<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>a4842884.txt
<DESCRIPTION>WILSON GREATBATCH TECHNOLOGIES INC.
<TEXT>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2004
Commission File Number 1-16137
WILSON GREATBATCH TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
16-1531026
(I.R.S. employer identification no.)
9645 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)
(716) 759-5600
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class: Name of Each Exchange on
Which Registered:
Common Stock, Par Value $.001 Per Share New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
None
<PAGE>
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
Aggregate market value of common stock of Wilson Greatbatch Technologies,
Inc. held by nonaffiliates as of July 2, 2004, based on the last sale price of
$27.13, as reported on the New York Stock Exchange: $580.0 million. Solely for
the purpose of this calculation, shares held by directors and officers and 10
percent shareholders of the Registrant have been excluded. Such exclusion should
not be deemed a determination by or an admission by the Registrant that these
individuals are, in fact, affiliates of the Registrant.
Shares of common stock outstanding on March 11, 2005: 21,564,618
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the company's definitive Proxy Statement for its 2004 Annual Meeting
of Stockholders are incorporated by reference into Part III of this report.
2
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("IMDs") through our Implantable Medical Components ("IMC") business. We
offer technologically advanced, highly reliable and long lasting products for
IMDs and enable our customers to introduce IMDs that are progressively smaller,
longer lasting, more efficient and more functional. We also leverage our core
competencies in technology and manufacturing through our Electrochem Power
Solutions ("EPS") business to develop and produce batteries and battery packs
for commercial applications that demand high performance and reliability,
including oil and gas exploration, oceanographic equipment and aerospace. We
believe that our proprietary technology, close customer relationships, multiple
product offerings, market leadership and dedication to quality provide us with
competitive advantages and create a barrier to entry for potential market
entrants.
We plan on expanding our business into value-added assembly of products that
incorporate components. With this in mind, we designed and built a state of the
art manufacturing facility in Tijuana Mexico, incorporating two class 100,000
clean rooms, 90,000 square feet of manufacturing space, engineering, metrology
and quality laboratories, and led by a management team with diverse medical
device and contract manufacturing backgrounds. We will be starting operations in
the 2nd quarter of 2005.
Our company was incorporated in 1997 and since that time has completed the
following acquisitions:
<TABLE>
<CAPTION>
Acquisition date Acquired company Business at time of acquisition
---------------- ---------------- -------------------------------
<S> <C> <C>
July 10, 1997 Wilson Greatbatch Ltd. Founded in 1970, the company designed and manufactured
("WGL") batteries for IMDs and commercial applications including
oil and gas, aerospace, and oceanographic.
August 7, 1998 Hittman Materials and Founded in 1962, the company designed and manufactured
Medical Components, Inc. ceramic and glass feedthroughs and specialized porous
("Hittman") coatings for electrodes used in IMDs.
August 4, 2000 Battery Engineering, Inc. Founded in 1983, the company designed and manufactured
("BEI") high-energy density batteries for industrial, commercial,
military and medical applications.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Acquisition date Acquired company Business at time of acquisition
---------------- ---------------- -------------------------------
<S> <C> <C>
June 18, 2001 Sierra-KD Components Founded in 1986, the company designed and manufactured
division of Maxwell ceramic electromagnetic filtering capacitors and
Technologies, Inc. integrated them with wire feedthroughs for use in IMDs.
("Sierra") Sierra also designed and manufactured ceramic capacitors
for military, aerospace and commercial applications.
July 9, 2002 Globe Tool and Founded in 1954, the company designed and manufactured
Manufacturing Company, Inc. precision enclosures used in IMDs and commercial products
("Globe") used within the aerospace, electronic, and automotive
sectors.
March 16, 2004 NanoGram Devices Founded in 1996, the company utilized their laser-based
Corporation ("NanoGram") nanomaterials synthesis technology to develop nanoscale
materials for battery and medical device applications.
</TABLE>
SEGMENT INFORMATION
Segment information including sales from external customers, profit or loss, and
assets by segment as well as sales from external customers and long-lived assets
by geographic area are incorporated by reference to Note 17 - Business Segment
Information of the Notes to Consolidated Financial Statements.
IMPLANTABLE MEDICAL DEVICES
An IMD is an instrument that is surgically inserted into the body to provide
diagnosis or therapy. One sector of the IMD market is cardiac rhythm management
("CRM"), which is comprised of devices such as implantable pacemakers,
cardioverter defibrillators ("ICDs"), cardiac resynchronization therapy ("CRT")
devices, and cardiac resynchronization therapy with backup defibrillation
devices ("CRT-D").
Another sector of the IMD market is neurostimulation ("Neuro"), which is
comprised of pacemaker-type devices that stimulate various nerves for the
treatment of various conditions. Beyond pain control, nerve stimulation for the
treatment of movement disabilities such as Parkinson's disease, epilepsy,
migraines, obesity and depression has shown promising results.
4
<PAGE>
The following table sets forth the main categories of battery-powered IMDs and
the principal illness or symptom treated by each device:
<TABLE>
<CAPTION>
Device Principal Illness or Symptom
------ ----------------------------
<S> <C>
Pacemakers............................................. Abnormally slow heartbeat (Bradycardia)
ICDs................................................... Rapid and irregular heartbeat (Tachycardia)
CRT/CRT-Ds............................................. Congestive heart failure
Neurostimulators....................................... Chronic pain, movement disabilities, epilepsy, obesity or
depression.
Left ventricular assist devices (LVADs)................ Heart failure
Drug pumps............................................. Diabetes or chronic pain
</TABLE>
CRM and Neuro markets are expected to experience double-digit growth for the
next three to five years. Increased demand is being driven by the following
factors:
o Advances in medical technology - new therapies will allow physicians
to use IMDs to treat a wider range of heart diseases.
o New, more sophisticated implantable devices - device manufacturers are
developing new CRM devices and adding new features to existing
products.
o New indications for CRM devices - the patient groups that are eligible
for CRM devices has increased. Insurance guidelines may allow device
reimbursements for these expanding patient populations.
o Expansion of Neurostimulator applications - therapies expected to
expand as new therapeutic applications for pulse generators are
identified.
o An aging population - the number of people in the United States that
are over age 65 is expected to double in the next 30 years.
o New indications for other devices - there is an increased use of
recently developed IMDs.
o New performance requirements - government regulators are increasingly
requiring that IMDs be protected from EMI interference.
o Global markets - increased market penetration worldwide.
COMMERCIAL BATTERY INDUSTRY
Commercial batteries are used in demanding applications such as oil and gas
exploration and production, oceanographic, and aerospace. High performance
batteries and battery packs are used in drilling tools, pipeline inspection
systems, lightening detectors and seismic applications in the oil and gas
markets.
High quality, reliable products that can deliver increased performance in severe
environments are the drivers for demand in the commercial battery industry. It
is expected that applications in new technologies used for reworking existing
wells will increase. Natural gas exploration is increasing at a rapid pace as
natural gas powered power plants increase in number. Pipeline inspection gauge
usage is increasing due to new US legislation. Military and aerospace trends
show increasing demand for reliable power sources, including rechargeable cells.
5
<PAGE>
PRODUCTS
The following table provides information about our principal products:
IMPLANTABLE MEDICAL COMPONENTS:
The following implantable medical products are used in IMDs unless otherwise
noted.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION PRINCIPAL PRODUCT ATTRIBUTES
------- ----------- ----------------------------
<S> <C> <C>
Batteries Power sources include: High reliability and predictability
Lithium Iodine ("Li Iodine") Long service life
Lithium silver vanadium oxide ("Li SVO") Customized configuration
Lithium carbon monoflouride ("Li CFx") Light weight
Lithium ion rechargeable ("Li Ion") Compact and less intrusive
Lithium SVO/CFx ("QHR" & "QMR")
Capacitors Storage for energy generated by a Stores more energy per unit volume
battery before delivery to the heart. (energy density) than other existing
Used in ICDs and CRT-Ds. technologies
Customized configuration
EMI Filters Filters electromagnetic interference to High reliability attenuation of EMI RF
limit undesirable response, over wide frequency ranges
malfunctioning or degradation in the Customized design
performance of electronic equipment
Feedthroughs Allow electrical signals to be brought Ceramic to metal seal is substantially
from inside hermetically sealed IMD to an more durable than traditional seals
electrode Multifunctional
Coated electrodes Deliver electric signal from the High quality coated surface
feedthrough to a body part undergoing Flexible in utilizing any combination
stimulation of biocompatible coating surfaces
Customized offering of surfaces and tips
Precision components o Machined High level of manufacturing precision
o Molded and over molded products Broad manufacturing flexibility
Enclosures and related o Titanium Precision manufacturing, flexibility in
components o Stainless steel configurations and materials.
Value-add assemblies Combination of multiple components in a Leveraging products and capabilities to
single package/unit provide subassemblies and assemblies
Provides synergies in component
technology and procurement systems
</TABLE>
<TABLE>
<CAPTION>
ELECTROCHEM POWER SOLUTIONS:
----------------------------
The following commercial products are used in oil and gas exploration, military and oceanographic equipment
PRODUCT DESCRIPTION PRINCIPAL PRODUCT ATTRIBUTES
------- ----------- ----------------------------
<S> <C> <C>
Batteries o Mid-rate Long-life dependability
o Spiral (high rate) High energy density
Battery packs Bundling of commercial batteries in a customer Increased power capabilities and ease
specific configuration of integration into customer
applications.
</TABLE>
6
<PAGE>
RESEARCH AND DEVELOPMENT
Our position as a leading developer and manufacturer of components for IMDs and
commercial batteries is largely the result of our long history of technological
innovation. We invest substantial resources in research, development and
engineering. Our scientists, engineers and technicians focus on improving
existing products, expanding the use of our products and developing new
products. In addition to our internal technology and product development
efforts, we at times engage outside research institutions for special projects.
PATENTS AND PROPRIETARY TECHNOLOGY
We rely on a combination of patents, licenses, trade secrets and know-how to
establish and protect our proprietary rights to our technologies and products.
As of December 31, 2004, we have 246 active U.S. patents and 67 active foreign
patents. We also have 129 U.S. and 329 foreign pending patent applications at
various stages of approval. During the past three years, we have received 113
new U.S. patents, of which 43 were received in 2004. Corresponding foreign
patents have been issued or are expected to be issued in the near future. Often,
several patents covering various aspects of the design protect a single product.
We believe this provides broad protection of the inventions employed.
Our active battery patents relate to process improvements and modifications to
the original technology that was developed either by our Company, or others.
As part of the NanoGram acquisition, we purchased 5 patents and the license
agreements for 28 others. This gives us access to a proprietary laser pyrolysis
system for producing nano-sized particles that will be used in our products and
manufacturing processes. In the near future, we intend to incorporate
nano-cathode materials into selected models of our next generation implantable
power sources. We also expect this innovative technology to have broad
applications to development work across other product offerings including
capacitor materials and implantable coatings.
In addition, we are also a party to several license agreements with third
parties pursuant to which we have obtained, on varying terms, the exclusive or
non-exclusive rights to patents held by them. One of these agreements is for the
basic technology used in our wet tantalum capacitors that we license from Evans
Capacitor Company. We have also granted rights in our own patents to others
under license agreements.
It is our policy to require our executive and technical employees, consultants
and other parties to execute confidentiality agreements. These agreements
prohibit disclosure of confidential information to third parties except in
specified circumstances. In the case of employees and consultants, the
agreements generally provide that all confidential information relating to our
business is the exclusive property of our company.
7
<PAGE>
MANUFACTURING AND QUALITY CONTROL
We primarily manufacture small lot sizes, as most customer orders range from a
few hundred to thousands of units. As a result, our ability to remain flexible
is an important factor in maintaining high levels of productivity. Each of our
production teams receives assistance from a manufacturing support team, which
typically consists of representatives from our quality control, engineering,
manufacturing, materials and procurement departments.
Our quality system is based upon an ISO documentation system and is driven by a
master validation plan that requires rigorous testing and validation of all new
processes or process changes that directly impact our products. All of our
existing manufacturing plants are ISO 9001-2000 registered, which requires
compliance with regulations regarding quality systems of product design (where
applicable), supplier control, manufacturing processes and management review.
This certification can only be achieved after completion of an audit conducted
by an independent authority. Our existing manufacturing plants are audited by
the National Standards Authority of Ireland, an independent auditing firm and
notified body that specializes in evaluating quality standards. To maintain
certification, all facilities must be reexamined routinely by our certifying
body.
SALES AND MARKETING
Products from our IMC business are sold directly to our customers. In our EPS
business, we utilize a combination of direct and indirect sales methods,
depending on the particular product. In 2004, approximately 65% of our products
were sold in the United States. Information regarding our sales by geographic
area is set forth at Note 17 of the Notes to the Consolidated Financial
Statements.
The majority of our medical customers contract with us to develop custom
components and assemblies to fit their specific product specifications. As a
result, we have established close working relationships between our internal
program managers and our customers. We market our products and technologies at
industry meetings and trade shows domestically and internationally, including
Heart Rhythm Society's Annual Scientific Sessions, CardioStim, and the American
Society for Artificial Internal Organs.
Internal sales managers support all activity, and involve engineers and
technology professionals in the sales process to address customer requests
appropriately.
We sell our commercial batteries and battery packs either directly to the end
user, directly to manufacturers that incorporate our products into other devices
for resale, or to distributors who sell our products to manufacturers and end
users. Our sales managers are trained to assist our customers in selecting
appropriate battery chemistries and configurations. We market our EPS products
at various technical trade meetings. We also place print advertisements in
relevant trade publications.
Firm backlog orders at December 31, 2004 and 2003, were $89.5 million and $40.4
million, respectively. Most of these orders are expected to be shipped within
one year.
8
<PAGE>
CUSTOMERS
Our medical customers include leading IMD manufacturers such as Guidant, St.
Jude Medical, Medtronic, Biotronik, Cyberonics and the Sorin Group ("Sorin /
ELA"). In 2004, Guidant, St. Jude Medical, and Medtronic collectively accounted
for approximately 70% of our total sales. The nature and extent of our selling
relationships with each CRM customer are different in terms of breadth of
component products purchased, purchased product volumes, length of contractual
commitment, ordering patterns, inventory management and selling prices.
Our EPS customers are primarily companies involved in oil and gas exploration,
military, oceanography and aerospace, including Halliburton, Computalog, PII and
Pathfinder.
We have entered into a supply agreement with Guidant pursuant to which Guidant
purchases batteries from us for use in its IMDs. The agreement secures pricing
and volumes for Li Iodine batteries, and establishes pricing at defined volume
levels for Li SVO and CFx batteries. A contract amendment effective August 16,
2004 adds QHR Frontier Cell pricing to the original agreement. The contract
period for the agreement is April 1, 2003 to December 31, 2006 and can be
renewed for additional one-year periods upon mutual agreement.
We entered into an agreement with Guidant during December 2004 pursuant to which
Guidant will purchase a minimum quantity of wet tantalum capacitors at prices
specified in the agreement during 2005. The period of the agreement is January
1, 2005 to December 31, 2005.
We have entered into a supply agreement with St. Jude Medical pursuant to which
St. Jude Medical purchases batteries, wet tantalum capacitors, filtered
feedthroughs, molded components and enclosures under specified price and volume
terms. A contract amendment effective January 1, 2005 extended the contract term
to December 31, 2008 and added QHR high rate, QMR medium rate, and Nano battery
technologies to the Agreement.
We have entered into a supply agreement with Medtronic pursuant to which
Medtronic will purchase implantable device shield sub-assemblies and other
products under specified price and volume terms. The contract term is seven
years, commencing August 2, 2004 and ending August 2, 2011.
SUPPLIERS AND RAW MATERIALS
We purchase certain critical raw materials from a limited number of suppliers
due to the technically challenging requirements of the supplied product and / or
the lengthy process required to qualify these materials with our customers. We
cannot quickly establish additional or replacement suppliers for these materials
because of these requirements. In the past, we have not experienced any
significant interruptions or delays in obtaining these raw materials. We
maintain minimum safety stock levels of critical raw materials.
For other raw material purchases, we utilize competitive pricing methods to
secure supply such as bulk purchases, precious metal pool buys, blanket orders,
and long term contracts. We believe that there are alternative suppliers or
substitute products available for each of the materials we purchase at
competitive prices.
9
<PAGE>
COMPETITION
Our existing or potential competitors in our IMC business includes leading IMD
manufacturers, such as Guidant, St. Jude Medical, Medtronic, Sorin / ELA and
Biotronik which currently have vertically integrated operations and may expand
their vertical integration capability in the future. Competitors also include
independent suppliers who typically specialize in one type of component.
Our known non-vertically integrated competitors include the following:
Product Line Competitors
Medical batteries Litronik (a subsidiary of Biotronik)
Eagle-Picher
Quallion
Capacitors Critical Medical Components
Feedthroughs Alberox (subsidiary of
The Morgan Crucible Co. PLC)
EMI filtering AVX (subsidiary of Kyocera)
Eurofarad
Enclosures Heraeus
Hudson
National Manufacturing
Commercial batteries/battery Eagle-Picher
packs Engineered Power
Saft
Tadiran
Tracer Technologies
Ultralife
Machined and molded Numerous
components
Value Added Assembly Numerous
GOVERNMENT REGULATION
Except as described below, our business is not subject to direct governmental
regulation other than the laws and regulations generally applicable to
businesses in the jurisdictions in which we operate. We are subject to federal,
state and local environmental laws and regulations governing the emission,
discharge, use, storage and disposal of hazardous materials and the remediation
of contamination associated with the release of these materials at our
facilities and at off-site disposal locations. Manufacturing and research,
10
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development and engineering activities involve the controlled use of, and our
products contain, small amounts of hazardous materials. Liabilities associated
with hazardous material releases arise principally under the Comprehensive
Environmental Response, Compensation and Liability Act and analogous state laws
which impose strict, joint and several liability on owners and operators of
contaminated facilities and parties that arrange for the off-site disposal of
hazardous materials. We are not aware of any material noncompliance with the
environmental laws currently applicable to our business and we are not subject
to any material claim for liability with respect to contamination at any company
facility or any off-site location. We cannot assure you, however, that we will
not be subject to such environmental liabilities in the future as a result of
historic or current operations.
As a component manufacturer, our medical products are not subject to regulation
by the Food and Drug Administration ("FDA"). However, the FDA and related state
and foreign governmental agencies regulate many of our customers' products as
medical devices. In many cases, the FDA must approve those products prior to
commercialization. We believe that our existing medical manufacturing plants
comply with current Good Manufacturing Practices ("cGMP") as applicable.
We have five Master Files on record with the FDA. Master Files may be used to
provide confidential detailed information about facilities, processes, or
articles used in the manufacturing, processing, packaging, and storing of one or
more medical device components. These submissions may be used by device
manufacturers to support the premarket notification process required by Section
510(k) of the Federal Food Drug & Cosmetic Act. This notification process is
necessary to obtain clearance from the FDA to market a device for human use in
the United States.
RECRUITING AND TRAINING
We invest substantial resources in our recruiting efforts that focus on
supplying quality personnel to support our business objectives. We have
established a number of programs that are designed to challenge and motivate our
employees. All staff is encouraged to be proactive in contributing ideas.
Feedback surveys are used to collect suggestions on ways that our business and
operations can be improved. We further meet our hiring needs through outside
sources as required.
We provide an intensive training program for our new employees that is designed
to educate them on safety, quality, business strategy, corporate culture, and
the methodologies and technical competencies that are required for our business.
Our safety training programs focus on such areas as basic industrial safety
practices and emergency response procedures to deal with any potential fires or
chemical spills. All of our employees are required to participate in a twenty
hour specialized training program that is designed to provide an understanding
of our quality objectives. Supporting our lifelong learning environment, we
offer our employees a tuition reimbursement program and encourage them to
continue their education at accredited colleges and universities. Many of our
professionals attend seminars on topics that are related to our corporate
objectives and strategies. We believe that comprehensive training is necessary
to ensure that our employees have state of the art skills, utilize best
practices, and have a common understanding of work practices.
11
<PAGE>
EMPLOYEES
The following table provides a breakdown of employees by primary function as of
December 31, 2004:
Manufacturing 919
Research and development 116
General and administrative 92
Engineering 82
Sales and marketing 16
-----
Total 1,225
=====
We also employ a number of temporary employees to assist us with various
projects and service functions and address peaks in staff requirements. Our
employees are not represented by any union. We believe that we have a good
relationship with our employees.
AVAILABLE INFORMATION
The Company makes available free of charge on or through its internet website
its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the Securities and Exchange Commission. Our Internet address is
http://www.greatbatch.com. The information contained on the Company's website is
not incorporated by reference in this annual report on Form 10-K and should not
be considered a part of this report.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
Some of the statements contained in this Annual Report on Form 10-K 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 IMD
industry;
o our ability to execute our business model and our business strategy;
o our ability to identify trends within the IMD, medical component, and
commercial power source 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.
12
<PAGE>
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to successfully consummate and
integrate acquisitions, unsuccessful expansion into new markets, competition,
inability to obtain licenses to key technology, regulatory changes or
consolidation in the healthcare industry, and other risks and uncertainties that
arise from time to time and are described in the Company's periodic filings with
the Securities and Exchange Commission and in Exhibit 99.1 to this filing.
13
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ITEM 2. PROPERTIES
Our executive offices are located in Clarence, New York.
The following table sets forth information about all of our significant
facilities as of December 31, 2004:
<TABLE>
<CAPTION>
Location Sq. Ft. Own/Lease Principal Use
-------- ------- --------- -------------
<S> <C> <C> <C>
Alden, NY...................... 125,000 Own Future medical battery and capacitor manufacturing
Amherst, NY.................... 81,650 Own Available for sale
Clarence, NY................... 82,766 Own Medical battery manufacturing and research,
development and engineering ("RD&E")
Clarence, NY................... 20,800 Own Machining and assembly of components
Clarence, NY................... 18,550 Lease Machining and assembly of components
Clarence, NY................... 45,306 Lease Executive offices and warehouse
Cheektowaga, NY................ 35,509 Lease Capacitor manufacturing and RD&E
Canton, MA..................... 32,000 Own Commercial battery manufacturing and RD&E
Columbia, MD................... 30,000 Lease Feedthrough and electrode manufacturing and RD&E
Carson City, NV................ 23,840 Own EMI filtering manufacturing and RD&E
Minneapolis, MN................ 72,000 Own Enclosure manufacturing and engineering
Tijuana, Mexico................ 144,000 Lease Future value-add assembly
</TABLE>
We believe these facilities are suitable and adequate for our current business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal actions arising in the normal course of
business. While we do not believe that the ultimate resolution of any such
pending activities will have a material adverse effect on our consolidated
results of operations, financial position, or cash flows, litigation is subject
to inherent uncertainties. If an unfavorable ruling were to occur, there exists
the possibility of a material adverse impact in the period in which the ruling
occurs.
During 2002, a former non-medical customer commenced an action alleging that the
Company had used proprietary information of the customer to develop certain
products. We have meritorious defenses and are vigorously defending the case. No
accrual for an adverse judgment has been made as such outcome is not deemed
probable, the potential range of loss is between $0.0 and $1.7 million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
The Company's common stock trades on the New York Stock Exchange ("NYSE") under
the symbol "GB." The following table sets forth, for the periods indicated, the
high and low closing prices per share for the common stock as reported on the
NYSE Composite Tape.
2003 High Low
---- ------ ------
First Quarter $29.77 $23.50
Second Quarter 37.25 26.55
Third Quarter 40.30 35.37
Fourth Quarter 43.05 35.60
2004
----
First Quarter $45.15 $34.60
Second Quarter 37.42 23.10
Third Quarter 27.10 14.41
Fourth Quarter 22.94 15.30
As of March 9, 2004 there were 239 record holders of the Company's common stock.
The Company Stock account included in our 401(k) Plan is considered one record
holder for the purposes of this calculation. There are approximately 1,600
holders of Company stock in the 401(k) including active and former employees.
We have not paid cash dividends and currently intend to retain any earnings to
further develop and grow our business.
The following table summarizes the information required by Item 703 of
Regulation S-K for purchases of the Company's equity securities by the Company
or any affiliated purchasers, as defined in Rule 10b-18(a)(3) under the
Securities Exchange Act, during the Company's fourth quarter:
<TABLE>
<CAPTION>
(d) Maximum number
(c) Total number of (or approximate value)
shares (or units) of shares (or units) that
a) Total number of purchased as part of may yet be purchased
shares (or units) (b) Average price paid publicly announced under the plans or
Period purchased per share (or unit) plans or programs programs
------------------ -------------------- ----------------------- ------------------------- -------------------------
<S> <C> <C>
November 2004 4,679(1) $ 20.39 N/A N/A
==================== ======================= ========================= ==========================
</TABLE>
(1) Includes 4,679 shares of Common Stock withheld from employees for payment
of taxes due upon the vesting of restricted stock.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table provides selected financial data of our Company for the
periods indicated. You should read the selected consolidated financial data set
forth below in conjunction with Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and with our consolidated
financial statements and related notes appearing elsewhere in this report. The
consolidated statement of operations data and the consolidated balance sheet
data for the periods indicated have been derived from our financial statements
and related notes.
<TABLE>
<CAPTION>
December 31, (5)
Years ended 2004 (4) 2003 2002 (3) 2001 (2)(6) 2000 (1)(6)
----------------------------------------------------------------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
<S> <C> <C> <C> <C> <C>
Sales $ 200,119 $ 216,365 $ 167,296 $ 135,575 $ 97,790
Income (loss) before income taxes $ 23,732 $ 33,316 $ 20,965 $ 13,778 $ (876)
Income (loss) per share
Basic $ 0.76 $ 1.10 $ 0.69 $ 0.44 $ (0.04)
Diluted $ 0.75 (7) $ 1.05 (7) $ 0.68 $ 0.43 $ (0.04)
----------------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Working capital $ 134,399 $ 170,455 $ 40,204 $ 61,596 $ 15,079
Total assets $ 479,938 $ 438,243 $ 312,251 $ 283,520 $ 181,647
Long-term obligations $ 195,681 $ 178,994 $ 77,040 $ 61,397 $ 30,951
</TABLE>
(1) In August 2000, we acquired the capital stock of BEI. These amounts
include the results of operations of BEI subsequent to its acquisition.
(2) In June 2001, we acquired substantially all of the assets and
liabilities of Sierra. These amounts include the results of operations
of Sierra subsequent to its acquisition.
(3) In July 2002, we acquired the capital stock of Globe. These amounts
include the results of operations of Globe subsequent to its
acquisition.
(4) In March 2004, we acquired the capital stock of NanoGram. These amounts
include the results of operations of NanoGram subsequent to its
acquisition.
(5) The Company's fiscal year ends on the Friday closest to December 31.
For clarity of presentation, the Company describes all periods as if
the year-end is December 31. Fiscal 2002 contained 53 weeks.
(6) We adopted Statement of Financial Accounting Standards (SFAS) No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB 13,
and Technical Corrections, at the beginning of fiscal year 2003. Under
SFAS No. 145, we are no longer allowed to classify debt extinguishments
as extraordinary items in our consolidated financial statements,
subject to limited exceptions. Accordingly, amounts previously
classified as extraordinary related to debt extinguishments in fiscal
2001and 2000 have been reclassified as components of income (loss)
before income taxes.
(7) We adopted Emerging Issues Task Force (EITF) Issue 04-08, The Effect of
Contingently Convertible Instruments on Diluted Earnings Per Share, in
the fourth quarter of 2004. Under EITF 04-08, we must include the
effect of the conversion of our convertible subordinated notes in the
calculation of diluted earnings per share using the if-converted method
as long as the effect is dilutive. The impact on the full year 2003 was
a $0.03 reduction in earnings per share from $1.08 to $1.05. There was
no impact on the full year 2004. Diluted earnings per share for 2003
are restated to reflect the adoption of EITF 04-08.
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS OF OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS IN CONJUNCTION WITH OUR FINANCIAL STATEMENTS AND
RELATED NOTES INCLUDED ELSEWHERE IN THIS REPORT.
Index
Our Business
o Our business
o Our customers
o Our CEO's view
Our Critical Accounting Estimates
o Inventories
o Goodwill and other indefinite lived assets
o Long-lived assets
o Provision for income taxes
Our Financial Results
o Results of operations table
o Fiscal 2004 compared to 2003
o Fiscal 2003 compared to 2002
o Liquidity and capital resources
o Off-balance sheet arrangements
o Contractual obligations
o Inflation
o Impact of recently issued accounting standards
o Subsequent events
Our Business
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("IMDs") through our Implantable Medical Components ("IMC") business. We
offer technologically advanced, highly reliable and long lasting products for
IMDs and enable our customers to introduce IMDs that are progressively smaller,
longer lasting, more efficient and more functional. We also leverage our core
competencies in technology and manufacturing through our Electrochem Power
Solutions ("EPS") business to develop and produce batteries and battery packs
for commercial applications that demand high performance and reliability,
including oil and gas exploration, oceanographic equipment and aerospace.
17
<PAGE>
Most of the IMC products that we sell are utilized by customers in cardiac
rhythm management ("CRM") devices. The CRM market comprises devices utilizing
high-rate batteries and capacitors such as implantable cardioverter
defibrillators ("ICDs") and cardiac resynchronization therapy with backup
defibrillation devices ("CRT-D") and devices utilizing low or medium rate
batteries but no capacitors (pacemakers and CRTs). All CRM devices utilize other
components such as enclosures and feedthroughs, and certain CRM devices utilize
electromagnetic interference ("EMI") filtering technology.
Our Customers
Our products are designed to provide reliable, long lasting solutions that meet
the evolving requirements and needs of our customers and the end users of their
products. Our medical customers include leading IMD manufacturers such as
Guidant, St. Jude Medical, Medtronic, Biotronik, Cyberonics and the Sorin Group.
A substantial part of our business is conducted with a limited number of
customers. In 2004, Guidant, St. Jude Medical, and Medtronic collectively
accounted for approximately 70% of our total sales. The nature and extent of our
selling relationships with each CRM customer are different in terms of breadth
of component products purchased, purchased product volumes, length of
contractual commitment, ordering patterns, inventory management and selling
prices. Our EPS customers are primarily companies involved in oil and gas
exploration, military, oceanography and aerospace.
We have entered into long-term supply agreements with some of our customers. For
each of our products, we recognize revenue when the products are shipped and
title passes.
Our CEO's View
At the end of 2003 and the beginning of 2004, we gathered the relevant data and
information on which to base our business forecast. Much of what constitutes the
bulk of the forecasting process relates to communications with customers as well
as our knowledge of historic and current industry trends. The forecasting
process is inexact with some significant factors either unknown to us or out of
our control. This was certainly the case in 2004 when the decision and sudden
actions of a significant customer adversely affected our sales and our earnings.
While a few isolated incidents did affect the 2004 results, it is also true that
there were other more systemic contributing factors. Concentration of risk, with
relatively few customers serving vertical markets, increased competition and
price pressures all played a role and these factors are expected to continue
into the future. This overview will detail our reactions to all of these
influences and provide a summary of how we are addressing each one of these
contributing factors.
Concentration of Risk - We will be launching new products in 2005, and
will also be providing important new services to expand our business with
existing customers. We are also nurturing opportunities to work with new
customers on development programs for components for totally new interventional
cardiac rhythm therapies.
Increased Competition - We have been the premier supplier of CRM device
power in the form of batteries and capacitors. We have expanded that business to
also include components that make up the vast majority of those found in a
typical pacemaker and defibrillator. Device feedthrough components, EMI filters,
hybrid molded header assemblies and enclosures are all part of our product line.
Our current product portfolio offers leading technology in power sources and
tantalum capacitors, and provides the opportunity for "bundling" these products
with our new assembly capabilities to provide "single source solutions."
18
<PAGE>
Price Pressures - Technology leadership in a vacuum will not ensure
success. Technology, no matter how advanced, must be priced to present the best
value package to the customer. To that end we continue to implement sweeping
changes in our facilities and processes. The execution of our Pre-Production
Quality Assurance process ("PPQA"), with defined stage gates driven by strict
adherence to Six-Sigma criteria ("Six Sigma" is a Motorola trademark), will
speed the new product development process and add significant efficiencies to
mature product production. Six Sigma is a quality methodology for eliminating
defects in any process. The fundamental objective of the Six Sigma methodology
is the implementation of a measurement-based strategy that focuses on process
improvement and variation reduction. Along with these initiatives, we are
excited to be commissioning two new manufacturing facilities that will provide
enhanced capability for cost reduction. As part of our continuing efforts to
improve our cost structure and manufacturing efficiencies, we will be
undertaking two consolidation efforts in 2005. The first will be the
consolidation of our capacitor and medical battery manufacturing operations into
our newly constructed advanced power source manufacturing facility in Alden, NY.
Also, we will be consolidating the work conducted at our Carson City, NV plant
into the newly constructed Tijuana, Mexico value-add assembly facility. We
believe we will then be well positioned to offer "best value" pricing to the
market.
Foundation for the Future - It is important to recognize that these
processes and initiatives were started over the past few years as part of our
broader strategic plan. They are the drivers at the very core of our strategy,
which is to be the supplier of the highest quality, most technologically
advanced and cost effective solutions for the industries we serve. This will
certainly raise the expectations of a vital and growing industry and at the same
time raise the bar for our competition.
In the near term however, in reaction to the unexpected reduction in sales
during 2004, we began the difficult process of reducing our workforce to align
our costs with our anticipated revenue for the year. It is vital to understand
that this realignment was totally motivated and implemented after careful
consideration on how to best achieve our already established near and long-term
strategic goals. The flip side to the disappointing news is confirmation that
the vast majority of our customers not only met, but actually exceeded our
internal projections for sales growth in 2004.
In 2004 (and continuing into 2005), we witnessed an unprecedented flow of new
products through the pipeline. One near term catalyst for growth is the
introduction of our Q-Series medical batteries. Initially they will be available
in two configurations - QHR (High Rate) and QMR (Medium Rate). These batteries
hold the promise of unparalleled performance in a wide range of implantable
device and neurostimulation applications and allow our customers to incorporate
advanced power-hungry features into these devices. While companies typically
announce new products that have modest improvements in form and/or function
regularly, the Q-Series firmly establishes a new industry standard. It delivers
advanced performance criteria to an industry that historically embraces new
products. We believe the Q-Series will represent a major breakthrough by
combining a smaller size with greater energy density (more power).
19
<PAGE>
New products, as well as enhancements to existing products, were a big part of
our story in 2004, and will continue to gain momentum and have positive impact
in 2005 and beyond. In addition, 2004 was witness to still another watershed
event that marks a unique achievement in our corporate history. In 2004 we
entered into an agreement with Medtronic to provide device sub-assembly
services. It allows us to add value beyond our traditional role as a provider of
discrete components, while providing opportunities for cross-selling and
"bundling" products and services. While at present we are working with Medtronic
in this arena and are focused on CRM and neurostimulator assemblies, we feel
confident in and are aggressively pursuing our options for similar agreements
with other customers and products.
Our work with nanotechnology driven products demonstrates real potential for
generating still more "milestone products" serving the CRM device market. The
investment WGT made in acquiring proprietary nanotechnology in 2004 is expected
to provide a springboard for the next major design/manufacturing/performance
revolution in batteries and related products. As the word implies, "nano"
unlocks the promise of smaller size, but just as significant it offers potential
for enhanced product performance and manufacturability. Additionally, nano
applications are not limited to batteries.
Our Critical Accounting Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles in the United States ("GAAP") requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
The methods, estimates and judgments we use in applying our accounting policies
have a significant impact on the results we report in our financial statements.
Management considers an accounting estimate to be critical if:
o It requires assumptions to be made that were uncertain at the
time the estimate was made; and
o Changes in the estimate or different estimates that could have
been selected could have a material impact on our consolidated
results of operations, financial position, or cash flows.
Our most critical accounting estimates are described below. We also have other
policies that we consider key accounting policies, such as our policies for
revenue recognition; however, these policies do not meet the definition of
critical accounting estimates, because they do not generally require us to make
estimates or judgments that are difficult or subjective.
20
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Balance Sheet Caption / Nature of Effect of Variations on Key
Critical Estimate Item Assumptions / Approach Used Assumptions Used
-------------------------------------- ---------------------------------------------------- ---------------------------------------
<S> <C> <C>
Inventories Inventory standard costing requires complex Variations in methods could have a
calculations that include assumptions for overhead material impact on the results. If
Inventories are stated at the lower absorption, scrap and sample calculations, our demand forecast for specific
of cost, determined using the manufacturing yield estimates and the products is greater than actual
first-in, first-out method, or determination of which costs are capitalizable. demand and we fail to reduce
market. The valuation of inventory requires us to estimate manufacturing output accordingly, we
obsolete or excess inventory as well as inventory could be required to record
that is not of saleable quality. additional inventory reserves, which
would have a negative impact on our
gross margins.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Goodwill and other indefinite lived We perform an annual review, or more frequently if We make certain estimates and
assets indicators of potential impairment exist, to assumptions that affect the
determine if the recorded goodwill and other determination of the expected future
Goodwill is initially recorded when indefinite lived assets are impaired. We assess cash flows from our goodwill and
the purchase price paid for an these assets for impairment by comparing the fair indefinite lived assets. These
acquisition exceeds the estimated value of the reporting units to their carrying estimates and assumptions include
fair value of the net identified value to determine if there is potential sales growth projections, cost of
tangible and intangible assets impairment. If the fair value of a reporting unit capital projections, and other key
acquired. Other indefinite lived is less than its carrying value, an impairment indications of future cash flows.
assets such as trademark & names are loss is recorded to the extent that the implied Significant changes in these
considered unamortizing intangible fair value of the goodwill within the reporting estimates and assumptions could
assets as they are expected to unit is less than its carrying value. Fair values create future impairment losses in
generate cash flows indefinitely. for goodwill are determined based on discounted either reporting unit.
These assets are subject to the cash flows, market multiples or appraised values
estimation risks related to the as appropriate.
purchase price allocation conducted
at acquisition.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Long-lived assets We assess the impairment of long-lived assets when Estimation of the useful lives of
events or changes in circumstances indicate that assets that are long-lived requires
Property, plant and equipment, the carrying value of the assets may not be significant management judgment.
definite-lived intangible assets, recoverable. Factors that we consider in deciding Events could occur, including changes
and other long-lived assets are when to perform an impairment review include in cash flow that would materially
carried at cost. This cost is significant under-performance of a business or affect our estimates and assumptions
charged to depreciation or product line in relation to expectations, related to depreciation. Unforeseen
amortization expense over the significant negative industry or economic trends, changes in operations or technology
estimated life of the operating and significant changes or planned changes in our could substantially alter the
assets primarily using straight-line use of the assets. Recoverability potential is assumptions regarding the ability to
rates. Long-lived assets acquired measured by comparing the carrying amount of the realize the return of our investment
through acquisition are subject to asset to the related total future undiscounted cash in operating assets and therefore the
the estimation risks related to the flows. If an asset's carrying value is not amount of depreciation expense to
initial purchase price allocation. recoverable through related cash flows, the asset charge against both current and
is considered to be impaired. Impairment is future sales. Also, as we make
measured by comparing the asset's carrying amount manufacturing process conversions and
to its fair value, based on the best information other factory planning decisions, we
available, including market prices or discounted must make subjective judgments
cash flow analysis. When it is determined that regarding the remaining useful lives
useful lives of assets are shorter than originally of assets, primarily manufacturing
estimated, and there are sufficient cash flows to equipment and building improvements.
support the carrying value of the assets, we
accelerate the rate of depreciation in order to
fully depreciate the assets over their new shorter
useful lives.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------- ---------------------------------------------------- ---------------------------------------
Balance Sheet Caption / Nature of Effect of Variations on Key
Critical Estimate Item Assumptions / Approach Used Assumptions Used
-------------------------------------- ---------------------------------------------------- ---------------------------------------
<S> <C> <C>
Provision for Income Taxes In relation to recording the provision for income Changes could occur that would
taxes, management must estimate the future tax materially affect our estimates and
In accordance with the liability rates applicable to the reversal of tax assumptions regarding deferred
method of accounting for income differences, make certain assumptions regarding taxes. Changes in current tax laws
taxes specified in Statement of whether tax differences are permanent or temporary and tax rates could affect the
Financial Accounting Standards No. and the related time of expected reversal. Also, valuation of deferred tax assets and
109, Accounting for Income Taxes, estimates are made as to whether taxable operating liabilities, thereby changing the
the provision for income taxes is income in future periods will be sufficient to income tax provision. Also,
the sum of income taxes both fully recognize any gross deferred tax assets. If significant declines in taxable
currently payable and deferred. The recovery is not likely, we must increase our income could materially impact the
changes in deferred tax assets and provision for taxes by recording a valuation realizable value of deferred tax
liabilities are determined based allowance against the deferred tax assets that we assets. At December 31, 2004 we had
upon the changes in differences estimate will not ultimately be recoverable. $3.6 million of deferred tax assets
between the basis of assets and Alternatively, we may make estimates about the on our balance sheet. A 1% increase
liabilities for financial reporting potential usage of deferred tax assets that in the effective tax rate would
purposes and the basis of assets and decrease our valuation allowances. As of December increase the current year provision
liabilities as measured by the 31, 2004, the Company has recorded a valuation by $237,000, reducing fully diluted
enacted tax rates that management allowance of $2.7 million against potential earnings per share by $0.01 based on
estimates will be in effect when the non-utilizable deferred tax assets. shares outstanding at December 31,
differences reverse. 2004.
In addition, the calculation of our tax
liabilities involves dealing with uncertainties in
the application of complex tax regulations. We
recognize liabilities for anticipated tax audit
issues in the U.S. and other tax jurisdictions
based on our estimate of whether, and the extent
to which, additional taxes will be due. If we
ultimately determine that payment of these amounts
is unnecessary, we reverse the liability and
recognize a tax benefit during the period in which
we determine that the liability is no longer
necessary. We record an additional charge in our
provision for taxes in the period in which we
determine that the recorded tax liability is less
than we expect the ultimate assessment to be.
-------------------------------------- ---------------------------------------------------- ---------------------------------------
</TABLE>
22
<PAGE>
Our Financial Results
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The commentary that follows should be read in conjunction with our consolidated
financial statements and related notes.
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. For clarity of presentation, the Company describes all
periods as if the year-end is December 31st. Fiscal 2002 included 53 weeks.
<TABLE>
<CAPTION>
Results of Operations Year ended December 31, 2004 - 2003 2003 - 2002
$ % $ %
In thousands, except per share data 2004 2003 2002 Change Change Change Change
---------------------------------------------------------------------------- -------------------------------------------------
IMC
<S> <C> <C> <C> <C> <C> <C> <C>
ICD batteries $ 35,646 $ 41,494 $28,518 $ (5,848) -14% $12,976 46%
Pacemaker and other batteries 19,494 24,578 21,692 (5,084) -21% 2,886 13%
ICD capacitors 21,981 31,668 24,679 (9,687) -31% 6,989 28%
Feedthroughs 47,387 48,257 36,378 (870) -2% 11,879 33%
Enclosures 21,709 24,742 10,845 (3,033) -12% 13,897 128%
Other 26,438 19,482 19,789 6,956 36% (307) -2%
--------------------------------- --------------------- ---------------------
Total IMC 172,655 190,221 141,901 (17,566) -9% 48,320 34%
EPS 27,464 26,144 25,395 1,320 5% 749 3%
--------------------------------- --------------------- ---------------------
Total sales 200,119 216,365 167,296 (16,246) -8% 49,069 29%
Cost of sales 119,397 126,537 96,398 (7,140) -6% 30,139 31%
--------------------------------- --------------------- ---------------------
Gross profit 80,722 89,828 70,898 (9,106) -10% 18,930 27%
Gross margin 40.3% 41.5% 42.4% -1.2% -0.9%
Selling, general, and administrative
expenses 26,719 30,384 24,369 (3,665) -12% 6,015 25%
SG&A as a % of sales 13.4% 14.0% 14.6% -0.7% -0.5%
Research, development and engineering
costs, net ("RD&E") 18,476 16,991 14,440 1,485 9% 2,551 18%
RD&E as a % of sales 9.2% 7.9% 8.6% 1.4% -0.8%
Intangible amortization 4,002 3,217 3,702 785 24% (485) -13%
Other operating expense 4,585 1,036 2,481 3,549 343% (1,445) -58%
--------------------------------- --------------------- ---------------------
Operating income 26,940 38,200 25,906 (11,260) -29% 12,294 47%
Operating margin 13.5% 17.7% 15.5% -4.2% 2.2%
Interest expense 4,535 4,101 3,752 434 11% 349 9%
Interest income (1,235) (702) (442) (533) 76% (260) 59%
Other (income) expense, net (92) 1,485 1,631 (1,577) -106% (146) -9%
Provision for income taxes 7,475 10,028 6,604 (2,553) -25% 3,424 52%
Effective tax rate 31.5% 30.1% 31.5% 1.4% -1.4%
--------------------------------- --------------------- ---------------------
Net income $ 16,257 $ 23,288 $14,361 $ (7,031) -30% $ 8,927 62%
================================= ===================== =====================
Net margin 8.1% 10.8% 8.6% -2.6% 2.2%
Diluted earnings per share $ 0.75 $ 1.05 $ 0.68 $ (0.30) -29% $ 0.37 54%
</TABLE>
23
<PAGE>
FISCAL 2004 COMPARED WITH FISCAL 2003
Sales
IMC. The nature and extent of our selling relationship with each CRM customer is
different in terms of component products purchased, selling prices, product
volumes, ordering patterns and inventory management. We have pricing
arrangements with our customers that many times do not specify minimum order
quantities. Our visibility to customer ordering patterns is over a relatively
short period of time. Our customers may have inventory management programs and
alternate supply arrangements of which we are unaware. Additionally, the
relative market share among the CRM device manufacturers changes periodically.
Consequently, these and other factors can significantly impact our sales in any
given period.
Volume accounted for approximately 7% of the 9% decrease in IMC sales, primarily
due to lower demand by a major customer for wet tantalum capacitors. Total sales
to this customer declined by $27.0 million in comparison to 2003. Sales to other
customers increased by 11% over 2003. The balance of the decrease (2%) was
attributable to lower selling prices. We believe that pricing pressures will
continue into the near future. The decrease in volume of batteries and
capacitors was partially offset by increased volume of other IMC products,
primarily coated components. The overall markets for CRM and Neuro are expected
to experience double-digit growth for the next three to five years.
EPS. Similar to IMC customers, we have pricing arrangements with our customers
that many times do not specify minimum quantities. Our visibility to customer
ordering patterns is over a relatively short period of time. The 5% increase in
EPS sales is due to volume, resulting from increased demand in the oil and gas
market both domestically and internationally.
Gross profit
The 120 basis point decrease in gross margin was primarily due to the following
factors:
a. Lower IMC selling prices: 200 basis points; and
b. Increased period costs resulting from excess capacity at our wet
tantalum capacitor manufacturing plant: 100 basis points.
c. Savings instituted during the year: (180) basis points, primarily
scrap reductions.
SG&A expenses
The realignment of management resources resulted in a $3.4 million reduction in
allocated costs to SG&A. Expenses also decreased as a result of cost savings
initiatives instituted mid-year including incentive compensation reductions of
approximately $1.0 million. These savings were partially offset by costs of
approximately $1.0 million associated with Sarbanes-Oxley compliance. The
remaining $0.3 million of expenses were comprised of individually insignificant
items.
24
<PAGE>
RD&E expenses
Expenses prior to reimbursements increased by $4.4 million. The main causes of
this increase include additional costs related to the Chief Technology Officer
position ($.9 million), additional development project expenses ($1.3 million)
and the balance was primarily due to the acquisition of NanoGram in March 2004.
These costs were offset by an increase in development efforts for projects where
the company is reimbursed for achieving certain development milestones. The
increase in reimbursements amounted to approximately $3.0 million. We expect to
maintain our spending on RD&E at a level that will support the new technologies
demanded by the customers we serve.
Amortization expense
The increase primarily reflects the impact of the additional intangible
amortization resulting from the NanoGram acquisition. The amortization of the
NanoGram intangibles amounts to approximately $1.1 million in 2004. There was
also a $0.2 million reduction in expense as certain definite lived intangibles
were fully amortized during 2003.
Other operating expense
The 2004 amount comprised the following:
a. $2.0 million associated with patents acquired in the second
quarter. These patents cover how capacitors are used in an ICD.
Although management believes the patents could have been
successfully challenged in court proceedings, a decision was made
to acquire the patents and remove this as a potential obstacle
for existing customers to more fully adopt wet tantalum
technology and for potential customers to initially adopt the
technology;
b. $0.8 million related to severance cost from a 7% mid-year
reduction in workforce;
c. $0.9 million related to costs associated with the start-up of
Tijuana facility; and
d. $0.8 million primarily related to various asset disposals.
Interest expense and interest income
Interest expense increased due to the addition of $90.0 million in
interest-bearing debt in May of 2003 resulting from the issuance of the
convertible subordinated notes.
Interest income increased as the issuance of the convertible subordinated notes
provided additional funds that are being invested on a short-term basis.
Provision for income taxes
Our effective tax rate increased primarily due to the recording of a valuation
allowance against certain New York State deferred tax assets. Based on
managements' review, after considering both the positive and negative support,
it was determined that certain tax assets primarily investment tax credits and
employees incentive credits were not considered to be more likely than not to be
realized. The tax provision increase related to the valuation allowance was $2.2
million.
25
<PAGE>
Our effective tax rate is below the United States statutory rate primarily as a
result of federal and state tax credits (3.3%), and the Extraterritorial Income
Exclusion ("ETI") for 2004 of (4.2%). The American Jobs Creation Act of 2004
(P.L. 108-357) ("the Act") signed into law on October 22, 2004 repeals the ETI
after December 31, 2004, and creates new tax incentives for a broad spectrum of
taxpayers. We have not completed a full assessment on how this law change will
impact the Company due to the potential changes in our manufacturing locations.
FISCAL 2003 COMPARED WITH FISCAL 2002
The increase in total sales for 2003 included a full year of sales of Globe,
which we acquired in July 2002. The Globe acquisition added $14.0 million, $3.7
million, and $1.8 million to sales, gross profit, and operating expenses
respectively in 2003 compared to 2002.
Sales
IMC. The sales growth for IMC was led by sales of ICD batteries reflecting the
strength of this market. In addition, capacitor and components sales increased
substantially over last year. Substantially all of the sales changes during 2003
were attributable to volume and sales mix. Looking at our overall sales mix, CRM
product sales increased over 2002 and represented 83% of our overall product
mix, up from 80% in 2002.
EPS. Commercial sales increased modestly from a slight rise in volume of orders
from oil and gas customers.
Gross profit
The following factors contributed to an approximately a 310 basis point decline
in the gross margin between 2003 and 2002:
a. Consolidation of EPS plants: 50 basis points;
b. Start-up costs from lean manufacturing: 50 basis points;
c. Inclusion of enclosure products: 100 basis points;
d. Hiring of new plant management personnel: 40 basis points; and
e. Changes in selling prices for certain medical components: 70
basis points.
SG&A expenses
Expenses increased in absolute dollars, but declined as a percent of sales due
to improved operating leverage. The $6.0 million increase in SG&A was comprised
of the following factors:
a. Incentive compensation and profit sharing expense: $1.0 million;
b. Incremental senior management related expenses: $2.0 million;
c. Corporate spending for information technology: $2.0 million; and
d. All other SG&A comprised of individually insignificant items:
$1.0 million.
26
<PAGE>
RD&E expenses
Expenses increased in absolute dollars, but decreased as a percent of sales as
sales growth outpaced spending. The increase in RD&E was comprised primarily of
the $1.8 million of expenses for the development of our QHR high rate battery
product.
Amortization expense
The reduction in intangible amortization reflects the impact of the sale of
certain intangible assets of the ceramic capacitor product line that was part of
the Sierra-KD components acquisition in 2003. In addition, one of the patent
licenses for wet tantalum capacitors was fully amortized during 2002.
Other operating expense
The 2003 amount is primarily attributable to the write-down of a manufacturing
facility that became available for sale as the result of a decision to purchase
an additional manufacturing facility in New York.
Interest expense and interest income
Interest expense was lower and interest income was higher primarily due to the
issuance of the $170.0 million convertible subordinated notes in May 2003. These
securities allowed for the outstanding line of credit to be fully replaced at a
lower rate of interest and additional funds to be invested on a short-term
basis.
Provision for income taxes
Our effective tax rate declined primarily as a result of increased research and
development credits, as well as the benefits of state tax planning strategies.
The impact of the lower effective tax rate during 2003 was approximately $0.5
million.
The ETI provided approximately $1.0 million of tax benefit in 2003.
Liquidity and Capital Resources
Our principal sources of liquidity are our operating cash flow combined with our
working capital of $134.4 million at December 31, 2004 and our unused $20
million credit line with our lending syndicate. Historically we have generated
cash from operations sufficient to meet our capital expenditure and debt service
needs, other than for acquisitions. At December 31, 2004, our current ratio was
5.8:1, so short-term liquidity is not a concern to management at this time.
The Company regularly engages in discussions relating to potential acquisitions
and may announce an acquisition transaction at any time. However, no active
negotiations are presently being conducted.
27
<PAGE>
Operating activities
In all years presented significant positive cash flows from operating activities
were achieved. Net cash provided by operating activities exceeded the
combination of net income, depreciation and amortization due to the favorable
cash flow impact of deferred taxes. Over the three-year period, changes in
operating assets and liabilities amounted to a net use of cash of approximately
$5.0 million.
Investing activities
Capital spending of $38.4 million in 2004 was significantly higher than
historical expenditure levels. The majority of the current year spending was for
the following:
a. New medical power manufacturing plant in Alden, NY ($22.1
million);
b. Oracle ERP system ($5.0 million); and
c. New assembly plant in Tijuana, Mexico ($4.6 million).
In comparison, we spent $11.9 million in 2003, which was primarily related to
normal maintenance capital.
In March 2004, we purchased NanoGram for approximately $45.7 million. The most
significant elements of the purchase price allocation were to patented and
unpatented technology and goodwill. NanoGram has a strong intellectual property
position around the laser pyrolysis process and accordingly a significant
allocation was made to these assets. The cost will be amortized over the
remaining estimated useful life of 11.5 years. For 2004 the amortization expense
was approximately $0.1 million per month. The residual amount of the allocation
of $35.1 million went to goodwill, which is not amortized but rather subject to
periodic testing for impairment. Pursuant to the valuation we obtained, the
status of the NanoGram technology was sufficiently advanced such that technical
feasibility requirements were met at the acquisition date; consequently, no
in-process R&D charge was recorded.
NanoGram was a materials research and development company focused on developing
nanoscale materials for use in various battery and potentially other medical
device applications. The primary purpose of this acquisition is to provide us
with additional intellectual property as well as additional research and
development capabilities. NanoGram is now referred to as our Advanced Research
Laboratory. Since the primary function of this operation is research and
development, all costs are appropriately classified in that category. No sales
revenue was attributable to this acquisition in 2004.
In 2002, approximately $47.1 million was spent related to the acquisition of
Globe. Globe was a manufacturer of precision titanium enclosures for IMDs. Globe
was acquired to further broaden our product offerings to include enclosures.
28
<PAGE>
Approximately $9.0 million of short-term investments were converted to cash
during the year.
Financing activities
During 2003, we successfully completed a $170.0 million convertible subordinated
notes offering. The proceeds of this offering were utilized to repay $85.0
million in long-term debt that was previously outstanding.
Capital Structure
At December 31, 2004, our capital structure consisted primarily of $170.0
million of convertible subordinated notes and our 21.4 million shares of common
stock outstanding. We have in excess of $92.0 million in cash, cash equivalents
and short-term investments and are in a position to facilitate future
acquisitions if necessary. We are also authorized to issue 100 million shares of
common stock and 100 million shares of preferred stock. The market value of our
outstanding common stock since our IPO has exceeded our book value and the
average daily trading volume of our common stock has also increased;
accordingly, we believe that if needed we can access public markets to sell
additional common or preferred stock assuming conditions are appropriate.
Our capital structure allows us to support our internal growth and provides
liquidity for corporate development initiatives. The current expectation for
2005 is that capital spending is expected to be in the range of $30.0 million to
$35.0 million, primarily due to the build-out of the advanced manufacturing
facility ($11.0 million), our value-add assembly plant ($10.0 million), and
normal maintenance capital expenditures.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements within the meaning of Item 303(a)(4)
of Regulation S-K.
Litigation
We are a party to various legal actions arising in the normal course of
business. While we do not believe that the ultimate resolution of any such
pending activities will have a material adverse effect on our consolidated
results of operations, financial position, or cash flows, litigation is subject
to inherent uncertainties. If an unfavorable ruling were to occur, there exists
the possibility of a material adverse impact in the period in which the ruling
occurs.
29
<PAGE>
Contractual Obligations
The following table summarizes our significant contractual obligations at
December 31, 2004, and the effect such obligations are expected to have on our
liquidity and cash flows in future periods.
------------------------------------------------
Less than 1-3 3-5 More than
CONTRACTUAL OBLIGATIONS Total 1 year years years 5 years
--------------------------------------------------------------------------------
Long-Term Debt Obligations (a):
Convertible Debentures $ 170,000 $ - $ - $ - $ 170,000
Capital Lease Obligations 1,652 1,000 652 - -
Operating Lease Obligations (b) 11,466 2,350 3,651 2,652 2,813
Purchase Obligations (c) 10,051 10,051 - - -
------------------------------------------------
Total $ 193,169 $ 13,401 $ 4,303 $ 2,652 $ 172,813
================================================
(a) The current portion of these liabilities is included. Amounts do not
include imputed interest. The annual interest expense on the convertible
debentures is 2.25%, or $3.8 million. See Note 9 - Debt of the Notes to the
Consolidated Financial Statements in this Form 10-K for additional
information about our long-term obligations.
(b) See Note 16 - Commitments and Contingencies of the Notes to the
Consolidated Financial Statements in this Form 10-K for additional
information about our operating lease obligations.
(c) Purchase orders or contracts for the purchase of raw materials and other
goods and services are not included in the table above. For the purposes of
this table, contractual obligations for purchase of goods or services are
defined as agreements that are enforceable and legally binding on the
Company and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions;
and the approximate timing of the transaction. Our purchase orders are
normally based on our current manufacturing needs and are fulfilled by our
vendors within short time horizons. We enter into blanket orders with
vendors that have preferred pricing and terms, however these orders are
normally cancelable by us without penalty. We do not have significant
agreements for the purchase of raw materials or other goods specifying
minimum quantities or set prices that exceed our expected requirements in
the short-term. We also enter into contracts for outsourced services;
however, the obligations under these contracts were not significant and the
contracts generally contain clauses allowing for cancellation without
significant penalty. During 2004, the Company commenced the build out of
its medical battery and capacitor manufacturing facility in Alden, NY and
its value-add manufacturing facility in Tijuana, Mexico. These facilities
will enable the Company to further consolidate its operations and implement
state of the art manufacturing capabilities at both locations. The
contractual obligations for construction of these facilities is $10.0
million and will be financed by existing, or internally generated cash.
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<PAGE>
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R). This statement is a revision of SFAS 123,
Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS 123(R) requires the measurement
of the cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. The cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award, or over the period that a performance measure
is expected to be met. We will adopt SFAS 123(R) on July 2, 2005, requiring
compensation cost to be recorded as expense for the portion of the outstanding
unvested awards, based on the grant-date fair value of those awards calculated
using the Black-Scholes option pricing model currently used under SFAS 123 for
proforma disclosures. Based on unvested options currently outstanding, the
effect of adopting SFAS 123(R) will reduce our net income by approximately $1.4
million in the second half of 2005.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4 (SFAS No. 151). SFAS No. 151 amends the guidance in ARB
No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal
amounts of idle facility expense, handling costs and wasted material (spoilage).
Among other provisions, the new rule requires that such items be recognized as
current-period charges, regardless of whether they meet the criterion of "so
abnormal" as stated in ARB No. 43. SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. We do not expect that adoption of SFAS No. 151
will have a material effect on its consolidated financial position, consolidated
results of operations, or liquidity.
Subsequent Events
On February 23, 2005 we announced our intent to consolidate our medical
capacitor manufacturing operations, currently in Cheektowaga, NY, and the
implantable medical battery manufacturing operations, currently in Clarence, NY,
into the advanced power source manufacturing facility in Alden, NY. We will also
consolidate the capacitor research, development and engineering operations from
the Cheektowaga, NY, facility into the existing implantable medical battery
research, development, and engineering operations in Clarence, NY.
The total cost estimated for these consolidation efforts is anticipated to be
between $3.5 and $4.0 million. We expect to incur this additional expense over
the next four fiscal quarters. The major categories of costs to be incurred,
which will primarily be cash expenditures, include the following:
o Production inefficiencies and revalidation - $1.5 to $1.7 million;
31
<PAGE>
o Training - $0.6 to $0.7 million;
o Moving and facility closures - $0.9 million to $1.0 million; and
o Infrastructure - $0.5 to $0.6 million
On March 7, 2005 we announced our intent to close the Carson City, NV facility
and consolidate the work performed at Carson City into the Tijuana, Mexico
facility.
The total estimated cost for this facility consolidation plan is anticipated to
be between $4.5 million and $5.4 million. We expect to incur this additional
cost over the next four fiscal quarters. The major categories of costs to be
incurred include the following:
o Costs related to the shut-down of the Carson City facility:
a. Severance and retention - $1.4 to $1.6 million;
b. Accelerated depreciation - $0.5 to $0.6 million; and
c. Other - $0.6 to $0.7 million
o Costs related to the move and consolidation of work into Tijuana:
a. Production inefficiencies and revalidation - $0.4 to $0.5 million;
b. Relocation and moving expenses - $0.3 to $0.5 million;
c. Personnel costs (including travel, training and duplicate wages) -
$1.0 to $1.1 million; and
d. Other - $0.3 to $0.4 million
All categories of costs are considered to be future cash expenditures, except
accelerated depreciation.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
Under our existing line of credit any borrowings bear interest at fluctuating
market rates. At December 31, 2004, we did not have any borrowings outstanding
under our line of credit and thus no interest rate sensitive financial
instruments.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of our Company and report
of the independent registered public accounting firm thereon are set forth
below.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet as of December 31, 2004 and 2003.
Consolidated Statement of Operations for the years ended December 31, 2004,
2003 and 2002.
Consolidated Statement of Cash Flows for the years ended December 31, 2004,
2003 and 2002.
Consolidated Statement of Stockholders' Equity for the years ended December
31, 2004, 2003 and 2002.
Notes to Consolidated Financial Statements.
33
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Wilson Greatbatch Technologies, Inc.
Clarence, New York
We have audited the accompanying consolidated balance sheets of Wilson
Greatbatch Technologies, Inc. and subsidiaries (the "Company") as of December
31, 2004 and January 2, 2004, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2004. Our audits also included the financial
statement schedule listed in the Index at Item 15(a)(2). These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Wilson Greatbatch Technologies,
Inc. and subsidiaries as of December 31, 2004 and January 2, 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 15, 2005 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ Deloitte & Touche LLP
Buffalo, New York
March 15, 2005
34
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEET
(In thousands)
--------------------------------------------------------------------------------
ASSETS December 31,
2004 2003
Current assets:
Cash and cash equivalents $ 89,473 $ 119,486
Short-term investments 2,759 11,559
Accounts receivable, net 24,288 23,726
Inventories 34,027 28,598
Prepaid expenses and other current assets 1,037 3,591
Refundable income taxes 3,673 583
Deferred income taxes 3,622 3,163
Asset available for sale 3,600 3,658
---------- ----------
Total current assets 162,479 194,364
Property, plant, and equipment, net 92,210 63,735
Intangible assets, net 63,984 51,441
Goodwill 156,772 119,521
Deferred income taxes - 2,896
Other assets 4,493 6,286
---------- ----------
Total assets $ 479,938 $ 438,243
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,971 $ 4,091
Accrued expenses and other current liabilities 18,109 18,968
Current portion of long-term debt 1,000 850
---------- ----------
Total current liabilities 28,080 23,909
Long-term debt, net of current portion 652 928
Convertible subordinated notes 170,000 170,000
Deferred income taxes 25,029 7,251
Other long-term liabilities - 815
---------- ----------
Total liabilities 223,761 202,903
---------- ----------
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock - -
Common stock 21 21
Additional paid-in capital 212,131 207,969
Deferred stock-based compensation (833) (1,185)
Treasury stock, at cost (95) (179)
Retained earnings 44,971 28,714
Accumulated other comprehensive income (18) -
---------- ----------
Total stockholders' equity 256,177 235,340
---------- ----------
Total liabilities and stockholders' equity $ 479,938 $ 438,243
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
35
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share amounts)
--------------------------------------------------------------------------------
Year Ended December 31,
2004 2003 2002
Sales $ 200,119 $ 216,365 $ 167,296
Cost of sales 119,397 126,537 96,398
---------- ---------- ----------
Gross profit 80,722 89,828 70,898
Selling, general and administrative expenses 26,719 30,384 24,369
Research, development and engineering costs, net 18,476 16,991 14,440
Amortization of intangible assets 4,002 3,217 3,702
Other operating expense, net 4,585 1,036 2,481
---------- ---------- ----------
Operating income 26,940 38,200 25,906
Interest expense 4,535 4,101 3,752
Interest income (1,235) (702) (442)
Other (income) expense, net (92) 1,485 1,631
---------- ---------- ----------
Income before income taxes 23,732 33,316 20,965
Provision for income taxes 7,475 10,028 6,604
---------- ---------- ----------
Net income $ 16,257 $ 23,288 $ 14,361
========== ========== ==========
Earnings per share:
Basic $ 0.76 $ 1.10 $ 0.69
Diluted $ 0.75 $ 1.05 $ 0.68
Weighted average shares outstanding:
Basic 21,358 21,149 20,941
Diluted 25,759 24,026 21,227
The accompanying notes are an integral part of these consolidated financial
statements
36
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WILSON GREATBATCH TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
----------------------------------------------------------------------------------------
Year Ended December 31,
2004 2003 2002
Cash flows from operating activities:
Net income $ 16,257 $ 23,288 $ 14,361
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,835 13,179 12,100
Stock-based compensation 3,312 3,306 3,667
Early extinguishment of debt - 1,487 -
Write-off of noncompete agreement - - 1,723
Write-off of investment in unrelated company - - 1,547
Deferred income taxes 12,203 4,578 3,765
Loss on disposal of assets 1,177 1,036 758
Changes in operating assets and liabilities:
Accounts receivable (563) (4,416) (379)
Inventories (5,429) 5,822 (2,752)
Prepaid expenses and other current assets 2,780 2,335 (1,450)
Accounts payable 4,763 (1,635) (1,685)
Accrued expenses and other current liabilities (1,149) 5,797 (2,972)
Income taxes (3,020) 24 (873)
---------- ---------- ---------
Net cash provided by operating activities 45,166 54,801 27,810
---------- ---------- ---------
Cash flows from investing activities:
Sale (purchase) of short-term investments 9,059 (11,559) -
Acquisition of property, plant and equipment (38,444) (11,925) (20,501)
Proceeds from sale of property, plant and
equipment and other assets 67 2,734 14
Decrease (increase) in other assets 23 107 (1,459)
Acquisition of subsidiary, net (45,716) - (47,124)
---------- ---------- ---------
Net cash used in investing activities (75,011) (20,643) (69,070)
---------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 170,000 32,000
Principal payments of long-term debt - (85,000) (29,880)
Principal payments of capital lease obligations (1,278) (434) -
Payment of debt issue costs - (4,535) -
Issuance of common stock 1,205 868 476
Net repurchase of treasury stock (95) (179) -
---------- ---------- ---------
Net cash provided by financing activities (168) 80,720 2,596
---------- ---------- ---------
Net (decrease) increase in cash and cash equivalents (30,013) 114,878 (38,664)
Cash and cash equivalents, beginning of year 119,486 4,608 43,272
---------- ---------- ---------
Cash and cash equivalents, end of year $ 89,473 $ 119,486 $ 4,608
========== ========== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
WILSON GREATBATCH TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
------------------------------------------------------------------------------------------------------------------------------------
Retained Accumulated Total
Common Stock Additional Deferred Treasury Stock Earnings Other Stock-
-------------- Paid in Stock Based ----------------(Accumulated Comprehensive holder's
Shares Amount Capital Compensation Shares Amount Deficit) Income Equity
Balance, December 31, 2001 20,983 21 200,880 - 195 (3,122) (8,935) - 188,844
Exercise of stock options 67 - 519 - - - - - 519
Shares contributed to ESOP - - 761 - (140) 2,254 - - 3,015
Common stock issuance expenses - - (39) - - - - - (39)
Reissuance of treasury stock - - 9 - (1) 5 - - 14
Tax benefit of stock option exercises - - 149 - - - - - 149
Net income - - - - - - 14,361 - 14,361
------- ------ --------- ------------ -------- ------- ----------- ------------- ----------
Balance, December 31, 2002 21,050 21 202,279 - 54 (863) 5,426 - 206,863
Shares contributed to ESOP 90 - 2,804 - (54) 863 - - 3,667
Exercise of stock options 77 - 868 - - - - - 868
Stock-based compensation 14 - - 583 - - - - 583
Restricted stock issued - - 1,768 (1,768) - - - - -
Tax benefit of stock option exercises - - 250 - - - - - 250
Purchase of treasury stock - - - - 5 (179) - - (179)
Net income - - - - - - 23,288 - 23,288
------- ------ --------- ------------ -------- ------- ----------- ------------- ----------
Balance, December 31, 2003 21,231 21 207,969 (1,185) 5 (179) 28,714 - 235,340
Exercise of stock options 100 - 1,200 - - - - - 1,200
Shares contributed to ESOP 66 - 2,571 - (4) 152 - - 2,723
Restricted stock issued - - 349 (349) - - - - -
Tax benefit of stock option exercises - - 123 - - - - - 123
Restricted stock forfeitures - - (85) 85 - - - - -
Stock-based compensation 14 - 4 616 (1) 27 - - 647
Purchase of treasury stock - - - - 5 (95) - - (95)
Net income - - - - - - 16,257 - 16,257
Unrealized losses on available-for-sale
securities - - - - - - - (18) (18)
----------
Total comprehensive income - - - - - - - - 16,239
------- ------ --------- ------------ -------- ------- ----------- ------------- ----------
Balance, December 31, 2004 21,411 21 212,131 (833) 5 (95) 44,971 (18) 256,177
======= ====== ========= ============ ======== ======= =========== ============= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
38
<PAGE>
WILSON GREATBATCH TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
The Company - The consolidated financial statements include the accounts of
Wilson Greatbatch Technologies, Inc. and its wholly owned subsidiaries
(collectively, the "Company"). All significant intercompany balances and
transactions have been eliminated in consolidation.
Nature of Operations - The Company operates in two reportable
segments-Implantable Medical Components ("IMC") and Electrochem Power
Solutions ("EPS"). The IMC segment designs and manufactures batteries,
capacitors, filtered feedthroughs, engineered components and enclosures
used in IMDs. The EPS segment designs and manufactures high performance
batteries and battery packs for use in oil and gas exploration,
oceanographic equipment and aerospace.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Year End - The Company utilizes a fifty-two,
fifty-three week fiscal year ending on the Friday nearest December 31st.
For clarity of presentation, the Company describes all periods as if the
year-end is December 31st. Fiscal 2002 included 53 weeks.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
highly liquid, short-term investments with maturities at the time of
purchase of three months or less.
Short-term Investments - Short-term investments are comprised of municipal
bonds acquired with maturities that exceed three months and are less than
one year at the time of acquisition and equity securities classified as
available-for-sale. Available-for-sale securities are carried at fair value
with the unrealized gain or loss, net of tax, reported in other
comprehensive income. Securities that the Company has the ability and
positive intent to hold to maturity are accounted for as held-to-maturity
securities and are carried at amortized cost. The cost of securities sold
is based on the specific identification method. Unrealized losses
considered to be other than temporary during the period are recognized in
current earnings.
Fair Value of Financial Instruments - The carrying amount of financial
instruments, including cash and cash equivalents, trade receivables and
accounts payable, approximated their fair value as of December 31, 2004 and
2003 because of the relatively short maturity of these instruments.
Inventories - Inventories are stated at the lower of cost, determined using
the first-in, first-out method, or market.
Assets Available for Sale - Assets available for sale are accounted for at
the lower of the carrying amount or each asset's estimated fair value less
costs to sell. Fair value is determined at prevailing market conditions or
appraisals as needed. At December 31, 2003, the Company classified its
Amherst, NY facility as held for sale. The Company recorded impairment for
$0.06 million for the year ended December 31, 2004. The Company continues
to pursue disposition of its held for sale asset, however there can be no
assurance if or when a sale will be completed or whether such sale will be
completed on terms that will enable the Company to realize the full
carrying value of the asset.
39
<PAGE>
Property, Plant and Equipment - Property, plant and equipment is carried at
cost. Depreciation is computed primarily by the straight-line method over
the estimated useful lives of the assets, which are as follows: buildings
and building improvements 7-40 years; machinery and equipment 3-10 years;
office equipment 3-10 years; and leasehold improvements over the remaining
lives of the improvements or the lease term, if less.
The cost of repairs and maintenance is charged to expense as incurred;
renewals and betterments are capitalized. Upon retirement or sale of an
asset, its cost and related accumulated depreciation or amortization are
removed from the accounts and any gain or loss is recorded in income or
expense.
Intangible Assets - Acquired intangible assets apart from goodwill and
trademark and names consist primarily of patented and unpatented
technology. The Company continues to amortize its definite-lived assets on
a straight-line basis over their estimated useful lives as follows:
patented technology, 8-17 years; unpatented technology, 5-15 years; and
other intangible assets, 3-10 years.
Impairment of Long-lived Assets - The Company assesses the impairment of
long-lived assets when events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. Factors that are
considered in deciding when to perform an impairment review include
significant under-performance of a business or product line in relation to
expectations, significant negative industry or economic trends, and
significant changes or planned changes in the use of the assets.
Recoverability potential is measured by comparing the carrying amount of
the asset to the related total future undiscounted cash flows. If an
asset's carrying value is not recoverable through related cash flows, the
asset is considered to be impaired. Impairment is measured by comparing the
asset's carrying amount to its fair value, based on the best information
available, including market prices or discounted cash flow analysis. When
it is determined that useful lives of assets are shorter than originally
estimated, and there are sufficient cash flows to support the carrying
value of the assets, the rate of depreciation is accelerated in order to
fully depreciate the assets over their new shorter useful lives. There was
no impairment of long-lived assets in 2002, 2003 or 2004.
Goodwill - Goodwill and trademark and names are not amortized but are
periodically tested for impairment.
The Company assesses goodwill for impairment by comparing the fair value of
the reporting units to their carrying amounts on an annual basis, or more
frequently if certain events occur or circumstances change, to determine if
there is potential impairment. If the fair value of a reporting unit is
less than it