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 MARCH 30, 2003
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: | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No: |X|
The number of shares of the registrant's Common Stock, par value $0.01 per
share, outstanding as of May 12, 2003 was 28,683,225.
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.........................................................14
Item 4. Controls and Procedures.............................................14
Part II: Other Information
--------------------------
Item 1. Legal Proceedings...................................................16
Item 2. Changes in Securities and Use of Proceeds...........................16
Item 3. Defaults Upon Senior Securities.....................................16
Item 4. Submission of Matters to a Vote of Security Holders.................16
Item 5. Other Information...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
Signatures ...................................................................16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 30, JUNE 30,
2003 2002
----------------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 14,126 $ 38,268
Accounts receivable, net 24,800 24,031
Inventories, net 24,300 20,503
Prepaid expenses and other current assets 3,069 2,402
--------- ---------
Total current assets 66,295 85,204
Property, plant, and equipment, net 52,030 42,045
Goodwill 104,170 113,113
Other identifiable intangible assets, net 3,839 4,092
Deferred financing costs 1,838 1,971
Other assets 1,612 1,404
--------- ---------
Total assets $ 229,784 $ 247,829
========= =========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,671 $ 7,924
Accrued compensation and benefits 4,439 5,352
Other accrued expenses 2,260 3,491
Restructuring reserve 953 2,381
Current portion of long-term debt 11,830 5,939
--------- ---------
Total current liabilities 29,153 25,087
Long-term debt, less current portion 35,080 35,967
Other long-term liabilities 766 455
Stockholders' equity:
Preferred stock -- 1,974
Common stock 277 269
Additional paid-in capital 275,197 268,455
Treasury stock (1,282) (1,282)
Accumulated other comprehensive loss (294) --
Accumulated deficit (109,113) (83,025)
Unearned compensation -- (71)
--------- ---------
Total stockholders' equity 164,785 186,320
--------- ---------
LIABILITIES & STOCKHOLDERS' EQUITY $ 229,784 $ 247,829
========= =========
See accompanying notes.
-3-
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------------- ----------------------------------
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
Revenues $ 44,511 $ 42,150 $ 130,135 $ 114,306
Costs and expenses:
Cost of product sold 34,007 31,483 97,989 86,099
Selling, general and administrative expense 8,379 8,283 24,475 22,550
Restructuring charges 1,948 -- 1,948 --
Goodwill impairment 30,000 -- 30,000 --
------------ ----------- ------------ -----------
Operating (loss) income (29,823) 2,384 (24,277) 5,657
------------ ----------- ------------ -----------
Interest expense, net (596) (2,363) (1,776) (7,248)
Other income (expense) 6 (2,857) 28 (2,867)
------------ ----------- ------------ -----------
Loss before income taxes (30,413) (2,836) (26,025) (4,458)
Income tax (expense) benefit (12) 3 (27) 3
------------ ----------- ------------ -----------
Net loss (30,425) (2,833) (26,052) (4,455)
Preferred stock dividends and accretion of
discount on preferred stock -- (25,817) -- (31,139)
------------ ----------- ------------ -----------
Net loss attributed to common stockholders $ (30,425) $ (28,650) $ (26,052) $ (35,594)
============ =========== ============ ===========
Net loss per share attributed to common stockholders
Basic and diluted $ (1.10) $ (4.01) $ (0.95) $ (6.06)
============ =========== ============ ===========
Weighted average common shares outstanding
Basic and diluted 27,639,127 7,146,444 27,413,489 5,876,987
See accompanying notes.
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MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
MARCH 30, MARCH 31,
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(26,052) $ (4,455)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 6,324 5,907
Amortization of other intangibles 253 277
Goodwill impairment 30,000 --
Amortization of deferred financing costs and discount
on long-term debt 305 876
Amortization of unearned compensation 71 107
Loss on retirement of equipment 1,122 --
Changes in operating assets and liabilities,
net of effect of business acquired:
Accounts receivable 145 1,610
Inventories (3,306) (5,342)
Prepaid expenses and other current assets (590) (809)
Interest escrow fund -- 1,849
Accounts payable, accrued compensation and benefits, accrued expenses (2,806) 391
Other (280) (292)
-------- --------
Net cash provided by operating activities 5,186 119
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired (22,591) (5,408)
Other additions to plant and equipment, net (10,623) (7,109)
Proceeds from sale of equipment 80 --
-------- --------
Net cash used in investing activities (33,134) (12,517)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt (2,997) (5,111)
Proceeds from long-term debt 8,000 --
Redemption of Series E preferred stock (2,010) --
Proceeds from sale of Series E preferred stock and common stock
net of costs 813 97,137
-------- --------
Net cash provided by financing activities 3,806 92,026
-------- --------
(Decrease) increase in cash and cash equivalents (24,142) 79,628
Cash and cash equivalents at beginning of period 38,268 20,289
-------- --------
Cash and cash equivalents at end of period $ 14,126 $ 99,917
-------- --------
See accompanying notes.
-5-
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.
STOCK BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
under the intrinsic value method in accordance with Accounts Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation," to its stock based employee compensation.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
MARCH 30, MARCH 31, MARCH 30, MARCH 31,
2003 2002 2003 2002
---- ---- ---- ----
Net loss, as reported $ (30,425) $ (28,650) $ (35,594) $ (35,594)
Less: Total stock-based employee compensation
expense determined under the fair value based
method for all awards (272) (256) (325) (767)
- -------------------------------------------------------------------------------------------------------------------------
Pro forma net loss $ (30,697) $ (28,906) $ (36,377) $ (36,361)
Basic and diluted-as reported $ (1.10) $ (4.01) $ (0.95) $ (6.06)
Basic and diluted-as pro forma $ (1.11) $ (4.04) $ (0.96) $ (6.19)
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 $6.0 million to net tangible
assets and $18.5 million to goodwill.
In conjunction with the acquisition, the Company utilized $8.0 million
from the acquisition line under the Company's existing credit facility.
-6-
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):
MARCH 30, JUNE 30,
2003 2002
----------------------- ----------------------
(UNAUDITED)
Raw material $14,843 $10,638
Work-in-progress 6,923 6,529
Finished goods 2,534 3,336
----------------------- ----------------------
Total $24,300 $20,503
======================= ======================
4. COMPREHENSIVE LOSS
Comprehensive loss represents net 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 March 30, 2003 and March 31, 2002, comprehensive loss was
$30.5 million and $28.7 million, respectively. For the nine-months ended March
30, 2003 and March 31, 2002, comprehensive loss was $26.3 million and $35.6
million, respectively.
5. 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. The Company adopted the new rules on accounting
for goodwill and other intangible assets beginning in the first quarter of
fiscal 2002. 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.
In accordance with SFAS No. 142, as a result of impairment indicators
MedSource initiated a goodwill impairment assessment during the third quarter of
fiscal 2003. As a result of its preliminary analysis, MedSource recorded a $30
million non-cash impairment charge. The non-cash impairment charge amount may be
adjusted when the analysis is finalized during the fourth quarter of 2003.
6. RESTRUCTURING CHARGES
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.
During the period ended March 30, 2003 the Company recorded an additional
charge of $1.4 million to cover identified restructuring costs in excess of the
original charge of $11.5 million. These excess restructuring costs were a result
of closing an additional facility, which was not part of the original
restructuring plan. As of the March 30, 2003 all of these restructuring efforts
have been completed and their costs recorded.
-7-
Information relating to the restructuring charges is as follows (in
millions):
INCURRED
THROUGH BALANCE AT
INITIAL ADDITIONAL MARCH 30, MARCH 30,
ACCRUAL RECLASS ACCRUAL 2003 2003
------------- ------------- -------------- ------------ -----------
Impairment of goodwill and other intangibles $ 3.6 -- -- $ 3.6 $ --
Impairment of property, plant and equipment 1.9 $ 2.3 -- 4.2 --
Employee termination benefits 3.8 (1.2) $ 1.2 3.8 0.8
Other direct costs 2.2 (1.1) 0.2 1.3 --
------------- ------------- -------------- ----------- ------------
$ 11.5 $ 0.0 $ 1.4 $ 12.9 $ 0.8
============= ============= ============== =========== ============
In June 2002, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit of Disposal Activities, effective for exit or disposal activities that are
initiated after December 31, 2002. In January 2003, the Company announced a
restructuring initiative that will involve continuing consolidation of our
operations network, resulting in a decrease in overall floor space and related
overhead costs. Pre-tax charges related to the continuing restructuring efforts
are projected to total approximately $15.0 million to $20.0 million and will be
incurred through the end of fiscal 2005. In accordance with SFAS 146, these
restructuring charges will be recognized when the liability is incurred. As of
March 30, 2003 the Company has recognized $0.5 million of costs associated with
this initiative.
Information relating to the restructuring charges is as follows (in
millions):
INCURRED
EXPENSED AS OF THROUGH BALANCE AT
MARCH 30, MARCH 30, MARCH 30,
2003 2003 2003
---------------- ---------------- ------------------
Employee termination benefits $ 0.5 $ 0.3 $ 0.2
---------------- ---------------- ------------------
$ 0.5 $ 0.3 $ 0.2
================ ================ ==================
7. SUBSEQUENT EVENTS
On May 9, 2003, the Company completed an amendment to the Credit
Agreement dated April 2, 2002. The amendment contains certain convents, which
require the Company to maintain, among other things, a minimum fixed charge
coverage ratio and interest coverage ratio and a maximum leverage ratio. If the
Company does not comply with its covenants under the Credit Agreement, the
maturity date of its obligations under the Credit Agreement could be
accelerated. In conjunction with the amendment, we made a payment of $7.5
million in the third quarter, which will be applied to all of our required forth
quarter debt payment, approximately half of our first quarter of fiscal 2004
payment, with the balance to be applied pro-rata based on our payments over the
remainder of the agreement.
-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 other four acquisitions were completed
before our year ended June 30, 2001.) 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 or selling three of the facilities, thus
improving capacity utilization and efficiency of the remaining facilities and
recorded a charge of $11.5 million in connection with these closings. The
Company recorded an additional $1.4 million of restructuring charges in the
third quarter of fiscal 2003 because it ultimately closed or sold four
facilities (and not three as originally intended).
-9-
In January 2003, we announced a restructuring initiative that will
involve continuing consolidation of our operations network, resulting in a
decrease in overall floor space and related overhead costs. Pre-tax charges
related to the continuing restructuring efforts are projected to total
approximately $15.0 million to $20.0 million and will be incurred through the
end of fiscal 2005. As of March 30, 2003 we had recognized $0.5 million of costs
associated with this initiative.
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 March 30, 2003, 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 non-medical customers as a percentage of our total
revenues have been decreasing over time. Sales to non-medical customers were
less than 2% of our total revenues during the three and nine-month periods ended
March 30, 2003.
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 nine
months ended March 30, 2003, with three customers accounting for 27%, 13%, 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
-10-
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 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 result in
a decrease in overall floor space and related overhead costs. Once fully
implemented, the growth and restructuring imitative should generate cost savings
of $6 million to $8 million on an annual basis. Pre-tax charges related to the
continuing restructuring efforts are projected to total approximately $15
million to $20 million and will be incurred through the end of fiscal 2005.
THREE MONTHS ENDED MARCH 30, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Revenues for the three-month period ended March 30, 2003 totaled $44.5
million compared to $42.2 million for the same period of the prior year, an
increase of 5.6%. The revenue increase was primarily due to our Cycam
acquisition. Excluding the expected decline in shipments reported of non-medical
products,
-11-
the June 2001 company restructuring and increased revenue from the Cycam
acquisition, our base medical business increased 6.0% compared to the prior
year. These revenue gains were driven by higher demand across all major market
segments.
Cost of products sold for the three-month period ended March 30, 2003
totaled $34.0 million compared to $31.5 million for the three-month period ended
March 31, 2002. The increase in cost of products sold resulted principally from
the increase in volume compared to the prior year period and competitive pricing
pressure.
Gross margin was 23.6% for the three months ended March 30, 2003,
compared to 25.3% for the same period of the prior year. The decrease is a
result of costs associated with the transfer of production of certain products
to other company facilities to achieve long-term operational efficiencies.
Selling, general, and administrative expense for the three-month period
ended March 30, 2003 totaled $8.4 million, or 18.8% of revenues, compared to
$8.3 million, or 19.7% of revenues, for the same period of the prior year.
As a result of impairment indicators, the Company initiated a goodwill
impairment assessment during the three-month period ended March 30, 2003. As a
result of this assessment, a $30.0 million non-cash impairment charge was
recorded in the third quarter. The non-cash impairment charge amount may be
adjusted when the analysis is finalized during the fourth quarter of 2003.
Net interest expense totaled $0.6 million for the three-month period
ended March 30, 2003 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 Initial Public Offering (IPO) and the debt refinancing in April
2002.
Net loss attributed to common shareholders totaled $30.4 million, or
$1.10 per share, compared with a loss of $28.7 million, or $4.01 per share, for
the same prior year period.
NINE MONTHS ENDED MARCH 30, 2003 COMPARED TO NINE MONTHS ENDED MARCH 31, 2003
Revenues for the nine-month period ended March 30, 2003 totaled $130.1
million compared to $114.3 million for the same period of the prior year, an
increase of 13.8%, of which 9.3% was due to acquisitions and 4.5% stemmed from
internal growth. Internal growth was driven by increased shipments of products
in all of the company's market segments - surgical instrumentation,
electomedical implants, interventional medicine and orthopedics. Excluding the
already noted expected decline in shipments reported of non-medical products,
the June 2001 company restructuring and increased revenue from the HVT and Cycam
acquisitions, our base medical business increased 6.0% compared to the prior
year.
Cost of products sold for the nine-month period ended March 30, 2003
totaled $98.0 million compared to $86.1 million for the nine-month period ended
March 31, 2002. The increase in cost of products sold resulted principally from
the increase in volume compared to the prior year period.
Gross margin was 24.7% for the nine months ended March 30, 2003, and
24.7% for the same period of the prior year.
Selling, general, and administrative expense for the nine-month period
ended March 30, 2003 totaled $24.5 million, or 18.8% of revenues, compared to
$22.6 million, or 19.7% of revenues, for the same period of the prior year. The
$1.9 million increase in SG&A resulted primarily from the impact of
acquisitions.
-12-
As a result of impairment indicators, the Company initiated a goodwill
impairment assessment during the nine-month period ended March 30, 2003. As a
result of this preliminary analysis, a $30.0 million non-cash impairment charge
was recorded in the third quarter. The non-cash impairment charge amount may be
adjusted when the analysis is finalized during the fourth quarter of 2003.
Net interest expense totaled $1.8 million for the nine-month period ended
March 30, 2003 and $7.2 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 loss attributed to common shareholders for the nine-month period
ended March 30, 2003 totaled $26.1 million, or $0.95 per share, compared with a
loss of $35.6 million, or $6.06 per share, for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash provided by operations and
borrowings under our senior credit facility, which includes a $15 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.
On May 9, 2003, we amended our senior credit facility. The amendment
contains certain convents, which require us to maintain, among other things, a
minimum fixed charge coverage ratio and interest coverage ratio and a maximum
leverage ratio. Consistent with credit facilities of this type, if we do not
comply with the covenants in the credit facility, the maturity date of our
obligations under the credit facility could be accelerated. In conjunction with
the amendment, we made a payment of $7.5 million in the third quarter, which
will be applied to all of our required forth quarter debt payment, approximately
half of our first quarter of fiscal 2004 payment, with the balance to be applied
pro-rata based on our payments over the remainder of the agreement.
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 $5.2 million for the
nine months ended March 30, 2003 compared to $0.1 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 $1.1 million loss on retirement of
equipment, and a $2.0 million decrease in inventory, offset by a $1.8 million
reduction in proceeds from the interest escrow fund received in the prior year
period, which did not recur in the current period, as well as a $1.5 million
increase in accounts receivable and a $3.2 million reduction in accounts payable
and other accrued expenses.
INVESTING ACTIVITIES
Cash used in investing activities was $33.1 million for the nine months
ended March 30, 2003, compared to $12.5 million for the prior year period. This
increase was due to cash of $18.4 million used for the acquisition of Cycam.
Cash paid for capital expenditures increased $2.5 million when compared to the
prior year period. We expect capital expenditures in fiscal 2003 to be
approximately $10 to $12 million.
-13-
FINANCING ACTIVITIES
Cash provided by financing activities was $3.8 million for the nine
months ended March 30, 2003, compared to $92.0 million for the prior year
period. The decrease over the prior period was primarily the result of a $96.3
million decrease of proceeds received from the sale of Series E preferred stock
and common stock, offset by proceeds of $8.0 million from the acquisition line
under our senior credit facility, in connection with the acquisition of Cycam.
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 March 30, 2003.
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 March 30, 2003 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.
-14-
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.
-15-
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 January 2003, we issued an aggregate of 46,923 shares of our
common stock upon exercise of warrants issued to seven 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 each of the investors used a "cashless"
exercise provision that enabled the investors 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 73 shares. 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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 Waiver and Second Amendment to Credit Agreement dated as of
May 9, 2003 among the registrant, its subsidiaries, Wachovia
Bank, National Association and the lenders named therein
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer
(b) We did not file any reports on Form 8-K during the period
covered by this quarterly 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: May 14, 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: May 14, 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: May 14, 2003
/s/ William J. Kullback
--------------------------------
William J. Kullback
Senior Vice President -- Finance
and Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
10.1 Waiver and Second Amendment to Credit Agreement dated as of
May 9, 2003 among the registrant, its subsidiaries, Wachovia
Bank, National Association and the lenders named therein
99.1 Certificate of Chief Executive Officer
99.2 Certificate of Chief Financial Officer