U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended April 1, 2005
Commission File Number 1-16137
GREATBATCH, 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 May 6, 2005 was: 21,581,083 shares
EXPLANATORY NOTE
Greatbatch, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-Q/A
to amend its Form 10-Q for the three months ended March 31, 2005 as filed with
the Securities and Exchange Commission on May 11, 2005 (the "Original Filing")
to (i) revise Part I, Item 1, Item 2, and Item 4, and Part II, Item 6 to reflect
the restatement of its condensed consolidated balance sheet and condensed
consolidated statement of cash flows to correct the classification of auction
rate securities which were previously classified as cash and cash equivalents,
to restate its consolidated statements of cash flows for the impact of changes
in accounts payable related to the acquisition of property, plant and equipment,
and to account for a deferred tax asset related to net operating losses acquired
in the Company's acquisition of NanoGram Devices Corporation in 2004, and (ii)
present revised exhibits 31.1, 31.2 and 32.1.
Except for the amendments set forth in this Amendment No. 1, the Original Filing
is not being modified or amended in any way, and the disclosures contained in
the Original Filing are not being updated herein.
The Company officially changed its name to Greatbatch, Inc. from Wilson
Greatbatch Technologies, Inc. during the second quarter of 2005. For purposes of
the following sections of this Amendment No. 1, the Company will continue to be
referred to as Wilson Greatbatch Technologies, Inc.
WILSON GREATBATCH TECHNOLOGIES, INC.
TABLE OF CONTENTS FOR FORM 10-Q/A
QUARTER ENDED MARCH 31, 2005
Page
COVER PAGE 1
TABLE OF CONTENTS 3
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheet (As restated) 4
Condensed Consolidated Statement of Operations and Comprehensive Income 5
Condensed Consolidated Statement of Cash Flows (As restated) 6
Notes to Condensed Consolidated Financial Statements (As restated) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition and 20
Results of Operations
ITEM 4. Controls and Procedures 30
PART II - OTHER INFORMATION
ITEM 6. Exhibits 32
SIGNATURES 33
EXHIBIT INDEX 34
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET - Unaudited
(IN THOUSANDS)
----------------------------------------------------------------------------------------------------------------------
ASSETS March 31, December 31,
2005(1) (2004)(1)
Current assets:
Cash and cash equivalents $ 32,807 $ 34,795
Short-term investments 52,929 57,437
Accounts receivable, net 29,672 24,288
Inventories 32,277 34,027
Refundable income taxes 3,972 3,673
Deferred income taxes 3,622 3,622
Prepaid expenses and other current assets 5,987 4,637
---------- ----------
Total current assets 161,266 162,479
Property, plant, and equipment, net 97,791 92,210
Intangible assets, net 63,021 63,984
Goodwill 155,039 155,039
Other assets 4,317 4,493
---------- ----------
Total assets $ 481,434 $ 478,205
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 7,006 8,971
Accrued expenses and other current liabilities 14,840 18,109
Current portion of long-term debt 890 1,000
---------- ----------
Total current liabilities 22,736 28,080
Long-term debt, net of current portion 408 652
Convertible subordinated notes 170,000 170,000
Deferred income taxes 25,255 23,296
---------- ----------
Total liabilities 218,399 222,028
---------- ----------
Stockholders' equity:
Preferred stock - -
Common stock 21 21
Additional paid-in capital 214,791 212,131
Deferred stock-based compensation (693) (833)
Treasury stock, at cost - (95)
Retained earnings 48,974 44,971
Accumulated other comprehensive loss (58) (18)
---------- ----------
Total stockholders' equity 263,035 256,177
---------- ----------
Total liabilities and stockholders' equity $ 481,434 $ 478,205
========== ==========
(1) As restated, see Note (2.)
The accompanying notes are an integral part of these condensed
consolidated financial statements
- 4 -
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
AND COMPREHENSIVE INCOME - Unaudited
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
2005 2004
Sales $ 56,358 $ 55,525
Cost of sales 35,571 32,350
---------- ----------
Gross profit 20,787 23,175
Selling, general and administrative expenses 6,766 6,925
Research, development and engineering costs, net 4,401 4,881
Amortization of intangible assets 958 775
Other operating expense, net 2,388 221
---------- ----------
Operating income 6,274 10,373
Interest expense 1,131 1,160
Interest income (575) (313)
Other expense, net - 2
---------- ----------
Income before provision for income taxes 5,718 9,524
Provision for income taxes 1,715 2,905
---------- ----------
Net income $ 4,003 $ 6,619
========== ==========
Earnings per share:
Basic $ 0.19 $ 0.31
Diluted $ 0.19 $ 0.29
Weighted average shares outstanding:
Basic 21,473 21,281
Diluted 21,583 25,911
Comprehensive income:
Net income $ 4,003 $ 6,619
Net unrealized loss on available for sale securities, net of
$23 deferred income tax benefit in 2005 (40) -
---------- ----------
Comprehensive income $ 3,963 $ 6,619
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements
- 5 -
WILSON GREATBATCH TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS - Unaudited
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------------------------
Three months ended
March 31,
2005(1) (2004)(1)
Cash flows from operating activities:
Net income $ 4,003 $ 6,619
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,039 3,362
Stock-based compensation 795 881
Deferred income taxes 1,959 -
Loss on disposal of assets 512 221
Changes in operating assets and liabilities:
Accounts receivable (5,384) (3,765)
Inventories 1,750 (2,781)
Prepaid expenses and other current assets (1,830) 210
Accounts payable (1,268) 1,593
Accrued expenses and other current liabilities (1,345) (3,837)
Income taxes (297) 332
---------- ----------
Net cash provided by operating activities 2,934 2,835
---------- ----------
Cash flows from investing activities:
Short-term investments
Purchases (22,092) (36,302)
Proceeds from dispositions 26,600 77,930
Acquisition of property, plant and equipment (9,220) (6,875)
Proceeds from sale of assets 23 9
Decrease (increase) in other assets 6 (68)
Acquisition of subsidiary, net - (45,445)
---------- ----------
Net cash used in investing activities (4,683) (10,751)
---------- ----------
Cash flows from financing activities:
Principal payments of long-term debt (354) (286)
Issuance of common stock 115 508
Issuance of treasury stock - 179
---------- ----------
Net cash (used in) provided by financing activities (239) 401
---------- ----------
Net decrease in cash and cash equivalents (1,988) (7,515)
Cash and cash equivalents, beginning of year 34,795 23,960
---------- ----------
Cash and cash equivalents, end of period $ 32,807 $ 16,445
========== ==========
(1) As restated, see Note (2.)
The accompanying notes are an integral part of these condensed
consolidated financial statements
- 6 -
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 accounting principles generally accepted
in the United States of America for interim financial information (APB 28,
Interim Financial Reporting) 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 accounting
principles generally accepted in the United States of America. 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 accounting
principles generally accepted in the United States of America 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/A for the year ended December
31, 2004.
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 first quarter of 2005 and 2004 each
contained 13 weeks.
2. RESTATEMENTS
Subsequent to the original filing of the Company's Form 10-Q for the three
months ended March 31, 2005, the Company concluded that its condensed
consolidated financial statements should be restated to change the
classification of auction rate securities from cash and cash equivalents to
short-term investments. Auction rate securities are securities that have
stated maturities beyond three months, but are priced and traded as
short-term investments due to the liquidity provided through the auction
mechanism that generally resets interest rates every 7 to 35 days. Although
management had determined the risk of failure of an auction process to be
remote, the definition of a cash equivalent in Statement of Financial
Accounting Standards (SFAS) No. 95, Statement of Cash Flows, requires
reclassification to short-term investments. The condensed consolidated
balance sheets as of March 31, 2005 and December 31, 2004, and condensed
consolidated statements of cash flows for the three months ended March 31,
2005 and 2004, have been restated in order to conform to this change in
- 7 -
classification. Due to the short-term nature of the interest rate resets,
the fair market value of the auction rate securities approximates their
recorded value.
The Company has also restated its condensed consolidated statement of cash
flows for the periods ended March 31, 2005 and 2004 to reflect the impact
of changes in accounts payable related to the acquisition of property,
plant and equipment as a non-cash activity as required under SFAS No. 95.
In addition, the Company determined that it had not accounted for a
deferred tax asset related to net operating losses acquired in the
Company's acquisition of NanoGram in 2004. The recording of this deferred
tax asset decreased long-term deferred income tax liabilities and
correspondingly decreased goodwill.
The restatements have been made to the Condensed Consolidated Balance Sheet
and Condensed Consolidated Statement of Cash Flows as follows:
Condensed Consolidated Balance Sheet as of
------------------------------------------
March 31, 2005
--------------
As previously
-------------
reported Adjustment As restated
-------- ---------- -----------
Current assets:
Cash and cash equivalents $ 78,860 $(46,053) $ 32,807
Short-term investments $ 6,876 $ 46,053 $ 52,929
Goodwill $ 156,772 $ (1,733) $ 155,039
Total assets $ 483,167 $ (1,733) $ 481,434
Long term liabilities
Deferred income taxes $ 26,988 $ (1,733) $ 25,255
Total liabilities $ 220,132 $ (1,733) $ 218,399
Total liabilities and stockholders' equity $ 483,167 $ (1,733) $ 481,434
Condensed Consolidated Balance Sheet as of
------------------------------------------
December 31, 2004
-----------------
As previously
-------------
reported Adjustment As restated
-------- ---------- -----------
Current assets:
Cash and cash equivalents $ 89,473 $(54,678) $ 34,795
Short-term investments $ 2,759 $ 54,678 $ 57,437
Goodwill $ 156,772 $ (1,733) $ 155,039
Total assets $ 479,938 $ (1,733) $ 478,205
Long term liabilities
Deferred income taxes $ 25,029 $ (1,733) $ 23,296
Total liabilities $ 223,761 $ (1,733) $ 222,028
Total liabilities and stockholders' equity $ 479,938 $ (1,733) $ 478,205
- 8 -
Condensed Consolidated Statement of Cash Flows for the three months ended
-------------------------------------------------------------------------
March 31, 2005
--------------
As previously
-------------
reported Adjustment As restated
-------- ---------- -----------
Cash flows from operating activities:
Net cash provided by operating activities $ 2,237 $ 697 $ 2,934
Cash flows from investing activities:
Net cash used in investing activities $ (12,611) $ 7,928 $ (4,683)
Net decrease in cash and cash equivalents $ (10,613) $ 8,625 $ (1,988)
Cash and cash equivalents, beginning of year $ 89,473 $ (54,678) $ 34,795
Cash and cash equivalents, end of period $ 78,860 $ (46,053) $ 32,807
Condensed Consolidated Statement of Cash Flows for the three months ended
-------------------------------------------------------------------------
March 31, 2004
--------------
As previously
-------------
reported Adjustment As restated
-------- ---------- -----------
Cash flows from operating activities:
Net cash provided by operating activities $ 2,575 $ 260 $ 2,835
Cash flows from investing activities:
Net cash used in investing activities $ (48,209) $ 37,458 $(10,751)
Net decrease in cash and cash equivalents $ (45,233) $ 37,718 $ (7,515)
Cash and cash equivalents, beginning of year $ 119,486 $ (95,526) $ 23,960
Cash and cash equivalents, end of period $ 74,253 $ (57,808) $ 16,445
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 SFAS No. 123,
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.
- 9 -
These pro forma calculations assume the common stock is freely tradable for
all periods presented and, as such, the impact is not necessarily
indicative of the effects on reported net income of future years.
Three months ended
March 31,
2005 2004
Risk-free interest rate 4.13% 3.07%
Expected volatility 52% 50%
Expected life (in years) 5 5
Expected dividend yield 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
March 31,
2005 2004
Net income as reported $ 4,003 $ 6,619
Stock-based employee compensation cost
included in net income as reported, net
of related tax effects $ 557 $ 612
Stock-based employee compensation cost
determined using the fair value based
method, net of related tax effects $ 1,042 $ 1,154
Pro forma net income $ 3,518 $ 6,077
Earnings per share:
Basic - as reported $ 0.19 $ 0.31
Basic - pro forma $ 0.17 $ 0.29
Diluted - as reported $ 0.19 $ 0.29
Diluted - pro forma $ 0.17 $ 0.27
4. SUPPLEMENTAL CASH FLOW INFORMATION (in thousands):
Three months ended
March 31,
2005 2004
Noncash investing and financing activities:
Common stock contributed to 401(k) Plan $ 2,729 $ 2,723
Property, plant and equipment purchases
included in accounts payable $ 1,533 $ 264
- 10 -
5. SHORT-TERM INVESTMENTS
Short-term investments at March 31, 2005 and December 31, 2004 consisted of
the following (in thousands):
As of March 31, 2005
Gross Gross
unrealized unrealized Estimated fair
Cost gains losses value
Available-for-sale:
Equity Securities $ 276 $ - $ (81) $ 195
Auction Rate Securities 46,053 - - 46,053
------------- ------------- ------------- -------------
Total available for sale securities 46,329 - (81) 46,248
Held-to-maturity:
Municipal Bonds(1) 6,681 - (13) 6,668
------------- ------------- ------------- -------------
Short-term investments $ 53,010 $ - $ (94) $ 52,916
============= ============= ============= =============
(1) The municipal bonds have maturity dates ranging from April 2005 to September 2005.
As of December 31, 2004
Gross Gross
unrealized unrealized Estimated fair
Cost gains losses value
Available-for-sale:
Equity Securities $ 276 $ - $ (18) $ 258
Auction Rate Securities 54,678 - - 54,678
------------- ------------- ------------- -------------
Total available for sale securities 54,954 - (18) 54,936
Held-to-maturity:
Municipal Bonds 2,501 1 - 2,502
------------- ------------- ------------- -------------
Short-term investments $ 57,455 $ 1 $ (18) $ 57,438
============= ============= ============= =============
- 11 -
6. INVENTORIES
Inventories comprised the following (in thousands):
March 31, December 31,
2005 2004
Raw materials $ 14,441 $ 14,053
Work-in-process 10,609 11,275
Finished goods 7,227 8,699
------------- -------------
Total $ 32,277 $ 34,027
============= =============
7. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
As of March 31, 2005
Gross carrying Accumulated Net carrying
amount amortization Amount
Amortizing intangible assets:
Patented technology $ 21,462 $ (10,537) $ 10,925
Unpatented technology 30,886 (7,082) 23,804
Other 1,340 (1,300) 40
------------- ------------- -------------
53,688 (18,919) 34,769
Non-amortizing intangible assets:
Trademark and names 31,420 (3,168) 28,252
------------- ------------- -------------
Total intangible assets $ 85,108 $ (22,087) $ 63,021
============= ============= =============
As of December 31, 2004
Gross carrying Accumulated Net carrying
amount amortization Amount
Amortizing intangible assets:
Patented technology $ 21,462 $ (10,137) $ 11,325
Unpatented technology 30,886 (6,525) 24,361
Other 1,340 (1,294) 46
------------- ------------- -------------
53,688 (17,956) 35,732
Non-amortizing intangible assets:
Trademark and names 31,420 (3,168) 28,252
------------- ------------- -------------
Total intangible assets $ 85,108 $ (21,124) $ 63,984
============= ============= =============
Aggregate amortization expense for first quarter 2005 and 2004 was $1.0
million and $0.8 million, respectively. Annual amortization expense is
estimated to be $2.9 million for the remainder of 2005, $3.8 million for
2006 to 2008, $3.2 million for 2009, and $2.7 million for 2010.
- 12 -
8. DEBT
Long-term debt comprised the following (in thousands):
March 31, December 31,
2005 2004
2.25% convertible subordinated notes, due 2013 $ 170,000 $ 170,000
Capital lease obligations 1,298 1,652
------------- -------------
171,298 171,652
Less current portion (890) (1,000)
------------- -------------
Total long-term debt $ 170,408 $ 170,652
============= =============
Revolving Line of Credit
As of March 31, 2005, the Company had no balance outstanding on its
existing $20.0 million committed revolving line of credit. As of March 31,
2005 the Company was not in compliance with one of the financial covenants
in the credit agreement. The Company and its lending syndicate are in the
process of amending the agreement and the Company expects to have an
amended agreement in place before May 31, 2005. The Company expects the
amended agreement will include a larger credit line and revised financial
covenants.
- 13 -
9. 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
March 31,
2005 2004
--------------- ---------------
Numerator for basic earnings per share:
Income from continuing operations $ 4,003 $ 6,619
Effect of dilutive securities:
Interest expense on convertible notes and related
deferred financing fees, net of tax - 768
--------------- ---------------
Numerator for diluted earnings per share $ 4,003 $ 7,387
=============== ===============
Denominator for basic earnings per share:
Weighted average shares outstanding 21,473 21,281
Effect of dilutive securities:
Convertible notes - 4,219
Stock options and unvested restricted stock 110 411
--------------- ---------------
Dilutive potential common shares 110 4,630
--------------- ---------------
Denominator for diluted earnings per share 21,583 25,911
=============== ===============
Basic earnings per share $ 0.19 $ 0.31
=============== ===============
Diluted earnings per share $ 0.19 $ 0.29
=============== ===============
10. COMPREHENSIVE INCOME
For first quarter 2004, the Company's only component of comprehensive
income is its net income. For first quarter 2005, the Company's
comprehensive income includes net income and an unrealized loss on
available-for-sale securities.
11. COMMITMENTS AND CONTINGENCIES
Litigation - During 2002, a former non-medical customer commenced an action
alleging that the Company had used proprietary information of the customer
to develop certain products. We have meritorious defenses and are
vigorously defending the case. No accrual for an adverse judgment has been
made as such outcome is not deemed probable, the potential risk of loss is
between $0.0 and $1.75 million.
On May 2, 2005, a complaint was filed against the Company by a developer of
an implantable drug delivery device in the United States Federal District
Court for the Central District of California. The complaint was legally
served on the Company on May 6, 2005. In its complaint, the plaintiff
alleges that the Company has breached a 2002 supply agreement providing for
the Company to supply the customer with pumps for drug delivery devices
- 14 -
that it is developing. Plaintiff seeks significant compensatory and
punitive damages, together with certain declatory and injunctive relief.
While the Company has not completed its investigation, it believes that it
has meritorious defenses and intends to vigorously defend this action.
Product Warranties - The change in aggregate product warranty liability for
the quarter ended March 31, 2005, is as follows (in thousands):
Beginning balance $ 926
Additions to warranty reserve 25
Warranty claims paid (3)
---------
Ending balance $ 948
=========
Capital Expenditures - During 2004, the Company commenced the build out of
its medical battery and capacitor manufacturing facility in Alden, NY and
its value-add manufacturing facility in Tijuana, Mexico. These facilities
will enable the Company to further consolidate its operations and implement
state of the art manufacturing capabilities at both locations. The total
contractual obligation for construction of these facilities at March 31,
2005 is $6.0 million and will be financed by existing or internally
generated cash.
12. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: Implantable
Medical Components ("IMC") and Electrochem Commercial Power ("ECP"),
(formerly "Electrochem Power Solutions"). The IMC segment designs and
manufactures critical components used in implantable medical devices. The
principal components are batteries, capacitors, filtered feedthroughs,
coated components, enclosures and machined and molded precision components.
The principal medical devices are pacemakers, defibrillators and
neurostimulators. The ECP segment designs and manufactures high performance
cells and battery packs; principal markets for these products are for oil
and gas exploration, oceanographic equipment, and aerospace.
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.
- 15 -
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
March 31,
Sales: 2005 2004
IMC
ICD batteries $ 10,751 $ 9,420
Pacemaker and other batteries 5,255 5,694
ICD Capacitors 4,297 8,408
Feedthroughs 13,682 13,727
Enclosures 6,547 5,397
Other 7,333 5,632
--------------- ---------------
Total IMC 47,865 48,278
ECP 8,493 7,247
--------------- ---------------
Total sales $ 56,358 $ 55,525
=============== ===============
Segment income from operations:
IMC $ 7,877 $ 10,822
ECP 1,880 2,295
--------------- ---------------
Total segment income from operations 9,757 13,117
Unallocated operating expenses (3,483) (2,744)
--------------- ---------------
Operating income as reported 6,274 10,373
Unallocated other income and expense (556) (849)
--------------- ---------------
Income before income taxes as reported $ 5,718 $ 9,524
=============== ===============
The carrying amount of goodwill at December 31, 2004 and March 31, 2005 is
as follows:
IMC ECP Total
$ 152,473 $ 2,566 $ 155,039
=========== =========== ===========
- 16 -
13. OTHER OPERATING EXPENSE
During first quarter 2005, the following non-recurring charges were
recorded in other operating expense in the Company's Condensed Consolidated
Statement of Operations.
Severance charges. The Company implemented a 4% workforce reduction as a
continuation of cost containment efforts initiated mid-year 2004, which
resulted in a severance charge of $1.5 million during the quarter.
Accrued liabilities at March 31, 2005 related to the severance charges
comprised the following (in thousands):
IMC ECP Corporate Total
Severance charges $ 860 $ 210 $ 430 $ 1,500
Cash payments (464) (73) (296) (833)
-------- -------- -------- --------
Balance, March 31, 2005 $ 396 $ 137 $ 134 $ 667
======== ======== ======== ========
The severance charges related to corporate employees are included in
unallocated operating expenses. It is expected that the remaining accrued
severance as of March 31, 2005, will be paid within the next six months.
Alden Facility Consolidation - On February 23, 2005, the Company announced
its intent to consolidate the medical capacitor manufacturing operations,
currently in Cheektowaga, NY, and the implantable medical battery
manufacturing operations, currently in Clarence, NY, into the advanced
power source manufacturing facility in Alden, NY ("Alden Facility"). The
Company is also consolidating the capacitor research, development and
engineering operations from the Cheektowaga, NY, facility into the existing
implantable medical battery research, development, and engineering
operations in Clarence, NY.
The total cost estimated for these consolidation efforts is anticipated to
be between $3.5 and $4.0 million. The Company expects to incur this
additional expense over the next three fiscal quarters. The expenses for
the Alden Facility consolidation are included in the IMC business segment.
The major categories of costs to be incurred, which will primarily be cash
expenditures, include the following:
o Production inefficiencies and revalidation - $1.5 to $1.7 million;
o Training - $0.6 to $0.7 million;
o Moving and facility closures - $0.9 million to $1.0 million; and
o Infrastructure - $0.5 to $0.6 million.
Alden Facility consolidation infrastructure expenses of $0.03 million were
incurred and paid during the quarter.
Carson City Facility shutdown and Tijuana Facility consolidation - On March
7, 2005, the Company announced its intent to close the Carson City, NV
facility ("Carson City Facility") and consolidate the work performed at the
Carson City Facility into the Tijuana, Mexico facility ("Tijuana
Facility").
- 17 -
The total estimated cost for this facility consolidation plan is
anticipated to be between $4.5 million and $5.4 million. The Company
expects to incur this additional cost over the next four fiscal quarters.
The major categories of costs to be incurred include the following:
o Costs related to the shutdown of the Carson City Facility:
a. Severance and retention - $1.4 to $1.6 million;
b. Accelerated depreciation - $0.5 to $0.6 million; and
c. Other - $0.6 to $0.7 million.
o Costs related to the Tijuana Facility consolidation:
a. Production inefficiencies and revalidation - $0.4 to $0.5
million;
b. Relocation and moving - $0.3 to $0.5 million;
c. Personnel (including travel, training and duplicate wages) - $1.0
to $1.1 million; and
d. Other - $0.3 to $0.4 million.
All categories of costs are considered to be future cash expenditures,
except accelerated depreciation. The expenses for the Carson City facility
shutdown and the Tijuana facility consolidation are included in the IMC
business segment.
Accrued liabilities at March 31, 2005 related to the Carson City facility
shutdown comprised the following (in thousands):
Severance and Accelerated
retention Depreciation Other Total
Restructuring charges $ 145 $ 50 $ - $ 195
Write-offs - (50) - (50)
------------- ------------- ------------- -------------
Balance, March 31, 2005 $ 145 $ - $ - $ 145
============= ============= ============= =============
As of the end of the first quarter of 2005, no expenses have been recorded
related to the Tijuana facility consolidation other than the cost related
to the Carson City shutdown described above.
14. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"). SFAS No. 151
amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense,
handling costs and wasted material (spoilage). Among other provisions, the
new rule requires that such items be recognized as current-period charges,
regardless of whether they meet the criterion of "so abnormal" as stated in
ARB No. 43. SFAS No. 151 is effective for fiscal years beginning after June
15, 2005. The company does not expect that adoption of SFAS No. 151 will
have a material effect on its consolidated financial position, consolidated
results of operations, or liquidity.
- 18 -
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123(R)"). This statement is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This standard requires the
Company to measure the cost of employee services received in exchange for
equity awards based on the grant date fair value of the awards. The cost
will be recognized as compensation expense over the vesting period of the
awards.
The Company anticipates adopting the provisions of SFAS No. 123(R) on
January 1, 2006 using the modified prospective application. Accordingly,
compensation expense will be recognized for all newly granted awards and
awards modified, repurchased, or cancelled after January 1, 2006.
Compensation cost for the unvested portion of awards that are outstanding
as of January 1, 2006 will be recognized ratably over the remaining vesting
period. The compensation cost for the unvested portion of awards will be
based on the fair value at date of grant as calculated for the Company's
pro forma disclosure under SFAS 123.
The Company estimates that the effect on net income and earnings per share
in the periods following adoption of SFAS 123(R) will be consistent with
the Company's pro forma disclosure under SFAS No. 123, except that
estimated forfeitures will be considered in the calculation of compensation
expense under SFAS 123(R). Additionally, the actual effect on net income
and earnings per share will vary depending upon the number of options
granted in subsequent periods compared to prior years.
- 19 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The condensed consolidated financial statements in Item 1 have been restated as
described in Note 2. -Restatements and the following discussion, analysis and
financial information herein have been revised to reflect the effects of the
restatements.
Introduction
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("IMDs") through our Implantable Medical Components ("IMC") business. We
offer technologically advanced, highly reliable and long lasting products for
IMDs and enable our customers to introduce IMDs that are progressively smaller,
longer lasting, more efficient and more functional. We also leverage our core
competencies in technology and manufacturing through our Electrochem Commercial
Power ("ECP") business (formerly "Electrochem Power Solutions") to develop and
produce cells and battery packs for commercial applications that demand high
performance and reliability, including oil and gas exploration, oceanographic
equipment and aerospace.
Most of the IMC 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.
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
first quarter of 2005 and 2004 each contained 13 weeks.
The commentary that follows should be read in conjunction with our condensed
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/A for the fiscal year ended December 31, 2004.
Overview
During and subsequent to the first quarter 2005, there were several developments
affecting our business:
o We recorded record sales results of $56.4 million in the quarter, led
by strong sales of ICD batteries, enclosures, coated components and
commercial power sources.
o We shipped the first assembly products from our facility in Tijuana,
Mexico. Remaining construction phases of the Tijuana facility are
proceeding as planned.
- 20 -
o We completed the construction of the medical battery portion of our
new advanced battery plant in Alden, NY. We began moving the
manufacturing equipment from the existing medical battery plant and
expect to complete the move by mid-2005. The construction related to
our capacitor manufacturing capabilities is underway and we expect to
complete construction by mid-2005. We anticipate that the move will be
completed by the third quarter of 2005.
o We signed a modification to an agreement with a major customer that
includes securing a significant increase in contractual minimum
quantities of wet tantalum capacitors as well as an extension of the
agreement through the first quarter of 2006.
Product Development
As mentioned in our annual report (which is available on our website,
www.greatbatch.com), our near term focus for growth in the medical battery
market is the introduction of our Q-Series batteries. Initially they will be
available in two configurations - QHR (High Rate) and QMR (Medium Rate). These
batteries hold the promise of unparalleled performance in a wide range of
implantable device and neurostimulation applications and allow our customers to
incorporate advanced power-hungry features into these devices. While companies
typically announce new products that have modest improvements in form and/or
function regularly, we believe the Q-Series firmly establishes a new industry
standard. It delivers advanced performance criteria to an industry that
historically embraces new products. We believe the Q-Series will represent a
major breakthrough by combining a smaller size with greater energy density (more
power).
Based on our limited test results to date, batteries incorporating
nanotechnology may demonstrate the potential for generating even further
improvements. While nanotechnology is showing some limited benefits in current
battery designs, we do not anticipate realizing its full potential until it can
be tested in the Q-Series design. As the word implies, "nano" unlocks the
promise of smaller size and offers potential for enhanced product performance
and manufacturability. Additionally, nano applications are not limited to
batteries. The same technology may well be the enabling force behind other new
products now in development such as significantly smaller higher voltage
capacitors, novel form batteries and capacitors that will be used in new, far
less intrusive cardiac therapy applications that represent an entirely new
approach to CRM treatment.
Non-recurring charges
During first quarter 2005, we recorded non-recurring charges in other operating
expense related to our ongoing cost savings and consolidation efforts.
Severance charges. The Company implemented a 4% workforce reduction, which
resulted in a severance charge of $1.5 million during the quarter. Of this
amount, $0.8 million was paid in cash during the quarter. The remaining balance
is anticipated to be paid in cash within the next six months.
- 21 -
Alden Facility Consolidation. On February 23, 2005, we announced our intent to
consolidate the medical capacitor manufacturing operations, currently in
Cheektowaga, NY, and the implantable medical battery manufacturing operations,
currently in Clarence, NY, into the advanced power source manufacturing facility
in Alden, NY ("Alden Facility"). We are also consolidating the capacitor
research, development and engineering operations from the Cheektowaga, NY,
facility into the existing implantable medical battery research, development,
and engineering operations in Clarence, NY.
The total cost estimated for these consolidation efforts is anticipated to be
between $3.5 and $4.0 million. Infrastructure expenses of $0.03 million were
incurred and paid in cash during the quarter. We expect to incur the remaining
expense over the next three fiscal quarters.
Carson City Facility shutdown and Tijuana Facility consolidation. On March 7,
2005, we announced our intent to close the Carson City, NV facility ("Carson
City Facility") and consolidate the work performed at the Carson City Facility
into the Tijuana, Mexico facility ("Tijuana Facility").
The total estimated cost for this facility consolidation plan is anticipated to
be between $4.5 million and $5.4 million, comprised of between $2.5 million to
$2.9 million for the Carson City Facility shutdown and $2.0 to $2.5 million for
the Tijuana Facility consolidation. We expect to incur these additional costs
over the next four fiscal quarters. All categories of costs are considered to be
future cash expenditures, except accelerated depreciation.
Carson City Facility shutdown expenses of $0.2 million were recorded during the
quarter, $0.15 million for severance and retention and $0.05 million for
accelerated depreciation. None of the severance and retention amounts were paid
by the end of the first quarter.
- 22 -
Results of Operation and Financial Condition
Three months
ended March 31, $ %
In thousands, except per share data 2005 2004 Change Change
------------------------------------------------------------------------------------------------------------------------
IMC
ICD batteries $ 10,751 $ 9,420 1,331 14%
Pacemaker and other batteries 5,255 5,694 (439) -8%
ICD Capacitors 4,297 8,408 (4,111) -49%
Feedthroughs 13,682 13,727 (45) 0%
Enclosures 6,547 5,397 1,150 21%
Other 7,333 5,632 1,701 30%
------------------------------------------------------------
Total IMC 47,865 48,278 (413) -1%
ECP 8,493 7,247 1,246 17%
------------------------------------------------------------
Total sales 56,358 55,525 833 2%
Cost of sales 35,571 32,350 3,221 10%
------------------------------------------------------------
Gross profit 20,787 23,175 (2,388) -10%
Gross margin 36.9% 41.7% -4.8%
Selling, general, and administrative expenses (SG&A) 6,766 6,925 (159) -2%
SG&A as a % of sales 12.0% 12.5% -0.5%
Research, development and engineering costs, net (RD&E) 4,401 4,881 (480) -10%
RD&E as a % of sales 7.8% 8.8% -1.0%
Intangible amortization 958 775 183 24%
Other operating expense, net 2,388 221 2,167 981%
------------------------------------------------------------
Operating income 6,274 10,373 (4,099) -40%
Operating margin 11.1% 18.7% 7.6%
Interest expense 1,131 1,160 (29) -3%
Interest income (575) (313) (262) 84%
Other expense (income), net - 2 (2) -100%
Provision for income taxes 1,715 2,905 (1,190) -41%
Effective tax rate 30.0% 30.5% -0.5%
------------------------------------------------------------
Net income $ 4,003 $ 6,619 $ (2,616) -40%
============================================================
Net margin 7.1% 11.9% -4.8%
Diluted earnings per share $ 0.19 $ 0.29 $ (0.10) -34%
- 23 -
Sales
IMC. The nature and extent of our selling relationship with each CRM customer is
different in terms of component products purchased, selling prices, product
volumes, ordering patterns and inventory management. We have pricing
arrangements with our customers that many times do not specify minimum order
quantities. Our visibility to customer ordering patterns is over a relatively
short period of time. Our customers may have inventory management programs and
alternate supply arrangements of which we are unaware. Additionally, the
relative market share among the CRM device manufacturers changes periodically.
Consequently, these and other factors can significantly impact our sales in any
given period.
The 1% decrease in IMC sales was primarily due to lower demand by a major
customer for wet tantalum capacitors combined with an average 1% reduction in
selling prices. The decrease in volume of capacitors was partially offset by
increased volume of other IMC products, primarily coated components, ICD
batteries and enclosures. Sales of a minor amount of assembly products
manufactured in our Tijuana Facility commenced during the quarter.
ECP. Similar to IMC customers, we have pricing arrangements with our customers
that many times do not specify minimum quantities. Our visibility to customer
ordering patterns is over a relatively short period of time. The 17% increase in
ECP sales is due to volume, resulting from increased demand for power sources
used in pipeline inspections. This demand can be attributed in part to increased
legislation in the oil and gas industry, resulting in the requirement of more
frequent inspections.
Gross profit
The 480 basis point decrease in gross margin was primarily due to the following
factors:
a. Increased period costs resulting from excess capacity at our Tijuana
assembly plant: 150 basis points;
b. Increased period costs resulting from excess capacity at our wet
tantalum capacitor manufacturing plant: 120 basis points;
c. Lower IMC selling prices: 100 basis points;
d. Various other individually immaterial items: 110 basis points.
SG&A expenses
Expenses decreased as a result of cost savings initiatives instituted mid-year
2004 and January 2005 including workforce reductions and consolidation efforts.
RD&E expenses
Expenses decreased as a result of cost reduction measures in our engineering
functions of $0.2 million, workforce reductions related to our cost savings
initiatives, and increased engineering income of $0.2 million from new product
development projects.
- 24 -
Amortization expense
The increase primarily reflects the impact of the additional intangible
amortization resulting from the NanoGram acquisition. The amortization of the
NanoGram intangibles amounts to approximately $0.4 million in the first quarter
of 2005.
Other operating expense
The increase is comprised of the following:
a. $1.5 million related to severance cost from a 4% reduction in
workforce;
b. $0.5 million related to asset writedowns;
c. $0.2 million related to cost associated with the shutdown of the
Carson City facility;
d. $0.2 million related to costs associated with the start-up of the
Tijuana facility.
Refer to non-recurring charges discussion for disclosure related to the timing
and level of remaining expenditures for items a, c, and d.
Interest expense and interest income
Interest expense was consistent from the prior year.
Interest income increased due to the movement of investments in mid-2004 from
tax deferred to taxable securities, which bear higher rates of return.
Provision for income taxes
The effective tax rate declined due to various state tax planning initiatives
realized in mid-2004. We anticipate the full year effective tax rate will not
exceed 30.0%.
Our effective tax rate is below the United States statutory rate primarily as a
result of federal and state tax credits and the allowable Extraterritorial
Income Exclusion ("ETI") for 2005.
Liquidity and Capital Resources
Revolving Line of Credit
As of March 31, 2005, we had no balance outstanding on our existing $20.0
million committed revolving line of credit. As of March 31, 2005 we were not in
compliance with one of the financial covenants in the credit agreement. We are
in the process of amending the agreement with our lending syndicate and we
expect to have an amended agreement in place before May 31, 2005. We expect that
the amended agreement will include a larger credit line and revised financial
covenants.
- 25 -
Our principal sources of liquidity are our operating cash flow combined with our
working capital of $138.5 million at March 31, 2005 and our unused 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. At March 31, 2005, our current ratio was 7.0:1.
The Company regularly engages in discussions relating to potential acquisitions
and may announce an acquisition transaction at any time.
Operating activities
Positive cash flows from operating activities were achieved in both periods
presented. During the current period, increased accounts receivable utilized
approximately $5.0 million dollars of the cash provided from operating
activities.
Investing activities
The majority of the current year increase in capital spending was for the
following:
a. New medical power manufacturing plant in Alden, NY - $3.0 million; and
b. New assembly plant in Tijuana, Mexico - $4.0 million.
In March 2004, we purchased NanoGram for approximately $45.7 million. The most
significant elements of the purchase price allocation were to patented and
unpatented technology and goodwill. The cost is being amortized over the
remaining estimated useful life of 11.5 years. The residual amount of the
allocation of $33.4 million went to goodwill, which is not amortized but rather
subject to periodic testing for impairment. NanoGram is now referred to as our
Advanced Research Laboratory. Since the primary function of this operation is
research and development, all costs are appropriately classified in that
category.
Approximately $4.5 million of short-term investments were sold during the
quarter, net of purchases.
Financing activities
Payments on capital lease obligations and non-qualified stock option exercises
are the primary financing activities for both periods presented.
Capital Structure
At March 31, 2005, our capital structure consisted primarily of $170.0 million
of convertible subordinated notes and our 21.6 million shares of common stock
outstanding. We have in excess of $86.0 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
- 26 -
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.
Our capital structure allows us to support our internal growth and provides
liquidity for corporate development initiatives. The current expectation for
2005 is that capital spending is expected to be in the range of $30.0 million to
$35.0 million, primarily due to the build-out of the Alden Facility ($11.0
million), the Tijuana Facility ($10.0 million), and normal maintenance capital
expenditures.
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
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4 ("SFAS 151"). SFAS No. 151 amends the guidance in ARB No.
43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, handling costs and wasted material (spoilage).
Among other provisions, the new rule requires that such items be recognized as
current-period charges, regardless of whether they meet the criterion of "so
abnormal" as stated in ARB No. 43. SFAS 151 is effective for fiscal years
beginning after June 15, 2005. We do not expect that adoption of SFAS 151 will
have a material effect on our consolidated financial position, consolidated
results of operations, or liquidity.
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment ("SFAS 123(R)"). This statement is a revision of SFAS 123,
Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This standard requires us to measure
the cost of employee services received in exchange for equity awards based on
the grant date fair value of the awards. The cost will be recognized as
compensation expense over the vesting period of the awards.
We will adopt the provisions of SFAS 123(R) on January 1, 2006 using the
modified prospective application. Accordingly, we will recognize compensation
expense for all newly granted awards and awards modified, repurchased, or
cancelled after January 1, 2006. Compensation cost for the unvested portion of
awards that are outstanding as of January 1, 2006 will be recognized ratably
over the remaining vesting period. The compensation cost for the unvested
portion of awards will be based on the fair value at date of grant as calculated
for our pro forma disclosure under SFAS No. 123.
- 27 -
We estimate that the effect on net income and earnings per share in the periods
following adoption of SFAS 123(R) will be consistent with our pro forma
disclosure under SFAS No. 123, except that estimated forfeitures will be
considered in the calculation of compensation expense under SFAS 123(R).
Additionally, the actual effect on net income and earnings per share will vary
depending upon the number of options granted in subsequent periods compared to
prior years.
Application of Critical Accounting Estimates
Our unaudited condensed 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 three months ended March 31, 2005, we did not change or adopt new
accounting policies that had a material effect on our consolidated financial
condition and results of operations.
Contractual Obligations
During 2004, we commenced the build out of our Alden Facility and our Tijuana
Facility. These facilities will enable the Company to further consolidate its
operations and implement state of the art manufacturing capabilities at both
locations. The contractual obligations for construction of these facilities is
$6.0 million and will be financed by existing, or internally generated cash.
Litigation
During 2002, a former non-medical customer commenced an action alleging that we
used proprietary information of the customer to develop certain products. We
have meritorious defenses and are vigorously defending the case. No accrual for
an adverse judgment has been made as such outcome is not deemed probable, the
potential risk of loss is between $0.0 and $1.75 million.
On May 2, 2005, a complaint was filed against us by a developer of an
implantable drug delivery device in the United States Federal District Court for
the Central District of California. The complaint was legally served on us on
May 6, 2005. In its complaint, the plaintiff alleges that we have breached a
2002 supply agreement providing for us to supply the customer with pumps for
drug delivery devices that it is developing. Plaintiff seeks significant
compensatory and punitive damages, together with certain declatory and
injunctive relief. While we have not completed our investigation, we believe we
have meritorious defenses and intend to vigorously defend this action.
- 28 -
Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q/A and
other written and oral statements made from time to time by us and our
representatives, are not statements of historical or current fact. As such, they
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and the
implantable medical device industry;
o our ability to successfully execute our business model and our
business strategy;
o our ability to identify trends within the for implantable medical
devices, medical components, and commercial power sources industries
and to offer products and services that meet the changing needs of
those markets;
o projected capital expenditures; and
o trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to 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.
- 29 -
ITEM 4. Controls and Procedures.
a. Evaluation of Disclosure Controls and Procedures. During the first quarter
of 2005, our management, including the principal executive officer and
principal financial officer, evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) related to the recording, processing,
summarization and reporting of information in our reports that we file with
the SEC. These disclosure controls and procedures have been designed to
ensure that material information relating to us, including our
subsidiaries, is made known to our management, including these officers, by
other of our employees, and that this information is recorded, processed,
summarized, evaluated and reported, as applicable, within the time periods
specified in the SEC's rules and forms. Due to the inherent limitations of
control systems, not all misstatements may be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of
the control. Our controls and procedures can only provide reasonable, not
absolute, assurance that the above objectives have been met.
As a result of the restatement of the Company's consolidated balance sheet
and consolidated statement of cash flows as of December 31, 2004 as
described in Amendment 1 to Form 10-K for the year ended December 31, 2004,
the Company's management, including the principal executive officer and
principal financial officer, have concluded that there was a material
weakness in internal control over financial reporting. Specifically, the
Company's review of the financial statements utilizing a financial
statement presentation and disclosure checklist to ensure that the
financial statements were fairly presented in accordance with generally
accepted accounting principles did not operate effectively as it relates to
the misstatements identified above. Solely as a result of this material
weakness, our Management has revised its earlier assessment and has now
concluded that our internal control over financial reporting was not
effective as of March 31, 2005.
b. Changes in Internal Control Over Financial Reporting.
-----------------------------------------------------
Since December 31, 2004, except as disclosed below, there have been no
changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
As of the date of this filing, we have remediated the material weakness in
our internal controls over financial reporting. The remedial actions
included:
1. Enhancing the financial reporting process to include the formal
review of all auction rate securities for proper classification,
as well as the appropriate cash flow presentation of liabilities
related to the acquisition of property, plant and equipment.
2. Establishing formal quarterly disclosure meetings which will
include our third party tax advisors to review significant
transactions during the period as well as to review and discuss
new accounting presentation and disclosure guidelines. Our
- 30 -
outside accountants, although not part of our control structure,
will participate in these meetings.
3. Enhancing our financial reporting practices to include the use of
multiple third-party financial reporting technical alerts that we
utilize to evaluate our accounting policies and financial
statement disclosures.
While we have not completed all of our Sarbanes-Oxley testing for 2005, we
believe that after putting into effect the remedial actions described
above, our Company's system of internal controls over financial reporting
is effective, which should enable us to arrive at the 2005 assessment that
our system of internal controls over financial reporting are adequate and
operating effectively.
- 31 -
PART II - OTHER INFORMATION
ITEM 6. Exhibits.
See the Exhibit Index for a list of those exhibits filed herewith.
- 32 -
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: December 16, 2005 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/ Thomas J. Mazza
------------------------------------------
Thomas J. Mazza
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
By /s/ Marco F. Benedetti
------------------------------------------
Marco F. Benedetti
Corporate Controller
(Principal Accounting Officer)
- 33 -
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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.
- 34 -