-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HlDPO5rR9ThtZQwkEde/tuJbvwyzTYYBTwmYKuf0hG7iB4KnoO91hxXnkbzvnDNa DfFf/Si+k9GuxayEjKs23g== 0000910680-04-000505.txt : 20040511 0000910680-04-000505.hdr.sgml : 20040511 20040511160101 ACCESSION NUMBER: 0000910680-04-000505 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20040328 FILED AS OF DATE: 20040511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDSOURCE TECHNOLOGIES INC CENTRAL INDEX KEY: 0001084726 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MEDICAL, DENTAL & HOSPITAL EQUIPMENT & SUPPLIES [5047] IRS NUMBER: 522094496 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-49702 FILM NUMBER: 04796487 BUSINESS ADDRESS: STREET 1: 110 CHESHIRE LANE CITY: MINNEAPOLIS STATE: MN ZIP: 55305 10-Q 1 form10q-03282004.txt MARCH 28, 2004 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________ to _________ Commission file number 000-49702 MedSource Technologies, Inc. (Exact name of registrant as specified in its charter) State of incorporation: Delaware IRS Employer Identification No: 52-2094496 110 Cheshire Lane, Suite 100, Minneapolis, MN 55305 (Address and zip code of principal executive office) (952) 807-1234 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No: |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes: |X| No: |_| The number of shares of the registrant's Common Stock, par value $0.01 per share, outstanding as of May 7, 2004 was 28,990,705. Table of Contents Part I: Financial Information ----------------------------- Item 1. Financial Statements..................................................3 Consolidated Balance Sheets...........................................3 Consolidated Statements of Operations.................................4 Consolidated Statements of Cash Flows.................................5 Notes to Consolidated Financial Statements............................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................10 Item 3. Quantitative and Qualitative Disclosures About Financial Market Risk..........................................................15 Item 4. Controls and Procedures..............................................16 Part II: Other Information -------------------------- Item 1. Legal Proceedings....................................................17 Item 2. Changes in Securities and Use of Proceeds............................17 Item 3. Defaults Upon Senior Securities......................................17 Item 4. Submission of Matters to a Vote of Security Holders..................17 Item 5. Other Information....................................................17 Item 6. Exhibits and Reports on Form 8-K.....................................17 Signatures....................................................................18 -2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 28, June 30, 2004 2003 --------------------------------------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 13,978 $ 10,781 Accounts receivable, net 23,075 23,710 Inventories 24,292 25,617 Prepaid expenses and other current assets 4,002 4,318 ------------------- ------------------- Total current assets 65,347 64,426 Property, plant, and equipment, net 50,551 52,752 Goodwill 96,637 96,582 Other identifiable intangible assets, net 1,327 1,432 Deferred financing costs 1,364 1,682 Other assets 1,338 1,343 ------------------- ------------------- Total assets $ 216,564 $ 218,217 =================== =================== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,579 $ 10,868 Accrued compensation and benefits 4,279 5,498 Other accrued expenses 2,916 2,293 Reserve for restructuring 489 958 Current portion of obligations under capital lease 1,290 1,326 Current portion of long-term debt 7,955 6,427 ------------------- ------------------- Total current liabilities 27,508 27,370 Obligations under capital leases, less current portion 2,999 3,962 Long-term debt, less current portion 25,877 30,073 Other long-term liabilities 602 731 Stockholders' equity: Common stock 292 289 Additional paid-in capital 278,192 277,791 Treasury stock (1,500) (1,463) Accumulated other comprehensive loss (217) (288) Accumulated deficit (115,676) (118,326) Unearned compensation (1,513) (1,922) ------------------- ------------------- Total stockholders' equity 159,578 156,081 ------------------- ------------------- Liabilities & stockholders' equity $ 216,564 $ 218,217 =================== ===================
See Notes to Consolidated Financial Statements -3- MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED ------------------------------- ----------------------------------- MARCH 28, MARCH 30, MARCH 28, MARCH 30, 2004 2003 2004 2003 ---------------- -------------- --------------- ----------------- Revenues $ 46,027 $ 44,511 $ 136,258 $ 130,135 Costs and expenses: Cost of product sold 35,037 34,007 104,107 97,989 Selling, general and administrative expense 7,692 8,379 23,224 24,475 Restructuring charges 1,100 1,948 3,989 1,948 Goodwill impairment -- 30,000 -- 30,000 ---------------- -------------- --------------- ----------------- Operating income (loss) 2,198 (29,823) 4,938 (24,277) Interest expense, net (668) (590) (2,027) (1,748) ---------------- -------------- --------------- ----------------- Income (loss) before income taxes 1,530 (30,413) 2,911 (26,025) Income tax expense 56 12 261 27 ---------------- -------------- --------------- ----------------- Net income (loss) $ 1,474 $ (30,425) $ 2,650 $ (26,052) ================ ============== =============== ================= Net income (loss) per (basic and diluted) $ 0.05 $ (1.10) $ 0.09 $ (0.95) ================ ============== =============== ================= Weighted average common shares outstanding Basic 28,125,901 27,639,127 28,044,846 27,413,489 Diluted 29,046,182 27,639,127 28,753,689 27,413,489
See Notes to Consolidated Financial Statements -4- MedSource Technologies, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) (Unaudited)
For the Nine Months Ended March 28, March 30, 2004 2003 ------------------ ------------------- Cash flows from operating activities: Net income $ 2,650 $ (26,052) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 7,045 6,324 Non-cash stock compensation 461 71 Goodwill impairment -- 30,000 Amortization of other intangibles 105 253 Amortization of deferred financing costs and discount on long-term debt 342 305 Loss on retirement of equipment 491 1,122 Changes in operating assets and liabilities, net of effect of business acquired: Accounts receivable 635 145 Inventories 1,325 (3,306) Prepaid expenses and other current assets 316 (590) Accounts payable, accrued compensation and benefits, accrued expenses and other (1,353) (2,806) Other (113) (280) ------------------ ------------------- Net cash provided by operating activities 11,904 5,186 Cash flows from investing activities: Acquisition of businesses, net of cash acquired -- (22,591) Proceeds from sale of equipment 348 80 Additions to plant and equipment, net (5,685) (10,623) ------------------ ------------------- Net cash used in investing activities (5,418) (33,134) Cash flows from financing activities: Payments of long-term debt (3,715) (2,997) Proceeds of long-term debt -- 8,000 Redemption of Series E preferred stock -- (2,010) Proceeds from sale of common stock, net of costs 345 813 ------------------ ------------------- Net cash (used in) provided by financing activities (3,370) 3,806 ------------------ ------------------- Increase (decrease) in cash and cash equivalents 3,197 (24,142) Cash and cash equivalents at beginning of period 10,781 38,268 ------------------ ------------------- Cash and cash equivalents at end of period $ 13,978 $ 14,126 ------------------ -------------------
See Notes To Consolidated Financial Statements -5- MEDSOURCE TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. INTERIM FINANCIAL STATEMENTS MedSource Technologies, Inc. ("we" or the "Company") has prepared the unaudited interim consolidated financial statements presented herein in accordance with accounting principles generally accepted in the United States for interim financial statements and in accordance with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated financial statements are unaudited but reflect all adjustments, consisting of normal recurring adjustments and accruals, which, in the opinion of management, are considered necessary for a fair presentation of our financial position and results of operations and cash flows for the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results that may be expected for the full fiscal year. The consolidated financial statements should be read in conjunction with the summary of significant accounting policies and notes to consolidated financial statements included in the Company's annual report for its fiscal year ended June 30, 2003. Preparation of the Company's financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates. Stock Based Compensation The Company accounts for its stock-based employee compensation plans using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Stock compensation is awarded to key employees in the form of stock options and restricted stock. All stock options are issued with exercise prices equal to the fair market value of the related shares on the date of issuance. Accordingly, as provided by APB No. 25, we did not recognize any stock compensation expense for stock options granted during the periods presented. The following table summarizes what our operating results would have been if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No.148, "Accounting for Stock-Based Compensation," to its stock based employee compensation (in thousands except share and per share amounts): -6-
For The Three Months Ended For the Nine Months Ended March 28, March 30, March 28, March 30, 2004 2003 2004 2003 ------------- -------------- ----------------- ---------------- Net income (loss) as reported $ 1,474 $ (30,425) $ 2,650 $ (26,052) Stock compensation expense - fair value based method (287) (272) (956) (325) ------------- -------------- ----------------- ---------------- Pro forma net income $ 1,187 $ (30,697) $ 1,694 $ (26,377) ============= ============== ================= ================ Net income (loss) per share as reported (basic and diluted) $ 0.05 $ (1.10) $ 0.09 $ (0.95) ============= ============== ================= ================ Pro forma net income (loss) per share (basic and diluted) $ 0.04 $ (1.11) $ 0.06 $ (0.96) ============= ============== ================= ================ Weighted average shares outstanding - basic 28,125,901 27,639,127 28,044,846 27,413,489 Effect of dilutive securities: Stock option plans 327,543 -- 153,292 -- Restricted stock 569,781 -- 532,600 -- Stock warrants 22,957 -- 22,951 -- ------------- -------------- ----------------- ---------------- Dilutive potential common shares 920,281 -- 708,843 -- ------------- -------------- ----------------- ---------------- Weighted average shares outstanding - diluted 29,046,182 27,639,127 28,753,689 27,413,489 ============= ============== ================= ================
We have issued restricted stock as part of employee incentive plans. The fair market value of the restricted stock is amortized over the projected remaining vesting period. During the three months and nine months ended March 28, 2004, we incurred $0.2 million and $0.5 million of non-cash stock compensation expenses related to restricted stock issuances. During the three and nine months ended March 30, 2003, we incurred $0.0 million and $0.1 million of non-cash stock compensation expenses related to restricted stock issuances. 2. ACQUISITION On September 4, 2002, the Company acquired Cycam, Inc. ("Cycam"), a company located in Houston, Pennsylvania that manufactures reconstructive implants and instruments. The total purchase price was approximately $24.4 million, which included $18.4 million in cash and 667,175 shares of common stock valued at $6.0 million. The fair market value of the shares issued in connection with the Cycam acquisition was based on the market price of our common stock on the date of issuance. The acquisition was recorded using the purchase method of accounting. The purchase price allocation was $6.0 million to net tangible assets and $18.4 million to goodwill. During the nine months ended March 28, 2003, the purchase price allocation was finalized and resulted in an increase of $0.1 million to the allocation to goodwill. In conjunction with the acquisition, the Company drew $8.0 million from the acquisition line under the Company's existing credit facility. The effect of the acquisition on our historical financial position and results of operations is not material, and therefore no pro forma data of this acquisition is presented. Cycam's operating results have been included in our consolidated operating results since the date of acquisition. The acquisition of Cycam expanded our capacity and capabilities in the metal machining of orthopedic reconstructive implants. In addition, Cycam provided us with the complimentary capabilities of plastic machining, surface coatings, near net shape forging, and sterilized packaging and kitting of orthopedic implants. Cycam also had strong relationships with several leading orthopedic companies where we had only a minor presence prior to the acquisition. -7- 3. INVENTORIES Inventories consisted of the following (in thousands): March 28, June 30, 2004 2003 ------------------ --------------- (Unaudited) Raw material $ 11,345 $ 13,806 Work-in-progress 8,590 8,389 Finished goods 4,357 3,422 ------------------ --------------- Total $ 24,292 $ 25,617 ================== =============== 4. GOODWILL During the nine months ended March 28, 2004, goodwill increased by $0.1 million resulting from purchase accounting adjustments related to the Cycam and Midwest Plastics acquisitions that occurred in the year ended June 30, 2003. 5. OTHER IDENTIFIABLE INTANGIBLE ASSETS, NET During the nine months ended March 28, 2004, other identifiable intangible assets, net, decreased by $0.1 million resulting from amortization. 6. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) represents net income (loss) attributed to common stockholders plus the results of any stockholders' equity changes relating to the Company's previous interest rate swaps and current interest rate cap agreements. For the three and nine months ended March 28, 2004 comprehensive income was $1.5 million and $2.7 million, respectively. For the three and nine months ended March 30, 2003, comprehensive loss was $30.5 million and $26.3 million, respectively. 7. Restructuring Charges During the three and nine months ended March 28, 2004, we continued our fiscal 2003 restructuring plan to reconfigure our resources in an effort to meet our customer's needs and lower our cost of operations. The restructuring plan includes facility consolidations, employee terminations, and other activities. We estimate the total cost of this restructuring plan will be $15.0 - $20.0 million and that the plan will be completed by the end of fiscal 2005. The total cost estimate includes an investment of $1.7 million in plant and equipment to ensure the facility consolidation does not disrupt operations. The estimate is based on the best available information at this time. These estimates may change as new information becomes available. The following table contains detailed information about the charges incurred to date related to the fiscal 2003 restructuring plan (in millions), recorded in accordance with SFAS No. 146, "Accounting for Costs Associated With Exit or Disposal Activities": -8-
Incurred Estimated Estimated through March Remaining Description Charges 28, 2004 Charges ------------------------------------------- --------------- ----------------- --------------- Employee termination $ 4.8 $ 2.1 $ 2.7 Facility consolidation 4.6 1.6 3.0 Property, plant and equipment disposals 2.2 0.4 1.8 Other direct costs 6.7 0.9 5.8 --------------- ----------------- --------------- Total $ 18.3 $ 5.0 $ 13.3 =============== ================= ===============
We estimate that we will incur $4.9 - $7.4 million and $7.1- $9.6 million of charges in fiscal 2004 and fiscal 2005, respectively, related to the fiscal 2003 restructuring plan. Employee termination charges represent the cost of reducing our workforce in conjunction with facility consolidations and other downsizing activities. Facility consolidation charges represent the direct costs of moving property, plant and equipment to different facilities. Property plant and equipment disposals represents the write-off of redundant assets that will no longer be used in ongoing operations as a result of our facility consolidation initiative, net of disposal proceeds. The following table contains information regarding our fiscal 2003 restructuring plan liability as of March 28, 2004 (in millions):
Balance at Balance at June 30, 2003 March 28, 2004 Description Additions Payments - ------------------------------------------- -------------- ------------ ------------ ----------------- Employee termination $ 0.5 $ 1.2 $ 1.2 $ 0.5 Facility consolidation -- 1.1 1.1 -- Property, plant and equipment disposals -- 0.5 0.5 -- Other direct costs -- 0.3 0.3 -- -------------- ------------ ------------ ----------------- Total $ 0.5 $ 3.1 $ 3.1 $ 0.5 ============== ============ ============ =================
During the three and nine months ended March 28, 2004, the Company continued to finalize the fiscal 2001 restructuring plan. All activities associated with the fiscal 2001 restructuring plan have been finalized. The following table contains information regarding our fiscal 2001 restructuring plan liability as of March 28, 2004 (in millions):
Payments through Balance at Initial Additional March 28, March 28, Description Accrual Reclassification Accrual 2004 2004 ------------ ---------------- -------------- -------------- ------------- Impairment of goodwill and other intangibles.. $ 3.6 $ -- $ -- $ 3.6 $ -- Impairment of property, plant and equipment... 1.9 2.3 0.1 4.3 -- Employee termination benefits................. 3.8 (1.2) 1.9 4.5 -- Other direct costs............................ 2.2 (1.1) 0.7 1.8 -- ------------ -------------- ------------ -------------- ------------- $ 11.5 $ -- $ 2.7 $ 14.2 $ -- ============ ============== ============== ============== =============
-9- 8. INCOME TAXES The effective income tax rate for the three months and nine months ended March 28, 2004, differs from the statutory rate due to the utilization of net operating loss carryovers. 9. SUBSEQUENT EVENT On April 27, 2004, the Company entered into an Agreement and Plan of Merger with Medical Device Manufacturing, Inc., a wholly owned subsidiary of UTI Corporation, ("Purchaser") and Pine Merger Corporation ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company with the Company being the surviving corporation and becoming a wholly-owned subsidiary of Purchaser. The merger is conditioned upon, among other things, the approval of the merger by the Company's stockholders, any required antitrust clearance and the receipt by Purchaser of the proceeds contemplated by financing commitments. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with our financial statements and related notes appearing elsewhere in this Report on Form 10-Q. The following discussion contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended. In many cases, you can identify forward-looking statements by terminology such as may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate, " "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors, as more fully discussed below and under the heading "risk factors" contained in our Form 10-K for the period ended June 30, 2003. Readers should not place undue reliance on any such forward-looking statements, which are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. We do not assume any obligation to update the forward-looking statements after the date hereof. OVERVIEW We provide product development and design services, precision metal and plastic part manufacturing, product assembly services and supply chain management. We provide our products and services to each of the following primary target markets: o Surgical instrumentation devices and components; o Electro-medical devices and components; o Interventional devices and components; and o Orthopedic devices and instruments. COMPANY HISTORY During 1998, our co-founders, Richard J. Effress and William J. Kidd, established MedSource to identify business opportunities in the medical engineering and manufacturing services industry. During March 1999, with additional equity capital from Whitney & Co., we acquired seven unaffiliated businesses to begin our operations. The original seven acquisitions were Kelco Industries, W.N. Rushwood d/b/a Hayden Precision Industries, National Wire and Stamping, The MicroSpring Company, Portlyn, Texcel and -10- Brimfield Precision. Our first fiscal period, which ended July 3,1999, consisted of only three months of consolidated results, which included material one-time expenses for business combination and formation. Since our initial acquisitions, we have acquired six additional businesses through March 28, 2003. Our most recent acquisition was Cycam Inc. in September 2002. The acquisition of Cycam, a manufacturer of reconstructive implants, provided us with complimentary capabilities of plastic machining, surface coatings, near net shape forging and sterilized packaging and kitting of orthopedic implants. Cycam also had strong relationships with several leading orthopedic companies where we had only a minor presence. All of our acquisitions were accounted for using the purchase method of accounting. RESTRUCTURING ACTIVITY During the three and nine months ended March 28, 2004, we continued to execute on our fiscal 2003 restructuring plan. We estimate the total cost of this restructuring plan will be approximately $15.0 - $20.0 million and we expect to incur the majority of these charges prior to the end of fiscal 2005. Prior to fiscal 2004, we incurred charges totaling $1.3 million related to this plan. During the three and nine months ended March 28, 2004, we incurred $1.1 million and $3.7 million, respectively, of charges related to this restructuring plan. The $1.1 million of restructuring charges incurred during the three months ended March 28, 2004, consisted of $0.5 million of facility consolidation expenses and $0.7 million of employee termination charges, partially offset by $0.1 million of property, plant and equipment disposal gains. The $5.0 million of restructuring charges incurred during the nine months ended March 28, 2004, consisted of $1.6 million of facility consolidation expenses, a $0.4 million write off of redundant equipment, $2.1 million of employee termination charges, and $0.9 million of other restructuring costs. During fiscal 2004 and fiscal 2005, we expect to incur $4.9 - $7.4 million and $7.1 - $9.6 million, respectively, in restructuring charges related to this plan. During the three and nine months ended March 28, 2004, we continued to finalize our fiscal 2001 restructuring plan. During the three and nine months ended March 28, 2004, we incurred $0.0 million and $0.3 million of restructuring charges related to this plan. The fiscal 2001 restructuring plan is complete. SUBSEQUENT EVENT On April 27, 2004, the Company entered into an Agreement and Plan of Merger with Medical Device Manufacturing, Inc., a wholly owned subsidiary of UTI Corporation, ("Purchaser") and Pine Merger Corporation ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company with the Company being the surviving corporation and becoming a wholly-owned subsidiary of Purchaser. The merger is conditioned upon, among other things, the approval of the merger by the Company's stockholders, any required antitrust clearance and the receipt by Purchaser of the proceeds contemplated by financing commitments. RESULTS OF OPERATIONS REVENUES We primarily recognize product revenues at the time products are shipped. Product shipments are supported by purchase orders from customers that indicate the price for each product. For services, we recognize revenues primarily on a time and materials basis. Service revenues are supported by customer orders or contracts that indicate the price for the services being rendered. For three and nine months ended March 28, 2004, service revenues were less than 10% of total revenues. Revenues for product shipments and services rendered must also have reasonable assurance of collectability from the customer. Reserves for -11- returns and allowances are recorded against revenues based on management's estimates and historical experience. We target the sale of our products and services to medical device companies in the four target markets described in Overview above. As we have continued to focus on these markets, our sales to non-medical customers as a percentage of our total revenues have been decreasing over time. Sales to non-medical customers represented approximately 2% of our total revenues during the three and nine months ended March 28, 2004. We expect sales to non-medical customers as a percentage of our total revenues to continue to decrease in the future. Historically, most of our revenues were derived from manufacturing components used in medical devices. However, in order to accelerate revenue growth and better serve our customers, we aggressively pursued opportunities for the assembly of completed devices. To support this effort, we have completed a number of acquisitions to expand our product offerings and enhance our supply chain services. Over time, we anticipate that revenues from the assembly of completed devices will likely continue to grow as a percentage of our total revenues. Nevertheless, we will continue to aggressively pursue component sales opportunities. During the three and nine months ended March 28, 2004, our top four customers accounted for 57% and 56% of our revenues, respectively, with one customer accounting for 31% and 29% of our revenues, respectively, and another accounting for 11% and 13% of our revenues, respectively. We expect revenues from our largest customers to continue to constitute a significant portion of our total revenues. We primarily derive our revenues from serving leading medical device companies. These customers are typically large companies with substantial market share in one or more of our four target markets, and we believe that expanding our relationships with these customers represents an important revenue opportunity. As a result, we devote significant sales efforts to securing additional business from the business units and product lines of the leading medical device companies that we currently serve, as well as developing business with other business units and product lines of these customers. As we increasingly focus on serving customers and expanding our offerings to them by developing or acquiring additional engineering and manufacturing capabilities, we expect the percentage of revenues we derive from these customers to increase over time, as compared with revenues from non-medical device companies. We also intend to continue to selectively pursue promising opportunities with emerging medical device companies. As discussed above, we have acquired six businesses since we began operations during March 1999. A substantial portion of our revenue growth to date has been attributable to the addition of these acquired companies' revenues. In the periods following these acquisitions, we have grown our revenues by offering our existing customers access to our newly acquired engineering and manufacturing capabilities, as well as by offering the customers of the acquired businesses access to our existing capabilities. We generally have retained the medical device customers of the companies that we have acquired, but have selectively discontinued business with customers of the acquired businesses that did not fit our strategic focus of serving leading and select emerging medical device companies in our four target markets or related medical fields. COST AND EXPENSES Cost of products sold includes expenses for raw materials, purchased components, outside services, supervisory, engineering and direct production manpower including benefits, production supplies, depreciation and other related expenses to support product manufacturing. We purchase most of the raw materials that are used in our products at prevailing market prices and, as a result, are subject to fluctuations in the market price of those raw materials. In particular, the prices of stainless steel, titanium and platinum have historically fluctuated, and the prices that we pay for these materials, and, in some cases, their availability, are dependent upon general market conditions. -12- Gross margins as a percentage of revenues for the three months ended March 28, 2004 and March 30, 2003 were 23.9% and 23.6%, respectfully. Gross margins as a percentage of revenues for the nine months ended March 28, 2004 and March 30, 2003 were 23.6% and 24.7%, respectively. Our margins are driven by sales mix between devices, components, and engineering services as well as the respective product mixes within our various product categories. Historically, our component business has generally produced higher gross margins. When we were initially formed during March 1999, we were predominately a components supplier. However, in order to expand the scope of our services and accelerate revenue growth, we aggressively pursued opportunities for the assembly of completed devices, which generally have higher material content and a lower value added content, and can result in lower gross margins but with lower capital investment. Selling, general and administrative expense includes strategic investments in our sales and marketing, operations and quality teams, and our corporate support staff. THREE MONTHS ENDED MARCH 28, 2004 COMPARED TO THREE MONTHS ENDED MARCH 30, 2003 Revenues for the three-month period ended March 28, 2004 totaled $46.0 million compared to $44.5 million for the same period of the prior year, an increase of 3.4%. Our growth was primarily driven by strength in our orthopedic and interventional markets. Orthopedic revenues increased by 31%, and interventional revenues increased by 9%. These strengths were partially offset by decreasing sales to our electro-medical implant and surgical instrumentation markets. Electro-medical implant revenues decreased by 12%, due partially to reduced inventory safety stock levels at some of our customers. Surgical instrumentation sales decreased by 1%. During the three-months ended March 28, 2004 and the three-months ended March 30, 2003, component revenue, assembly revenue and engineering services revenue comprised 66%, 30% and 4%, respectively, of total revenues. Cost of products sold for the three-month period ended March 28, 2004 totaled $35.0 million compared to $34.0 million for the three-month period ended March 30, 2003. The increase in cost of products sold resulted from the increase in sales volume compared to the prior year period. Gross margin was 23.9% for the three months ended March 28, 2004, compared to 23.6% for the three months ended March 30, 2003. Selling, general, and administrative expense for the three-month period ended March 28, 2004 totaled $7.7 million, or 16.7% of revenues, compared to $8.4 million, or 18.8% of revenues, for the three months ended March 30, 2003. The decrease in selling, general, and administrative expense was primarily the result of cost savings from our fiscal 2003 and fiscal 2001 restructuring plans. Net interest expense totaled $0.7 million for the three-month period ended March 28, 2004 and $0.6 million for the three months ended March 30, 2003. Net income totaled $1.5 million, or $0.05 per share (basic and diluted), compared with a net loss of $(30.4) million, or $(1.10) per share (basic and diluted), for the three months ended March 30, 2003. NINE MONTHS ENDED MARCH 28, 2004 COMPARED TO NINE MONTHS ENDED MARCH 28, 2003 Revenues for the nine-month period ended March 28, 2004 totaled $136.3 million compared to $130.1 million for the same period of the prior year, an increase of 4.7%. Approximately 0.9% of this increase was due to the acquisition of Cycam Inc. and the other 3.8% was due to internal growth. Our internal growth was primarily driven by strength in our orthopedic and electro-medical implant markets. -13- Orthopedic and electro-medical implant revenues increased by 14% compared to the prior year period. These strengths were partially offset by decreasing sales to our interventional market. Interventional revenues decreased by 3%. During the nine-months ended March 28, 2004, component revenue, assembly revenue and engineering services revenue comprised 67%, 29% and 4%, respectively, of total revenues. This compares to a revenue mix of 65%, 31%, and 4% for components, assembly, and engineering services, respectively, for the nine months ended March 30, 2003. Cost of products sold for the nine-month period ended March 28, 2004 totaled $104.1 million compared to $98.0 million for the nine-month period ended March 30, 2003. The increase in cost of products sold resulted primarily from the increase in volume compared to the prior year period as well as an increase in the absorption of costs associated with underutilized facilities. Gross margin was 23.6% for the nine months ended March 28, 2004, compared to 24.7% for the nine months ended March 30, 2003. The decrease in gross margin resulted primarily from: the absorption of costs associated with certain underutilized manufacturing operations, an unfavorable sales mix; and rising platinum costs. Selling, general, and administrative expense for the nine-month period ended March 28, 2004 totaled $23.2 million, or 17.0% of revenues, compared to $24.5 million, or 18.8% of revenues, for the nine months ended March 30, 2003. The decrease in selling, general, and administrative expense was primarily the result of cost savings from our fiscal 2003 and fiscal 2001 restructuring plans. Net interest expense totaled $2.0 million for the nine-month period ended March 28, 2004 and $1.7 million for the same prior year period. Net income for the nine-month period ended March 28, 2004 totaled $2.7 million, or $0.09 per share (basic and diluted), compared with a net loss of $(26.1) million, or $(4.01) per share, for the same prior year period. LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity are cash provided by operations and borrowings under our senior credit facility, which includes a $15.0 million unused revolving credit facility. To date, our principal uses of cash have been to fund working capital requirements, finance capital expenditures, meet debt service requirements and finance acquisitions. We expect that these uses will continue in the future. Management believes that current cash balances and cash generated from operations, combined with available borrowings under our senior credit facility, will be adequate to fund requirements for working capital, capital expenditures, and future expansion for the next 12 months. OPERATING ACTIVITIES Net cash provided by operating activities totaled $12.0 million for the nine months ended March 28, 2004 compared to $5.2 million for the nine months ended March 30, 2003. The increase in cash provided by operating activities over the prior year period was primarily the result of a $6.1 million improvement in net operating asset management, primarily driven by improved inventory management. In addition, the Company's cash cycle has seen improvement compared to the prior year. -14- INVESTING ACTIVITIES Cash used in investing activities was $5.4 million for the nine months ended March 28, 2004, compared to $33.1 million for the nine months ended March 30, 2003. All investing cash outflows for the nine months ended March 28, 2004 were used to invest in property and equipment. We expect capital expenditures in fiscal 2004 to be approximately $9.5 million. During the nine months ended March 30, 2003 we used $22.6 million of cash to finance the acquisitions and invested $10.6 million in property and equipment. FINANCING ACTIVITIES Cash (used in) provided by financing activities was $(3.4) million for the nine months ended March 28, 2004, compared to $3.8 million for the nine months ended March 30, 2003. During the nine months ended March 28, 2004 we repaid $3.7 million of principal on our long-term debt obligations. We expect to pay $2.1 million, $9.1 million, $11.4 million, and $9.7 million of the outstanding principal balance of our long-term debt obligations during the remainder of fiscal 2004, 2005, 2006, and 2007, respectively. If the merger described in Subsequent Event above takes place, it is anticipated that our then outstanding debt will be repaid in full at the time of the merger. During the nine months ended March 30, 2003 we paid $2.0 million to redeem outstanding series E preferred stock, paid $3.0 million of principal on our long-term debt obligation, received $0.8 million of proceeds from the sale of our common stock and received $8.0 million of proceeds from our acquisition long-term debt. OFF-BALANCE SHEET ARRANGEMENTS We do not have any "off-balance sheet arrangements" (as such term in defined in Item 303 of Regulations S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. CRITICAL ACCOUNTING POLICIES There has been no material change to the Critical Accounting Policies we disclosed in our annual report on Form 10-K for our year ended June 30, 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not earnings or cash flows. We do not have any obligations under any fixed rate debt. For variable rate debt, changes in interest rates generally do not impact the fair market value of the debt instrument, but do affect future earnings and cash flows. We had $33.8 million of variable rate debt outstanding under our senior credit facility at March 28, 2004. To reduce our exposure to interest rate risk, we entered into an interest rate cap agreement to hedge our exposure to interest rate risk under our new senior credit facility. The effect of a 10% increase in interest rates would have resulted in an immaterial increase in interest expense during our period ended March 28, 2004. FOREIGN CURRENCY RISK The majority of our sales and purchases are denominated in United States dollars and as a result, we have relatively little exposure to foreign currency exchange risk with respect to our sales. Accordingly, we do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instrument for trading or speculative purposes. -15- ITEM 4. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we are required to file under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. Management believes that there are reasonable assurances that our controls and procedures will achieve management's control objectives. We have carried out an evaluation, under the supervision and with the participation of our management, including our Chairman of the Board and Chief Executive Officer and our Senior Vice President -- Finance and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of March 28, 2004. Based upon the foregoing, our Chairman of the Board and Chief Executive Officer and our Senior Vice President -- Finance and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to MedSource (and its consolidated subsidiaries) required to be included in our Exchange Act reports. CHANGES IN INTERNAL CONTROLS The evaluation referred to above did not identify any significant changes in our internal controls over financial reporting that occurred during our quarter ended March 28, 2004 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. -16- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS During March 2004, we issued an aggregate of 3,328 shares of our common stock upon exercise of warrants issued to one of the investors who had purchased our Series E preferred stock in 2001. The exercise price of the warrants was $0.01 per share, and the investor used a "cashless" provision that enabled her to surrender the right to receive upon exercise of the warrants a number of shares of common stock with a value equal to the aggregate exercise price of the warrants and, as a result, surrendered the right to receive an aggregate of 5 shares. We issued these securities in reliance on the exemption from registration provided by Section 4(2) of the Securities Act of 1933 as transactions not involving any public offering and Rule 506 thereunder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith: Exhibit Number Description ------ ----------- 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended 32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K On April 28, 2004, we filed a Report on Form 8-K to file a press release announcing our financial results for the quarter ended March 28, 2004, and the execution of an agreement and plan of merger. -17- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 10, 2004 MEDSOURCE TECHNOLOGIES, INC. By: /s/ Richard J. Effress --------------------------------------- Richard J. Effress, Chairman and Chief Executive Officer By: /s/ William J. Kullback --------------------------------------- William J. Kullback Senior Vice President - Finance and Chief Financial Officer -18- EX-31 2 ex31-1.txt EXHIBIT 31.1 Exhibit 31.1 CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER I, Richard J. Effress, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MedSource Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) [omitted pursuant to the transition rules of SEC Release Nos. 33-8238 and 34-47986;] (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; (d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: May 10, 2004 /s/ Richard J. Effress ----------------------------------- Richard J. Effress Chairman of the Board and Chief Executive Officer EX-31 3 ex31-2.txt EXHIBIT 31.2 Exhibit 31.2 CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER I, William J. Kullback, certify that: 1. I have reviewed this quarterly report on Form 10-Q of MedSource Technologies, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) [omitted pursuant to the transition rules of SEC Release Nos. 33-8238 and 34-47986;] (c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; (d) disclosed in this report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially effect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. Date: May 10, 2004 /s/ William J. Kullback -------------------------------------- William J. Kullback Senior Vice President -- Finance and Chief Financial Officer EX-32 4 ex32-1.txt EXHIBIT 32.1 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of MedSource Technologies, Inc., (The "Company") on Form 10-Q for the period ended March 28, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard J. Effress, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request. Dated: May 10, 2004 /s/ Richard J. Effress ----------------------------------- Richard J. Effress Chairman of the Board and Chief Executive Officer EX-32 5 ex32-2.txt EXHIBIT 32.2 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the quarterly report of MedSource Technologies, Inc., (The "Company") on Form 10-Q for the period ended March 28, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William J. Kullback, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in such Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by Section 906 has been provided to the Company and will be furnished to the Securities and Exchange Commission or its staff upon request. Dated: May 10, 2004 /s/ William J. Kullback ---------------------------------------- William J. Kullback Senior Vice President -- Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----