debentures. Pursuant to the terms of the registration rights agreement, the Company is required to use its best efforts to have this Registration Statement on Form S-3 declared effective by the Securities and Exchange Commission not later than November 24, 2003. -9- Capital Lease Obligations The Company leases assets under non-cancelable lease arrangements. As of September 30, 2003, future minimum lease payments under capital leases are as follows: (In thousands) Amount -------------- ------ 2003 $ 65 2004 676 2005 595 2006 309 ------- Total minimum lease payments 1,645 Less imputed interest (60) ------- Present value of minimum lease payments 1,585 Less current portion (679) ------- Long-term capital lease obligations $ 906 ======= Revolving Line of Credit As of December 31, 2002 the Company had $85.0 million outstanding under the term loan portion of its senior credit facility and no balance outstanding on the $20.0 million committed revolving line of credit portion. As a result of the issuance of the contingent convertible subordinated notes, the entire outstanding balance of the term loan of $72.5 million was paid in full during the second quarter. The revolving line of credit continues to be available to the Company for future borrowing and matures on July 1, 2005. Interest rates under the revolving line of credit vary with the Company's leverage. The Company is required to pay a commitment fee of between 0.50% and 0.125% per annum on the unused portion of the revolving line of credit based on the Company's leverage. 6. RESTRICTED STOCK On November 15, 2002, the Company's Board of Directors approved the Restricted Stock Plan under which stock awards may be granted to employees. The Plan was not effective until shareholder approval was received at the Annual Meeting of Stockholders held on May 9, 2003. The number of shares that are reserved and may be issued under the plan cannot exceed 200,000. The Compensation and Organization Committee of the Company's Board of Directors determines the number of shares that may be granted under the plan. Restricted stock awards are either time-vested or performance-vested based on the terms of each individual award agreement. Time-vested restricted stock vests 50% on the first anniversary of the date of the award and 50% on the second anniversary of the date of the award. Performance-vested restricted stock vests upon the achievement of certain annual diluted earnings per share targets by the company, or the seventh anniversary date of the award. There were 37,200 shares granted to certain officers and key employees under the terms of the plan during 2002. On August 1, 2003, the Company's Board of Directors approved an additional 13,200 of performance-vested shares for grant on November 1, 2003. No shares -10- of restricted stock vested as of September 30, 2003. Unamortized deferred compensation expense with respect to the restricted stock grants amounted to $883,000 at September 30, 2003 and is being amortized based on the vesting schedules attributable to the underlying restricted stock grants. Compensation expense of $221,000 was recognized during the third quarter of 2003. 7. SALE OF ASSETS In June 2003, the Company completed the sale of certain assets used in the manufacture and sale of its commercial capacitor product line for approximately $2.3 million. There was no material gain or loss on the transaction. 8. INVENTORIES Inventories comprised the following (in thousands): September 30, December 31, 2003 2002 Raw materials $14,594 $15,693 Work-in-process 10,106 13,592 Finished goods 6,039 5,623 ------- ------- Total $30,739 $34,908 ======= ======= 9. INTANGIBLE ASSETS Intangible assets comprised the following (in thousands): As of September 30, 2003 Gross Net carrying Accumulated Carrying amount Amortization Amount Amortizing intangible assets: Patented technology $ 21,567 $ (8,241) $13,326 Unpatented technology 14,515 (4,454) 10,061 Other 1,340 (671) 669 -------- -------- ------- 37,422 (13,366) 24,056 Unamortizing intangible assets: Trademark and names 31,420 (3,235) 28,185 -------- -------- ------- Total intangible assets $ 68,842 $(16,601) $52,241 ======== ======== ======= Aggregate amortization expense for third quarter 2003 was $796,000. 10. COMPREHENSIVE INCOME For all periods presented, the Company's only component of comprehensive income is its net income for those periods. -11- 11. COMMITMENTS AND CONTINGENCIES The Company is a party to various legal actions arising in the normal course of business. The Company does not believe that the ultimate resolution of any such pending activities will have a material adverse effect on its consolidated results of operations, financial position, or cash flows. 12. BUSINESS SEGMENT INFORMATION The Company operates its business in two reportable segments: medical technology and commercial power sources. The medical technology segment designs and manufactures batteries for devices in the cardiac rhythm management ("CRM") industry including implantable cardioverter defibrillators ("ICDs"), pacemakers, cardiac resynchronization therapy ("CRT") and other medical devices; capacitors for ICDs; and filtered feedthroughs, engineered components and enclosures used in implantable medical devices. The commercial power sources segment designs and manufactures high performance batteries for use in oil and gas exploration, oceanographic equipment, and aerospace. The Company's medical technology segment includes multiple business units 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 reportable segments are separately managed, and their performance is evaluated based on numerous factors, including 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, and intangible amortization. Third quarter and year-to-date 2003 segment income also includes a portion of non-segment specific selling, general and administrative and research, development and engineering expenses based on allocation bases appropriate to the expense categories. The remaining unallocated selling, general and administrative, research, development and engineering expenses and intangible amortization along with interest expense, and certain non-recurring items are not allocated to reportable segments. This change is not reflected in the third quarter and year-to-date 2002 calculation of segment income from operations because it is impractical to do so. The allocation of expenses to segments in 2003 does not change the composition of the reportable segments; the change is only a revision to the calculation of segment income from operations. Transactions between the two segments are not significant. -12- An analysis and reconciliation of the Company's business segment information to the respective information in the condensed consolidated financial statements is as follows (dollars in thousands): Three months ended Nine months ended September 30, September 30, Sales: 2003 2002 2003 2002 Medical technology ICD batteries $ 10,603 $ 7,650 $ 32,641 $ 21,344 Pacemaker batteries 5,580 5,049 18,035 15,763 Other batteries 907 798 2,453 2,475 ICD capacitors 7,869 5,894 22,866 17,194 Components 24,648 19,308 70,661 43,874 -------- -------- --------- --------- Total medical technology 49,607 38,699 146,656 100,650 Commercial power sources 6,728 6,651 20,338 19,331 -------- -------- --------- --------- Total sales $ 56,335 $ 45,350 $ 166,994 $ 119,981 ======== ======== ========= ========= Segment income from operations: Medical technology $ 13,281 $ 10,663 $ 35,822 $ 30,646 Commercial power sources 1,423 2,348 2,922 6,517 -------- -------- --------- --------- Total segment income from operations 14,704 13,011 38,744 37,163 Unallocated operating expenses (2,923) (6,669) (7,670) (19,096) -------- -------- --------- --------- Operating income as reported 11,781 6,342 31,074 18,067 Unallocated other income and expense (861) (2,645) (4,113) (4,034) -------- -------- --------- --------- Income before income taxes $ 10,920 $ 3,697 $ 26,961 $ 14,033 ======== ======== ========= ========= The changes in the carrying amount of goodwill are as follows (amounts in thousands): Commercial Medical Power Technology Sources Total Balance at December 31, 2002 $116,841 $2,566 $119,407 Goodwill recorded during the year 114 -- 114 -------- ------ -------- Balance at September 30, 2003 $116,955 $2,566 $119,521 ======== ====== ======== -13- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction We are a leading developer and manufacturer of batteries, capacitors, filtered feedthroughs, engineered components and enclosures used in implantable medical devices. We also develop and manufacture high performance batteries and battery packs used in other demanding non-medical applications. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks. For 53-week years, the first, second and third quarters each have 13 weeks, and the fourth quarter has 14 weeks. For clarity of presentation, the Company describes all periods as if each quarter end is March 31st, June 30th and September 30th and as if the year-end is December 31st. The commentary that follows should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. -14- Results of Operations - unaudited Three months ended Nine months ended September 30, $ % September 30, $ % In thousands, except per share data 2003 2002 Change Change 2003 2002 Change Change - ------------------------------------------------------------------------------------------------------------------------------------ Medical Technology ICD batteries $ 10,603 $ 7,650 $ 2,953 39% $ 32,641 $ 21,344 $ 11,297 53% Pacemaker batteries 5,580 5,049 531 11% 18,035 15,763 2,272 14% Other batteries 907 798 109 14% 2,453 2,475 (22) -1% ICD capacitors 7,869 5,894 1,975 34% 22,866 17,194 5,672 33% Components 24,648 19,308 5,340 28% 70,661 43,874 26,787 61% ------------------------------------------------------------------------------------------ Total Medical Technology 49,607 38,699 7,315 19% 146,656 100,650 32,459 32% Commercial Power Sources 6,728 6,651 77 1% 20,338 19,331 1,007 5% ------------------------------------------------------------------------------------------ Total Sales 56,335 45,350 10,985 24% 166,994 119,981 47,013 39% Cost of sales 32,462 26,478 5,984 23% 97,137 69,558 27,579 40% ------------------------------------------------------------------------------------------ Gross profit 23,873 18,872 5,001 26% 69,857 50,423 19,434 39% Gross margin 42.4% 41.6% 41.8% 42.0% Selling, general, and administrative expenses (SG&A) 7,336 6,300 1,036 16% 23,204 17,310 5,894 34% SG&A as a % of sales 13.0% 13.9% 13.9% 14.4% Research, development and engineering costs, net (RD&E) 3,960 3,470 490 14% 13,155 10,514 2,641 25% RD&E as a % of sales 7.0% 7.7% 7.9% 8.8% Intangible amortization 796 1,037 (241) -23% 2,424 2,809 (385) -14% Write-off of noncompete agreement -- 1,723 (1,723) -100% -- 1,723 (1,723) -100% ------------------------------------------------------------------------------------------ Operating income 11,781 6,342 5,439 86% 31,074 18,067 13,007 72% Operating margin 20.9% 14.0% 18.6% 15.1% Interest expense 1,154 1,098 56 5% 2,952 2,702 250 9% Interest income (253) (34) (219) 644% (384) (314) (70) 22% Early extinguishment of debt -- -- 1,603 -- 1,603 100% Write-off of investment in unrelated company -- 1,547 (1,547) -100% -- 1,547 (1,547) -100% Other (income) expense, net (40) 34 (74) -218% (58) 99 (157) -159% Provision for income taxes 3,144 1,220 1,924 158% 8,196 4,631 3,565 77% Effective tax rate 28.8% 33.0% 30.4% 33.0% ------------------------------------------------------------------------------------------ Net income $ 7,776 $ 2,477 $ 5,299 214% $ 18,765 $ 9,402 $ 9,363 100% ========================================================================================== Net margin 13.8% 5.5% 11.2% 7.8% Diluted earnings per share $ 0.36 $ 0.12 $ 0.24 200% $ 0.87 $ 0.44 $ 0.43 98% -15- Sales Medical. Our medical technology sales comprise various component products that are sold to medical device manufacturers. Most of the medical technology products that we sell are utilized by customers in cardiac rhythm management ("CRM") devices. The CRM market comprises devices utilizing high-rate batteries and capacitors such as implantable cardioverter defibrillators ("ICDs") and cardiac resynchronization therapy with backup defibrillation devices ("CRT-D") and devices utilizing low or medium rate batteries but no capacitors (pacemakers and CRTs). All CRM devices utilize other components such as enclosures and feedthroughs, and certain CRM devices utilize electromagnetic interference ("EMI") filtering technology. The nature and extent of our selling relationships with each CRM customer are different in terms of component products purchased, selling prices, product volumes, ordering patterns and inventory management. Additionally, the relative market share changes among the CRM device manufacturers changes periodically. Consequently, these and other factors can significantly impact our sales in any given quarter. During the quarter and year to date 2003, we saw higher relative sales growth from our products that utilize high rate batteries, tantalum capacitors, EMI filtering and precision manufactured enclosures. Substantially all of the sales growth in every product category was due to volume and not to price changes. ICD capacitor revenues increased during the quarter in part due to the commencement of shipments to an additional customer. Components revenues benefited in the quarter and year to date from the considerable growth attributable to increased volume in both enclosure and filtered feedthrough orders generated from manufacturers of both low and high rate CRM devices. Commercial. Commercial power sources sales improved both for the third quarter and year to date 2003 periods as the result of demand from customers in the oil and gas exploration market. Gross margin The higher overall gross margin in the quarter over the prior year was due to improvements for our medical battery products, ICD capacitors, and medical components products, primarily EMI filtered feedthroughs and enclosures. The on-going implementation of lean manufacturing initiatives at all plants has contributed considerably to this result. Partially offsetting these improved margins was a reduction related to costs incurred in the consolidation of the commercial battery operations that was completed in September 2003. Gross profit for year to date 2003 increased in dollars over year to date 2002 reflecting the increased sales. The gross margin declined slightly through September of 2003 over the comparable period of 2002. SG&A expenses SG&A expenses for the quarter increased in dollars and declined as a percentage of total sales. Ongoing infrastructure improvements and losses on disposition of property, plant and equipment, contributed to the increased expense in the quarter. -16- SG&A expenses for the year to date increased in dollars and declined as a percentage of total sales. The expense increase is due to the ongoing efforts to build the financial, quality, and information technology infrastructure necessary to support the Company's continued growth. The addition of SG&A for Greatbatch-Globe has also increased spending for the year to date. RD&E expenses RD&E expenses for the quarter increased in dollars, but declined as a percentage of total sales. The increase in expense in the quarter relates to new development programs for batteries and capacitors used in ICDs. RD&E expenses for the year to date increased in dollars, but declined as a percentage of total sales. The decrease in the percentage of expenses as related to sales for the year to date is primarily attributable to the low level of RD&E expenses at Greatbatch-Globe. We expect our spending on RD&E to be at a level that will enable us to maintain technology leadership. Amortization expense Intangible amortization decreased for the quarter and year to date 2003 due to the write-off of the Greatbatch-Hittman Noncompete/Employment Agreement in third quarter 2002. Amortization expense for second quarter and year to date 2002 included $144 thousand and $611 thousand, respectively for this agreement that is not included in the expense for the comparable periods in 2003. Partially offsetting this decline for the year to date is the addition of amortizable intangible assets from the acquisition of Greatbatch-Globe in July 2002. Interest expense/income Interest expense for the quarter includes the fixed 2.25% interest coupon and amortization of deferred financing fees related to the convertible notes. The expense for the quarter is above prior year due to the higher level of debt. Year to date interest includes interest on the term loan and amortization of deferred financing fees related to that loan through May 2003. Interest income for the quarter and year to date increased due to proceeds resulting from the convertible notes offering. Early extinguishment and other expense In May 2003 we sold $170 million of convertible debt securities to an investment bank syndicate and from the proceeds paid off the then existing $72.5 million Term Loan. This transaction resulted in the write-off of $1.6 million of deferred financing fees associated with the Term Loan. Provision for income taxes In third quarter 2003 we completed certain strategic tax projects that resulted in a benefit greater than had been anticipated. We completed a federal research and development tax credit study as -17- well as an analysis of the tax treatment of our foreign transactions. Accordingly, our year to date tax provision reflects our current estimate of what our effective rate will be for the full year. The lower third quarter effective rate is a result of our providing taxes at a higher rate in the first half of 2003. Liquidity and Capital Resources Our principal source of short-term liquidity is our working capital of $157.6 million at September 30, 2003 combined with our unused $20 million credit line with our lending syndicate. Historically we have generated cash from operations sufficient to meet our capital expenditure and debt service needs, other than for acquisitions, and we anticipate that this will continue for the remainder of 2003. At September 30, 2003 our current ratio was 6.8:1, an increase from 3:1 at December 31, 2002. Therefore we believe that we have sufficient short-term liquidity. The Company regularly engages in discussions relating to potential acquisitions and has identified several possible acquisition opportunities. The Company currently does not have any commitments, understandings, or agreements to acquire any other business; however, the Company may announce an acquisition transaction at any time. At September 30, 2003 our capital structure consisted primarily of $170 million of debt securities and our 21.2 million shares of common stock outstanding. We have in excess of $122 million in cash, cash equivalents and short-term investments and are in a position to facilitate future acquisitions if necessary. We are also authorized to issue 100 million shares of common stock and 100 million shares of preferred stock. The market value of our outstanding common stock since our IPO has exceeded our book value and the average daily trading volume of our common stock has also increased; accordingly, we believe that if needed we can access public markets to sell additional common or preferred stock if conditions are appropriate in the public markets. Inflation We do not believe that inflation has had a significant effect on our operations. Impact of Recently Issued Accounting Standards None. 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 -18- current expectations, which are subject to known and unknown risks, uncertainties and assumptions. They include statements relating to: o future sales, expenses and profitability; o the future development and expected growth of our business and the implantable medical device industry; o our ability to successfully execute our business model and our business strategy; o our ability to identify trends within the for implantable medical devices, medical components, and commercial power sources industries and to offer products and services that meet the changing needs of those markets; o projected capital expenditures; and o trends in government regulation. You can identify forward-looking statements by terminology such as "may," "will," "should," "could," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those suggested by these forward-looking statements. In evaluating these statements and our prospects generally, you should carefully consider the factors set forth below. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary factors and to others contained throughout this report. We are under no duty to update any of the forward-looking statements after the date of this report or to conform these statements to actual results. Although it is not possible to create a comprehensive list of all factors that may cause actual results to differ from the results expressed or implied by our forward-looking statements or that may affect our future results, some of these factors include the following: dependence upon a limited number of customers, product obsolescence, inability to market current or future products, pricing pressure from customers, reliance on third party suppliers for raw materials, products and subcomponents, fluctuating operating results, inability to maintain high quality standards for our products, challenges to our intellectual property rights, product liability claims, inability to successfully consummate and integrate acquisitions, unsuccessful expansion into new markets, competition, inability to obtain licenses to key technology, regulatory changes or consolidation in the healthcare industry, and other risks and uncertainties that arise from time to time as described in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission. -19- ITEM 3. Quantitative and Qualitative Disclosures About Market Risk. Under the Company's existing line of credit any borrowings bear interest at fluctuating market rates. At September 30, 2003, the Company did not have any interest rate sensitive financial instruments. The discussion and the estimated amounts referred to above include forward-looking statements of market risk that 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. ITEM 4. Controls and Procedures. As of the end of the period covered by this quarterly report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is made know to them on a timely basis, and that these disclosure controls and procedures are effective to insure such information is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. There have been no changes in the Company's internal controls over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -20- 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 On August 5, 2003, the Company filed a Current Report on Form 8-K containing information pursuant to Item 9 ("Regulation FD Disclosure") relating to the announcement of earnings for the quarter ended July 4, 2003. -21- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our registration statement on Form S-1 (File No. 333-37554) filed on May 22, 2000). 3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to our quarterly report on Form 10-Q ended March 29, 2002). 31 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -22- SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 12, 2003 WILSON GREATBATCH TECHNOLOGIES, INC. By /s/ Edward F. Voboril ------------------------------------------- Edward F. Voboril Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) By /s/ Lawrence P. Reinhold ------------------------------------------- Lawrence P. Reinhold Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) -23-