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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended October 3, 2003
Commission File Number 1-16137
WILSON GREATBATCH TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
16-1531026
(I.R.S. employer identification no.)
9645 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)
(716) 759-6901
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The number of shares outstanding of the Company's common stock, $.001 par
value per share, as of November 10, 2003 was: 21,178,510
WILSON GREATBATCH TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER AND NINE MONTH PERIOD ENDED SEPTEMBER 30, 2003
Page
COVER PAGE 1
TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 20
ITEM 4. Controls and Procedures 20
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 21
ITEM 2. Changes in Securities and Use of Proceeds 21
ITEM 3. Defaults Upon Senior Securities 21
ITEM 4. Submission of Matters to a Vote of Security Holders 21
ITEM 5. Other Information 21
ITEM 6. Exhibits and Reports on Form 8-K 21
EXHIBIT INDEX 22
SIGNATURES 23
-2-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Unaudited
(IN THOUSANDS)
- --------------------------------------------------------------------------------
ASSETS September 30, December 31,
2003 2002
Current assets:
Cash and cash equivalents $ 112,756 $ 4,608
Short-term investments 9,447 --
Accounts receivable, net 26,997 19,310
Inventories 30,739 34,908
Prepaid expenses and other current assets 716 3,339
Refundable income taxes 624 3,038
Deferred income taxes 3,349 3,349
--------- ---------
Total current assets 184,628 68,552
Property, plant, and equipment, net 65,604 64,699
Intangible assets, net 52,241 55,804
Goodwill 119,521 119,407
Other assets 6,966 3,789
--------- ---------
Total assets $ 428,960 $ 312,251
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,371 $ 5,726
Accrued expenses and other current liabilities 22,017 13,872
Current portion of long-term debt 679 8,750
--------- ---------
Total current liabilities 27,067 28,348
Long-term debt, net of current portion 170,906 76,250
Other long-term liabilities 813 790
--------- ---------
Total liabilities 198,786 105,388
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 21 21
Additional paid-in capital 206,845 202,279
Deferred stock-based compensation (883) --
Retained earnings 24,191 5,426
Treasury stock, at cost -- (863)
--------- ---------
Total stockholders' equity 230,174 206,863
--------- ---------
Total liabilities and stockholders' equity $ 428,960 $ 312,251
========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements
-3-
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS - Unaudited
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
Sales $ 56,335 $ 45,350 $ 166,994 $ 119,981
Cost of sales 32,462 26,478 97,137 69,558
-------- -------- --------- ---------
Gross profit 23,873 18,872 69,857 50,423
Selling, general and administrative expenses 7,336 6,300 23,204 17,310
Research, development and engineering costs, net 3,960 3,470 13,155 10,514
Amortization of intangible assets 796 1,037 2,424 2,809
Write-off of noncompete agreement -- 1,723 -- 1,723
-------- -------- --------- ---------
Operating income 11,781 6,342 31,074 18,067
Interest expense 1,154 1,098 2,952 2,702
Interest income (253) (34) (384) (314)
Early extinguishment of debt -- -- 1,603 --
Write-off of investment in unrelated company -- 1,547 -- 1,547
Other (income) expense, net (40) 34 (58) 99
-------- -------- --------- ---------
Income before income taxes 10,920 3,697 26,961 14,033
Provision for income taxes 3,144 1,220 8,196 4,631
-------- -------- --------- ---------
Net income $ 7,776 $ 2,477 $ 18,765 $ 9,402
======== ======== ========= =========
Earnings per share:
Basic $ 0.37 $ 0.12 $ 0.89 $ 0.45
Diluted $ 0.36 $ 0.12 $ 0.87 $ 0.44
Weighted average shares outstanding:
Basic 21,168 20,966 21,132 20,922
Diluted 21,623 21,265 21,507 21,263
The accompanying notes are an integral part of these condensed
consolidated financial statements
-4-
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - Unaudited
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
2003 2002
Cash flows from operating activities:
Net income $ 18,765 $ 9,402
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 10,305 9,438
Stock-based compensation 1,966 1,485
Early extinguishment of debt 1,487 --
Write-off of noncompete agreement -- 1,723
Write-off of investment in unrelated company -- 1,547
Deferred income taxes (468) --
Loss on disposal of assets 411 40
Changes in operating assets and liabilities:
Accounts receivable (7,687) (3,378)
Inventories 3,681 (151)
Prepaid expenses and other current assets 2,623 (76)
Accounts payable (1,355) (2,601)
Accrued expenses and other current liabilities 6,596 (1,961)
Income taxes 5,764 373
--------- --------
Net cash provided by operating activities 42,088 15,841
--------- --------
Cash flows from investing activities:
Purchase of short-term investments (9,447) --
Acquisition of property, plant and equipment (7,724) (11,726)
Proceeds from sale of assets 2,458 13
Increase in intangible assets -- (344)
Decrease (increase) in other assets 107 (92)
Acquisition of subsidiary, net -- (46,972)
--------- --------
Net cash used in investing activities (14,606) (59,121)
--------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 170,000 32,000
Principal payments of long-term debt (85,000) (29,130)
Principal payments of capital lease obligations (240) --
Payment of debt issue costs (4,535) --
Costs related to public offering of stock -- (39)
Issuance of common stock 441 502
--------- --------
Net cash provided by financing activities 80,666 3,333
--------- --------
Net increase (decrease) in cash and cash equivalents 108,148 (39,947)
Cash and cash equivalents, beginning of year 4,608 43,272
--------- --------
Cash and cash equivalents, end of period $ 112,756 $ 3,325
========= ========
The accompanying notes are an integral part of these condensed
consolidated financial statements
-5-
WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity
with generally accepted accounting principles. Operating results for
interim periods are not necessarily indicative of results that may be
expected for the fiscal year as a whole. In the opinion of management, the
condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation of the results of Wilson Greatbatch Technologies, Inc.
(the "Company") for the periods presented. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, sales, expenses, and related
disclosures at the date of the financial statements and during the
reporting period. Actual results could differ from these estimates. For
further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
year ended January 3, 2003.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on
the Friday nearest December 31st. For 52-week years, each quarter contains
13 weeks. For 53-week years, the first, second and third quarters each
have 13 weeks, and the fourth quarter has 14 weeks. For clarity of
presentation, the Company describes all periods as if each quarter end is
March 31st, June 30th and September 30th and as if the year-end is
December 31st.
2. STOCK-BASED COMPENSATION
In 2002, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure. This standard provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. Additionally, the standard also
requires prominent disclosures in the Company's financial statements about
the method of accounting used for stock-based employee compensation, and
the effect of the method used when reporting financial results.
The Company accounts for stock-based compensation in accordance with
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"). As permitted in that standard,
the Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board No. 25,
Accounting for Stock Issued to Employees, and related interpretations.
The Company has determined the pro forma information as if the Company had
accounted for stock options granted under the fair value method of SFAS
No. 123. The Black-Scholes
-6-
option-pricing model was used with the following weighted average
assumptions. These pro forma calculations assume the common stock is
freely tradable for all periods presented and, as such, the impact is not
necessarily indicative of the effects on reported net income of future
years.
Three months Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
Risk-free interest rate 2.61% 3.79% 2.68% 3.79%
Expected volatility 55% 55% 55% 55%
Expected life (in years) 5 5 5 5
Expected dividend yield 0% 0% 0% 0%
The Company's net income and earnings per share as if the fair value based
method had been applied to all outstanding and unvested awards in each
year is as follows (in thousands except per share data):
Three months Nine months
ended September 30, ended September 30,
2003 2002 2003 2002
Net income as reported $ 7,776 $ 2,477 $ 18,765 $ 9,402
Stock-based employee compensation cost included
in net income as reported, net of related tax effects $ 606 $ 282 $ 1,368 $ 995
Stock-based employee compensation cost
determined using the fair value based method, net of
related tax effects $ 1,134 $ 521 $ 2,576 $ 1,570
Pro forma net income $ 7,248 $ 2,238 $ 17,557 $ 8,827
Earnings per share:
Basic - as reported $ 0.37 $ 0.12 $ 0.89 $ 0.45
Basic - pro forma $ 0.34 $ 0.11 $ 0.83 $ 0.42
Diluted - as reported $ 0.36 $ 0.12 $ 0.87 $ 0.44
Diluted - pro forma $ 0.34 $ 0.11 $ 0.82 $ 0.42
-7-
3. SUPPLEMENTAL CASH FLOW INFORMATION
Nine Months Ended
September 30,
2003 2002
Noncash investing and financing activities (in thousands):
Acquisition of property utilizing capitalized leases 1,585 $ --
Common stock contributed to ESOP 3,668 3,022
4. SHORT-TERM INVESTMENTS
Short-term investments at September 30, 2003 consist of investments
acquired with maturities that exceed three months and are less than six
months at the time of acquisition. Securities that the Company has the
ability and positive intent to hold to maturity are accounted for as
held-to-maturity securities and are carried at amortized cost. The cost of
securities sold is based on the specific identification method.
Held-to-maturity securities consist of (in thousands):
As of September 30, 2003
Gross Gross
unrealized Unrealized Estimated
Cost gains losses Fair Value
Municipal Bonds $9,447 $ -- $ (3) $9,444
------ ------ ------ ------
Short-term investments $9,447 $ -- $ (3) $9,444
====== ====== ====== ======
The municipal bonds have maturity dates ranging from October 2003 to
February 2004. There were no short-term investments as of December 31,
2002.
5. DEBT
September 30, December 31,
2003 2002
2.25% convertible subordinated notes, due 2013 $ 170,000 $ --
Capital lease obligations 1,585 --
Term loan -- 85,000
--------- --------
171,585 85,000
Less current portion (679) (8,750)
--------- --------
Total long-term debt $ 170,906 $ 76,250
========= ========
Convertible Debentures
In May 2003, the Company completed a private placement of contingent
convertible subordinated notes totaling $170.0 million, due 2013. The
notes bear interest at 2.25 percent per annum, payable semiannually.
Beginning with the six-month interest period
-8-
commencing June 15, 2010, the Company will pay additional contingent
interest during any six-month interest period if the trading price of the
debentures for each of the five trading days immediately preceding the
first day of the interest period equals or exceeds 120% of the principal
amount of the debentures.
Holders may convert the debentures into shares of the Company's common
stock at a conversion rate of 24.8219 shares per $1,000 principal amount
of debentures, subject to adjustment, before the close of business on June
15, 2013 only under the following circumstances: (1) during any fiscal
quarter commencing after July 4, 2003, if the closing sale price of the
Company's common stock exceeds 120% of the conversion price for at least
20 trading days in the 30 consecutive trading day period ending on the
last trading day of the preceding fiscal quarter; (2) subject to certain
exceptions, during the five business days after any five consecutive
trading day period in which the trading price per $1,000 principal amount
of the debentures for each day of such period was less than 98% of the
product of the closing sale price of the Company's common stock and the
number of shares issuable upon conversion of $1,000 principal amount of
the debentures; (3) if the debentures have been called for redemption; or
(4) upon the occurrence of certain corporate events.
Beginning June 20, 2010, the Company may redeem any of the debentures at a
redemption price of 100% of their principal amount, plus accrued interest.
Note holders may require the Company to repurchase their debentures on
June 15, 2010 or at any time prior to their maturity following a
fundamental change at a repurchase price of 100% of their principal
amount, plus accrued interest. The debentures are subordinated in right of
payment to all of our senior indebtedness and effectively subordinated to
all debts and other liabilities of our subsidiaries.
Concurrent with the issuance of the notes, the Company used approximately
$72.5 million of the proceeds from this private placement to pay off the
term loan. Debt issuance expenses totaled $4.5 million at September 30,
2003 and will be amortized using the straight-line method over a
seven-year term.
On August 5, 2003 the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission in satisfaction of certain
registration rights granted to the holders of the debentures. Pursuant to
the terms of the registration rights agreement, the Company is required to
use its best efforts to have this Registration Statement on Form S-3
declared effective by the Securities and Exchange Commission not later
than November 24, 2003.
-9-
Capital Lease Obligations
The Company leases assets under non-cancelable lease arrangements. As of
September 30, 2003, future minimum lease payments under capital leases are
as follows:
(In thousands) Amount
-------------- ------
2003 $ 65
2004 676
2005 595
2006 309
-------
Total minimum lease payments 1,645
Less imputed interest (60)
-------
Present value of minimum lease payments 1,585
Less current portion (679)
-------
Long-term capital lease obligations $ 906
=======
Revolving Line of Credit
As of December 31, 2002 the Company had $85.0 million outstanding under
the term loan portion of its senior credit facility and no balance
outstanding on the $20.0 million committed revolving line of credit
portion. As a result of the issuance of the contingent convertible
subordinated notes, the entire outstanding balance of the term loan of
$72.5 million was paid in full during the second quarter. The revolving
line of credit continues to be available to the Company for future
borrowing and matures on July 1, 2005. Interest rates under the revolving
line of credit vary with the Company's leverage. The Company is required
to pay a commitment fee of between 0.50% and 0.125% per annum on the
unused portion of the revolving line of credit based on the Company's
leverage.
6. RESTRICTED STOCK
On November 15, 2002, the Company's Board of Directors approved the
Restricted Stock Plan under which stock awards may be granted to
employees. The Plan was not effective until shareholder approval was
received at the Annual Meeting of Stockholders held on May 9, 2003. The
number of shares that are reserved and may be issued under the plan cannot
exceed 200,000. The Compensation and Organization Committee of the
Company's Board of Directors determines the number of shares that may be
granted under the plan. Restricted stock awards are either time-vested or
performance-vested based on the terms of each individual award agreement.
Time-vested restricted stock vests 50% on the first anniversary of the
date of the award and 50% on the second anniversary of the date of the
award. Performance-vested restricted stock vests upon the achievement of
certain annual diluted earnings per share targets by the company, or the
seventh anniversary date of the award.
There were 37,200 shares granted to certain officers and key employees
under the terms of the plan during 2002. On August 1, 2003, the Company's
Board of Directors approved an additional 13,200 of performance-vested
shares for grant on November 1, 2003. No shares
-10-
of restricted stock vested as of September 30, 2003. Unamortized deferred
compensation expense with respect to the restricted stock grants amounted
to $883,000 at September 30, 2003 and is being amortized based on the
vesting schedules attributable to the underlying restricted stock grants.
Compensation expense of $221,000 was recognized during the third quarter
of 2003.
7. SALE OF ASSETS
In June 2003, the Company completed the sale of certain assets used in the
manufacture and sale of its commercial capacitor product line for
approximately $2.3 million. There was no material gain or loss on the
transaction.
8. INVENTORIES
Inventories comprised the following (in thousands):
September 30, December 31,
2003 2002
Raw materials $14,594 $15,693
Work-in-process 10,106 13,592
Finished goods 6,039 5,623
------- -------
Total $30,739 $34,908
======= =======
9. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
As of September 30, 2003
Gross Net
carrying Accumulated Carrying
amount Amortization Amount
Amortizing intangible assets:
Patented technology $ 21,567 $ (8,241) $13,326
Unpatented technology 14,515 (4,454) 10,061
Other 1,340 (671) 669
-------- -------- -------
37,422 (13,366) 24,056
Unamortizing intangible assets:
Trademark and names 31,420 (3,235) 28,185
-------- -------- -------
Total intangible assets $ 68,842 $(16,601) $52,241
======== ======== =======
Aggregate amortization expense for third quarter 2003 was $796,000.
10. COMPREHENSIVE INCOME
For all periods presented, the Company's only component of comprehensive
income is its net income for those periods.
-11-
11. COMMITMENTS AND CONTINGENCIES
The Company is a party to various legal actions arising in the normal
course of business. The Company does not believe that the ultimate
resolution of any such pending activities will have a material adverse
effect on its consolidated results of operations, financial position, or
cash flows.
12. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: medical
technology and commercial power sources. The medical technology segment
designs and manufactures batteries for devices in the cardiac rhythm
management ("CRM") industry including implantable cardioverter
defibrillators ("ICDs"), pacemakers, cardiac resynchronization therapy
("CRT") and other medical devices; capacitors for ICDs; and filtered
feedthroughs, engineered components and enclosures used in implantable
medical devices. The commercial power sources segment designs and
manufactures high performance batteries for use in oil and gas
exploration, oceanographic equipment, and aerospace.
The Company's medical technology segment includes multiple business units
that have been aggregated because they share similar economic
characteristics and similarities in the areas of products, production
processes, types of customers, methods of distribution and regulatory
environment. The reportable segments are separately managed, and their
performance is evaluated based on numerous factors, including income from
operations.
Management defines segment income from operations as gross profit less
costs and expenses attributable to segment specific selling, general and
administrative and research, development and engineering expenses, and
intangible amortization. Third quarter and year-to-date 2003 segment
income also includes a portion of non-segment specific selling, general
and administrative and research, development and engineering expenses
based on allocation bases appropriate to the expense categories. The
remaining unallocated selling, general and administrative, research,
development and engineering expenses and intangible amortization along
with interest expense, and certain non-recurring items are not allocated
to reportable segments. This change is not reflected in the third quarter
and year-to-date 2002 calculation of segment income from operations
because it is impractical to do so. The allocation of expenses to segments
in 2003 does not change the composition of the reportable segments; the
change is only a revision to the calculation of segment income from
operations. Transactions between the two segments are not significant.
-12-
An analysis and reconciliation of the Company's business segment
information to the respective information in the condensed consolidated
financial statements is as follows (dollars in thousands):
Three months ended Nine months ended
September 30, September 30,
Sales: 2003 2002 2003 2002
Medical technology
ICD batteries $ 10,603 $ 7,650 $ 32,641 $ 21,344
Pacemaker batteries 5,580 5,049 18,035 15,763
Other batteries 907 798 2,453 2,475
ICD capacitors 7,869 5,894 22,866 17,194
Components 24,648 19,308 70,661 43,874
-------- -------- --------- ---------
Total medical technology 49,607 38,699 146,656 100,650
Commercial power sources 6,728 6,651 20,338 19,331
-------- -------- --------- ---------
Total sales $ 56,335 $ 45,350 $ 166,994 $ 119,981
======== ======== ========= =========
Segment income from operations:
Medical technology $ 13,281 $ 10,663 $ 35,822 $ 30,646
Commercial power sources 1,423 2,348 2,922 6,517
-------- -------- --------- ---------
Total segment income from operations 14,704 13,011 38,744 37,163
Unallocated operating expenses (2,923) (6,669) (7,670) (19,096)
-------- -------- --------- ---------
Operating income as reported 11,781 6,342 31,074 18,067
Unallocated other income and expense (861) (2,645) (4,113) (4,034)
-------- -------- --------- ---------
Income before income taxes $ 10,920 $ 3,697 $ 26,961 $ 14,033
======== ======== ========= =========
The changes in the carrying amount of goodwill are as follows (amounts in
thousands):
Commercial
Medical Power
Technology Sources Total
Balance at December 31, 2002 $116,841 $2,566 $119,407
Goodwill recorded during the year 114 -- 114
-------- ------ --------
Balance at September 30, 2003 $116,955 $2,566 $119,521
======== ====== ========
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
We are a leading developer and manufacturer of batteries, capacitors, filtered
feedthroughs, engineered components and enclosures used in implantable medical
devices. We also develop and manufacture high performance batteries and battery
packs used in other demanding non-medical applications.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the
Friday nearest December 31st. For 52-week years, each quarter contains 13 weeks.
For 53-week years, the first, second and third quarters each have 13 weeks, and
the fourth quarter has 14 weeks. For clarity of presentation, the Company
describes all periods as if each quarter end is March 31st, June 30th and
September 30th and as if the year-end is December 31st.
The commentary that follows should be read in conjunction with our condensed
consolidated financial statements and related notes included elsewhere in this
report.
-14-
Results of Operations - unaudited
Three months ended Nine months ended
September 30, $ % September 30, $ %
In thousands, except per share data 2003 2002 Change Change 2003 2002 Change Change
- ------------------------------------------------------------------------------------------------------------------------------------
Medical Technology
ICD batteries $ 10,603 $ 7,650 $ 2,953 39% $ 32,641 $ 21,344 $ 11,297 53%
Pacemaker batteries 5,580 5,049 531 11% 18,035 15,763 2,272 14%
Other batteries 907 798 109 14% 2,453 2,475 (22) -1%
ICD capacitors 7,869 5,894 1,975 34% 22,866 17,194 5,672 33%
Components 24,648 19,308 5,340 28% 70,661 43,874 26,787 61%
------------------------------------------------------------------------------------------
Total Medical Technology 49,607 38,699 7,315 19% 146,656 100,650 32,459 32%
Commercial Power Sources 6,728 6,651 77 1% 20,338 19,331 1,007 5%
------------------------------------------------------------------------------------------
Total Sales 56,335 45,350 10,985 24% 166,994 119,981 47,013 39%
Cost of sales 32,462 26,478 5,984 23% 97,137 69,558 27,579 40%
------------------------------------------------------------------------------------------
Gross profit 23,873 18,872 5,001 26% 69,857 50,423 19,434 39%
Gross margin 42.4% 41.6% 41.8% 42.0%
Selling, general, and administrative
expenses (SG&A) 7,336 6,300 1,036 16% 23,204 17,310 5,894 34%
SG&A as a % of sales 13.0% 13.9% 13.9% 14.4%
Research, development and
engineering costs, net (RD&E) 3,960 3,470 490 14% 13,155 10,514 2,641 25%
RD&E as a % of sales 7.0% 7.7% 7.9% 8.8%
Intangible amortization 796 1,037 (241) -23% 2,424 2,809 (385) -14%
Write-off of noncompete agreement -- 1,723 (1,723) -100% -- 1,723 (1,723) -100%
------------------------------------------------------------------------------------------
Operating income 11,781 6,342 5,439 86% 31,074 18,067 13,007 72%
Operating margin 20.9% 14.0% 18.6% 15.1%
Interest expense 1,154 1,098 56 5% 2,952 2,702 250 9%
Interest income (253) (34) (219) 644% (384) (314) (70) 22%
Early extinguishment of debt -- -- 1,603 -- 1,603 100%
Write-off of investment in
unrelated company -- 1,547 (1,547) -100% -- 1,547 (1,547) -100%
Other (income) expense, net (40) 34 (74) -218% (58) 99 (157) -159%
Provision for income taxes 3,144 1,220 1,924 158% 8,196 4,631 3,565 77%
Effective tax rate 28.8% 33.0% 30.4% 33.0%
------------------------------------------------------------------------------------------
Net income $ 7,776 $ 2,477 $ 5,299 214% $ 18,765 $ 9,402 $ 9,363 100%
==========================================================================================
Net margin 13.8% 5.5% 11.2% 7.8%
Diluted earnings per share $ 0.36 $ 0.12 $ 0.24 200% $ 0.87 $ 0.44 $ 0.43 98%
-15-
Sales
Medical. Our medical technology sales comprise various component products that
are sold to medical device manufacturers. Most of the medical technology
products that we sell are utilized by customers in cardiac rhythm management
("CRM") devices. The CRM market comprises devices utilizing high-rate batteries
and capacitors such as implantable cardioverter defibrillators ("ICDs") and
cardiac resynchronization therapy with backup defibrillation devices ("CRT-D")
and devices utilizing low or medium rate batteries but no capacitors (pacemakers
and CRTs). All CRM devices utilize other components such as enclosures and
feedthroughs, and certain CRM devices utilize electromagnetic interference
("EMI") filtering technology. The nature and extent of our selling relationships
with each CRM customer are different in terms of component products purchased,
selling prices, product volumes, ordering patterns and inventory management.
Additionally, the relative market share changes among the CRM device
manufacturers changes periodically. Consequently, these and other factors can
significantly impact our sales in any given quarter.
During the quarter and year to date 2003, we saw higher relative sales growth
from our products that utilize high rate batteries, tantalum capacitors, EMI
filtering and precision manufactured enclosures. Substantially all of the sales
growth in every product category was due to volume and not to price changes. ICD
capacitor revenues increased during the quarter in part due to the commencement
of shipments to an additional customer. Components revenues benefited in the
quarter and year to date from the considerable growth attributable to increased
volume in both enclosure and filtered feedthrough orders generated from
manufacturers of both low and high rate CRM devices.
Commercial. Commercial power sources sales improved both for the third quarter
and year to date 2003 periods as the result of demand from customers in the oil
and gas exploration market.
Gross margin
The higher overall gross margin in the quarter over the prior year was due to
improvements for our medical battery products, ICD capacitors, and medical
components products, primarily EMI filtered feedthroughs and enclosures. The
on-going implementation of lean manufacturing initiatives at all plants has
contributed considerably to this result. Partially offsetting these improved
margins was a reduction related to costs incurred in the consolidation of the
commercial battery operations that was completed in September 2003.
Gross profit for year to date 2003 increased in dollars over year to date 2002
reflecting the increased sales. The gross margin declined slightly through
September of 2003 over the comparable period of 2002.
SG&A expenses
SG&A expenses for the quarter increased in dollars and declined as a percentage
of total sales. Ongoing infrastructure improvements and losses on disposition of
property, plant and equipment, contributed to the increased expense in the
quarter.
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SG&A expenses for the year to date increased in dollars and declined as a
percentage of total sales. The expense increase is due to the ongoing efforts to
build the financial, quality, and information technology infrastructure
necessary to support the Company's continued growth. The addition of SG&A for
Greatbatch-Globe has also increased spending for the year to date.
RD&E expenses
RD&E expenses for the quarter increased in dollars, but declined as a percentage
of total sales. The increase in expense in the quarter relates to new
development programs for batteries and capacitors used in ICDs.
RD&E expenses for the year to date increased in dollars, but declined as a
percentage of total sales. The decrease in the percentage of expenses as related
to sales for the year to date is primarily attributable to the low level of RD&E
expenses at Greatbatch-Globe. We expect our spending on RD&E to be at a level
that will enable us to maintain technology leadership.
Amortization expense
Intangible amortization decreased for the quarter and year to date 2003 due to
the write-off of the Greatbatch-Hittman Noncompete/Employment Agreement in third
quarter 2002. Amortization expense for second quarter and year to date 2002
included $144 thousand and $611 thousand, respectively for this agreement that
is not included in the expense for the comparable periods in 2003. Partially
offsetting this decline for the year to date is the addition of amortizable
intangible assets from the acquisition of Greatbatch-Globe in July 2002.
Interest expense/income
Interest expense for the quarter includes the fixed 2.25% interest coupon and
amortization of deferred financing fees related to the convertible notes. The
expense for the quarter is above prior year due to the higher level of debt.
Year to date interest includes interest on the term loan and amortization of
deferred financing fees related to that loan through May 2003. Interest income
for the quarter and year to date increased due to proceeds resulting from the
convertible notes offering.
Early extinguishment and other expense
In May 2003 we sold $170 million of convertible debt securities to an investment
bank syndicate and from the proceeds paid off the then existing $72.5 million
Term Loan. This transaction resulted in the write-off of $1.6 million of
deferred financing fees associated with the Term Loan.
Provision for income taxes
In third quarter 2003 we completed certain strategic tax projects that resulted
in a benefit greater than had been anticipated. We completed a federal research
and development tax credit study as
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well as an analysis of the tax treatment of our foreign transactions.
Accordingly, our year to date tax provision reflects our current estimate of
what our effective rate will be for the full year. The lower third quarter
effective rate is a result of our providing taxes at a higher rate in the first
half of 2003.
Liquidity and Capital Resources
Our principal source of short-term liquidity is our working capital of $157.6
million at September 30, 2003 combined with our unused $20 million credit line
with our lending syndicate. Historically we have generated cash from operations
sufficient to meet our capital expenditure and debt service needs, other than
for acquisitions, and we anticipate that this will continue for the remainder of
2003. At September 30, 2003 our current ratio was 6.8:1, an increase from 3:1 at
December 31, 2002. Therefore we believe that we have sufficient short-term
liquidity.
The Company regularly engages in discussions relating to potential acquisitions
and has identified several possible acquisition opportunities. The Company
currently does not have any commitments, understandings, or agreements to
acquire any other business; however, the Company may announce an acquisition
transaction at any time.
At September 30, 2003 our capital structure consisted primarily of $170 million
of debt securities and our 21.2 million shares of common stock outstanding. We
have in excess of $122 million in cash, cash equivalents and short-term
investments and are in a position to facilitate future acquisitions if
necessary. We are also authorized to issue 100 million shares of common stock
and 100 million shares of preferred stock. The market value of our outstanding
common stock since our IPO has exceeded our book value and the average daily
trading volume of our common stock has also increased; accordingly, we believe
that if needed we can access public markets to sell additional common or
preferred stock if conditions are appropriate in the public markets.
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
None.
Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q and other
written and oral statements made from time to time by us and our
representatives, are not statements of historical or current fact. As such, they
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our
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current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and the
implantable medical device industry;
o our ability to successfully execute our business model and our
business strategy;
o our ability to identify trends within the for implantable medical
devices, medical components, and commercial power sources industries
and to offer products and services that meet the changing needs of
those markets;
o projected capital expenditures; and
o trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to successfully consummate and
integrate acquisitions, unsuccessful expansion into new markets, competition,
inability to obtain licenses to key technology, regulatory changes or
consolidation in the healthcare industry, and other risks and uncertainties that
arise from time to time as described in the Company's Annual Report on Form 10-K
and other periodic filings with the Securities and Exchange Commission.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Under the Company's existing line of credit any borrowings bear interest at
fluctuating market rates. At September 30, 2003, the Company did not have any
interest rate sensitive financial instruments. The discussion and the estimated
amounts referred to above include forward-looking statements of market risk that
involve certain assumptions as to market interest rates. Actual future market
conditions may differ materially from such assumptions. Accordingly, the
forward-looking statements should not be considered projections of future events
by the Company.
ITEM 4. Controls and Procedures.
As of the end of the period covered by this quarterly report on Form 10-Q, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including our Chief Executive Officer
and our Chief Financial Officer, of the effectiveness of the design and
operation of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that these disclosure controls and procedures are effective to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is made know to them on a timely basis, and that these disclosure
controls and procedures are effective to insure such information is recorded,
processed, summarized and reported within the time periods specified in the
Commission's rules and forms. There have been no changes in the Company's
internal controls over financial reporting during the most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Changes in Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
See the Exhibit Index for a list of those exhibits filed herewith.
(b) Reports on Form 8-K
On August 5, 2003, the Company filed a Current Report on Form 8-K
containing information pursuant to Item 9 ("Regulation FD Disclosure")
relating to the announcement of earnings for the quarter ended July 4,
2003.
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EXHIBIT INDEX
Exhibit No. Description
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3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to our registration
statement on Form S-1 (File No. 333-37554) filed on May 22,
2000).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to our quarterly report on Form 10-Q ended March
29, 2002).
31 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: November 12, 2003 WILSON GREATBATCH TECHNOLOGIES, INC.
By /s/ Edward F. Voboril
-------------------------------------------
Edward F. Voboril
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
By /s/ Lawrence P. Reinhold
-------------------------------------------
Lawrence P. Reinhold
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
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