U.S. SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2004
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)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on Which Registered:
Common Stock, Par Value $.001 Per Share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
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. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Aggregate market value of common stock of Wilson Greatbatch Technologies,
Inc. held by nonaffiliates as of July 2, 2004, based on the last sale price of
$27.13, as reported on the New York Stock Exchange: $580.0 million. Solely for
the purpose of this calculation, shares held by directors and officers and 10
percent shareholders of the Registrant have been excluded. Such exclusion should
not be deemed a determination by or an admission by the Registrant that these
individuals are, in fact, affiliates of the Registrant.
Shares of common stock outstanding on March 11, 2005: 21,564,618
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's definitive Proxy Statement for its 2004 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
2
EXPLANATORY NOTE
Greatbatch, Inc. (the "Company") is filing this Amendment No. 1 on Form 10-K/A
to amend its Form 10-K for the year ended December 31, 2004 as filed with the
Securities and Exchange Commission on March 15, 2005 (the "Original Filing") to
(i) revise Part I, Item 6, Item 7, Item 8, Item 9A and Part IV, Item 15 to
reflect the restatement of its consolidated balance sheets as of December 31,
2004 and January 2, 2004 and its consolidated statements of cash flows for the
years then ended to correct the classification of auction rate securities which
were previously classified as cash and cash equivalents, to revise 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 23.1, 31.1, 31.2, 32.1 and 99.1.
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
this Amendment No. 1, the Company will continue be referred to as Wilson
Greatbatch Technologies, Inc.
3
PART I
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table provides selected financial data of our Company for the
periods indicated. You should read the selected consolidated financial data set
forth below in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and with our consolidated
financial statements and related notes appearing elsewhere in this report. The
consolidated statement of operations data and the consolidated balance sheet
data for the periods indicated have been derived from our financial statements
and related notes. The following financial information has been amended to
reflect the restatements described in Note 2. Restatements to the consolidated
financial statements in Item 8.
December 31,(5)
Years ended 2004 (4) 2003 2002 (3) 2001 (2)(6) 2000 (1)(6)
-------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Sales $200,119 $216,365 $167,296 $135,575 $ 97,790
Income (loss) before income taxes $ 23,732 $ 33,316 $ 20,965 $ 13,778 $ (876)
Income (loss) per share
Basic $ 0.76 $ 1.10 $ 0.69 $ 0.44 $ (0.04)
Diluted $ 0.75 (7)$ 1.05 (7)$ 0.68 $ 0.43 $ (0.04)
-------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $134,399 $170,455 $ 40,204 $ 61,596 $ 15,079
Total assets $478,205 $438,243 $312,251 $283,520 $181,647
Long-term obligations $193,948 $178,994 $ 77,040 $ 61,397 $ 30,951
(1) In August 2000, we acquired the capital stock of BEI. These amounts
include the results of operations of BEI subsequent to its acquisition.
(2) In June 2001, we acquired substantially all of the assets and
liabilities of Sierra. These amounts include the results of operations
of Sierra subsequent to its acquisition.
(3) In July 2002, we acquired the capital stock of Globe. These amounts
include the results of operations of Globe subsequent to its
acquisition.
(4) In March 2004, we acquired the capital stock of NanoGram. These amounts
include the results of operations of NanoGram subsequent to its
acquisition.
(5) The Company's fiscal year ends on the Friday closest to December 31.
For clarity of presentation, the Company describes all periods as if
the year-end is December 31. Fiscal 2002 contained 53 weeks.
(6) We adopted Statement of Financial Accounting Standards (SFAS) No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB 13,
and Technical Corrections, at the beginning of fiscal year 2003. Under
SFAS No. 145, we are no longer allowed to classify debt extinguishments
as extraordinary items in our consolidated financial statements,
subject to limited exceptions. Accordingly, amounts previously
classified as extraordinary related to debt extinguishments in fiscal
2001and 2000 have been reclassified as components of income (loss)
before income taxes.
4
(7) We adopted Emerging Issues Task Force (EITF) Issue 04-08, The Effect of
Contingently Convertible Instruments on Diluted Earnings Per Share, in
the fourth quarter of 2004. Under EITF 04-08, we must include the
effect of the conversion of our convertible subordinated notes in the
calculation of diluted earnings per share using the if-converted method
as long as the effect is dilutive. The impact on the full year 2003 was
a $0.03 reduction in earnings per share from $1.08 to $1.05. There was
no impact on the full year 2004. Diluted earnings per share for 2003
are restated to reflect the adoption of EITF 04-08.
5
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.
The Company's consolidated financial statements have been restated as described
in Note 2 -Restatements to the consolidated financial statements in Item 8, and
the following discussion and analysis and related financial information
contained herein have been revised to reflect the effects of the restatements.
Index
Our Business
------------
o Our business
o Our customers
o Our CEO's view
Our Critical Accounting Estimates
---------------------------------
o Inventories
o Goodwill and other indefinite lived assets
o Long-lived assets
o Provision for income taxes
Our Financial Results
---------------------
o Results of operations table
o Fiscal 2004 compared to 2003
o Fiscal 2003 compared to 2002
o Liquidity and capital resources
o Off-balance sheet arrangements
o Contractual obligations
o Inflation
o Impact of recently issued accounting standards
o Subsequent events
Our Business
------------
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
6
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.
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.
Our Customers
-------------
Our products are designed to provide reliable, long lasting solutions that meet
the evolving requirements and needs of our customers and the end users of their
products. Our medical customers include leading IMD manufacturers such as
Guidant, St. Jude Medical, Medtronic, Biotronik, Cyberonics and the Sorin Group.
A substantial part of our business is conducted with a limited number of
customers. In 2004, Guidant, St. Jude Medical, and Medtronic collectively
accounted for approximately 70% of our total sales. The nature and extent of our
selling relationships with each CRM customer are different in terms of breadth
of component products purchased, purchased product volumes, length of
contractual commitment, ordering patterns, inventory management and selling
prices. Our EPS customers are primarily companies involved in oil and gas
exploration, military, oceanography and aerospace.
We have entered into long-term supply agreements with some of our customers. For
each of our products, we recognize revenue when the products are shipped and
title passes.
Our CEO's View
--------------
At the end of 2003 and the beginning of 2004, we gathered the relevant data and
information on which to base our business forecast. Much of what constitutes the
bulk of the forecasting process relates to communications with customers as well
as our knowledge of historic and current industry trends. The forecasting
process is inexact with some significant factors either unknown to us or out of
our control. This was certainly the case in 2004 when the decision and sudden
actions of a significant customer adversely affected our sales and our earnings.
While a few isolated incidents did affect the 2004 results, it is also true that
there were other more systemic contributing factors. Concentration of risk, with
relatively few customers serving vertical markets, increased competition and
price pressures all played a role and these factors are expected to continue
into the future. This overview will detail our reactions to all of these
influences and provide a summary of how we are addressing each one of these
contributing factors.
Concentration of Risk - We will be launching new products in 2005, and
will also be providing important new services to expand our business with
existing customers. We are also nurturing opportunities to work with new
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customers on development programs for components for totally new interventional
cardiac rhythm therapies.
Increased Competition - We have been the premier supplier of CRM device
power in the form of batteries and capacitors. We have expanded that business to
also include components that make up the vast majority of those found in a
typical pacemaker and defibrillator. Device feedthrough components, EMI filters,
hybrid molded header assemblies and enclosures are all part of our product line.
Our current product portfolio offers leading technology in power sources and
tantalum capacitors, and provides the opportunity for "bundling" these products
with our new assembly capabilities to provide "single source solutions."
Price Pressures - Technology leadership in a vacuum will not ensure
success. Technology, no matter how advanced, must be priced to present the best
value package to the customer. To that end we continue to implement sweeping
changes in our facilities and processes. The execution of our Pre-Production
Quality Assurance process ("PPQA"), with defined stage gates driven by strict
adherence to Six-Sigma criteria ("Six Sigma" is a Motorola trademark), will
speed the new product development process and add significant efficiencies to
mature product production. Six Sigma is a quality methodology for eliminating
defects in any process. The fundamental objective of the Six Sigma methodology
is the implementation of a measurement-based strategy that focuses on process
improvement and variation reduction. Along with these initiatives, we are
excited to be commissioning two new manufacturing facilities that will provide
enhanced capability for cost reduction. As part of our continuing efforts to
improve our cost structure and manufacturing efficiencies, we will be
undertaking two consolidation efforts in 2005. The first will be the
consolidation of our capacitor and medical battery manufacturing operations into
our newly constructed advanced power source manufacturing facility in Alden, NY.
Also, we will be consolidating the work conducted at our Carson City, NV plant
into the newly constructed Tijuana, Mexico value-add assembly facility. We
believe we will then be well positioned to offer "best value" pricing to the
market.
Foundation for the Future - It is important to recognize that these
processes and initiatives were started over the past few years as part of our
broader strategic plan. They are the drivers at the very core of our strategy,
which is to be the supplier of the highest quality, most technologically
advanced and cost effective solutions for the industries we serve. This will
certainly raise the expectations of a vital and growing industry and at the same
time raise the bar for our competition.
In the near term however, in reaction to the unexpected reduction in sales
during 2004, we began the difficult process of reducing our workforce to align
our costs with our anticipated revenue for the year. It is vital to understand
that this realignment was totally motivated and implemented after careful
consideration on how to best achieve our already established near and long-term
strategic goals. The flip side to the disappointing news is confirmation that
the vast majority of our customers not only met, but actually exceeded our
internal projections for sales growth in 2004.
In 2004 (and continuing into 2005), we witnessed an unprecedented flow of new
products through the pipeline. One near term catalyst for growth is the
introduction of our Q-Series medical batteries. Initially they will be available
8
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, 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).
New products, as well as enhancements to existing products, were a big part of
our story in 2004, and will continue to gain momentum and have positive impact
in 2005 and beyond. In addition, 2004 was witness to still another watershed
event that marks a unique achievement in our corporate history. In 2004 we
entered into an agreement with Medtronic to provide device sub-assembly
services. It allows us to add value beyond our traditional role as a provider of
discrete components, while providing opportunities for cross-selling and
"bundling" products and services. While at present we are working with Medtronic
in this arena and are focused on CRM and neurostimulator assemblies, we feel
confident in and are aggressively pursuing our options for similar agreements
with other customers and products.
Our work with nanotechnology driven products demonstrates real potential for
generating still more "milestone products" serving the CRM device market. The
investment WGT made in acquiring proprietary nanotechnology in 2004 is expected
to provide a springboard for the next major design/manufacturing/performance
revolution in batteries and related products. As the word implies, "nano"
unlocks the promise of smaller size, but just as significant it offers potential
for enhanced product performance and manufacturability. Additionally, nano
applications are not limited to batteries.
Our Critical Accounting Estimates
---------------------------------
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States ("GAAP") requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
The methods, estimates and judgments we use in applying our accounting policies
have a significant impact on the results we report in our financial statements.
Management considers an accounting estimate to be critical if:
o It requires assumptions to be made that were uncertain at the time the
estimate was made; and
o Changes in the estimate or different estimates that could have been
selected could have a material impact on our consolidated results of
operations, financial position, or cash flows.
Our most critical accounting estimates are described below. We also have other
policies that we consider key accounting policies, such as our policies for
revenue recognition; however, these policies do not meet the definition of
critical accounting estimates, because they do not generally require us to make
estimates or judgments that are difficult or subjective.
9
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Balance Sheet Caption / Nature of Effect of Variations on Key
Critical Estimate Item Assumptions / Approach Used Assumptions Used
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Inventories Inventory standard costing requires complex Variations in methods could have a
calculations that include assumptions for overhead material impact on the results. If
Inventories are stated at the lower absorption, scrap and sample calculations, our demand forecast for specific
of cost, determined using the manufacturing yield estimates and the products is greater than actual
first-in, first-out method, or determination of which costs are capitalizable. demand and we fail to reduce
market. The valuation of inventory requires us to estimate manufacturing output accordingly, we
obsolete or excess inventory as well as inventory could be required to record
that is not of saleable quality. additional inventory reserves, which
would have a negative impact on our
gross margins.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Goodwill and other indefinite lived
lived assets We perform an annual review, or more frequently We make certain estimates and
if indicators of potential impairment exist, to assumptions that affect the
determine if the recorded goodwill and other determination of the expected future
Goodwill is initially recorded when indefinite lived assets are impaired. We assess cash flows from our goodwill and
the purchase price paid for an these assets for impairment by comparing the fair indefinite lived assets. These
acquisition exceeds the estimated value of the reporting units to their carrying estimates and assumptions include
fair value of the net identified value to determine if there is potential sales growth projections, cost of
tangible and intangible assets impairment. If the fair value of a reporting unit capital projections, and other key
acquired. Other indefinite lived is less than its carrying value, an impairment indications of future cash flows.
assets such as trademark & names are loss is recorded to the extent that the implied Significant changes in these
considered unamortizing intangible fair value of the goodwill within the reporting estimates and assumptions could
assets as they are expected to unit is less than its carrying value. Fair values create future impairment losses in
generate cash flows indefinitely. for goodwill are determined based on discounted either reporting unit.
These assets are subject to the cash flows, market multiples or appraised values
estimation risks related to the as appropriate.
purchase price allocation conducted
at acquisition.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Long-lived assets We assess the impairment of
long-lived assets when events or changes Estimation of the useful lives of
in circumstances indicate that assets that are long-lived requires
Property, plant and equipment, the carrying value of the assets may not be significant management judgment.
definite-lived intangible assets, recoverable. Factors that we consider in deciding Events could occur, including changes
and other long-lived assets are when to perform an impairment review include in cash flow that would materially
carried at cost. This cost is significant under-performance of a business or affect our estimates and assumptions
charged to depreciation or product line in relation to expectations, related to depreciation. Unforeseen
amortization expense over the significant negative industry or economic trends, changes in operations or technology
estimated life of the operating and significant changes or planned changes in our could substantially alter the
assets primarily using straight-line use of the assets. Recoverability potential is assumptions regarding the ability to
rates. Long-lived assets acquired measured by comparing the carrying amount of the realize the return of our investment
through acquisition are subject to asset to the related total future undiscounted cash in operating assets and therefore the
the estimation risks related to the flows. If an asset's carrying value is not amount of depreciation expense to
initial purchase price allocation. recoverable through related cash flows, the asset charge against both current and
is considered to be impaired. Impairment
is future sales. Also, as we make
measured by comparing the asset's
carrying amount manufacturing process
conversions and to its fair value, based
on the best information other factory
planning decisions, we available,
including market prices or discounted
must make subjective judgments cash flow
analysis. When it is determined that
regarding the remaining useful lives
useful lives of assets are shorter than
originally of assets, primarily
manufacturing estimated, and there are
sufficient cash flows to equipment and
building improvements. support the
carrying value of the assets, we
accelerate the rate of depreciation in
order to fully depreciate the assets
over their new shorter useful lives.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
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-------------------------------------- ---------------------------------------------------- ---------------------------------------
Balance Sheet Caption / Nature of Effect of Variations on Key
Critical Estimate Item Assumptions / Approach Used Assumptions Used
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Provision for Income Taxes In relation to recording the provision for income
taxes, management must Changes could occur that would
estimate the future tax materially affect our estimates and
In accordance with the liability rates applicable to the reversal of tax assumptions regarding deferred
method of accounting for income differences, make certain assumptions regarding taxes. Changes in current tax laws
taxes specified in Statement of whether tax differences are permanent or temporary and tax rates could affect the
Financial Accounting Standards No. and the related time of expected reversal. Also, valuation of deferred tax assets and
109, Accounting for Income Taxes, estimates are made as to whether taxable operating liabilities, thereby changing the
the provision for income taxes is income in future periods will be sufficient to income tax provision. Also,
the sum of income taxes both fully recognize any gross deferred tax assets. If significant declines in taxable
currently payable and deferred. The recovery is not likely, we must increase our income could materially impact the
changes in deferred tax assets and provision for taxes by recording a valuation realizable value of deferred tax
liabilities are determined based allowance against the deferred tax assets that we assets. At December 31, 2004 we had
upon the changes in differences estimate will not ultimately be recoverable. $3.6 million of deferred tax assets
between the basis of assets and Alternatively, we may make estimates about the on our balance sheet. A 1% increase
liabilities for financial reporting potential usage of deferred tax assets that in the effective tax rate would
purposes and the basis of assets and decrease our valuation allowances. As of December increase the current year provision
liabilities as measured by the 31, 2004, the Company has recorded a valuation by $237,000, reducing fully diluted
enacted tax rates that management allowance of $2.7 million against potential earnings per share by $0.01 based on
estimates will be in effect when the non-utilizable deferred tax assets. shares outstanding at December 31,
differences reverse. 2004.
In addition, the calculation of our tax
liabilities involves dealing with
uncertainties in the application of
complex tax regulations. We recognize
liabilities for anticipated tax audit
issues in the U.S. and other tax
jurisdictions based on our estimate of
whether, and the extent to which,
additional taxes will be due. If we
ultimately determine that payment of
these amounts is unnecessary, we reverse
the liability and recognize a tax benefit
during the period in which we determine
that the liability is no longer
necessary. We record an additional charge
in our provision for taxes in the period
in which we determine that the recorded
tax liability is less than we expect the
ultimate assessment to be.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
11
Our Financial Results
---------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The commentary that follows should be read in conjunction with our consolidated
financial statements and related notes.
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. For clarity of presentation, the Company describes all
periods as if the year-end is December 31st. Fiscal 2002 included 53 weeks.
Results of Operations Year ended December 31, 2004 - 2003 2003 - 2002
In thousands, except per share data 2004 2003 2002 $Change % Change $Change % Change
--------------------------------------------------------------------- --------------------------------------
IMC
ICD batteries $35,646 $41,494 $28,518 $(5,848) -14% $12,976 46%
Pacemaker and other batteries 19,494 24,578 21,692 (5,084) -21% 2,886 13%
ICD capacitors 21,981 31,668 24,679 (9,687) -31% 6,989 28%
Feedthroughs 47,387 48,257 36,378 (870) -2% 11,879 33%
Enclosures 21,709 24,742 10,845 (3,033) -12% 13,897 128%
Other 26,438 19,482 19,789 6,956 36% (307) -2%
------------------------ -------------------- -----------------
Total IMC 172,655 190,221 141,901 (17,566) -9% 48,320 34%
EPS 27,464 26,144 25,395 1,320 5% 749 3%
------------------------ -------------------- -----------------
Total sales 200,119 216,365 167,296 (16,246) -8% 49,069 29%
Cost of sales 119,397 126,537 96,398 (7,140) -6% 30,139 31%
------------------------ -------------------- -----------------
Gross profit 80,722 89,828 70,898 (9,106) -10% 18,930 27%
Gross margin 40.3% 41.5% 42.4% -1.2% -0.9%
Selling, general, and administrative
expenses ("SG&A") 26,719 30,384 24,369 (3,665) -12% 6,015 25%
SG&A as a % of sales 13.4% 14.0% 14.6% -0.7% -0.5%
Research, development and engineering
costs, net ("RD&E") 18,476 16,991 14,440 1,485 9% 2,551 18%
RD&E as a % of sales 9.2% 7.9% 8.6% 1.4% -0.8%
Intangible amortization 4,002 3,217 3,702 785 24% (485) -13%
Other operating expense 4,585 1,036 2,481 3,549 343% (1,445) -58%
------------------------ -------------------- -----------------
Operating income 26,940 38,200 25,906 (11,260) -29% 12,294 47%
Operating margin 13.5% 17.7% 15.5% -4.2% 2.2%
Interest expense 4,535 4,101 3,752 434 11% 349 9%
Interest income (1,235) (702) (442) (533) 76% (260) 59%
Other (income) expense, net (92) 1,485 1,631 (1,577) -106% (146) -9%
Provision for income taxes 7,475 10,028 6,604 (2,553) -25% 3,424 52%
Effective tax rate 31.5% 30.1% 31.5% 1.4% -1.4%
------------------------ -------------------- -----------------
Net income $16,257 $23,288 $14,361 $(7,031) -30% $ 8,927 62%
======================== ==================== =================
Net margin 8.1% 10.8% 8.6% -2.6% 2.2%
Diluted earnings per share $ 0.75$ 1.05$ 0.68 $ (0.30) -29% $ 0.37 54%
12
FISCAL 2004 COMPARED WITH FISCAL 2003
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.
Volume accounted for approximately 7% of the 9% decrease in IMC sales, primarily
due to lower demand by a major customer for wet tantalum capacitors. Total sales
to this customer declined by $27.0 million in comparison to 2003. Sales to other
customers increased by 11% over 2003. The balance of the decrease (2%) was
attributable to lower selling prices. We believe that pricing pressures will
continue into the near future. The decrease in volume of batteries and
capacitors was partially offset by increased volume of other IMC products,
primarily coated components. The overall markets for CRM and Neuro are expected
to experience double-digit growth for the next three to five years.
EPS. 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 5% increase in
EPS sales is due to volume, resulting from increased demand in the oil and gas
market both domestically and internationally.
Gross profit
The 120 basis point decrease in gross margin was primarily due to the following
factors:
a. Lower IMC selling prices: 200 basis points; and
b. Increased period costs resulting from excess capacity at our wet
tantalum capacitor manufacturing plant: 100 basis points.
c. Savings instituted during the year: (180) basis points, primarily
scrap reductions.
SG&A expenses
The realignment of management resources resulted in a $3.4 million reduction in
allocated costs to SG&A. Expenses also decreased as a result of cost savings
initiatives instituted mid-year including incentive compensation reductions of
approximately $1.0 million. These savings were partially offset by costs of
approximately $1.0 million associated with Sarbanes-Oxley compliance. The
remaining $0.3 million of expenses were comprised of individually insignificant
items.
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RD&E expenses
Expenses prior to reimbursements increased by $4.4 million. The main causes of
this increase include additional costs related to the Chief Technology Officer
position ($.9 million), additional development project expenses ($1.3 million)
and the balance was primarily due to the acquisition of NanoGram in March 2004.
These costs were offset by an increase in development efforts for projects where
the company is reimbursed for achieving certain development milestones. The
increase in reimbursements amounted to approximately $3.0 million. We expect to
maintain our spending on RD&E at a level that will support the new technologies
demanded by the customers we serve.
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 $1.1 million in 2004. There was
also a $0.2 million reduction in expense as certain definite lived intangibles
were fully amortized during 2003.
Other operating expense
The 2004 amount comprised the following:
a. $2.0 million associated with patents acquired in the second quarter.
These patents cover how capacitors are used in an ICD. Although
management believes the patents could have been successfully
challenged in court proceedings, 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;
b. $0.8 million related to severance cost from a 7% mid-year reduction in
workforce;
c. $0.9 million related to costs associated with the start-up of Tijuana
facility; and
d. $0.8 million primarily related to various asset disposals.
Interest expense and interest income
Interest expense increased due to the addition of $90.0 million in
interest-bearing debt in May of 2003 resulting from the issuance of the
convertible subordinated notes.
Interest income increased 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 increased primarily due to the recording of a valuation
allowance against certain New York State deferred tax assets. Based on
managements' review, after considering both the positive and negative support,
it was determined that certain tax assets primarily investment tax credits and
employees incentive credits were not considered to be more likely than not to be
realized. The tax provision increase related to the valuation allowance was $2.2
million.
14
Our effective tax rate is below the United States statutory rate primarily as a
result of federal and state tax credits (3.3%), and the Extraterritorial Income
Exclusion ("ETI") for 2004 of (4.2%). The American Jobs Creation Act of 2004
(P.L. 108-357) ("the Act") signed into law on October 22, 2004 repeals the ETI
after December 31, 2004, and creates new tax incentives for a broad spectrum of
taxpayers. We have not completed a full assessment on how this law change will
impact the Company due to the potential changes in our manufacturing locations.
FISCAL 2003 COMPARED WITH FISCAL 2002
The increase in total sales for 2003 included a full year of sales of Globe,
which we acquired in July 2002. The Globe acquisition added $14.0 million, $3.7
million, and $1.8 million to sales, gross profit, and operating expenses
respectively in 2003 compared to 2002.
Sales
IMC. The sales growth for IMC was led by sales of ICD batteries reflecting the
strength of this market. In addition, capacitor and components sales increased
substantially over last year. Substantially all of the sales changes during 2003
were attributable to volume and sales mix. Looking at our overall sales mix, CRM
product sales increased over 2002 and represented 83% of our overall product
mix, up from 80% in 2002.
EPS. Commercial sales increased modestly from a slight rise in volume of orders
from oil and gas customers.
Gross profit
The following factors contributed to an approximately a 310 basis point decline
in the gross margin between 2003 and 2002:
a. Consolidation of EPS plants: 50 basis points;
b. Start-up costs from lean manufacturing: 50 basis points;
c. Inclusion of enclosure products: 100 basis points;
d. Hiring of new plant management personnel: 40 basis points; and
e. Changes in selling prices for certain medical components: 70 basis
points.
SG&A expenses
Expenses increased in absolute dollars, but declined as a percent of sales due
to improved operating leverage. The $6.0 million increase in SG&A was comprised
of the following factors:
a. Incentive compensation and profit sharing expense: $1.0 million;
b. Incremental senior management related expenses: $2.0 million;
c. Corporate spending for information technology: $2.0 million; and
d. All other SG&A comprised of individually insignificant items: $1.0
million.
15
RD&E expenses
Expenses increased in absolute dollars, but decreased as a percent of sales as
sales growth outpaced spending. The increase in RD&E was comprised primarily of
the $1.8 million of expenses for the development of our QHR high rate battery
product.
Amortization expense
The reduction in intangible amortization reflects the impact of the sale of
certain intangible assets of the ceramic capacitor product line that was part of
the Sierra-KD components acquisition in 2003. In addition, one of the patent
licenses for wet tantalum capacitors was fully amortized during 2002.
Other operating expense
The 2003 amount is primarily attributable to the write-down of a manufacturing
facility that became available for sale as the result of a decision to purchase
an additional manufacturing facility in New York.
Interest expense and interest income
Interest expense was lower and interest income was higher primarily due to the
issuance of the $170.0 million convertible subordinated notes in May 2003. These
securities allowed for the outstanding line of credit to be fully replaced at a
lower rate of interest and additional funds to be 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 state tax planning strategies.
The impact of the lower effective tax rate during 2003 was approximately $0.5
million.
The ETI provided approximately $1.0 million of tax benefit in 2003.
Liquidity and Capital Resources
Our principal sources of liquidity are our operating cash flow combined with our
working capital of $134.4 million at December 31, 2004 and our unused $20
million credit line with our lending syndicate. Historically we have generated
cash from operations sufficient to meet our capital expenditure and debt service
needs, other than for acquisitions. At December 31, 2004, our current ratio was
5.8:1, so short-term liquidity is not a concern to management at this time.
The Company regularly engages in discussions relating to potential acquisitions
and may announce an acquisition transaction at any time. However, no active
negotiations are presently being conducted.
16
Operating activities
In all years presented significant positive cash flows from operating activities
were achieved. Net cash provided by operating activities exceeded the
combination of net income, depreciation and amortization due to the favorable
cash flow impact of deferred taxes. Over the three-year period, changes in
operating assets and liabilities amounted to a net use of cash of approximately
$6.4 million.
Investing activities
Capital spending of $36.7 million in 2004 was significantly higher than
historical expenditure levels. The majority of the current year spending was for
the following:
a. New medical power manufacturing plant in Alden, NY ($20.4 million);
b. Oracle ERP system ($5.0 million); and
c. New assembly plant in Tijuana, Mexico ($4.6 million).
In comparison, we spent $12.5 million in 2003, which was primarily related
to normal maintenance capital.
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. NanoGram has a strong intellectual property
position around the laser pyrolysis process and accordingly a significant
allocation was made to these assets. The cost will be amortized over the
remaining estimated useful life of 11.5 years. For 2004 the amortization expense
was approximately $0.1 million per month. 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. Pursuant to the valuation we obtained, the
status of the NanoGram technology was sufficiently advanced such that technical
feasibility requirements were met at the acquisition date; consequently, no
in-process R&D charge was recorded. The Company determined that it could utilize
$5.0 of gross carryforward net operating losses that were acquired as part of
the acquisition but were not recorded on the opening balance sheet. The
Company's consolidated balance sheet has been restated to reflect the additional
$1.7 million deferred tax asset.
NanoGram was a materials research and development company focused on developing
nanoscale materials for use in various battery and potentially other medical
device applications. The primary purpose of this acquisition is to provide us
with additional intellectual property as well as additional research and
development capabilities. 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. No sales
revenue was attributable to this acquisition in 2004.
In 2002, approximately $47.1 million was spent related to the acquisition of
Globe. Globe was a manufacturer of precision titanium enclosures for IMDs. Globe
was acquired to further broaden our product offerings to include enclosures.
17
Approximately $50.0 million of short-term investments were converted to cash
during the year, net of purchases.
Financing activities
During 2003, we successfully completed a $170.0 million convertible subordinated
notes offering. The proceeds of this offering were utilized to repay $85.0
million in long-term debt that was previously outstanding.
Capital Structure
At December 31, 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 $92.0 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.
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 advanced manufacturing
facility ($11.0 million), our value-add assembly plant ($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.
Litigation
We are a party to various legal actions arising in the normal course of
business. While we do not believe that the ultimate resolution of any such
pending activities will have a material adverse effect on our consolidated
results of operations, financial position, or cash flows, litigation is subject
to inherent uncertainties. If an unfavorable ruling were to occur, there exists
the possibility of a material adverse impact in the period in which the ruling
occurs.
18
Contractual Obligations
The following table summarizes our significant contractual obligations at
December 31, 2004, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods.
Less than More than
CONTRACTUAL OBLIGATIONS Total 1 year 1-3 years 3-5 years 5 years
--------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations (a):
Convertible Debentures $ 170,000 $ - $ - $ - $ 170,000
Capital Lease Obligations 1,652 1,000 652 - -
Operating Lease Obligations (b) 11,466 2,350 3,651 2,652 2,813
Purchase Obligations (c) 10,051 10,051 - - -
----------------------------------------------------------------
Total $ 193,169 $ 13,401 $ 4,303 $ 2,652 $ 172,813
================================================================
(a) The current portion of these liabilities is included. Amounts do not
include imputed interest. The annual interest expense on the
convertible debentures is 2.25%, or $3.8 million. See Note 10 - Debt
of the Notes to the Consolidated Financial Statements in this Form
10-K/A for additional information about our long-term obligations.
(b) See Note 17 - Commitments and Contingencies of the Notes to the
Consolidated Financial Statements in this Form 10-K/A for additional
information about our operating lease obligations.
(c) Purchase orders or contracts for the purchase of raw materials and
other goods and services are not included in the table above. For the
purposes of this table, contractual obligations for purchase of goods
or services are defined as agreements that are enforceable and legally
binding on the Company and that specify all significant terms,
including: fixed or minimum quantities to be purchased; fixed, minimum
or variable price provisions; and the approximate timing of the
transaction. Our purchase orders are normally based on our current
manufacturing needs and are fulfilled by our vendors within short time
horizons. We enter into blanket orders with vendors that have
preferred pricing and terms, however these orders are normally
cancelable by us without penalty. We do not have significant
agreements for the purchase of raw materials or other goods specifying
minimum quantities or set prices that exceed our expected requirements
in the short-term. We also enter into contracts for outsourced
services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty. 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 contractual
obligations for construction of these facilities are $10.0 million and
will be financed by existing, or internally generated cash.
19
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS No. 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. SFAS 123(R) requires the measurement
of the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award, or over the period that a performance measure
is expected to be met. We will adopt SFAS 123(R) on July 2, 2005, requiring
compensation cost to be recorded as expense for the portion of the outstanding
unvested awards, based on the grant-date fair value of those awards calculated
using the Black-Scholes option pricing model currently used under SFAS 123 for
proforma disclosures. Based on unvested options currently outstanding, the
effect of adopting SFAS 123(R) will reduce our net income by approximately $1.4
million in the second half of 2005.
In November 2004, the FASB issued 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. We do not expect that
adoption of SFAS No. 151 will have a material effect on its consolidated
financial position, consolidated results of operations, or liquidity.
Subsequent Events
On February 23, 2005 we announced our intent to consolidate our 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. We will also
consolidate 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. We expect to incur this additional expense over
the next four fiscal quarters. 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;
20
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
On March 7, 2005 we announced our intent to close the Carson City, NV facility
and consolidate the work performed at Carson City into the Tijuana, Mexico
facility.
The total estimated cost for this facility consolidation plan is anticipated to
be between $4.5 million and $5.4 million. We expect 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 shut-down 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 move and consolidation of work into Tijuana:
a. Production inefficiencies and revalidation - $0.4 to $0.5
million;
b. Relocation and moving expenses - $0.3 to $0.5 million;
c. Personnel costs (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.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Under our existing line of credit any borrowings bear interest at fluctuating
market rates. At December 31, 2004, we did not have any borrowings outstanding
under our line of credit and thus no interest rate sensitive financial
instruments.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of our Company
and report of independent registered public accounting firm
thereon are set forth below.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2004 and 2003
(As restated).
Consolidated Statement of Operations for the years ended December 31,
2004, 2003 and 2002.
Consolidated Statement of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 (As restated).
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements (As restated).
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Greatbatch, Inc. (formerly named Wilson Greatbatch Technologies, Inc.)
Clarence, NY
We have audited the accompanying consolidated balance sheet of Greatbatch, Inc.,
formerly named Wilson Greatbatch Technologies, Inc., and subsidiaries (the
"Company") as of December 31, 2004 and January 2, 2004, and the related
consolidated statement of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2004. Our audits also
included the financial statement schedule listed in the Index at Item 15(a) (2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2004
and January 2, 2004, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 15, 2005 (December 16, 2005 as to the effect of the material
weakness described in Management's Report on Internal Control Over Financial
Reporting (as revised)) expresses an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an adverse opinion on the effectiveness of the Company's internal
control over financial reporting.
As discussed in Note 2, the accompanying consolidated financial statements have
been restated.
23
/s/ DELOITTE & TOUCHE LLP
Buffalo, NY
March 15, 2005
(December 16, 2005 as to the effects of the restatement discussed in Note 2)
24
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
----------------------------------------------------------------------------
ASSETS December 31,
2004 (1) 2003 (1)
Current assets:
Cash and cash equivalents $ 34,795 $ 23,960
Short-term investments 57,437 107,085
Accounts receivable, net 24,288 23,726
Inventories 34,027 28,598
Prepaid expenses and other current assets 1,037 3,591
Refundable income taxes 3,673 583
Deferred income taxes 3,622 3,163
Asset available for sale 3,600 3,658
--------- ---------
Total current assets 162,479 194,364
Property, plant, and equipment, net 92,210 63,735
Intangible assets, net 63,984 51,441
Goodwill 155,039 119,521
Deferred income taxes - 2,896
Other assets 4,493 6,286
--------- ---------
Total assets $478,205 $438,243
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,971 $ 4,091
Accrued expenses and other current liabilities 18,109 18,968
Current portion of long-term debt 1,000 850
--------- ---------
Total current liabilities 28,080 23,909
Long-term debt, net of current portion 652 928
Convertible subordinated notes 170,000 170,000
Deferred income taxes 23,296 7,251
Other long-term liabilities - 815
--------- ---------
Total liabilities 222,028 202,903
--------- ---------
Commitments and contingencies (Note 17)
Stockholders' equity:
Preferred stock - -
Common stock 21 21
Additional paid-in capital 212,131 207,969
Deferred stock-based compensation (833) (1,185)
Treasury stock, at cost (95) (179)
Retained earnings 44,971 28,714
Accumulated other comprehensive income (18) -
--------- ---------
Total stockholders' equity 256,177 235,340
--------- ---------
Total liabilities and stockholders' equity $478,205 $438,243
========= =========
(1) As restated, see Note 2.
The accompanying notes are an integral part of these consolidated
financial statements
25
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
------------------------------------------------------------------------------
Year Ended December 31,
2004 2003 2002
Sales $200,119 $216,365 $167,296
Cost of sales 119,397 126,537 96,398
-------- -------- --------
Gross profit 80,722 89,828 70,898
Selling, general and administrative expenses 26,719 30,384 24,369
Research, development and engineering costs, net 18,476 16,991 14,440
Amortization of intangible assets 4,002 3,217 3,702
Other operating expense, net 4,585 1,036 2,481
-------- -------- --------
Operating income 26,940 38,200 25,906
Interest expense 4,535 4,101 3,752
Interest income (1,235) (702) (442)
Other (income) expense, net (92) 1,485 1,631
-------- -------- --------
Income before income taxes 23,732 33,316 20,965
Provision for income taxes 7,475 10,028 6,604
-------- -------- --------
Net income $ 16,257 $ 23,288 $ 14,361
======== ======== ========
Earnings per share:
Basic $ 0.76 $ 1.10 $ 0.69
Diluted $ 0.75 $ 1.05 $ 0.68
Weighted average shares outstanding:
Basic 21,358 21,149 20,941
Diluted 25,759 24,026 21,227
The accompanying notes are an integral part of these consolidated
financial statements
26
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
-------------------------------------------------------------------------------------------------
Year Ended December 31,
2004 (1) 2003 (1) 2002 (1)
Cash flows from operating activities:
Net income $16,257 $23,288 $14,361
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,835 13,179 12,100
Stock-based compensation 3,312 3,306 3,667
Early extinguishment of debt - 1,487 -
Write-off of noncompete agreement - - 1,723
Write-off of investment in unrelated company - - 1,547
Deferred income taxes 12,203 4,578 3,765
Loss on disposal of assets 1,177 1,036 758
Changes in operating assets and liabilities:
Accounts receivable (563) (4,416) (379)
Inventories (5,429) 5,822 (2,752)
Prepaid expenses and other current assets 2,780 2,335 (1,450)
Accounts payable 3,057 (1,064) (2,118)
Accrued expenses and other current liabilities (1,149) 5,797 (2,972)
Income taxes (3,020) 24 (873)
--------- --------- --------
Net cash provided by operating activities 43,460 55,372 27,377
--------- --------- --------
Cash flows from investing activities:
Short-term investments
Purchases (175,089) (190,730) -
Proceeds from dispositions 224,737 83,645 -
Acquisition of property, plant and equipment (36,738) (12,496) (20,068)
Proceeds from sale of property, plant and equipment
and other assets 67 2,734 14
Decrease (increase) in other assets 282 107 (1,459)
Acquisition of subsidiary, net (45,716) - (47,124)
--------- --------- --------
Net cash used in investing activities (32,457) (116,740) (68,637)
--------- --------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 170,000 32,000
Principal payments of long-term debt - (85,000) (29,880)
Principal payments of capital lease obligations (1,278) (434) -
Payment of debt issue costs - (4,535) -
Issuance of common stock 1,205 868 476
Net repurchase of treasury stock (95) (179) -
--------- --------- --------
Net cash (used in) provided by financing activities (168) 80,720 2,596
--------- --------- --------
Net increase (decrease) in cash and cash equivalents 10,835 19,352 (38,664)
Cash and cash equivalents, beginning of year 23,960 4,608 43,272
--------- --------- --------
Cash and cash equivalents, end of year $34,795 $23,960 $ 4,608
========= ========= ========
(1) As restated, see Note 2.
The accompanying notes are an integral part of these condensed
consolidated financial statements
27
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
------------------------------------------------------------------------------------------------------------------------
Deferred Retained Accumulated
Common Stock Additional Stock Treasury Stock Earnings Other Total
-------------- Paid in Based ---------------- (Accumulated Comprehensive Stockholder's
Shares Amount Capital Compensation Shares Amount Deficit) Income Equity
Balance, December 31,
2001 20,983 21 200,880 - 195 (3,122) (8,935) - 188,844
Exercise of stock
options 67 - 519 - - - - - 519
Shares contributed to
ESOP - - 761 - (140) 2,254 - - 3,015
Common stock issuance
expenses - - (39) - - - - - (39)
Reissuance of treasury
stock - - 9 - (1) 5 - - 14
Tax benefit of stock
option exercises - - 149 - - - - - 149
Net income - - - - - - 14,361 - 14,361
------ -- ------- ---- - --- ------ --- -------
Balance, December 31,
2002 21,050 21 202,279 - 54 (863) 5,426 - 206,863
Shares contributed to
ESOP 90 - 2,804 - (54) 863 - - 3,667
Exercise of stock
options 77 - 868 - - - - - 868
Stock-based compensation 14 - - 583 - - - - 583
Restricted stock issued - - 1,768 (1,768) - - - - -
Tax benefit of stock
option exercises - - 250 - - - - - 250
Purchase of treasury
stock - - - - 5 (179) - - (179)
Net income - - - - - - 23,288 - 23,288
------ -- ------- ---- - --- ------ --- -------
Balance, December 31,
2003 21,231 21 207,969 (1,185) 5 (179) 28,714 - 235,340
Exercise of stock
options 100 - 1,200 - - - - - 1,200
Shares contributed to
ESOP 66 - 2,571 - (4) 152 - - 2,723
Restricted stock issued - - 349 (349) - - - - -
Tax benefit of stock
option exercises - - 123 - - - - - 123
Restricted stock
forfeitures - - (85) 85 - - - - -
Stock-based compensation 14 - 4 616 (1) 27 - - 647
Purchase of treasury
stock - - - - 5 (95) - - (95)
Net income - - - - - - 16,257 - 16,257
Unrealized losses on
available-for-sale
securities - - - - - - - (18) (18)
-------
Total comprehensive
income - - - - - - - - 16,239
------ -- ------- ---- - --- ------ --- -------
Balance, December 31,
2004 21,411 21 212,131 (833) 5 (95) 44,971 (18) 256,177
====== == ======= ==== = === ====== === =======
The accompanying notes are an integral part of these consolidated financial statements.
28
WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Company - The consolidated financial statements include the accounts of
Wilson Greatbatch Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Nature of Operations - The Company operates in two reportable
segments-Implantable Medical Components ("IMC") and Electrochem Power
Solutions ("EPS"). The IMC segment designs and manufactures batteries,
capacitors, filtered feedthroughs, engineered components and enclosures
used in IMDs. The EPS segment designs and manufactures high performance
batteries and battery packs for use in oil and gas exploration,
oceanographic equipment and aerospace.
2. RESTATEMENTS
Subsequent to the original filing of the Company's 2004 Form 10-K, the
Company concluded that its 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 Standard (SFAS) No. 95, Statement of Cash Flows,
requires reclassification to short-term investments. The consolidated
balance sheets as of December 31, 2004 and 2003, and consolidated
statements of cash flows for the years ended December 31, 2004, and 2003,
have been restated in order to conform to this change in 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 consolidated statement of cash flows for
the years ended December 31, 2004, 2003 and 2002 to reflect the impact of
changes in accounts payable related to the acquisition of property, plant
and equipment as a non-cash item as required under SFAS No. 95.
In addition, the Company determined that it had not accounted for a
deferred tax asset in purchase accounting related to net operating losses
acquired in the Company's acquisition of NanoGram Devices Corporation in
2004. The recording of the deferred tax asset decreased long-term deferred
income tax liabilities and correspondingly decreased goodwill.
29
The restatements have been made to the Consolidated Balance Sheet and
Consolidated Statement of Cash Flows as follows:
Consolidated Balance Sheet as of
--------------------------------
December 31, 2004
-----------------
As
previously
---------- As
reported Adjustment 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
Consolidated Balance Sheet as of
--------------------------------
December 31, 2003
-----------------
As
previously
---------- As
reported Adjustment restated
---------- ---------- --------
Current assets:
Cash and cash equivalents $119,486 $(95,526) $ 23,960
Short-term investments $ 11,559 $ 95,526 $107,085
Consolidated Statement of Cash Flows for the year ended
-------------------------------------------------------
December 31, 2004
-----------------
As
previously
---------- As
reported Adjustment restated
---------- ---------- --------
Cash flows from operating activities:
Net cash provided by operating activities $ 45,166 $ (1,706) $ 43,460
Cash flows from investing activities:
Net cash used in investing activities $(75,011) $ 42,554 $(32,457)
Net increase (decrease) in cash and cash equivalents $(30,013) $ 40,848 $ 10,835
Cash and cash equivalents, beginning of year $119,486 $(95,526) $ 23,960
Cash and cash equivalents, end of year $ 89,473 $(54,678) $ 34,795
30
Consolidated Statement of Cash Flows for the year ended
-------------------------------------------------------
December 31, 2003
-----------------
As
previously
---------- As
reported Adjustment restated
---------- ---------- --------
Cash flows from operating activities:
Net cash provided by operating activities $ 54,801 $ 571 $55,372
Cash flows from investing activities:
Net cash used in investing activities $(20,643) $(96,097)$(116,740)
Net increase (decrease) in cash and cash equivalents $114,878 $(95,526) $19,352
Cash and cash equivalents, end of period $119,486 $(95,526) $23,960
Consolidated Statement of Cash Flows for the year ended
-------------------------------------------------------
December 31, 2002
-----------------
As
previously
---------- As
reported Adjustment restated
---------- ---------- --------
Cash flows from operating activities:
Net cash provided by operating activities $ 27,810 $ (433) $27,377
Cash flows from investing activities:
Net cash used in investing activities $(69,070) $ 433 $(68,637)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Year End - The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st.
Fiscal 2004, 2003, and 2002 ended on December 31, 2004, January 2, 2004 and
January 3, 2003. For clarity of presentation, the Company describes all
periods as if the year-end is December 31st. Fiscal 2002 included 53 weeks.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
highly liquid, short-term investments with maturities at the time of
purchase of three months or less.
Short-term Investments - Short-term investments are comprised of municipal
bonds acquired with maturities that exceed three months and are less than
one year at the time of acquisition, auction rate securities and equity
securities classified as available-for-sale. Available-for-sale securities
are carried at fair value with the unrealized gain or loss, net of tax,
reported in accumulated other comprehensive income as a separate component
of stockholder's equity. Realized gains and losses and investment income
are included in current earnings. Due to the short term nature of the
interest rate resets, the fair market value of the auction rate securities
approximates their recorded value. Securities that the Company has the
ability and positive intent to hold to maturity are accounted for as
held-to-maturity securities and are carried at amortized cost. The cost of
securities sold is based on the specific identification method. Unrealized
losses considered to be other than temporary during the period are
recognized in current earnings.
31
Fair Value of Financial Instruments - The carrying amount of financial
instruments, including cash and cash equivalents, trade receivables and
accounts payable, approximated their fair value as of December 31, 2004 and
2003 because of the relatively short maturity of these instruments.
Inventories - Inventories are stated at the lower of cost, determined using
the first-in, first-out method, or market.
Assets Available for Sale - Assets available for sale are accounted for at
the lower of the carrying amount or each asset's estimated fair value less
costs to sell. Fair value is determined at prevailing market conditions or
appraisals as needed. At December 31, 2003, the Company classified its
Amherst, NY facility as held for sale. The Company recorded impairment for
$0.06 million for the year ended December 31, 2004. The Company continues
to pursue disposition of its held for sale asset, however there can be no
assurance if or when a sale will be completed or whether such sale will be
completed on terms that will enable the Company to realize the full
carrying value of the asset.
Property, Plant and Equipment - Property, plant and equipment is carried at
cost. Depreciation is computed primarily by the straight-line method over
the estimated useful lives of the assets, which are as follows: buildings
and building improvements 7-40 years; machinery and equipment 3-10 years;
office equipment 3-10 years; and leasehold improvements over the remaining
lives of the improvements or the lease term, if less.
The cost of repairs and maintenance is charged to expense as incurred;
renewals and betterments are capitalized. Upon retirement or sale of an
asset, its cost and related accumulated depreciation or amortization are
removed from the accounts and any gain or loss is recorded in income or
expense.
Intangible Assets - Acquired intangible assets apart from goodwill and
trademark and names consist primarily of patented and unpatented
technology. The Company continues to amortize its definite-lived assets on
a straight-line basis over their estimated useful lives as follows:
patented technology, 8-17 years; unpatented technology, 5-15 years; and
other intangible assets, 3-10 years.
Impairment of Long-lived Assets - The Company assesses the impairment of
long-lived assets when events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Factors that are
considered in deciding when to perform an impairment review include
significant under-performance of a business or product line in relation to
expectations, significant negative industry or economic trends, and
significant changes or planned changes in the use of the assets.
Recoverability potential is measured by comparing the carrying amount of
the asset to the related total future undiscounted cash flows. If an
asset's carrying value is not recoverable through related cash flows, the
asset is considered to be impaired. Impairment is measured by comparing the
asset's carrying amount to its fair value, based on the best information
available, including market prices or discounted cash flow analysis. When
it is determined that useful lives of assets are shorter than originally
32
estimated, and there are sufficient cash flows to support the carrying
value of the assets, the rate of depreciation is accelerated in order to
fully depreciate the assets over their new shorter useful lives. There was
no impairment of long-lived assets in 2002, 2003 or 2004.
Goodwill - Goodwill and trademark and names are not amortized but are
periodically tested for impairment.
The Company assesses goodwill for impairment by comparing the fair value of
the reporting units to their carrying amounts on an annual basis, or more
frequently if certain events occur or circumstances change, to determine if
there is potential impairment. If the fair value of a reporting unit is
less than its carrying value, an impairment loss is recorded to the extent
that the implied fair value of the goodwill within the reporting unit is
less than its carrying value. Fair values for goodwill are determined based
on discounted cash flows, market multiples or appraised values as
appropriate. The Company has determined that, based on the goodwill
impairment test, no impairment of goodwill and other indefinite-lived
intangible assets has occurred. Note 18 - Business Segment information
contains an analysis of goodwill by segment.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
trade receivables. A significant portion of the Company's sales are to
three customers, all in the medical device industry, and, as such, the
Company is directly affected by the condition of those customers and that
industry. However, the credit risk associated with trade receivables is
minimal due to the Company's stable customer base. The Company maintains
cash deposits with major banks, which from time to time may exceed
federally insured limits. Note 18 - Business Segment information contains
an analysis of sales and accounts receivable for the Company's significant
customers.
Allowance for Doubtful Accounts - The Company provides credit, in the
normal course of business, to its customers. The Company also maintains an
allowance for doubtful customer accounts and charges actual losses against
this allowance when incurred.
Income Taxes - The Company provides for income taxes using the liability
method whereby deferred tax liabilities and assets are recognized for
changes in deferred tax assets and liabilities determined based upon the
changes in differences between the basis of assets and liabilities for
financial reporting purposes and the basis of assets and liabilities as
measured by the enacted tax rates that management estimates will be in
effect when the differences reverse. A valuation allowance is provided on
deferred tax assets if it is determined that it is more likely than not
that the asset will not be realized.
Revenue Recognition - Revenue from the sale of products is recognized at
the time product is shipped to customers and title passes. The Company
allows customers to return defective or damaged products for credit,
replacement, or exchange. Revenue is recognized as the net amount to be
received after deducting estimated amounts for product returns and
allowances. The Company includes shipping and handling fees billed to
customers in Sales. Shipping and handling costs associated with inbound
freight are generally recorded in Cost of Goods Sold.
33
Product Warranties - The Company generally warrants that its products will
meet customer specifications and will be free from defects in materials and
workmanship. The Company accrues its estimated exposure to warranty claims
based upon recent historical experience and other specific information as
it becomes available.
Research and Development - Research and development costs are expensed as
incurred.
Engineering Costs - Engineering expenses are expensed as incurred. Cost
reimbursements for engineering services from customers for whom the Company
designs products are recorded as an offset to engineering costs upon
achieving development milestones specified in the contracts.
Net research, development and engineering costs are as follows (in
thousands):
Year Ended December 31,
2004 2003 2002
Research and development costs $15,760 $ 9,446 $ 7,156
------- ------- -------
Engineering costs 6,729 8,649 8,882
Less cost reimbursements (4,013) (1,104) (1,598)
------- ------- -------
Engineering costs, net 2,716 7,545 7,284
------- ------- -------
Total research and development
and engineering costs, net $18,476 $16,991 $14,440
======= ======= =======
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 years presented and, as such, the
impact is not necessarily indicative of the effects on reported net income
of future years.
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):
Year Ended December 31,
2004 2003 2002
Risk-free interest rate 3.62% 2.75% 3.79%
Expected volatility 52% 55% 55%
Expected life (in years) 5 5 5
Expected dividend yield 0% 0% 0%
34
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):
Year Ended December 31,
2004 2003 2002
Net income as reported $ 16,257 $23,288 $14,361
Stock based employee compensation cost included in net
income as reported $ 2,250 $ 2,311 $ 2,512
Stock-based employee compensation cost determined using
the fair value based method, net of related tax effects $ 4,635 $ 4,054 $ 2,972
Pro forma net income $13,872 $21,545 $13,901
Net earnings per share:
Basic - as reported $ 0.76 $ 1.10 $ 0.69
Basic - pro forma $ 0.65 $ 1.02 $ 0.66
Diluted - as reported $ 0.75 $ 1.05 $ 0.68
Diluted - pro forma $ 0.66 $ 0.98 $ 0.65
Earnings Per Share - Basic earnings per share is calculated by dividing net
income by the weighted average number of shares outstanding during the
period. Diluted earnings per share is calculated by adjusting for
common stock equivalents, which consist of stock options and unvested
restricted stock. Holders of our convertible notes may convert them
into shares of the Company's common stock under certain circumstances
(see Note 10 - Debt for a description of our convertible subordinated
notes).
The Company adopted Emerging Issues Task Force ("EITF") Issue 04-08, The
Effect of Contingently Convertible Instruments on Diluted Earnings Per
Share, in the fourth quarter of 2004. Under EITF 04-08, we must include the
effect of the conversion of our convertible subordinated notes in the
calculation of diluted earnings per share using the if-converted method as
long as the effect is dilutive. For computation of earnings per share under
conversion conditions, the number of diluted shares outstanding increases
by the amount of shares that are potentially convertible during that
period. Also, net income is adjusted for the calculation to add back
interest expense on the convertible notes as well as deferred financing
fees amortization recorded during the period.
35
The following table reflects the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
2004 2003 2002
---- ---- ----
Numerator for basic earnings per share:
Income from continuing operations $16,257 $23,288 $14,361
Effect of dilutive securities:
Interest expense on convertible notes and related
deferred financing fees, net of tax 3,027 1,881 -
------- ------- -------
Numerator for diluted earnings per share $19,284 $25,169 $14,361
======= ======= =======
Denominator for basic earnings per share:
Weighted average shares outstanding 21,358 21,149 20,941
Effect of dilutive securities:
Convertible notes 4,219 2,492 -
Stock options and unvested restricted stock 182 385 286
------- ------- -------
Dilutive potential common shares 4,401 2,877 286
------- ------- -------
Denominator for diluted earnings per share 25,759 24,026 21,227
======= ======= =======
Basic earnings per share $ 0.76 $ 1.10 $ 0.69
======= ======= =======
Diluted earnings per share $ 0.75 $ 1.05 $ 0.68
======= ======= =======
Comprehensive Income - Comprehensive income includes all changes in
stockholders' equity during a period except those resulting from
investments by owners and distribution to owners. For 2003 and 2002, the
Company's only component of comprehensive income is its net income. For
2004, the Company's comprehensive income includes net income and unrealized
losses on available-for-sale securities.
Use of Estimates - 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 and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of sales and expenses during the reporting period. Actual results
could differ materially from those estimates.
36
Supplemental Cash Flow Information (in thousands):
Year Ended December 31,
2004 2003 2002
Cash paid during the year for:
Interest $ 4,586 $3,740 $ 3,092
Income taxes 318 5,674 6,055
Noncash investing and financing activities:
Acquisition of property utilizing capitalized leases $1,159 $2,212 $ -
Common stock contributed to ESOP 2,723 3,667 3,019
Property plant and equipment purchases included in
accounts payable 2,230 524 1,095
Recent Accounting Pronouncements -- In December 2004, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment
("SFAS No. 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. SFAS 123(R) requires the measurement of the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The cost will
be recognized over the period during which an employee is required to
provide service in exchange for the award, or over the period that a
performance measure is expected to be met. The Company will adopt SFAS
123(R) on July 2, 2005, requiring compensation cost to be recorded as
expense for the portion of the outstanding unvested awards, based on the
grant-date fair value of those awards calculated using the Black-Scholes
option pricing model currently used under SFAS 123 for proforma
disclosures. Based on unvested options currently outstanding, the effect of
adopting SFAS 123(R) will reduce the Company's net income by approximately
$1.4 million in the second half of 2005.
In November 2004, the FASB issued 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.
4. ACQUISITIONS
During 2002 and 2004, the Company completed two acquisitions as follows:
37
o Globe Tool and Manufacturing Company, Inc. ("Globe"), a manufacturer
of precision titanium enclosures for implantable medical devices.
Globe was acquired to further broaden our product offering to include
enclosures.
o NanoGram Devices Corporation ("NanoGram"), a materials research and
development company focused on developing nanoscale materials for
implantable medical devices. NanoGram was acquired to further broaden
our materials science expertise. NanoGram utilizes nanomaterials
synthesis technology in the development of battery and medical device
applications.
These acquisitions have been accounted for using the purchase method of
accounting and accordingly, the results of the operations of these
acquisitions have been included in the consolidated financial statements
from the date of acquisition.
38
Acquisition information (in thousands):
Acquired Company
---------------------------------
Globe NanoGram
---------------- --------------
Acquisition date July 9, 2002 March 16, 2004
Purchase price:
---------------
Cash paid $ 46,637 $ 45,000
Transaction costs 487 716
---------------- --------------
Total purchase price $ 47,124 $ 45,716
================ ==============
Purchase price allocation:
--------------------------
Assets:
Cash $ 923 $ -
Accounts receivable 1,558 -
Refundable income tax 2,427 -
Inventories 3,130 -
Property and equipment 8,490 562
Other assets 263 168
Trademark and names 1,760 -
Patented and unpatented technology 7,392 16,500
Noncompete/employment agreements 1,177 -
Goodwill 35,384 33,363
Liabilities:
Accounts payable 858 117
Accrued payroll and related expenses 3,036 -
Other current liabilities - 718
Deferred income taxes 1,356 4,042
Other liabilities 10,130 -
---------------- --------------
Total purchase price $ 47,124 $ 45,716
================ ==============
Amounts disclosed for Globe as part of the purchase price allocation table
have been expanded from prior year presentation to provide more information
related to the significant assets and liabilities included in the
acquisition.
The NanoGram patented and unpatented technology is being amortized over
11.5 years. The goodwill is not deductible for tax purposes.
39
The following unaudited pro forma summary presents the Company's
consolidated results of operations for 2004 and 2003 as if the NanoGram
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 adjusted interest
income.
December 31,
In thousands except per share amounts: 2004 2003
Revenues $200,119 $216,365
Net income $ 15,195 $ 19,344
Net income per diluted share: $ 0.71 $ 0.89
The proforma results are not necessarily indicative of
those that would have actually occurred had the acquisitions taken place at
the beginning of the periods presented.
5. SHORT-TERM INVESTMENTS
Short-term investments at December 31, 2004 and 2003 consist of the
following (in thousands):
As of December 31, 2004
Gross Gross Estimated
unrealized unrealized 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
============= ======== ======= =======
As of December 31, 2003
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
Available-for-sale:
Auction Rate Securities 95,526 - - 95,526
Held-to-maturity:
Municipal Bonds 11,559 - (1) 11,558
------------- -------- ------- -------
Short-term investments $ 107,085 $ - $ (1)$107,084
============= ======== ======= =======
The municipal bonds have maturity dates ranging from January 2005 to April
2005.
40
6. INVENTORIES
Inventories comprised the following (in thousands):
December 31,
2004 2003
Raw material 14,053 11,688
Work-in-process 11,275 10,421
Finished goods 8,699 6,489
---------------- ----------------
Total 34,027 28,598
================ ================
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment comprised the following (in thousands):
December 31,
2004 2003
Manufacturing machinery and equipment $57,781 $53,313
Buildings and building improvements 16,285 15,380
Information technology hardware and software 8,950 7,384
Leasehold improvements 8,782 5,440
Land and land improvements 4,659 4,659
Property under capital leases 3,370 -
Furniture and fixtures 2,766 2,631
Construction work in process 32,129 8,595
Other 147 148
------------- ------------
134,869 97,550
Less accumulated depreciation (42,659) (33,815)
------------- ------------
Total $92,210 $63,735
============= ============
Depreciation expense for property and equipment, including property under
capital leases, during 2004, 2003 and 2002 was approximately $10.1 million,
$9.3 million, and $7.6 million, respectively.
41
8. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
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
Unamortizing intangible assets:
Trademark and names 31,420 (3,168) 28,252
-------------- ------------- ------------
Total intangible assets $85,108 $(21,124) $63,984
============== ============= ============
As of December 31, 2003
Gross carrying Accumulated Net carrying
amount amortization Amount
Amortizing intangible assets:
Patented technology $21,462 $(8,536) $12,926
Unpatented technology 15,335 (5,549) 9,786
Other 1,340 (863) 477
-------------- ------------- ------------
38,137 (14,948) 23,189
Unamortizing intangible assets:
Trademark and names 31,420 (3,168) 28,252
-------------- ------------- ------------
Total intangible assets $69,557 $(18,116) $51,441
============== ============= ============
Annual amortization expense is estimated to be $3.8 million for 2005 to
2008, and $3.2 million for 2009.
9. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities comprised the following (in
thousands):
December 31,
2004 2003
Salaries and benefits $5,805 $5,170
Profit sharing and bonuses 6,796 9,589
Other 5,508 4,209
------------ ------------
Total $18,109 $18,968
============ ============
42
10. DEBT
Long-term debt comprised the following (in thousands):
December 31,
2004 2003
2.25% convertible subordinated notes, due 2013 $170,000 $170,000
Capital lease obligations 1,652 1,778
---------- ---------
171,652 171,778
Less current portion (1,000) (850)
---------- ---------
Total long-term debt $170,652 $170,928
========== =========
Convertible Subordinated Notes
In May 2003, the Company completed a private placement of contingent
convertible subordinated notes totaling $170.0 million, due 2013. In
November 2003 the Company had a Registration Statement with the Securities
and Exchange Commission declared effective with respect to these notes and
the underlying common stock. The notes bear interest at 2.25 percent per
annum, payable semiannually. Beginning with the six-month interest period
commencing June 15, 2010, the Company will pay additional contingent
interest during any six-month interest period if the trading price of the
notes for each of the five trading days immediately preceding the first day
of the interest period equals or exceeds 120% of the principal amount of
the notes.
Holders may convert the notes into shares of the Company's common stock at
a conversion rate of 24.8219 shares per $1,000 principal amount of notes,
subject to adjustment, before the close of business on June 15, 2013 only
under the following circumstances: (1) during any fiscal quarter commencing
after July 4, 2003, if the closing sale price of the Company's common stock
exceeds 120% of the conversion price for at least 20 trading days in the 30
consecutive trading day period ending on the last trading day of the
preceding fiscal quarter; (2) subject to certain exceptions, during the
five business days after any five consecutive trading day period in which
the trading price per $1,000 principal amount of the notes for each day of
such period was less than 98% of the product of the closing sale price of
the Company's common stock and the number of shares issuable upon
conversion of $1,000 principal amount of the notes; (3) if the notes have
been called for redemption; or (4) upon the occurrence of certain corporate
events.
Beginning June 20, 2010, the Company may redeem any of the notes at a
redemption price of 100% of their principal amount, plus accrued interest.
Note holders may require the Company to repurchase their notes on June 15,
2010 or at any time prior to their maturity following a fundamental change
at a repurchase price of 100% of their principal amount, plus accrued
interest. The notes are subordinated in right of payment to all of our
senior indebtedness and effectively subordinated to all debts and other
liabilities of our subsidiaries.
43
Concurrent with the issuance of the notes, the Company used approximately
$72.5 million of the proceeds from this private placement to pay off the
term loan. Debt issuance expenses totaled $4.5 million and are being
amortized using the effective yield method over a seven-year term.
The fair-value of the convertible subordinated notes as of December 31,
2004 was $154.7 million based on quoted market prices.
Capital Lease Obligations
The Company leases assets under non-cancelable lease arrangements. As of
December 31, 2004, future minimum lease payments under capital leases are
as follows:
(In thousands) Amount
------------- ------
2005 $1,031
2006 659
---------
Total minimum lease payments 1,690
Less imputed interest (38)
---------
Present value of minimum lease payments 1,652
Less current portion (1,000)
---------
Long-term capital lease obligations $652
=========
The fair-value of the capital leases as of December 31, 2004 was $1.6
million based on interest rates in effect at year-end.
Revolving Line of Credit
As of December 31, 2004 the Company had no balance outstanding on its $20.0
million committed revolving line of credit. The revolving line of credit
continues to be available to the Company for future borrowing and matures
on July 1, 2005. The revolving line of credit is secured by the Company's
accounts receivable and inventories and requires the Company to comply with
various quarterly financial covenants, as defined, related to net earnings
or loss before interest, taxes, depreciation, and amortization ("EBITDA"),
and ratios of leverage, interest, fixed charges as they relate to EBITDA
and funded debt to total capitalization. Interest rates under the revolving
line of credit vary with the Company's leverage. The Company is required to
pay a commitment fee of between .50% and .125% per annum on the unused
portion of the revolving line of credit based on the Company's leverage.
44
11. EMPLOYEE BENEFIT PLANS
Savings Plan - The Company sponsors a defined contribution 401(k) plan,
which covers substantially all of its employees. The plan provides for the
deferral of employee compensation under Section 401(k) and a Company match.
Net costs related to this defined contribution plan were approximately $0.9
million, $0.8 million and $0.7 million in 2004, 2003 and 2002,
respectively.
Employee Stock Ownership Plan - The Company sponsored a non-leveraged
Employee Stock Ownership Plan ("ESOP") and related trust prior to June 29,
2004. Effective June 29, 2004 the ESOP was merged into the 401(k) plan.
Under the terms of the amended 401(k) plan document there is an annual
defined contribution equal to five percent of each employee's eligible
annual compensation. This contribution is contributed to the 401(k) plan in
the form of Company stock. Compensation cost recognized for the defined
contribution in Company stock was approximately $2.7 million, $2.7 million,
and $2.3 million in 2004, 2003 and 2002, respectively.
As of December 31, 2004, the 401(k) Plan held 499,430 shares of WGT stock
and there were 121,743 committed-to-be released shares for the plan, which
equals the estimated number of shares to settle the liability based on the
closing market price of the shares at December 31, 2004. The final number
of shares contributed to the plan was 153,268, computed based on the
closing market price of the shares on the actual contribution date of
February 22, 2005, with an adjustment for forfeitures remaining in the
plan.
Education Assistance Program - The Company reimburses tuition, textbooks
and laboratory fees for college or other lifelong learning programs for all
of its employees. The Company also reimburses college tuition for the
dependent children of its full-time employees. For certain employees, the
dependent children benefit vests on a straight-line basis over ten years.
Minimum academic achievement is required in order to receive reimbursement
under both programs. Aggregate expenses under the programs were
approximately $0.8 million, $0.7 million, and $0.6 million in 2004, 2003
and 2002, respectively.
12. STOCK OPTION PLANS
The Company has stock option plans that provide for the issuance of
nonqualified and incentive stock options to employees of the Company. The
Company's 1997 Stock Option Plan ("1997 Plan") authorizes the issuance of
options to purchase up to 480,000 shares of the Company's common stock. The
stock options generally vest over a five-year period and may vary depending
upon the achievement of earnings targets. The stock options expire 10 years
from the date of the grant. Stock options are granted at exercise prices
equal to or greater than the fair market value of the Company's common
stock at the date of the grant.
The Company's 1998 Stock Option Plan ("1998 Plan") authorizes the issuance
of nonqualified and incentive stock options to purchase up to 1,220,000
shares the Company's common stock, subject to the terms of the plan. The
stock options vest over a three to five year period and may vary depending
upon the achievement of earnings targets. The stock options expire 10 years
from the date of the grant. Stock options are granted at exercise prices
equal to or greater than the fair value of the Company's common stock at
the date of the grant.
45
The Company has a stock option plan that provides for the issuance of
nonqualified stock options to Non-Employee Directors (the "Director Plan").
The Director Plan authorizes the issuance of nonqualified stock options to
purchase up to 100,000 shares of the Company's common stock from its
treasury, subject to the terms of the plan. The stock options vest over a
three-year period. The stock options expire 10 years from the date of
grant. Stock options are granted at exercise prices equal to or greater
than the fair value of the Company's common stock at the date of the grant.
As of December 31, 2004, options for 430,183 shares were available for
future grants under the plans. The weighted average remaining contractual
life is seven years.
A summary of the transactions under the 1997 Plan, 1998 Plan, and the
Director Plan for 2002, 2003 and 2004 follows:
Weighted Weighted
Average Average
Option Exercise Grant Date
Activity Price Fair Value
------------- --------- ------------
Options outstanding at December 31, 2001 666,319 $11.38
Options granted 344,774 24.97 $12.22
Options exercised (67,783) 7.77
Options forfeited (67,661) 12.78
-------------
Options outstanding at December 31, 2002 875,649 $16.92
Options granted 377,360 33.28 $16.51
Options exercised (77,094) 11.14
Options forfeited (23,015) 25.20
-------------
Options outstanding at December 31, 2003 1,152,900 $22.50
Options granted 288,516 25.97 $12.62
Options exercised (99,774) 12.51
Options forfeited (91,788) 28.65
-------------
Options outstanding at December 31, 2004 1,249,854 $23.68
=============
Options exercisable at:
December 31, 2002 451,037 12.09
December 31, 2003 657,452 17.39
December 31, 2004 824,453 21.59
46
The following table provides detail regarding the options outstanding and
exercisable at December 31, 2004.
Options Outstanding Options Exercisable
--------------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- ----------- ------------ -------- ----------- ---------
$5.00 165,605 2.8 $5.00 165,604 $5.00
$15.00 - 21.35 241,845 6.3 16.16 163,591 15.64
$23.85 - 35.70 760,706 8.2 28.63 472,381 28.67
$37.36 - 42.57 81,698 8.9 37.79 22,877 37.82
----------- ------------ -------- ----------- ---------
1,249,854 7.1 $23.68 824,453 $21.59
=========== ============ ======== =========== =========
13. RESTRICTED STOCK PLAN
On November 15, 2002, the Company's Board of Directors approved the
Restricted Stock Plan under which stock awards may be granted to employees.
The Plan received shareholder approval at the Annual Meeting of
Stockholders held on May 9, 2003. The number of shares that are reserved
and may be issued under the plan cannot exceed 200,000. The Compensation
and Organization Committee of the Company's Board of Directors determines
the number of shares that may be granted under the plan. Restricted stock
awards are either time-vested or performance-vested based on the terms of
each individual award agreement. Time-vested restricted stock vests 50% on
the first anniversary of the date of the award and 50% on the second
anniversary of the date of the award. Performance-vested restricted stock
vests upon the achievement of certain annual diluted earnings per share
targets by the company, or the seventh anniversary date of the award.
A summary of the transactions under the Restricted Stock Plan for 2003 and
2004 follows:
Restricted Weighted Average
Stock Grant Date
Activity Fair Value
------------- ----------------
Restricted stock outstanding at December 31, 2002
Shares granted 50,400 $35.08
Shares vested (13,500)
Shares forfeited -
-------------
Restricted stock outstanding at December 31, 2003 36,900
Shares granted 19,100 $18.29
Shares vested (13,500)
Shares forfeited (2,200)
-------------
Restricted stock outstanding at December 31, 2004 40,300
=============
47
Unamortized deferred compensation expense with respect to the restricted
stock grants amounted to $0.8 million and $1.2 million at December 31, 2004
and 2003, respectively. The deferred compensation is being amortized based
on the vesting schedules attributable to the underlying restricted stock
grants. Compensation expense of $0.6 million was recognized during 2004 and
2003.
14. OTHER OPERATING EXPENSE
During second quarter 2004, there were two charges included in other
operating expense in the Company's Condensed Consolidated Statement of
Operations.
Patent acquisition. The Company recorded a $2.0 million pre-tax charge
associated with the acquisition of certain patents during the quarter. The
acquired patents cover how wet tantalum capacitors are used in an
Impantable Cardioverter Defibrillator ("ICD"). Although the Company
believed that the patents could have been successfully challenged in court
proceedings prior to the acquisition, a decision was made to acquire the
patents and remove this as a potential obstacle for existing customers to
more fully adopt wet tantalum technology and for potential customers to
initially adopt the technology. The Company had a prior legal opinion that
in effect concluded the patents were not valid, therefore the Company
believes it is appropriate to record the $2.0 million acquisition cost in
accordance with its economic substance as a period expense. This expense is
included in year to date other operating expense for IMC.
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 second quarter.
The severance charges during the second quarter 2004 were $0.6 million and
$0.1 million for IMC and EPS, respectively. The remaining $0.1 million
related to corporate employees and is included in year to date unallocated
operating expenses. There is no remaining accrued severance as of December
31, 2004 related to this event as all amounts have been paid.
48
15. INCOME TAXES
The provision (benefit) for income taxes comprised the following (in
thousands):
Year Ended December 31,
2004 2003 2002
Current:
Federal $(4,620) $4,820 $2,573
State (125) 630 266
------------- ------------- --------------
(4,745) 5,450 2,839
------------- ------------- --------------
Deferred:
Federal 8,818 7,363 4,137
State 3,402 (2,785) (372)
------------- ------------- --------------
12,220 4,578 3,765
------------- ------------- --------------
Provision for income taxes $7,475 $10,028 $6,604
============= ============= ==============
The tax effect of major temporary differences that give rise to the
Company's net deferred tax accounts are as follows (in thousands):
December 31,
2004 2003
Depreciation $(6,023) $(4,776)
Contingent interest on convertible notes (7,194) (2,575)
Amortization of intangible assets (12,843) (1,118)
Tax credits 1,996 2,779
Accrued expenses and deferred compensation 2,007 2,226
Inventory valuation 2,138 1,745
Investments 579 565
Net operating loss carryforwards 2,432 433
Other - 94
----------- ------------
Net deferred tax (liability) asset (16,908) (627)
Less valuation allowance (2,766) (565)
----------- ------------
Net deferred tax (liability) asset $(19,674) $(1,192)
=========== ============
As of December 31, 2004, the Company has available $5.0 million of federal
net operating loss carryforwards that begin expiring in 2022, $1.1 million
of state net operating loss carryforwards that begin to expire in 2018 and
$3.1 million of federal and state tax credit carryforwards that begin
expiring in 2013.
49
In assessing the realizability of deferred tax assets, management
considers, within each taxing jurisdiction, whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies
in making this assessment. Based on the consideration of the weight of both
positive and negative evidence, management has determined that it is more
likely than not that portions of the deferred tax assets remaining at
December 31, 2004 related to the valuation of an investment and certain
state investment tax credits and NOLs will not be realized. The valuation
allowance increase related to the allowance for the state investment tax
credits and NOLs was $2.2 million and the valuation allowance increase
related to investments was $0.01 million.
The provision for income taxes differs in each of the years from the
federal statutory rate due to the following:
Year Ended December 31,
2004 2003 2002
Statutory rate 35.0 % 35.0 % 35.0 %
State taxes, net of federal benefit (1.5) 2.0 3.3
Permanent items (7.2) (6.8) -
Federal and state tax credits (3.3) (2.1) (10.7)
State net operating losses (0.9) - -
Valuation allowance 9.3 - 2.7
Other 0.1 2.0 1.2
---------- --------- ---------
Effective tax rate 31.5 % 30.1 % 31.5 %
========== ========= =========
In 2004, 2003, and 2002, 43,911, 39,090, and 27,608 shares of common stock,
respectively, were issued through the exercise of non-qualified stock
options or through the disqualifying disposition of incentive stock
options. The total tax benefit to the Company from these transactions,
which is credited to additional paid-in capital rather than recognized as a
reduction of income tax expense, was $0.1 million, $0.3 million, and $0.1
million in 2004, 2003, and 2002, respectively. These tax benefits have also
been recognized in the consolidated balance sheet as a reduction of current
income taxes payable.
16. CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of common stock, $.001 par value per share and 100,000,000 shares of
preferred stock, $.001 par value per share. There are no preferred shares
issued or outstanding. There were 21,410,319 and 21,231,121 shares issued
in 2004 and 2003, respectively. There were 21,405,640 and 21,226,357 shares
outstanding in 2004 and 2003, respectively.
17. COMMITMENTS AND CONTINGENCIES
Litigation - The Company is a party to various legal actions arising in the
normal course of business. While 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, litigation is subject to inherent uncertainties.
If an unfavorable ruling were to occur, there exists the possibility of a
material adverse impact in the period in which the ruling occurs.
50
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 $1.7 million.
License agreements - The Company is a party to various license agreements
through 2018 for technology that is utilized in certain of its products.
The most significant of these is an agreement to license the basic
technology used for wet tantalum capacitors. The initial payment under the
original agreement was $0.8 million and was fully amortized in 2002. The
company is required to pay royalties based on agreed upon terms through
August 2014.
Expenses related to license agreements were $1.3 million, $1.5 million, and
$1.4 million, for 2004, 2003, and 2002, respectively.
Product Warranties - The change in aggregate product warranty liability for
the year ended December 31, 2004, is as follows (in thousands):
Beginning balance $313
Additions to warranty reserve 781
Warranty claims paid (168)
------------
Ending balance $926
============
Operating Leases - The Company is a party to various operating lease
agreements for buildings, equipment and software. The Company incurred
operating lease expense of $2.2 million, $1.7 million, and $0.9 million, in
2004, 2003 and 2002, respectively.
If all lease extension options are exercised as expected by the Company,
minimum future annual operating lease payments are $2.4 million in 2005;
$1.7 million in 2006; $1.1 million in 2007; $0.8 million in 2008; and $0.9
million in 2009 and $4.6 million thereafter.
Workers' Compensation Trust - In Western New York, the Company is a member
of a group self-insurance trust that provides workers' compensation
benefits to eligible employees of the Company and other group member
employers. For locations outside of Western New York, the Company utilizes
traditional insurance relationships to provide workers' compensation
benefits. Under the terms of the Trust, the Company makes annual
contributions to the Trust based on reported salaries paid to the employees
using a rate based formula. Based on actual experience, the Company could
receive a refund or be assessed additional contributions. For financial
statement purposes, no amounts have been recorded for any refund or
additional assessment since the Trust has not informed the Company of any
such adjustments. Under the trust agreement, each participating
organization has joint and several liability for trust obligations if the
assets of the trust are not sufficient to cover its obligation. The Company
does not believe that it has any current obligations under the joint and
several liability.
51
Purchase Commitments - Contractual obligations for purchase of goods or
services are defined as agreements that are enforceable and legally binding
on the Company and that specify all significant terms, including: fixed or
minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Our purchase
orders are normally based on our current manufacturing needs and are
fulfilled by our vendors within short time horizons. We enter into blanket
orders with vendors that have preferred pricing and terms, however these
orders are normally cancelable by us without penalty. We do not have
significant agreements for the purchase of raw materials or other goods
specifying minimum quantities or set prices that exceed our expected
requirements in the short-term. We also enter into contracts for outsourced
services; however, the obligations under these contracts were not
significant and the contracts generally contain clauses allowing for
cancellation without significant penalty.
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
contractual obligations for construction of these facilities are $10.0
million and will be financed by existing, or internally generated cash.
18. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: Implantable
Medical Components ("IMC") and Electrochem Power Solutions ("EPS"). The IMC
segment designs and manufactures critical components used in implantable
medical devices. The principal components are batteries, capacitors,
filtered feedthroughs, enclosures and precision components. The principal
medical devices are pacemakers, defibrillators and neurostimulators. The
EPS segment designs and manufactures high performance batteries and battery
packs; principal markets for these products are for oil and gas
exploration, oceanographic equipment, and aerospace.
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. In 2002, segment income did not
include any non-segment specific selling, general and administrative and
research, development and engineering expenses. The change in 2003 to
allocate these expenses is not reflected in the 2002 calculation of segment
income from operations because it is impractical to do so. 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 3.
52
An analysis and reconciliation of the Company's business segment
information to the respective information in the consolidated financial
statements is as follows (dollars in thousands):
2004 2003 2002
Sales:
IMC
Medical batteries:
ICD batteries $35,646 $41,494 $28,518
Pacemakers and other batteries 19,494 24,578 21,692
ICD capacitors 21,981 31,668 24,679
Feedthroughs 47,387 48,257 36,378
Enclosures 21,709 24,742 10,845
Other 26,438 19,482 19,789
------------ ------------ ------------
Total IMC sales 172,655 190,221 141,901
EPS 27,464 26,144 25,395
------------ ------------ ------------
Total sales $200,119 $216,365 $167,296
============ ============ ============
Segment income from operations:
IMC $28,950 $43,504 $40,969
EPS 8,005 4,374 8,262
------------ ------------ ------------
Total segment income from operations 36,955 47,878 49,231
Unallocated operating expenses (10,015) (9,678) (23,325)
------------ ------------ ------------
Operating income as reported 26,940 38,200 25,906
Unallocated other income and expense (3,208) (4,884) (4,941)
------------ ------------ ------------
Income before income taxes as reported $23,732 $33,316 $20,965
============ ============ ============
Depreciation and amortization:
IMC $11,683 $10,809 $10,090
EPS 877 854 807
------------ ------------ ------------
Total depreciation included in segment
income from operations 12,560 11,663 10,897
Unallocated depreciation and amortization 2,275 1,516 1,203
------------ ------------ ------------
Total depreciation and amortization $14,835 $13,179 $12,100
============ ============ ============
The changes in the carrying amount of goodwill :
IMC EPS Total
Balance at December 31, 2003 $116,955 $2,566 $119,521
Goodwill recorded during the year 33,363 - 33,363
Adjustments recorded during the year 2,155 - 2,155
------------ ------------ ------------
Balance at December 31, 2004 $152,473 $2,566 $155,039
============ ============ ============
Amounts disclosed for 2002 and 2003 in the above sales table have been
expanded from previous filings to better coincide with our significant
product lines.
53
Year Ended December 31,
2004 2003 2002
Expenditures for tangible long-lived assets,
excluding acquisitions:
IMC $33,537 $6,924 $6,616
EPS 664 693 1,119
------------- ------------ ------------
Total reportable segments 34,201 7,617 7,735
Unallocated long-lived tangible assets 5,403 4,308 12,766
------------- ------------ ------------
Total expenditures $39,604 $11,925 $20,501
============= ============ ============
December 31,
2004 2003
Identifiable assets, net:
IMC $333,647 $250,642
EPS 20,690 20,817
------------- ------------
Total reportable segments 354,337 271,459
Unallocated assets 123,868 166,784
------------- ------------
Total assets $478,205 $438,243
============= ============
Sales by geographic area are presented by attributing sales from external
customers based on where the products are shipped.
Year Ended December 31,
2004 2003 2002
Sales by geographic area:
United States $129,166 $140,578 $127,145
Foreign countries 70,953 75,787 40,151
------------- ------------ -----------
Consolidated sales $200,119 $216,365 $167,296
============= ============ ===========
December 31,
2004 2003
Long-lived assets:
United States $311,085 $243,879
Foreign countries 4,641 -
------------- ------------
Consolidated long-lived assets $315,726 $243,879
============= ============
54
Three customers accounted for a significant portion of the Company's sales
and accounts receivable as follows:
Sales Accounts Receivable
----------------------------- ----------------------
Year Ended December 31, December 31,
2004 2003 2002 2004 2003
Customer A 36% 46% 41% 27% 31%
Customer B 24% 20% 25% 20% 19%
Customer C 10% 7% 5% 9% 5%
--------- --------- --------- ----------- ----------
Total 70% 73% 71% 56% 55%
========= ========= ========= =========== ==========
19. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(In Thousands, except per share data)
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
2004
Sales $46,475 $45,177 $52,942 $55,525
Gross profit 16,327 17,402 23,818 23,175
Net income 1,859 3,046 4,733 6,619
Earnings per share - basic 0.09 0.14 0.22 0.31
Earnings per share - diluted 0.09 0.14 0.21 0.28
2003
Sales $49,371 $56,335 $55,802 $54,857
Gross profit 19,838 23,873 23,217 22,813
Net income 4,523 7,776 4,952 6,037
Earnings per share - basic 0.21 0.37 0.23 0.29
Earnings per share - diluted 0.21 0.34 0.23 0.28
20. SUBSEQUENT EVENTS - UNAUDITED
On February 23, 2005 the Company announced its intent to consolidate its medical
capacitor and its medical battery 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. The Company will also consolidate 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.
On March 7, 2005 the Company announced its intent to close its Carson City, NV
facility and consolidate the work performed at Carson City into its Tijuana,
Mexico facility.
******
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Restatement.
Subsequent to the filing of the Company's original Form 10-K for the fiscal year
ended December 31, 2004, Management concluded that its consolidated financial
statements should be restated to reflect the impact of the following
corrections:
o Classification of Auction Rate Securities (ARS) - 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 Standard No. 95, Statement of Cash Flows
(SFAS No. 95), requires reclassification to short-term investments. This
reclassification impacted the consolidated balance sheets as of December
31, 2004 and 2003 and consolidated statements of cash flows for the years
ended December 31, 2004 and 2003. There was no impact on earnings or
stockholders' equity in any period.
o Deferred Taxes - A deferred tax asset related to net operating losses
acquired in the Company's acquisition of NanoGram Devices Corporation in
2004 was not recorded during the one year time frame allowed to finalize
the purchase price allocation. The recording of the deferred tax asset
decreased long-term deferred income tax liabilities and correspondingly
decreased goodwill in the consolidated balance sheet as of December 31,
2004. There was no impact on earnings, stockholders' equity, or cash flows
in any period.
o Cash Flows Presentation- The Company has also restated its consolidated
statement of cash flows for the impact of changes in accounts payable
related to the acquisition of property, plant and equipment which are
required to be presented as a non-cash activity per SFAS No. 95. This was a
correction of an error in presentation on the consolidated statements of
cash flows for the years ended December 31, 2004, 2003 and 2002 only, and
had no impact on earnings, the balance sheet, or stockholders equity in any
period.
At the time of the filing of the Company's third quarter 2005 Form 10-Q
(November 9, 2005), Management was preparing restatements to reflect the ARS and
Deferred Tax reclassifications. The combination of these two issues was not
deemed a material weakness. Management discussed these issues with its
independent registered public accounting firm, Deloitte & Touche LLP and with
the Audit Committee of the Board of Directors. After these discussions
Management determined that the Company should correct its previously issued
consolidated financial statements to account for these two restatements. In
light of these restatements, it was also determined that the consolidated
financial statements should no longer be relied upon. This determination was
reported under Item 4.02 in the Form 8-K that the Company filed on November 9,
2005.
56
At the time of the filing of the Company's third quarter 2005 Form 10-Q
(November 9, 2005), the cumulative impact of the Cash Flows Presentation issue
on the September 30, 2005 Statement of Cash Flows was a $38 thousand reduction
in cash flow from operations and a corresponding increase in cash flow from
investing activities. At that time Management also believed that the potential
impact of this issue in other periods was likely immaterial and generally that
this matter would not result in a material misstatement of the Company's
consolidated financial statements. Based on this belief, Management did not
revise its original assessment of the effectiveness of the Company's internal
control over financial reporting at December 31, 2004.
Subsequent to the filing of the third quarter 2005 10-Q, the Company continued
to analyze the impact of the Cash Flow Presentation issue on the Statement of
Cash Flows for the interim and annual periods in 2004 and the March and June
2005 interim periods and discussed this analysis with its independent registered
public accountants. Based on this further analysis, Management determined that
the Cash Flow Presentation issue's impact on the prior period statements of cash
flows would be deemed material. The impact on the statement of cash flows for
the year ended December 31, 2004 was a $1.7 million decrease in operating cash
flows and a corresponding increase in cash flows from investing activities.
Considering this issue to be material, in conjunction with the previously
disclosed restatement, has resulted in Management revising its assessment of the
effectiveness of internal controls over financial reporting as of December 31,
2004 under the guidance issued by the Public Company Accounting Oversight Board.
See Management's Report on Internal Control Over Financial Reporting (as
restated).
(b) Evaluation of Disclosure Controls and Procedures
In connection with the restatements, under the direction of our Chief Executive
Officer and Chief Financial Officer, we reevaluated our disclosure controls and
procedures. It was determined that there was a material weakness in financial
reporting controls that resulted in the restatements described above. Solely as
a result of this material weakness, our Management has revised its earlier
assessment and has now concluded that our disclosure controls and procedures
were not effective as of December 31, 2004.
(c) Remediation of Material Weakness in Internal Control
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 independent registered
public accounting firm, although not part of our control structure,
will participate in these meetings.
57
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 internal control over financial reporting is effective, which should
enable us to conclude for purposes of our 2005 assessment that our system of
internal controls over financial reporting are designed and operating
effectively.
As previously reported, there was no change in our internal control over
financial reporting during the quarter ended December 31, 2004, that materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. However, subsequent to September 30, 2005, we took the
remedial actions described above regarding the material weakness that existed at
December 31, 2004.
(d) Management's Report on Internal Control Over Financial Reporting (as
restated)
The Management of Greatbatch, Inc. is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company.
With the participation of the Chief Executive Officer and the Chief Financial
Officer, our Management conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2004, based on the
framework and criteria established in Internal Control -- Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In the Company's Annual Report on Form 10-K for the year ended December 31,
2004, filed on March 15, 2005, Management concluded that our internal control
over financial reporting was effective as of December 31, 2004. Subsequently,
Management identified three misstatements related to the balance sheet
classification of auction rate securities, the purchase accounting for income
tax attributes of acquired companies, and cash flow presentation of changes in
accounts payable related to the acquisition of property, plant and equipment.
Management determined that these misstatements were the result of a material
weakness in internal control over financial reporting. Specifically, our review
of the financial statements utilizing a 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.
The issues above and the related material weakness has caused us to amend our
Annual Report on Form 10-K for the year ended December 31, 2004, in order to
restate the consolidated financial statements for the years ended December 31,
2004, 2003 and 2002.
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 December 31, 2004.
The Company's independent registered public accounting firm, Deloitte & Touche
LLP, has issued an audit report on our Management's revised assessment of our
internal control over financial reporting as of December 31, 2004. This audit
report follows.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Greatbatch, Inc. (formerly named Wilson Greatbatch Technologies, Inc.)
Clarence, New York
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting (as restated),
that Greatbatch, Inc. (formerly named Wilson Greatbatch Technologies, Inc.) and
subsidiaries (the "Company") did not maintain effective internal control over
financial reporting as of December 31, 2004, because of the effect of the
material weakness identified in management's assessment based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Company's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
59
In our report dated March 15, 2005, we expressed an unqualified opinion on
management's assessment that the Company maintained effective internal control
over financial reporting and an unqualified opinion on the effectiveness of
internal control over financial reporting. As described in the following
paragraph, the Company subsequently identified material misstatements in its
2002, 2003 and 2004 annual financial statements and 2004 and 2005 interim
financial statements, which caused such annual and interim financial statements
to be restated. Management subsequently revised its assessment due to the
identification of a material weakness, described in the following paragraph, in
connection with the financial statement restatement. Accordingly, our opinion on
the effectiveness of the Company's internal control over financial reporting as
of December 31, 2004 expressed herein is different from that expressed in our
previous report.
A material weakness is a significant deficiency, or combination of significant
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. Management identified three misstatements related to the balance
sheet classification of auction rate securities, the purchase accounting for
income tax attributes of acquired companies, and cash flow presentation of
changes in accounts payable related to the acquisition of property, plant and
equipment. Management determined that these misstatements were the result of a
material weakness in internal control over financial reporting. Specifically,
the review of the financial statements utilizing a 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. This material
weakness does not effect the nature, timing, and extent of audit tests applied
in our audit of the consolidated financial statements of the Company as of and
for the year ended December 31, 2004, and this report also does not effect our
report on such restated consolidated financial statements.
In our opinion, management's revised assessment that the Company did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion,
because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2004, based on the criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule of the Company as of and for the
year ended December 31, 2004 and our report dated March 15, 2005, December 16,
2005 as to the effects of the restatement discussed in Note 2, (which report
expressed an unqualified opinion and included an explanatory paragraph relating
to the restatement discussed in Note 2).
/s/ Deloitte & Touche LLP
Buffalo, New York
March 15, 2005 (December 16, 2005 as to the effect of the material weakness
described in Management's Report on Internal Control over Financial Reporting
(as restated))
60
PART III
Reference is made to the information responsive to the Items comprising
this Part III contained in our definitive proxy statement for our 2004 Annual
Meeting of Stockholders, which is incorporated by reference herein.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
The following consolidated financial statements of our company
and report of the independent registered public accounting
firm thereon are set forth below:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheet as of December 31, 2004 and 2003
(As restated).
Consolidated Statement of Operations for the years ended
December 31, 2004, 2003 and 2002.
Consolidated Statement of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 (As restated).
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements (As restated).
(2) FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is included in
this report on Form 10-K: Schedule II - Valuation and
Qualifying Accounts.
61
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Col. C
Additions
-------------------------------------
Col. B Col. E
Balance at Charged to Col. D Balance at
Col. A Beginning Charged to Other Accounts- eductions - End of
Description of Period Costs & Expenses Describe Describe (2) Period
2004
Allowance for
doubtful accounts $ 426 $ 5 $ - $ (26) $ 405
Valuation allowance
for income taxes $ 565 $ 2,201 (1) $ - $ - $ 2,766
2003
Allowance for
doubtful accounts $ 460 $ 25 $ - $ (59) $ 426
Valuation allowance
for income taxes $ 565 $ - $ - $ - $ 565
2002
Allowance for
doubtful accounts $ 447 $ 13 $ - $ - $ 460
Valuation allowance
for income taxes $ - $ 565 (1) $ - $ - $ 565
(1) Allowance recorded in the provision for income taxes.
(2) Accounts written off, net of collections on accounts receivable previously
written off.
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
62
(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23.1* Consent of Deloitte & Touche LLP.
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.
99.1* Risks Related to our Business.
* Filed herewith.
63
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
President, Chief Executive Officer
And Chairman
(Principal Executive Officer)
By /s/ Thomas J. Mazza
----------------------------------
Thomas J. Mazza
Vice President and Controller
(Principal Financial Officer)
By /s/ Marco F. Benedetti
----------------------------------
Marco F. Benedetti
Corporate Controller
(Principal Accounting Officer)
64
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
23.1* Consent of Deloitte & Touche LLP.
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.
99.1* Risks Related to our Business.
* Filed herewith.
65