U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 2006
Commission File Number 1-16137
GREATBATCH, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State of incorporation)
16-1531026
(I.R.S. employer identification no.)
9645 Wehrle Drive
Clarence, New York
14031
(Address of principal executive offices)
(716) 759-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer" and "large accelerated filer" in Exchange Act Rule 12b-2
(check one):
---------------------------- ---------------------- --------------------------
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
---------------------------- ---------------------- --------------------------
Indicate by check mark whether the Registrant is a shell company (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The number of shares outstanding of the Company's common stock, $.001
par value per share, as of May 5, 2006 was: 21,809,895 shares.
GREATBATCH, INC.
TABLE OF CONTENTS FOR FORM 10-Q
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2006
Page
COVER PAGE 1
TABLE OF CONTENTS 2
PART I - FINANCIAL INFORMATION (unaudited)
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations and
Comprehensive Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 23
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 39
ITEM 4. Controls and Procedures 39
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 40
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 40
ITEM 3. Defaults Upon Senior Securities 40
ITEM 4. Submission of Matters to a Vote of Security Holders 40
ITEM 5. Other Information 40
ITEM 6. Exhibits 40
SIGNATURES 41
EXHIBIT INDEX 42
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GREATBATCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - Unaudited
(In thousands except for share and per share data)
-------------------------------------------------------------------------------------------
ASSETS March 31, December 31,
2006 2005
Current assets:
Cash and cash equivalents $ 38,888 $ 46,403
Short-term investments 66,018 65,746
Accounts receivable, net of allowance of $439 in 2006
and $450 in 2005 39,857 29,997
Inventories 48,200 45,184
Refundable income taxes - 928
Deferred income taxes 6,257 6,257
Prepaid expenses and other current assets 1,601 1,488
-------- --------
Total current assets 200,821 196,003
Property, plant, and equipment, net 97,368 97,705
Intangible assets, net 30,933 31,891
Trademark and names 28,252 28,252
Goodwill 155,039 155,039
Other assets 4,399 4,021
-------- --------
Total assets $516,812 $512,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,501 $ 13,678
Accrued expenses and other current liabilities 19,352 29,903
Current portion of long-term debt 165 464
-------- --------
Total current liabilities 35,018 44,045
Convertible subordinated notes 170,000 170,000
Deferred income taxes 31,969 30,261
-------- --------
Total liabilities 236,987 244,306
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value, authorized 100,000,000
shares; no shares issued or outstanding in 2006 or 2005 - -
Common stock, $.001 par value, authorized 100,000,000
shares; 21,808,578 shares issued in 2006 and
21,658,134 shares issued in 2005 22 22
Additional paid-in capital 220,158 215,614
Retained earnings 59,689 53,039
Accumulated other comprehensive loss (44) (70)
-------- --------
Total stockholders' equity 279,825 268,605
-------- --------
Total liabilities and stockholders' equity $516,812 $512,911
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements
3
GREATBATCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME - Unaudited
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------------------------------------
Three months ended
March 31,
2006 2005
Sales $68,107 $56,358
Cost and expenses:
Cost of sales - excluding amortization of intangible assets 39,515 35,571
Amortization of intangible assets - cost of sales 958 958
Selling, general and administrative expenses 9,015 6,766
Research, development and engineering costs, net 5,898 4,401
Other operating expense, net 2,669 2,388
------- -------
Operating income 10,052 6,274
Interest expense 1,135 1,131
Interest income (1,192) (575)
Other (income) expense, net (44) -
------- -------
Income before provision for income taxes 10,153 5,718
Provision for income taxes 3,503 1,715
------- -------
Net income $ 6,650 $ 4,003
======= =======
Earnings per share:
Basic $ 0.31 $ 0.19
Diluted $ 0.28 $ 0.19
Weighted average shares outstanding:
Basic 21,738 21,473
Diluted 26,103 21,583
Comprehensive income:
Net income $ 6,650 $ 4,003
Net unrealized gain (loss) on available for sale securities, net of
deferred income tax expense of $8 in the three month period in 2006
and income tax benefit of $23 in the three month period in 2005 26 (40)
------- -------
Comprehensive income $ 6,676 $ 3,963
======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements
4
GREATBATCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(IN THOUSANDS)
----------------------------------------------------------------------------------------------
Three months ended
March 31,
2006 2005
Cash flows from operating activities:
Net income $ 6,650 $ 4,003
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,918 4,039
Stock-based compensation 2,207 795
Deferred income taxes 1,708 1,959
Loss on disposal of assets 3 512
Changes in operating assets and liabilities:
Accounts receivable (9,860) (5,384)
Inventories (3,016) 1,750
Prepaid expenses and other current assets (113) (1,830)
Accounts payable 2,069 (1,268)
Accrued expenses and other current liabilities (9,954) (1,345)
Income taxes 1,807 (297)
-------- --------
Net cash (used in) provided by operating
activities (3,581) 2,934
-------- --------
Cash flows from investing activities:
Short-term investments:
Purchases (10,589) (22,092)
Proceeds from dispositions 10,350 26,600
Acquisition of property, plant and equipment (3,692) (9,220)
Proceeds from sale of assets - 23
(Increase) decrease in other assets (38) 6
-------- --------
Net cash used in investing activities (3,969) (4,683)
-------- --------
Cash flows from financing activities:
Principal payments of long-term debt (299) (354)
Issuance of common stock 334 115
-------- --------
Net cash provided by (used in) financing
activities 35 (239)
Net decrease in cash and cash equivalents (7,515) (1,988)
Cash and cash equivalents, beginning of year 46,403 34,795
-------- --------
Cash and cash equivalents, end of period $ 38,888 $ 32,807
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements
5
GREATBATCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information necessary for a
fair presentation of financial position, results of operations, and cash
flows in conformity with accounting principles generally accepted in the
United States of America. Operating results for interim periods are not
necessarily indicative of results that may be expected for the fiscal year
as a whole. In the opinion of management, the condensed consolidated
financial statements reflect all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
results of Greatbatch, Inc. (the "Company") for the periods presented. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, sales, expenses, and related disclosures at
the date of the financial statements and during the reporting period.
Actual results could differ from these estimates. For further information,
refer to the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
2005.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on
the Friday nearest December 31st. For 52-week years, each quarter contains
13 weeks. For clarity of presentation, the Company describes all periods as
if each quarter end is March 31st, June 30th and September 30th and as if
the year-end is December 31st. The first quarter of 2006 and 2005 each
contained 13 weeks.
2. STOCK-BASED COMPENSATION
Effective January 1, 2006, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"),
and related Securities and Exchange Commission rules included in Staff
Accounting Bulletin No. 107, on a modified prospective basis. The
incremental cost of expensing options under SFAS No. 123(R) was
approximately $0.9 million ($0.6 million net of tax). Under this method,
compensation cost recognized beginning January 1, 2006 will include costs
related to 1) all share-based payments (stock options and restricted stock
awards) granted prior to but not yet vested as of January 1, 2006, based on
the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and 2)
all share-based payments (stock options and restricted stock awards)
granted subsequent to December 31, 2005 based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123(R). SFAS No.
123(R) also amends SFAS No. 95, Statement of Cash Flows, to require that
excess tax benefits that had been reflected as cash flows from operating
6
activities be reflected as cash flows from financing activities.
Compensation cost for nonqualified stock options is generally recognized
ratably over a four-year vesting period. Compensation cost for incentive
stock options is generally recognized ratably over a five to seven year
vesting period. Compensation costs for restricted stock awards granted to
employees are recognized ratably over the vesting period determined at the
time of grant. The Company has continued to use the Black-Scholes option
pricing model to estimate the fair value of stock options granted
subsequent to the date of adoption of SFAS No. 123(R).
Compensation costs related to stock options and restricted stock for the
quarter ended March 31, 2006 totaled $1.4 million, which includes
approximately $0.3 million for accelerated vesting for certain retirement
eligible employees. The stock-based compensation expense is included in the
statement of earnings primarily in selling, general, and administrative
expenses. The impact to earnings net of tax was $0.9 million ($0.03 per
diluted share). Stock-based compensation included in the Condensed
Consolidated Statement of Cash Flows includes stock options, restricted
stock and the annual defined contribution to the employee 401(k) Plan.
Stock-based compensation expense is only recorded for those awards that are
expected to vest. Forfeiture estimates for determining appropriate
stock-based compensation expense are estimated at the time of grant based
on historical experience and demographic characteristics. Revisions are
made to those estimates in subsequent periods if actual forfeitures differ
from estimated forfeitures. A 9% forfeiture estimate was used for the
stock-based compensation expense recorded during the first quarter 2006.
Stock Options
Summary of Stock Option Plans
-----------------------------
The Company has stock option plans that provide for the issuance of
nonqualified and incentive stock options to employees of the Company. The
Company's 1997 Stock Option Plan ("1997 Plan") authorizes the issuance of
nonqualified and incentive stock options to purchase up to 480,000 shares
of the Company's common stock, subject to the terms of the plan. The stock
options granted under the 1997 Plan generally vest over a five-year period
and may vary depending upon the achievement of earnings targets. The stock
options expire 10 years from the date of the grant. Stock options are
granted at exercise prices equal to or greater than the fair market value
of the Company's common stock at the date of the grant.
The Company's 1998 Stock Option Plan ("1998 Plan") authorizes the issuance
of nonqualified and incentive stock options to purchase up to 1,220,000
shares the Company's common stock, subject to the terms of the plan. The
stock options granted under the 1998 Plan vest over a three to five year
period and may vary depending upon the achievement of earnings targets. The
stock options expire 10 years from the date of the grant. Stock options are
granted at exercise prices equal to or greater than the fair value of the
Company's common stock at the date of the grant.
The Company has a stock option plan that provides for the issuance of
nonqualified stock options to Non-Employee Directors (the "Director Plan").
The Director Plan authorizes the issuance of nonqualified stock options to
purchase up to 100,000 shares of the Company's common stock from its
7
treasury, subject to the terms of the plan. The stock options vest
immediately. The stock options expire 10 years from the date of grant.
Stock options are granted at exercise prices equal to or greater than the
fair value of the Company's common stock at the date of the grant.
The Company's 2005 Stock Incentive Plan ("2005 Plan") authorizes the
issuance of equity incentive awards including nonqualified and incentive
stock options, for up to 1,000,000 shares of the Company's common stock,
subject to the terms of the plan. The stock options granted under the 2005
Plan generally vest over a four year period and may vary depending upon the
achievement of earnings targets and also upon the terms of each specific
grant. The stock options expire 10 years from the date of the grant. Stock
options are granted at exercise prices equal to or greater than the fair
value of the Company's common stock at the date of the grant.
As of March 31, 2006, 852,365 shares were available for future grants of
options under the plans, subject to an overall limit on awards imposed
under the 2005 Plan.
Fair Value
----------
The Company utilizes the Black-Scholes Option Pricing Model to determine
the fair value of stock options under SFAS No. 123(R), consistent with that
used for pro forma disclosures in prior years. Management is required to
make certain assumptions with respect to selected model inputs, including
anticipated changes in the underlying stock price (i.e., expected
volatility) and option exercise activity (i.e., expected life). Expected
volatility is based on the historical volatility of the Company's stock
over the most recent period commensurate with the estimated expected life
of the Company's stock options and other factors. The expected life of
options granted, which represents the period of time that the options are
expected to be outstanding, is based, primarily, on historical data. The
expected dividend yield is based on the Company's history and expectation
of dividend payouts. The risk-free rate is based on the U.S. Treasury yield
curve in effect at the time of grant for a period commensurate with the
estimated expected life. If factors change and result in different
assumptions in the application of SFAS No. 123(R) in future periods, the
stock option expense that the Company records for future grants may differ
significantly from what the Company has recorded in the current period.
The weighted-average fair value of options granted during the quarter ended
March 31, 2006 was $10.41 ($9.00 in 2005) based on the Black-Scholes Option
Pricing model. The following weighted-average assumptions were used for
grants in 2006 and 2005:
Three months ended
March 31,
2006 2005
Risk-free interest rate 4.63% 4.13%
Expected volatility 39.8% 52.0%
Expected life (in years) 4.99 5.00
Expected dividend yield 0% 0%
8
Stock Option Activity
---------------------
The following table summarizes stock option activity related to the
Company's plans for the three months ended March 31, 2006:
Weighted
Average
Weighted Remaining Aggregate
Number of Average Contractual Intrinsic
Stock Exercise Life Value
Options Price (In years) (In millions)
---------------------------------------------------
Outstanding at December 31, 2005 1,397,160 $23.16
Granted 245,069 25.23
Exercised (34,056) 9.81
Forfeited or Expired (12,596) 27.34
------------
Outstanding at March 31, 2006 1,595,577 $23.73 7.4 $3.4
=================================================
Exercisable at March 31, 2006 875,583 $23.95 7.1 $2.6
=================================================
We calculated intrinsic value for those options that had an exercise price
lower than the market price of our common shares as of March 31, 2006. The
aggregate intrinsic value of outstanding options as of March 31, 2006 is
calculated as the difference between the exercise price of the underlying
options and the market price of our common shares for the 488,607 options
that were in-the-money at that date. The aggregate intrinsic value of
exercisable options as of March 31, 2006 is calculated as the difference
between the exercise price of the underlying options and the market price
of our common shares for the 296,403 exercisable options that were
in-the-money at that date. The Company's closing stock price was $21.91 as
of March 31, 2006. The total intrinsic value of stock options exercised
during the first quarter of 2006 was $0.4 million ($0.04 million for 2005).
Cash received from option exercises under all share-based payment
arrangements for the quarter ended March 31, 2006 was $0.3 million. The
actual tax benefit realized from stock option exercises totaled $0.04
million for the quarter ended March 31, 2006. Proceeds from the exercise of
stock options under stock option plans are credited to common stock at par
value and the excess is credited to additional paid-in capital.
As of March 31, 2006, $7.5 million of unrecognized compensation cost
related to non-vested stock options is expected to be recognized over a
weighted-average period of approximately 5 years.
In November 2005, the FASB issued FSP No. FAS 123(R)-3, Transition Election
Related to Accounting for the Tax Effects of Share-Based Payment Awards.
This FSP provides an elective alternative simplified method for calculating
the pool of excess tax benefits available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123(R) and reported in
the Condensed Consolidated Statements of Cash Flows. Companies may take up
to one year from the effective date of the FSP to evaluate the available
transition alternatives and make a one-time election as to which method to
9
adopt. The Company is currently in the process of evaluating the
alternative methods of calculating the pool of excess tax benefits.
Pro Forma Information under SFAS No. 123 for Periods Prior to 2006
------------------------------------------------------------------
Prior to the adoption of SFAS No. 123(R), we accounted for stock options to
employees in accordance with Accounting Principles Board Opinion (APB) No.
25, Accounting for Stock Issued to Employees, and related interpretations.
We also provided the disclosures required under SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123), as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosures. As a
result, no expense was reflected in our net income for the period ended
March 31, 2005 for stock options, as all options granted had an exercise
price equal to the market value of the underlying common stock on the date
of grant. However, stock-based compensation expense was recognized for
restricted stock awards.
The Company's net income and earnings per share as if the fair value based
method had been applied to all outstanding and unvested awards for the
three months ended March 31, 2005 is as follows (in thousands except per
share data):
Net income as reported $4,003
Add:
---
Stock-based employee compensation cost included in net
income as reported, net of related tax effects $557
Deduct:
-------
Stock-based employee compensation cost determined using
the fair value based method, net of related tax effects $1,042
-----------
Pro forma net income $3,518
===========
Earnings per share:
Basic - as reported $0.19
Basic - pro forma $0.17
Diluted - as reported $0.19
Diluted - pro forma $0.17
Restricted Stock
Summary of Restricted Stock Plans
---------------------------------
The Company's 2002 Restricted Stock Plan authorizes the issuance of stock
awards to employees. The number of shares that are reserved and may be
issued under the plan cannot exceed 200,000. The Compensation and
Organization Committee of the Company's Board of Directors determines the
number of shares that may be granted under the plan. Restricted stock
awards are either time-vested or performance-vested based on the terms of
each individual award agreement. Time-vested restricted stock vests 50% on
10
the first anniversary of the date of the award and 50% on the second
anniversary of the date of the award. Performance-vested restricted stock
vests upon the achievement of certain annual diluted earnings per share
targets by the company, or the seventh anniversary date of the award.
The Company's 2005 Plan authorizes the issuance of restricted stock,
restricted stock units and stock bonuses of up to 400,000 shares, subject
to the terms of the plan with an overall limit on awards of 1,000,000
shares. The restricted stock granted under the plan generally vests 50% on
the second anniversary of the date of the award and 25% on the third and
fourth anniversaries of the date of the award and vary depending upon the
achievement of earnings targets and also upon the terms of each specific
grant.
As of March 31, 2006, there were 536,955 available for future grants under
the plans, subject to the overall limit imposed by the 2005 Plan.
Restricted Stock Activity
-------------------------
The following table summarizes restricted stock activity related to the
Company's plans for the three months ended March 31, 2006:
Weighted
Restricted Average
Stock Grant Date
Activity Fair Value
-------- ----------
Unvested restricted stock outstanding at December 31, 2005 93,956 $22.46
Shares granted 44,247 25.22
Shares vested - -
Shares forfeited (2,158) 21.58
-------------
Unvested restricted stock outstanding at March 31, 2006 136,045 $23.37
============= ======
As of March 31, 2006, there was $2.2 million of total unrecognized
compensation cost related to the restricted awards. That cost is expected
to be recognized over a weighted-average period of 5 years.
3. SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended
March 31,
2006 2005
Noncash investing and financing activities (in thousands):
Common stock contributed to 401(k) Plan $2,780 $2,729
Property, plant and equipment purchases
included in accounts payable $1,647 $1,533
Other asset purchases included in accrued expenses
and other current liabilities $530 $-
11
4. SHORT-TERM INVESTMENTS
Short-term investments at March 31, 2006 and December 31, 2005 consist of
investments expected to be settled or reset within a twelve month period.
Short-term investments comprised the following (in thousands):
As of March 31, 2006
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
Available-for-sale:
Equity Securities $ 276 $ - $ (41) 235
Auction Rate Securities 65,783 - - 65,783
------- ------- ------- -------
Short-term investments $66,059 $ - $ (41) $66,018
======= ======= ======= =======
As of December 31, 2005
Gross Gross Estimated
unrealized unrealized fair
Cost gains losses value
Available-for-sale:
Equity Securities $ 276 $ - $ (74) $ 202
Auction Rate Securities 65,544 - - 65,544
------- ------- ------- -------
Total available-for-sale
securities $65,820 $ - $ (74) $65,746
======= ======= ======= =======
5. INVENTORIES
Inventories comprised the following (in thousands):
March 31, December 31,
2006 2005
Raw materials $24,832 $24,864
Work-in-process 11,798 11,266
Finished goods 11,570 9,054
-------- --------
Total $48,200 $45,184
======== ========
12
6. INTANGIBLE ASSETS
Intangible assets comprised the following (in thousands):
As of March 31, 2006
Gross Accumulated Net
carrying amortization carrying
amount Amount
Amortizing intangible assets:
Patented technology $21,462 $(12,139) $ 9,323
Unpatented technology 30,886 (9,306) 21,580
Other 1,340 (1,310) 30
------- -------- -------
53,688 (22,755) 30,933
======= ======== =======
As of December 31, 2005
Gross Accumulated Net
carrying amortization carrying
amount Amount
Amortizing intangible assets:
Patented technology $21,462 $(11,738) $ 9,724
Unpatented technology 30,886 (8,750) 22,136
Other 1,340 (1,309) 31
------- -------- -------
53,688 (21,797) 31,891
======= ======== =======
Aggregate amortization expense for first quarter 2006 and 2005 was $1.0
million. Annual amortization expense is estimated to be $2.9 million for
the remainder of 2006, $3.8 million for 2007 to 2008, $3.2 million for
2009, $2.7 million for 2010 and $2.7 million for 2011.
7. DEBT
Long-term debt comprised the following (in thousands):
March 31, December 31,
2006 2005
2.25% convertible subordinated notes, due 2013 $170,000 $170,000
Capital lease obligations 165 464
-------- --------
170,165 170,464
Less current portion (165) (464)
-------- --------
Total long-term debt $170,000 $170,000
======== ========
Revolving Line of Credit
On May 31, 2005, the Company amended its Senior Secured Credit Facility,
which included changes to the underlying covenants. The amended facility
replaced the old $20.0 million revolving credit facility with a new
three-year $50.0 million Revolving Credit Facility ("new revolver"), which
contains a $10.0 million sub-limit for the issuance of commercial or
13
standby letters of credit. The new revolver is secured by the Company's
non-realty assets including cash, accounts and notes receivable, and
inventories. The new revolver requires the Company to comply with two
quarterly financial covenants, as defined. The first relates to the ratio
of consolidated net earnings or loss before interest, taxes, depreciation,
and amortization ("EBITDA") to Fixed Charges. The second is a Leverage
ratio, which is calculated based on the ratio of Consolidated Funded Debt
less Cash, Cash Equivalent Investments and Short-Term Investments to
Consolidated EBITDA. Interest rates under the new revolver vary with the
Company's leverage. The Company is required to pay a commitment fee of
between .125% and .250% per annum on the unused portion of the new revolver
based on the Company's leverage. As of March 31, 2006, the Company had no
balance outstanding on the new revolver.
8. EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted earnings
per share (in thousands, except per share amounts):
Three months ended
March 31,
2006 2005
------- -------
Numerator for basic earnings per share:
Net income $ 6,650 $ 4,003
Effect of dilutive securities:
Interest expense on convertible notes and related
deferred financing fees, net of tax 733 -
------- -------
Numerator for diluted earnings per share $ 7,383 $ 4,003
======= =======
Denominator for basic earnings per share:
Weighted average shares outstanding 21,738 21,473
Effect of dilutive securities:
Convertible notes 4,219 -
Stock options and unvested restricted stock 146 110
------- -------
Dilutive potential common shares 4,365 110
------- -------
Denominator for diluted earnings per share 26,103 21,583
======= =======
Basic earnings per share $ 0.31 $ 0.19
======= =======
Diluted earnings per share $ 0.28 $ 0.19
======= =======
For the three months ended March 31, 2005, the impact of the convertible
notes was anti-dilutive.
14
9. COMPREHENSIVE INCOME
The Company's comprehensive income for the three month period ended March
31, 2006 includes net income and a net unrealized gain on
available-for-sale securities. Comprehensive income for the three month
period ended March 31, 2005 includes net income and a net unrealized loss
on available-for-sale securities.
10. COMMITMENTS AND CONTINGENCIES
During 2002, a former non-medical customer commenced an action alleging
that the Company had used proprietary information of the customer to
develop certain products. We have meritorious defenses and are vigorously
defending the matter. The potential risk of loss is between $0.0 and $1.7
million.
Product Warranties - The change in aggregate product warranty liability for
the quarter ended March 31, 2006 is as follows (in thousands):
Beginning balance at December 31, 2005 $2,443
Additions to warranty reserve 167
Warranty claims paid (717)
------
Ending balance at March 31, 2006 $1,893
======
Capital Expenditures - During 2004, the Company commenced the build out of
its medical battery and capacitor manufacturing facility in Alden, NY and
its value-add manufacturing facility in Tijuana, Mexico. These facilities
are enabling the Company to further consolidate its operations and
implement state of the art manufacturing capabilities at both locations.
The total remaining contractual obligation for construction of these
facilities at March 31, 2006 is $4.5 million and will be financed by
existing cash, short-term investments, or cash generated from operations.
11. BUSINESS SEGMENT INFORMATION
The Company operates its business in two reportable segments: Implantable
Medical Components ("IMC") and Electrochem Commercial Power ("ECP"). The
IMC segment designs and manufactures critical components used in
implantable medical devices. The principal components are batteries,
capacitors, filtered feedthroughs, enclosures and precision components. The
principal medical devices are pacemakers, defibrillators and
neurostimulators. The ECP segment designs and manufactures high performance
batteries and battery packs; principal markets for these products are for
oil and gas exploration, oceanographic equipment, and aerospace.
The Company defines segment income from operations as sales less cost of
sales including amortization and expenses attributable to segment-specific
selling, general and administrative, research, development and engineering
expenses and other operating expenses. Segment income also includes a
15
portion of non-segment specific selling, general and administrative, and
research, development and engineering expenses based on allocations
appropriate to the expense categories. The remaining unallocated operating
expenses are primarily corporate headquarters and administrative function
expenses. The unallocated operating expenses along with other income and
expense are not allocated to reportable segments. Transactions between the
two segments are not significant.
An analysis and reconciliation of the Company's business segment
information to the respective information in the consolidated financial
statements is as follows (in thousands):
Three months ended
March 31,
Sales: 2006 2005
IMC
ICD batteries $12,679 $10,751
Pacemaker and other batteries 5,787 5,255
ICD Capacitors 3,568 4,297
Feedthroughs 16,288 13,682
Enclosures 6,340 6,547
Other 12,918 7,333
------- -------
Total IMC 57,580 47,865
ECP 10,527 8,493
------- -------
Total sales $68,107 $56,358
======= =======
Segment income from operations:
IMC $10,900 $ 7,877
ECP 2,843 1,880
------- -------
Total segment income from operations 13,743 9,757
Unallocated operating expenses (3,691) (3,483)
------- -------
Operating income as reported 10,052 6,274
Unallocated other income and expense 101 (556)
------- -------
Income before provision for income taxes
as reported $10,153 $ 5,718
======= =======
The carrying amount of goodwill at December 31, 2005 and March 31, 2006 is
as follows:
IMC ECP Total
$152,473 $ 2,566 $155,039
======== ======== ========
16
12. OTHER OPERATING EXPENSE
During the first quarter ended March 31, 2006, the following charges were
recorded in other operating expense in the Company's Condensed Consolidated
Statement of Operations (in thousands).
Three months ended
March 31,
2006 2005
(a) Alden facility consolidation $ 500 $ -
(b) Carson City facility shutdown and Tijuana Facility
Consolidation No. 1 1,200 200
(c) Columbia facility shutdown, Tijuana Facility
consolidation No. 2 and RD&E consolidation 1,000 -
(d) Tijuana start-up - 200
(e) Asset dispositions and other - 500
(f) Severance - 1,500
------ ------
$2,700 $ 2,400
====== ======
(a) Alden Facility Consolidation - On February 23, 2005, the Company
announced its intent to consolidate the medical capacitor manufacturing
operations, currently in Cheektowaga, NY, and the implantable medical
battery manufacturing operations, currently in Clarence, NY, into the
advanced power source manufacturing facility in Alden, NY ("Alden
Facility"). The Company is also consolidating the capacitor research,
development and engineering operations from the Cheektowaga, NY, facility
into the Technology Center in Clarence, NY.
The total cost estimated for these consolidation efforts is anticipated to
be between $3.5 and $4.0 million. The expenses for the Alden Facility
consolidation are included in the IMC business segment. The Alden facility
is substantially complete as of March 31, 2006 and we therefore do not
expect to incur any additional significant expense. The major categories of
costs, which will primarily be cash expenditures, include the following:
o Production inefficiencies and revalidation - $0.3 to $0.5 million;
o Training - $0.2 million;
o Moving and facility closures - $2.6 to $2.7 million; and
o Other - $0.4 to $0.6 million.
17
Accrued liabilities at March 31, 2006 related to the Alden Facility
consolidation comprised the following (in thousands):
Production
inefficiencies Moving and
and facility
revalidation Training closures Other Total
Restructuring charges $ 230 $23 $2,180 $373 $2,806
Cash payments (230) (23) (1,144) (373) (1,770)
Accelerated depreciation/
asset write-offs - - (838) - (838)
------------- ------------- ------------- ------------- ------------
Balance, December 31, 2005 $ - $ - $ 198 $ - $ 198
Restructuring charges $38 $ - $ 412 $ - $ 450
Cash payments (38) - (475) - (513)
Accelerated depreciation/
asset write-offs - - - - -
------------- ------------- ------------- ------------- ------------
Balance, March 31, 2006 $ - $ - $ 135 $ - $ 135
============= ============= ============= ============= ============
(b) Carson City Facility shutdown and Tijuana Facility consolidation No. 1.
On March 7, 2005, the Company announced its intent to close the Carson
City, NV facility ("Carson City Facility") and consolidate the work
performed at the Carson City Facility into the Tijuana, Mexico facility
("Tijuana Facility consolidation No. 1").
The total estimated cost for this facility consolidation plan is
anticipated to be between $6.6 million and $6.8 million. The Company
expects to incur and pay the remaining cost over the next two fiscal
quarters through September 2006. The major categories of costs include the
following:
o Costs related to the shutdown of the Carson City Facility:
a. Severance and retention - $3.0 million;
b. Accelerated depreciation - $0.6 million; and
c. Other - $0.3 million.
o Costs related to Tijuana Facility consolidation No. 1:
a. Production inefficiencies and revalidation - $0.4 to $0.5 million;
b. Relocation and moving - $0.3 million;
c. Personnel (including travel, training and duplicate wages) - $1.5
to $1.6 million; and
d. Other - $0.5 million.
All categories of costs are considered to be cash expenditures, except
accelerated depreciation. Once the moves are completed, the Company
anticipates annual cost savings in the range of $2.5 to $3.1 million. The
expenses for the Carson City facility shutdown and the Tijuana Facility
consolidation No. 1 are included in the IMC business segment.
18
Accrued liabilities at March 31, 2006 related to the Carson City Facility
shutdown comprised the following (in thousands):
Severance and Accelerated
retention Depreciation Other Total
Restructuring charges $2,096 $ 595 $221 $2,912
Cash payments - - (221) (221)
Write-offs - (595) - (595)
------------- ------------- ------------- -----------
Balance, December 31, 2005 $2,096 $ - $ - $2,096
Restructuring charges 616 - 1 617
Cash payments - - (1) (1)
Write-offs - - - -
------------- ------------- ------------- -----------
Balance, March 31, 2006 $2,712 $ - $ - $2,712
============= ============= ============= ===========
Accrued liabilities at March 31, 2006 related to the Tijuana Facility
consolidation No. 1 comprised the following (in thousands):
Production
inefficiencies
and Relocation
revalidation and moving Personnel Other Total
Restructuring charges $ 5 $ 123 $ 1,050 $ 350 $ 1,528
Cash payments (5) (123) (1,050) (350) (1,528)
Write-offs - - - - -
--------------- ----------- ------------ ------------ -----------
Balance, December 31, 2005 $ - $ - $ - $ - $ -
Restructuring charges 118 52 336 105 611
Cash payments (118) (52) (336) (105) (611)
Write-offs - - - - -
--------------- ----------- ------------ ------------ -----------
Balance, March 31, 2006 $ - $ - $ - $ - $ -
=============== =========== ============ ============ ===========
(c) Columbia Facility shutdown, Tijuana Facility consolidation No. 2 and
RD&E consolidation. On November 16, 2005, the Company announced its intent
to close both the Columbia, MD facility ("Columbia Facility") and the
Fremont, CA Advanced Research Laboratory ("ARL"). The manufacturing
operations at the Columbia Facility will be moved into the Tijuana Facility
("Tijuana Facility consolidation No. 2"). The research, development and
engineering ("RD&E") and product development functions at the Columbia
Facility and at ARL will relocate to the Technology Center in Clarence, NY.
The total estimated cost for this facility consolidation plan is
anticipated to be between $7.9 million and $8.3 million. The Company
expects to incur and pay the remaining cost over the next five fiscal
quarters through June 2007. The major categories of costs include the
following:
19
o Costs related to the shutdown of the Columbia Facility and ARL and the
move and consolidation of the RD&E functions to Clarence, NY:
a. Severance and retention - $2.7 to $2.8 million;
b. Personnel (including travel, training and duplicate wages) - $1.5
million
c. Accelerated depreciation/asset write-offs - $0.7 million; and
d. Other - $0.3 to $0.4 million.
o Costs related to Tijuana Facility consolidation No. 2:
a. Production inefficiencies and revalidation - $0.4 to $0.5
million;
b. Relocation and moving - $0.2 million;
c. Personnel (including travel, training and duplicate wages) - $2.0
to $2.1 million; and
d. Other (including asset write-offs) - $0.1 million.
All categories of costs are considered to be cash expenditures, except for
accelerated depreciation and asset write-offs. Once the moves are
completed, the Company anticipates annual cost savings in the range of $5.0
to $6.0 million. The expenses for the Columbia Facility and ARL shutdowns,
the Tijuana Facility consolidation No. 2 and the RD&E consolidation are
included in the IMC business segment.
Accrued liabilities at March 31, 2006 related to the Columbia Facility and
ARL shutdowns and the RD&E consolidation comprised the following (in
thousands):
Severance Accelerated
and depreciation /
retention Personnel asset write-offs Other Total
Restructuring charges $ 379 $ - $ 435 $ 310 $ 1,124
Cash payments - - - - -
Write-offs - - (435) - (435)
------------ --------- -------------- ------- ----------
Balance, December 31, 2005 $ 379 $ - $ - $ 310 $ 689
Restructuring charges 421 202 - 94 717
Cash payments (137) (202) - (393) (732)
Write-offs - - - - -
------------ --------- -------------- ------- ----------
Balance, March 31, 2006 $ 663 $ - $ - $ 11 $ 674
============ ========= ============== ======= ==========
20
Accrued liabilities at March 31, 2006 related to Tijuana Facility
consolidation No. 2 comprised the following (in thousands):
Production
inefficiencies
and Relocation
revalidation and moving Personnel Other Total
Restructuring charges $ - $ - $ 10 $ - $ 10
Cash payments - - (10) - (10)
--------------- ------------- ----------- ---------- -----------
Balance, December 31, 2005 $ - $ - $ - $ - $ -
Restructuring charges - - 242 13 255
Cash payments - - (242) (13) (255)
--------------- ------------- ----------- ---------- -----------
Balance, March 31, 2006 $ - $ - $ - $ - $ -
=============== ============== =========== ========== ===========
(d) Tijuana start-up. Other Tijuana start-up expenses (not associated with
the Carson City Facility or Columbia Facility consolidation) during the
first quarter of 2005 amount to $0.2 million. These expenses are primarily
related to the initial start-up of the value added assembly business.
(e) Asset dispositions. Expense is for property, plant, and equipment
dispositions.
(f) Severance charges. During the first quarter of 2005, the Company
implemented a 4% workforce reduction as a continuation of cost containment
efforts initiated mid-year 2004, which resulted in a severance charge of
$1.5 million, which was paid in 2005. Expense of $0.9 million was recorded
in the IMC segment, $0.2 million in the ECP segment, and $0.4 was recorded
in unallocated operating expenses under business segment information.
13. RECENTLY ADOPTED STANDARDS
In June 2005 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting
Changes and Error Corrections, ("SFAS 154") a replacement of APB Opinion
No. 20, Accounting Changes, and Statement No. 3, Reporting Accounting
Changes in Interim Financial Statements. SFAS 154 changes the requirements
for the accounting for and the reporting of a change in accounting
principle. Previously, most voluntary changes in accounting principles
required recognition by recording a cumulative effect adjustment within net
income in the period of change. SFAS 154 requires retrospective application
to prior periods' financial statements, unless it is impracticable to
determine either the specific period effects or the cumulative effect of
the change. SFAS 154 is effective for accounting changes made in fiscal
years beginning after December 15, 2005. SFAS 154 was effective for
accounting changes and corrections of errors made after January 1, 2006.
21
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123(R)"). This statement is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. The Company adopted the
provisions of SFAS No. 123(R) on January 1, 2006 using the modified
prospective method. Note 2. - Stock-Based Compensation provides additional
information related to the implementation of SFAS No. 123.
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 was effective January 1, 2006 and did not have a
material effect on the Company's Condensed Consolidated Financial
Statements.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Our Business
We are a leading developer and manufacturer of batteries, capacitors,
feedthroughs, enclosures, and other components used in implantable medical
devices ("IMDs") through our Implantable Medical Components ("IMC") business. We
offer technologically advanced, highly reliable and long lasting products for
IMDs and enable our customers to introduce IMDs that are progressively smaller,
longer lasting, more efficient and more functional. We also leverage our core
competencies in technology and manufacturing through our Electrochem Commercial
Power ("ECP") business (formerly "Electrochem Power Solutions") to develop and
produce cells and battery packs for commercial applications that demand high
performance and reliability, including oil and gas exploration, oceanographic
equipment and aerospace.
Most of the IMC products that we sell are utilized by customers in cardiac
rhythm management ("CRM") devices. The CRM market comprises devices utilizing
high-rate batteries and capacitors such as implantable cardioverter
defibrillators ("ICDs") and cardiac resynchronization therapy ("CRT") with
backup defibrillation devices ("CRT-D") and devices utilizing low or medium rate
batteries but no capacitors (pacemakers and CRTs). All CRM devices utilize other
components such as enclosures and feedthroughs, and certain CRM devices utilize
electromagnetic interference ("EMI") filtering technology.
Our Customers
Our products are designed to provide reliable, long lasting solutions that meet
the evolving requirements and needs of our customers and the end users of their
products. Our medical customers include leading IMD manufacturers such as
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 first quarter of 2006, 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 ECP 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.
Business Highlights
o We achieved record quarterly sales of $68.1 million, up 21% from $56.4
million in the first quarter of 2005.
o Implantable Medical Components sales were $57.6 million, up 20% from
the first quarter, driven by strong sales of batteries, feedthroughs
and assembly products.
23
o Electrochem Commercial Power sales of $10.5 million were up 24% from
the first quarter, led by strong growth in the oil and gas, and
oceanographic markets.
o Diluted earnings per share increased by 47% to $0.28, which included
stock-based compensation expense of $0.02 per share related to the adoption
of SFAS No. 123(R).
o Operating margin, including move-related expenses, severance costs and
stock-based compensation, improved by 3.7% in the first quarter to 14.8%.
o We signed a new supply agreement with Sorin/ELA in March 2006. This new
comprehensive agreement represents a significant incremental revenue
opportunity over the 5-year term, as it includes provisions for all of our
medical component technologies. The renewable agreement has an initial term
ending on December 31, 2010.
o The facility moves of shield assembly, filtered feedthroughs, and
feedthroughs to our Tijuana Facility are proceeding as planned. The
filtered feedthrough move from our Carson City Facility is expected to be
completed by the middle of 2006. The feedthrough move from our Columbia
Facility is expected to be completed by the second quarter of 2007.
Our CEO's View
We are extremely pleased with our record sales results and the strong start to
2006. We delivered better than expected sales results across the breadth of our
medical and commercial products. We experienced solid growth from both our
domestic and international customer base, which reflects the strength of our
position in these markets. The improving operating margins reflect greater
operating leverage from the increased sales volume. In addition, the
consolidation of our medical power manufacturing operations coupled with
improved utilization at our Tijuana Facility, combined to increase our operating
margins in the quarter to approximately 15%. We remain confident that the
strategic initiatives we have put in place to expand our product offering and
reduce our manufacturing costs will allow us to continue to advance our
competitive position in the marketplace.
Product Development
Our strategy is to maintain technology leadership by providing a fresh pipeline
of next generation core products. Currently, the company is developing a series
of new products for customer applications in the CRM, Neurostimulation and
Commercial markets.
Some of the key development milestones for 2006 are as follows:
1. Continue the evolution of our Q series high rate ICD batteries.
2. Complete the development of a high voltage capacitor system.
3. Develop Q series medium rate battery for neurostimulation and
pacemaker applications.
4. Augment our existing rechargeable battery with a new rechargeable
battery offering for use in neurostimulation applications.
5. Develop rechargeable battery packs for use in commercial applications.
24
6. Introduce new inductor slab filtered feedthrough technology and molded
headers.
7. Continue development of the batteries and capacitors used in
intravascular ICD devices.
IMC. As mentioned in our annual report (which is available on our website,
www.greatbatch.com), our near term focus for growth in the medical battery
market, a portion of our IMC business, is the introduction of our Q-Series
batteries. Initially they will be available in two configurations - QHR (High
Rate) and QMR (Medium Rate). These batteries hold the promise of unparalleled
performance in a wide range of implantable device and neurostimulation
applications and allow our customers to incorporate advanced power-hungry
features into these devices. While companies typically announce new products
that have modest improvements in form and/or function regularly, we believe the
Q-Series firmly establishes a new industry standard. It delivers advanced
performance criteria to an industry that historically embraces new products. We
believe the Q-Series will represent a major breakthrough by combining a smaller
size with greater energy density (more power).
ECP. ECP continues to develop new and innovative power solutions for the world's
most demanding commercial applications. ECP has developed a new high energy
lithium cell for a customer in the telematics market. Due to their exceptional
high energy, two of these new cells are capable of providing power for the
entire 10-year life of the telematics device. ECP developed a battery pack
capable of withstanding the customer's harsh operating conditions such as high
vibration, high shock, salt spray, high temperature, low temperature, and high
humidity.
ECP developed a modular battery pack for a customer's fleet of underwater
sonabuoys which measure water characteristics. The long life of ECP cells,
coupled with their ability to withstand harsh conditions, make them ideally
suited for buoys. The customer's expense of commissioning a ship to replace the
batteries in each buoy is reduced when using ECP batteries due to their long
life.
Cost savings and consolidation efforts
During 2005, we initiated several significant cost savings and consolidation
efforts.
Alden Facility Consolidation. On February 23, 2005, we announced our intent to
consolidate the medical capacitor manufacturing operations, currently in
Cheektowaga, NY, and the implantable medical battery manufacturing operations,
currently in Clarence, NY, into the advanced power source manufacturing facility
in Alden, NY ("Alden Facility"). We are also consolidating the capacitor
research, development and engineering operations from the Cheektowaga, NY,
facility into the Technology Center in Clarence, NY.
The Alden Facility consolidation is substantially complete as of the end of the
first quarter 2006, and we do not expect to incur any significant expense for
the remainder of the year. Expenses of $2.8 million were incurred in 2005 and
$0.5 million were incurred during the first quarter 2006 for a total cost of
$3.3 million. Of these, $1.8 million were paid in cash and $0.9 million were for
assets written-off in 2005. Approximately $0.5 million were paid in cash during
the first quarter 2006. An additional $0.1 million remains to be paid.
25
Carson City Facility shutdown and Tijuana Facility consolidation No. 1. On March
7, 2005, we announced our intent to close the Carson City, NV facility ("Carson
City Facility") and consolidate the work performed at the Carson City Facility
into the Tijuana, Mexico facility ("Tijuana Facility consolidation No. 1").
The total estimated cost for this facility consolidation plan is anticipated to
be between $6.6 million and $6.8 million, comprised of $3.9 million for the
Carson City Facility shutdown and $2.7 million to $2.9 million for Tijuana
Facility consolidation No. 1. We expect to incur the remaining costs over the
next two fiscal quarters. All categories of costs are considered to be cash
expenditures, except for accelerated depreciation.
Carson City Facility shutdown expenses of $3.5 million have been incurred to
date, of which $2.9 million were incurred in 2005, and $0.6 million were
incurred in the first quarter 2006. In 2005, $0.2 million were paid in cash and
$0.6 million were recorded as accelerated depreciation. Of the $2.1 million
remaining accrual balance at year-end, no amounts were paid during the first
quarter 2006. Tijuana Facility consolidation No. 1 expenses of $1.5 million were
incurred and paid in 2005, and $0.6 were incurred and paid in 2006.
Once the moves are completed, we anticipate annual cost savings in the range of
$2.5 to $3.1 million. The expenses for the Carson City facility shutdown and the
Tijuana Facility consolidation No. 1 are included in the IMC business segment.
Columbia Facility & ARL shutdown, Tijuana Facility consolidation No. 2, and RD&E
Consolidation. On November 16, 2005, we announced our intent to close both the
Columbia, MD facility ("Columbia Facility") and the Fremont, CA Advanced
Research Laboratory ("ARL"). The manufacturing operations at the Columbia
Facility will be moved into the Tijuana Facility ("Tijuana Facility
consolidation No. 2"). The research, development and engineering ("RD&E") and
product development functions at the Columbia Facility and at ARL have begun to
relocate to the Technology Center in Clarence, NY.
The total estimated cost for this facility consolidation plan is anticipated to
be between $7.9 million and $8.3 million. We expect to incur this additional
cost over the next five fiscal quarters. All categories of costs are considered
to be future cash expenditures, except for accelerated depreciation and asset
write-offs.
Columbia Facility and ARL shutdown expenses of $1.8 million have been recorded
to date. Approximately $1.1 million were incurred in 2005, and $0.7 million were
incurred in first quarter 2006, of which $0.4 million were recorded for assets
written-off. Approximately $0.7 million was paid in cash during the first
quarter of 2006. The balance is expected to be paid by the end of the third
quarter, 2006. Tijuana Facility consolidation plan No. 2 expenses of $0.3
million and $0.01 million were incurred and paid in cash in 2006 and 2005,
respectively.
Once the moves are completed, the Company anticipates annual cost savings in the
range of $5.0 to $6.0 million. The expenses for the Columbia Facility and ARL
shutdowns, the Tijuana Facility consolidation No. 2 and the RD&E consolidation
are included in the IMC business segment.
26
Severance charges. The Company implemented a 4% workforce reduction during the
first quarter of 2005, which resulted in a severance charge of $1.5 million. All
amounts were paid in 2005.
Our Financial Results
We utilize a fifty-two, fifty-three week fiscal year ending on the Friday
nearest December 31st. For 52-week years, each quarter contains 13 weeks. For
clarity of presentation, we describe all periods as if each quarter end is March
31st, June 30th and September 30th and as if the year-end is December 31st. The
first quarter of 2006 and 2005 each contained 13 weeks.
The commentary that follows should be read in conjunction with our consolidated
financial statements and related notes and with the Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our Form
10-K for the fiscal year ended December 31, 2005.
27
Results of Operations Three months ended
March 31, 2005 - 2004
In thousands, except per share data 2006 2005 $ Change % Change
--------------------------------------------------------------------------------------- ------------------
IMC
ICD batteries $12,679 $10,751 $ 1,928 18%
Pacemaker and other batteries 5,787 5,255 532 10%
ICD capacitors 3,568 4,297 (729) -17%
Feedthroughs 16,288 13,682 2,606 19%
Enclosures 6,340 6,547 (207) -3%
Other 12,918 7,333 5,585 76%
----------------- ------------------
Total IMC 57,580 47,865 9,715 20%
ECP 10,527 8,493 2,034 24%
----------------- ------------------
Total sales 68,107 56,358 11,749 21%
Cost of sales - excluding amortization of intangible assets 39,515 35,571 3,944 11%
Amortization of intangible assets - cost of sales 958 958 - 0%
----------------- ------------------
Gross profit (1) 27,634 19,829 7,805 39%
Gross margin 40.6% 35.2% 5.4%
Selling, general, and administrative expenses ("SG&A") 9,015 6,766 2,249 33%
SG&A as a % of sales 13.2% 12.0% 1.2%
Research, development and engineering costs, net ("RD&E") 5,898 4,401 1,497 34%
RD&E as a % of sales 8.7% 7.8% 0.9%
Other operating expense 2,669 2,388 281 12%
----------------- ------------------
Operating income 10,052 6,274 3,778 60%
Operating margin 14.8% 11.1% 3.7%
Interest expense 1,135 1,131 4 0%
Interest income (1,192) (575) (617) 107%
Other (income) expense, net (44) - (44) N/A
Provision for income taxes 3,503 1,715 1,788 104%
Effective tax rate 34.5% 30.0% 4.5%
----------------- ------------------
Net income $ 6,650 $ 4,003 $ 2,647 66%
================= ==================
Net margin 9.8% 7.1% 2.7%
Diluted earnings per share $ 0.28 $ 0.19 $ 0.09 47%
(1) Gross profit, which equals total sales minus cost of sales including
amortization of intangible assets, has been revised from prior year.
28
Sales
IMC. The nature and extent of our selling relationship with each CRM customer is
different in terms of component products purchased, selling prices, product
volumes, ordering patterns and inventory management. We have pricing
arrangements with our customers that at times do not specify minimum order
quantities. Our visibility to customer ordering patterns is over a relatively
short period of time. Our customers may have inventory management programs and
alternate supply arrangements of which we are unaware. Additionally, the
relative market share among the CRM device manufacturers changes periodically.
Consequently, these and other factors can significantly impact our sales in any
given period.
Our customers may initiate field actions with respect to market-released
products. These actions may include product recalls or communications with a
significant number of physicians about a product or labeling issue. The scope of
such actions can range from very minor issues affecting a small number of units
to more significant actions. There are a number of factors, both short-term and
long-term related to these field actions that may impact our results. In the
short-term, if product has to be replaced, or customer inventory levels have to
be restored, this will result in increased component demand. Also, changing
customer order patterns due to market share shifts or accelerated device
replacements may also have a positive impact on our sales results in the
near-term. These same factors may have longer-term implications as well.
Customer inventory levels may ultimately have to be rebalanced to match demand.
We believe that the market continues to exhibit strong underlying growth
fundamentals (as evidenced by the increased number of CRM device implants) and
that we are well positioned to participate in this market growth.
The increase in IMC sales of 20% during the first quarter was primarily due to
strong demand for ICD batteries, filtered feedthroughs, feedthroughs, and
assembly products.
ECP. Similar to IMC customers, we have pricing arrangements with our customers
that many times do not specify minimum quantities. Our visibility to customer
ordering patterns is over a relatively short period of time.
The ECP sales increases of 24% in the first quarter and have been driven by
volume increases due to a number of factors.
First and foremost, we have expanded our commercial sales force. We are
aggressively pursuing new business opportunities and have been successful on
many of these fronts.
Second, we have significantly reduced our manufacturing lead times at our
Canton, Massachusetts facility, which has allowed us to be more responsive to
our customers needs. We will continue to expand on these efforts from various
lean manufacturing initiatives that are underway in our Canton facility and
throughout the Company.
The third factor that has contributed to our positive commercial results has
been favorable market dynamics. The oil and gas exploration market remains
29
robust due to the increased demand for products used in pipeline inspections,
pressure monitoring and measurement while drilling applications. In addition, we
have seen an increase in demand for power sources used in wave monitoring and
seismic recording, due to increased Tsunami related concerns, mainly in the
international markets.
Cost of Sales
Lower cost of sales as a percentage of sales in the quarter was primarily due to
the following factors:
Three months ended
March 31, 2006
Production efficiencies primarily associated with higher
volumes (a) -6.1%
Excess capacity at wet tantalum capacitor facility (b) -1.0%
Excess capacity at Tijuana facility (c) 1.6%
Lower IMC selling prices (d) 0.9%
Other -0.8%
----------------------------
Total percentage point impact on cost of sales as a percentage of
sales -5.4%
============================
(a) This decrease in cost of sales is primarily due to the fact that as
production volumes increase, fixed costs such as plant overhead and
depreciation do not increase at the same rate.
(b) During 2005, the Capacitor facility was not being utilized to its full
capacity. The cost associated with the excess capacity in first quarter
2005 was eliminated as capacitor manufacturing was consolidated into the
Alden facility.
(c) The Tijuana facility was new in 2005 and its infrastructure and floor space
were coming on line during the first quarter of 2005. In first quarter
2006, the underutilized infrastructure was fully operational and increased
excess capacity costs.
(d) Sales prices for IMC are subject to pricing agreements with customers. Many
times these agreements allow for changes in price due to customer specific
levels of demand.
We expect cost of sales as a percentage of sales to decrease over the next
several years as the result of the consolidation efforts and the elimination of
excess capacity. Excess capacity for the Tijuana Facility is not expected to be
eliminated until mid 2007 when the last announced consolidation effort is
anticipated to be completed (see the "cost savings and consolidation efforts"
section for additional information).
Amortization of intangible assets - cost of sales
Amortization expense for the first quarter of 2006 was comparable to the first
quarter of 2005.
30
SG&A expenses
The increase in SG&A expenses for the first quarter 2006 is primarily due to the
following factors (in millions):
SFAS No. 123(R) stock-based compensation expense $ 0.8
Increased workforce 0.6
Directors' fees 0.3
Increased incentive compensation 0.1
Other 0.4
----------------
Net increase in SG&A $ 2.2
================
The increase in stock-based compensation expense is expected to continue into
the future.
RD&E expenses
Net research, development and engineering costs are as follows (in millions):
Three Months Ended
March 31,
2006 2005
Research and development costs $ 4.0 $ 3.8
----------- ------------
Engineering costs 2.3 1.4
Less cost reimbursements (0.4) (0.8)
----------- ------------
Engineering costs, net 1.9 0.6
----------- ------------
Total research and development and engineering costs, net $ 5.9 $ 4.4
=========== ============
The increase in RD&E expenses in the first quarter of 2006 is primarily due to
increased personnel costs (headcount), coupled with decreased reimbursement of
50% on new product development projects in the current quarter compared to last
year. In terms of the development costs billed, reimbursements were lower due to
the timing of the achievement of revenue milestones. Reimbursements for
achieving certain development milestones are netted against gross spending. We
expect that RD&E costs will be within the range of 9% to 10% as a percentage of
sales for the remainder of 2006 due to increased investment in future
development programs.
31
Other operating expense
Other operating expense for 2006 and 2005 comprised the following costs (in
millions):
Three months ended March
31,
2006 2005
Carson City facility shutdown (a) $ 1.2 $ 0.2
Columbia Facility and Advanced Research Laboratory
shutdown (a) 1.0 -
Alden facility consolidation (a) 0.5 -
Tijuana start-up - 0.2
Severance (a) - 1.5
Asset dispositions and other (b) - 0.5
------------- ------------
$ 2.7 $ 2.4
============= ============
(a) Refer to "Cost savings and consolidation efforts" discussion for disclosure
related to the timing and level of remaining expenditures for these items
as of March 31, 2006.
(b) Expenditures in 2005 were for asset disposals.
Other operating expenses for the remainder of 2006 are expected to be in the
range of $8.0 million and $10.0 million primarily related to plant
consolidations and asset dispositions. In the future, other operating expenses
are expected to be substantially reduced after the second quarter of 2007 when
the last announced consolidation effort is anticipated to be completed.
Interest expense and interest income
Interest expense is consistent with the prior year's quarter, and is primarily
related to the outstanding convertible notes.
Interest income increased in the first quarter 2006 in comparison to the first
quarter of 2005 due to increased cash, cash equivalents and short-term
investment balances coupled with higher interest rates on the invested cash.
Provision for income taxes
Our effective tax rate of 34.5% for the first quarter of 2006 is below the
United States statutory rate primarily as a result of the allowable
Extraterritorial Income Exclusion ("ETI") and the Qualified Production
Activities Deduction. In comparison to the first quarter of 2005, the year to
date effective tax rate is higher due to the expiration of the federal research
and development tax credit and the reduction in 2006 of the level of allowable
ETI benefits.
We estimate our effective tax rate to be approximately 34% for the full year
2006.
32
Liquidity and Capital Resources
March 31, December 31,
(Dollars in millions) 2006 2005
Cash and cash equivalents and short-term investments (a) $ 104.9 $ 112.1
Working capital (b) $ 165.8 $ 152.0
Current ratio 5.7:1.0 4.5:1.0
(a) Short-term investments consist of investments acquired with maturities that
exceed three months and are less than one year at the time of acquisition,
equity securities classified as available-for-sale, and auction rate
securities.
(b) Working capital increased by approximately $14.0 million. Net earnings of
$6.7 million and company stock contributed to the 401(k) Plan of $2.8
million are the primary drivers of the increase.
Revolving Line of Credit
On May 31, 2005, we amended our Senior Secured Credit Facility, which included
changes to the underlying covenants. The amended facility replaced the old $20.0
million revolving credit facility with a new three-year $50.0 million Revolving
Credit Facility ("new revolver"), which contains a $10.0 million sub-limit for
the issuance of commercial or standby letters of credit. The new revolver is
secured by our non-realty assets including cash, accounts and notes receivable,
and inventories. The new revolver requires us to comply with two quarterly
financial covenants. The first relates to the ratio of consolidated net earnings
or loss before interest, taxes, depreciation, and amortization ("EBITDA") to
Fixed Charges. The second is a Leverage ratio, which is calculated based on the
ratio of Consolidated Funded Debt less Cash, Cash Equivalent Investments and
Short-Term Investments to Consolidated EBITDA. Interest rates under the new
revolver vary with our leverage. We are required to pay a commitment fee of
between .125% and .250% per annum on the unused portion of the new revolver
based on our leverage. As of March 31, 2006, we had no balance outstanding on
the new revolver.
Our principal sources of liquidity are our operating cash flow combined with our
working capital of $165.8 million at March 31, 2006 and availability under the
new revolver. Historically we have generated cash from operations sufficient to
meet our capital expenditure and debt service needs, other than for
acquisitions. At March 31, 2006, our current ratio was 5.7:1.
The Company regularly engages in discussions relating to potential acquisitions
and may announce an acquisition transaction at any time.
Operating activities
Net cash flows used by operating activities for the three months ended March 31,
2006 decreased by approximately $6.5 million over the comparable period in 2005
primarily due to increased accounts receivable due to higher sales, and
decreased accrued expenses due to the payment in 2006 of amounts accrued for
2005 incentive compensation and profit sharing programs.
33
Investing activities
The majority of the acquisition of property, plant and equipment for the first
quarter of 2006 was related to the movement of operations from the Columbia
Facility to the Tijuana Facility.
Short-term investments increased by approximately $0.3 million.
Financing activities
Payments on capital lease obligations and cash from non-qualified stock option
exercises are the primary financing activities for the first quarter of 2006 and
2005.
Capital Structure
At March 31, 2006, our capital structure consisted primarily of $170.0 million
of convertible subordinated notes and 21.8 million shares of common stock
outstanding. We have approximately $105.0 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; accordingly, we believe
that if needed we can access public markets to sell additional common or
preferred stock assuming conditions are appropriate.
Our capital structure allows us to support our internal growth and provides
liquidity for corporate development initiatives. Our current expectation for
2006 is that capital spending will be in the range of $22.0 million to $27.0
million, of which $5.0 to $7.0 million is attributable to the Tijuana Facility
build-out.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, except for operating leases, within
the meaning of Item 303(a)(4) of Regulation S-K.
Inflation
We do not believe that inflation has had a significant effect on our operations.
Impact of Recently Adopted Accounting Standards
In June 2005 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error
Corrections, ("SFAS 154") a replacement of APB Opinion No. 20, Accounting
Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS 154 changes the requirements for the accounting for and the
reporting of a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition by recording a cumulative
effect adjustment within net income in the period of change. SFAS 154 requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the specific period effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005. SFAS 154 was effective for
accounting changes and corrections of errors made after January 1, 2006.
34
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123(R)"). This statement is a revision of SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. We adopted the provisions of SFAS No.
123(R) on January 1, 2006 using the modified prospective method. See Note 2 -
Stock-Based Compensation of the Notes to the Condensed Consolidated Financial
Statements in this Form 10-Q and the "Application of Critical Accounting
Estimates" section below for additional information related to the
implementation of SFAS No. 123(R).
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 was effective January 1, 2006
and did not have a material effect on its Condensed Consolidated Financial
Statements.
Application of Critical Accounting Estimates
Our unaudited condensed consolidated financial statements are based on the
selection of accounting policies and the application of significant accounting
estimates, some of which require management to make significant assumptions. We
believe that some of the more critical estimates and related assumptions that
affect our financial condition and results of operations are in the areas of
inventories, goodwill and other indefinite lived intangible assets, long-lived
assets income taxes, and stock-based compensation.
During the three months ended March 31, 2006, we did not change or adopt new
accounting policies that had a material effect on our consolidated financial
condition and results of operations other than stock-based compensation
policies.
Effective January 1, 2006, we adopted the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), Share-Based Payment ("SFAS No. 123(R)"), and related Securities and
Exchange Commission rules included in Staff Accounting Bulletin No. 107, on a
modified prospective basis. Under this method, compensation cost recognized
beginning January 1, 2006 includes costs related to 1) all share-based payments
(stock options and restricted stock awards) granted prior to but not yet vested
as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and 2) all share-based payments (stock options and
restricted stock awards) granted subsequent to December 31, 2005 based on the
grant-date fair value estimated in accordance with the provisions of SFAS No.
123(R). Compensation cost for nonqualified stock options is generally recognized
ratably over a four-year vesting period. Compensation cost for incentive stock
options is generally recognized ratably over a seven-year vesting period.
Compensation costs for restricted stock awards granted to employees are
recognized ratably over the vesting period determined at the time of grant. The
Company has continued to use the Black-Scholes option pricing model to estimate
the fair value of stock options granted subsequent to the date of adoption of
SFAS No. 123(R).
35
Compensation costs related to stock options and restricted stock for the quarter
ended March 31, 2006 totaled $1.4 million, and are included in the statement of
earnings primarily in selling, general, and administrative expenses.
As of March 31, 2006, $7.5 million of unrecognized compensation cost related to
non-vested stock options is expected to be recognized over a weighted-average
period of approximately 5 years.
We utilize the Black-Scholes Options Pricing Model to determine the fair value
of stock options under SFAS No. 123(R), consistent with that used for pro forma
disclosures in prior years. We are required to make certain assumptions with
respect to selected model inputs, including anticipated changes in the
underlying stock price (i.e., expected volatility) and option exercise activity
(i.e., expected life). Expected volatility is based on the historical volatility
of the Company's stock over the most recent period commensurate with the
estimated expected life of the Company's stock options and other factors. The
expected life of options granted, which represents the period of time that the
options are expected to be outstanding, is based, primarily, on historical data.
The expected dividend yield is based on our Company's history and expectation of
dividend payouts. The risk-free rate is based on the U.S. Treasury yield curve
in effect at the time of grant for a period commensurate with the estimated
expected life. If factors change and result in different assumptions in the
application of SFAS No. 123(R) in future periods, the stock option expense that
we record for future grants may differ significantly from what we have recorded
in the current period.
There is a high degree of subjectivity involved in selecting the option pricing
model assumptions used to estimate share-based compensation expense under SFAS
No. 123(R). Option pricing models were developed for use in estimating the value
of traded options that have no vesting or hedging restrictions, are fully
transferable and do not cause dilution. Because our share-based payments have
characteristics significantly different from those of freely traded options, and
because changes in the subjective input assumptions can materially affect our
estimates of fair values, existing valuation models may not provide reliable
measures of the fair values of our share-based compensation. Consequently, there
is a risk that our estimates of the fair values of our share-based compensation
awards on the grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration or forfeiture of those share-based
payments in the future. Stock options may expire worthless or otherwise result
in zero intrinsic value as compared to the fair values originally estimated on
the grant date and reported in our condensed consolidated financial statements.
Alternatively, value may be realized from these instruments that is
significantly in excess of the fair values originally estimated on the grant
date and reported in our condensed consolidated financial statements.
36
There are significant differences among valuation models. This may result in a
lack of comparability with other companies that use different models, methods
and assumptions. There is also a possibility that we will adopt a different
valuation model in the future. This may result in a lack of consistency in
future periods and may materially affect the fair value estimate of share-based
payments.
Contractual Obligations
During 2004, we commenced the build out of our Alden Facility and our Tijuana
Facility. These facilities will enable us to further consolidate our operations
and implement state of the art manufacturing capabilities at both locations. The
total remaining contractual obligation for construction of these facilities is
$4.5 million and will be financed by existing cash, short term investments, and
cash generated from operations.
37
Forward-Looking Statements
Some of the statements contained in this Quarterly Report on Form 10-Q and other
written and oral statements made from time to time by us and our
representatives, are not statements of historical or current fact. As such, they
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We have based these forward-looking statements on our
current expectations, which are subject to known and unknown risks,
uncertainties and assumptions. They include statements relating to:
o future sales, expenses and profitability;
o the future development and expected growth of our business and
the implantable medical device industry;
o our ability to successfully execute our business model and our
business strategy;
o our ability to identify trends within the implantable medical
devices, medical components, and commercial power sources
industries and to offer products and services that meet the
changing needs of those markets;
o projected capital expenditures; and
o trends in government regulation.
You can identify forward-looking statements by terminology such as "may,"
"will," "should," "could," "expects," "intends," "plans," "anticipates,"
"believes," "estimates," "predicts," "potential" or "continue" or the negative
of these terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those suggested
by these forward-looking statements. In evaluating these statements and our
prospects generally, you should carefully consider the factors set forth below.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these cautionary factors and
to others contained throughout this report. We are under no duty to update any
of the forward-looking statements after the date of this report or to conform
these statements to actual results.
Although it is not possible to create a comprehensive list of all factors that
may cause actual results to differ from the results expressed or implied by our
forward-looking statements or that may affect our future results, some of these
factors include the following: dependence upon a limited number of customers,
product obsolescence, inability to market current or future products, pricing
pressure from customers, reliance on third party suppliers for raw materials,
products and subcomponents, fluctuating operating results, inability to maintain
high quality standards for our products, challenges to our intellectual property
rights, product liability claims, inability to successfully consummate and
integrate acquisitions, unsuccessful expansion into new markets, competition,
inability to obtain licenses to key technology, regulatory changes or
consolidation in the healthcare industry, and other risks and uncertainties that
arise from time to time as described in the Company's Annual Report on Form 10-K
and other periodic filings with the Securities and Exchange Commission.
38
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
Under our line of credit any borrowings bear interest at fluctuating market
rates. At March 31, 2006, we did not have any borrowings outstanding under our
line of credit and thus no interest rate sensitive financial instruments other
than short-term investments. We do not believe that the impact of fluctuations
in interest rates on short-term investments will have a material effect on our
condensed consolidated financial statements.
The company incurs certain expenses related to the Tijuana operations that are
denominated in a foreign currency. We do not believe that the impact of foreign
currency fluctuations will have a material effect on our consolidated financial
statements.
ITEM 4. Controls and Procedures.
a. Evaluation of Disclosure Controls and Procedures. During the first quarter
of 2006, our management, including the principal executive officer and
principal financial officer, evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934) related to the recording, processing,
summarization and reporting of information in our reports that we file with
the SEC. These disclosure controls and procedures have been designed to
ensure that material information relating to us, including our
subsidiaries, is made known to our management, including these officers, by
other of our employees, and that this information is recorded, processed,
summarized, evaluated and reported, as applicable, within the time periods
specified in the SEC's rules and forms. Due to the inherent limitations of
control systems, not all misstatements may be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of
the control. Our controls and procedures can only provide reasonable, not
absolute, assurance that the above objectives have been met.
Based on their evaluation, as of March 31, 2006, our principal executive
officer and principal financial officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934) are effective.
b. Changes in Internal Control Over Financial Reporting.
There have been no changes in our internal control over financial reporting
that occurred during our last fiscal quarter to which this Quarterly Report
on Form 10-Q relates that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
39
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 1A. Risk Factors.
No material changes from risk factors as previously disclosed in the Company's
Form 10-K for the year ended December 31, 2005.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
See the Exhibit Index for a list of those exhibits filed herewith.
40
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: May 10, 2006 GREATBATCH, INC.
By /s/ Edward F. Voboril
-------------------------------------------------
Edward F. Voboril
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
By /s/ Thomas J. Mazza
-------------------------------------------------
Thomas J. Mazza
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
By /s/ Marco F. Benedetti
-------------------------------------------------
Marco F. Benedetti
Corporate Controller
(Principal Accounting Officer)
41
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to our quarterly
report on Form 10-Q ended July 1, 2005).
3.2 Amended and Restated Bylaws (incorporated by reference to
Exhibit 3.2 to our quarterly report on Form 10-Q ended March
29, 2002).
10.1+ Supply Agreement for medical device components dated March
31, 2006, between Greatbatch, Inc. and SORIN/ELA BIOMEDICA
CRM and ELA MEDICAL SAS.
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Portions of the exhibit marked "+" have been omitted and filed separately with
the Securities and Exchange Commission pursuant to a request for confidential
treatment.
42