SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended DECEMBER 29, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-49702
MEDSOURCE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: DELAWARE IRS Employer Identification No: 52-2094496
110 CHESHIRE LANE, SUITE 100, MINNEAPOLIS, MN 55305
(Address and zip code of principal executive office)
(952) 807-1234
(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: |_|
The number of shares of the registrant's Common Stock, par value $0.01
per share, outstanding as of February 3, 2003 was 27,800,820.
TABLE OF CONTENTS
Part I: Financial Information
-----------------------------
Item 1. Financial Statements.................................................3
Consolidated Balance Sheets..........................................3
Consolidated Statements of Operations................................4
Consolidated Statements of Cash Flows................................5
Notes to Consolidated Financial Statements...........................6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................9
Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk.13
Item 4. Controls and Procedures..............................................14
Part II: Other Information
--------------------------
Item 1. Legal Proceedings....................................................15
Item 2. Changes in Securities and Use of Proceeds............................15
Item 3. Defaults Upon Senior Securities......................................15
Item 4. Submission of Matters to a Vote of Security Holders..................15
Item 5. Other Information....................................................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
Signatures....................................................................17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 29, JUNE 30,
2002 2002
---------------------------------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $15,400 $38,268
Accounts receivable, net 25,070 24,031
Inventories 22,761 20,503
Prepaid expenses and other current assets 3,274 2,402
------------------- -------------------
Total current assets 66,505 85,204
Property, plant, and equipment, net 51,396 42,045
Goodwill, net 130,510 113,113
Other identifiable intangible assets, net 3,923 4,092
Deferred financing costs 1,937 1,971
Other assets 5,447 1,404
------------------- -------------------
Total assets $259,718 $247,829
=================== ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,075 $7,924
Accrued compensation and benefits 5,237 5,352
Other accrued expenses 2,635 3,491
Restructuring reserve 1,462 2,381
Current portion of long-term debt 4,994 5,939
------------------- -------------------
Total current liabilities 20,403 25,087
Long-term debt, less current portion 43,362 35,967
Other long-term liabilities 813 455
Stockholders' equity:
Preferred stock - 1,974
Common stock 277 269
Additional paid-in capital 275,092 268,455
Treasury stock (1,282) (1,282)
Accumulated other comprehensive loss (259) -
Accumulated deficit (78,688) (83,025)
Unearned compensation - (71)
------------------- -------------------
Total stockholders' equity 195,140 186,320
------------------- -------------------
LIABILITIES & STOCKHOLDERS' EQUITY $259,718 $247,829
=================== ===================
See accompanying notes.
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MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -----------------------------------
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2002 2001 2002 2001
---------------- -------------- --------------- -----------------
Revenues $44,621 $38,290 $85,624 $72,155
Costs and expenses:
Cost of product sold 33,170 28,509 63,982 54,616
Selling, general and administrative expense 8,023 7,679 15,928 14,080
Amortization of intangibles 85 80 168 169
---------------- -------------- --------------- -----------------
Operating income 3,343 2,022 5,546 3,290
---------------- -------------- --------------- -----------------
Interest expense, net (659) (2,409) (1,180) (4,886)
Other income (expense) 23 (13) 22 (27)
---------------- -------------- --------------- -----------------
Income (loss) before income taxes 2,707 (400) 4,388 (1,623)
Income tax (expense) (13) -- (15) --
---------------- -------------- --------------- -----------------
Net income (loss) 2,694 (400) 4,373 (1,623)
Preferred stock dividends and accretion of
discount on preferred stock -- (2,661) -- (5,322)
---------------- -------------- --------------- -----------------
Net income (loss) attributed to common
stockholders $2,694 ($3,061) $4,373 ($6,945)
================ ============== =============== =================
Net income (loss) per share attributed to common
stockholders
Basic and diluted $0.10 ($0.58) $0.16 ($1.32)
================ ============== =============== =================
Weighted average common shares outstanding
Basic 27,652,413 5,256,155 27,398,219 5,256,057
Diluted 27,862,127 5,256,155 27,622,816 5,256,057
See accompanying notes.
-4-
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
DECEMBER 29, DECEMBER 30,
2002 2001
----------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,373 $ (1,623)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 3,941 3,769
Amortization of other intangibles 168 169
Amortization of deferred financing costs and discount
on long-term debt 206 563
Amortization of unearned compensation 71 71
Loss on retirement of equipment 49 -
Changes in operating assets and liabilities, net of effect of business
acquired:
Accounts receivable (156) 191
Inventories (1,668) (3,198)
Prepaid expenses and other current assets (813) (416)
Interest escrow fund - 1,250
Accounts payable, accrued compensation and benefits, accrued expenses
and other (4,688) (4,751)
Other (821) (49)
----------------- -------------------
Net cash provided by (used in) operating activities 662 (4,024)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (18,359) --
Investment in other assets (3,751) --
Other additions to plant and equipment, net (6,500) (5,115)
----------------- -------------------
Net cash used in investing activities (28,610) (5,115)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (1,550) (3,387)
Proceeds of long-term debt 8,000 --
Redemption of Series E preferred stock (2,010) --
Proceeds from sale of common stock, net of costs 640 5,554
----------------- -------------------
Net cash provided by financing activities 5,080 2,167
----------------- -------------------
Decrease in cash and cash equivalents (22,868) (6,972)
Cash and cash equivalents at beginning of period 38,268 20,289
----------------- -------------------
Cash and cash equivalents at end of period $ 15,400 $ 13,317
----------------- -------------------
See accompanying notes.
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MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
MedSource Technologies, Inc. (the "Company") has prepared the unaudited
interim consolidated financial statements presented herein in accordance with
accounting principles generally accepted in the United States for interim
financial statements and in accordance with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all information and footnotes
required by accounting principles generally accepted in the United States for
complete financial statements. The consolidated financial statements are
unaudited but, reflect all adjustments, consisting of normal recurring
adjustments and accruals which, in the opinion of management, are considered
necessary for a fair presentation of our financial position and results of
operations and cash flows for the interim periods presented. The consolidated
financial statements should be read in conjunction with the summary of
significant accounting policies and notes to consolidated financial statements
included in the Company's annual report for its fiscal year ended June 30, 2002.
Results of operations for interim periods are not necessarily indicative of the
results that may be expected for the full fiscal year.
2. ACQUISITION
On September 4, 2002, the Company acquired Cycam, Inc., a company located
in Houston, Pennsylvania that manufactures reconstructive implants and
instruments. The total purchase price was approximately $24.4 million, which
included $18.4 million in cash and 667,175 shares of common stock valued at $6.0
million. The acquisition was recorded using the purchase method of accounting.
The preliminary purchase price allocation was $5.5 million to net tangible
assets and $18.5 million to goodwill.
In conjunction with the acquisition, the Company drew $8.0 million from the
acquisition line under the Company's existing credit facility.
The effect of the acquisition on the financial position and results of
operations is not material, and therefore no pro forma data of this acquisition
is required or presented.
3. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 29, JUNE 30,
2002 2002
---------------- ----------------
(UNAUDITED)
Raw material $ 12,453 $ 10,638
Work-in-progress 6,294 6,529
Finished goods 4,014 3,336
---------------- ----------------
Total $ 22,761 $20,503
================ ================
4. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) attributed to
common stockholders plus the results of any stockholders' equity changes
relating to the Company's previous interest rate swaps and current interest rate
cap agreements. For the three-months ended December 29, 2002 and December 30,
2001, comprehensive income (loss) was $2.4 million and ($3.1) million,
respectively. For the six-months ended December 29, 2002 and December 30, 2001,
comprehensive income (loss) was $4.1 million and ($6.9) million, respectively.
-6-
5. INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share attributed to common
stockholders for each period presented was computed using the weighted average
number of shares of common stock outstanding during the period. For the three
and six-month periods ended December 29, 2002, the impact of the assumed
exercise of certain options and warrants was dilutive and was therefore included
in determining the diluted weighted average shares outstanding. For the three
and six-month periods ended December 30, 2001, the impact of the same securities
would have been anti-dilutive, and those securities were therefore excluded from
the computation.
The table below sets forth the computation of basic and diluted net
earnings (loss) per share:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
DECEMBER 29, DECEMBER 30, DECEMBER 29, DECEMBER 30,
2002 2001 2002 2001
--------------------------------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
Numerator:
Net income (loss) $2,694 ($3,061) $4,373 ($6,945)
Denominator:
Basic-weighted average shares outstanding 27,652,413 5,256,155 27,398,219 5,256,057
Effect of dilutive securities:
Employee stock options 46,354 - 61,237 -
Warrants 163,360 - 163,360 -
--------------------------------- ----------------- -----------------
Diluted-weighted average shares outstanding 27,862,127 5,256,155 27,622,816 5,256,057
--------------------------------- ----------------- -----------------
Basic net earnings (loss) per share $0.10 ($0.58) $0.16 ($1.32)
--------------------------------- ----------------- -----------------
Diluted net earnings (loss) per share $0.10 ($0.58) $0.16 ($1.32)
--------------------------------- ----------------- -----------------
6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations, and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001 with early adoption permitted for companies with fiscal years
beginning after March 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal 2002. Amounts
previously recorded as separately identifiable intangibles for acquired work
force and customer base were subsumed to goodwill in accordance with FAS 141,
increasing goodwill by $34.6 million as of the date of adoption. Effective with
the July 1, 2001 adoption of FAS 142, goodwill is no longer amortized but is
instead subject to an annual impairment test. The transitional test conducted in
connection with the adoption of FAS 142 and the annual impairment test,
performed as of the beginning of the Company's fiscal 2002 fourth quarter
resulted in no impairment being required.
In the current quarter, the Company made purchase price allocations related
to the earlier HV Technologies and Cycam, Inc. acquisitions. These allocations
resulted in a $0.4 million increase to goodwill.
-7-
7. RESTRUCTURING CHARGE
In June 2001, the Company completed a strategic review of its manufacturing
operations and support functions. Based on this review and with approval of the
Board of Directors, management began actions to eliminate redundant facilities
and recorded a restructuring charge of $11.5 million.
Information relating to the restructuring charges is as follows (in
millions):
INCURRED
THROUGH BALANCE AT
INITIAL DECEMBER 29, DECEMBER 29,
ACCRUAL RECLASS 2002 2002
----------- -------------- ------------- -------------
Impairment of goodwill and other intangibles $ 3.6 -- $ 3.6 --
Impairment of property, plant and equipment 1.9 $ 2.0 3.9 --
Employee termination benefits 3.8 (1.5) 2.0 $ 0.3
Other direct costs 2.2 (0.5) 0.5 1.2
----------- -------------- ------------- -------------
$ 11.5 $ 0.0 $ 10.0 $ 1.5
=========== ============== ============= =============
-8-
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
You should read the following discussion in conjunction with our financial
statements and related notes appearing elsewhere in this Report on Form 10-Q.
The following discussion contains "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. In many cases, you can identify
forward-looking statements by terminology such as may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate, " "predict," "intend,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those indicated in these
statements as a result of certain factors, as more fully discussed below and
under the heading "risk factors" contained in our Form 10-K for the period ended
June 30, 2002. Readers should not place undue reliance on any such
forward-looking statements, which are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made. We
do not assume any obligation to update the forward-looking statements after the
date hereof.
OVERVIEW
We provide product development and design services, precision metal and
plastic part manufacturing, product assembly services and supply chain
management. We provide our products and services to each of the following
primary target markets:
o Surgical instrumentation devices and components;
o Electro-medical devices and components;
o Interventional devices and components; and
o Orthopedic devices and instruments.
COMPANY HISTORY
During 1998, our co-founders, Richard J. Effress and William J. Kidd,
established MedSource to identify business opportunities in the medical
engineering and manufacturing services industry. We began operations when we
acquired seven companies during March 1999 and have subsequently completed six
additional acquisitions, most recently HV Technologies, or HVT, in January 2002
and Cycam Inc. in September 2002. The acquisition of HVT, a specialized
manufacturer of polyimide and composite micro-tubing used in interventional and
minimally invasive catheters, delivery systems and instruments, enabled us to
expand our offering of proprietary manufacturing capabilities to our customers
in the interventional device market. We acquired Cycam Inc. in September 2002.
The acquisition of Cycam, a manufacturer of reconstructive implants and
instruments, enhances our capabilities within plastic machining, propriety
coating technology, clean room knitting and packaging along with multi axis
machining. All of our acquisitions were accounted for using the purchase method
of accounting.
During June 2001, we completed a review of our manufacturing operations and
support functions. Based on our evaluation of the unique and common
characteristics of our various facilities, we determined that we could achieve
over-all cost savings by closing three of the facilities, thus improving
capacity utilization and efficiency of the remaining facilities. We sold our
facilities in Pittsfield and East Longmeadow, Massachusetts during our fiscal
year ended June 30, 2002. We also initiated the shutdown of our facility in
Danbury, Connecticut during our fiscal year ended June 30, 2002 and expect it to
be closed by the end of February 2003.
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RESULTS OF OPERATIONS
REVENUES
We recognize product revenues at the time products are shipped. Product
shipments are supported by purchase orders from customers that indicate the
price for each product. For services, we recognize revenues primarily on a time
and materials basis. Service revenues are supported by customer orders or
contracts that indicate the price for the services being rendered. For three
months ended December 29, 2002, service revenues were less than 10% of total
revenues. Revenues for product shipments and services rendered must also have
reasonable assurance of collectability from the customer. Reserves for returns
and allowances are recorded against revenues based on management's estimates and
historical experience.
We target the sale of our products and services to medical device companies
in four target markets. As we have continued to focus on these markets, our
sales to nonmedical customers as a percentage of our total revenues have been
decreasing over time. Sales to nonmedical customers were less than 2% of our
total revenues during the three and six-month periods ended December 29, 2002.
Historically, most of our revenues were derived from manufacturing
components used in medical devices. However, in order to accelerate revenue
growth and better serve our customers, we aggressively pursued opportunities for
the assembly of completed devices. To support this effort, we have completed a
number of acquisitions to expand our product offerings and enhance our supply
chain services. Over time, we anticipate that revenues from the assembly of
completed devices will likely continue to grow as a percentage of our total
revenues.
Recent competitive pressures, coupled with the fact that many of our
customers' orders are increasingly based on engineering projects with ever
longer pre-commercialization phases and device assembly projects that are
engineering intensive, but cost sensitive, has put pressure on engineering
resources, lengthened our time-to-revenue cycle and increased the demand we face
for lower cost products and services.
In order to address these competitive pressures, along with the nature of
our customer orders described above, we announced a growth strategy and
restructuring initiative during January 2003. The initiative is intended to
focus additional resources on our medical device assembly and engineering
services businesses. The initiative will involve the cost savings measures
described below under "-- Cost and Expenses."
Our top four customers accounted for 56% of our revenues for the six months
ended December 29, 2002, with three customers accounting for 28%, 12%, and 11%
or our revenues respectively. We expect revenues from our largest customers to
continue to constitute an increasing portion of our total revenues.
We primarily derive our revenues from serving leading medical device
companies. These customers are typically large companies with substantial market
share in one or more of our four target markets, and we believe that expanding
our relationships with these customers represents our most important revenue
opportunity. As a result, we devote significant sales efforts to securing
additional business from the business units and product lines of the leading
medical device companies that we currently serve, as well as developing business
with other business units and product lines of these customers. As we
increasingly focus on serving leading medical device companies and expand our
offerings to them by developing or acquiring additional engineering and
manufacturing capabilities, we expect the percentage of revenues we derive from
these customers to increase over time, as compared with revenues from
non-medical device companies. We also intend to continue to selectively pursue
promising opportunities with emerging medical device companies.
As discussed above, we have acquired six businesses after March 1999. A
substantial portion of our revenue growth to date has been attributable to the
addition of these acquired companies' revenues. In the
-10-
periods following these acquisitions, we have grown our revenues by offering our
existing customers access to our newly acquired engineering and manufacturing
capabilities, as well as by offering the customers of the acquired businesses
access to our existing capabilities. We generally have retained the medical
device customers of the companies that we have acquired, but have selectively
discontinued business with customers of the acquired businesses that did not fit
our strategic focus of serving leading and select emerging medical device
companies in our four target markets or related medical fields. We expect to
continue to selectively make acquisitions of complementary medical engineering
and manufacturing services providers that bring desired capabilities, customers
and/or geographic coverage that either strengthens our position in our target
markets or provide us with a significant presence in a new market.
We generally do not have long-term volume commitments from our customers,
and they may cancel their orders or change or delay volume levels at any time.
COST AND EXPENSES
Cost of products sold includes expenses for raw materials, purchased
components, outside services, supervisory, engineering and direct production
manpower including benefits, production supplies, depreciation and other related
expenses to support product manufacturing. We purchase most of the raw materials
that are used in our products at prevailing market prices and, as a result, are
subject to fluctuations in the market price of those raw materials. In
particular, the prices of stainless steel, titanium and platinum have
historically fluctuated, and the prices that we pay for these materials, and, in
some cases, their availability, are dependent upon general market conditions.
Our margins are driven by sales mix between devices and components as well
as the respective product mixes within our various product categories.
Historically, our component business produced strong gross margins. When we were
initially formed during March 1999, we were predominately a components supplier.
However, in order to expand the scope of our services and accelerate revenue
growth, we aggressively pursued opportunities for the assembly of completed
devices, which generally have higher material content and a lower value added
content, and can result in slightly lower gross margins but with lower capital
investment. Additionally, we are seeing an evolving environment resulting in
greater demands from our customers and more competition within both our
components and assembly business. As a result of these conditions, we have
initiated a growth and restructuring plan (described below).
Selling, general and administrative expense includes support of our
facilities for production and shipments to the customer as well as strategic
investments in our sales and marketing, operations and quality teams, and our
corporate support staff.
The restructuring initiative we announced in January 2003 will involve
continuing consolidation of our operations network, resulting in a decrease in
overall floor space and related overhead costs. To cover the costs of this
growth strategy and restructuring, we expect to incur costs related to
restructuring efforts of approximately $25.0 to $35.0 million through the end of
fiscal 2006. Additionally, we are currently determining what, if any, goodwill
impairment charges will be incurred related to the initiative.
THREE MONTHS ENDED DECEMBER 29, 2002 COMPARED TO THREE MONTHS ENDED
DECEMBER 30, 2001
Revenues for the three-month period ended December 29, 2002 totaled $44.6
million compared to $38.3 million for the same period of the prior year, an
increase of 16%, of which 12% was due to acquisitions and 4% was due to internal
growth. Excluding the expected decline in shipments reported of non-medical
revenue, a June 2001 company restructuring, and excluding an increased revenue
from the HVT and Cycam acquisitions, our base medical business increased 10%
compared to the prior year. These revenue gains were driven by higher demand
across all major market segments.
-11-
Cost of products sold for the three-month period ended December 29, 2002
totaled $33.2 million compared to $28.5 million for the three-month period ended
December 30, 2001. The increase in cost of products sold resulted principally
from the increase in volume compared to the prior year period.
Gross margin was 25.7% for the three months ended December 29, 2002,
compared to 25.5% for the same period of the prior year.
Selling, general, and administrative expense for the three-month period
ended December 29, 2002 totaled $8.0 million, or 18.0% of revenues, compared to
$7.7 million, or 20.1% of revenues, for the same period of the prior year. The
$0.3 million increase in SG&A resulted mainly from the impact of acquisitions.
Amortization of intangibles totaled $0.1 million for the three-month
periods ended December 29, 2002 and December 30, 2001.
Net interest expense totaled $0.7 million for the three-month period ended
December 29, 2002 and $2.4 million for the same prior year period. This was due
to both lower debt and interest rates from the prior period as a result of the
March 2002 IPO and the debt refinancing in April 2002.
Net income attributed to common shareholders totaled $2.7 million, or $0.10
per share, compared with a loss of $3.1 million, or $0.58 per share, for the
same prior year period.
SIX MONTHS ENDED DECEMBER 29, 2002 COMPARED TO SIX MONTHS ENDED
DECEMBER 30, 2001
Revenues for the six-month period ended December 29, 2002 totaled $85.6
million compared to $72.2 million for the same period of the prior year, an
increase of 19%, of which 12% was due to acquisitions and 7% was due to internal
growth. Internal growth was driven by increased shipments of products in the
interventional cardiology and reconstructive orthopedic markets to several of
our established customers. Excluding the already noted expected decline in
shipments reported of non-medical revenue, a June 2001 company restructuring,
and excluding an increased revenue from the HVT and Cycam acquisitions, our base
medical business increased 14% compared to the prior year.
Cost of products sold for the six-month period ended December 29, 2002
totaled $64.0 million compared to $54.6 million for the six-month period ended
December 30, 2001. The increase in cost of products sold resulted principally
from the increase in volume compared to the prior year period.
Gross margin was 25.3% for the six months ended December 29, 2002, compared
to 24.3% for the same period of the prior year due to a higher mix of business
in higher-margin locations and increased operating leverage due to the June 2001
restructuring.
Selling, general, and administrative expense for the six-month period ended
December 29, 2002 totaled $15.9 million, or 18.6% of revenues, compared to $14.1
million, or 19.5% of revenues, for the same period of the prior year. The $1.8
million increase in SG&A resulted mainly from the impact of acquisitions.
Amortization of intangibles totaled $0.2 million for the six-month periods
ended December 29, 2002 and December 30, 2001.
Net interest expense totaled $1.2 million for the six-month period ended
December 29, 2002 and $4.9 million for the same prior year period. This was due
to both lower debt and interest rates from the prior period as a result of the
March 2002 IPO and the debt refinancing in April 2002.
Net income attributed to common shareholders for the six-month period ended
December 29, 2002 totaled $4.4 million, or $0.16 per share, compared with a loss
of $6.9 million, or $1.32 per share, for the same prior year period.
-12-
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash provided by operations and
borrowings under our senior credit facility, which includes a $25 million unused
revolving credit facility. To date, our principal uses of cash have been to
finance capital expenditures, meet debt service requirements and finance
acquisitions. We expect that these uses will continue in the future.
Management believes that current cash balances and cash generated from
operations, combined with available borrowings under our senior credit facility,
will be adequate to fund requirements for working capital, capital expenditures,
and future expansion for the next 12 months.
OPERATING ACTIVITIES
Net cash provided by operating activities totaled $0.7 million for the six
months ended December 29, 2002 compared to net cash used of $4.0 million for the
prior year period. The increase in cash provided by operating activities over
the prior year period was primarily the result of a $6.0 million increase in net
income and a $1.5 million decrease in inventory offset by a $1.3 million
reduction in proceeds from the interest escrow fund received in the prior year
period but not recurring in the current period, as well as a $1.1 million
increase in accounts receivable and other.
INVESTING ACTIVITIES
Cash used in investing activities was $28.6 million for the six months
ended December 29, 2002, compared to $5.1 million for the prior year period.
This increase was due to cash of $18.4 million used for the acquisition of
Cycam, and a $3.8 million investment to acquire certain machinery, equipment and
intangibles. Cash paid for capital expenditures increased $1.4 million when
compared to the prior year period. We expect capital expenditures in fiscal 2003
to be approximately $10 to $12 million.
FINANCING ACTIVITIES
Cash provided by financing activities was $5.1 million for the six months
ended December 29, 2002 compared to cash used by financing activities of $2.2
million for the prior year period. The increase was primarily due to proceeds of
$8.0 million from the acquisition line under our senior credit facility, in
connection with the acquisition of Cycam, a reduction of $1.8 million in
long-term debt payments from the prior period, offset by $4.9 million reduction
in common stock proceeds as well as $2.0 million used for the redemption of the
remainder of the Series E preferred stock.
CRITICAL ACCOUNTING POLICIES
There has been no material change to the Critical Accounting Policies we
disclosed in our annual report on Form 10-K for our year ended June 30, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Amounts outstanding under our senior credit facility bear interest at a
floating rate. To reduce our exposure to interest rate risk, we entered into cap
agreements to hedge our exposure to interest rate risk under this facility.
Changes in the fair value of the caps will be recorded in Accumulated Other
Comprehensive Loss in Stockholders' Equity. We had entered into a similar swap
agreement in connection with amounts due under our old senior credit facility.
The effect of a 10% increase in interest rates would have resulted in an
immaterial increase in interest expense during our period ended December 29,
2002.
-13-
FOREIGN CURRENCY RISK
Most of our sales and purchases are denominated in United States dollars
and as a result, we have relatively little exposure to foreign currency exchange
risk with respect to our sales. Accordingly, we do not use forward exchange
contracts to hedge exposures denominated in foreign currencies or any other
derivative financial instrument for trading or speculative purposes. The effect
of a 10% change in exchange rates as of December 29, 2002 would not have had a
material impact on our operating results for the fiscal year then ended.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that we are required to
filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our principal executive officer and our principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures which, by their nature, can provide
only reasonable assurance regarding management's control objectives.
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman of the Board and Chief Executive Officer and our Senior
Vice President -- Finance and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon the foregoing, our Chairman of the Board
and Chief Executive Officer and our Senior Vice President -- Finance and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to MedSource
(and its consolidated subsidiaries) required to be included in our Exchange Act
reports.
CHANGES IN INTERNAL CONTROLS
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out the evaluation referred to above.
-14-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
During October 2002, we issued an aggregate of 3,329 shares of our common
stock upon exercise of warrants issued to one of the investors who had purchased
our Series E preferred stock in 2001. The exercise price of the warrants was
$0.01 per share, and the investor used a "cashless" exercise provision that
enabled him to surrender the right to receive upon exercise of the warrants a
number of shares of common stock with a value equal to the aggregate exercise
price of the warrants and, as a result, surrendered the right to receive an
aggregate of one share. We issued these securities in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 and
Rule 506 thereunder.
During November 2002, we issued an aggregate of 1,332 shares of our common
stock to four directors as payment for their $2,500 quarterly directors' fee. We
issued these securities in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act of 1933 as transactions not involving any
public offering and Rule 506 thereunder.
During December 2002, we issued an aggregate of 3,329 shares of our common
stock upon exercise of warrants issued to one of the investors who had purchased
our Series E preferred stock in 2001. The exercise price of the warrants was
$0.01 per share, and the investor used a "cashless" exercise provision that
enabled him to surrender the right to receive upon exercise of the warrants a
number of shares of common stock with a value equal to the aggregate exercise
price of the warrants and, as a result, surrendered the right to receive an
aggregate of one share. We issued these securities in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act of 1933 and
Rule 506 thereunder.
During December 2002, we also issued an aggregate of 537 shares of our
common stock to one director as payment for his $2,500 quarterly director's fee.
We issued these securities in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933 as transactions not
involving any public offering and Rule 506 thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders on November 5, 2002, our
stockholders:
o elected the following persons by the following votes to serve as Class
I directors, to serve until our annual meeting of stockholders
scheduled to be held in the year 2005 and until their successors are
duly elected and qualified:
VOTES
-----
NOMINEE FOR WITHHELD
- ------- --- --------
Richard J. Effress............................... 16,001,393 2,694,139
William J. Kidd.................................. 18,087,212 608,320
T. Michael Long.................................. 18,088,112 607,420
-15-
o ratified the action of our board in appointing Ernst & Young LLP as
our independent auditors for the fiscal year ending June 30, 2003 by
the following vote:
FOR AGAINST ABSTAIN
--- ------- -------
18,474,002 200,764 20,766
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit
Number Description
-------------------------------------------------------------------------
10.1 Form of Employment Severance and Termination Agreements between
the registrant and William J. Kullback
10.2 Form of Employment Severance and Termination Agreements between
the registrant and Rolf Dahl
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer
(b) The registrant did not file a current report on Form 8-K during the
period covered by this report.
-16-
SIGNATURES
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.
Dated: February 12, 2003
MEDSOURCE TECHNOLOGIES, INC.
By: /s/Richard J. Effress
--------------------------------------
Richard J. Effress, Chairman
and Chief Executive Officer
By: /s/William J. Kullback
--------------------------------------
William J. Kullback
Senior Vice President - Finance and
Chief Financial Officer
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, Richard J. Effress, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MedSource
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 12, 2003
/s/Richard J. Effress
--------------------------------
Richard J. Effress
Chairman of the Board and Chief
Executive Officer
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, William J. Kullback, certify that:
1. I have reviewed this quarterly report on Form 10-Q of MedSource
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: February 12, 2003
/s/William J. Kullback
-------------------------------------
William J. Kullback
Senior Vice President -- Finance and Chief
Financial Officer
EXHIBIT INDEX
Exhibit
Number Description Page No.
-------------------------------------------------------------------------
10.1 Form of Employment Severance and Termination Agreements
between the registrant and William J. Kullback
10.2 Form of Employment Severance and Termination Agreements
between the registrant and Rolf Dahl
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer