U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 30, 2007
Commission File Number 1-16137
GREATBATCH, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
16-1531026
(I.R.S. employer identification no.)
9645 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)
(716) 759-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Exchange Act Rule 12b-2
(check one):
---------------------------- --------------------- -------------------------
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
---------------------------- --------------------- -------------------------
Indicate by check mark whether the Registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]
The number of shares outstanding of the Company's common stock, $0.001 par value
per share, as of May 7, 2007 was: 22,327,572 shares.
GREATBATCH, INC.
TABLE OF CONTENTS FOR FORM 10-Q
AS OF AND FOR THE THREE MONTHS ENDED March 30, 2007
Page
COVER PAGE 1
TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations and Comprehensive Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 21
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 34
ITEM 4. Controls and Procedures 34
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 35
ITEM 1A. Risk Factors 35
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 35
ITEM 3. Defaults Upon Senior Securities 35
ITEM 4. Submission of Matters to a Vote of Security Holders 35
ITEM 5. Other Information 35
ITEM 6. Exhibits 35
SIGNATURES 36
EXHIBIT INDEX 37
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GREATBATCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - Unaudited
(in thousands except share and per share data)
-----------------------------------------------------------------------------------------------------
As of
-------------------------------
March 30, December 29,
ASSETS 2007 2006
-------------------------------
Current assets:
Cash and cash equivalents $ 147,128 $ 71,147
Short-term investments available for sale 78,614 71,416
Accounts receivable, net of allowance of $533 in 2007 and $532 in
2006 38,505 31,285
Inventories 54,483 57,667
Refundable income taxes - 1,569
Deferred income taxes 6,021 5,899
Prepaid expenses and other current assets 1,523 2,343
-------------------------------
Total current assets 326,274 241,326
Property, plant, and equipment, net 89,674 91,869
Amortizing intangible assets, net 27,130 28,078
Trademarks and tradenames 28,252 28,252
Goodwill 155,039 155,039
Other assets 6,159 3,263
-------------------------------
Total assets $ 632,528 $ 547,827
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,161 $ 12,657
Accrued expenses and other current liabilities 32,373 29,618
-------------------------------
Total current liabilities 51,534 42,275
Convertible subordinated notes 240,111 170,000
Deferred income taxes 25,490 35,859
-------------------------------
Total liabilities 317,135 248,134
-------------------------------
Stockholders' equity:
Preferred stock, $0.001 par value, authorized 100,000,000 shares;
no shares issued or outstanding in 2007 or 2006 - -
Common stock, $0.001 par value, authorized 100,000,000 shares;
22,317,711 shares issued and outstanding in 2007 and 22,119,142
shares issued and 22,111,516 shares outstanding in 2006 22 22
Additional paid-in capital 232,239 227,187
Treasury stock, at cost, no shares in 2007 and 7,626 shares in 2006 - (205)
Retained earnings 79,834 69,165
Accumulated other comprehensive income 3,298 3,524
-------------------------------
Total stockholders' equity 315,393 299,693
-------------------------------
Total liabilities and stockholders' equity $ 632,528 $ 547,827
===============================
The accompanying notes are an integral part of these condensed consolidated financial statements
-3-
GREATBATCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME - Unaudited
(in thousands except per share data)
-----------------------------------------------------------------------------------------------------
Three months ended
-------------------------------
March 30, March 31,
2007 2006
-------------------------------
Sales $ 76,860 $ 68,107
Costs and expenses:
Cost of sales - excluding amortization of intangible assets 47,288 39,515
Cost of sales - amortization of intangible assets 948 958
Selling, general and administrative expenses 10,033 9,015
Research, development and engineering costs, net 6,452 5,898
Other operating expense, net 1,533 2,669
-------------------------------
Operating income 10,606 10,052
Interest expense 1,144 1,135
Interest income (1,856) (1,192)
Gain on extinguishment of debt (4,473) -
Other income, net (16) (44)
-------------------------------
Income before provision for income taxes 15,807 10,153
Provision for income taxes 5,138 3,503
-------------------------------
Net income $ 10,669 $ 6,650
===============================
Earnings per share:
Basic $ 0.48 $ 0.31
Diluted $ 0.43 $ 0.28
Weighted average shares outstanding:
Basic 22,014 21,738
Diluted 26,470 26,103
Comprehensive income:
Net income $ 10,669 $ 6,650
Net unrealized gain (loss) on short-term investments available for
sale, net of tax (226) 26
-------------------------------
Comprehensive income $ 10,443 $ 6,676
===============================
The accompanying notes are an integral part of these condensed consolidated financial statements
-4-
GREATBATCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
-----------------------------------------------------------------------------------------------------
Three months ended
-------------------------------
March 30, March 31,
2007 2006
--------------- --------------
Cash flows from operating activities:
Net income $ 10,669 $ 6,650
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,989 4,918
Stock-based compensation 2,548 2,207
Gain on extinguishment of debt (4,473) -
Deferred income taxes (10,369) 1,708
(Gain) loss on disposal of assets (251) 3
Changes in operating assets and liabilities:
Accounts receivable (7,220) (9,860)
Inventories 3,184 (3,016)
Prepaid expenses and other current assets 820 (113)
Accounts payable 6,617 2,069
Accrued expenses and other current liabilities (13,266) (9,954)
Income taxes 15,370 1,807
--------------- --------------
Net cash provided by (used in) operating activities 8,618 (3,581)
--------------- --------------
Cash flows from investing activities:
Short-term investments:
Purchases (22,925) (10,589)
Proceeds from dispositions 15,379 10,350
Acquisition of property, plant and equipment (1,829) (3,692)
Proceeds from sale of property, plant and equipment 1 -
Insurance proceeds for replacement of assets 300 -
Increase in other assets - (38)
--------------- --------------
Net cash used in investing activities (9,074) (3,969)
--------------- --------------
Cash flows from financing activities:
Principal payments of long-term debt - (299)
Proceeds from issuance of long-term debt 76,000 -
Issuance of common stock 610 334
Excess tax benefits from stock-based awards 32 -
Net repurchase of treasury stock (205) -
--------------- --------------
Net cash provided by financing activities 76,437 35
--------------- --------------
Net increase (decrease) in cash and cash equivalents 75,981 (7,515)
Cash and cash equivalents, beginning of year 71,147 46,403
--------------- --------------
Cash and cash equivalents, end of period $ 147,128 $ 38,888
=============== ==============
The accompanying notes are an integral part of these condensed consolidated financial statements
-5-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information
(Accounting Principles Board Opinion ("APB") No. 28, Interim Financial
Reporting) and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information
necessary for a fair presentation of financial position, results of
operations, and cash flows in conformity with accounting principles
generally accepted in the United States of America. Operating results for
interim periods are not necessarily indicative of results that may be
expected for the fiscal year as a whole. In the opinion of management, the
condensed consolidated financial statements reflect all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation of the results of Greatbatch, Inc. and its indirect
wholly-owned subsidiary Greatbatch, Ltd. (collectively the "Company") for
the periods presented. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, sales, expenses,
and related disclosures at the date of the financial statements and during
the reporting period. Actual results could differ from these estimates. The
December 29, 2006 condensed consolidated balance sheet data was derived
from audited financial statements but does not include all disclosures
required by accounting principles generally accepted in the United States
of America. For further information, refer to the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K
for the year ended December 29, 2006. The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st.
For 52-week years, each quarter contains 13 weeks. The first quarter of
2007 and 2006 ended on March 30 and March 31, respectively.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended
------------------------------
March 30, March 31,
2007 2006
------------------------------
Noncash investing and financing activities: (in thousands)
Net unrealized gain (loss) on available-for-sale
securities $ (226) $ 26
Common stock contributed to 401(k) Plan 2,956 2,780
Property, plant and equipment purchases included in
accounts payable 695 1,647
Deferred financing fees and acquisition costs included
in accrued expenses and other current liabilities
(note 6) 4,495 530
Exchange of convertible subordinated notes (note 6) 117,782 -
Cash paid (received) during the period for:
Interest $ 337 $ 16
Income taxes 105 (13)
-6-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
3. SHORT-TERM INVESTMENTS
Short-term investments available for sale at March 30, 2007 and December
29, 2006 are comprised of the following (in thousands):
Gross Gross
unrealized unrealized Estimated
Cost gains losses fair value
---------------------------------------------
March 30, 2007
--------------
Equity securities $ 291 $ 4,274 $ (34)$ 4,531
Auction rate securities and other 74,083 - - 74,083
---------------------------------------------
Total available for sale securities $ 74,374 $ 4,274 $ (34)$ 78,614
=============================================
December 29, 2006
-----------------
Equity securities $ 291 $ 4,588 $ - $ 4,879
Auction rate securities and other 66,537 4 (4) 66,537
---------------------------------------------
Total available for sale securities $ 66,828 $ 4,592 $ (4)$ 71,416
=============================================
In April 2007, the Company sold an equity security investment which
resulted in a pre-tax gain of $4.0 million.
4. INVENTORIES
Inventories are comprised of the following (in thousands):
March 30, December 29,
2007 2006
----------------------------
Raw materials $ 27,755 $ 28,568
Work-in-process 13,500 13,528
Finished goods 13,228 15,571
----------------------------
Total $ 54,483 $ 57,667
============================
-7-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
5. AMORTIZING INTANGIBLE ASSETS
Amortizing intangible assets are comprised of the following (in thousands):
Gross carrying Accumulated Net carrying
amount amortization amount
----------------------------------------------
March 30, 2007
--------------
Patented technology $ 21,462 $ (13,711) $ 7,751
Unpatented technology 30,886 (11,531) 19,355
Other 1,340 (1,316) 24
------------- ---------------- ---------------
Total amortizing intangible
assets $ 53,688 $ (26,558) $ 27,130
============= ================ ===============
December 29, 2006
-----------------
Patented technology $ 21,462 $ (13,320) $ 8,142
Unpatented technology 30,886 (10,975) 19,911
Other 1,340 (1,315) 25
------------- ---------------- ---------------
Total amortizing intangible
assets $ 53,688 $ (25,610) $ 28,078
============= ================ ===============
Aggregate amortization expense for the first quarter of 2007 and 2006 was
$0.9 million and $1.0 million, respectively. As of March 30, 2007, annual
amortization expense is estimated to be $2.8 million for the remainder of
2007, $3.8 million for 2008, $3.2 million for 2009 and $2.7 million for
2010, 2011 and 2012. The above amounts do not contemplate the intangible
assets that will be recorded in connection with the acquisitions of BIOMEC,
Inc. and Enpath Medical, Inc. (See note 14).
6. DEBT
Long-term debt is comprised of the following (in thousands):
March 30, December 29,
2007 2006
----------- ------------
2.25% convertible subordinated notes I, due
2013 $ 52,218 $ 170,000
2.25% convertible subordinated notes II, due
2013 197,782 -
Unamortized discount (9,889) -
----------- ------------
Total long-term debt $ 240,111 $ 170,000
=========== ============
Convertible Subordinated Notes - In May 2003, the Company completed a
private placement of $170.0 million of 2.25% convertible subordinated
notes, due 2013 ("CSN I"). In November 2003 the Company had a registration
statement with the Securities and Exchange Commission ("SEC") declared
effective with respect to these notes and the underlying common stock. In
March 2007, the Company entered into separate, privately negotiated
agreements to exchange $117.8 million of CSN I for an equivalent principal
amount of a new series of 2.25% convertible subordinated notes due 2013
("CSN II") (collectively the "Exchange").
The primary purpose of the Exchange was to eliminate the June 15, 2010 call
and put option that is included in the terms of CSN I. In connection with
the Exchange, the Company issued an additional $80 million aggregate
principal amount of CSN II at a price of $950 per $1,000 of principal. In
April 2007, the Company filed a registration statement with the SEC with
respect to these notes and has 90 days from March 28, 2007 to have such
registration statement declared effective. In the event that the Company
fails to comply with this requirement it is obligated to make additional
payments equal to 0.5% of the aggregate principal amount outstanding.
-8-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
The Exchange was accounted for as an extinguishment of debt and resulted in
a pre-tax gain of $4.5 million ($2.9 million net of tax) or $0.11 per
diluted share. As a result of the extinguishment, the Company had to
recapture the tax interest expense that was previously deducted on the
extinguished debentures. This resulted in an additional current income tax
liability of approximately $11.3 million, which is payable in 2007. This
amount was previously recorded as a non-current deferred tax liability on
the balance sheet. The following is a summary of the significant terms of
CSN I and CSN II:
CSN I - The notes bear interest at 2.25 percent per annum, payable
semiannually. Holders may convert the notes into shares of the Company's
common stock at a conversion rate of 24.8219 shares per $1,000 of
principal, 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 $40.29 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 of principal 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 of principal; (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 the Company's subsidiaries.
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.
CSN II - The notes bear interest at 2.25 percent per annum, payable
semiannually. The holders may convert the notes into shares of the
Company's common stock at a conversion price of $34.70 per share, which is
equivalent to a conversion ratio of 28.8219 shares per $1,000 of principal.
The conversion price and the conversion ratio will adjust automatically
upon certain changes to the Company's capitalization.
The notes are convertible at the option of the holders at such time as: (i)
the closing price of the Company's common stock exceeds 150% of the
conversion price of the notes for 20 out of 30 consecutive trading days;
(ii) the trading price per $1,000 of principal is less than 98% of the
product of the closing sale price of common stock for each day during any
five consecutive trading day period and the conversion rate per $1,000 of
principal; (iii) the notes have been called for redemption; (iv) the
Company distributes to all holders of common stock rights or warrants
entitling them to purchase additional shares of common stock at less than
-9-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
the average closing price of common stock for the ten trading days
immediately preceding the announcement of the distribution; (v) the Company
distributes to all holders of common stock any form of dividend which has a
per share value exceeding 5% of the price of the common stock on the day
prior to such date of distribution; (vi) the Company affects a
consolidation, merger, share exchange or sale of assets pursuant to which
its common stock is converted to cash or other property; (vii) the period
beginning 60 days prior to but excluding June 15, 2013; and (viii) certain
fundamental changes occur or are approved by the Company's Board of
Directors.
Conversions in connection with corporate transactions that constitute a
fundamental change require the Company to pay a premium make-whole amount
whereby the conversion ratio on the notes may be increased by up to 8.2
shares per $1,000 of principal. The premium make-whole amount will be paid
in shares of common stock upon any such conversion, subject to the net
share settlement feature of the notes described below.
The notes contain a net share settlement feature that requires the Company
to pay cash for each $1,000 of principal. Any amounts in excess of $1,000
will be settled in shares of the Company's common stock, or at the
Company's option, cash. The Company has a one-time irrevocable election to
pay the holders in shares of its common stock, which it currently does not
plan to exercise.
The notes are redeemable by the Company at any time on or after June 20,
2012, or at the option of a holder upon the occurrence of certain
fundamental changes affecting the Company. The notes are subordinated in
right of payment to all of our senior indebtedness and effectively
subordinated to all debts and other liabilities of the Company's
subsidiaries.
The following is a reconciliation of deferred financing fees for the first
quarter of 2007, which are included in other assets:
Balance at December 29, 2006 $ 2,305
Financing costs deferred 4,331
Write off during the period due to extinguishment (1,416)
Amortization during the period (180)
-----------
Balance at March 30, 2007 $ 5,040
===========
The $4.3 million of financing fees deferred in connection with the Exchange
and new CSN II notes issued will be paid in the second quarter of 2007.
Revolving Line of Credit - The Company maintains a three-year $50 million
Revolving Credit Facility (the "Revolver"), which contains a $10.0 million
sub-limit for the issuance of commercial or standby letters of credit. The
Revolver is secured by the Company's non-realty assets including cash,
accounts and notes receivable, and inventories and has an expiration date
of May 31, 2008. The Revolver requires compliance with two quarterly
financial covenants, as defined. The first relates to the ratio of
consolidated net earnings or loss before interest, taxes, depreciation, and
amortization ("EBITDA") to fixed charges. The second is a leverage ratio,
which is calculated based on the ratio of consolidated funded debt less
cash, cash equivalent investments and short-term investments to
consolidated EBITDA. Interest rates under the Revolver vary with the
-10-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
Company's leverage. The Company is required to pay a commitment fee of
between 0.125% and 0.250% per annum on the unused portion of the Revolver
based on the Company's leverage. As of March 30, 2007, the Company had no
balance outstanding on the Revolver.
In April 2007, the Company signed a commitment letter for a new five-year
senior credit facility (the "Credit Facility") consisting of a $235 million
revolving credit facility, which can be increased to $335 million upon the
Company's request. The Credit Facility also contains a $15 million letter
of credit subfacility and a $15 million swingline subfacility. This Credit
Facility will replace the $50 million Revolver and has similar financial
covenants, interest rates, commitment fees and prioritization as the
Revolver. The Company expects that this agreement will become effective in
the second quarter of 2007.
7. STOCK-BASED COMPENSATION
Compensation costs related to share-based payments for the three months
ended March 30, 2007 totaled $1.7 million, $1.1 million net of tax, or
$0.04 per diluted share. This compares to $1.4 million, $0.9 million net of
tax, or $0.03 per diluted share for the three months ended March 31, 2006.
The following table summarizes stock option activity related to the
Company's stock-based incentive plans:
Weighted
average
Weighted remaining Aggregate
Number of average contractual intrinsic
stock exercise life (in value(1) (in
options price years) millions)
-----------------------------------------------------
Outstanding at January 1, 2006 1,397,160 $ 23.16
Granted(2) 483,265 23.92
Exercised (160,605) 12.97
Forfeited or Expired (93,291) 24.94
-------------
Outstanding at December 29, 2006 1,626,529 $ 24.27 7.4 $ 6.4
Granted 164,832 25.50
Exercised (32,748) 18.63
Forfeited or Expired (44,115) 29.92
-------------
Outstanding at March 30, 2007 1,714,498 $ 24.36 7.4 $ 4.4
=====================================================
Exercisable at March 30, 2007 904,913 $ 25.30 6.1 $ 2.6
=====================================================
(1) Intrinsic value is calculated for in-the-money options (exercise price
less than market price) outstanding and/or exercisable as the
difference between the market price of our common shares as of March
30, 2007 ($25.50) and the weighted average exercise price of the
underlying options, multiplied by the number of options outstanding
and/or exercisable.
(2) Includes 183,648 performance based stock options which had a weighted
average exercise price of $22.38 per share.
-11-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
The weighted-average fair value and assumptions used to value options
granted are as follows:
Three months ended
---------------------------------
March 30, March 31,
2007 2006
---------------- ---------------
Weighted-average fair value $10.33 $10.41
Risk-free interest rate 4.48% 4.63%
Expected volatility 39% 40%
Expected life (in years) 5 5
Expected dividend yield 0% 0%
The following table summarizes restricted stock and restricted stock unit
activity related to the Company's plans:
Weighted average
Activity fair value
--------------- ----------------
Nonvested at January 1, 2006 93,956 $ 22.46
Shares granted 145,126 23.25
Shares vested (25,911) 20.00
Shares forfeited (9,015) 22.63
---------------
Nonvested at December 29, 2006 204,156 $ 23.32
Shares granted 63,338 25.50
Shares vested (9,436) 25.50
Shares forfeited -
---------------
Nonvested at March 30, 2007 258,058 $ 23.78
===============
On March 6, 2007, the Board of Directors awarded 50,193 shares of
restricted stock to executives of the Company. These awards had a value of
$1.3 million as of the grant date and are subject to approval by
stockholders, at the Company's 2007 Annual Meeting of Stockholders which
will be held on May 22, 2007, of an amendment to the Company's 2005 Stock
Incentive Plan to increase the number of shares available for grant by
1,450,000 shares.
8. OTHER OPERATING EXPENSE
The following were recorded in other operating expense, net in the
Company's Consolidated Statements of Operations and Comprehensive Income
(in thousands):
Three months ended
-------------------------
March 30, March 31,
2007 2006
----------- -----------
(a) Alden facility consolidation $ - $ 515
(b) Carson City facility shutdown and Tijuana
facility consolidation No. 1 386 1,228
(c) Columbia facility shutdown, Tijuana facility
consolidation No. 2 and RD&E consolidation 1,303 922
(d) ECP expansion 137 -
(e) Asset dispositions and other (293) 4
----------- -----------
$ 1,533 $ 2,669
=========== ===========
-12-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
(a) Alden Facility consolidation - Beginning in the first quarter of 2005
and ending in the second quarter of 2006 the Company consolidated the
medical capacitor manufacturing operations in Cheektowaga, NY, and the
implantable medical battery manufacturing operations in Clarence, NY, into
the advanced power source manufacturing facility in Alden, NY ("Alden
Facility"). The Company also consolidated the capacitor research,
development and engineering operations from the Cheektowaga, NY facility
into the Technology Center in Clarence, NY.
The total cost for these consolidation efforts was $3.4 million, which was
below the Company's original estimate of $3.5 to $4.0 million. The expenses
for the Alden Facility consolidation are included in the IMC business
segment and included the following:
o Production inefficiencies and revalidation - $0.3 million;
o Moving and facility closures - $2.7 million; and
o Other - $0.4 million.
(b) Carson City Facility shutdown and Tijuana Facility consolidation No. 1.
On March 7, 2005, the Company announced its intent to close the Carson
City, NV facility ("Carson City Facility") and consolidate the work
performed at that facility into the Tijuana, Mexico facility ("Tijuana
Facility consolidation No. 1").
The Company delayed the anticipated final closing of the Carson City
Facility until the second quarter of 2007 in order to accommodate a
customer's regulatory approval. If this closing is delayed further,
additional costs could be incurred. The total revised estimate for this
plan is anticipated to be between $7.7 million and $7.9 million of which
$7.6 million has been incurred through March 30, 2007. The major categories
of costs include the following:
o Costs related to the shutdown of the Carson City Facility:
a. Severance and retention - $3.9 million;
b. Accelerated depreciation - $0.6 million; and
c. Other - $0.5 million.
o Costs related to the Tijuana Facility consolidation No. 1:
a. Production inefficiencies and revalidation - $0.4 million;
b. Relocation and moving - $0.2 million;
c. Personnel (including travel, training and duplicate wages) - $1.5
to $1.7 million; and
d. Other - $0.6 million.
All categories of costs are considered to be cash expenditures, except
accelerated depreciation. Once the moves are completed, the Company
anticipates annual cost savings in the range of $2.5 million to $3.1
million. The expenses for the Carson City Facility shutdown and the Tijuana
Facility consolidation No. 1 are included in the IMC business segment.
-13-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
Accrued liabilities related to the Carson City Facility shutdown are
comprised of the following (in thousands):
Severance and Accelerated
retention depreciation Other Total
-------------------------------------------------------------
Restructuring charges $ 3,551 $ 600 $ 278 $ 4,429
Cash payments (2,394) - (278) (2,672)
Write-offs - (600) - (600)
-------------------------------------------------------------
Balance, December 29, 2006 $ 1,157 $ - $ - $ 1,157
Restructuring charges 279 - - 279
Cash payments (134) - - (134)
-------------------------------------------------------------
Balance, March 30, 2007 $ 1,302 $ - $ - $ 1,302
=============================================================
Accrued liabilities related to the Tijuana Facility consolidation No. 1 are
comprised of the following (in thousands):
Production
inefficiencies Relocation
and revalidation and moving Personnel Other Total
------------------------------------------------------------------------------
Restructuring charges $ 293 $ 124 $ 1,701 $ 636 $ 2,754
Cash payments (293) (124) (1,701) (636) (2,754)
------------------------------------------------------------------------------
Balance, December 29, 2006 $ - $ - $ - $ - $ -
Restructuring charges 107 - - - 107
Cash payments (107) - - - (107)
------------------------------------------------------------------------------
Balance, March 30, 2007 $ - $ - $ - $ - $ -
==============================================================================
(c) Columbia Facility shutdown, Tijuana Facility consolidation No. 2 and
RD&E consolidation. On November 16, 2005, the Company announced its intent
to close both the Columbia, MD facility ("Columbia Facility") and the
Fremont, CA Advanced Research Laboratory ("ARL"). The manufacturing
operations at the Columbia Facility will be moved into the Tijuana Facility
("Tijuana Facility consolidation No. 2"). The research, development and
engineering ("RD&E") and product development functions at the Columbia
Facility and at ARL will relocate to the Technology Center in Clarence, NY.
The total estimated cost for this facility consolidation plan is
anticipated to be between $8.4 million and $8.9 million of which $7.6
million has been incurred through March 30, 2007. The ARL move and closure
portion of this consolidation project is complete. The Company expects to
incur and pay the remaining cost for the other portions of the
consolidation project in 2007.
-14-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
The major categories of costs include the following:
o Costs related to the shutdown of the Columbia Facility and ARL and the
move and consolidation of the RD&E functions to Clarence, NY:
a. Severance and retention - $2.8 to $3.0 million;
b. Personnel (including travel, training and duplicate wages) - $1.5
million
c. Accelerated depreciation/asset write-offs - $0.5 million; and
d. Other - $0.3 to $0.4 million.
o Costs related to Tijuana Facility consolidation No. 2:
a. Production inefficiencies and revalidation - $0.4 to $0.5
million;
b. Relocation and moving - $0.2 million;
c. Personnel (including travel, training and duplicate wages) - $2.6
to $2.7 million; and
d. Other (including asset write-offs) - $0.1 million.
All categories of costs are considered to be cash expenditures, except for
accelerated depreciation and asset write-offs. Once the moves are
completed, the Company anticipates annual cost savings in the range of $5.0
million to $6.0 million. The expenses for the Columbia Facility and ARL
shutdowns, the Tijuana Facility consolidation No. 2 and the RD&E
consolidation are included in the IMC business segment.
Accrued liabilities related to the Columbia Facility and ARL shutdowns and
the RD&E consolidation are comprised of the following (in thousands):
Accelerated
Severance and depreciation /
retention Personnel asset write-offs Other Total
-------------------------------------------------------------------------
Restructuring charges $ 2,297 $ 701 $ 509 $ 428 $ 3,935
Cash payments (550) (701) - (428) (1,679)
Write-offs - - (509) - (509)
-------------------------------------------------------------------------
Balance, December 29, 2006 $ 1,747 $ - $ - $ - $ 1,747
Restructuring charges 510 72 - 4 586
Cash payments (257) (72) - (4) (333)
-------------------------------------------------------------------------
Balance, March 30, 2007 $ 2,000 $ - $ - $ - $ 2,000
=========================================================================
-15-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
Accrued liabilities related to Tijuana Facility consolidation No. 2 are
comprised of the following (in thousands):
Production
inefficiencies
and Relocation and
revalidation moving Personnel Other Total
------------------------------------------------------------------------------------
Restructuring charges $ 264 $ 149 $ 1,594 $ 317 $ 2,324
Cash payments (264) (149) (1,594) (317) (2,324)
------------------------------------------------------------------------------------
Balance, December 29, 2006 $ - $ - $ - $ - $ -
Restructuring charges 60 7 433 217 717
Cash payments (60) (7) (433) (217) (717)
------------------------------------------------------------------------------------
Balance, March 30, 2007 $ - $ - $ - $ - $ -
====================================================================================
(d) Electrochem Commercial Power ("ECP") expansion. In February 2007, the
Company announced that it will close its current manufacturing facility in
Canton, MA and construct a new 80,000 square foot facility in the
Massachusetts area to perform those operations in. The expected completion
of this $28 million expansion project is mid-2008. The total expense to be
recognized for this relocation is estimated to be $2.2 million to $2.4
million. Costs related to this move are included in the ECP business
segment and include the following:
o Production inefficiencies and revalidation - $0.6 million;
o Moving and facility closure - $0.9 million to $1.0 million;
o Accelerated depreciation - $0.4 million; and
o Other - $0.3 million to $0.4 million.
(e) Asset dispositions and other. During the first quarter of 2007, the
Company received $0.3 million of insurance proceeds related to equipment
damaged during transportation to the Tijuana Facility in the second quarter
of 2006. The remaining expense is for property, plant and equipment
dispositions.
9. INCOME TAXES
Effective in the first quarter of 2007, the Company adopted the provisions
of Financial Standards Accounting Board ("FASB") Interpretation ("FIN") No.
48 Accounting for Uncertainty in Income Taxes, an interpretation of FASB
Statement of Financial Accounting Standards ("SFAS") No. 109. FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized under
SFAS 109. FIN No. 48 prescribes a recognition threshold and measurement
attribute for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return and also provides
guidance on various related matters such as derecognition, interest and
penalties, and disclosure.
Upon adoption of FIN No. 48, the Company did not recognize any adjustment
to its $1.8 million of unrecognized tax benefits, all of which would
favorably impact the effective tax rate (net of federal benefit on state
issues), if recognized. The Company's unrecognized tax benefits consist of
refund claims which did not meet the more likely than not threshold under
FIN No. 48. At the end of the first quarter, there was no change in the
balance of unrecognized tax benefits. The Company anticipates that the
total unrecognized tax benefits could significantly change within the next
twelve months due to the settlement of audits/appeals currently in process,
however, quantification of an estimated range cannot be made at this time.
-16-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
The Company will recognize interest expense related to uncertain tax
positions as Interest Expense. Penalties, if incurred, would be recognized
as a component of Selling, General and Administrative Expenses. At the end
of the first quarter, there was no accrued interest or penalties related to
uncertain tax positions. The tax years 2003-2006 remain open to examination
by the major taxing jurisdictions to which we are subject. The 2001 and
2002 tax years remain open in certain jurisdictions as a result of
audits/appeals currently in process.
10. COMMITMENTS AND CONTINGENCIES
Litigation - The Company is a party to various legal actions arising in the
normal course of business including actions brought by former employees who
were terminated in connection with our consolidation initiatives. 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.
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 matter. The potential risk of loss is between $0.0 and $1.7
million.
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.
The change in aggregate product warranty liability for the quarter ended
March 30, 2007 is as follows (in thousands):
Beginning balance at December 29, 2006 $ 1,993
Additions to warranty reserve 452
Warranty claims paid (721)
------------
Ending balance at March 30, 2007 $ 1,724
============
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. As of March 30, 2007,
the total contractual obligation related to such expenditures is
approximately $10.5 million and will be financed by existing cash,
short-term investments or cash generated from operations. 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.
-17-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
11. EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
Three months ended
----------------------------
March 30, March 31,
2007 2006
----------------------------
Numerator for basic earnings per share:
Net Income $ 10,669 $ 6,650
Effect of dilutive securities:
Interest expense on convertible notes and related
deferred financing fees, net of tax 727 733
----------------------------
Numerator for diluted earnings per share $ 11,396 $ 7,383
============================
Denominator for basic earnings per share:
Weighted average shares outstanding 22,014 21,738
Effect of dilutive securities:
Convertible notes 4,219 4,219
Stock options and unvested restricted stock 237 146
----------------------------
Dilutive potential common shares 4,456 4,365
----------------------------
Denominator for diluted earnings per share 26,470 26,103
============================
Basic earnings per share $ 0.48 $ 0.31
============================
Diluted earnings per share $ 0.43 $ 0.28
============================
The diluted weighted average share calculations do not include 786,716 and
1,123,903 of stock options for the three months ended March 30, 2007 and
March 31, 2006, respectively, as they are not dilutive to the earnings per
share calculations.
12. COMPREHENSIVE INCOME
The Company's comprehensive income includes net income and the net
unrealized gain (loss) on its short-term investments available for sale.
The net unrealized gain (loss) on short-term investments available for sale
reported on the Condensed Consolidated Statements of Operations and
Comprehensive Income are shown net of a deferred income tax benefit of $122
thousand and tax expense of $8 thousand for the three month periods ended
March 30, 2007 and March 31, 2006, respectively.
-18-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
13. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: Implantable
Medical Components ("IMC") and Electrochem Commercial Power ("ECP"). 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.
Additionally, the IMC business includes value-added assembly of products
that incorporate these components. The principal medical devices are
pacemakers, defibrillators and neurostimulators. The ECP segment designs
and manufactures high performance batteries and battery packs; principal
markets for these products are for oil and gas exploration, pipeline
inspection, telematics, oceanography equipment, seismic, communication,
military and aerospace applications.
The Company defines segment income from operations as sales less cost of
sales, including amortization, and expenses attributable to
segment-specific selling, general, administrative, research, development,
engineering and other operating expenses. Segment income also includes a
portion of non-segment specific selling, general, administrative, research,
development and engineering expenses based on allocations appropriate to
the expense categories. The remaining unallocated operating expenses are
primarily corporate headquarters and administrative function expenses. The
unallocated operating expenses along with other income and expense are not
allocated to reportable segments. Transactions between the two segments are
not significant.
An analysis and reconciliation of the Company's business segment
information to the respective information in the consolidated financial
statements is as follows (in thousands):
Three months ended
----------------------------
March 30, March 31,
Sales: 2007 2006
----------------------------
IMC
ICD batteries $ 11,651 $ 12,679
Pacemaker and other batteries 5,845 5,787
ICD capacitors 8,514 3,568
Feedthroughs 18,393 16,288
Enclosures 5,706 6,340
Other medical 15,087 12,918
----------------------------
Total IMC 65,196 57,580
ECP 11,664 10,527
----------------------------
Total sales $ 76,860 $ 68,107
============================
Segment income from operations:
IMC $ 11,721 $ 10,900
ECP 2,722 2,843
----------------------------
Total segment income from operations 14,443 13,743
Unallocated operating income
(expenses) (3,837) (3,691)
----------------------------
Operating income as reported 10,606 10,052
Unallocated other income 5,201 101
----------------------------
Income before provision for income
taxes as reported $ 15,807 $ 10,153
============================
The carrying amount of goodwill at March 30, 2007 and December 29, 2006 for
IMC was $152.4 million and $2.6 million for ECP.
-19-
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't) - Unaudited
--------------------------------------------------------------------------------
14. ACQUISITIONS (Subsequent Event)
On April 3, 2007, the Company acquired substantially all of the assets of
BIOMEC, Inc. ("BIOMEC") for $11.4 million in cash and future additional
consideration. BIOMEC has grants in place that will fund substantially all
of its development costs through 2008. Currently, the engineering team is
working on various projects, including a novel-polymer coating (biomimetic)
that mimics the surface of endothelial cells of blood vessels.
Additionally, BIOMEC has a product development agreement and a 20%
investment partnership in IntElect Medical, Inc., an early stage
neurostimulation device company that works in conjunction with the
Cleveland Clinic. This transaction was accounted for under the purchase
method of accounting.
On April 30, 2007, the Company jointly announced with Enpath Medical, Inc.
("Enpath") that they have entered into a definitive merger agreement under
which the Company will acquire Enpath for $14.38 per share in cash, or
approximately $102 million, including assumption of debt. Under the terms
of the agreement, the Company will commence a tender offer for all of
Enpath's outstanding shares no later than May 8, 2007. The transaction is
subject to customary closing conditions and regulatory approvals and the
tender of a majority of Enpath's outstanding shares, on a fully diluted
basis. The purchase price will be funded out of the Company's available
cash and short-term investments. The transaction is expected to close in
late June. Enpath is a medical products company engaged in designing,
developing, manufacturing and marketing single use medical device products
for the cardiac rhythm management, neuromodulation and interventional
radiology markets.
15. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 2007, the FASB issued SFAS No 159, The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment of FASB
Statement No. 115. This Statement provides entities with an option to
choose to measure eligible items at fair value at specified election dates.
If elected, an entity must report unrealized gains and losses on the item
in earnings at each subsequent reporting date. The fair value option: may
be applied instrument by instrument, with a few exceptions, such as
investments otherwise accounted for by the equity method; is irrevocable
(unless a new election date occurs); and is applied only to entire
instruments and not to portions of instruments. The Company is still
evaluating the impact of SFAS No. 159 on its financial statements, which is
effective beginning in fiscal year 2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.
This Statement defines fair value, establishes a framework for measuring
fair value while applying generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS No. 157 establishes
a fair value hierarchy that distinguishes between (1) market participant
assumptions based on market data obtained from independent sources and (2)
the reporting entity's own assumptions developed based on unobservable
inputs. The Company is still evaluating the impact of SFAS No. 157 on its
financial statements, which is effective beginning in fiscal year 2008.
-20-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
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 that
enable our customers to introduce IMDs that are progressively smaller, longer
lasting, more efficient and more functional. Additionally, through our
manufacturing facility in Tijuana Mexico, our IMC business includes value-added
assembly of products that incorporates the components we manufacture. We also
leverage our core competencies in technology and manufacturing through our
Electrochem Commercial Power ("ECP") business to develop and produce cells and
battery packs for commercial applications that demand high performance and
reliability, including oil and gas exploration, pipeline inspection, telematics,
oceanographic equipment, seismic, communication, military and aerospace
applications. 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 ("CRT") 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 Boston
Scientific, St. Jude Medical, Medtronic, Biotronik, Cyberonics and the Sorin
Group. A substantial part of our business is conducted with a limited number of
customers. For the first quarter of 2007, Boston Scientific, Medtronic and St.
Jude Medical collectively accounted for approximately 69% of our total sales
compared to 70% for the first quarter of 2006. 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 ECP customers are primarily companies involved in oil and gas
exploration, pipeline inspection, telematics, oceanographic equipment, seismic,
communication, military and aerospace applications industries. 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.
Business Highlights
o Total Company - record sales of $76.9 million, an increase of 13%
compared to $68.1 million in 2006.
>> IMC - record sales of $65.2 million, an increase of 13% compared
to $57.6 million in 2006, driven by growth of ICD capacitors,
feedthroughs and assembly products partially offset by a decrease
in ICD battery sales.
>> ECP - sales of $11.7 million, an increase of 11% compared to
$10.5 million in 2006, driven by growth in oil & gas, pipeline
inspection, and military products.
o Earnings per share increased by 54% to $0.43, inclusive of a $0.11
gain on the exchange of $117.8 million of convertible debentures.
o Final production run for Carson City plant is scheduled for June 2007.
-21-
o Columbia, Maryland shutdown scheduled to be completed in the second
half of 2007.
o ECP expansion on track for completion in mid - 2008.
o Completed the exchange of $117.8 million of the existing $170 million
convertible subordinated debentures outstanding. Issued an additional
$80 million of new convertible subordinated debentures and received
cash of $74 million (net of fees and discount).
o Received commitments for a new revolving bank credit facility of $235
million with the ability to expand to $335 million.
o Completed the acquisition of BIOMEC, Inc. for $11.4 million on April
3, 2007.
o Announced on April 30, 2007 that we entered into a definitive
agreement to acquire Enpath Medical, Inc.
Our CEO's View
We had a solid start to the year achieving sales of $76.9 million, a 13%
increase over last years first quarter. Medical sales were at $65.2 million and
the Commercial business achieved growth of 11%. We earned 43 cents in the
quarter compared with 28 cents last year. This result is inclusive of a one-time
gain of 11 cents from the exchange of $117.8 million of our subordinated
convertible debentures.
Our ICD capacitor sales more than doubled in the quarter to $8.5 million, a $4.9
million increase over the prior year first quarter. Our lean manufacturing
systems enabled reduced lead times to capture this revenue opportunity.
Approximately half of the increase in the quarter was due to inventory
replenishment by our customers. In addition to inventory related demand, sales
increased as a result of a customer supply issue. We anticipate this higher
level of demand continuing into the second quarter.
We also continue to experience growth in our feedthrough business with sales
increasing by 13% over last years first quarter. The majority of this growth has
come from domestic market share penetration.
Other medical products sales increased by $2.2 million, or 17% from last year.
Other medical sales consists of assembly, coatings and machined components. The
growth in this quarter was split evenly between the coatings and assembly
products.
ICD battery sales declined by 8% and pacemaker and other battery volume
increased slightly from the first quarter of last year. However, on a sequential
basis, ICD sales were up 16% from the fourth quarter of 2006. The first quarter
2006 represented our toughest year-over-year comparison. ICD battery sales
softened through the balance of 2006 reflecting the general slowdown in the ICD
market.
On the commercial side of the business, sales were up 11% from last years first
quarter. The growth in the quarter primarily came from oil & gas, pipeline
inspection and military markets. Oil and gas drilling activity remains strong
and continues to drive the core growth of the business. The growth over the last
two years has resulted in launching our capacity expansion plan. We are in the
process of developing facility plans which will more than double our existing
capacity. We plan to begin construction of a new 80,000 square foot
manufacturing facility in the Massachusetts area in June of this year. We expect
to complete this important expansion project by mid- 2008. In addition to a new
expanded facility, we will also be investing in semi-automation equipment.
We have recently completed several important transactions. First, we refinanced
$117.8 million of our existing convertible debentures and issued $80 million in
new debentures. Second, on April 3rd we completed the acquisition of BIOMEC
which expands our offerings to include design service capabilities, and third,
we received customer clearance to complete the closure of our Carson City
facility, which is now scheduled for June 2007. Additionally, on April 30, 2007
-22-
we announced that we signed a definitive agreement to acquire Enpath Medical, a
developer, manufacturer and marketer of single use medical device products for
the cardiac rhythm management, neuromodulation and interventional radiology
markets. We view the acquisition of Enpath as another long-term growth platform
and is consistent with our stated goal of broadening both our market and product
reach.
Product Development
Currently, the company is developing a series of new products for customer
applications in the CRM, neurostimulation and commercial markets.
Some of the key development initiatives are as follows:
1. Continue the evolution of our Q series high rate ICD batteries.
2. Complete the development of a high voltage and high energy density
capacitor system.
3. Develop Q series medium rate battery for neurostimulation and
pacemaker applications.
4. Augment our existing rechargeable battery with a new rechargeable
battery offering for use in neurostimulation applications.
5. Develop rechargeable battery packs for use in commercial applications.
6. Continue development of the batteries and capacitors used in
intravascular ICD devices.
IMC. Our near term focus for growth in the medical battery market, a portion of
our IMC business, is the introduction of our Q-Series batteries. Initially they
will be available in two configurations - QHR (High Rate) and QMR (Medium Rate).
These batteries hold the promise of unparalleled performance in a wide range of
implantable device and neurostimulation applications and allow our customers to
incorporate advanced power-hungry features into these devices. 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). The first ICD
device implant with our new QHR technology occurred in the third quarter of
2006. We expect a second customer to begin implanting our QHR technology in the
near term. We also released a new, non-proprietary model of medium-rate
implantable "Q" series battery.
In addition to primary batteries, our rechargeable battery program also
continues to make progress in qualification and is receiving tremendous interest
from Neurostimulation customers.
In addition to our battery programs, we continue to advance our ICD capacitor
technology with the development of a higher energy capacitor expected for
release in 2008. Furthermore, we continue to develop the technology for a next
generation higher voltage capacitor.
Finally, enabling safe MRI device interaction continues to remain a key focus
and represents a potential growth opportunity for the company. We anticipate
unveiling a series of new technologies in this area in the near future.
ECP. ECP continues to develop new and innovative power solutions for the world's
most demanding commercial applications. ECP has developed a new high energy
lithium cell for a customer in the telematics market. Due to their exceptional
high energy, two of these new cells are capable of providing power for the
entire 10-year life of the telematics device. ECP also has developed a battery
pack capable of withstanding the customer's harsh operating conditions such as
high vibration, high shock, salt spray, high temperature, low temperature, and
high humidity.
-23-
Finally, ECP has developed a modular battery pack for a customer's fleet of
underwater sonabuoys which measure water characteristics. The long life of ECP
cells, coupled with their ability to withstand harsh conditions, make them
ideally suited for buoys. The customer's expense of commissioning a ship to
replace the batteries in each buoy is reduced when using ECP batteries due to
their long life.
Cost Savings and Consolidation Efforts
During 2005, we initiated several significant cost savings and consolidation
efforts, the implementation of which continued during 2006 and the first three
months of 2007.
Alden Facility Consolidation. Beginning in the first quarter of 2005 and ending
in the second quarter of 2006 we consolidated our medical capacitor
manufacturing operations in Cheektowaga, NY, and our implantable medical battery
manufacturing operations in Clarence, NY, into our advanced power source
manufacturing facility in Alden, NY ("Alden Facility"). We also consolidated our
capacitor research, development and engineering operations from our Cheektowaga,
NY facility into our Technology Center in Clarence, NY.
The total cost for these consolidation efforts was $3.4 million, which was below
the Company's original estimate of $3.5 to $4.0 million. Expenses of $2.8
million were incurred in 2005 and $0.6 million were incurred during the first
two quarters of 2006. In total, $1.8 million was paid in cash and $0.8 million
was for assets written-off in 2005. Approximately $0.8 million was paid in cash
during 2006. The expenses for the Alden Facility consolidation were included in
the IMC business segment.
Carson City Facility shutdown and Tijuana Facility consolidation No. 1. On March
7, 2005, we announced our intent to close the Carson City, NV facility ("Carson
City Facility") and consolidate the work performed at our Carson City Facility
into our Tijuana, Mexico facility ("Tijuana Facility consolidation No. 1").
The Company delayed the anticipated final closing of the Carson City Facility
until the second quarter of 2007 in order to accommodate a customer's regulatory
approval. If this closing is delayed further, additional costs could be
incurred. The total revised estimate for this plan is anticipated to be between
$7.7 million and $7.9 million of which $7.6 million has been incurred and is
comprised of $5.0 million for the Carson City Facility shutdown and $2.7 million
to $2.9 million for the Tijuana Facility consolidation No. 1. To date, $7.6
million of expenses has been recorded. All categories of costs are considered to
be cash expenditures, except for accelerated depreciation.
Carson City Facility shutdown expenses of $4.7 million have been incurred to
date, of which $4.4 million were recorded in 2005 and 2006, and $0.3 million
were incurred in the first three months of 2007. In 2005 and 2006, $2.6 million
were paid in cash and $0.6 million were recorded as accelerated depreciation. In
2007, $0.1 million were paid in cash. To date, $2.5 million of the $3.8 million
of severance and retention recorded to date was paid. Tijuana Facility
consolidation No. 1 expenses of $2.8 million were incurred and paid in 2005 and
2006, and $0.1 million were incurred and paid in 2007.
Once the moves are completed, we anticipate annual cost savings in the range of
$2.5 to $3.1 million. The expenses for the Carson City Facility shutdown and the
Tijuana Facility consolidation No. 1 are included in the IMC business segment.
-24-
Columbia Facility & ARL shutdown, Tijuana Facility consolidation No. 2, and RD&E
Consolidation. On November 16, 2005, we announced our intent to close both our
Columbia, MD facility ("Columbia Facility") and our Fremont, CA Advanced
Research Laboratory ("ARL"). The manufacturing operations at our Columbia
Facility will be moved into our Tijuana Facility ("Tijuana Facility
consolidation No. 2"). The research, development and engineering ("RD&E") and
product development functions at our Columbia Facility have begun to relocate to
the Technology Center in Clarence, NY. The ARL relocation to the Technology
Center in Clarence, NY is complete.
The total revised estimated cost for this facility consolidation plan is
anticipated to be between $8.4 million and $8.9 million. To date, we have
expensed $7.6 million related to these projects and expect to incur the
remaining costs in 2007. All categories of costs are considered to be future
cash expenditures, except for accelerated depreciation and asset write-offs.
Approximately $3.9 million of the Columbia Facility and ARL shutdown costs were
incurred in 2005 and 2006 ($0.5 million for assets written-off), and $0.6
million were incurred in the first three months of 2007. Approximately $0.3
million was paid in cash during the first three months of 2007. Tijuana Facility
consolidation plan No. 2 expenses of $2.3 million were incurred and paid in cash
in 2006 and $0.7 million in the first quarter of 2007.
Once the moves are completed, the Company anticipates annual cost savings in the
range of $5.0 to $6.0 million. The expenses for the Columbia Facility and ARL
shutdowns, the Tijuana Facility consolidation No. 2 and the RD&E consolidation
are included in the IMC business segment.
ECP Expansion. In February 2007, the Company announced that it will close its
current manufacturing facility in Canton, MA and construct a new 80,000 square
foot facility in the Massachusetts area to perform those operations in. The
expected completion of this $28 million expansion project is mid-2008. The total
expense to be recognized for this relocation is estimated to be $2.2 million to
$2.4 million. During the first three months of 2007, approximately $0.1 million
of costs were incurred related to this project, which were primarily non-cash
items. Costs related to this move are included in the ECP business segment.
Our Financial Results
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. For 52-week years, each quarter contains 13 weeks. The
first quarter of 2007 and 2006 ended on March 30, and March 31, respectively.
The commentary that follows should be read in conjunction with our condensed
consolidated financial statements and related notes and with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Form 10-K for the fiscal year ended December 29, 2006.
-25-
Results of Operation
Three months ended
----------------------
March 30, March 31, $ %
In thousands, except per share data 2007 2006 Change Change
----------------------------------------------------------------------------------------
IMC
ICD batteries $ 11,651 $ 12,679 (1,028) -8%
Pacemaker and other batteries 5,845 5,787 58 1%
ICD capacitors 8,514 3,568 4,946 139%
Feedthroughs 18,393 16,288 2,105 13%
Enclosures 5,706 6,340 (634) -10%
Other medical 15,087 12,918 2,169 17%
-------------------------------------------
Total IMC 65,196 57,580 7,616 13%
ECP 11,664 10,527 1,137 11%
-------------------------------------------
Total sales 76,860 68,107 8,753 13%
Cost of sales - excluding amortization
of intangible assets 47,288 39,515 7,773 20%
Cost of sales - amortization
of intangible assets 948 958 (10) -1%
-------------------------------------------
Total Cost of Sales (1) 48,236 40,473 7,763 19%
Cost of sales as a % of sales 62.8% 59.4% 3.4%
Selling, general, and administrative
expenses (SG&A) 10,033 9,015 1,018 11%
SG&A as a % of sales 13.1% 13.2% -0.1%
Research, development and engineering
costs, net (RD&E) 6,452 5,898 554 9%
RD&E as a % of sales 8.4% 8.7% -0.3%
Other operating expense, net 1,533 2,669 (1,136) -43%
-------------------------------------------
Operating income 10,606 10,052 554 6%
Operating margin 13.8% 14.8% -1.0%
Interest expense 1,144 1,135 9 1%
Interest income (1,856) (1,192) (664) -56%
Other (income) expense, net (4,489) (44) (4,445) -10102%
Provision for income taxes 5,138 3,503 1,635 47%
Effective tax rate 32.5% 34.5% -2.0%
-------------------------------------------
Net income $ 10,669 $ 6,650 $ 4,019 60%
===========================================
Net margin 13.9% 9.8% 4.1%
Diluted earnings per share $ 0.43 $ 0.28 $ 0.15 54%
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 at 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.
-26-
Our customers may initiate field actions with respect to market-released
products. These actions may include product recalls or communications with a
significant number of physicians about a product or labeling issue. The scope of
such actions can range from very minor issues affecting a small number of units
to more significant actions. There are a number of factors, both short-term and
long-term related to these field actions that may impact our results. In the
short-term, if product has to be replaced, or customer inventory levels have to
be restored, this will result in increased component demand. Also, changing
customer order patterns due to market share shifts or accelerated device
replacements may also have a positive impact on our sales results in the
near-term. These same factors may have longer-term implications as well.
Customer inventory levels may ultimately have to be rebalanced to match demand.
The increase in IMC sales of 13% for the three month period ending March 30,
2007 was driven by growth of ICD capacitors, feedthroughs and coatings and
assembly products, which are included in the other medical category. Our ICD
capacitor sales more than doubled in the quarter, to $8.5 million, a $4.9
million increase over the prior year. Approximately half of the increase was due
to our customers replenishing inventory in the current quarter. In addition to
inventory related demand, sales increased as a result of a customer supply
issue, which we anticipate continuing into the second quarter. We also continued
to experience growth in our feedthrough business with sales increasing by 13%
from last year. The majority of this growth has come from domestic market share
penetration.
This growth was partially offset by lower sales from ICD batteries as well as
medical enclosures. ICD battery sales declined by 8%. However, ICD sales were up
16% from fourth quarter of 2006. ICD battery sales softened through the balance
of 2006 reflecting the general slowdown in the ICD market but began to rebound
in the first quarter of 2007.
ECP. Similar to IMC customers, we have pricing arrangements with our customers
that many times do not specify minimum quantities. Our visibility to customer
ordering patterns is over a relatively short period of time.
ECP sales increased 11% from last year. The growth in the quarter primarily came
from oil & gas, pipeline inspection and military markets. Oil and gas drilling
activity remains strong and continues to drive the core growth of the business.
Cost of Sales
Changes from the prior year to cost of sales as a percentage of sales were
primarily due to the following:
Three months ended
March 30, 2007
-------------------
Production inefficiencies primarily associated with
lower volumes (a) 3.2%
Excess capacity at Tijuana Facility (b) -1.1%
Mix change (c) 0.7%
Other 0.6%
-------------------
Total percentage point change to cost of sales as a
percentage of sales 3.4%
===================
(a) This increase in cost of sales is primarily due to lower production of ICD
batteries, which absorb a greater amount of fixed costs such as plant
overhead and depreciation. In the prior year period, ICD production volume
was 9% higher in response to increased sales and replenishment of safety
stock.
-27-
(b) The Tijuana Facility was fully operational in the first quarter of 2006 but
was not being fully utilized as it was only producing sub-assemblies. In
2007, the facility was producing increased volumes of sub-assemblies and
the majority of the filtered feedthroughs reducing the excess capacity from
the prior year. In accordance with the Company's inventory accounting
policy, excess capacity costs were expensed.
(c) The revenue increase from 2006 was primarily in capacitors, which generally
have lower margins.
We expect cost of sales as a percentage of sales to decrease over the next
several years as the result of the consolidation efforts and the elimination of
excess capacity. Excess capacity for the Tijuana Facility is not expected to be
eliminated until mid-2007 when the last announced consolidation effort is
anticipated to be completed (see the "cost savings and consolidation efforts"
section for additional information).
SG&A expenses
Changes from the prior year to SG&A expenses were due to the following (in
thousands):
Three months ended
March 30, 2007
---------------------
Stock-based compensation expense (a) $ 250
Increased workforce (b) 230
Director fees (c) 150
Legal fees (d) 130
Other 258
---------------------
Net increase in SG&A $ 1,018
=====================
(a) Increase in stock-based compensation related to our leadership succession
planning transition. The increase in stock-based compensation expense is
expected to continue into the future.
(b) The increased workforce expense was a result of the Company's efforts to
increase the marketing and sales of its products as well as general and
administrative costs related to finance personnel additions in 2006.
(c) Increase in director fees is consistent with the approved plan as disclosed
in our most recent proxy. (d) Increase in legal fees is due to customer
contract negotiations and the financing transactions discussed above.
RD&E expenses
Net research, development and engineering costs are as follows (in thousands):
Three months ended
-------------------------------
March 30, March 31,
2007 2006
-------------------------------
Research and development costs $ 3,631 $ 3,973
-------------------------------
Engineering costs 3,131 2,356
Less cost reimbursements (310) (431)
-------------------------------
Engineering costs, net 2,821 1,925
-------------------------------
Total research and development and
engineering costs, net $ 6,452 $ 5,898
===============================
The increase in RD&E expenses for the three month period ended March 30, 2007 is
primarily due to the planned increase in engineering personnel costs
(headcount), as we continue to invest substantial resources to develop new
products. In terms of the development costs billed, reimbursements were lower
due to lower volume and timing of reimbursable development projects.
Reimbursements for achieving certain development milestones are netted against
gross spending.
-28-
Other operating expense
Other operating expense for 2007 and 2006 are comprised of the following costs
(in thousands):
Three months ended
------------------------------
March 30, March 31,
2007 2006
-------------- --------------
(a) Alden facility consolidation $ - $ 515
(a) Carson City facility shutdown and Tijuana
facility consolidation No. 1 386 1,228
(a) Columbia facility shutdown, Tijuana
facility
consolidation No. 2 and RD&E consolidation 1,303 922
(a) ECP expansion 137 -
(b) Asset dispositions and other (293) 4
-------------- --------------
$ 1,533 $ 2,669
============== ==============
(a) Refer to the "Cost Savings and Consolidation Efforts" discussion for
disclosure related to the timing and level of remaining expenditures for
these items as of March 30, 2007.
(b) During the first quarter of 2007, the Company received $0.3 million of
insurance proceeds related to equipment damaged during transportation to
the Tijuana Facility in the second quarter of 2006. The remaining expense
is for property, plant and equipment dispositions.
Interest expense and interest income
Interest expense for the three months ended March 30, 2007 is consistent with
prior year periods, and is primarily related to our outstanding convertible
notes. Interest expense is expected to increase in the future as a result of the
additional $80.0 million of 2.25% convertible subordinated notes issued during
the first quarter of 2007 and additional amortization of deferred fees and
discounts associated with these notes and the notes exchanged during the quarter
(See Gain on extinguishment of debt).
Interest income for the three months ended March 30, 2007 increased in
comparison to the same periods of 2006 primarily due to increased cash, cash
equivalents and short-term investment balances.
Gain on extinguishment of debt
In March 2007, the Company entered into separate, privately negotiated
agreements to exchange $117.8 million of the original $170.0 million of 2.25%
convertible subordinated notes due 2013 ("CSN I") for an equivalent principal
amount of a new series of 2.25% convertible subordinated notes due 2013. The
primary purpose of this transaction was to eliminate the June 15, 2010 call and
put option that is included in the terms of CSN I. This exchange was accounted
for as an extinguishment of debt and resulted in a net pre-tax gain of $4.5
million ($2.9 million net of tax) or $0.11 per diluted share.
Provision for income taxes
Our effective tax rate for the first quarter of 2007 was 32.5% compared to 34.5%
for the same period of 2006. This decrease was primarily a result of our
estimated increase in R&D tax credits and the Qualified Production Activities
Deduction for 2007.
-29-
Subsequent Events
On April 3, 2007, the Company acquired substantially all of the assets of
BIOMEC, Inc. ("BIOMEC") for $11.4 million in cash and future additional
consideration. BIOMEC has grants in place that will fund substantially all of
its development costs through 2008. Currently, the engineering team is working
on various projects, including a novel-polymer coating (biomimetic) that mimics
the surface of endothelial cells of blood vessels. Additionally, BIOMEC has a
product development agreement and a 20% investment partnership in IntElect
Medical, Inc., an early stage neurostimulation device company that works in
conjunction with the Cleveland Clinic. This transaction was accounted for under
the purchase method of accounting.
On April 30, 2007, the Company jointly announced with Enpath Medical, Inc.
("Enpath") that they have entered into a definitive merger agreement under which
the Company will acquire Enpath for $14.38 per share in cash, or approximately
$102 million, including assumption of debt. Under the terms of the agreement,
the Company will commence a tender offer for all of Enpath's outstanding shares
no later than May 8, 2007. The transaction is subject to customary closing
conditions and regulatory approvals and the tender of a majority of Enpath's
outstanding shares, on a fully diluted basis. The purchase price will be funded
out of the Company's available cash and short-term investments. The transaction
is expected to close in late June. Enpath is a medical products company engaged
in designing, developing, manufacturing and marketing single use medical device
products for the cardiac rhythm management, neuromodulation and interventional
radiology markets.
Liquidity and Capital Resources
March 30, December 29,
(Dollars in millions) 2007 2006
-------------------------
Cash and cash equivalents and short-term investments
(a)(b) $ 225.7 $ 142.6
Working capital (b) $ 274.7 $ 199.1
Current ratio 6.3 : 1.0 5.7 : 1.0
(a) Short-term investments consist of investments acquired with maturities that
exceed three months and are less than one year at the time of acquisition,
equity securities classified as available-for-sale, and auction rate
securities.
(b) Cash and cash equivalents and working capital increased primarily due to
$76.0 million of net cash received from the issuance of additional 2.25%
convertible subordinated notes due 2013 in March 2007.
Revolving Line of Credit
The Company maintains a three-year $50 million Revolving Credit Facility (the
"Revolver"), which contains a $10.0 million sub-limit for the issuance of
commercial or standby letters of credit. The Revolver is secured by the
Company's non-realty assets including cash, accounts and notes receivable, and
inventories and has an expiration date of May 31, 2008. The Revolver requires
compliance with two quarterly financial covenants, as defined. The first relates
to the ratio of consolidated net earnings or loss before interest, taxes,
depreciation, and amortization ("EBITDA") to fixed charges. The second is a
leverage ratio, which is calculated based on the ratio of consolidated funded
debt less cash, cash equivalent investments and short-term investments to
consolidated EBITDA. Interest rates under the Revolver vary with the Company's
leverage. The Company is required to pay a commitment fee of between 0.125% and
0.250% per annum on the unused portion of the Revolver based on the Company's
leverage. As of March 30, 2007, the Company had no balance outstanding on the
Revolver.
In April 2007, the Company signed a commitment letter for a new five-year senior
credit facility (the "Credit Facility") consisting of a $235 million revolving
credit facility, which can be increased to $335 million upon the Company's
request. The Credit Facility also contains a $15 million letter of credit
subfacility and a $15 million swingline subfacility. This Credit Facility will
replace the $50 million Revolver and has similar financial covenants, interest
rates, commitment fees and prioritization as the Revolver. The Company expects
that this agreement will become effective in the second quarter of 2007.
-30-
Our principal sources of liquidity are our operating cash flow combined with our
working capital of $225.7 million at March 30, 2007 and availability under our
Revolver. Historically we have generated cash from operations sufficient
to meet our capital expenditure and debt service needs, other than for
acquisitions. At March 30, 2007, our current ratio was 6.3:1.0. As discussed
above, subsequent to the end of the first quarter, the Company acquired
substantially all of the assets of BIOMEC for $11.4 million in cash and future
additional consideration and entered into a definitive merger agreement to
acquire Enpath for approximately $102 million in cash, including the assumption
of debt. These transactions will be funded with the Company's cash and cash
equivalents and short-term investments available for sale. The Company regularly
engages in discussions relating to potential acquisitions and may announce
additional acquisition transactions at any time.
Operating activities
Net cash flows from operating activities for the three months ended March 30,
2007 increased $12.2 million over the comparable period in 2006. This was
primarily the result of a decrease in inventory levels due to increased sales
and a decreased accounts receivable change compared to the first quarter of
2006. The $4.5 million ($2.9 million net of tax) non-cash gain on the
extinguishment of debt during the first quarter of 2007 resulted in a
reclassification of approximately $11.3 million of income tax liability, which
is payable in 2007. This amount was previously recorded as a non-current
deferred tax liability on the balance sheet.
Investing activities
The majority of the acquisition of property, plant and equipment for the first
three months of 2007 was related to routine purchases made in order to support
our internal growth and to maintain our technology leadership. We expect these
purchases to increase in the future as we begin construction of a new 80,000
square foot manufacturing facility in the Massachusetts area in June of this
year. In addition to a new expanded facility, we will also be investing in
semi-automation equipment. The expected completion of this $28 million expansion
project is mid-2008. We expect to use $113.4 million of cash and cash
equivalents and short term investments available for sale to fund the
acquisition of BIOMEC and Enpath in the second quarter of 2007.
Net cash invested in short-term instruments during the first three months of
2007 of $7.5 million is primarily a result of the investment of excess cash flow
from operations.
Financing activities
Cash flow from financing activities for the first quarter of 2007 was primarily
related to the issuance of $80.0 million of additional 2.25% convertible
subordinated notes due 2013 at a price of $950 per $1,000 of principal. The
Company has incurred approximately $4.3 million of financing fees related to
this transaction which will be paid in the second quarter of 2007. Additionally,
cash flows from financing activities included cash received from non-qualified
stock option exercises for both 2007 and 2006.
Capital Structure
At March 30, 2007, our capital structure consisted of $240.1 million of
convertible subordinated notes and our 22.3 million shares of common stock
outstanding. We have $225.7 million in cash, cash equivalents and short-term
investments and are in a position to finance our future acquisitions. 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; 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. Our current expectation for 2007 is that capital spending will be
in the range of $35.0 million to $45.0 million, of which $20.0 million is
attributable to the ECP expansion.
-31-
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4)
of Regulation S-K.
Contractual Obligations
In the normal course of business, the Company makes routine purchase commitments
(primarily equipment and raw material purchases) in order to maintain the
technological leadership of its manufacturing facilities and meet the needs of
its customers. As of March 30, 2007, total contractual obligations related to
such expenditures are approximately $10.5 million and will be financed by
existing cash, short-term investments, or cash generated from operations.
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No 159, The Fair Value
Option for Financial Assets and Financial Liabilities--Including an amendment of
FASB Statement No. 115. This Statement provides entities with an option to
choose to measure eligible items at fair value at specified election dates. If
elected, an entity must report unrealized gains and losses on the item in
earnings at each subsequent reporting date. The fair value option: may be
applied instrument by instrument, with a few exceptions, such as investments
otherwise accounted for by the equity method; is irrevocable (unless a new
election date occurs); and is applied only to entire instruments and not to
portions of instruments. The Company is still evaluating the impact of SFAS No.
159 on its financial statements, which is effective beginning in fiscal year
2008.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
while applying generally accepted accounting principles, and expands disclosures
about fair value measurements. SFAS No. 157 establishes a fair value hierarchy
that distinguishes between (1) market participant assumptions based on market
data obtained from independent sources and (2) the reporting entity's own
assumptions developed based on unobservable inputs. The Company is still
evaluating the impact of SFAS No. 157 on its financial statements, which is
effective beginning in fiscal year 2008.
Application of Critical Accounting Estimates
Our unaudited condensed consolidated financial statements are based on the
selection of accounting policies and the application of significant accounting
estimates, some of which require management to make significant assumptions. We
believe that some of the more critical estimates and related assumptions that
affect our financial condition and results of operations are in the areas of
inventories, goodwill and other indefinite lived intangible assets, long-lived
assets, share-based compensation and income taxes. For further information,
refer to Item 7 "Managements Discussion and Analysis of Financial Condition and
Results of Operations" and Item 8 "Financial Statements and Supplementary Data"
in the Company's Annual Report on Form 10-K for the year ended December 29,
2006.
-32-
During the three months ended March 30, 2007, we did not change or adopt new
accounting policies that had a material effect on our consolidated financial
condition and results of operations.
Effective in the first quarter of 2007, the Company adopted the provisions of
FASB Interpretation ("FIN") No. 48 Accounting for Uncertainty in Income Taxes,
an interpretation of FASB SFAS No. 109. FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized under SFAS 109. FIN No. 48 prescribes a
recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return and also provides guidance on various related matters such as
derecognition, interest and penalties, and disclosure.
Upon adoption of FIN No. 48, the Company did not recognize any adjustment to its
$1.8 million of unrecognized tax benefits, all of which would favorably impact
the effective tax rate (net of federal benefit on state issues), if recognized.
The Company's unrecognized tax benefits consist of refund claims which did not
meet the more likely than not threshold under FIN No. 48. At the end of the
first quarter, there was no change in the balance of unrecognized tax benefits.
The Company anticipates that the total unrecognized tax benefits could
significantly change within the next twelve months due to the settlement of
audits/appeals currently in process, however, quantification of an estimated
range cannot be made at this time.
The Company will recognize interest expense related to uncertain tax positions
as Interest Expense. Penalties, if incurred, would be recognized as a component
of Selling, General and Administrative Expenses. At the end of the first
quarter, there was no accrued interest or penalties related to uncertain tax
positions. The tax years 2003-2006 remain open to examination by the major
taxing jurisdictions to which we are subject. The 2001 and 2002 tax years remain
open in certain jurisdictions as a result of audits/appeals currently in
process.
Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q and other
written and oral statements made from time to time by us and our representatives
are not statements of historical or current fact. As such, they are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We have based these forward-looking statements on our current
expectations, which are subject to known and unknown risks, uncertainties and
assumptions. They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and the
industries we operate in;
o our ability to successfully execute our business model and our
business strategy;
o our ability to identify trends within the implantable medical devices,
medical components, and commercial power sources industries and to
offer products and services that meet the changing needs of those
markets;
o projected capital expenditures; and
o trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
-33-
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to successfully consummate and
integrate acquisitions, unsuccessful expansion into new markets, competition,
inability to obtain licenses to key technology, regulatory changes or
consolidation in the healthcare industry, and other risks and uncertainties that
arise from time to time as described in the Company's Annual Report on Form 10-K
and other periodic filings with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Under our line of credit any borrowings bear interest at fluctuating market
rates. At March 30, 2007, we did not have any borrowings outstanding under our
line of credit and thus no interest rate sensitive financial instruments other
than short-term investments. We do not believe that the impact of fluctuations
in interest rates on our short-term investments will have a material effect on
our condensed consolidated financial statements.
The company incurs certain expenses related to the Tijuana operations that are
denominated in a foreign currency. We do not believe that the impact of foreign
currency fluctuations will have a material effect on our condensed consolidated
financial statements.
ITEM 4. CONTROLS AND PROCEDURES.
a. Evaluation of Disclosure Controls and Procedures.
-------------------------------------------------
Our management, including the principal executive officer and principal
financial officer, evaluated our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) related to the recording, processing, summarization and reporting
of information in our reports that we file with the SEC as of March 30,
2007. These disclosure controls and procedures have been designed to
provide reasonable assurance that material information relating to us,
including our subsidiaries, is made known to our management, including
these officers, by other of our employees, and that this information is
recorded, processed, summarized, evaluated and reported, as applicable,
within the time periods specified in the SEC's rules and forms.
Based on their evaluation, as of March 30, 2007, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures are effective.
b. Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting
that occurred during our last fiscal quarter to which this Quarterly Report
on Form 10-Q relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
-34-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material changes to those legal proceedings as previously
disclosed in the Company's Form 10-K for the year ended December 29, 2006.
ITEM 1A. RISK FACTORS.
There have been no material changes in risk factors as previously disclosed in
the Company's Form 10-K for the year ended December 29, 2006, except as follows:
We face risks associated with our proposed acquisition of Enpath Medical, Inc.
Our proposed acquisition of Enpath Medical, Inc. ("Enpath") presents several
risks and uncertainties, including the following:
o We may not consummate the acquisition or it may be delayed, for
reasons beyond our control, and we may incur costs that may not be
reimbursed;
o The allocation of the purchase price to Enpath's assets, the
amortization of intangible assets resulting from that allocation and
the impact of fair value purchase accounting adjustments may adversely
affect our earnings;
o We may be unsuccessful in integrating Enpath's business;
o Integrating Enpath's business may be distractive to our management and
disruptive to our business and the costs of integration may be
significant; and
o We may assume liabilities in the Enpath acquisition that we did not
anticipate that could have a material adverse effect on our operating
results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
See the Exhibit Index for a list of those exhibits filed herewith.
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SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 7, 2007 GREATBATCH, INC.
By /s/ Thomas J. Hook
-------------------------------------
Thomas J. Hook
President and Chief Executive Officer
(Principal Executive Officer)
By /s/ Thomas J. Mazza
-------------------------------------
Thomas J. Mazza
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
By /s/ Marco F. Benedetti
-------------------------------------
Marco F. Benedetti
Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to our quarterly report on Form 10-Q
ended July 1, 2005).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to our quarterly report on Form 10-Q ended March 29,
2002).
10.1*+ Amendment No. 2 to Supplier Partnering Agreement between Wilson
Greatbatch Ltd. and Pacesetter, Inc. (d/b/a St. Jude Medical
CRMD) dated August 24, 2005.
10.2*+ Amendment No. 2 to Supplier Partnering Agreement between
Greatbatch, Inc. and Pacesetter, Inc. (d/b/a St. Jude Medical
CRMD) dated November 17, 2005.
10.3*+ Amendment No. 4 to Supplier Partnering Agreement between
Greatbatch, Inc. and Pacesetter, Inc. (d/b/a St. Jude Medical
CRMD) dated April 20, 2006.
10.4*+ Amendment No. 5 to Supplier Partnering Agreement between
Greatbatch, Inc. and Pacesetter, Inc. (d/b/a St. Jude Medical
CRMD) dated February 28, 2007.
10.5*+ Amendment No. 6 to Supplier Partnering Agreement between
Greatbatch, Inc. and Pacesetter, Inc. (d/b/a St. Jude Medical
CRMD) dated February 28, 2007.
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* 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.
* - Filed herewith.
+ - Portions of these exhibits have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
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