Back to GetFilings.com

UNITED STATES
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 September 27, 2002

Commission File Number 1-16137

WILSON GREATBATCH TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)

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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

See notes to condensed consolidated financial statements.

WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarter and Nine Months Ended September 27, 2002
(Unaudited)

The revenues and results of operations of Globe have been included from the date of acquisition, July 9, 2002.

Medical. Total medical technology revenues for the quarter ended September 27, 2002, increased overall from the third quarter of 2001. Medical battery revenues for the third quarter of 2002 increased from third quarter 2001 primarily due to demand for our implantable cardioverter defibrillators (ICD) batteries. Demand for these batteries increased substantially over the third quarter of 2001 while pacemaker, and other device revenues declined. Capacitor revenues for the quarter ended September 27, 2002, decreased from the third quarter of 2001 as the result of the timing of customer orders. Sales of medical components for the third quarter of 2002 increased from the quarter ended September 28, 2001, primarily due to the inclusion of revenues from Greatbatch-Globe, and strong revenues from our filtered feedthrough products.

Total medical technology revenues for the nine months ended September 27, 2002, also increased overall compared to the nine months ended September 28, 2001. Medical battery revenues for the nine months ended September 27, 2002, increased over the prior year mainly due to our customers' increased current demand for ICD batteries. Partially offsetting this increase was a $1.0 million decline in royalty revenues as compared to the prior year's comparable nine month period. These royalties were payable from Medtronic, Inc. on patents that have subsequently expired. Capacitor revenues increased for the nine months ended September 27, 2002, compared to the nine months ended September 28, 2002 as a result of increased demand by our existing customer for capacitors over 2001 levels. The significant increase in sales of medical components for the nine months ended September 27, 2002, over the nine months ended September 28, 2001, was primarily due to the inclusion of revenues from Greatbatch-Sierra during the full nine month period in 2002 versus approximately three and one half months during the nine months ended September 28, 2001, and Greatbatch-Globe for the third quarter of 2002.

Commercial. Commercial power sources revenues increased for the quarter ended September 27, 2002, from the third quarter of 2001 due to a modest increase in demand from oil and gas customers.

Commercial power sources revenues for the first nine months of 2002 decreased from the nine months ended September 28, 2001, principally due to a decreased level of exploration in the oil and gas industry in the first six months of this year compared to the nine months ended September 27, 2001.

Gross profit for the quarter ended September 27, 2002, increased from the third quarter of 2001 due to increased revenues. Gross margin for the third quarter of 2002 decreased to 42% from 43% for the third quarter of 2001. The decline was primarily due to a $0.6 million purchase accounting charge related to the Greatbatch-Globe acquisition.

Gross profit for the nine months ended September 27, 2002, increased from the nine months ended September 28, 2001, as a result of increased revenues. Gross margin for the first nine months of 2002 decreased to 42% from 45% for the first nine months of 2001. Production yield issues at Greatbatch-Sierra, along with reduced royalty revenues compared to the first nine months of 2001 were the primary contributors to the reduced gross profit rate.

Selling, general and administrative expenses for the quarter ended September 27, 2002, increased from the three months ended September 28, 2001, both in dollars, and as a percentage of revenues. As a percentage of total revenues, selling, general and administrative expenses in the third quarter of 2002 were 14%, compared to 12% for the same period in 2001.

Selling, general and administrative expenses for the nine months ended September 27, 2002, also increased from the first nine months of 2001 both in dollars, and as a percentage of total revenues. As a percentage of total revenues, selling, general and administrative expenses in the first nine months of 2002 were 14%, as compared to 13% in the first nine months of 2001. The increase in selling, general and administrative expenses for the quarter and nine month periods is primarily due to the inclusion of costs associated with Greatbatch-Sierra and Greatbatch-Globe in 2002, costs associated with our Six Sigma - quality initiatives, the general development of our infrastructure to support Company growth, and expenses related to ongoing patent activity.

Research, development and engineering expenses for the quarter ended September 27, 2002, were above third quarter 2001 levels. As a percentage of total revenues, research, development and engineering expenses were 8% in the third quarter of 2002 as well as the third quarter of 2001.

Research, development and engineering expenses for the nine months ended September 27, 2002, increased from the nine months ended September 28, 2001. As a percentage of total revenues, research, development and engineering expenses were 9% in the first nine months of 2002 as compared to 10% for the first nine months of 2001. The decrease in the percentage of expenses as related to revenues for the quarter and nine month periods is primarily attributable to the lower levels of research, development, and engineering activities at Greatbatch-Globe. We expect to maintain our investment in research, development and engineering at a level that we believe will support the new technologies demanded by the implantable medical device markets.

Intangible amortization for both the quarter and nine months ended September 27, 2002, decreased significantly from the quarter and nine months ended September 28, 2001. The reduction in amortization expense for both the quarter and year to date periods was due to the cessation of the amortization for goodwill and other intangible assets with indefinite lives effective December 29, 2001, the beginning of our fiscal year 2002 in accordance with the provisions of SFAS No. 142.

The non-recurring charge of $1.7 million for the write-off of the noncompete agreement for the three months and nine months ended September 27, 2002, has no comparable amounts in 2001. The charge in September 2002 was associated with the write-off of the net book value of the Greatbatch-Hittman Noncompete/Employment Agreement's intangible asset after the passing of Mr. Fred Hittman.

Net interest expense was $1.1 million for the quarter ended September 27, 2002, a decrease of $0.1 million, or 8% from $1.2 million for the quarter ended September 28, 2001. This decrease is attributable to reduced interest rates for the third quarter of 2002 compared to the third quarter of 2001. For the nine months ended September 27, 2002, net interest expense was $2.4 million, a decline of $0.2 million, or 8%, from $2.6 million for the first nine months of 2001. This decrease is primarily due to increased interest income earned on investments in 2002.

The non-recurring charge of $1.5 million for the write-off of the remaining net book value of an investment in an unrelated company included in the three months and nine months ended September 27, 2002, has no comparable amounts in 2001. This write-off was the result of an analysis of the financial viability of the unrelated company. It was determined that the Company's investment in the unrelated company has a fair value that is less than its carrying value.

Our effective tax rate for the third quarter and first nine months of 2002 was 33.0% as compared to 37.9% and 37.5% for the third quarter and first nine months of 2001. Our effective tax rate in 2002 relative to 2001 has declined due to the anticipated benefits of tax planning projects currently underway. The 2002 tax rate also incorporates the anticipated increased state taxes related to the Greatbatch-Globe acquisition.

Income before extraordinary loss in the third quarter of 2002 declined compared to the third quarter of 2001 due to the non-recurring charges for the write-off of the noncompete agreement, and the write-off of the investment in the unrelated company. For the nine months ended September 27, 2002, income before extraordinary loss increased compared to the first nine months of 2001 as a result of the reduced tax rate in 2002 as compared to 2001.

If the provisions of SFAS No. 142 had been implemented on the first day of fiscal year 2001, income from continuing operations and diluted earnings per share from continuing operations for third quarter 2001 would have been $4.0 million and $0.19, respectively. For the first nine months of 2001, income from continuing operations and diluted earnings per share would have been $10.4 million and $0.53, respectively.

The extraordinary loss of $3.0 million, net of taxes, for the nine months ended September 28, 2001, has no comparable amount in 2002. The loss in 2001 was associated with the restructuring of our long-term debt in the first quarter of 2001 and the related write-off of deferred financing fees, a call premium paid, and loan discounts associated with the debt.

Net income for the three months ended September 27, 2002, decreased compared to net income for the third quarter of 2001 due to the non-recurring charges for the write-off of the noncompete agreement, and the write-off of the investment in the unrelated company. If SFAS No. 142 had been implemented on the first day of fiscal year 2001, net income and diluted earnings per share for third quarter 2001 would have been $4.0 million and $0.19, respectively.

Net income for the first nine months of 2002 increased as compared to net income for first nine months of 2001 as a result of the reduced tax rate in 2002 compared to 2001, as well as the extraordinary loss in 2001 that is not present in 2002. If SFAS No. 142 had been implemented on the first day of fiscal year 2001, net income and diluted earnings per share for the first nine months of 2001 would have been $7.5 million and $0.38, respectively.

Total assets at September 27, 2002, were $306.7 million compared to $283.5 million at December 28, 2001. The most significant change in the balance sheet position resulted from the acquisition of Greatbatch-Globe effective July 9, 2002. In July 2002, we amended our credit facility to partially provide for the financing necessary to consummate the acquisition.

At September 27, 2002, we had $3.3 million of cash and cash equivalents compared to $43.3 million at September 28, 2001. The primary reduction in cash and cash equivalents was the use of approximately $32.0 million for the Greatbatch-Globe acquisition. Cash provided by operating activities for the nine month period ended September 27, 2002, was $15.8 million as compared to $10.6 million for the same period ended September 28, 2001. Higher net income in the first nine months of 2002 had a positive effect on cash provided by operating activities as compared to first nine months of 2001, along with the reduction of accounts receivable, inventories, accounts payable, and accrued expenses and other current liabilities.

Net cash used in investing activities was $59.1 million in the nine months ended September 27, 2002, as compared to a use of $54.6 million in the nine months ended September 28, 2001. The acquisition of Greatbatch-Globe represented $47.0 million of the usage for the period ended September 27, 2002. The acquisition of Greatbatch-Sierra represented $46.9 million of the usage for the period ended September 28, 2001. Capital expenditures were $11.7 million and $5.0 million for the first nine months of 2002 and 2001, respectively.

Cash provided by financing activities for the nine month period ending September 27, 2002, was $3.3 million, compared with $87.6 million for the same period ended September 28, 2001. In the first nine months of 2002, substantially all of the cash provided by financing activities was from $32.0 million of proceeds from the refinancing of the term loan, offset by $29 million of debt repayment. In January 2001, we used $40.0 million of proceeds from the term loan and cash generated by operating activities to pay off the remaining senior debt and 13% senior subordinated notes. In June 2001, we amended our credit facility to borrow an additional $47.0 million in order to finance the acquisition of Greatbatch-Sierra.

We believe that cash generated from operations will be sufficient to meet our ordinary working capital needs and planned capital expenditures. Capital expenditures for 2002 are expected to increase from historical levels, as we invest in increased production capacity and product development opportunities. These investments include completion of an expansion to our research and development facilities, which began in 2001.

Our capital structure consists of interest-bearing debt and equity. Interest-bearing debt as a percentage of our total capitalization increased to 30% at September 27, 2002, compared to 28% at December 28, 2001. Our long-term debt at September 27, 2002, consisted primarily of the $85.8 million term loan.

In July 2002, we amended our credit facility to facilitate the acquisition of Greatbatch-Globe. The amendment provided for a $120.0 million facility consisting of a $100.0 million term loan and a $20.0 million revolving line of credit.

Both the term loan and revolving line of credit have a term of five years, maturing in July 2007. The amended credit facility is secured by our accounts receivable and inventories and requires us to comply with various quarterly financial covenants related to EBITDA, as defined in the credit agreement, and ratios of leverage, interest, fixed charges, and capitalization as they relate to EBITDA. The Company is in compliance with these quarterly financial covenants. Both the term loan and revolving line of credit bear interest at a rate that varies with our level of leverage. Through September 27, 2002, the applicable interest rates for both the term loan and the revolving line of credit were prime plus 0.25%, or LIBOR, plus 2.375%, at the Company's option.

At September 27, 2002, there was $85.8 million outstanding on the term loan and no amounts outstanding under the revolving line of credit. The weighted average interest rate as of September 27, 2002, for the term loan was 4.3%.

We do not believe that inflation has had a significant effect on our operations during the current fiscal year.

In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets (SFAS No. 143). SFAS No. 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS No. 143 is effective in fiscal years beginning after June 15, 2002, with early adoption permitted. We expect that the provisions of SFAS No. 143 will not have a material impact on its consolidated financial statements upon adoption. We plan to adopt SFAS No. 143 effective January 3, 2003, the beginning of fiscal year 2003.

In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145). This accounting standard, which is effective for fiscal years beginning after May 15, 2002, requires, among other things, that debt certain debt extinguishments will no longer meet the criteria for classification as extraordinary items. The adoption of SFAS No. 145 is not expected to have a material effect on our consolidated financial statements. We plan to adopt SFAS No. 143 effective January 3, 2003, the beginning of fiscal year 2003.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit and Disposal Activities (SFAS No. 146). SFAS No. 146 revises the accounting for exit and disposal activities under Emerging Issues Task Force Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, by spreading out the reporting of expenses related to restructuring activities. Commitment to a plan to exit an activity or dispose of long-lived assets will no longer be sufficient to record a one-time charge for most anticipated costs. Instead, companies will record exit or disposal costs when they are "incurred" and can be measured at fair value, and they will subsequently adjust the recorded liability for changes in estimated cash flows. The provisions of SFAS No. 146 are effective prospectively for exit or disposal activities initiated after December 31, 2002. Companies may not restate previously issued financial statements for the effect of the provisions of SFAS No. 146 and liabilities that a company previously recorded under EITF Issue No. 94-3 are grandfathered. We do not believe that the adoption of SFAS No. 146 will have a material impact on our consolidated financial statements. We plan to adopt SFAS No. 146 effective January 3, 2003, the beginning of fiscal year 2003.

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:

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 described in the Company's Annual Report on Form 10-K and other periodic filings with the Securities and Exchange Commission.

Under the new credit facility both the term loan and any borrowings under the line of credit bear interest at fluctuating market rates. An analysis of the impact on our interest rate sensitive financial instruments of a hypothetical 10% change in short-term interest rates shows an impact on expected 2002 earnings of approximately $0.3 million of higher or lower earnings, depending on whether short-term rates rise or fall by 10%. The discussion and the estimated amounts referred to above include forward-looking statements of market risk which 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.

None.

None.

None.

None

None.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX