SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 000-49702
MedSource Technologies, Inc.
(Exact name of registrant as specified in its charter)
State of incorporation: Delaware IRS Employer Identification No: 52-2094496
110 Cheshire Lane, Suite 100, Minneapolis, MN 55305
(Address and zip code of principal executive office)
(952) 807-1234
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No: |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes: |X| No: |_|
The number of shares of the registrant's Common Stock, par value $0.01
per share, outstanding as of May 7, 2004 was 28,990,705.
Table of Contents
Part I: Financial Information
-----------------------------
Item 1. Financial Statements..................................................3
Consolidated Balance Sheets...........................................3
Consolidated Statements of Operations.................................4
Consolidated Statements of Cash Flows.................................5
Notes to Consolidated Financial Statements............................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................10
Item 3. Quantitative and Qualitative Disclosures About Financial
Market Risk..........................................................15
Item 4. Controls and Procedures..............................................16
Part II: Other Information
--------------------------
Item 1. Legal Proceedings....................................................17
Item 2. Changes in Securities and Use of Proceeds............................17
Item 3. Defaults Upon Senior Securities......................................17
Item 4. Submission of Matters to a Vote of Security Holders..................17
Item 5. Other Information....................................................17
Item 6. Exhibits and Reports on Form 8-K.....................................17
Signatures....................................................................18
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
March 28, June 30,
2004 2003
---------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 13,978 $ 10,781
Accounts receivable, net 23,075 23,710
Inventories 24,292 25,617
Prepaid expenses and other current assets 4,002 4,318
------------------- -------------------
Total current assets 65,347 64,426
Property, plant, and equipment, net 50,551 52,752
Goodwill 96,637 96,582
Other identifiable intangible assets, net 1,327 1,432
Deferred financing costs 1,364 1,682
Other assets 1,338 1,343
------------------- -------------------
Total assets $ 216,564 $ 218,217
=================== ===================
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,579 $ 10,868
Accrued compensation and benefits 4,279 5,498
Other accrued expenses 2,916 2,293
Reserve for restructuring 489 958
Current portion of obligations under capital lease 1,290 1,326
Current portion of long-term debt 7,955 6,427
------------------- -------------------
Total current liabilities 27,508 27,370
Obligations under capital leases, less current portion 2,999 3,962
Long-term debt, less current portion 25,877 30,073
Other long-term liabilities 602 731
Stockholders' equity:
Common stock 292 289
Additional paid-in capital 278,192 277,791
Treasury stock (1,500) (1,463)
Accumulated other comprehensive loss (217) (288)
Accumulated deficit (115,676) (118,326)
Unearned compensation (1,513) (1,922)
------------------- -------------------
Total stockholders' equity 159,578 156,081
------------------- -------------------
Liabilities & stockholders' equity $ 216,564 $ 218,217
=================== ===================
See Notes to Consolidated Financial Statements
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MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -----------------------------------
MARCH 28, MARCH 30, MARCH 28, MARCH 30,
2004 2003 2004 2003
---------------- -------------- --------------- -----------------
Revenues $ 46,027 $ 44,511 $ 136,258 $ 130,135
Costs and expenses:
Cost of product sold 35,037 34,007 104,107 97,989
Selling, general and administrative expense 7,692 8,379 23,224 24,475
Restructuring charges 1,100 1,948 3,989 1,948
Goodwill impairment -- 30,000 -- 30,000
---------------- -------------- --------------- -----------------
Operating income (loss) 2,198 (29,823) 4,938 (24,277)
Interest expense, net (668) (590) (2,027) (1,748)
---------------- -------------- --------------- -----------------
Income (loss) before income taxes 1,530 (30,413) 2,911 (26,025)
Income tax expense 56 12 261 27
---------------- -------------- --------------- -----------------
Net income (loss) $ 1,474 $ (30,425) $ 2,650 $ (26,052)
================ ============== =============== =================
Net income (loss) per (basic and diluted) $ 0.05 $ (1.10) $ 0.09 $ (0.95)
================ ============== =============== =================
Weighted average common shares outstanding
Basic 28,125,901 27,639,127 28,044,846 27,413,489
Diluted 29,046,182 27,639,127 28,753,689 27,413,489
See Notes to Consolidated Financial Statements
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MedSource Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (In thousands)
(Unaudited)
For the Nine Months Ended
March 28, March 30,
2004 2003
------------------ -------------------
Cash flows from operating activities:
Net income $ 2,650 $ (26,052)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 7,045 6,324
Non-cash stock compensation 461 71
Goodwill impairment -- 30,000
Amortization of other intangibles 105 253
Amortization of deferred financing costs and discount
on long-term debt 342 305
Loss on retirement of equipment 491 1,122
Changes in operating assets and liabilities, net of effect of business
acquired:
Accounts receivable 635 145
Inventories 1,325 (3,306)
Prepaid expenses and other current assets 316 (590)
Accounts payable, accrued compensation and benefits,
accrued expenses and other (1,353) (2,806)
Other (113) (280)
------------------ -------------------
Net cash provided by operating activities 11,904 5,186
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- (22,591)
Proceeds from sale of equipment 348 80
Additions to plant and equipment, net (5,685) (10,623)
------------------ -------------------
Net cash used in investing activities (5,418) (33,134)
Cash flows from financing activities:
Payments of long-term debt (3,715) (2,997)
Proceeds of long-term debt -- 8,000
Redemption of Series E preferred stock -- (2,010)
Proceeds from sale of common stock, net of costs 345 813
------------------ -------------------
Net cash (used in) provided by financing activities (3,370) 3,806
------------------ -------------------
Increase (decrease) in cash and cash equivalents 3,197 (24,142)
Cash and cash equivalents at beginning of period 10,781 38,268
------------------ -------------------
Cash and cash equivalents at end of period $ 13,978 $ 14,126
------------------ -------------------
See Notes To Consolidated Financial Statements
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MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. INTERIM FINANCIAL STATEMENTS
MedSource Technologies, Inc. ("we" or the "Company") has prepared the
unaudited interim consolidated financial statements presented herein in
accordance with accounting principles generally accepted in the United States
for interim financial statements and in accordance with the instructions to Form
10-Q and Regulation S-X. Accordingly, they do not include all information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The consolidated financial statements
are unaudited but reflect all adjustments, consisting of normal recurring
adjustments and accruals, which, in the opinion of management, are considered
necessary for a fair presentation of our financial position and results of
operations and cash flows for the interim periods presented. Results of
operations for interim periods are not necessarily indicative of the results
that may be expected for the full fiscal year.
The consolidated financial statements should be read in conjunction
with the summary of significant accounting policies and notes to consolidated
financial statements included in the Company's annual report for its fiscal year
ended June 30, 2003.
Preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Stock Based Compensation
The Company accounts for its stock-based employee compensation plans
using the intrinsic value method in accordance with Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Stock compensation is awarded to key employees in the form of
stock options and restricted stock. All stock options are issued with exercise
prices equal to the fair market value of the related shares on the date of
issuance. Accordingly, as provided by APB No. 25, we did not recognize any stock
compensation expense for stock options granted during the periods presented. The
following table summarizes what our operating results would have been if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No.148, "Accounting for Stock-Based
Compensation," to its stock based employee compensation (in thousands except
share and per share amounts):
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For The Three Months Ended For the Nine Months Ended
March 28, March 30, March 28, March 30,
2004 2003 2004 2003
------------- -------------- ----------------- ----------------
Net income (loss) as reported $ 1,474 $ (30,425) $ 2,650 $ (26,052)
Stock compensation expense - fair
value based method (287) (272) (956) (325)
------------- -------------- ----------------- ----------------
Pro forma net income $ 1,187 $ (30,697) $ 1,694 $ (26,377)
============= ============== ================= ================
Net income (loss) per share as
reported (basic and diluted) $ 0.05 $ (1.10) $ 0.09 $ (0.95)
============= ============== ================= ================
Pro forma net income (loss) per
share (basic and diluted) $ 0.04 $ (1.11) $ 0.06 $ (0.96)
============= ============== ================= ================
Weighted average shares
outstanding - basic 28,125,901 27,639,127 28,044,846 27,413,489
Effect of dilutive securities:
Stock option plans 327,543 -- 153,292 --
Restricted stock 569,781 -- 532,600 --
Stock warrants 22,957 -- 22,951 --
------------- -------------- ----------------- ----------------
Dilutive potential common shares 920,281 -- 708,843 --
------------- -------------- ----------------- ----------------
Weighted average shares
outstanding - diluted 29,046,182 27,639,127 28,753,689 27,413,489
============= ============== ================= ================
We have issued restricted stock as part of employee incentive plans.
The fair market value of the restricted stock is amortized over the projected
remaining vesting period. During the three months and nine months ended March
28, 2004, we incurred $0.2 million and $0.5 million of non-cash stock
compensation expenses related to restricted stock issuances. During the three
and nine months ended March 30, 2003, we incurred $0.0 million and $0.1 million
of non-cash stock compensation expenses related to restricted stock issuances.
2. ACQUISITION
On September 4, 2002, the Company acquired Cycam, Inc. ("Cycam"), a
company located in Houston, Pennsylvania that manufactures reconstructive
implants and instruments. The total purchase price was approximately $24.4
million, which included $18.4 million in cash and 667,175 shares of common stock
valued at $6.0 million. The fair market value of the shares issued in connection
with the Cycam acquisition was based on the market price of our common stock on
the date of issuance. The acquisition was recorded using the purchase method of
accounting. The purchase price allocation was $6.0 million to net tangible
assets and $18.4 million to goodwill. During the nine months ended March 28,
2003, the purchase price allocation was finalized and resulted in an increase of
$0.1 million to the allocation to goodwill. In conjunction with the acquisition,
the Company drew $8.0 million from the acquisition line under the Company's
existing credit facility. The effect of the acquisition on our historical
financial position and results of operations is not material, and therefore no
pro forma data of this acquisition is presented. Cycam's operating results have
been included in our consolidated operating results since the date of
acquisition.
The acquisition of Cycam expanded our capacity and capabilities in the
metal machining of orthopedic reconstructive implants. In addition, Cycam
provided us with the complimentary capabilities of plastic machining, surface
coatings, near net shape forging, and sterilized packaging and kitting of
orthopedic implants. Cycam also had strong relationships with several leading
orthopedic companies where we had only a minor presence prior to the
acquisition.
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3. INVENTORIES
Inventories consisted of the following (in thousands):
March 28, June 30,
2004 2003
------------------ ---------------
(Unaudited)
Raw material $ 11,345 $ 13,806
Work-in-progress 8,590 8,389
Finished goods 4,357 3,422
------------------ ---------------
Total $ 24,292 $ 25,617
================== ===============
4. GOODWILL
During the nine months ended March 28, 2004, goodwill increased by $0.1
million resulting from purchase accounting adjustments related to the Cycam and
Midwest Plastics acquisitions that occurred in the year ended June 30, 2003.
5. OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET
During the nine months ended March 28, 2004, other identifiable
intangible assets, net, decreased by $0.1 million resulting from amortization.
6. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) represents net income (loss) attributed to
common stockholders plus the results of any stockholders' equity changes
relating to the Company's previous interest rate swaps and current interest rate
cap agreements. For the three and nine months ended March 28, 2004 comprehensive
income was $1.5 million and $2.7 million, respectively. For the three and nine
months ended March 30, 2003, comprehensive loss was $30.5 million and $26.3
million, respectively.
7. Restructuring Charges
During the three and nine months ended March 28, 2004, we continued our
fiscal 2003 restructuring plan to reconfigure our resources in an effort to meet
our customer's needs and lower our cost of operations. The restructuring plan
includes facility consolidations, employee terminations, and other activities.
We estimate the total cost of this restructuring plan will be $15.0 - $20.0
million and that the plan will be completed by the end of fiscal 2005. The total
cost estimate includes an investment of $1.7 million in plant and equipment to
ensure the facility consolidation does not disrupt operations. The estimate is
based on the best available information at this time. These estimates may change
as new information becomes available. The following table contains detailed
information about the charges incurred to date related to the fiscal 2003
restructuring plan (in millions), recorded in accordance with SFAS No. 146,
"Accounting for Costs Associated With Exit or Disposal Activities":
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Incurred Estimated
Estimated through March Remaining
Description Charges 28, 2004 Charges
------------------------------------------- --------------- ----------------- ---------------
Employee termination $ 4.8 $ 2.1 $ 2.7
Facility consolidation 4.6 1.6 3.0
Property, plant and equipment disposals 2.2 0.4 1.8
Other direct costs 6.7 0.9 5.8
--------------- ----------------- ---------------
Total $ 18.3 $ 5.0 $ 13.3
=============== ================= ===============
We estimate that we will incur $4.9 - $7.4 million and $7.1- $9.6
million of charges in fiscal 2004 and fiscal 2005, respectively, related to the
fiscal 2003 restructuring plan.
Employee termination charges represent the cost of reducing our
workforce in conjunction with facility consolidations and other downsizing
activities. Facility consolidation charges represent the direct costs of moving
property, plant and equipment to different facilities. Property plant and
equipment disposals represents the write-off of redundant assets that will no
longer be used in ongoing operations as a result of our facility consolidation
initiative, net of disposal proceeds.
The following table contains information regarding our fiscal 2003
restructuring plan liability as of March 28, 2004 (in millions):
Balance at Balance at
June 30, 2003 March 28, 2004
Description Additions Payments
------------------------------------------- -------------- ------------ ------------ -----------------
Employee termination $ 0.5 $ 1.2 $ 1.2 $ 0.5
Facility consolidation -- 1.1 1.1 --
Property, plant and equipment disposals -- 0.5 0.5 --
Other direct costs -- 0.3 0.3 --
-------------- ------------ ------------ -----------------
Total $ 0.5 $ 3.1 $ 3.1 $ 0.5
============== ============ ============ =================
During the three and nine months ended March 28, 2004, the Company
continued to finalize the fiscal 2001 restructuring plan. All activities
associated with the fiscal 2001 restructuring plan have been finalized. The
following table contains information regarding our fiscal 2001 restructuring
plan liability as of March 28, 2004 (in millions):
Payments
through Balance at
Initial Additional March 28, March 28,
Description Accrual Reclassification Accrual 2004 2004
------------ ---------------- -------------- -------------- -------------
Impairment of goodwill and other intangibles.. $ 3.6 $ -- $ -- $ 3.6 $ --
Impairment of property, plant and equipment... 1.9 2.3 0.1 4.3 --
Employee termination benefits................. 3.8 (1.2) 1.9 4.5 --
Other direct costs............................ 2.2 (1.1) 0.7 1.8 --
------------ -------------- ------------ -------------- -------------
$ 11.5 $ -- $ 2.7 $ 14.2 $ --
============ ============== ============== ============== =============
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8. INCOME TAXES
The effective income tax rate for the three months and nine months
ended March 28, 2004, differs from the statutory rate due to the utilization of
net operating loss carryovers.
9. SUBSEQUENT EVENT
On April 27, 2004, the Company entered into an Agreement and Plan of
Merger with Medical Device Manufacturing, Inc., a wholly owned subsidiary of UTI
Corporation, ("Purchaser") and Pine Merger Corporation ("Merger Sub"), pursuant
to which Merger Sub will merge with and into the Company with the Company being
the surviving corporation and becoming a wholly-owned subsidiary of Purchaser.
The merger is conditioned upon, among other things, the approval of the merger
by the Company's stockholders, any required antitrust clearance and the receipt
by Purchaser of the proceeds contemplated by financing commitments.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
financial statements and related notes appearing elsewhere in this Report on
Form 10-Q.
The following discussion contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, as amended. In many cases, you can identify
forward-looking statements by terminology such as may," "will," "should,"
"expect," "plan," "anticipate," "believe," "estimate, " "predict," "intend,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These forward-looking statements involve risks and uncertainties.
Our actual results could differ materially from those indicated in these
statements as a result of certain factors, as more fully discussed below and
under the heading "risk factors" contained in our Form 10-K for the period ended
June 30, 2003. Readers should not place undue reliance on any such
forward-looking statements, which are made pursuant to the Private Securities
Litigation Reform Act of 1995 and, as such, speak only as of the date made. We
do not assume any obligation to update the forward-looking statements after the
date hereof.
OVERVIEW
We provide product development and design services, precision metal and
plastic part manufacturing, product assembly services and supply chain
management. We provide our products and services to each of the following
primary target markets:
o Surgical instrumentation devices and components;
o Electro-medical devices and components;
o Interventional devices and components; and
o Orthopedic devices and instruments.
COMPANY HISTORY
During 1998, our co-founders, Richard J. Effress and William J. Kidd,
established MedSource to identify business opportunities in the medical
engineering and manufacturing services industry. During March 1999, with
additional equity capital from Whitney & Co., we acquired seven unaffiliated
businesses to begin our operations. The original seven acquisitions were Kelco
Industries, W.N. Rushwood d/b/a Hayden Precision Industries, National Wire and
Stamping, The MicroSpring Company, Portlyn, Texcel and
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Brimfield Precision. Our first fiscal period, which ended July 3,1999, consisted
of only three months of consolidated results, which included material one-time
expenses for business combination and formation.
Since our initial acquisitions, we have acquired six additional
businesses through March 28, 2003. Our most recent acquisition was Cycam Inc. in
September 2002. The acquisition of Cycam, a manufacturer of reconstructive
implants, provided us with complimentary capabilities of plastic machining,
surface coatings, near net shape forging and sterilized packaging and kitting of
orthopedic implants. Cycam also had strong relationships with several leading
orthopedic companies where we had only a minor presence. All of our acquisitions
were accounted for using the purchase method of accounting.
RESTRUCTURING ACTIVITY
During the three and nine months ended March 28, 2004, we continued to
execute on our fiscal 2003 restructuring plan. We estimate the total cost of
this restructuring plan will be approximately $15.0 - $20.0 million and we
expect to incur the majority of these charges prior to the end of fiscal 2005.
Prior to fiscal 2004, we incurred charges totaling $1.3 million related to this
plan. During the three and nine months ended March 28, 2004, we incurred $1.1
million and $3.7 million, respectively, of charges related to this restructuring
plan.
The $1.1 million of restructuring charges incurred during the three
months ended March 28, 2004, consisted of $0.5 million of facility consolidation
expenses and $0.7 million of employee termination charges, partially offset by
$0.1 million of property, plant and equipment disposal gains. The $5.0 million
of restructuring charges incurred during the nine months ended March 28, 2004,
consisted of $1.6 million of facility consolidation expenses, a $0.4 million
write off of redundant equipment, $2.1 million of employee termination charges,
and $0.9 million of other restructuring costs. During fiscal 2004 and fiscal
2005, we expect to incur $4.9 - $7.4 million and $7.1 - $9.6 million,
respectively, in restructuring charges related to this plan.
During the three and nine months ended March 28, 2004, we continued to
finalize our fiscal 2001 restructuring plan. During the three and nine months
ended March 28, 2004, we incurred $0.0 million and $0.3 million of restructuring
charges related to this plan. The fiscal 2001 restructuring plan is complete.
SUBSEQUENT EVENT
On April 27, 2004, the Company entered into an Agreement and Plan of
Merger with Medical Device Manufacturing, Inc., a wholly owned subsidiary of UTI
Corporation, ("Purchaser") and Pine Merger Corporation ("Merger Sub"), pursuant
to which Merger Sub will merge with and into the Company with the Company being
the surviving corporation and becoming a wholly-owned subsidiary of Purchaser.
The merger is conditioned upon, among other things, the approval of the merger
by the Company's stockholders, any required antitrust clearance and the receipt
by Purchaser of the proceeds contemplated by financing commitments.
RESULTS OF OPERATIONS
REVENUES
We primarily recognize product revenues at the time products are
shipped. Product shipments are supported by purchase orders from customers that
indicate the price for each product. For services, we recognize revenues
primarily on a time and materials basis. Service revenues are supported by
customer orders or contracts that indicate the price for the services being
rendered. For three and nine months ended March 28, 2004, service revenues were
less than 10% of total revenues. Revenues for product shipments and services
rendered must also have reasonable assurance of collectability from the
customer. Reserves for
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returns and allowances are recorded against revenues based on management's
estimates and historical experience.
We target the sale of our products and services to medical device
companies in the four target markets described in Overview above. As we have
continued to focus on these markets, our sales to non-medical customers as a
percentage of our total revenues have been decreasing over time. Sales to
non-medical customers represented approximately 2% of our total revenues during
the three and nine months ended March 28, 2004. We expect sales to non-medical
customers as a percentage of our total revenues to continue to decrease in the
future.
Historically, most of our revenues were derived from manufacturing
components used in medical devices. However, in order to accelerate revenue
growth and better serve our customers, we aggressively pursued opportunities for
the assembly of completed devices. To support this effort, we have completed a
number of acquisitions to expand our product offerings and enhance our supply
chain services. Over time, we anticipate that revenues from the assembly of
completed devices will likely continue to grow as a percentage of our total
revenues. Nevertheless, we will continue to aggressively pursue component sales
opportunities.
During the three and nine months ended March 28, 2004, our top four
customers accounted for 57% and 56% of our revenues, respectively, with one
customer accounting for 31% and 29% of our revenues, respectively, and another
accounting for 11% and 13% of our revenues, respectively. We expect revenues
from our largest customers to continue to constitute a significant portion of
our total revenues.
We primarily derive our revenues from serving leading medical device
companies. These customers are typically large companies with substantial market
share in one or more of our four target markets, and we believe that expanding
our relationships with these customers represents an important revenue
opportunity. As a result, we devote significant sales efforts to securing
additional business from the business units and product lines of the leading
medical device companies that we currently serve, as well as developing business
with other business units and product lines of these customers. As we
increasingly focus on serving customers and expanding our offerings to them by
developing or acquiring additional engineering and manufacturing capabilities,
we expect the percentage of revenues we derive from these customers to increase
over time, as compared with revenues from non-medical device companies. We also
intend to continue to selectively pursue promising opportunities with emerging
medical device companies.
As discussed above, we have acquired six businesses since we began
operations during March 1999. A substantial portion of our revenue growth to
date has been attributable to the addition of these acquired companies'
revenues. In the periods following these acquisitions, we have grown our
revenues by offering our existing customers access to our newly acquired
engineering and manufacturing capabilities, as well as by offering the customers
of the acquired businesses access to our existing capabilities. We generally
have retained the medical device customers of the companies that we have
acquired, but have selectively discontinued business with customers of the
acquired businesses that did not fit our strategic focus of serving leading and
select emerging medical device companies in our four target markets or related
medical fields.
COST AND EXPENSES
Cost of products sold includes expenses for raw materials, purchased
components, outside services, supervisory, engineering and direct production
manpower including benefits, production supplies, depreciation and other related
expenses to support product manufacturing. We purchase most of the raw materials
that are used in our products at prevailing market prices and, as a result, are
subject to fluctuations in the market price of those raw materials. In
particular, the prices of stainless steel, titanium and platinum have
historically fluctuated, and the prices that we pay for these materials, and, in
some cases, their availability, are dependent upon general market conditions.
-12-
Gross margins as a percentage of revenues for the three months ended
March 28, 2004 and March 30, 2003 were 23.9% and 23.6%, respectfully. Gross
margins as a percentage of revenues for the nine months ended March 28, 2004 and
March 30, 2003 were 23.6% and 24.7%, respectively. Our margins are driven by
sales mix between devices, components, and engineering services as well as the
respective product mixes within our various product categories. Historically,
our component business has generally produced higher gross margins. When we were
initially formed during March 1999, we were predominately a components supplier.
However, in order to expand the scope of our services and accelerate revenue
growth, we aggressively pursued opportunities for the assembly of completed
devices, which generally have higher material content and a lower value added
content, and can result in lower gross margins but with lower capital
investment.
Selling, general and administrative expense includes strategic
investments in our sales and marketing, operations and quality teams, and our
corporate support staff.
THREE MONTHS ENDED MARCH 28, 2004 COMPARED TO THREE MONTHS ENDED MARCH 30, 2003
Revenues for the three-month period ended March 28, 2004 totaled $46.0
million compared to $44.5 million for the same period of the prior year, an
increase of 3.4%. Our growth was primarily driven by strength in our orthopedic
and interventional markets. Orthopedic revenues increased by 31%, and
interventional revenues increased by 9%. These strengths were partially offset
by decreasing sales to our electro-medical implant and surgical instrumentation
markets. Electro-medical implant revenues decreased by 12%, due partially to
reduced inventory safety stock levels at some of our customers. Surgical
instrumentation sales decreased by 1%.
During the three-months ended March 28, 2004 and the three-months ended
March 30, 2003, component revenue, assembly revenue and engineering services
revenue comprised 66%, 30% and 4%, respectively, of total revenues.
Cost of products sold for the three-month period ended March 28, 2004
totaled $35.0 million compared to $34.0 million for the three-month period ended
March 30, 2003. The increase in cost of products sold resulted from the increase
in sales volume compared to the prior year period.
Gross margin was 23.9% for the three months ended March 28, 2004,
compared to 23.6% for the three months ended March 30, 2003.
Selling, general, and administrative expense for the three-month period
ended March 28, 2004 totaled $7.7 million, or 16.7% of revenues, compared to
$8.4 million, or 18.8% of revenues, for the three months ended March 30, 2003.
The decrease in selling, general, and administrative expense was primarily the
result of cost savings from our fiscal 2003 and fiscal 2001 restructuring plans.
Net interest expense totaled $0.7 million for the three-month period
ended March 28, 2004 and $0.6 million for the three months ended March 30, 2003.
Net income totaled $1.5 million, or $0.05 per share (basic and
diluted), compared with a net loss of $(30.4) million, or $(1.10) per share
(basic and diluted), for the three months ended March 30, 2003.
NINE MONTHS ENDED MARCH 28, 2004 COMPARED TO NINE MONTHS ENDED MARCH 28, 2003
Revenues for the nine-month period ended March 28, 2004 totaled $136.3
million compared to $130.1 million for the same period of the prior year, an
increase of 4.7%. Approximately 0.9% of this increase was due to the acquisition
of Cycam Inc. and the other 3.8% was due to internal growth. Our internal growth
was primarily driven by strength in our orthopedic and electro-medical implant
markets.
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Orthopedic and electro-medical implant revenues increased by 14% compared to the
prior year period. These strengths were partially offset by decreasing sales to
our interventional market. Interventional revenues decreased by 3%.
During the nine-months ended March 28, 2004, component revenue,
assembly revenue and engineering services revenue comprised 67%, 29% and 4%,
respectively, of total revenues. This compares to a revenue mix of 65%, 31%, and
4% for components, assembly, and engineering services, respectively, for the
nine months ended March 30, 2003.
Cost of products sold for the nine-month period ended March 28, 2004
totaled $104.1 million compared to $98.0 million for the nine-month period ended
March 30, 2003. The increase in cost of products sold resulted primarily from
the increase in volume compared to the prior year period as well as an increase
in the absorption of costs associated with underutilized facilities.
Gross margin was 23.6% for the nine months ended March 28, 2004,
compared to 24.7% for the nine months ended March 30, 2003. The decrease in
gross margin resulted primarily from: the absorption of costs associated with
certain underutilized manufacturing operations, an unfavorable sales mix; and
rising platinum costs.
Selling, general, and administrative expense for the nine-month period
ended March 28, 2004 totaled $23.2 million, or 17.0% of revenues, compared to
$24.5 million, or 18.8% of revenues, for the nine months ended March 30, 2003.
The decrease in selling, general, and administrative expense was primarily the
result of cost savings from our fiscal 2003 and fiscal 2001 restructuring plans.
Net interest expense totaled $2.0 million for the nine-month period
ended March 28, 2004 and $1.7 million for the same prior year period.
Net income for the nine-month period ended March 28, 2004 totaled $2.7
million, or $0.09 per share (basic and diluted), compared with a net loss of
$(26.1) million, or $(4.01) per share, for the same prior year period.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash provided by operations and
borrowings under our senior credit facility, which includes a $15.0 million
unused revolving credit facility. To date, our principal uses of cash have been
to fund working capital requirements, finance capital expenditures, meet debt
service requirements and finance acquisitions. We expect that these uses will
continue in the future.
Management believes that current cash balances and cash generated from
operations, combined with available borrowings under our senior credit facility,
will be adequate to fund requirements for working capital, capital expenditures,
and future expansion for the next 12 months.
OPERATING ACTIVITIES
Net cash provided by operating activities totaled $12.0 million for the
nine months ended March 28, 2004 compared to $5.2 million for the nine months
ended March 30, 2003. The increase in cash provided by operating activities over
the prior year period was primarily the result of a $6.1 million improvement in
net operating asset management, primarily driven by improved inventory
management. In addition, the Company's cash cycle has seen improvement compared
to the prior year.
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INVESTING ACTIVITIES
Cash used in investing activities was $5.4 million for the nine months
ended March 28, 2004, compared to $33.1 million for the nine months ended March
30, 2003. All investing cash outflows for the nine months ended March 28, 2004
were used to invest in property and equipment. We expect capital expenditures in
fiscal 2004 to be approximately $9.5 million. During the nine months ended March
30, 2003 we used $22.6 million of cash to finance the acquisitions and invested
$10.6 million in property and equipment.
FINANCING ACTIVITIES
Cash (used in) provided by financing activities was $(3.4) million for
the nine months ended March 28, 2004, compared to $3.8 million for the nine
months ended March 30, 2003. During the nine months ended March 28, 2004 we
repaid $3.7 million of principal on our long-term debt obligations. We expect to
pay $2.1 million, $9.1 million, $11.4 million, and $9.7 million of the
outstanding principal balance of our long-term debt obligations during the
remainder of fiscal 2004, 2005, 2006, and 2007, respectively. If the merger
described in Subsequent Event above takes place, it is anticipated that our then
outstanding debt will be repaid in full at the time of the merger. During the
nine months ended March 30, 2003 we paid $2.0 million to redeem outstanding
series E preferred stock, paid $3.0 million of principal on our long-term debt
obligation, received $0.8 million of proceeds from the sale of our common stock
and received $8.0 million of proceeds from our acquisition long-term debt.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any "off-balance sheet arrangements" (as such term in
defined in Item 303 of Regulations S-K) that are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
CRITICAL ACCOUNTING POLICIES
There has been no material change to the Critical Accounting Policies
we disclosed in our annual report on Form 10-K for our year ended June 30, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
For fixed rate debt, changes in interest rates generally affect the
fair market value of the debt instrument, but not earnings or cash flows. We do
not have any obligations under any fixed rate debt.
For variable rate debt, changes in interest rates generally do not
impact the fair market value of the debt instrument, but do affect future
earnings and cash flows. We had $33.8 million of variable rate debt outstanding
under our senior credit facility at March 28, 2004. To reduce our exposure to
interest rate risk, we entered into an interest rate cap agreement to hedge our
exposure to interest rate risk under our new senior credit facility. The effect
of a 10% increase in interest rates would have resulted in an immaterial
increase in interest expense during our period ended March 28, 2004.
FOREIGN CURRENCY RISK
The majority of our sales and purchases are denominated in United
States dollars and as a result, we have relatively little exposure to foreign
currency exchange risk with respect to our sales. Accordingly, we do not use
forward exchange contracts to hedge exposures denominated in foreign currencies
or any other derivative financial instrument for trading or speculative
purposes.
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ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the reports that we are
required to file under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management, including our principal executive officer and our principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
Management believes that there are reasonable assurances that our controls and
procedures will achieve management's control objectives.
We have carried out an evaluation, under the supervision and with the
participation of our management, including our Chairman of the Board and Chief
Executive Officer and our Senior Vice President -- Finance and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15 as of March 28,
2004. Based upon the foregoing, our Chairman of the Board and Chief Executive
Officer and our Senior Vice President -- Finance and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to MedSource (and its
consolidated subsidiaries) required to be included in our Exchange Act reports.
CHANGES IN INTERNAL CONTROLS
The evaluation referred to above did not identify any significant
changes in our internal controls over financial reporting that occurred during
our quarter ended March 28, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During March 2004, we issued an aggregate of 3,328 shares of our common
stock upon exercise of warrants issued to one of the investors who had purchased
our Series E preferred stock in 2001. The exercise price of the warrants was
$0.01 per share, and the investor used a "cashless" provision that enabled her
to surrender the right to receive upon exercise of the warrants a number of
shares of common stock with a value equal to the aggregate exercise price of the
warrants and, as a result, surrendered the right to receive an aggregate of 5
shares. We issued these securities in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of 1933 as
transactions not involving any public offering and Rule 506 thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith:
Exhibit
Number Description
------ -----------
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of
1934, as amended
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On April 28, 2004, we filed a Report on Form 8-K to file a
press release announcing our financial results for the quarter ended
March 28, 2004, and the execution of an agreement and plan of merger.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 10, 2004
MEDSOURCE TECHNOLOGIES, INC.
By: /s/ Richard J. Effress
---------------------------------------
Richard J. Effress, Chairman
and Chief Executive Officer
By: /s/ William J. Kullback
---------------------------------------
William J. Kullback
Senior Vice President - Finance
and Chief Financial Officer
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