U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended October 1, 2004
Commission File Number 1-16137
WILSON GREATBATCH TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
16-1531026
(I.R.S. employer identification no.)
9645 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)
(716) 759-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The number of shares outstanding of the Company's common stock, $.001 par
value per share, as of November 5, 2004 was: 21,393,819 shares.
WILSON GREATBATCH TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2004
Page
COVER PAGE 1
TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheet 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and 16
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 4. Controls and Procedures 24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Unaudited
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
ASSETS September 30, December 31,
2004 2003
Current assets:
Cash and cash equivalents $77,801 $119,486
Short-term investments 6,064 11,559
Accounts receivable, net 28,777 23,726
Inventories 33,348 28,598
Prepaid expenses and other current assets 1,328 3,591
Refundable income taxes 575 583
Deferred income taxes 3,163 3,163
Asset available for sale 3,600 3,658
-------- --------
Total current assets 154,656 194,364
Property, plant, and equipment, net 83,146 63,735
Intangible assets, net 65,061 51,441
Goodwill 156,759 119,521
Deferred income taxes 2,896 2,896
Other assets 5,009 6,286
-------- --------
Total assets $467,527 $438,243
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,077 4,091
Accrued expenses and other current liabilities 18,147 18,968
Current portion of long-term debt 809 850
-------- --------
Total current liabilities 22,033 23,909
Long-term debt, net of current portion 1,138 928
Convertible subordinated notes 170,000 170,000
Deferred income taxes 20,026 7,251
Other long-term liabilities - 815
-------- --------
Total liabilities 213,197 202,903
-------- --------
Stockholders' equity:
Preferred stock - -
Common stock 21 21
Additional paid-in capital 211,812 207,969
Deferred stock-based compensation (615) (1,185)
Treasury stock, at cost - (179)
Retained earnings 43,112 28,714
-------- --------
Total stockholders' equity 254,330 235,340
-------- --------
Total liabilities and stockholders' equity $467,527 $438,243
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements
3
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - Unaudited
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- -----------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Sales $45,177 $56,335 $153,644 $166,994
Cost of sales 27,775 32,375 89,249 97,004
------- ------- -------- --------
Gross profit 17,402 23,960 64,395 69,990
Selling, general and administrative expenses 6,913 7,290 20,227 23,127
Research, development and engineering costs, net 4,156 3,953 14,725 13,148
Amortization of intangible assets 1,074 796 2,925 2,424
Other operating expense, net 346 125 3,524 272
Operating income 4,913 11,796 22,994 31,019
Interest expense 1,144 1,154 3,448 2,952
Interest income (244) (253) (802) (384)
Early extinguishment of debt - - - 1,603
Other income, net (75) (25) (75) (113)
------- ------- -------- --------
Income before provision for income taxes 4,088 10,920 20,423 26,961
Provision for income taxes 1,042 3,144 6,025 8,196
------- ------- -------- --------
Net income $3,046 $7,776 $14,398 $18,765
======= ======= ======== ========
Earnings per share:
Basic $0.14 $0.37 $0.67 $0.89
Diluted $0.14 $0.36 $0.67 $0.87
Weighted average shares outstanding:
Basic 21,387 21,168 21,345 21,132
Diluted 21,495 21,623 21,517 21,507
The accompanying notes are an integral part of these condensed consolidated financial statements
4
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - Unaudited
(IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
2004 2003
Cash flows from operating activities:
Net income $14,398 $18,765
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,861 10,305
Stock-based compensation 2,061 1,966
Early extinguishment of debt - 1,487
Deferred income taxes 4,780 (468)
Loss on disposal of assets 551 411
Changes in operating assets and liabilities:
Accounts receivable (5,051) (7,687)
Inventories (4,750) 3,681
Prepaid expenses and other current assets 2,310 2,623
Accounts payable (1,131) (1,355)
Accrued expenses and other current liabilities 49 6,596
Income taxes (159) 5,764
------------- -------------
Net cash provided by operating activities 23,919 42,088
------------- -------------
Cash flows from investing activities:
Sale (purchase) of short-term investments 5,495 (9,447)
Acquisition of property, plant and equipment (26,046) (7,724)
Proceeds from sale of assets 69 2,458
Decrease in other assets 37 107
Acquisition of subsidiary, net (45,604) -
------------- -------------
Net cash used in investing activities (66,049) (14,606)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 170,000
Principal payments of long-term debt (924) (85,240)
Payment of debt issue costs - (4,535)
Issuance of common stock 1,190 441
Issuance of treasury stock 179 -
------------- -------------
Net cash provided by financing activities 445 80,666
------------- -------------
Net (decrease) increase in cash and cash equivalents (41,685) 108,148
Cash and cash equivalents, beginning of year 119,486 4,608
------------- -------------
Cash and cash equivalents, end of period $77,801 $112,756
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements
5
WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of financial position, results of operations,
and cash flows in conformity with generally accepted accounting principles.
Operating results for interim periods are not necessarily indicative of results
that may be expected for the fiscal year as a whole. In the opinion of
management, the condensed consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation of the results of Wilson Greatbatch Technologies, Inc.
(the "Company") for the periods presented. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, sales, expenses, and related disclosures at the date of the
financial statements and during the reporting period. Actual results could
differ from these estimates. For further information, refer to the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended January 2, 2004.
Certain reclassifications were made to the prior years' financial
statements to conform with the current year presentation. None of the
reclassifications affected net income or stockholders' equity.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on
the Friday nearest December 31st. For 52-week years, each quarter contains 13
weeks. For clarity of presentation, the Company describes all periods as if each
quarter end is March 31st, June 30th and September 30th and as if the year-end
is December 31st. The third quarter of 2004 and 2003 each contained 13 weeks.
The nine months ended September 30, 2004 and 2003 each contained 39 weeks.
2. ACQUISITION
During March 2004, the Company completed the following acquisition:
o NanoGram Devices Corporation ("NDC"), a materials research and
development company focused on developing nanoscale materials for
implantable medical devices. NDC was acquired to further broaden our
materials science expertise. NDC utilizes nanomaterials synthesis
technology in the development of battery and medical device
applications.
6
The acquisition was accounted for using the purchase method of accounting
and accordingly, the results of the operations of NDC have been included in the
consolidated financial statements from the date of acquisition.
Acquisition information:
Acquisition date March 16, 2004
Purchase price:
- ---------------
Cash paid $45,000
Transaction costs 604
----------------
Total purchase price $45,604
================
Purchase price allocation:
- --------------------------
Assets:
Property and equipment $717
Other assets 168
Intangible assets (amortizing over 13 years) 16,500
Goodwill 35,082
Liabilities:
Accounts payable 117
Other current liabilities 971
Deferred income taxes 5,775
----------------
Total purchase price $45,604
================
The following pro forma information presents the Company's consolidated
results of operations for 2004 and 2003 as if the acquisition had been
consummated at January 1, 2003. The pro forma consolidated results of operations
include certain pro forma adjustments, including the amortization of intangible
assets and interest on a term loan.
Three months ended Nine months ended
September 30, September 30,
In thousands except per share amounts: 2004 2003 2004 2003
Sales $45,177 $56,335 $153,644 $166,994
Net income $3,046 $6,690 $13,305 $15,843
Net income per diluted share: $0.14 $0.31 $0.62 $0.74
The pro forma results are not necessarily indicative of those that would
have actually occurred had the acquisition taken place at the beginning of the
periods presented.
7
3. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123"). As permitted in that standard, the Company has
chosen to account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board No. 25, Accounting for Stock Issued to
Employees, and related interpretations.
The Company has determined the pro forma information as if the Company had
accounted for stock options granted under the fair value method of SFAS No. 123.
The Black-Scholes option-pricing model was used with the following weighted
average assumptions. These pro forma calculations assume the common stock is
freely tradable for all periods presented and, as such, the impact is not
necessarily indicative of the effects on reported net income of future years.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Risk-free interest rate 3.48% 2.61% 3.65% 2.68%
Expected volatility 50% 55% 50% 55%
Expected life (in years) 5 5 5 5
Expected dividend yield 0% 0% 0% 0%
The Company's net income and earnings per share as if the fair value based
method had been applied to all outstanding and unvested awards in each year is
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
Net income as reported $3,046 $7,776 $14,398 $18,765
Stock-based employee compensation cost
included in net income as reported, net
of related tax effects $396 $606 $1,484 $1,368
Stock-based employee compensation cost
determined using the fair value based
method, net of related tax effects $1,082 $1,134 $2,747 $2,576
Pro forma net income $2,360 $7,248 $13,135 $17,557
Earnings per share:
Basic - as reported $0.14 $0.37 $0.67 $0.89
Basic - pro forma $0.11 $0.34 $0.62 $0.83
Diluted - as reported $0.14 $0.36 $0.67 $0.87
Diluted - pro forma $0.11 $0.34 $0.61 $0.82
8
4. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
2004 2003
Noncash investing and financing activities:
Acquisition of property utilizing capital leases $1,089 $1,585
Common stock contributed to ESOP $2,723 $3,668
5. SHORT-TERM INVESTMENTS
Short-term investments at September 30, 2004 consist of investments
acquired with maturities that exceed three months and are less than one year at
the time of acquisition.
Held-to-maturity securities comprised the following:
As of September 30, 2004
Cost Gross Gross
Unrealized Unrealized Estimated
Gains Losses Fair Value
Municipal Bonds $6,064 $- $(6) $6,058
------- - --- -------
Short-term investments $6,064 $- $(6) $6,058
======= = === =======
The municipal bonds have maturity dates ranging from July 2004 to January
2005.
As of December 31, 2003
Cost Gross Gross
Unrealized Unrealized Estimated
Gains Losses Fair Value
Municipal Bonds $11,559 $- $(1) $11,558
------- - --- -------
Short-term investments $11,559 $- $(1) $11,558
======= = === =======
6. INVENTORIES
Inventories comprised the following:
September 30, December 31,
2004 2003
Raw materials $12,199 $11,688
Work-in-process 12,518 10,421
Finished goods 8,631 6,489
------- -------
Total $33,348 $28,598
======= =======
9
7. INTANGIBLE ASSETS
Intangible assets comprised the following:
As of September 30, 2004
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
Amortizing intangible assets:
Patented technology $21,462 $(9,737) $11,725
Unpatented technology 30,886 (5,969) 24,917
Other 1,340 (1,174) 166
------- -------- -------
53,688 (16,880) 36,808
Non-amortizing intangible assets:
Trademark and names 31,420 (3,167) 28,253
------- -------- -------
Total intangible assets $85,108 $(20,047) $65,061
======= ======== =======
Aggregate amortization expense for the third quarter 2004 and 2003 was
$1,086 and $800, respectively. Aggregate amortization expense for the nine
months ended September 30, 2004 and 2003 was $2,948 and $2,438, respectively.
Estimated amortization expense for the remainder of 2004 and for the years
subsequent to 2004 are as follows:
Remainder of 2004 $1,074
2005 3,841
2006 3,812
2007 3,794
2008 3,794
2009 3,248
10
8. EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted earnings
per share:
Three Months Ended Nine months
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Earnings per share - basic
- --------------------------
Earnings available to common shareholders $3,046 $7,776 $14,398 $18,765
Weighted average shares outstanding 21,387 21,168 21,345 21,132
Earnings per share - basic $0.14 $0.37 $0.67 $0.89
Earnings per share - diluted
- ----------------------------
Earnings available to common shareholders $3,046 $7,776 $14,398 $18,765
Weighted average shares outstanding 21,387 21,168 21,345 21,132
Dilutive impact of options outstanding &
unvested restricted stock 108 455 172 375
------ ------ ------ ------
Weighted average shares and potential
dilutive shares outstanding 21,495 21,623 21,517 21,507
Earnings per share - diluted $0.14 $0.36 $0.67 $0.87
Net income per diluted share for the three and nine months ended September
30, 2004 and 2003 exclude the effect of 4,219 shares related to the contingent
convertible notes, as the effect is anti-dilutive. See Note 13 for discussion of
recent accounting standards impacting contingent convertible securities.
9. COMPREHENSIVE INCOME
For all periods presented, the Company's only component of comprehensive
income is its net income.
10. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the normal
course of business. The Company does not believe that the ultimate resolution of
any such pending activities will have a material adverse effect on its
consolidated results of operations, financial position, or cash flows.
11
Product Warranties - The change in aggregate product warranty liability for
the quarter ended September 30, 2004, is as follows:
Beginning balance at June 30, 2004 $337
Additions to warranty reserve 81
Warranty claims paid (66)
------------
Ending balance at September 30, 2004 $352
============
Lease Agreements - In second quarter 2004, the Company entered into an
operating lease agreement for a 144,000 square foot manufacturing facility in
Tijuana, Mexico. The lease has an initial term of ten years with two renewal
options for an additional 5 years each. This facility is currently under
construction and will initially house the Company's new assembly operations.
Lease payments will not commence until construction of the facility is
substantially completed per the terms of the agreement. When payments commence,
the annual lease expense is estimated to be $338 for the first year, $566 for
the second year, with 3% annual increases thereafter for years three through
ten.
Workers' Compensation Trust - In Western New York, the Company is a member
of a group self-insurance trust that provides workers' compensation benefits to
eligible employees of the Company and other group member employers. For
locations outside of Western New York, the Company utilizes traditional
insurance relationships to provide workers' compensation benefits. Under the
terms of the Trust, the Company makes annual contributions to the Trust based on
reported salaries paid to the employees using a rate based formula. Based on
actual experience, the Company could receive a refund or be assessed additional
contributions. For financial statement purposes, no amounts have been recorded
for any refund or additional assessment since the Trust has not informed the
Company of any such adjustments. Under the trust agreement, each participating
organization has joint and several liability for trust obligations if the assets
of the trust are not sufficient to cover its obligation. The Company does not
believe that it has any current obligations under the joint and several
liability.
11. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: Implantable
Medical Components ("IMC") and Electrochem Power Solutions ("EPS"). The IMC
segment designs and manufactures critical components used in implantable medical
devices. The principal components are batteries, capacitors, filtered
feedthroughs, enclosures and precision components. The principal medical devices
are pacemakers, defibrillators and neurostimulators. The EPS segment designs and
manufactures high performance batteries and battery packs; principal markets for
these products are for oil and gas exploration, oceanographic equipment, and
aerospace.
12
In second quarter of 2003, the Company was completely reorganized. This
reorganization consisted of position additions, eliminations and reassignments
along with new operational performance measures to align compensation with new
roles. Fundamental to this was the need to more fully allocate various costs to
the new business units and functional areas. During 2003, the Company's IMC
segment included multiple business units that were aggregated because they share
similar economic characteristics and similarities in the areas of products,
production processes, types of customers, methods of distribution and regulatory
environment. The reportable segments were separately managed, and their
performance was evaluated based on numerous factors, including income from
operations. Effective January 1, 2004, the Company completed an internal
reorganization consolidating three business units into one business unit which
comprises the IMC segment.
The Company defines segment income from operations as gross profit less
costs and expenses attributable to segment specific selling, general and
administrative, research, development and engineering expenses, intangible
amortization and other operating expenses. Segment income also includes a
portion of non-segment specific selling, general and administrative, and
research, development and engineering expenses based on allocations appropriate
to the expense categories. The remaining unallocated operating expenses along
with other income and expense are not allocated to reportable segments.
Transactions between the two segments are not significant. The accounting
policies of the segments are the same as those described and referenced in Note
1.
13
An analysis and reconciliation of the Company's business segment
information to the respective information in the condensed consolidated
financial statements is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
Sales: 2004 2003 2004 2003
IMC
ICD batteries $7,687 $10,603 $27,226 $32,641
Pacemaker and other batteries 4,116 6,121 15,166 19,518
ICD Capacitors 4,103 7,869 18,750 22,866
Feedthroughs 9,533 14,086 35,521 37,441
Enclosures 5,631 6,235 16,170 19,453
Other 6,676 4,693 19,390 14,737
------- ------- -------- --------
Total IMC 37,746 49,607 132,223 146,656
EPS 7,431 6,728 21,421 20,338
------- ------- -------- --------
Total sales $45,177 $56,335 $153,644 $166,994
======= ======= ======== ========
Segment income from operations:
IMC $5,272 $13,296 $24,490 $35,768
EPS 2,267 1,423 6,170 2,922
------- ------- -------- --------
Total segment income from operations 7,539 14,719 30,660 38,690
Unallocated operating expenses (2,626) (2,923) (7,666) (7,671)
------- ------- -------- --------
Operating income as reported 4,913 11,796 22,994 31,019
Unallocated other income and expense (825) (876) (2,571) (4,058)
------- ------- -------- --------
Income before income taxes as reported $4,088 $10,920 $20,423 $26,961
======= ======= ======== ========
The changes in the carrying amount of goodwill are as follows:
IMC EPS Total
Balance at January 1, 2004 $116,955 $2,566 $119,521
Goodwill recorded during the year 37,238 - 37,238
-------- ------ --------
Balance at September 30, 2004 $154,193 $2,566 $156,759
======== ====== ========
The Company assesses goodwill for impairment under the provisions of SFAS
No. 142 Goodwill and Other Intangible Assets. SFAS No. 142 requires the Company
to assess goodwill for impairment by comparing the fair value of the reporting
units to their carrying amounts on an annual basis, or more frequently if
certain events occur or circumstances change, to determine if there is potential
impairment. The Company will be performing its annual goodwill impairment test
at January 1, 2005.
14
12. OTHER OPERATING EXPENSE
During second quarter 2004, there were two charges included in other
operating expense in the Company's Condensed Consolidated Statement of
Operations.
Patent acquisition. The Company recorded a $2,000 pre-tax charge associated
with the acquisition of certain patents during the quarter. The acquired patents
cover how wet tantalum capacitors are used in an Impantable Cardioverter
Defibrillator ("ICD"). Although the Company believed that the patents could have
been successfully challenged in court proceedings prior to the acquisition, a
decision was made to acquire the patents and remove this as a potential obstacle
for existing customers to more fully adopt wet tantalum technology and for
potential customers to initially adopt the technology. The Company had a prior
legal opinion that in effect said the patents were not valid, therefore the
Company believes it is appropriate to record the $2,000 acquisition cost in
accordance with its economic substance as a period expense.
Severance charges. In response to a reduction in forecasted sales for the
year, the Company implemented a 7% workforce reduction during June, which
resulted in a severance charge of $800 during the second quarter. The severance
charges during the second quarter 2004 were $600 and $100 for IMC and EPS,
respectively. The remaining $100 relates to corporate employees and is included
in year to date unallocated operating expenses.
The remaining accrued severance of $190 as of September 30, 2004, is
expected to be paid within the next three months. The unpaid balance is $120,
$40 and $30 for IMC, EPS, and unallocated corporate, respectively.
13. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
On September 30, 2004 the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a final consensus that the dilutive
effect of contingent convertible debt instruments must be included in diluted
earnings per share regardless of whether the triggering contingency has been
satisfied. This consensus, EITF Issue 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share, is effective for the Company for
reporting periods ending after December 15, 2004. The Financial Accounting
Standards Board ("FASB") ratified this consensus in October 2004. The provisions
of EITF Issue 04-8 will be applied on a retroactive basis and will require
restatement of prior period diluted earnings per share. The Company believes
that the EITF as written could result in additional dilution to its diluted
earnings per share of up to 4,129 shares. The Company will adopt EITF 04-08 as
of December 31, 2004 and will restate the computation of diluted earnings per
share for prior periods. When the Company adopts this consensus in the fourth
quarter of 2004, it anticipates it will restate its diluted earnings per share
for the 2nd, 3rd and 4th quarters of 2003, the full year 2003, and the 1st and
2nd quarters of 2004. For the 3rd quarter of 2004 and for the anticipated
results of the 4th quarter and full year 2004, the impact would be anti-dilutive
and therefore will not be adjusted.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
We are a leading developer and manufacturer of critical components used in
implantable medical devices ("IMDs") through our Implantable Medical Components
("IMC") business. The principal components are batteries, capacitors, filtered
feedthroughs, enclosures and precision components. The principal medical devices
are pacemakers, defibrillators and neurostimulators. We also leverage our core
competencies in technology and manufacturing through our Electrochem Power
Solutions ("EPS") business to develop and produce batteries and battery packs
for commercial applications that demand high performance and reliability. The
principal markets for these products are oil and gas exploration, oceanographic
equipment and aerospace.
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. For 52-week years, each quarter contains 13 weeks. For
clarity of presentation, we describe all periods as if each quarter end is March
31st, June 30th and September 30th and as if the year-end is December 31st. The
third quarter of 2004 and 2003 each contained 13 weeks. The nine months ended
September 30, 2004 and 2003 each contained 39 weeks.
The commentary that follows should be read in conjunction with our
consolidated financial statements and related notes and with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Form 10-K for the fiscal year ended January 2, 2004.
Overview
During and subsequent to the third quarter 2004, there were several
developments affecting our business:
- We executed a supply agreement with Medtronic, Inc. to provide
sub-assembly for many of its Cardiac Rhythm Management ("CRM") and
Neurostimulation devices.
- We are on schedule to complete construction of our new advanced
battery manufacturing plant in Alden, New York and the assembly plant
in Tijuana, Mexico in the first quarter of 2005.
- We have successfully implemented the ERP business platform at three
locations and remain on schedule to implement the final location in
the fourth quarter of 2004.
- We extended the current supply agreement with St. Jude Medical, Inc.
through 2008.
- We amended the current supply agreement with Guidant Corporation to
include QHR cell pricing, our next generation medical battery
technology.
- We experienced a 20% decline in sales during the third quarter
primarily due to lower sales volume to one major CRM customer.
16
Results of Operation and Financial Condition
Three months ended Nine months ended
September 30, $ % September 30, $ %
In thousands, except per share data 2004 2003 Change Change 2004 2003 Change Change
- ------------------------------------------------------------------------------------------------------------------------
IMC
ICD batteries $7,687 $10,603 (2,916) -28% $27,226 $32,641 $(5,415) -17%
Pacemaker and other batteries 4,116 6,121 (2,005) -33% 15,166 19,518 (4,352) -22%
ICD Capacitors 4,103 7,869 (3,766) -48% 18,750 22,866 (4,116) -18%
Feedthroughs 9,533 14,086 (4,553) -32% 35,521 37,441 (1,920) -5%
Enclosures 5,631 6,235 (604) -10% 16,170 19,453 (3,283) -17%
Other 6,676 4,693 1,983 42% 19,390 14,737 4,653 32%
-------------------------------------------------------------------
Total IMC 37,746 49,607 (11,861) -24% 132,223 146,656 (14,433) -10%
EPS 7,431 6,728 703 10% 21,421 20,338 1,083 5%
-------------------------------------------------------------------
Total sales 45,177 56,335 (11,158) -20% 153,644 166,994 (13,350) -8%
Cost of sales 27,775 32,375 (4,600) -14% 89,249 97,004 (7,755) -8%
-------------------------------------------------------------------
Gross profit 17,402 23,960 (6,558) -27% 64,395 69,990 (5,595) -8%
Gross margin 38.5% 42.5% 41.9% 41.9%
Selling, general, and administrative expenses (SG&A) 6,913 7,290 (377) -5% 20,227 23,127 (2,900) -13%
SG&A as a % of sales 15.3% 12.9% 13.2% 13.8%
Research, development and engineering costs, net
(RD&E) 4,156 3,953 203 5% 14,725 13,148 1,577 12%
RD&E as a % of sales 9.2% 7.0% 9.6% 7.9%
Intangible amortization 1,074 796 278 35% 2,925 2,424 501 21%
Other operating expense 346 125 221 177% 3,524 272 3,252 1196%
-------------------------------------------------------------------
Operating income 4,913 11,796 (6,883) -58% 22,994 31,019 (8,025) -26%
Operating margin 10.9% 20.9% 15.0% 18.6%
Interest expense 1,144 1,154 (10) -1% 3,448 2,952 496 17%
Interest income (244) (253) 9 -4% (802) (384) (418) 109%
Early extinguishment of debt - - - - 1,603 (1,603) -100%
Other expense (income), net (75) (25) (50) 200% (75) (113) 38 -34%
Provision for income taxes 1,042 3,144 (2,102) -67% 6,025 8,196 (2,171) -26%
Effective tax rate 25.5% 28.8% 29.5% 30.4%
-------------------------------------------------------------------
Net income $3,046 $7,776 $(4,730) -61% $14,398 $18,765 $(4,367) -23%
===================================================================
Net margin 6.7% 13.8% 9.4% 11.2%
Diluted earnings per share $0.14 $0.36 $(0.22) -61% $0.67 $0.87 $(0.20) -23%
17
Sales
IMC. Our medical technology sales comprise various component products that
are sold to medical device manufacturers. Many of the medical technology
products that we sell are utilized by customers in cardiac rhythm management
("CRM") devices. The nature and extent of our selling relationship with each CRM
customer is different in terms of component products purchased, selling prices,
product volumes, ordering patterns and inventory management. We have pricing
arrangements with our customers that do not specify minimum order quantities.
Our visibility to customer ordering patterns is over a relatively short period
of time. Our customers may have inventory management programs and alternate
supply arrangements of which we are unaware. Additionally, the relative market
share among the CRM device manufacturers changes periodically. Consequently,
these and other factors can significantly impact our sales in any given period.
A volume decrease of 21% combined with a 3% price decrease were the primary
drivers for the sales decline for IMC in the third quarter. As a percentage of
the total IMC sales decline for the quarter, 84% was primarily due to lower
sales volume to one major CRM customer. This particular decline is not expected
to reverse in the immediate future. Due to a variety of factors, we anticipate
that our customers will continue to demand technologically advanced products at
competitive prices. The average selling prices of our current IMC products are
expected to decrease over the next several years.
A volume decrease of 8% combined with a 2% price decrease were the primary
drivers for the sales decline for IMC on a year to date basis. On a year-to-date
basis, the IMC sales volume decline was primarily due to lower sales to one
major CRM customer.
EPS. The increase in EPS sales for the quarter and the year to date was
primarily the result of demand for batteries by customers in the oil and gas
industry. Price changes did not significantly impact sales in the third quarter
or year to date.
Gross profit
For the quarter ended September 2004, approximately 280 basis points of the
400 basis point decrease in overall gross margin were related to the price
decreases in the IMC product lines. Price changes in the EPS segment were not a
significant factor in the overall gross margin analysis. The remaining decrease
in the gross margin was primarily related to the unfavorable impact of spreading
fixed manufacturing costs over lower production volumes in the IMC segment.
For the year-to-date comparison, price decreases of IMC products had a
negative impact of approximately 220 basis points on the overall gross margin.
Price in the EPS segment was not a significant factor in the overall gross
margin analysis. This decrease was offset by improved plant performance, in
particular in the area of scrap reduction.
18
SG&A expenses
The lower SG&A expense for the third quarter and year to date is primarily
due to the continued effect of cost controls put in place during the second
quarter of 2004 including lower incentive compensation.
RD&E expenses
Expenses for the third quarter and year to date increased compared to last
year in absolute dollars, and as a percent of sales due to the inclusion of
seven months of development costs from NDC. We expect the expense level for RD&E
to increase for the balance of 2004 as the new Greatbatch Technologies Advanced
Research Laboratory is fully integrated. The additional expense is estimated at
between $1.0 million and $3.0 million.
Amortization expense
Amortization expense for the third quarter and year to date is higher than
the prior year due to the incremental intangible asset amortization resulting
from the NDC acquisition. The acquisition has added $0.4 million per quarter to
our amortization expense.
Other operating expense
Other operating expense for the third quarter included $0.4 million for
start-up expenses related to the new Tijuana facility and $0.2 million for
dispositions of property, plant and equipment. These increases were offset by a
$0.2 million reduction for other miscellaneous items.
Year to date operating expense has three primary components. First is the
$2.0 million acquisition of certain patents incurred in the second quarter.
Also, the second quarter implementation of a 7% workforce reduction resulted in
a severance charge of $0.8 million. Lastly, we have incurred $0.7 million in
expense for dispositions of property, plant and equipment.
Interest expense and interest income
Interest expense for the third quarter is consistent with the prior year.
Year to date interest increased over the prior year as the interest-bearing debt
increased by $90.0 million in May of 2003 as the result of the issuance of the
convertible subordinated notes.
Interest income for the quarter is consistent with the prior year. Year to
date interest income increased over the prior year as the issuance of the
convertible subordinated notes provided additional funds that are being invested
on a short-term basis.
Provision for income taxes
The effective tax rate for the third quarter declined from the prior year
due to various state planning initiatives realized in the current quarter. For
the year to date, our effective tax rate declined from the prior year primarily
as a result of increased research and development credits, as well as the
benefits of federal and state tax planning strategies. We anticipate the fourth
quarter effective tax rate to be 29.5%.
19
The American Jobs Creation Act of 2004 (P.L. 108-357) ("the Act") signed
into law on October 22, 2004 repeals the Extraterritorial Income Exclusion
("ETI") after the World Trade Organization ruled it to be an illegal export
subsidy. The Act addresses the illegal subsidy issue and creates new tax breaks
for a broad spectrum of taxpayers. The repeal of the ETI will impact
transactions after December 31, 2004. We have not completed a full assessment on
how this law change will impact the Company.
Liquidity and Capital Resources
Our principal source of short-term liquidity is our working capital of
$132.6 million at September 30, 2004 combined with our unused $20 million credit
line with our lending syndicate. At September 30, 2004 our current ratio was
7.0:1, a decrease from 7.6:1 at June 30, 2004. While these ratios are down from
8.1:1 at December 31, 2003, we do not consider this decline to be significant as
$45.5 million of cash was utilized during the first quarter of 2004 to fund the
acquisition of NDC and our liquidity continues to be sound.
Year to date operating cash flow declined from 2003 levels due in large
measure to the increase in inventories compared to 2003. Inventory levels have
increased to meet the safety stock requirements of our customers. The other key
factor contributing to the decline in operating cash flow is the reduction in
accrued expenses and other current liabilities in 2004 compared to 2003. This
reflects the payment of accrued 2003 bonuses during the first quarter of 2004
that were significantly higher than the 2002 bonuses paid during 2003.
The Company regularly engages in discussions relating to potential
acquisitions and may announce an acquisition transaction at any time.
At September 30, 2004, our capital structure consisted primarily of $170.0
million of convertible subordinated notes and our 21.4 million shares of common
stock outstanding. We have in excess of $83.0 million in cash, cash equivalents
and short-term investments and are in a position to facilitate future
acquisitions if necessary. We are also authorized to issue 100 million shares of
common stock and 100 million shares of preferred stock. The market value of our
outstanding common stock since our IPO has exceeded our book value and the
average daily trading volume of our common stock has also increased;
accordingly, we believe that if needed we can access public markets to sell
additional common or preferred stock assuming conditions are appropriate.
Capital spending of $26.0 million in the first nine months of 2004 is
significantly higher than historical expenditure levels. The majority of the
current year spending was for the build-out of our new medical battery plant and
the continuation of the ERP implementation. In comparison, we spent $7.7 million
in the nine months ended September 30, 2003, which was primarily for maintenance
capital expenditures. In 2003, we significantly enhanced our balance sheet
through improved cash flow from operations and through the convertible note
financing we completed in May. This improved capital structure allows us to
support our internal growth and provides liquidity for corporate development
initiatives. We anticipate that for the remainder of 2004 we will continue to
incur additional capital costs related to the advanced battery manufacturing
plant, the Mexican manufacturing facility and the ERP implementation. We
estimate that capital spending for the balance of 2004 will be in the range of
$20.0 million to $25.0 million.
20
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item
303(a)(4) of Regulation S-K.
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
On September 30, 2004 the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board reached a final consensus that the dilutive
effect of contingent convertible debt instruments must be included in diluted
earnings per share regardless of whether the triggering contingency has been
satisfied. This consensus, EITF Issue 04-8, The Effect of Contingently
Convertible Debt on Diluted Earnings per Share, is effective for us for
reporting periods ending after December 15, 2004. The Financial Accounting
Standards Board ("FASB") ratified this consensus in October 2004. The provisions
of EITF Issue 04-8 will be applied on a retroactive basis and will require
restatement of prior period diluted earnings per share. We believe that the EITF
as written could result in additional dilution to our diluted earnings per share
of up to 4,129,000 shares. We will adopt EITF 04-08 as of December 31, 2004 and
will restate the computation of diluted earnings per share for prior periods.
When we adopt this consensus in the fourth quarter of 2004, we anticipate we
will restate our diluted earnings per share for the 2nd, 3rd and 4th quarters of
2003, the full year 2003, and the 1st and 2nd quarters of 2004. For the 3rd
quarter of 2004 and for the anticipated results of the 4th quarter and full year
2004, the impact would be anti-dilutive and therefore will not be adjusted.
Application of Critical Accounting Estimates
Our unaudited consolidated financial statements are based on the selection
of accounting policies and the application of significant accounting estimates,
some of which require management to make significant assumptions. We believe
that some of the more critical estimates and related assumptions that affect our
financial condition and results of operations are in the areas of inventories,
goodwill and other indefinite lived intangible assets, long-lived assets and
income taxes.
During the nine months ended September 30, 2004, we did not change or adopt
new accounting policies that had a material effect on our consolidated financial
condition and results of operations.
Contractual Obligations
In the second quarter of 2004, we entered into an operating lease agreement
for a 144,000 square foot manufacturing facility in Tijuana, Mexico. The lease
has an initial term of ten years with two renewal options for an additional 5
years each. This facility is currently under construction and will initially
house the Company's new assembly operations. Lease payments will not commence
until construction of the facility is substantially completed per the terms of
the agreement. When payments commence, the annual lease expense is estimated to
be $338 for the first year, $566 for the second year, with 3% annual increases
thereafter for years three through ten.
21
Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q and
other written and oral statements made from time to time by us and our
representatives, are not statements of historical or current fact. As such, they
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and the
implantable medical device industry;
o our ability to successfully execute our business model and our
business strategy;
o our ability to identify trends within the for implantable medical
devices, medical components, and commercial power sources industries
and to offer products and services that meet the changing needs of
those markets;
o projected capital expenditures; and
o trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors
that may cause actual results to differ from the results expressed or implied by
our forward-looking statements or that may affect our future results, some of
these factors include the following: dependence upon a limited number of
customers, product obsolescence, inability to market current or future products,
pricing pressure from customers, reliance on third party suppliers for raw
materials, products and subcomponents, fluctuating operating results, inability
to maintain high quality standards for our products, challenges to our
intellectual property rights, product liability claims, inability to
22
successfully consummate and integrate acquisitions, unsuccessful expansion into
new markets, competition, inability to obtain licenses to key technology,
regulatory changes or consolidation in the healthcare industry, and other risks
and uncertainties that arise from time to time as described in the Company's
Annual Report on Form 10-K and other periodic filings with the Securities and
Exchange Commission.
23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Under our existing line of credit any borrowings bear interest at
fluctuating market rates. At September 30, 2004, we did not have any borrowings
outstanding under our line of credit and thus no interest rate sensitive
financial instruments.
ITEM 4. Controls and Procedures.
a) Evaluation of Disclosure Controls and Procedures. We carried out an
evaluation, under the supervision and with the participation of the
Company's management including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
"disclosure controls and procedures" (as defined in the Securities Exchange
Act of 1934 Rules 13a-15(e)). Based upon that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end
of the period covered by this report, our disclosure controls and
procedures were effective to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified by the SEC's rules and forms.
b) Changes in Internal Control Over Financial Reporting.
As previously disclosed, the Company is in the process of implementing a
global ERP system designed to enhance our internal controls. By the end of 2004,
all facilities are expected to be operational on the global ERP system.
The Company is currently undergoing a comprehensive effort to comply with
Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is required for our
fiscal year-end December 31, 2004. This effort includes documenting and testing
of internal controls. During the course of these activities, the Company has
identified certain internal control issues which management believes should be
improved. The Company's review continues, but to date the Company has not
identified any material weaknesses in its internal control as defined by the
Public Company Accounting Oversight Board. The Company is nonetheless making
improvements to its internal controls over financial reporting as a result of
its review efforts. These planned improvements include additional information
technology controls, further formalization of policies and procedures, improved
segregation of duties and additional monitoring controls.
24
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities, Use of Proceeds, and Issuer Purchases of
Equity Securities.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
See the Exhibit Index for a list of those exhibits filed herewith.
25
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 10, 2004 WILSON GREATBATCH TECHNOLOGIES, INC.
By /s/ Edward F. Voboril
-------------------------------------------
Edward F. Voboril
Chairman of the Board, President and Chief
Executive Officer
(Principal Executive Officer)
By /s/ Lawrence P. Reinhold
------------------------------------------
Lawrence P. Reinhold
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ Thomas J. Mazza
-----------------------------------------
Thomas J. Mazza
Vice President and Controller
(Principal Accounting Officer)
26
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to our registration statement on Form
S-1 (File No. 333-37554) filed on May 22, 2000).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to our quarterly report on Form 10-Q ended March 29, 2002).
10.1+ Supply Agreement, dated August 2, 2004, by and between Wilson
Greatbatch Technologies, Inc. and Medtronic Puerto Rico
Operations Co.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Portions of the exhibit marked "+" have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a request for
confidential treatment.
27