Business Context and Reporting Period
Company: Greatbatch, Inc. (formerly Wilson Greatbatch Technologies, Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2005
Business Overview: The Company operates two segments: Implantable Medical Components (IMC), manufacturing batteries and capacitors for medical devices, and Electrochem Commercial Power (ECP), producing high-performance cells for commercial applications.
Key Financial Metrics
| Metric | Q3 2005 | Q3 2004 | 9M 2005 | 9M 2004 |
|---|---|---|---|---|
| Sales | $62.4M | $45.2M | $182.2M | $153.6M |
| Gross Profit | $24.2M | $17.4M | $70.1M | $64.4M |
| Operating Income | $1.4M | $4.9M | $15.7M | $23.0M |
| Net Income | $0.8M | $3.0M | $10.0M | $14.4M |
| Diluted EPS | $0.03 | $0.14 | $0.46 | $0.65 |
| Cash & Equivalents | $39.3M | N/A | $39.3M (End) | $19.1M (End) |
| Short-term Investments | $62.8M | N/A | $62.8M (End) | $57.4M (End) |
| Total Debt | $170.8M | N/A | $170.8M (End) | $171.7M (End) |
| Operating Cash Flow (9M) | N/A | N/A | $32.8M | $24.0M |
Note: Debt consists primarily of $170.0M in convertible subordinated notes due 2013. The Company has a $50.0M revolving credit facility with no outstanding balance as of September 30, 2005.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 38% in Q3 and 19% for the nine months ended September 30, 2005, compared to the prior year. IMC sales grew 43% (Q3) driven by demand for ICD batteries and feedthroughs; ECP sales grew 11% (Q3).
- Profitability Decline: Despite revenue growth, Net Income dropped 75% in Q3 and 30% for the nine months. Operating income fell 71% in Q3 and 32% year-to-date.
- Restructuring Charges: "Other operating expense" surged to $7.8M in Q3 (vs. $0.3M in Q3 2004) and $14.2M for the nine months (vs. $3.5M). This includes $4.5M in asset dispositions (including a $2.8M write-down of battery equipment), $1.4M for Alden facility consolidation, and $0.9M for Carson City facility shutdown.
- Margin Compression: Gross margin decreased 340 basis points year-to-date due to excess capacity at wet tantalum capacitor and Tijuana facilities, lower selling prices, and higher platinum costs.
Guidance, Outlook, and Risks
- Facility Consolidation: The Company is consolidating operations into new facilities in Alden, NY, and Tijuana, Mexico. Remaining costs for these projects are estimated at $3.4M to $5.4M, expected to be incurred over the next few quarters.
- Product Development: Focus is on the Q-Series batteries (QHR and QMR) for the medical market and new high-energy lithium cells for commercial telematics and oceanographic applications.
- Subsequent Event: On October 25, 2005, the Company entered a licensing agreement with Medtronic, Inc. regarding tantalum capacitor intellectual property. No significant financial impact is anticipated in the near term.
- Restatements: The Company restated prior period financials to reclassify auction rate securities from cash equivalents to short-term investments and to record a deferred tax asset related to the NanoGram acquisition, reducing goodwill by $1.7M.
- Risks: Dependence on a limited number of customers, potential product recalls (field actions), pricing pressure, and the successful integration of facility consolidations.
Investor Verification Checklist
- Restructuring Costs: Verify the remaining cash outflows required for the Alden and Tijuana facility consolidations and the impact on future operating margins.
- Asset Write-downs: Confirm the rationale and future utility of the $2.8M write-down of automated cathode assembly equipment.
- Customer Concentration: Assess the risk associated with field actions in the ICD market and the Company's reliance on specific CRM device manufacturers.
- Debt Covenants: Review compliance with the new $50M revolving credit facility covenants (EBITDA to Fixed Charges and Leverage ratios).
- Accounting Changes: Monitor the impact of adopting SFAS No. 123(R) on stock-based compensation effective January 1, 2006.