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 July 2, 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 August 6, 2004 was: 21,381,859 shares
WILSON GREATBATCH TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-Q
QUARTER ENDED JUNE 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 15
Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 23
ITEM 4. Controls and Procedures 23
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 24
ITEM 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 24
ITEM 3. Defaults Upon Senior Securities 24
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 24
ITEM 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
EXHIBIT INDEX 27
-2-
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Unaudited
(IN THOUSANDS)
- --------------------------------------------------------------------------------
ASSETS JUNE 30, DECEMBER 31,
2004 2003
--------- -----------
Current assets:
Cash and cash equivalents $ 79,851 $ 119,486
Short-term investments 3,070 11,559
Accounts receivable, net 29,354 23,726
Inventories 32,989 28,598
Prepaid expenses and other current assets 2,474 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 155,076 194,364
Property, plant, and equipment, net 74,994 63,735
Intangible assets, net 66,079 51,441
Goodwill 156,825 119,521
Deferred income taxes 2,896 2,896
Other assets 6,000 6,286
--------- ---------
Total assets $ 461,870 $ 438,243
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,641 $ 4,091
Accrued expenses and other current liabilities 13,491 18,968
Current portion of long-term debt 1,182 850
--------- ---------
Total current liabilities 20,314 23,909
Long-term debt, net of current portion 939 928
Convertible subordinated notes 170,000 170,000
Deferred income taxes 18,786 7,251
Other long-term liabilities 815 815
--------- ---------
Total liabilities 210,854 202,903
--------- ---------
Stockholders' equity:
Preferred stock -- --
Common stock 21 21
Additional paid-in capital 211,778 207,969
Deferred stock-based compensation (849) (1,185)
Treasury stock, at cost -- (179)
Retained earnings 40,066 28,714
--------- ---------
Total stockholders' equity 251,016 235,340
--------- ---------
Total liabilities and stockholders' equity $ 461,870 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ --------------------------
2004 2003 2004 2003
-------- -------- --------- ---------
Sales $ 52,942 $ 55,802 $ 108,467 $ 110,659
Cost of sales 29,124 32,585 61,474 64,629
-------- -------- --------- ---------
Gross profit 23,818 23,217 46,993 46,030
Selling, general and administrative expenses 6,389 8,146 13,314 15,837
Research, development and engineering costs, net 5,688 4,635 10,569 9,195
Amortization of intangible assets 1,076 813 1,851 1,628
Other operating expense, net 2,957 77 3,178 147
-------- -------- --------- ---------
Operating income 7,708 9,546 18,081 19,223
Interest expense 1,144 867 2,304 1,798
Interest income (245) (122) (558) (131)
Early extinguishment of debt -- 1,603 -- 1,603
Other income, net (2) (30) -- (88)
-------- -------- --------- ---------
Income before provision for income taxes 6,811 7,228 16,335 16,041
Provision for income taxes 2,078 2,276 4,983 5,052
-------- -------- --------- ---------
Net income $ 4,733 $ 4,952 $ 11,352 $ 10,989
======== ======== ========= =========
Earnings per share:
Basic $ 0.22 $ 0.23 $ 0.53 $ 0.52
Diluted $ 0.22 $ 0.23 $ 0.53 $ 0.51
Weighted average shares outstanding:
Basic 21,366 21,159 21,323 21,114
Diluted 21,496 21,535 21,562 21,416
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)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
2004 2003
--------- ---------
Cash flows from operating activities:
Net income $ 11,352 $ 10,989
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 7,253 6,817
Stock-based compensation 1,511 1,095
Early extinguishment of debt -- 1,487
Deferred income taxes 3,540 (468)
Loss on disposal of assets 115 425
Changes in operating assets and liabilities:
Accounts receivable (5,628) (7,415)
Inventories (4,391) 1,772
Prepaid expenses and other current assets 1,164 2,490
Accounts payable 1,433 (1,730)
Accrued expenses and other current liabilities (2,915) 3,808
Income taxes (1,502) 504
--------- ---------
Net cash provided by operating activities 11,932 19,774
--------- ---------
Cash flows from investing activities:
Sale (purchase) of short-term investments 8,489 (2,991)
Acquisition of property, plant and equipment (15,183) (5,116)
Proceeds from sale of assets 64 2,302
Decrease in other assets 37 107
Acquisition of subsidiary, net (45,604) --
--------- ---------
Net cash used in investing activities (52,197) (5,698)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 170,000
Principal payments of long-term debt (663) (85,000)
Payment of debt issue costs -- (4,540)
Issuance of common stock 1,114 330
Issuance of treasury stock 179 --
--------- ---------
Net cash provided by financing activities 630 80,790
--------- ---------
Net (decrease) increase in cash and cash equivalents (39,635) 94,866
Cash and cash equivalents, beginning of year 119,486 4,608
--------- ---------
Cash and cash equivalents, end of period $ 79,851 $ 99,474
========= =========
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 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 second quarter of 2004 and 2003 each
contained 13 weeks. The six months ended June 30, 2004 and 2003 each
contained 26 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 (in thousands):
Acquisition date March 16, 2004
--------------
Purchase price:
Cash paid $ 45,000
Transaction costs 604
--------
Total purchase price $ 45,604
========
Purchase price allocation:
Property and equipment $ 717
Other assets/(liabilities) (6,695)
Intangible assets (amortizing over 13 years) 16,500
Goodwill 35,082
--------
Total purchase price $ 45,604
========
The above preliminary purchase price allocation has not been finalized, and
any required adjustments will be recorded as necessary.
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.
SIX MONTHS ENDED
JUNE 30,
------------------------
In thousands except per share amounts: 2004 2003
--------- ---------
Sales $108,467 $110,659
Net income $ 10,276 $ 9,009
Net income per diluted share: $ 0.48 $ 0.42
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.
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.
-7-
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -----------------
2004 2003 2004 2003
----- ----- ----- -----
Risk-free interest rate 3.93% 2.60% 3.80% 2.45%
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 (in thousands except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2004 2003 2004 2003
----------- ---------- ---------- ----------
Net income as reported $ 4,733 $ 4,952 $ 11,352 $ 10,989
Stock-based employee compensation cost
included in net income as reported, net
of related tax effects $ 438 $ 406 $ 1,050 $ 750
Stock-based employee compensation cost
determined using the fair value based method,
net of related tax effects $ 968 $ 676 $ 2,104 $ 1,438
Pro forma net income $ 4,203 $ 4,682 $ 10,298 $ 10,301
Earnings per share:
Basic - as reported $ 0.22 $ 0.23 $ 0.53 $ 0.52
Basic - pro forma $ 0.20 $ 0.22 $ 0.48 $ 0.49
Diluted - as reported $ 0.22 $ 0.23 $ 0.53 $ 0.51
Diluted - pro forma $ 0.20 $ 0.22 $ 0.48 $ 0.48
-8-
4. SUPPLEMENTAL CASH FLOW INFORMATION
SIX MONTHS ENDED
JUNE 30,
---------------------
2004 2003
------- -------
Noncash investing and financing activities (in thousands):
Acquisition of property utilizing capital leases $ 1,007 $ 1,445
Common stock contributed to ESOP 2,723 3,668
5. SHORT-TERM INVESTMENTS
Short-term investments at June 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 (in thousands):
AS OF JUNE 30, 2004
-----------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ -------- ------- -------
Municipal Bonds $3,070 $ -- $ (2) $3,068
------ -------- ------- -------
Short-term investments $3,070 $ -- $ (2) $3,068
====== ======== ======= =======
The municipal bonds have maturity dates ranging from July 2004 to January
2005.
AS OF JUNE 30, 2004
-----------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------ -------- ------- -------
Municipal Bonds $11,559 $-- $(1) $11,558
------ -------- ------- -------
Short-term investments $11,559 $-- $(1) $11,558
====== ======== ======= =======
6. INVENTORIES
Inventories comprised the following (in thousands):
JUNE 30, DECEMBER 31,
2004 2003
-------- ------------
Raw materials $ 11,250 $ 11,688
Work-in-process 12,006 10,421
Finished goods 9,733 6,489
-------- ---------
Total $ 32,989 $ 28,598
======== =========
-9-
7. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
GROSS NET
CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT
-------- -------------- --------
Amortizing intangible assets:
Patented technology $ 21,462 $ (9,337) $12,125
Unpatented technology 30,886 (5,413) 25,473
Other 1,340 (1,044) 296
53,688 (15,794) 37,894
Unamortizing intangible assets:
Trademark and names 31,420 (3,235) 28,185
Total intangible assets $ 85,108 $(19,029) $66,079
Aggregate amortization expense for the second quarter 2004 and 2003 was
$1,081 and $813 respectively. Aggregate amortization expense for the six
months ended June 30, 2004 and 2003 was $1,862 and $1,632 respectively.
Estimated amortization expense for the remainder of 2004 and for the years
subsequent to 2004 are as follows:
Remainder of 2004 $ 2,161
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 (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ----------------------
2004 2003 2004 2003
------- ------- ------- ---------
Earnings per share - basic
Earnings available to common shareholders $ 4,733 $ 4,952 $11,352 $10,989
Weighted average shares outstanding 21,366 21,159 21,323 21,114
Earnings per share - basic $ 0.22 $ 0.23 $ 0.53 $ 0.52
Earnings per share - diluted
Earnings available to common shareholders $ 4,733 $ 4,952 $11,352 $10,989
Weighted average shares outstanding 21,366 21,159 21,323 21,114
Dilutive impact of options outstanding & unvested restricted stock 130 376 239 302
------- ------- ------- -------
Weighted average shares and potential dilutive shares outstanding 21,496 21,535 21,562 21,416
Earnings per share - diluted $ 0.22 $ 0.23 $ 0.53 $ 0.51
Contingent convertible notes outstanding at June 30, 2004 were excluded
from the computation of diluted earnings for the three and six months ended
June 30, 2004 because the conditions required to convert the notes were not
met. The notes were not convertible for the three and six month periods
ended June 30, 2003, as conversion is only possible for any fiscal quarter
commencing after July 4, 2003. 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 June 30, 2004, is as follows (in thousands):
Beginning balance at March 31, 2004 $ 313
Additions to warranty reserve 96
Warranty claims paid (72)
-----
Ending balance at June 30, 2004 $337
=====
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 value-added
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 (in thousands) is
estimated to be $338 for the first year, $566 for the second year, with 3%
annual increases thereafter for years three through ten.
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 including oil and gas exploration, oceanographic equipment, and
aerospace.
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.
-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 (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- --------------------------
SALES: 2004 2003 2004 2003
--------- -------- --------- ---------
IMC
ICD batteries $ 10,119 $ 11,278 $ 19,539 $ 22,038
Pacemaker and other batteries 5,361 7,022 11,050 13,442
ICD Capacitors 6,239 7,849 14,647 14,997
Feedthroughs 12,261 12,108 26,016 23,281
Enclosures 5,142 6,310 10,539 13,244
Other 7,077 4,454 12,686 10,048
-------- -------- --------- ---------
Total IMC 46,199 49,021 94,477 97,050
EPS 6,743 6,781 13,990 13,609
-------- -------- --------- ---------
Total sales $ 52,942 $ 55,802 $ 108,467 $ 110,659
======== ======== ========= =========
Segment income from operations:
IMC 8,396 11,450 19,218 22,471
EPS 1,608 911 3,903 1,499
-------- -------- --------- ---------
Total segment income from operations 10,004 12,361 23,121 23,970
Unallocated operating expenses (2,296) (2,815) (5,040) (4,747)
-------- -------- --------- ---------
Operating income as reported 7,708 9,546 18,081 19,223
Unallocated other income and expense (897) (2,318) (1,746) (3,182)
-------- -------- --------- ---------
Income before income taxes as reported 6,811 7,228 16,335 16,041
======== ======== ========= =========
The changes in the carrying amount of goodwill are as follows
(amounts in thousands):
IMC EPS TOTAL
-------- ------ --------
Balance at January 1, 2004 $116,955 $2,566 $119,521
Goodwill recorded during the year 37,304 -- 37,304
-------- ------ --------
Balance at June 30, 2004 $154,259 $2,566 $156,825
======== ====== ========
12. OTHER OPERATING EXPENSE
During second quarter 2004, there were two non-recurring charges included
in other operating expense in the Company's Condensed Consolidated
Statement of Operations.
-13-
Patent acquisition. The Company recorded a $2.0 million pre-tax charge
associated with the acquisition of certain patents during the quarter. The
acquired patents cover how 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.
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 $0.8 million during the quarter. The
severance charges were $0.6 million and $0.1 million for IMC and EPS,
respectively. The remaining $0.1 million relates to corporate employees and
is included in unallocated operating expenses.
The remaining accrued severance of $0.5 as of June 30, 2004, is expected to
be paid within the next six months. The unpaid balance is $0.3 million,
$0.1 million, and $0.1 million for IMC, EPS, and unallocated corporate,
respectively.
13. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
At its meeting on July 1, 2004, the Emerging Issues Task Force (EITF) of
the Financial Accounting Standards Board reached a tentative 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 tentative consensus, EITF Issue 04-8,
The Effect of Contingently Convertible Debt on Diluted Earnings per Share,
would be effective for the Company for reporting periods ending after
December 15, 2004. The provisions of EITF Issue 04-8 would be applied on a
retroactive basis and would require restatement of prior period earnings
per share. The consensus is tentative to allow time for public comment,
which ends on September 3, 2004. The Company believes that the EITF as
written could result in additional dilution to its diluted earnings per
share. Until a final consensus is reached, the Company cannot estimate the
effect that this change would have on its diluted earnings per share.
-14-
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,
including 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
second quarter of 2004 and 2003 each contained 13 weeks. The six months ended
June 30, 2004 and 2003 each contained 26 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 the second quarter 2004, there were several developments affecting our
business:
o We received notifications that a major customer will reduce its
anticipated orders for the balance of 2004.
o In response to the reduced sales forecasts, we implemented a 7%
workforce reduction during June, which resulted in a severance charge
of $0.8 million during the quarter and the elimination of
approximately $8.0 million from our ongoing annual cost structure.
o Subsequent to the second quarter, we signed a long-term agreement with
a major diversified Cardiac Rhythm Management ("CRM") device
manufacturer to provide value-added sub assembly of most of their
implantable medical devices for CRM and other applications. It is
currently anticipated that sales will commence in the second quarter
of 2005.
o Construction on the new advanced battery manufacturing facility in
Alden, NY continued on schedule.
-15-
o Integration of the first quarter 2004 NDC acquisition is proceeding as
planned. The first Nano-Silver Vanadium Oxide ("SVO") cells were
successfully manufactured in June and are currently going through our
quality control testing processes.
o During the quarter we acquired certain patents that cover how
capacitors are used in an Impantable Cardioverter Defibrillator
("ICD"). Although we believe 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. We recorded a $2.0 million pre-tax charge associated with
these patents.
o We began construction on a new manufacturing facility in Tijuana,
Mexico. This facility will initially house our new value-added
assembly operations. We anticipate incurring approximately $3.0
million in start-up expenses in 2004 pertaining to the construction of
this facility.
o We signed a development contract for a new wet tantalum capacitor
customer during the quarter. This capacitor will provide a new
therapeutic approach to CRM.
-16-
RESULTS OF OPERATION AND FINANCIAL CONDITION
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, $ % JUNE 30, $ %
--------------------- -------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA 2004 2003 CHANGE CHANGE 2004 2003 CHANGE CHANGE
- -----------------------------------------------------------------------------------------------------------------------------------
IMC
ICD batteries $ 10,119 $ 11,278 $(1,159) -10% $ 19,539 $ 22,038 $(2,499) -11%
Pacemaker and other batteries 5,361 7,022 (1,661) -24% 11,050 13,442 (2,392) -18%
ICD Capacitors 6,239 7,849 (1,610) -21% 14,647 14,997 (350) -2%
Feedthroughs 12,261 12,108 153 1% 26,016 23,281 2,735 12%
Enclosures 5,142 6,310 (1,168) -19% 10,539 13,244 (2,705) -20%
Other 7,077 4,454 2,623 59% 12,686 10,048 2,638 26%
----------------------------------------------------------------------------------------------
Total IMC 46,199 49,021 (2,822) -6% 94,477 97,050 (2,573) -3%
EPS 6,743 6,781 (38) -1% 13,990 13,609 381 3%
----------------------------------------------------------------------------------------------
Total sales 52,942 55,802 (2,860) -5% 108,467 110,659 (2,192) -2%
Cost of sales 29,124 32,585 (3,461) -11% 61,474 64,629 (3,155) -5%
----------------------------------------------------------------------------------------------
Gross profit 23,818 23,217 601 3% 46,993 46,030 963 2%
Gross margin 45.0% 41.6% 43.3% 41.6%
Selling, general, and administrative
expenses (SG&A) 6,389 8,146 (1,757) -22% 13,314 15,837 (2,523) -16%
SG&A as a % of sales 12.1% 14.6% 12.3% 14.3%
Research, development and
engineering costs, net (RD&E) 5,688 4,635 1,053 23% 10,569 9,195 1,374 15%
RD&E as a % of sales 10.7% 8.3% 9.7% 8.3%
Intangible amortization 1,076 813 263 32% 1,851 1,628 223 14%
Other operating expense 2,957 77 2,880 3740% 3,178 147 3,031 2062%
----------------------------------------------------------------------------------------------
Operating income 7,708 9,546 (1,838) -19% 18,081 19,223 (1,142) -6%
Operating margin 14.6% 17.1% 16.7% 17.4%
Interest expense 1,144 867 277 32% 2,304 1,798 506 28%
Interest income (245) (122) (123) 101% (558) (131) (427) 326%
Early extinguishment of debt -- 1,603 (1,603) -100% -- 1,603 (1,603) -100%
Other expense (income), net (2) (30) 28 -93% -- (88) 88 -100%
Provision for income taxes 2,078 2,276 (198) -9% 4,983 5,052 (69) -1%
Effective tax rate 30.5% 31.5% 30.5% 31.5%
---------------------------------------------------------------------------------------------
Net income $ 4,733 $ 4,952 $ (219) -4% $ 11,352 $ 10,989 $ 363 3%
=============================================================================================
Net margin 8.9% 8.9% 10.5% 9.9%
Diluted earnings per share $ 0.22 $ 0.23 $ (0.01) -4% $ 0.53 $ 0.51 $ 0.02 4%
-17-
SALES
IMC. The IMC sales decline for the quarter was due to lower sales to one major
CRM customer. Sales increased to all of the remaining major CRM customers. An
overall volume decrease of 7% combined with a 2% price decrease were the drivers
for the sales decline for IMC in the second quarter, partially offset by a 3%
favorable product mix impact due to increased sales of feedthroughs and other
products including coated components. The sales volume decline was primarily in
the batteries and capacitors product lines.
The IMC sales decline year to date was also due to lower sales volumes to one
major CRM customer. Sales increased to the remaining major CRM customers. On a
year to date basis, we have experienced a 1% overall sales decrease due to lower
prices.
EPS. The slight sales decline for EPS was the result of product mix. For the
year to date, sales have increased due to higher demand for batteries. This
volume increase has been offset by a product mix that is favoring products with
lower selling prices per unit.
GROSS PROFIT
IMC gross margin for the second quarter and year to date increased due to
production improvements related to the implementation of Six Sigma and lean
manufacturing initiatives (including reductions in scrap levels), and a
favorable product mix.
The increase in EPS gross margin for the second quarter and year to date is
primarily due to cost reductions resulting from the consolidation of the EPS
plants that was completed in 2003.
SG&A EXPENSES
Expenses for the second quarter and on a year to date basis declined compared to
the prior year primarily due to lower incentive compensation accruals and the
elimination of certain general management positions resulting from an internal
reorganization from four business units to two.
RD&E EXPENSES
Expenses for the second quarter and year to date increased compared to last year
in absolute dollars, and as a percent of sales due to the inclusion of four
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 Advanced Research
Laboratory is fully integrated. The additional expense is estimated at between
$4.0 million and $5.0 million.
AMORTIZATION EXPENSE
Amortization expense for the second 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.
-18-
OTHER OPERATING EXPENSE
The increase for the second quarter and the year to date has two primary
components. First is the $2.0 million acquisition of certain patents that cover
how capacitors are used in an ICD. Although we believe the patents could have
been successfully challenged in court proceedings, we decided 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. Also during the second quarter as a response to the
reduced sales forecasts, we implemented a 7% workforce reduction, which resulted
in a severance charge of $0.8 million.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense for the second quarter and year-to-date 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 and year to date 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
Our effective tax rate declined primarily as a result of increased research and
development credits, as well as the benefits of federal and state tax planning
strategies.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of short-term liquidity is our working capital of $134.8
million at June 30, 2004 combined with our unused $20 million credit line with
our lending syndicate. At June 30, 2004 our current ratio was 7.6:1, an increase
from 7.4:1 at March 31, 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 strong.
The Company regularly engages in discussions relating to potential acquisitions
and may announce an acquisition transaction at any time.
At June 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 $82.0 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.
-19-
Capital spending of $15.0 million in the first six 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 $5.1 million
in the first quarter of 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 $32.0 million to $37.0
million.
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
At its meeting on July 1, 2004, the Emerging Issues Task Force (EITF) reached a
tentative 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 tentative consensus, EITF
Issue 04-8, The Effect of Contingently Convertible Debt on Diluted Earnings per
Share, would be effective for our reporting periods ending after December 15,
2004. The provisions of EITF Issue 04-8 would be applied on a retroactive basis
and would require restatement of prior period earnings per share. The consensus
is tentative to allow time for public comment, which ends on September 3, 2004.
We believe that the EITF as written could result in additional dilution to our
diluted earnings per share. Until a final consensus is reached, we cannot
estimate the effect that this change would have on our diluted earnings per
share.
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 six months ended June 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.
-20-
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 value-added 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 (in thousands)
is estimated to be $338 for the first year, $566 for the second year, with 3%
annual increases thereafter for years three through ten.
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.
-21-
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.
-22-
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Under our existing line of credit any borrowings bear interest at fluctuating
market rates. At June 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. During the second quarter ended June 30, 2004, we began
the implementation of the following ERP initiatives that are designed to
enhance our internal controls:
o The Oracle ERP system will (1) reduce the number of platforms used to
record, summarize and report the o results of operations and financial
position; (2) integrate various databases into consolidated files; and
(3) reduce the number of manual processes employed by the Company;
o The Company is designing and implementing new policies and procedures
related to general ledger, accounts payable, accounts receivable,
inventory and production, cash management and treasury, payroll and
sales
o order entry, including communicating them to our staff who are
undergoing training on these new policies and procedures; and
The Company is imposing mitigating and redundant controls where
changes to certain processes are underway o and not completed.
Such policies and procedures and redundant and mitigating controls, in
management's opinion, represent an improvement in our internal control
environment.
By the end of 2004, all facilities are expected to be operational on the
global ERP system. The Company is taking the necessary steps to monitor and
maintain the appropriate internal controls during this period of change.
-23-
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.
At the Company's Annual Meeting of stockholders held on May 25, 2004, the
stockholders approved the following:
(a) A proposal to elect eight directors of the Company to serve until the
next annual meeting of stockholders or until their successors are duly
elected and qualified, as follows:
Director Votes For Votes Withheld
-------- --------- --------------
Edward F. Voboril 17,954,252 850,533
Pamela G. Bailey 18,192,296 602,489
Joseph A. Miller 18,094,420 700,365
Bill R. Sanford 15,584,670 3,210,115
Peter H. Soderberg 16,908,582 1,886,203
Thomas S. Summer 16,809,170 1,985,615
William B. Summers 16,905,845 1,888,940
John P. Wareham 16,907,137 1,887,648
There were no broker non-votes.
ITEM 5. OTHER INFORMATION.
None.
-24-
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 April 29, 2004, the Company filed a Current Report on Form 8-K
containing information pursuant to Item 11 ("Temporary Suspension of
Trading Under Registrant's Employee Benefit Plans") to provide a notice
to Directors and Executive Officers of WGT regarding a blackout period
related to the Wilson Greatbatch Technologies, Inc. Equity Plus Plan -
401(k) Retirement Plan.
On May 6, 2004, the Company filed a Current Report on Form 8-K
containing information pursuant to Item 5 ("Other Events") in order to
provide additional information to Institutional Shareholder Services
regarding tax fees that WGT reported in its proxy statement for its
2004 Annual Meeting of Shareholders.
On May 11, 2004, the Company furnished a Current Report on Form 8-K
containing information pursuant to Item 12 ("Results of Operations and
Financial Condition") relating to the announcement of earnings for the
fiscal quarter ended April 2, 2004.
On May 14, 2004, the Company filed a Current Report on Form 8-K
containing information pursuant to Item 5 ("Other Events") relating to
the announcement of the Company's revision of previously forecasted
sales guidance for 2004.
-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: August 11, 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 Lease Agreement, dated April 22, 2004, by and between Wilson Greatbatch
Technologies, Inc. as tenant and ProLogis Tijuana Mexico Investment LLC, as
landlord, for space at the Tijuana Industrial Center II located in Tijuana,
Baja California, Mexico.
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.
-27-