UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT
TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 17, 2015
GREATBATCH, INC.
(Exact
name of registrant as specified in its charter)
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| Delaware |
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1-16137 |
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16-1531026 |
| (State or Other Jurisdiction
of incorporation) |
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(Commission
File Number) |
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(IRS Employer
Identification No.) |
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| 2595 Dallas Parkway, Suite 310, Frisco, Texas |
|
75034 |
| (Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code (716) 759-5600
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any
of the following provisions:
| ¨ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ |
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ |
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ |
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 7.01 Regulation FD Disclosure.
As previously disclosed, on August 27, 2015, Greatbatch Ltd., a direct wholly owned subsidiary of Greatbatch, Inc. (the “Company”), entered into
a commitment letter with a consortium of lender banks (the “Debt Commitment Parties”) and their respective affiliates, pursuant to which, on the terms and subject to the conditions set forth therein, the Debt Commitment Parties committed
to provide Greatbatch Ltd. with debt financing (collectively, together with the increases described below, the “Debt Financing”), consisting of (i) (A) a $300 million senior secured term loan A facility, (B) a $1.0 billion
senior secured term loan B facility (the “TLB Facility”) and (C) a $200 million senior secured revolving facility and (ii) a $400 million senior unsecured bridge loan facility (the “Bridge Facility”) (as reduced by the
amount of any long term debt financing issued by Greatbatch Ltd. in lieu of such Bridge Facility), for the previously announced acquisition (the “Merger”) of Lake Region Medical Holdings, Inc. (“Lake Region”). Subsequent to the
announcement of the Merger, Greatbatch Ltd. determined to seek an increase, such increase to be on a non-committed basis, in the amount of the Debt Financing such that the aggregate principal amount of the TLB Facility is now proposed to be $1,025
million. Greatbatch Ltd. expects to seek long-term debt financing in the amount of $435 million in lieu of a portion or all of the drawings under the Bridge Facility, subject to market and other conditions.
In connection with marketing of the Debt Financing to prospective lenders, the following information will be provided to such prospective lenders:
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• |
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Greatbatch Pro Forma Adjusted EBITDA for the twelve months ended July 3, 2015 is approximately $330 million, which is composed of (i) Greatbatch Adjusted EBITDA for the twelve months ended July 3, 2015 of
approximately $162 million; (ii) Lake Region Adjusted EBITDA for the twelve months ended July 4, 2015 of approximately $143 million; and (iii) $25 million of year one pre-tax operating synergies for the combined company. Lake
Region’s Adjusted EBITDA for the twelve months ended July 4, 2015 is lower than previously announced reflecting an adjustment for certain expenses identified during the Company’s due diligence review, to be consistent with the
Company’s definition of adjustments to EBITDA. |
| |
• |
|
In connection with the Company’s previously announced proposed spin-off (“Spin-off”) of its QiG Group, LLC subsidiary (“QiG Group”) (to be known upon completion of the Spin-off as Nuvectra
Corporation), the Company currently expects to make a cash capital contribution in the amount of approximately $75 million to QiG Group (the “Capital Contribution”) immediately prior to the completion of such Spin-off. The amount of the
Capital Contribution is preliminary and is subject to further modification, either upwards or downwards, in connection with the completion of the Spin-off. |
In addition, the following information will also be provided to such prospective lenders in connection with the marketing of the Debt Financing:
(i) Accellent Inc. consolidated financial statements as of and for the years ended January 3, 2015 and December 31, 2013 and (ii) Accellent Inc. condensed consolidated financial statements as of July 4, 2015 and
January 3, 2015 and for the three and six months ended July 4, 2015 and June 28, 2014. This information is attached hereto as Exhibits 99.1 and 99.2, respectively, and is incorporated by reference herein. The financial statements
contained in Exhibits 99.1 and 99.2 consist of financial statements of Accellent Inc., Lake Region’s indirect wholly-owned operating subsidiary.
The
information furnished under Item 7.01 of this Current Report on Form 8-K and in Exhibits 99.1 and 99.2 shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended
(“Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference into any filing made by the Company under the Exchange Act or the Securities Act of 1933, as amended (the
“Securities Act”), except as shall be expressly set forth by specific reference in such filing.
Cautionary Statement Regarding
Forward-Looking Statements
Some of the statements contained in this Current Report on Form 8-K are “forward-looking statements” within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act.
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 “variations” or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about the benefits of the proposed
Merger, including future financial and operating results, the combined company’s plans, objectives, expectations and intentions, the expected timing of completion of the transaction and other statements that are not historical facts. Such
statements are based upon the current beliefs and expectations of the Company’s management and are subject to significant risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties
include, but are not limited to: the possibility that the anticipated synergies and other benefits from the proposed Merger will not be realized, or will not be realized within the anticipated time periods; the inability to obtain regulatory
approvals of the Merger (including the approval of antitrust authorities necessary to complete the transaction) on the terms desired or anticipated; the timing of such approvals and the risk that such approvals may result in the imposition of
conditions that could adversely affect the combined company or the expected benefits of the transaction;
1
the risk that a condition to closing the transaction may not be satisfied on a timely basis or at all; the risk that the proposed transaction fails to close for any other reason; the risks and
uncertainties related to the Company’s ability to successfully integrate the operations, products and employees of the Company and Lake Region; the effect of the potential disruption of management’s attention from ongoing business
operations due to the pending Merger; the effect of the announcement of the proposed Merger on the Company’s and Lake Region’s relationships with their respective customers, vendors and lenders and on their respective operating results and
businesses generally; risks relating to the value of the Company shares to be issued in the transaction; access to available financing (including financing for the acquisition or refinancing of the Company’s or Accellent Inc.’s debt) on a
timely basis and on reasonable terms; and the following factors that may impact the Company’s and the combined company’s business: dependence upon a limited number of customers; customer ordering patterns; product obsolescence; inability
to market current or future products; pricing pressure from customers; inability to timely and successfully implement cost reduction and plant consolidation initiatives; reliance on third party suppliers for raw materials, products and
subcomponents; fluctuating operating results; inability to maintain high quality standards for products; challenges to intellectual property rights; product liability claims; product field actions or recalls; inability to successfully consummate and
integrate acquisitions and to realize synergies and to operate these acquired businesses in accordance with expectations; our unsuccessful expansion into new markets; failure to develop new products including system and device products; the timing,
progress and ultimate success of pending regulatory actions and approvals, inability to obtain licenses to key technology; regulatory changes, including health care reform, or consolidation in the healthcare industry; global economic factors
including currency exchange rates and interest rates; the resolution of various legal actions; and other risks and uncertainties that arise from time to time and are described in the Company’s periodic filings with the Securities and Exchange
Commission. The Company assumes no obligation to update forward-looking statements in this Current Report on Form 8-K whether to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial
conditions or prospects, or otherwise.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
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| Exhibit
Number |
|
Description of Exhibit |
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| 99.1 |
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Consolidated Financial Statements as of and for the years ended January 3, 2015 and December 31, 2013 of Accellent Inc., and Independent Auditors’ Report. |
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| 99.2 |
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Condensed Consolidated Financial Statements as of July 4, 2015 and January 3, 2015 and for the three and six months ended July 4, 2015 and June 28, 2014 of Accellent Inc. |
2
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.
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| Date: September 17, 2015 |
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GREATBATCH, INC. |
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By: |
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/s/ Michael Dinkins |
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Michael Dinkins |
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Executive Vice President & Chief Financial Officer |
EXHIBIT INDEX
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| Exhibit
Number |
|
Description of Exhibit |
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| 99.1 |
|
Consolidated Financial Statements as of and for the years ended January 3, 2015 and December 31, 2013 of Accellent Inc., and Independent Auditors’ Report. |
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| 99.2 |
|
Condensed Consolidated Financial Statements as of July 4, 2015 and January 3, 2015 and for the three and six months ended July 4, 2015 and June 28, 2014 of Accellent Inc. |
Exhibit 99.1
Accellent Inc.
Consolidated Financial Statements as of
and for the
Years Ended January 3, 2015 and December 31, 2013, and
Independent Auditors’ Report
ACCELLENT INC.
TABLE OF CONTENTS
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Page |
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| INDEPENDENT AUDITORS’ REPORT |
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1 |
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| CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED JANUARY 3, 2015 AND DECEMBER 31, 2013: |
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| Consolidated Balance Sheets |
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2 |
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| Consolidated Statements of Operations |
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3 |
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| Consolidated Statements of Comprehensive Loss |
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4 |
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| Consolidated Statements of Stockholder’s Equity |
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5 |
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| Consolidated Statements of Cash Flows |
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6-7 |
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| Notes to Consolidated Financial Statements |
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8 |
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INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholder of Accellent Inc.
Wilmington, Massachusetts
We have audited the accompanying
consolidated financial statements of Accellent Inc. and subsidiaries (the “Company”), which comprise the consolidated balance sheets as of January 3, 2015 and December 31, 2013, and the related consolidated statements of
operations, comprehensive loss, stockholder’s equity, and cash flows for the fiscal years then ended.
Management’s Responsibility for the
Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial
statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures
selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the Company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
January 3, 2015 and December 31, 2013, and the results of its operations and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.
Boston, Massachusetts
April 17, 2015
1
ACCELLENT INC.
Consolidated Balance Sheets
(in thousands, except per share data)
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As of |
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January 3,
2015 |
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December 31,
2013 |
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| Assets |
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| Current assets: |
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| Cash |
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$ |
44,191 |
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$ |
72,240 |
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| Accounts receivable, net of allowances of $5,119 and $2,601 at January 3, 2015 and December 31, 2013, respectively |
|
|
78,078 |
|
|
|
59,624 |
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| Inventory |
|
|
89,191 |
|
|
|
61,688 |
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| Deferred income taxes |
|
|
4,404 |
|
|
|
— |
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| Prepaid expenses and other current assets |
|
|
6,192 |
|
|
|
2,973 |
|
|
|
|
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|
|
|
|
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| Total current assets |
|
|
222,056 |
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|
196,525 |
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| Property, plant and equipment, net |
|
|
186,637 |
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|
116,957 |
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| Goodwill |
|
|
719,842 |
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|
556,315 |
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| Other intangible assets, net |
|
|
193,782 |
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|
119,808 |
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| Deferred financing costs and other assets, net |
|
|
23,443 |
|
|
|
11,625 |
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| Total assets |
|
$ |
1,345,760 |
|
|
$ |
1,001,230 |
|
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| Liabilities and Stockholder’s Equity |
|
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| Current liabilities: |
|
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| Current portion of long-term debt |
|
$ |
8,350 |
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$ |
7 |
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| Accounts payable |
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|
27,531 |
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19,229 |
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| Accrued payroll and benefits |
|
|
20,865 |
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11,928 |
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| Accrued interest |
|
|
3,460 |
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|
19,303 |
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| Accrued expenses and other current liabilities |
|
|
31,847 |
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|
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20,927 |
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| Total current liabilities |
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92,053 |
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|
71,394 |
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| Long-term debt |
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|
1,040,388 |
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713,652 |
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| Deferred income taxes |
|
|
38,936 |
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|
33,925 |
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| Other liabilities |
|
|
9,480 |
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|
|
7,783 |
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| Total liabilities |
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1,180,857 |
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|
826,754 |
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| Commitments and contingencies (Note 19) |
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| Stockholder’s equity: |
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| Common stock, par value $0.01 per share, 50,000 shares authorized; 1 share issued and outstanding at January 3, 2015 and
December 31, 2013 |
|
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— |
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— |
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| Additional paid-in capital |
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717,345 |
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640,703 |
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| Accumulated other comprehensive loss |
|
|
(41,071 |
) |
|
|
(1,186 |
) |
| Accumulated deficit |
|
|
(511,371 |
) |
|
|
(465,041 |
) |
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| Total stockholder’s equity |
|
|
164,903 |
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|
|
174,476 |
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| Total liabilities and stockholder’s equity |
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$ |
1,345,760 |
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|
$ |
1,001,230 |
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|
|
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|
See notes to consolidated financial statements.
2
ACCELLENT INC.
Consolidated Statements of Operations
(in thousands)
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Fiscal Years |
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2014 |
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2013 |
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| Net sales |
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$ |
752,264 |
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$ |
525,712 |
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| Cost of sales (exclusive of amortization) |
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573,616 |
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389,766 |
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| Gross profit |
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178,648 |
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135,946 |
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| Operating expenses: |
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| Selling, general and administrative |
|
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82,676 |
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52,105 |
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| Research and development |
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8,763 |
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|
2,027 |
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| Impairment of intangible assets and goodwill |
|
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26,800 |
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63,128 |
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| Restructuring |
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3,138 |
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|
280 |
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| Amortization of intangible assets |
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|
25,039 |
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14,939 |
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| Loss on disposal of property and equipment |
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40 |
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1,088 |
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| Total operating expenses |
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146,456 |
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|
133,567 |
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| Income from operations |
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32,192 |
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|
2,379 |
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| Other expense, net: |
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| Interest expense, net |
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(63,096 |
) |
|
|
(69,145 |
) |
| Loss on debt extinguishment |
|
|
(53,421 |
) |
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— |
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| Other, net |
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(887 |
) |
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(1,036 |
) |
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| Total other expense, net |
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(117,404 |
) |
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(70,181 |
) |
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| Loss from operations before income taxes |
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(85,212 |
) |
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(67,802 |
) |
| Provision (benefit) for income taxes |
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(38,882 |
) |
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4,527 |
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| Net loss from continuing operations |
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(46,330 |
) |
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(72,329 |
) |
| Net loss from discontinued operations |
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— |
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(63 |
) |
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| Net loss |
|
$ |
(46,330 |
) |
|
$ |
(72,392 |
) |
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|
See notes to consolidated financial statements.
3
ACCELLENT INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
|
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| |
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Fiscal Years |
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| |
|
2014 |
|
|
2013 |
|
| Net loss |
|
$ |
(46,330 |
) |
|
$ |
(72,392 |
) |
| Other comprehensive income (loss), net of income taxes: |
|
|
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| Foreign currency translation adjustments |
|
|
(34,884 |
) |
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|
1,374 |
|
| Pension actuarial gain (loss) |
|
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(2,123 |
) |
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|
170 |
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| Amortization of pension actuarial loss |
|
|
38 |
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34 |
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| Curtailment of pension |
|
|
338 |
|
|
|
— |
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| Unrealized loss on derivatives |
|
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(3,254 |
) |
|
|
— |
|
| Unrealized gain on investment |
|
|
— |
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32 |
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| Realized gain on investment |
|
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— |
|
|
|
(242 |
) |
|
|
|
|
|
|
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|
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| Other comprehensive income (loss), net of income taxes |
|
|
(39,885 |
) |
|
|
1,368 |
|
|
|
|
|
|
|
|
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| Comprehensive loss |
|
$ |
(86,215 |
) |
|
$ |
(71,024 |
) |
|
|
|
|
|
|
|
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|
See notes to consolidated financial statements.
4
ACCELLENT INC.
Consolidated Statements of Stockholder’s Equity
(in thousands, except per share data)
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Common Stock
$0.01 par value |
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Additional
Paid-in
Capital |
|
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Accumulated
Other
Comprehensive
Income (Loss) |
|
|
Accumulated
Deficit |
|
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Total
Stockholder’s
Equity |
|
| |
|
Shares |
|
|
Amount |
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| Balance, January 1, 2013 |
|
|
1 |
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|
$ |
— |
|
|
$ |
639,610 |
|
|
$ |
(2,554 |
) |
|
$ |
(392,649 |
) |
|
$ |
244,407 |
|
| Proceeds from issuance of parent company stock to employees |
|
|
— |
|
|
|
— |
|
|
|
75 |
|
|
|
— |
|
|
|
— |
|
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|
75 |
|
| Vesting of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
407 |
|
|
|
— |
|
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|
— |
|
|
|
407 |
|
| Share-based compensation |
|
|
— |
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— |
|
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|
651 |
|
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|
— |
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— |
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|
651 |
|
| Exercise of employee stock options |
|
|
— |
|
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— |
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|
70 |
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|
— |
|
|
|
— |
|
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|
70 |
|
| Repurchase of parent company stock |
|
|
— |
|
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|
— |
|
|
|
(110 |
) |
|
|
— |
|
|
|
— |
|
|
|
(110 |
) |
| Other comprehensive income, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,368 |
|
|
|
— |
|
|
|
1,368 |
|
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(72,392 |
) |
|
|
(72,392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2013 |
|
|
1 |
|
|
|
— |
|
|
|
640,703 |
|
|
|
(1,186 |
) |
|
|
(465,041 |
) |
|
|
174,476 |
|
| Issuance of parent company stock in acquisition |
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
|
|
— |
|
|
|
— |
|
|
|
75,000 |
|
| Proceeds from issuance of parent company stock to employees |
|
|
— |
|
|
|
— |
|
|
|
95 |
|
|
|
— |
|
|
|
— |
|
|
|
95 |
|
| Vesting of restricted stock |
|
|
— |
|
|
|
— |
|
|
|
387 |
|
|
|
— |
|
|
|
— |
|
|
|
387 |
|
| Share-based compensation |
|
|
— |
|
|
|
— |
|
|
|
1,143 |
|
|
|
— |
|
|
|
— |
|
|
|
1,143 |
|
| Repurchase of parent company stock |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
| Settlement of roll-over stock options |
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
| Other comprehensive loss, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(39,885 |
) |
|
|
— |
|
|
|
(39,885 |
) |
| Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(46,330 |
) |
|
|
(46,330 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 3, 2015 |
|
|
1 |
|
|
$ |
— |
|
|
$ |
717,345 |
|
|
$ |
(41,071 |
) |
|
$ |
(511,371 |
) |
|
$ |
164,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
5
ACCELLENT INC.
Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(46,330 |
) |
|
$ |
(72,392 |
) |
| Net loss from discontinued operations |
|
|
— |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
| Net loss from continuing operations |
|
|
(46,330 |
) |
|
|
(72,329 |
) |
| Adjustments to reconcile net loss to net cash flows provided by operating activities (net of acquisition): |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
50,803 |
|
|
|
33,016 |
|
| Amortization of debt discounts and non-cash interest accrued |
|
|
3,318 |
|
|
|
3,289 |
|
| Impact of inventory valuation step-up in an acquisition |
|
|
6,263 |
|
|
|
— |
|
| Change in allowance for bad debts |
|
|
— |
|
|
|
(11 |
) |
| Impairment of intangible assets and goodwill |
|
|
26,800 |
|
|
|
63,128 |
|
| Loss on disposal of property and equipment |
|
|
40 |
|
|
|
1,088 |
|
| Realized gain on available for sale security |
|
|
— |
|
|
|
(242 |
) |
| Deferred income tax expense |
|
|
(42,837 |
) |
|
|
2,820 |
|
| Non-cash compensation expense |
|
|
1,649 |
|
|
|
768 |
|
| Loss on debt extinguishment |
|
|
53,421 |
|
|
|
— |
|
| Changes in operating assets and liabilities (net of effects of an acquisition): |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
1,670 |
|
|
|
(10,140 |
) |
| Inventory |
|
|
(3,148 |
) |
|
|
(4,421 |
) |
| Prepaid expenses and other assets |
|
|
(1,078 |
) |
|
|
(762 |
) |
| Accounts payable, accrued expenses and other liabilities |
|
|
(10,868 |
) |
|
|
8,092 |
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities of continuing operations |
|
|
39,703 |
|
|
|
24,296 |
|
| Net cash used in operating activities of discontinued operations |
|
|
— |
|
|
|
(262 |
) |
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
|
39,703 |
|
|
|
24,034 |
|
|
|
|
|
|
|
|
|
|
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Acquisition of a business, net of cash acquired |
|
|
(303,871 |
) |
|
|
— |
|
| Capital expenditures |
|
|
(29,825 |
) |
|
|
(21,170 |
) |
| Proceeds from the sale of property and equipment |
|
|
351 |
|
|
|
963 |
|
| Proceeds from the sale of security |
|
|
— |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities of continuing operations |
|
|
(333,345 |
) |
|
|
(19,965 |
) |
| Net cash provided by investing activities of discontinued operations |
|
|
— |
|
|
|
7,987 |
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(333,345 |
) |
|
|
(11,978 |
) |
|
|
|
|
|
|
|
|
|
(Continued)
6
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds from borrowings on long-term debt |
|
|
1,055,000 |
|
|
|
— |
|
| Repayments of long-term debt and capital lease obligations |
|
|
(721,272 |
) |
|
|
(11 |
) |
| Borrowings under revolving line of credit |
|
|
27,000 |
|
|
|
— |
|
| Repayment of principal under revolving line of credit |
|
|
(27,000 |
) |
|
|
— |
|
| Proceeds from sale of parent company stock |
|
|
95 |
|
|
|
— |
|
| Repurchase of parent company common stock |
|
|
(12 |
) |
|
|
(110 |
) |
| Proceeds from the exercise of options in parent company stock |
|
|
— |
|
|
|
25 |
|
| Purchase of interest rate cap |
|
|
(524 |
) |
|
|
— |
|
| Fees on prepayment of long-term debt |
|
|
(42,400 |
) |
|
|
— |
|
| Payment of debt issuance costs |
|
|
(23,982 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
266,905 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
| Effect of exchange rate changes |
|
|
(1,312 |
) |
|
|
378 |
|
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in cash and cash equivalents |
|
|
(28,049 |
) |
|
|
12,338 |
|
| Cash, beginning of year |
|
|
72,240 |
|
|
|
59,902 |
|
|
|
|
|
|
|
|
|
|
| Cash, end of year |
|
$ |
44,191 |
|
|
$ |
72,240 |
|
|
|
|
|
|
|
|
|
|
| Supplemental cash flow information: |
|
|
|
|
|
|
|
|
| Cash paid for interest |
|
$ |
75,342 |
|
|
$ |
65,784 |
|
|
|
|
|
|
|
|
|
|
| Cash paid for income taxes, net of refunds |
|
$ |
11,988 |
|
|
$ |
1,514 |
|
|
|
|
|
|
|
|
|
|
| Issuance of parent company stock in acquisition |
|
$ |
75,000 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
| Property and equipment purchases included in accrued expenses |
|
$ |
1,269 |
|
|
$ |
1,894 |
|
|
|
|
|
|
|
|
|
|
(Concluded)
See notes to consolidated financial statements.
7
ACCELLENT INC.
Notes to Consolidated Financial Statements
Fiscal Years Ended January 3, 2015 and December 31, 2013
| 1. |
Business and Basis of Presentation |
Description of Business
Accellent Inc. (the “Company”) is a wholly owned subsidiary of Accellent Acquisition Corp., which in turn is a wholly owned
subsidiary of Accellent Holdings Corp. (“Accellent Holdings”), which in turn is a wholly owned subsidiary of Lake Region Medical Holdings, Inc. (“LRM Holdings”). On March 12, 2014, the Company completed the acquisition of
Lake Region Manufacturing, Inc. (“Lake Region”), a Minnesota entity doing business as Lake Region Medical (the “Lake Region Medical Acquisition”). The Lake Region Medical Acquisition was completed through a Contribution and
Merger Agreement among the Company, Accellent Holdings, LRM Holdings (“Buyer”), Lake Region and the other parties thereto (the “Contribution and Merger Agreement”). Accellent Holdings formed Buyer and Accellent Inc. formed Lake
Region Merger Sub Inc. (“Merger Sub”) for purposes of consummating the transaction. Pursuant to the Contribution and Merger Agreement, Merger Sub merged with and into Lake Region, with Lake Region surviving as a wholly owned subsidiary of
the Company (“Lake Region Merger”). In September 2014, the Company commenced doing business as Lake Region Medical. LRM Holdings, since its formation, and Accellent Holdings, prior to the formation of LRM Holdings, is referred to herein as
the “parent company”.
The Company provides its customers in the medical device industry design and engineering, precision
component manufacturing, device assembly and supply chain management services and is a manufacturer of interventional and diagnostic wire-formed medical devices and components specializing in minimally
invasive devices for cardiovascular, endovascular and neurovascular applications for customers worldwide. The Company has extensive resources focused on providing its customers with reliable, high-quality, cost-efficient, integrated outsourced
solutions. Sales are focused primarily in the United States of America (“U.S.”) and Western European markets. Headquartered in Wilmington, Massachusetts, the Company has manufacturing facilities in North America, Europe, and Asia. The
Company operates in two segments: Advanced Surgical (“AS Segment”) and Cardio & Vascular (“C&V Segment”).
Basis of Presentation
Effective January 1, 2014, the Company changed its financial reporting year end from the calendar twelve months ending December 31 to
the date determined by an annual reporting cycle whereby each fiscal year will typically consist of four 13-week quarters. As a result of this change, fiscal year 2014 began on January 1, 2014, ended on January 3, 2015, and included an
additional week in the fourth quarter resulting in a 53-week fiscal year with 368 days. The change in fiscal year did not have a material impact on the financial results for the year ended January 3, 2015. Fiscal year 2013 presented in the
accompanying consolidated financial statements included 52 weeks. Unless otherwise indicated, references to fiscal years 2014 and 2013 are to the Company’s fiscal years ended January 3, 2015 and December 31, 2013, respectively.
| 2. |
Summary of Significant Accounting Policies |
Principles of Consolidation
These consolidated financial statements include the accounts of the Company, the parent company and the Company’s wholly
owned subsidiaries, including those of Lake Region since March 13, 2014. All intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S., requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities during the reporting periods, the reported amounts of revenue and expenses during the reporting periods, and the disclosure of contingent assets and liabilities at
the date of the financial statements. On an ongoing basis, the Company bases estimates and assumptions on historical experience, currently available information, and various other factors that management believes to be reasonable under the
circumstances. Actual results may differ materially from these estimates and assumptions.
8
Cash and Cash Equivalents
Cash and cash equivalents consist of cash in bank deposit accounts and highly liquid investments with an original or remaining maturity of 90
days or less when acquired. At January 3, 2015 and December 31, 2013, the Company had no cash equivalents.
Allowance for
Doubtful Accounts
The Company provides credit to its customers in the normal course of business. The Company maintains an
allowance for doubtful accounts for those receivables that it determines are no longer collectible. The Company estimates its losses from uncollectable accounts based upon recent historical experience, the length of time the receivable has been
outstanding and other specific information as it becomes available. The allowance for doubtful accounts was $0.6 million at January 3, 2015 and December 31, 2013.
Inventories
Inventories are stated at the lower of cost (on first-in, first-out basis) or market and include the cost of materials, labor and manufacturing
overhead. Costs related to abnormal amounts of idle facility expense, freight, handling costs, and wasted material are recognized as current period expenses. In addition to stating inventory at the lower of cost or market, the Company also evaluates
inventory each reporting period for excess quantities and obsolescence, establishing reserves when necessary based upon historical experience, assessment of economic conditions and expected demand. Once recorded, these reserves are considered
permanent adjustments to the carrying value of inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures
which significantly increase the value of, or extend the useful lives of property, plant and equipment, are capitalized, while replaced assets are retired when removed from service. Acquired assets to be placed in service are those assets where
either (i) the Company has yet to begin using the asset in operations or (ii) additional costs are necessary to complete the asset for the use in operation. Depreciation expense is recorded on assets when they are placed in
service.
Depreciation is calculated using the straight-line method over the estimated useful lives of depreciable assets. Useful lives of
depreciable assets, by class, are as follows:
|
|
|
| Buildings |
|
20 years |
| Machinery and equipment |
|
3 to 10 years |
| Leasehold improvements |
|
Lessor of useful life or remaining lease term |
| Computer equipment and software |
|
3 years |
| Automobiles |
|
3 years |
The Company evaluates the useful lives and potential impairment of property, plant and equipment whenever
events or changes in circumstances indicate that either the useful life or carrying value may be impaired. Events and circumstances which may indicate impairment include a change in the use or condition of the asset, regulatory changes impacting the
future use of the asset, or projected operating or cash flow losses, or an expectation that an asset could be disposed of prior to the end of its useful life. If the carrying value of the asset is not recoverable based on an analysis of cash flow, a
charge for impairment is recorded equal to the amount by which the carrying value of the asset exceeds its fair value, less costs to sell. In these instances, fair value is estimated utilizing either a market approach considering quoted market
prices for identical or similar assets, or the income approach determined using discounted projected cash flows. Additionally, the Company analyzes the remaining useful lives of potential impaired assets and adjusts these lives when appropriate.
Goodwill
Goodwill represents the amount of cost over the fair value of the net assets of acquired businesses. Goodwill is carried at the reporting unit
level and subject to an annual impairment test (or more often if impairment indicators arise), using an estimated fair value-based approach. Fair value is estimated using a combined weighted average of a market based (utilizing fair value multiples
of comparable publicly traded companies) and an income based approach (utilizing discounted projected after tax cash flows). In applying the income based approach, the Company makes assumptions about the amount and timing of
9
future expected cash flows, growth rates and appropriate discount rates. The amount and timing of future cash flows are based on the Company’s most recent long-term financial projections.
The Company’s discount rate is determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflects the risks associated with achieving future cash flows. If the estimated fair value of the reporting
unit is less than its carrying value, the amount of impairment, if any, is based on the implied fair value of goodwill. The Company has elected October 31st as the annual impairment assessment date and performs additional impairment tests if
triggering events occur. There was no impairment of the carrying value of goodwill at October 31, 2014 and 2013 due to the estimated fair values of the reporting units exceeding the carrying values of those reporting units. However, as
discussed in Note 6, there was an impairment of the carrying value of goodwill within one of its reporting units in the first quarter of fiscal year 2013.
Other Intangible Assets
Other intangible assets include the value ascribed to trade names, developed technology and know-how, as well as customer contracts and
relationships obtained in connection with acquisitions. The values ascribed to finite lived intangible assets are amortized to expense over the estimated useful life of the assets. The amortization periods are as follows:
|
|
|
|
|
| |
|
Amortization
Period |
|
| Developed technology and know-how |
|
|
8.5 years |
|
| Customer contracts and relationships |
|
|
15 years |
|
| Trade names |
|
|
15 years |
|
The Company evaluates indefinite lived intangible assets, for potential impairment on an annual basis and
whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted cash flows expected to be generated by the assets. If the carrying value of an intangible asset is not recoverable, a
charge for impairment is recorded equal to the amount by which the carrying value of the asset exceeds its related fair value. The estimated fair value is generally based on projections of future cash flows using the relief-from-royalty method and
appropriate discount rates. The Company’s discount rate is determined using estimates of market participant risk-adjusted weighted-average costs of capital and reflects the risks associated with achieving future cash flows.
Revenue Recognition
The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred
or services have been performed, the price from the buyer is fixed or determinable, and collectability is reasonably assured.
Amounts
billed for shipping and handling fees are classified within net sales in the consolidated statements of operations. Costs incurred for shipping and handling are classified as cost of sales. Shipping and handling fees were not significant for fiscal
years 2014 and 2013.
The Company recognizes an allowance for estimated future sales returns in the period revenue is recorded. The
estimate of future returns is based on pending returns and historical return data, among other factors. The allowance for sales returns was $4.5 million and $2.1 million at January 3, 2015 and December 31, 2013,
respectively.
A significant portion of the Company’s customer base is comprised of companies within the medical device industry. The
Company does not require collateral from its customers.
Taxes collected from customers relating to product sales and remitted to
governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.
Research and Development Costs
Research and development costs are expensed as incurred.
10
Environmental Costs
Environmental expenditures that relate to an existing condition caused by past operations and that do not provide future benefits are expensed
as incurred. Liabilities are recorded when environmental assessments are made, the requirement for remedial efforts is probable and the amount of the liability can be reasonably estimated. Liabilities are recorded generally no later than the
completion of feasibility studies. The Company has an ongoing monitoring and identification process to assess how the activities, with respect to known exposures, are progressing against the recorded liabilities, as well as to identify other
potential remediation sites that are presently unknown.
Income Taxes
The Company utilizes the asset and liability method of accounting for income taxes. Under this method, the Company determines deferred tax
assets and liabilities based on the differences between the financial statement and the tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances
are provided when the Company does not believe it to be more likely than not that the benefit of identified deferred tax assets will be realized. The Company records a liability to recognize the exposure related to uncertain income tax positions
taken on returns that have been filed or that are expected to be taken in a tax return. The Company evaluates its uncertain tax positions based on a determination of whether and how much of a tax benefit taken by the Company in its tax filings or
positions is more likely than not to be realized. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.
The Company has not provided U.S. income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries as of
January 3, 2015 because the Company intends to permanently reinvest such earnings outside the U.S. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not
practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
Share-Based
Compensation
The Company’s employees participate in the parent company’s share-based compensation and incentive plans
and accounts for these arrangements in the Company’s financial statements using the fair value method. The Company recognizes compensation expense over the requisite service period of the award, which is generally the vesting period, and when
attainment of the associated performance criteria becomes probable for stock option awards that vest upon attainment of certain performance targets. Share-based compensation expense is recorded using the graded attribution method, which results in
higher compensation expense in the earlier periods than recognition on a straight-line method. The Company records the expense in the consolidated statements of operations in the same manner in which the award recipients’ costs are classified.
The fair value of restricted stock awards and restricted stock units is based upon the estimated grant date fair value of the underlying common stock on the grant date. The Company uses the Black-Scholes
option-pricing model to estimate the fair value of stock options, inclusive of assumptions for the estimated grant date fair value of the underlying common stock, risk-free interest rates, dividends, expected terms and estimated volatility. The
volatility of the parent company’s common stock is estimated utilizing a weighted average stock price volatility of its publicly traded peer companies, adjusted for the entity’s financial performance and the risks associated with the
illiquid nature of the common stock. The risk free rate is based on U.S. Treasury rate for notes with terms best matching of the option’s expected term. The dividend yield assumption of 0.0% is based on the Company’s history and its
expectation of not paying dividends on common shares. The Company calculated the weighted-average expected term of the options using the simplified method, which is a method of applying a formula that uses the vesting term and the contractual term
to compute the expected term of a stock option. The decision to use the simplified method is based on a lack of relevant historical data. The Company records expense related to awards issued to non-employees over the related service period and
periodically revalues the awards as they vest. The accounting for stock options requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Defined Benefit Pension Plans
The Company recognizes the funded status of each of its defined benefit pension and postretirement plans as an asset or liability in the
consolidated balance sheets. Changes in the funded status are recognized in the year in which changes occur through other comprehensive loss. The funded status of each of the Company’s plans is measured as of the reporting date.
11
Accumulated Other Comprehensive Loss
Comprehensive loss is comprised of net loss, plus all changes in equity of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. These changes in equity are recorded as adjustments to accumulated other comprehensive loss in the Company’s consolidated balance sheet. The components of accumulated other comprehensive loss
consist of cumulative foreign currency translation adjustments, pension related gains and losses and unrealized gains and losses on investments and derivatives, including interest rate cap structures (“interest rate cap”) and interest rate
swap agreements (“interest rate swap”).
Fair Value Measurements
On a recurring basis, the Company measures certain financial assets and liabilities at fair value based upon quoted market prices when
available, or from discounted future cash flows. The carrying value of the Company’s financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short maturities. The Company’s
financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant
to the fair value measurement. The three levels are as follows:
|
|
|
| Measurement Type |
|
Description |
| Level 1 |
|
Utilizes quoted market prices for identical assets or liabilities, principally in active brokered markets. |
|
|
| Level 2 |
|
Utilizes other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs. |
|
|
| Level 3 |
|
Utilizes unobservable inputs determined using management’s best estimate of inputs that a market participant would use in pricing the asset or liability at the measurement date, including assumptions about risk. |
Derivatives and Hedging
The Company formally documents, designates and assesses the effectiveness of transactions that receive hedge accounting treatment initially and
on an ongoing basis. All derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivatives that qualify for hedge accounting treatment are recorded in accumulated other comprehensive loss.
For the ineffective portions of the qualifying hedges, the change in fair value is recorded through earnings in the period of change. Derivative assets and derivative liabilities are classified as other current assets or other current liabilities
based on the gain or loss position of the contract as of the reporting date.
The Company’s earnings and cash flows are subject to
fluctuations due to changes in interest rates on long-term debt, and it seeks to mitigate a portion of these risks by entering into interest rate cap and interest rate swap transactions. The Company reports cash flows arising from its hedging
instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with the Company’s derivative programs are classified as operating activities in the accompanying consolidated
statements of cash flows.
The Company is currently hedging cash flow fluctuations due to interest on long-term debt through March 2018.
On March 18, 2014, the Company entered into a series of interest rate swap transactions. Under each interest rate swap agreement, the Company will exchange quarterly fixed payments with quarterly variable payments from the counterparties.
Simultaneously, the Company also entered into an Interest Rate Cap Transaction with a counterparty, whereby the Company will receive payments to the extent the three month LIBOR rate exceeds 5%. Prior to March 18, 2014, there were no
outstanding derivative transactions.
At January 3, 2015, the Company’s interest rate swap and interest rate cap agreements
qualified as cash flow hedges, the fair values of which resulted in a current liability of $3.3 million. The Company expects to ultimately record any gains or losses on the interest rate swap and interest rate cap transactions in earnings consistent
with the term of the contract.
During fiscal year 2014, no amounts were reclassified from accumulated other comprehensive income to
earnings due to hedge ineffectiveness and no amounts are expected to be reclassified into earnings in fiscal year 2015.
12
Foreign Currency Translation
The Company has manufacturing subsidiaries in Europe, Mexico, and Malaysia. The functional currency of each of these subsidiaries is the
respective local currency. Assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the current rate of exchange existing at period end, while revenues and expenses are translated at average monthly
exchange rates. Translation gains and losses are recorded as a component of other comprehensive loss within the consolidated statements of other comprehensive loss. Transaction gains and losses are included in other expense, net. Currency
transaction gains included in other expense, net in fiscal years 2014 and 2013 were $0.9 million and $2.1 million, respectively.
Evaluation of Subsequent Events
Management has evaluated subsequent events involving the Company for potential recognition or disclosure in the accompanying consolidated
financial statements through April 17, 2015. Subsequent events are events or transactions that occur after the balance sheet date but before the accompanying consolidated financial statements are issued.
Recent Accounting Pronouncements
On January 16, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-02, “Intangibles - Goodwill and Other (Topic 350): Accounting for Goodwill (A Consensus of the Private Company Council)”, which provides private companies an alternative for the subsequent
accounting of goodwill. This accounting update provides an accounting alternative for the subsequent measurement of goodwill, whereby a private entity may elect to amortize goodwill on a straight-line basis over 10 years, or less than 10 years if
the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the
reporting unit level. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014,
and interim periods within annual periods beginning after December 15, 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available
for issuance. The Company does not intend to elect the alternative treatment of goodwill.
On January 16, 2014, the FASB issued ASU
No. 2014-03, “Derivatives and Hedging (Topic 815): Accounting for Certain Receivable-Variable, Pay-Fixed Interest Rate Swaps - Simplified Hedge Accounting Approach (A Consensus of the Private Company Council)”, which provides private
companies an alternative to apply a simplified hedge accounting approach if certain conditions are met. The simplified hedge accounting approach will be effective for annual periods beginning after December 15, 2014, and interim periods within
annual periods beginning after December 15, 2015, with early adoption permitted. The Company’s hedging transactions do not qualify for the simplified hedge accounting approach and as such the Company does not expect this guidance to have a
material impact on the Company’s consolidated financial statements.
On May 28, 2014, the FASB issued ASU No. 2014-09,
“Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition
guidance, including industry-specific guidance. This new guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017; Nonpublic entities may apply the
requirements earlier than the nonpublic effective date but no earlier than the public entity effective date beginning after December 15, 2016. Entities have the option of using either a full retrospective or a modified approach to adopt the
guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon
adoption.
On June 12, 2014, the FASB issued ASU 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Allow
a Performance Target to Be Achieved After the Requisite Service Period,” which requires that a performance target that could be achieved after the requisite service period be treated as a performance condition that affects the vesting of the
award. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may apply the amendments in ASU 2014-12 either:
(i) prospectively to all awards granted or modified after the effective date; or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial
statements and to all new or modified awards thereafter. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements when adopted.
13
In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern”. ASU 2014-15 requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In
doing so, companies will have reduced diversity in the timing and content of disclosures than under current guidance. ASU 2014-15 is effective for the Company in the first quarter of 2016 with early adoption permitted. The Company does not believe
the impact of adopting ASU 2014-15 on its consolidated financial statements will be significant.
| 3. |
Acquisition of Lake Region |
As discussed in Note 1, on March 12, 2014, the Company
completed the Lake Region Medical Acquisition. Immediately prior to closing the transaction, i) certain stockholders of Lake Region, severally and not jointly, contributed certain of their shares of Lake Region common stock to Buyer in exchange for,
and in the aggregate, 27.778 million shares of Buyer common stock at $2.70 per share for a value of $75.0 million and ii) certain stockholders of Accellent Holdings, severally and not jointly contributed their respective shares of Accellent
Holdings to Buyer in exchange for an equal number of shares of Buyer. Following the contribution of those certain shares of Lake Region common stock to Buyer, the Company paid $315.0 million in cash consideration to the remaining former Lake Region
stockholders (“Seller”) for the remaining outstanding shares of Lake Region common stock, which were acquired via the Lake Region Merger, subject to adjustments in respect of outstanding indebtedness, cash, change in control payments and
certain expenses of Lake Region. Subsequent to the closing, $3.2 million of working capital adjustments, to the benefit of the Buyer, were identified, reviewed and agreed to by the Seller and received by the Company in June 2014 out of the $25.0
million initially held in escrow. Provided that the Buyer will have no further claims on the escrow amount pursuant to the Contribution and Merger Agreement on or prior to June 12, 2015 (the “Scheduled Release Date”), the remaining
escrow of $21.8 million will be released to the Seller on the Scheduled Release Date. The acquisition of Lake Region supports the Company’s strategic intent to grow its C&V Segment and to create a leading interventional vascular business
with more scale, a broader product offering and deeper customer relationships.
The transaction has been accounted for as a business
combination. The acquired business contributed net sales of $173.7 million, or 23% of consolidated net sales, in fiscal year 2014. Additionally, the acquired business contributed $7.2 million of pre-tax income in fiscal year 2014. The results
of the acquired business are included in the C&V Segment.
The Company generally employs the income method to estimate the fair value
of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants,
and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative market position and the discount rate applied to the
cash flows, among others.
Significant judgment is required in estimating the fair value of intangible assets acquired in a business
combination and in assigning their respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management. Significant estimates and assumptions
inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers
to entry, a brand’s relative market position and the discount rate applied to the cash flows, among others. Any resultant allocation of purchase price consideration paid in excess of the fair value of assets assessed and acquired less
liabilities assumed was identified accordingly and recognized as goodwill. The Company recognized approximately $181.1 million of goodwill, which is not tax deductible and is primarily due to the inherent
long-term value anticipated from the synergies and business opportunities expected to be achieved as a result of the transaction. A summary of the purchase price allocation for the acquisition of Lake Region
is as follows:
Consideration transferred (in thousands):
|
|
|
|
|
| Cash |
|
$ |
315,000 |
|
| Fair value of equity securities issued by LRM Holdings to Seller |
|
|
75,000 |
|
| Reimbursement of transaction costs to Seller |
|
|
1,669 |
|
| Working capital adjustment |
|
|
(3,264 |
) |
|
|
|
|
|
| Total fair value of consideration transferred |
|
$ |
388,405 |
|
|
|
|
|
|
14
Fair value measurement of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
| Cash |
|
$ |
9,534 |
|
| Accounts receivable |
|
|
22,613 |
|
| Inventories |
|
|
32,832 |
|
| Prepaid expenses and other assets |
|
|
16,076 |
|
| Property, plant and equipment |
|
|
74,869 |
|
| Definitive life intangible assets |
|
|
|
|
| Trade name |
|
|
16,700 |
|
| Developed technology and know-how |
|
|
38,000 |
|
| Backlog |
|
|
1,200 |
|
| Customer relationships |
|
|
78,000 |
|
| Goodwill |
|
|
181,085 |
|
| Accounts payable, accrued expenses and other liabilities |
|
|
(37,572 |
) |
| Deferred tax liabilities |
|
|
(44,932 |
) |
|
|
|
|
|
| Total net assets acquired |
|
$ |
388,405 |
|
|
|
|
|
|
Net cash paid (in thousands):
|
|
|
|
|
| Cash paid at the closing date |
|
$ |
(315,000 |
) |
| Cash held by Lake Region |
|
|
9,534 |
|
| Reimbursement of transaction costs to Seller |
|
|
(1,669 |
) |
| Working capital adjustment received |
|
|
3,264 |
|
|
|
|
|
|
| Net cash paid |
|
$ |
(303,871 |
) |
|
|
|
|
|
The Company incurred transaction related costs of $5.9 million during fiscal year 2014. These costs consisted
primarily of legal and accounting fees and have been recorded in selling, general and administrative expenses. The $133.9 million of acquired intangible assets is comprised of trade name of $16.7 million, technology of $38.0 million, backlog of $1.2
million and customer relationships of $78.0 million, with weighted average amortization periods of 15 years, 11 years, 1 year and 15 years, respectively. The amortization expense related to the acquired intangible assets in fiscal year 2014 was $8.7
million. In fiscal year 2014, the $6.3 million related to the inventory fair value adjustment from the purchase price allocation was recorded to cost of sales.
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Raw materials |
|
$ |
22,849 |
|
|
$ |
13,885 |
|
| Work-in-process |
|
|
41,233 |
|
|
|
29,969 |
|
| Finished goods |
|
|
25,109 |
|
|
|
17,834 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
89,191 |
|
|
$ |
61,688 |
|
|
|
|
|
|
|
|
|
|
During fiscal years 2014 and 2013, the Company recorded charges for excess and obsolete inventory of $0.7
million and $1.3 million, respectively.
15
| 5. |
Property, Plant and Equipment |
Property, plant and equipment consisted of the following
(in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Land |
|
$ |
7,928 |
|
|
$ |
3,769 |
|
| Buildings |
|
|
47,469 |
|
|
|
15,947 |
|
| Machinery and equipment |
|
|
209,887 |
|
|
|
178,354 |
|
| Leasehold improvements |
|
|
16,439 |
|
|
|
17,061 |
|
| Computer equipment and software |
|
|
41,991 |
|
|
|
33,735 |
|
| Acquired assets to be placed in service |
|
|
26,298 |
|
|
|
16,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
350,012 |
|
|
|
265,436 |
|
| Less—Accumulated depreciation |
|
|
(163,375 |
) |
|
|
(148,479 |
) |
|
|
|
|
|
|
|
|
|
| Property, plant and equipment, net |
|
$ |
186,637 |
|
|
$ |
116,957 |
|
|
|
|
|
|
|
|
|
|
Cost and accumulated depreciation for property retired or disposed of are removed from the accounts, and any
gain or loss on disposal is recorded in earnings. Capitalized interest in connection with constructing property and equipment was not material. Depreciation expense was $25.8 million and $18.1 million for fiscal years 2014 and 2013, respectively.
16
| 6. |
Goodwill and Other Intangible Assets |
The Company reports all amortization expense
related to finite lived intangible assets separately within its consolidated statements of operations. For fiscal years 2014 and 2013, the Company recorded amortization expense related to intangible assets as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Cost of sales |
|
$ |
3,596 |
|
|
$ |
1,988 |
|
| Selling, general and administrative |
|
|
21,443 |
|
|
|
12,951 |
|
|
|
|
|
|
|
|
|
|
| Total amortization reported |
|
$ |
25,039 |
|
|
$ |
14,939 |
|
|
|
|
|
|
|
|
|
|
Goodwill consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Goodwill |
|
$ |
1,000,269 |
|
|
$ |
836,742 |
|
| Accumulated impairment losses |
|
|
(280,427 |
) |
|
|
(280,427 |
) |
|
|
|
|
|
|
|
|
|
| Goodwill carrying amount |
|
$ |
719,842 |
|
|
$ |
556,315 |
|
|
|
|
|
|
|
|
|
|
Upon completing the acquisition of Lake Region in March 2014, the Company concluded it would change its name
to Lake Region Medical and no longer use the trade name “Accellent” (“Accellent Trade Name”). Immediately prior to the business combination, the Company had a carrying value of $29.4 million related to the Accellent Trade Name.
The planned change in name represented a triggering event for impairment testing that resulted in the recording of an impairment charge related to the Accellent Trade Name of $26.8 million in the first quarter of fiscal year 2014. The then remaining
balance of $2.6 million was amortized through the end of fiscal year 2014, its remaining useful life. Management recorded a tax benefit of $11.1 million on a discrete basis related to the impairment.
During the first quarter of 2013, the Company reorganized its business into the AS Segment and C&V Segment. The evaluation of the
reporting units had also been reassessed and changed to reflect the current structure and operations. During the first quarter of fiscal 2013, goodwill was assigned to the new Advanced Surgical (“AS”) reporting unit and Cardio &
Vascular (“C&V”) reporting unit based on the relative fair values of the reporting units. This resulted in goodwill of $134 million being assigned to its AS reporting unit, and $485.4 million being assigned to its C&V reporting
unit. After the preliminary allocation of the goodwill, the carrying amount of the AS reporting unit exceeded its fair value by approximately $16 million, which required the Company to perform an interim goodwill impairment test for the AS reporting
unit. Pursuant to the next step of impairment testing, the Company calculated an implied fair value of goodwill based on a hypothetical purchase price allocation. As a result, the Company recorded a pre-tax goodwill impairment charge of $63.1
million in fiscal year 2013.
The acquired tax basis of goodwill amortizable for federal income tax purposes is approximately $110.9
million. The remaining amortizable tax basis of goodwill is $15.4 million at January 3, 2015.
The following table depicts the change
in the Company’s goodwill during fiscal years 2013 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cardio &
Vascular |
|
|
Advanced
Surgical |
|
|
Total |
|
| Balance January 1, 2013 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
619,443 |
|
| Transfer to segments |
|
|
485,354 |
|
|
|
134,089 |
|
|
|
— |
|
| Impairment |
|
|
— |
|
|
|
(63,128 |
) |
|
|
(63,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2013 |
|
|
485,354 |
|
|
|
70,961 |
|
|
|
556,315 |
|
| Acquisition of Lake Region |
|
|
181,085 |
|
|
|
— |
|
|
|
181,085 |
|
| Translation losses included as a component of other comprehensive loss |
|
|
(17,558 |
) |
|
|
— |
|
|
|
(17,558 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 3, 2015 |
|
$ |
648,881 |
|
|
$ |
70,961 |
|
|
$ |
719,842 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Intangible assets consisted of the following at January 3, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net Carrying
Amount |
|
| Developed technology and know-how |
|
$ |
53,832 |
|
|
$ |
(19,759 |
) |
|
$ |
34,073 |
|
| Customer contracts and relationships |
|
|
268,700 |
|
|
|
(124,992 |
) |
|
|
143,708 |
|
| Trade names and trademarks |
|
|
19,300 |
|
|
|
(3,506 |
) |
|
|
15,794 |
|
| Backlog |
|
|
1,147 |
|
|
|
(940 |
) |
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
342,979 |
|
|
$ |
(149,197 |
) |
|
$ |
193,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consisted of the following at December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net Carrying
Amount |
|
| Developed technology and know-how |
|
$ |
16,991 |
|
|
$ |
(16,162 |
) |
|
$ |
829 |
|
| Customer contracts and relationships |
|
|
197,575 |
|
|
|
(107,996 |
) |
|
|
89,579 |
|
| Trade names and trademarks |
|
|
29,400 |
|
|
|
— |
|
|
|
29,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total intangible assets |
|
$ |
243,966 |
|
|
$ |
(124,158 |
) |
|
$ |
119,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated intangible asset amortization expense for future fiscal years is as follows (in thousands):
|
|
|
|
|
| |
|
Amount |
|
| 2015 |
|
$ |
22,926 |
|
| 2016 |
|
|
22,719 |
|
| 2017 |
|
|
22,719 |
|
| 2018 |
|
|
22,719 |
|
| 2019 |
|
|
22,719 |
|
| Thereafter |
|
|
79,980 |
|
|
|
|
|
|
| Total |
|
$ |
193,782 |
|
|
|
|
|
|
The remaining weighted average amortization periods for the Company’s finite lived intangible assets at
the end of fiscal years 2014 and 2013 were as follows (in years):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Developed technology and know-how |
|
|
9.9 |
|
|
|
0.4 |
|
| Customer contracts and relationships |
|
|
9.2 |
|
|
|
6.9 |
|
| Trade names and trademarks |
|
|
14.2 |
|
|
|
— |
|
| Customer backlog |
|
|
0.2 |
|
|
|
— |
|
| Total finite lived intangible assets |
|
|
9.7 |
|
|
|
6.9 |
|
18
Other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Pension and other retirement plan liabilities |
|
$ |
6,288 |
|
|
$ |
4,826 |
|
| Environmental liabilities |
|
|
1,273 |
|
|
|
1,334 |
|
| Deferred compensation |
|
|
590 |
|
|
|
501 |
|
| Restructuring liabilities |
|
|
886 |
|
|
|
736 |
|
| Other long-term liabilities |
|
|
443 |
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
9,480 |
|
|
$ |
7,783 |
|
|
|
|
|
|
|
|
|
|
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| First Lien Loan maturing on March 12, 2021, interest at 4.5% |
|
$ |
828,738 |
|
|
$ |
— |
|
| Second Lien Loan maturing on March 12, 2022, interest at 7.5% |
|
|
220,000 |
|
|
|
— |
|
| Senior secured notes maturing on February 1, 2017, interest at 8.375% (“Senior Secured Notes”) |
|
|
— |
|
|
|
400,000 |
|
| Senior subordinated notes maturing on November 1, 2017, interest at 10.0% (“Senior Subordinated Notes”) |
|
|
— |
|
|
|
315,000 |
|
| Capital lease obligations |
|
|
— |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
| Total debt |
|
|
1,048,738 |
|
|
|
715,009 |
|
| Less—unamortized discount |
|
|
— |
|
|
|
(1,350 |
) |
| Less—current portion |
|
|
(8,350 |
) |
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
| Long-term debt, excluding current portion |
|
$ |
1,040,388 |
|
|
$ |
713,652 |
|
|
|
|
|
|
|
|
|
|
In March 2014, in connection with the acquisition of Lake Region, the Company obtained $1.06 billion of new
debt financing sufficient to finance the acquisition, repay the Company’s Senior Secured Notes and Senior Subordinated Notes (collectively the “Notes”), and pay transaction expenses (the “Refinancing”). On March 12,
2014, the Company completed its cash tender offers for any and all of (i) the $400 million aggregate principal amount of its outstanding Senior Secured Note and (ii) the $315 million aggregate principal amount of its outstanding Senior
Subordinated Notes. A total of $368.7 million in aggregate principal amount, or approximately 92.16%, of the outstanding amount of the Senior Secured Notes, and $244.6 million in aggregate principal amount, or approximately 77.66%, of the
outstanding amount of the Senior Subordinated Notes were repurchased by the Company in tender offers. Additionally on March 12, 2014, the Company transferred $111.7 million to the note paying agent to be held in escrow as payment to the holders
that did not tender on the Senior Secured and Senior Subordinated Notes. On April 11, 2014, the note paying agent redeemed all of the Notes remaining outstanding after the consummation of the tender offers, including $31.3 million aggregate
principal amount of the Senior Secured Notes and $70.4 million aggregate principal amount of the Senior Subordinated Notes (the “Redemption”). The Senior Secured Notes were redeemed at a redemption price of 103.0%, together with accrued
and unpaid interest and the Senior Subordinated Notes were redeemed at a redemption price of 107.5%, together with accrued and unpaid interest.
In connection with the early repayment of existing debt, the Company recognized a loss on the debt extinguishment of $53.4 million, which
includes $42.3 million of existing debt prepayment fees, $9.8 million of existing deferred financing fees, net and $1.3 million of existing discount on the Notes. As part of the Refinancing, the Company terminated its revolving credit facility.
19
The following describes the significant terms and conditions of the Company’s long-term debt
arrangements in place at January 3, 2015.
First Lien Loan
The First Lien Loan (“First Lien”) administered by UBS AG - Stamford (“UBS”) totaling $835.0 million bears interest at an all-inclusive interest rate of 4.5% which includes a 3.5% margin, and for the first year of the loan, the LIBOR rate is fixed at 1% floor. After the first year, the rate is the greater of the 1% floor or the three
month LIBOR. The alternative base rate (“ABR”) rate is the Federal prime rate plus a margin of 2.50%. Choosing between the ABR rate or LIBOR rate for the year is determined at the Company’s discretion, once chosen the contract for ABR
or LIBOR is 12 months. The Company has elected the LIBOR rate for the first 12 months. The First Lien matures on March 12, 2021. Interest is payable quarterly, commencing June 12, 2014. Principal payments of the First Lien Loan are payable
in quarterly installments at 0.25% of initial aggregate principal commencing June 30, 2014 that are approximately $2.1 million and running through December 31, 2020, with the remaining principal payment of approximately $778.6 million due
at maturity.
The Company’s obligations under the First Lien are jointly and severally guaranteed on a secured basis by the Company
and all of the Company’s domestic subsidiaries. All obligations under the First Lien, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the
guarantors.
The Company may redeem the First Lien, in whole or in part, at a price equal to 100.00% of the principal amount thereof plus
accrued and unpaid interest, if any, if the payment occurs on or before March 11, 2021.
Included in the First Lien is a Revolving
Credit Commitment (the “Revolver”) with a syndicate of financial institutions. The Revolver provides for revolving credit financing of up to $75.0 million, which includes a Swingline Commitment of $15.0 million, subject to borrowing base
availability, and matures on March 12, 2019. Borrowings under the Revolver bear interest at a rate per annum equal to, at the Company’s option: either (1) the ABR rate of the Federal prime rate plus a margin of 2.5%, or (2) the
LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period of intended borrowing plus a margin of 3.5%. In addition to interest on any outstanding borrowings under the Revolver, the Company is required
to pay a commitment fee of 0.50% per annum related to unutilized commitments. The Company must also pay customary administrative agency fees and customary letter of credit fees equal to the applicable margin on LIBOR loans. Total amount of
commitment, administrative agency and letter of credit fees incurred under the Revolver in fiscal year 2014 were minimal and are included within “Interest expense, net” in the accompanying condensed consolidated statements of operations.
The Company’s aggregate borrowing capacity was $62.8 million, after giving effect to outstanding letters of credit totaling $12.2 million and there were no amounts outstanding under the Revolver at January 3, 2015.
All outstanding borrowings under the Revolver are due and payable in full on March 12, 2019 and are unconditionally guaranteed jointly
and severally on a secured basis by all the Company’s existing and subsequently acquired or organized, direct or indirect U.S. restricted subsidiaries.
Solely with respect to any borrowings under the Revolver, the Company will not be permitted to have a First Lien Leverage Ratio greater than
7.75 to 1.00 for any trailing twelve month period beginning after June 30, 2014. The First Lien Leverage Ratio is the ratio of Consolidated First Lien Secured Debt minus cash and cash equivalents of the borrower, then divided by Consolidated
EBITDA as defined in the agreement.
Second Lien Loan
The Second Lien Loan (“Second Lien”) administered by Goldman Sachs Bank USA (“Goldman Sachs”) totaling $220.0 million
bears interest at an all-inclusive interest rate of 7.5%, per annum which includes a 6.5% margin for LIBOR loans and for the first year of the loans, the LIBOR rate is fixed at 1% floor. After the first year the rate is the greater of the 1%
LIBOR floor or the three month LIBOR. The ABR rate is the Federal prime rate plus a margin of 5.50%. Choosing between ABR or LIBOR rate for the year is determined at the Company’s discretion. Once chosen the contract for ABR or LIBOR is 12
months. The Company has elected the LIBOR rate for the first 12 months. The Second Lien matures on March 12, 2022. Interest is payable quarterly, commencing June 12, 2014. Principal payment of the Second Lien is due at maturity.
The Company’s obligations under the Second Lien are jointly and severally guaranteed on a secured basis by the Company and all of the
Company’s domestic subsidiaries. All obligations under the Second Lien, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the guarantors.
20
The Company may redeem the Second Lien, during any 12-month period commencing on the issue date,
in whole or in part, at a price equal to 102.00% of the principal amount thereof plus accrued and unpaid interest, if any, if the prepayment occurs prior to March 12, 2015; at a price equal to 101.00% of the principal amount thereof plus
accrued and unpaid interest, if any, if the prepayment occurs on or after March 12, 2015 through March 11, 2016; and at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, if the prepayment
occurs on or after March 12, 2016 through March 11, 2022.
The indentures that govern the First Lien and Second Lien and the
credit agreement that governs the Revolver, contain restrictions on the Company’s ability, and the ability of the Company’s subsidiaries: to (i) incur additional indebtedness or issue preferred stock; (ii) create liens;
(iii) consolidate, merge, sell or otherwise dispose of all or substantially all of the Company’s assets; (iv) sell certain assets; (v) repay subordinated indebtedness prior to its stated maturity; (vi) pay dividends on,
repurchase or make distributions in respect of the Company’s capital stock or make other restricted payments; (vii) make certain investments; (viii) enter into certain transactions with the Company’s affiliates.
Annual minimum principal payments on the Company’s long-term debt in future fiscal years are as follows (in thousands):
|
|
|
|
|
| |
|
Amount |
|
| 2015 |
|
$ |
8,350 |
|
| 2016 |
|
|
8,350 |
|
| 2017 |
|
|
8,350 |
|
| 2018 |
|
|
8,350 |
|
| 2019 |
|
|
8,350 |
|
| Thereafter |
|
|
1,006,988 |
|
|
|
|
|
|
| Total |
|
$ |
1,048,738 |
|
|
|
|
|
|
Interest expense, net, as reported in the statements of operations for fiscal years 2014 and 2013 has been
offset by interest income of $0.1 million and $47,000.
Costs incurred in connection with the issuance of debt is deferred and amortized
over the term of the debt on a straight-line basis as a component of interest expense. As of January 3, 2015 and December 31, 2013, the unamortized balance of deferred financing costs included in other assets in the accompany balance
sheets was $21.3 million and $10.3 million, respectively.
| 9. |
Discontinued Operations and Divestitures |
The Company sold certain of its businesses
during fiscal year 2012 that were accounted for as discontinued operations. One of the sale transactions was consummated on December 31, 2012 and accounted for as sold as of and for fiscal year 2012. However, the cash proceeds resulting from
the sale, which totaled $8.3 million, were not received at closing and were received in fiscal year 2013. In fiscal year 2013, the Company incurred $0.1 million of expenses related to the disposed businesses and reported this amount as loss from
discontinued operations, net in the accompanying consolidated statements of operations and cash flows.
The Company’s Board of Directors has authorized an aggregate number
of common shares for issuance equal to 1,000 shares, $0.01 par value per share. Upon formation of LRM Holdings and in connection with the Lake Region Merger, all outstanding common stock, stock options and other share-based awards of Accellent
Holdings were converted into common stock, stock options and other share-based awards of LRM Holdings with the same rights, terms and conditions.
LRM Holdings is party to a registration rights agreement with entities affiliated with the Company’s principal stockholder,
KKR & Co. L.P., (“KKR”), and entities affiliated with another significant stockholder, Bain Capital (“Bain”), (each a “Sponsor Entity” and together the “Sponsor Entities”) pursuant to which the
Sponsor Entities are entitled to certain demand rights with respect to the registration and sale of their shares of LRM Holdings.
21
| 11. |
Restructuring Expenses |
In fiscal year 2014, the Company announced the planned closure
of its Arvada, Colorado site, the consolidation of its two Galway, Ireland sites and other restructuring actions that will result in a reduction in staff across both manufacturing and administrative functions at certain locations. All affected
employees were offered individually determined severance arrangements. The decision to close its Arvada site and to consolidate its two Galway, Ireland sites results from the Company’s manufacturing strategy developed as part of the integration
resulting from the Lake Region Merger in March 2014. For fiscal year 2014, the Company recorded a restructuring charge of $3.1 million relating to planned and actual staff reductions, including obligations for employee severances. The Company will
incur additional restructuring charges related to the planned staff reductions through the first half of 2016, when the planned facilities consolidation and staff reductions are expected to be completed. Additional restructuring charges related to
closing facilities and relocation of manufacturing equipment are also expected. The cash payments related to these restructuring actions are expected to continue through 2016, and possibly early 2017.
Other exit costs related to restructuring activities in fiscal years 2014 and 2013 include costs and payments related to restructuring
activities in fiscal years 2012 and 2011 related to the closing of facilities. Those activities were completed.
The following table
summarizes the amounts recorded related to Corporate restructuring activities in fiscal years 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee
Costs |
|
|
Other Exit
Costs |
|
|
Total |
|
| Accrual Balance, January 1, 2013 |
|
$ |
1,329 |
|
|
$ |
790 |
|
|
$ |
2,119 |
|
| Restructuring expenses incurred |
|
|
(16 |
) |
|
|
296 |
|
|
|
280 |
|
| Cash payments |
|
|
(1,240 |
) |
|
|
(162 |
) |
|
|
(1,402 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accrual Balance, December 31, 2013 |
|
|
73 |
|
|
|
924 |
|
|
|
997 |
|
| Restructuring expenses incurred |
|
|
3,091 |
|
|
|
47 |
|
|
|
3,138 |
|
| Cash payments |
|
|
(502 |
) |
|
|
(194 |
) |
|
|
(696 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accrual Balance, January 3, 2015 |
|
$ |
2,662 |
|
|
$ |
777 |
|
|
$ |
3,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring expenses incurred are reflected in the accompanying consolidated statements of operations
and the accrual balances as of January 3, 2015 and December 31, 2013 are included in accrued expenses and other current liabilities or other liabilities in the accompanying consolidated balance sheets as of their respective periods and
depending on timing of the expected cash payments.
| 12. |
Share-Based Compensation |
The Company’s employees participate under an Amended and
Restated 2005 Equity Plan for Key Employees of Lake Region Medical Holdings, Inc. and its subsidiaries and affiliates (the “2005 Equity Plan”), which provides for grants of parent company stock in the form of incentive stock options,
nonqualified stock options, restricted stock, restricted stock units and stock appreciation rights.
The 2005 Equity Plan requires
exercise of stock options within 10 years of grant. Vesting is determined in the applicable stock option agreement and occurs either in equal installments over 5 years from the date of grant (“Time-Based”), or upon achievement of certain
performance targets over a five-year period (“Performance-Based”). Targets underlying the vesting of Performance-Based awards are achieved upon the attainment of a specified level of targeted adjusted earnings performance “Adjusted
EBITDA”, as defined in the Company’s long-term debt agreements and as measured each calendar year. The vesting requirements for Performance-Based awards permit a catch-up of vesting should the target
not be achieved in the specified calendar year but is achieved in a subsequent calendar year within the five-year vesting period. As of January 3, 2015, the achievement of the underlying performance targets for outstanding Performance-Based
awards is not deemed probable. The Company has not granted any Performance-Based awards since 2013. Certain of the share-based awards granted and outstanding as of January 3, 2015, are subject to accelerated vesting upon a sale of the Company
or similar changes in control.
At January 3, 2015, the total number of shares authorized under the 2005 Equity Plan is
17.4 million shares and 3.6 million shares were available for future grant.
22
The fair value of the parent company common stock is determined by the parent company’s
board of directors utilizing weighted market-based and discounted cash flow approaches and applying a variety of factors, including the entity’s financial position, historical financial performance, projected financial performance, valuations
of publicly traded peer companies, the illiquid nature of the common stock, and arm’s length sales of parent company common stock. The fair value of the parent company common stock was $2.70 and $2.70 per share at January 3, 2015 and
December 31, 2013, respectively.
Share-based compensation expense
The Company’s share-based compensation expense (benefit) for fiscal years 2014 and 2013 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Roll-over options |
|
$ |
(2 |
) |
|
$ |
(65 |
) |
| Restricted stock awards and units |
|
|
387 |
|
|
|
407 |
|
| Time-Based awards |
|
|
1,144 |
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,529 |
|
|
$ |
993 |
|
|
|
|
|
|
|
|
|
|
During fiscal years 2014 and 2013, the Company did not achieve the performance targets required for
outstanding Performance-Based awards to vest and, as of January 3, 2015, any future vesting of the outstanding awards is not probable. Accordingly, no share-based compensation expense related to
Performance-Based awards has been recorded.
Share-based compensation expense was recorded in the consolidated statements of operations
for fiscal years 2014 and 2013 follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Cost of sales |
|
$ |
599 |
|
|
$ |
340 |
|
| Selling, general and administrative |
|
|
930 |
|
|
|
653 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,529 |
|
|
$ |
993 |
|
|
|
|
|
|
|
|
|
|
Restricted stock awards and units
Prior to fiscal year 2014, the Company granted restricted stock awards that were subject to forfeiture over vesting terms of one to five years.
In fiscal year 2014, the Company exchanged the restricted stock awards for restricted stock units under the same terms and conditions. The exchange of restricted stock awards for restricted stock units has been accounted for as a modification and
did not have a material effect upon the consolidated financial statements in fiscal year 2014. Restricted stock awards and units are generally issued for no consideration.
A summary of restricted stock awards and units activity for fiscal year 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of
Shares |
|
|
Weighted
Average
Contractual
Term (in years) |
|
|
Aggregate
Intrinsic Value
(in thousands) |
|
| Issued and unvested, January 1, 2014 |
|
|
630,000 |
|
|
|
5.0 |
|
|
$ |
1,575 |
|
| Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
| Vested |
|
|
(155,000 |
) |
|
|
|
|
|
|
|
|
| Forfeited, canceled or expired |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issued and unvested, January 3, 2015 |
|
|
475,000 |
|
|
|
4.0 |
|
|
$ |
1,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares expected to vest |
|
|
475,000 |
|
|
|
4.0 |
|
|
$ |
1,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At January 3, 2015, there is $1.3 million of unrecognized share-based compensation expense yet to
recognize related to restricted stock units, which is expected to be recognized over the next 4.0 years.
23
Stock options
A summary of stock option activity for fiscal year 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of
shares |
|
|
Weighted
average
exercise price
per share |
|
|
Weighted
Average
Remaining
Contractual
Term (in years) |
|
|
Aggregate
Intrinsic Value
(in thousands) |
|
| Outstanding at January 1, 2014 |
|
|
11,252,455 |
|
|
$ |
2.78 |
|
|
|
7.0 |
|
|
$ |
48 |
|
| Granted |
|
|
1,625,000 |
|
|
|
2.70 |
|
|
|
9.5 |
|
|
|
— |
|
| Forfeited |
|
|
(169,000 |
) |
|
|
2.60 |
|
|
|
7.0 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at January 3, 2015 |
|
|
12,708,455 |
|
|
$ |
2.77 |
|
|
|
6.2 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested or expected to vest at January 3, 2015 |
|
|
7,811,450 |
|
|
$ |
2.83 |
|
|
|
6.2 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercisable at January 3, 2015 |
|
|
3,982,563 |
|
|
$ |
2.96 |
|
|
|
6.2 |
|
|
$ |
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used for calculating the fair value of stock options granted during fiscal year 2014 and
2013, is as follows:
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Expected term to exercise (in years) |
|
|
6.5 |
|
|
|
6.5 |
|
| Expected volatility |
|
|
28.73 |
% |
|
|
28.93 |
% |
| Risk-free rate |
|
|
1.91 |
% |
|
|
1.99 |
% |
| Dividend yield |
|
|
— |
% |
|
|
— |
% |
At January 3, 2015, there is $3.7 million of unrecognized share-based compensation expense attributed to
Time-Based awards that is expected to be recognized over 3.5 years, the remaining weighted-average vesting period for Time-Based awards. In addition, at January 3, 2015, there is $4.4 million of unrecognized share-based compensation expense
attributed to Performance-Based awards that may be recognized over 3.5 years should the underlying performance targets become probable.
In 2005, fully vested stock options, or “Roll-Over” options were issued to employees with an exercise price of $1.25 per share in
exchange for replaced awards. The Company had, at its option, the right to repurchase the Roll-Over options at fair market value from terminating employees within 60 days of termination and provide employees with settlement options to satisfy tax
obligations in excess of minimum withholding rates. As a result of these features, the Roll-Over options were recorded as a liability, included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets, until
such options were exercised, forfeited, expired or settled. As of January 3, 2015, no Roll-Over options remain outstanding.
The
table below summarizes the activity relating to the Roll-Over options during fiscal years 2014 and 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| |
|
Liability (in
thousands) |
|
|
Roll-Over
Options
Outstanding |
|
|
Liability (in
thousands) |
|
|
Roll-Over
Options
Outstanding |
|
| Balance at beginning of fiscal year |
|
$ |
31 |
|
|
|
20,182 |
|
|
$ |
141 |
|
|
|
80,727 |
|
| Options exercised |
|
|
(29 |
) |
|
|
(20,182 |
) |
|
|
(45 |
) |
|
|
(60,545 |
) |
| Change in fair value |
|
|
(2 |
) |
|
|
— |
|
|
|
(65 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at end of fiscal year |
|
$ |
— |
|
|
|
— |
|
|
$ |
31 |
|
|
|
20,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Roll-Over options permitted net settlement by the holder of the option and, therefore, no cash was
required to be exchanged upon exercise.
24
As of December 31, 2013, the Roll-Over options had a weighted average estimated fair value
of $1.45 per share based on the Black-Scholes option-pricing model using the following weighted average assumptions:
|
|
|
|
|
| |
|
2013 |
|
| Expected term to exercise (in years) |
|
|
0.4 |
|
| Expected volatility |
|
|
20.9 |
% |
| Risk-free rate |
|
|
0.1 |
% |
| Dividend yield |
|
|
— |
% |
Director’s Deferred Compensation Plan
The parent company maintains a Directors’ Deferred Compensation Plan (the “Directors’ Plan”) for all non-employee
directors. The Plan allows each non-employee director to elect to defer receipt of all or a portion of their annual directors’ fees to a future date or dates. Any amounts deferred under the Directors’ Plan are credited to a phantom stock
account. The number of phantom shares of parent company common stock credited to each director’s phantom stock account is determined based on the amount of the compensation deferred during any given year, divided by the then fair market value
per share of the parent company common stock as determined in the good faith discretion by the parent company’ Board of Directors, or $2.70 at January 3, 2015. During fiscal years 2014 and 2013, the Company recorded compensation expense
related to the Directors’ Plan of $0.1 million.
| 13. |
Employee Benefit Plans |
Defined Benefit Pension Plans
The Company has pension plans covering employees at two facilities, one in the United States of America (the “Domestic Plan”) and one
in Germany (the “Foreign Plan”).
The Domestic Plan was frozen as to new participants in November 2006. In fiscal year 2014, the
Company implemented a plan to terminate the Domestic Plan (see Curtailment and Settlement below) and, as of January 3, 2015, the Domestic Plan held no assets and the obligation was completely settled. Benefits for the Domestic Plan were
provided at a fixed rate for each month of service. The Company’s funding policy was consistent with the minimum funding requirements of laws and regulations. For the Domestic Plan, plan assets as of December 31, 2013 consisted of equity
and fixed income investment funds. The Foreign Plan is an unfunded frozen pension plan and is limited to covering employees hired before 1993.
The Company recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of
its benefit plans in the consolidated balance sheet, with a corresponding adjustment to other comprehensive loss as of the end of each fiscal year. The measurement date used in determining the projected benefit obligation is December 31,
consistent with the plan sponsor’s fiscal year end. As of January 3, 2015 and December 31, 2013, the Accumulated Benefit Obligation of the Company’s defined benefit pension plans totaled $3.8 million and $4.8 million,
respectively.
The change in the projected benefit obligation is as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Benefit obligation at beginning of year |
|
$ |
5,328 |
|
|
$ |
5,053 |
|
| Service cost |
|
|
83 |
|
|
|
76 |
|
| Interest cost |
|
|
177 |
|
|
|
192 |
|
| Actuarial loss |
|
|
1,250 |
|
|
|
(16 |
) |
| Currency translation adjustment |
|
|
(597 |
) |
|
|
154 |
|
| Benefits paid |
|
|
(80 |
) |
|
|
(131 |
) |
| Settlement/curtailment |
|
|
(1,652 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Benefit obligation at end of year |
|
$ |
4,509 |
|
|
$ |
5,328 |
|
|
|
|
|
|
|
|
|
|
25
The change in Domestic Plan assets during fiscal years 2014 and 2013 were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Fair value of plan assets at beginning of year |
|
$ |
1,381 |
|
|
$ |
1,063 |
|
| Actual return on plan assets |
|
|
— |
|
|
|
195 |
|
| Employer contributions |
|
|
278 |
|
|
|
183 |
|
| Benefits paid |
|
|
(7 |
) |
|
|
(60 |
) |
| Settlement/curtailment |
|
|
(1,652 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Fair value of plan assets at end of year |
|
$ |
— |
|
|
$ |
1,381 |
|
|
|
|
|
|
|
|
|
|
A reconciliation of the accrued benefit cost for both the Domestic and Foreign Plans recognized in the
financial statements is as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Funded status |
|
$ |
(4,509 |
) |
|
$ |
(3,947 |
) |
| Unrecognized net actuarial gain |
|
|
1,647 |
|
|
|
955 |
|
|
|
|
|
|
|
|
|
|
| Accrued benefit obligation |
|
|
(2,862 |
) |
|
|
(2,992 |
) |
|
|
|
|
|
|
|
|
|
| Presented as current liabilities |
|
|
(74 |
) |
|
|
(80 |
) |
| Presented as other long-term liabilities |
|
|
(4,435 |
) |
|
|
(3,867 |
) |
| Accumulated other comprehensive income |
|
|
1,647 |
|
|
|
955 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
(2,862 |
) |
|
$ |
(2,992 |
) |
|
|
|
|
|
|
|
|
|
The following changes in projected benefit obligations were recognized in other comprehensive loss for fiscal
years 2014 and 2013:
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Net actuarial pension gain (loss) |
|
$ |
(2,123 |
) |
|
$ |
170 |
|
| Curtailment loss |
|
|
338 |
|
|
|
— |
|
| Amortization of net actuarial pension loss |
|
|
38 |
|
|
|
34 |
|
|
|
|
|
|
|
|
|
|
| Total recognized in other comprehensive loss (income) |
|
$ |
(1,747 |
) |
|
$ |
204 |
|
|
|
|
|
|
|
|
|
|
| Total recognized in net periodic benefit cost and other comprehensive income (loss) |
|
$ |
(2,375 |
) |
|
$ |
(21 |
) |
|
|
|
|
|
|
|
|
|
As of January 3, 2015, there was approximately $1.6 million of accumulated unrecognized net actuarial
loss that has yet to be recognized as a component of net periodic benefit cost in the future periods. Of this amount the Company expects to recognize approximately $0.1 million in earnings as a component of net periodic benefit cost during fiscal
year 2015. The Company does not expect to be required to make any contributions to the Company’s funded plans in fiscal 2016.
Components of net periodic benefit cost for both the Domestic and Foreign Plan were as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Service cost |
|
$ |
83 |
|
|
$ |
76 |
|
| Interest cost |
|
|
177 |
|
|
|
192 |
|
| Expected return of plan assets |
|
|
(8 |
) |
|
|
(77 |
) |
| Recognized net actuarial loss |
|
|
38 |
|
|
|
34 |
|
| Settlement/curtailment |
|
|
338 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
| Total net periodic benefit cost |
|
$ |
628 |
|
|
$ |
225 |
|
|
|
|
|
|
|
|
|
|
26
Assumptions for benefit obligations were as follows:
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Discount rate |
|
|
2.3 |
% |
|
|
3.9 |
% |
| Rate of compensation increase |
|
|
3.0 |
% |
|
|
2.2 |
% |
Assumptions for net periodic benefit costs were as follows:
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Discount rate |
|
|
2.7 |
% |
|
|
3.7 |
% |
| Expected long term return on plan assets |
|
|
— |
% |
|
|
7.0 |
% |
| Rate of compensation increase |
|
|
3.0 |
% |
|
|
2.2 |
% |
To develop the expected long-term rate of return on plan assets, the Company considered the historical returns
and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio and the payment of plan expenses from the pension trust. This resulted in the selection of the 7.0% expected long-term rate
of return on plan assets assumption.
To develop the discount rate utilized in determining benefit obligations and net periodic benefit
cost, the Company performed a cash flow analysis using third party pension discount curve information and the projected cash flows of the plan as of the measurement date.
Estimated annual future benefit payments for the Foreign Plan in future fiscal years are as follows:
|
|
|
|
|
| Fiscal year |
|
Amount
(in thousands) |
|
| 2015 |
|
$ |
74 |
|
| 2016 |
|
|
74 |
|
| 2017 |
|
|
96 |
|
| 2018 |
|
|
99 |
|
| 2019 |
|
|
100 |
|
| Thereafter |
|
|
641 |
|
The fair values of the Company’s Domestic Plan’s assets at December 31, 2013 by asset class,
classified according to the fair value hierarchy were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total
Carrying
Value |
|
|
Quoted
Market Prices
in Active
Markets
(Level 1) |
|
|
Significant
Other
Observable
Inputs
(Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
| Fixed income securities |
|
$ |
6 |
|
|
$ |
6 |
|
|
$ |
— |
|
|
$ |
— |
|
| Short- term fixed income securities |
|
|
1,375 |
|
|
|
1,375 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,381 |
|
|
$ |
1,381 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Domestic Plan’s target asset allocation by asset class at December 31, 2013 were as follows:
|
|
|
|
|
| Domestic equity |
|
|
69.0 |
% |
| Fixed income |
|
|
31.0 |
% |
The asset allocation policy was developed in consideration of the long-term investment objective of ensuring
that there is an adequate level of assets to support benefit obligations to plan participants. A secondary objective is minimizing the impact of market fluctuations on the value of the plans’ assets.
27
In addition to the broad asset allocation described above, the following policies apply to the
individual asset classes:
| |
i. |
Fixed income investments shall be oriented toward investment grade securities rated “BBB” or higher. They are diversified among individual securities and sectors. |
| |
ii. |
Equity investments are diversified among individual securities, industries and economic sectors. Most securities held are issued by companies with medium to large market capitalizations. |
Curtailment and Settlement
In fiscal year 2014, in connection with a plan to terminate the Domestic Plan, the Company offered participants either lump-sum payment or
fully funded annuities to settle their remaining pension benefit. As part of this program, the Company settled $1.7 million of its pension obligations for U.S. participants with an equal amount paid from plan assets and additional Company
contributions. As a result, the Company recorded settlement losses of $0.3 million in fiscal year 2014. These settlement charges were recorded in selling, general and administrative expenses with a corresponding balance sheet reduction in
accumulated other comprehensive loss.
401(k) and Other Plans
The Company has a 401(k) plan (“401(k) Plan”) available for most employees. An employee may contribute up to 50% of gross salary to
the 401(k) Plan, subject to certain maximum compensation and contribution limits as adjusted from time to time by the Internal Revenue Service. The Company’s Board of Directors determines annually the amount of contribution, if any, the Company
shall make to the 401(k) Plan. The employees’ contributions vest immediately, while the Company’s contributions vest over a five-year period. The Company matches 50% of an employee’s
contributions for the first 6% of the employee’s gross salary at a maximum contribution rate per employee of 3% of the employee’s gross salary. The Company’s matching contributions totaled $3.7 million and $2.5 million for fiscal
years 2014 and 2013, respectively.
The Company also continued the 401(k) plan available for the Lake Region employees subsequent to the
Lake Region Medical Acquisition through December 31, 2014. This plan was available for most Lake Region employees whereby employees were allowed to contribute up to 50% of gross salary to the plan, subject to certain maximum compensation and
contribution limits as adjusted from time to time by the Internal Revenue Service. Lake Region matched 50% of an employee’s contributions for the first 6% of the employee’s gross salary at a maximum contribution rate per employee of 3% of
the employee’s gross salary. The Company’s matching contributions for fiscal year 2014 totaled $0.7 million and vest over a five-year period. The plan terminated on December 31, 2014 and all eligible participants were eligible to
participate in the 401(k) Plan.
The Company also maintains a Supplemental Executive Retirement Pension Program (“SERP”) that
covers one of its employees. The SERP is a non-qualified, unfunded deferred compensation plan. Expenses incurred by the Company related to the SERP, which are actuarially determined, were $0.1 million for fiscal years 2014 and 2013. The
liability for the plan was $1.8 million and $1.0 million as of January 3, 2015 and December 31, 2013, respectively, and was included within other long-term liabilities in the accompanying consolidated balance sheets.
The Company’s employees located in foreign jurisdictions meeting minimum age and service requirements participate in
defined contribution plans whereby participants may defer a portion of their annual compensation on a pretax basis, subject to legal limitations. Company contributions to these plans are discretionary and vary per region. The Company expensed
contributions of $0.5 million and $0.1 million for fiscal year 2014 and 2013, respectively.
The Company has obligations to provide
termination benefits to employees in certain foreign jurisdictions upon termination, whether voluntary or involuntary, in accordance with local employment laws. The Company accrues the termination benefits over each employee’s employment term
based upon actual and estimated years of service. As of January 3, 2015 and December 31, 2013, the accrued benefits aggregated $1.0 million and $0.9 million, respectively, and are included in accrued payroll and benefits in the
accompanying consolidated balance sheets.
28
The provision for income taxes includes federal, state and foreign taxes
currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The components of the provision (benefit) for income taxes for fiscal years 2014 and 2013 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Current |
|
|
|
|
|
|
|
|
| Federal |
|
$ |
— |
|
|
$ |
— |
|
| State |
|
|
112 |
|
|
|
(92 |
) |
| Foreign |
|
|
3,843 |
|
|
|
1,799 |
|
| Deferred |
|
|
|
|
|
|
|
|
| Federal |
|
|
(39,637 |
) |
|
|
2,502 |
|
| State |
|
|
(2,685 |
) |
|
|
287 |
|
| Foreign |
|
|
(515 |
) |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
| Total provision |
|
$ |
(38,882 |
) |
|
$ |
4,527 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes included income from foreign operations of $13.5 million and $7.5 million for
fiscal years 2014 and 2013, respectively.
Major differences between income taxes at the federal statutory rate and the amount recorded in
the accompanying consolidated statements of operations for fiscal years 2014 and 2013 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Expected tax benefit at statutory rate |
|
$ |
(29,824 |
) |
|
$ |
(23,753 |
) |
| Change in valuation allowance on deferred tax assets |
|
|
7,207 |
|
|
|
6,036 |
|
| State tax benefit, net of federal benefit |
|
|
(2,859 |
) |
|
|
(2,114 |
) |
| Foreign rate differential |
|
|
(1,801 |
) |
|
|
256 |
|
| Repatriation of earnings |
|
|
1,225 |
|
|
|
1,126 |
|
| Changes in reserves for uncertain tax positions |
|
|
36 |
|
|
|
(223 |
) |
| Stock options |
|
|
(11 |
) |
|
|
(38 |
) |
| Foreign tax credits |
|
|
(1,592 |
) |
|
|
(1,819 |
) |
| Return to provision and other adjustments |
|
|
(11,263 |
) |
|
|
2,961 |
|
| Permanent difference - goodwill impairment |
|
|
— |
|
|
|
22,095 |
|
|
|
|
|
|
|
|
|
|
| Tax provision |
|
$ |
(38,882 |
) |
|
$ |
4,527 |
|
|
|
|
|
|
|
|
|
|
29
The following is a summary of the significant components of the Company’s deferred tax
assets and liabilities consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Deferred tax assets |
|
|
|
|
|
|
|
|
| Operating loss and tax credit carryforwards |
|
$ |
142,767 |
|
|
$ |
125,487 |
|
| Environmental liabilities |
|
|
484 |
|
|
|
504 |
|
| Accrued compensation |
|
|
8,526 |
|
|
|
5,840 |
|
| Inventory and accounts receivable |
|
|
4,675 |
|
|
|
3,570 |
|
| Other |
|
|
10,052 |
|
|
|
6,604 |
|
|
|
|
|
|
|
|
|
|
| Total deferred tax asset |
|
|
166,504 |
|
|
|
142,005 |
|
|
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| Depreciation |
|
|
(15,667 |
) |
|
|
(5,629 |
) |
| Intangibles |
|
|
(79,430 |
) |
|
|
(72,152 |
) |
|
|
|
|
|
|
|
|
|
| Total deferred tax liabilities |
|
|
(95,097 |
) |
|
|
(77,781 |
) |
|
|
|
|
|
|
|
|
|
| Valuation allowance |
|
|
(103,928 |
) |
|
|
(96,564 |
) |
|
|
|
|
|
|
|
|
|
| Total net deferred tax liability |
|
$ |
(32,521 |
) |
|
$ |
(32,340 |
) |
|
|
|
|
|
|
|
|
|
The Company’s deferred income tax expense results primarily from the different book and
tax treatment for a portion of the Company’s goodwill and the Company’s trade name intangible asset, “the amortizing tax intangibles”. For tax purposes, the amortizing tax intangibles acquired in taxable asset transactions are
subject to annual amortization, which reduces their tax basis. Such assets are not amortized for financial reporting purposes, which gives rise to a different book and tax basis. The lower taxable basis of the amortizing tax intangibles would result
in higher taxable income upon any future disposition of the underlying business. Deferred taxes are recorded to reflect the future incremental taxes from the basis differences that would be incurred upon a future sale. This amount is included as a
deferred tax liability in the table above within “Intangibles” and totals $24.1 million and $32.8 million at January 3, 2015 and December 31, 2013, respectively. In addition, as of January 3, 2015, there is a deferred tax
liability of $7.3 million related to basis differences in assets of an Irish subsidiary.
At January 3, 2015, the Company had federal
net operating loss (“NOL”) carryforwards of approximately $340.7 million expiring at various dates through 2034. If not utilized, these carryforwards will begin to expire in 2019. Such losses are also subject to limitations of Internal
Revenue Code, Section 382, which in general provides that utilization of NOL’s is subject to an annual limitation if an ownership change results from transactions increasing the ownership of certain shareholders or public groups in the
stock of a corporation by more than 50 percentage points over a three-year period. Such an ownership change occurred in 2005. Certain acquired losses are subject to preexisting Section 382 limitations, which predate the the ownership change in
2005. Subsequent ownership changes, as defined in Section 382, could further limit the amount of net operating loss carryforwards, as well as research and development credits that can be utilized to offset future taxable income.
The Company’s federal NOL carryforward for tax return purposes as of January 3, 2015 is $21.5 million greater than its federal NOL
for financial reporting purposes due to $12.7 million of unrecognized tax benefits as well as $8.8 million of unrealized excess tax benefits related to share-based compensation awards. The tax benefit of the share-based compensation awards would be
recognized for financial statement purposes through additional paid-in capital, in the period in which the tax benefit reduces income taxes payable.
The Company assessed the positive and negative evidence bearing upon the realizability of its deferred tax assets and, based on an assessment
of this evidence, concluded that $33.7 million of deferred tax assets would be recognized as a result of future reversal of deferred tax liabilities associated with definite lived assets recorded in the accounting for the Lake Region Medical
Acquisition. The Company concluded that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets. As a result, a valuation allowance on substantially all of the net deferred tax assets
has been provided, after considerations for deferred tax liabilities for goodwill, which will not be a future source of income.
The
Company’s valuation allowance increased $7.4 million and $6.0 million during fiscal years 2014 and 2013, respectively, principally due to the Company’s net losses in each of these years.
30
As of January 3, 2015 and December 31, 2013, the Company had not accrued deferred
income taxes on $71.0 million and $11.2 million, respectively, of unremitted earnings from foreign subsidiaries as such earnings are expected to be permanently reinvested outside of the U.S. However, to the extent such foreign earnings were
remitted in the future a deferred tax liability of $29.9 million would be recorded.
The change in unrecognized tax benefits related
to uncertain tax positions for fiscal years 2014 and 2013 follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Balance, beginning of year |
|
$ |
7,313 |
|
|
$ |
7,536 |
|
| Gross increases for tax positions taken in prior periods |
|
|
36 |
|
|
|
36 |
|
| Lapse of statute of limitations |
|
|
— |
|
|
|
(259 |
) |
|
|
|
|
|
|
|
|
|
| Balance, end of year |
|
$ |
7,349 |
|
|
$ |
7,313 |
|
|
|
|
|
|
|
|
|
|
Substantially all of the of uncertain tax benefits at January 3, 2015 would not impact the effective tax
rate if recognized in a future period, assuming the Company were to continue to maintain a valuation allowance on substantially all net federal and state deferred tax assets.
The Company recognizes interest and penalties related to unrecognized tax benefits as a component of its provision for income tax expense.
During fiscal years 2014 and 2013, the recorded amounts for interest and penalties, respectively were minimal. The Company maintains balances for accrued interest and accrued penalties of $0.4 million and $0.1 million, and $0.4 million and
$0.1 million, relating to unrecognized tax benefits as of January 3, 2015 and December 31, 2013, respectively.
The Company
is subject to income taxes in the U.S. Federal jurisdiction, and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax law and regulations and require significant
judgment to apply. With exception to the state of New York, the Company is not currently under any examination by U.S. Federal, state and local, or non-U.S. tax authorities. The tax years since December 31, 2006 through 2014, inclusive, remain
subject to examination by major tax jurisdictions. However, since the Company has net operating loss carryforwards which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing
authorities if such net operating loss carryforwards are utilized, notwithstanding that the statute for assessment may have closed.
| 15. |
Related-Party Transactions |
The Company maintains a management services agreement with
its principal equity owner, KKR, pursuant to which KKR will provide certain structuring, consulting and management advisory services. During fiscal years 2014 and 2013, the Company incurred management fees and expenses with KKR of $1.6
million and $1.4 million, respectively. As of January 3, 2015 and December 31, 2013, the Company owed KKR $0.4 million for unpaid management fees, which are included in accrued expenses and other current liabilities in the
accompanying consolidated balance sheets. The Company has also historically utilized the services of Capstone Consulting LLC (“Capstone”), an entity affiliated with KKR. The Company incurred fees and expenses related to Capstone of
$1.3 million during fiscal year 2014. No fees or expenses related to Capstone were incurred during fiscal year 2013. At January 3, 2015 the Company owed Capstone $0.2 million, which are included in accrued expenses and other current
liabilities in the accompanying consolidated balance sheet at that date, and had no outstanding payables as of December 31, 2013.
In
addition to the above, entities affiliated with KKR Asset Management (“KKR-AM”), an affiliate of KKR, owned approximately $29.8 million and $16.5 million principal amount of the First Lien and Second Lien, respectively, term loans at
January 3, 2015. At December 31, 2013, entities affiliated with KKR-AM owned approximately $14.0 million principal amount of the Company’s then outstanding Senior Secured Notes and approximately $26.4 million principal amount of the
Company’s then outstanding Senior Subordinated Notes.
The Company sells products to Biomet, Inc., which is privately owned by a
consortium of private equity sponsors, including KKR. Net revenues from sales to Biomet, Inc. during fiscal years 2014 and 2013 totaled $0.3 million and $0.2 million, respectively. At January 3, 2015 and December 31, 2013, accounts
receivable due from Biomet were immaterial.
31
The Company utilizes the services of SunGard Data Systems, Inc. (“SunGard”), a provider
of software and information processing solutions, which is privately owned by a consortium of private equity sponsors, including KKR and Bain, another significant Company stockholder. The Company entered into an agreement with SunGard whereby
SunGard provides information systems hosting services. The Company incurred approximately $0.8 million in fees in connection with this agreement for fiscal years 2014 and 2013. At January 3, 2015 and December 31, 2013 the amount due to
SunGard totaled $0.1 million.
| 16. |
Fair Value Measurements |
Financial Instruments
The Company uses the Black-Scholes option pricing model to determine the fair value of its liability for Roll-Over option awards. A
roll-forward of the change in fair value of this financial instrument and information regarding the Level 3 inputs and the significant assumptions used in estimating the Roll-Over options’ fair value are also included in Note 8.
The Company determines the fair value of interest rate swap and interest rate cap transactions based on forward yield curves.
The following table provide a summary of the financial assets and liabilities recorded at fair value as of January 3, 2015 and
December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements Determined Using |
|
| |
|
Total Carrying
Value |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Significant
Other
Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
| At January 3, 2015: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liability for interest rate swap and interest rate cap transactions |
|
$ |
3,253 |
|
|
$ |
— |
|
|
$ |
3,253 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liability for Roll-Over options |
|
$ |
31 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For other instruments, the estimated fair value has been determined by the Company using available market information; however, considerable
judgment is required in interpreting market data to develop these estimates. The methods and assumptions used to estimate the fair value of each class of financial instruments is as set forth below:
| |
• |
|
Accounts receivable and accounts payable: The carrying amounts of these items are a reasonable estimate of their fair values at January 3, 2015 and December 31, 2013 based on the short-term
nature of these items. |
| |
• |
|
Long-term Debt as of January 3, 2015: |
| |
• |
|
Borrowings under the First Lien due 2021—Borrowings under the First Lien bear interest at an all-inclusive interest rate of 4.5% which includes a 3.5% margin, and
for the first year of the loan, the LIBOR rate is fixed at 1% floor. After the first year the rate is the greater of the 1% LIBOR floor or the three month LIBOR. The Company intends to carry the First Lien until maturity.
The fair value of the First Lien, was approximately 96.5%, or $799.7 million, compared to its carrying value of $828.7 million. The fair value of the Company’s First Lien was estimated using inputs derived
principally from market observable data, also referred to as Level 2 inputs. The Company intends to carry the long-term debts until their maturity. |
|
| |
• |
|
Borrowings under the Second Lien Notes due 2022—Borrowings under the Second Lien bear interest at an all-inclusive interest rate of 7.5% per annum, which includes a 6.5% margin, and for the first year
of the loan, the LIBOR rate is fixed at the 1% floor. After the first year, the rate is the greater of the 1% LIBOR floor or the three month LIBOR. The Company intends to carry the Second Lien until maturity. The fair value of the Second Lien,
was approximately 94.0%, or $206.8 million, compared to their carrying value of $220.0 million. The fair value of the Company’s Second Lien was estimated using inputs derived principally from market observable data, also referred to as Level 2
inputs. The Company intends to carry the long-term debts until their maturity. |
32
| |
• |
|
Long-term Debt as of December 31, 2013: |
| |
• |
|
Borrowings under the Senior Secured Notes due 2017—Borrowings under the Senior Secured Notes had a fixed rate. The fair value of the Senior Secured Notes, which is level 2 in the fair value hierarchy, was
approximately 104.8% or $419.2 million as of December 31, 2013, based on quoted market prices, compared to their carrying value of $400.0 million at that date. |
| |
• |
|
Borrowings under the Senior Subordinated Notes due 2017—Borrowings under the Senior Subordinated Notes had a fixed rate. The fair value of the Senior Subordinated Notes, which is Level 2 in the fair value
hierarchy, was 103.3%, or $325.4 million as of December 31, 2013, based on quoted market prices, compared to their carrying value of $315.0 million at that date. |
| 17. |
Environmental Matters |
The Pennsylvania Department of Environmental Protection
(“DEP”) filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (“EPA”) National Air Emissions Standards for
hazardous air pollutants from halogenated solvent cleaning operations. These revised standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning
machines) from facility emission limits for trichloroethylene (“TCE”) and other degreaser emissions. The EPA has agreed to reconsider the exemption. The Company’s Collegeville facility meets current EPA control standards for TCE
emissions and is exempt from the new lower TCE emission limit since the Company manufactures narrow tubes. As part of efforts to lower TCE emissions, the Company has begun to implement a process that will reduce the Company’s TCE emissions
generated by its Collegeville facility. However, this process will not reduce TCE emissions to the levels required should a new standard become law. The Company submitted a proposed Post Remediation Care Plan (“PRCP”) with a corresponding
Environmental Covenant (“EC”) to the EPA. Upon EPA approval of the PRCP and EC, the current Administrative Consent Order associated with the Collegeville facility will be terminated. The Company’s obligations under the proposed PRCP
include the continued operation and maintenance of the on-site groundwater extraction and treatment system and annual sampling of a defined set of groundwater wells as a means to monitor contaminant containment within approved boundaries.
At January 3, 2015 and December 31, 2013, the Company maintained reserves for environmental liabilities of approximately $1.3
million, of which the Company expects to pay $0.1 million during fiscal year 2015.
In January 2015, the Company was notified by the New
Jersey Department of Environmental Protection (“NJDEP”) of its intent to revoke a no further action determination made by the NJDEP in favor of the Company in 2002 pertaining to the property on which the Company operated a manufacturing
facility starting in 1971 (the “Kleiner Property”). The Company sold the Kleiner Property in 2004 and vacated the facility in 2007. The Company is cooperating with the NJDEP and believes the NJDEP’s notice of intent is unwarranted. In
December 2014, the current owner of the Kleiner Property commenced litigation against the Company and an executive officer of the Company, and other unrelated third parties, alleging that the defendants caused or contributed to alleged groundwater
contamination beneath the Kleiner Property. The Company denies all of the allegations made by the current owner, and the Company is presently asserting a vigorous defense to the allegations. The Company has concluded that it is not probable that a
liability has occurred and, as such, no liability has been recorded as of January 3, 2015.
33
| 18. |
Geographic Information and Significant Customers |
Substantially all of the
Company’s sales were derived from medical device manufacturing companies.
The following table presents net sales by country or
geographic region based on the location of the customer and in order of significance for fiscal years 2014 and 2013 (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Net sales: |
|
|
|
|
|
|
|
|
| United States of America |
|
$ |
564,849 |
|
|
$ |
404,465 |
|
| Ireland |
|
|
42,392 |
|
|
|
33,348 |
|
| Germany |
|
|
41,668 |
|
|
|
35,192 |
|
| Central and South America |
|
|
41,291 |
|
|
|
15,560 |
|
| Belgium |
|
|
13,574 |
|
|
|
3,391 |
|
| Asia Pacific |
|
|
10,699 |
|
|
|
6,363 |
|
| United Kingdom |
|
|
5,899 |
|
|
|
3,034 |
|
| Switzerland |
|
|
5,638 |
|
|
|
7,681 |
|
| Eastern Europe |
|
|
5,584 |
|
|
|
2,229 |
|
| Sweden |
|
|
5,057 |
|
|
|
4,503 |
|
| France |
|
|
4,221 |
|
|
|
3,286 |
|
| Netherlands |
|
|
3,284 |
|
|
|
1,423 |
|
| Rest of World |
|
|
8,108 |
|
|
|
5,237 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
752,264 |
|
|
$ |
525,712 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, based on the location of the assets, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| United States |
|
$ |
123,012 |
|
|
$ |
87,429 |
|
| Ireland |
|
|
39,203 |
|
|
|
3,637 |
|
| Germany |
|
|
12,201 |
|
|
|
11,969 |
|
| Asia |
|
|
11,098 |
|
|
|
13,056 |
|
| Mexico |
|
|
1,123 |
|
|
|
866 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
186,637 |
|
|
$ |
116,957 |
|
|
|
|
|
|
|
|
|
|
Significant Customers
For fiscal years 2014 and 2013, the Company’s ten largest customers in the aggregate accounted for 74% and 68% of consolidated net sales,
respectively. Percentages of net sales from all greater than 10% customers are as follows:
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years Ended |
|
| |
|
2014 |
|
|
2013 |
|
| Customer A |
|
|
18 |
% |
|
|
17 |
% |
| Customer B |
|
|
15 |
% |
|
|
15 |
% |
| Customer C |
|
|
14 |
% |
|
|
11 |
% |
| Customer D |
|
|
12 |
% |
|
|
10 |
% |
34
Customers with 10% or greater concentration in accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Customer A |
|
|
14 |
% |
|
|
18 |
% |
| Customer B |
|
|
11 |
% |
|
|
12 |
% |
| Customer C |
|
|
* |
|
|
|
12 |
% |
| 19. |
Commitments and Contingencies |
The Company is obligated on various lease agreements for
office space, automobiles and equipment, expiring through 2020, which are accounted for as operating leases.
Aggregate rental expense for
fiscal years 2014 and 2013 was $7.8 million and $7.2 million, respectively. Minimum rental commitments under all operating leases in future fiscal years are as follows (in thousands):
|
|
|
|
|
| |
|
Amount |
|
| 2015 |
|
$ |
6,525 |
|
| 2016 |
|
|
5,922 |
|
| 2017 |
|
|
5,119 |
|
| 2018 |
|
|
4,355 |
|
| 2019 |
|
|
3,504 |
|
| Thereafter |
|
|
4,306 |
|
|
|
|
|
|
| Total |
|
$ |
29,731 |
|
|
|
|
|
|
The Company is involved in various legal proceedings in the ordinary course of business, including with
respect to environmental matters. In the opinion of management, the outcome of such proceedings will not have a material effect on the Company’s financial position or results of operations or cash flows.
The Company has various purchase commitments totaling $45.4 million at January 3, 2015 for materials, supplies, machinery and equipment
incident to the ordinary conduct of business. Such purchase commitments are generally for a period of less than one year, often cancelable and able to be rescheduled and not at prices in excess of current market prices.
Open letters of credit aggregated $15.4 million as of January 3, 2015.
| 20. |
Changes in Accumulated Other Comprehensive Loss |
The following table summarizes the
changes in accumulated other comprehensive loss for fiscal year 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined Benefit
Pension Items |
|
|
Unrealized
Loss On
Derivatives |
|
|
Foreign
Currency Items |
|
|
Total |
|
| Balance at January 1, 2014 |
|
$ |
(957 |
) |
|
$ |
— |
|
|
$ |
(229 |
) |
|
$ |
(1,186 |
) |
| Other comprehensive loss before reclassifications |
|
|
(1,747 |
) |
|
|
— |
|
|
|
(34,884 |
) |
|
|
(36,631 |
) |
| Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| Change in fair value |
|
|
— |
|
|
|
(3,254 |
) |
|
|
— |
|
|
|
(3,254 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
|
(1,747 |
) |
|
|
(3,254 |
) |
|
|
(34,884 |
) |
|
|
(39,885 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 3, 2015 |
|
$ |
(2,704 |
) |
|
$ |
(3,254 |
) |
|
$ |
(35,113 |
) |
|
$ |
(41,071 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
The following table summarizes the changes in accumulated other comprehensive loss for fiscal
year 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined Benefit
Pension Items |
|
|
Unrealized
Gains and
Losses on
Available-for-
Sale Securities |
|
|
Foreign
Currency Items |
|
|
Total |
|
| Balance at January 1, 2013 |
|
$ |
(1,161 |
) |
|
$ |
210 |
|
|
$ |
(1,603 |
) |
|
$ |
(2,554 |
) |
| Other comprehensive income before reclassifications |
|
|
204 |
|
|
|
— |
|
|
|
1,374 |
|
|
|
1,578 |
|
| Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
|
(210 |
) |
|
|
— |
|
|
|
(210 |
) |
| Change in fair value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
|
204 |
|
|
|
(210 |
) |
|
|
1,374 |
|
|
|
1,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at December 31, 2013 |
|
$ |
(957 |
) |
|
$ |
— |
|
|
$ |
(229 |
) |
|
$ |
(1,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has organized its business into the AS Segment and
C&V Segment. In the AS Segment, the Company manufactures a broad range of products for its customers which primarily consist of medical devices, components, and instruments. These products are used in minimal invasive surgery, endoscopy,
orthopedics, drug delivery, and other general surgery applications including spinal surgery, arthroscopy and joint preservation & reconstruction. Advanced surgical instruments typically consist of a handle/hand-piece, a rigid/flexible tube
and an electromechanical or mechanical end piece. In the C&V Segment, the Company manufactures a broad range of products for its customers which primarily consist of devices used in i) interventional vascular therapies that include
cardiovascular, neurovascular and peripheral catheters, guidewires and delivery systems; ii) cardiac rhythm management that includes pacemakers, implantable defibrillators, and cardiac leads; iii) neuromodulation that includes neurostimulation
devices and leads and catheter systems for pain management; and iv) cardiac surgery that includes transcatheter heart valve systems, heart valve components and surgical tools.
Included in the C&V Segment are the results of Lake Region, which was acquired on March 12, 2014. Lake Region is an Original
Development Manufacturer (ODM) of minimally invasive devices and delivery systems to the cardiology and endovascular markets. Lake Region contributed net sales of $173.7 million for fiscal year 2014, representing 32.5% of net sales of the C&V
Segment.
The Company allocates resources based on revenues as well as earnings before interest, taxes, depreciation, amortization, and
other specific and non-recurring items (“Adjusted EBITDA”) of each segment. Those expenses not allocable to each segment include non-allocable overhead costs, selling, general and administrative expenses, including human resources, legal,
finance, information technology, general and administrative expenses. Non-allocable expenses also include the amortization of intangible assets and certain restructuring expenses. Corporate services assets include intangible assets, deferred tax
assets and liabilities, cash and cash equivalents, debt and other non-allocated assets.
36
The Company’s net sales and Adjusted EBITDA by segment as well as a reconciliation of Total Adjusted EBITDA
to the consolidated loss from continuing operations before provision for income taxes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Net sales: |
|
|
|
|
|
|
|
|
| Cardio & Vascular |
|
$ |
533,819 |
|
|
$ |
326,769 |
|
| Advanced Surgical |
|
|
223,219 |
|
|
|
202,468 |
|
| Intersegment |
|
|
(4,774 |
) |
|
|
(3,525 |
) |
|
|
|
|
|
|
|
|
|
| Total net sales |
|
$ |
752,264 |
|
|
$ |
525,712 |
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA: |
|
|
|
|
|
|
|
|
| Cardio & Vascular |
|
$ |
126,618 |
|
|
$ |
98,632 |
|
| Advanced Surgical |
|
|
33,061 |
|
|
|
31,859 |
|
| Corporate Services |
|
|
(22,234 |
) |
|
|
(24,574 |
) |
|
|
|
|
|
|
|
|
|
| Total Adjusted EBITDA |
|
$ |
137,445 |
|
|
$ |
105,917 |
|
|
|
|
|
|
|
|
|
|
| Reconciliation of Adjusted EBITDA to loss from operations before income taxes: |
|
|
|
|
|
|
|
|
| Impairment of intangible assets and goodwill |
|
$ |
(26,800 |
) |
|
$ |
(63,128 |
) |
| Interest expense, net |
|
|
(63,096 |
) |
|
|
(69,145 |
) |
| Depreciation and amortization |
|
|
(50,803 |
) |
|
|
(33,016 |
) |
| Impact of inventory value step-up |
|
|
(6,263 |
) |
|
|
— |
|
| Share-based compensation - employees |
|
|
(1,529 |
) |
|
|
(993 |
) |
| Share-based compensation - non-employees |
|
|
(120 |
) |
|
|
225 |
|
| Employee severance and relocation |
|
|
(2,083 |
) |
|
|
(1,295 |
) |
| Restructuring expenses |
|
|
(3,138 |
) |
|
|
(280 |
) |
| Merger costs and other |
|
|
(5,860 |
) |
|
|
— |
|
| Integration costs |
|
|
(5,386 |
) |
|
|
— |
|
| Plant closure costs |
|
|
(621 |
) |
|
|
(1,468 |
) |
| Currency loss |
|
|
(936 |
) |
|
|
(2,050 |
) |
| Loss on disposal of property and equipment |
|
|
(40 |
) |
|
|
(1,088 |
) |
| Other taxes |
|
|
(231 |
) |
|
|
(299 |
) |
| Loss on debt extinguishment |
|
|
(53,421 |
) |
|
|
— |
|
| Sarbanes-Oxley related preparation |
|
|
(416 |
) |
|
|
— |
|
| Pension curtailment and related costs |
|
|
(419 |
) |
|
|
— |
|
| Management fees to stockholder |
|
|
(1,495 |
) |
|
|
(1,424 |
) |
| Gain from the sale of security |
|
|
— |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
| Total adjustments |
|
|
(222,657 |
) |
|
|
(173,719 |
) |
|
|
|
|
|
|
|
|
|
| Loss from operations before income taxes |
|
$ |
(85,212 |
) |
|
$ |
(67,802 |
) |
|
|
|
|
|
|
|
|
|
The Company’s capital expenditures by segment for fiscal years 2014 and 2013 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
| |
|
Fiscal Years |
|
| |
|
2014 |
|
|
2013 |
|
| Capital expenditures: |
|
|
|
|
|
|
|
|
| Cardio & Vascular |
|
$ |
18,359 |
|
|
$ |
11,182 |
|
| Advanced Surgical |
|
|
10,994 |
|
|
|
9,683 |
|
| Corporate Services |
|
|
472 |
|
|
|
305 |
|
|
|
|
|
|
|
|
|
|
| Total capital expenditures |
|
$ |
29,825 |
|
|
$ |
21,170 |
|
|
|
|
|
|
|
|
|
|
37
The Company’s assets by segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
January 3,
2015 |
|
|
December 31,
2013 |
|
| Assets: |
|
|
|
|
|
|
|
|
| Cardio & Vascular |
|
$ |
1,041,551 |
|
|
$ |
624,418 |
|
| Advanced Surgical |
|
|
178,709 |
|
|
|
179,319 |
|
| Corporate Services |
|
|
125,500 |
|
|
|
197,493 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
1,345,760 |
|
|
$ |
1,001,230 |
|
|
|
|
|
|
|
|
|
|
38
Exhibit 99.2
Accellent Inc.
Condensed Consolidated Financial Statements as of July 4, 2015 and January 3, 2015
and for the Three and Six Months Ended July 4, 2015 and June 28, 2014
ACCELLENT INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Assets |
|
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
|
| Cash |
|
$ |
45,708 |
|
|
$ |
44,191 |
|
| Accounts receivable, net of allowances of $4,478 and $5,119 as of July 4, 2015 and January 3, 2015, respectively |
|
|
82,731 |
|
|
|
78,078 |
|
| Inventory |
|
|
97,958 |
|
|
|
89,191 |
|
| Deferred income taxes |
|
|
4,407 |
|
|
|
4,404 |
|
| Prepaid expenses and other current assets |
|
|
8,552 |
|
|
|
6,192 |
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
239,356 |
|
|
|
222,056 |
|
| Property, plant and equipment, net |
|
|
184,304 |
|
|
|
186,637 |
|
| Goodwill |
|
|
710,646 |
|
|
|
719,842 |
|
| Other intangible assets, net |
|
|
178,583 |
|
|
|
193,782 |
|
| Deferred financing costs and other assets, net |
|
|
21,643 |
|
|
|
23,443 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
1,334,532 |
|
|
$ |
1,345,760 |
|
|
|
|
|
|
|
|
|
|
| Liabilities and Stockholder’s Equity |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Current portion of long-term debt |
|
$ |
8,350 |
|
|
$ |
8,350 |
|
| Accounts payable |
|
|
33,787 |
|
|
|
27,531 |
|
| Accrued payroll and benefits |
|
|
20,128 |
|
|
|
20,865 |
|
| Accrued interest |
|
|
3,442 |
|
|
|
3,460 |
|
| Accrued expenses and other current liabilities |
|
|
32,553 |
|
|
|
31,847 |
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
98,260 |
|
|
|
92,053 |
|
| Long-term debt |
|
|
1,036,212 |
|
|
|
1,040,388 |
|
| Deferred income taxes |
|
|
37,931 |
|
|
|
38,936 |
|
| Other liabilities |
|
|
9,431 |
|
|
|
9,480 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
|
1,181,834 |
|
|
|
1,180,857 |
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies (Note 14) |
|
|
|
|
|
|
|
|
| Stockholder’s equity: |
|
|
|
|
|
|
|
|
| Common stock, par value $0.01 per share, 50,000 shares authorized; 1 share issued and outstanding at July 4, 2015 and
January 3, 2015, respectively |
|
|
— |
|
|
|
— |
|
| Additional paid-in capital |
|
|
718,430 |
|
|
|
717,345 |
|
| Accumulated other comprehensive loss |
|
|
(62,826 |
) |
|
|
(41,071 |
) |
| Accumulated deficit |
|
|
(502,906 |
) |
|
|
(511,371 |
) |
|
|
|
|
|
|
|
|
|
| Total stockholder’s equity |
|
|
152,698 |
|
|
|
164,903 |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and stockholder’s equity |
|
$ |
1,334,532 |
|
|
$ |
1,345,760 |
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
2
ACCELLENT INC.
Unaudited Condensed Consolidated Statements of Operations
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| |
|
|
|
|
(As Adjusted) |
|
|
|
|
|
(As Adjusted) |
|
| Net sales |
|
$ |
204,292 |
|
|
$ |
202,449 |
|
|
$ |
402,570 |
|
|
$ |
349,147 |
|
| Cost of sales (exclusive of amortization) |
|
|
152,518 |
|
|
|
155,443 |
|
|
|
301,683 |
|
|
|
267,177 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
51,774 |
|
|
|
47,006 |
|
|
|
100,887 |
|
|
|
81,970 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Selling, general and administrative expenses |
|
|
21,965 |
|
|
|
21,937 |
|
|
|
42,437 |
|
|
|
40,219 |
|
| Research and development expenses |
|
|
3,044 |
|
|
|
2,705 |
|
|
|
5,283 |
|
|
|
3,721 |
|
| Impairment of trade name |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26,800 |
|
| Restructuring expenses |
|
|
898 |
|
|
|
— |
|
|
|
1,911 |
|
|
|
2 |
|
| Loss (gain) on disposal of assets |
|
|
33 |
|
|
|
(24 |
) |
|
|
202 |
|
|
|
(45 |
) |
| Amortization of intangible assets |
|
|
5,386 |
|
|
|
7,322 |
|
|
|
11,072 |
|
|
|
11,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
|
31,326 |
|
|
|
31,940 |
|
|
|
60,905 |
|
|
|
82,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) from operations |
|
|
20,448 |
|
|
|
15,066 |
|
|
|
39,982 |
|
|
|
(294 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss on debt extinguishment |
|
|
— |
|
|
|
(39 |
) |
|
|
— |
|
|
|
(53,422 |
) |
| Interest expense, net |
|
|
(14,943 |
) |
|
|
(14,956 |
) |
|
|
(29,664 |
) |
|
|
(32,347 |
) |
| Other expense, net |
|
|
(405 |
) |
|
|
(75 |
) |
|
|
(310 |
) |
|
|
(181 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total other expense, net |
|
|
(15,348 |
) |
|
|
(15,070 |
) |
|
|
(29,974 |
) |
|
|
(85,950 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before income taxes |
|
|
5,100 |
|
|
|
(4 |
) |
|
|
10,008 |
|
|
|
(86,244 |
) |
| Provision (benefit) for income taxes |
|
|
(326 |
) |
|
|
(296 |
) |
|
|
1,543 |
|
|
|
(41,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
5,426 |
|
|
$ |
292 |
|
|
$ |
8,465 |
|
|
$ |
(45,062 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
3
ACCELLENT INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| |
|
|
|
|
(As Adjusted) |
|
|
|
|
|
(As Adjusted) |
|
| Net income (loss) |
|
$ |
5,426 |
|
|
$ |
292 |
|
|
$ |
8,465 |
|
|
$ |
(45,062 |
) |
| Other comprehensive income (loss), net of income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unrealized gain (loss) on derivatives |
|
|
125 |
|
|
|
(3,434 |
) |
|
|
(3,564 |
) |
|
|
(1,698 |
) |
| Realized loss on derivatives |
|
|
261 |
|
|
|
— |
|
|
|
261 |
|
|
|
— |
|
| Cumulative translation adjustment |
|
|
3,291 |
|
|
|
(2,273 |
) |
|
|
(18,452 |
) |
|
|
(4,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss), net of income taxes |
|
|
3,677 |
|
|
|
(5,707 |
) |
|
|
(21,755 |
) |
|
|
(6,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Comprehensive income (loss) |
|
$ |
9,103 |
|
|
$ |
(5,415 |
) |
|
$ |
(13,290 |
) |
|
$ |
(51,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
4
ACCELLENT INC.
Unaudited Condensed Consolidated Statement of Stockholder’s Equity
For the Six Months Ended July 4, 2015
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Common Stock |
|
|
Additional
Paid-In
Capital |
|
|
Accumulated
Other
Comprehensive
Loss |
|
|
Accumulated
Deficit |
|
|
Total
Equity |
|
| |
|
|
|
|
|
| |
|
Shares |
|
|
Amount |
|
|
|
|
|
| Balance, January 4, 2015 |
|
|
1 |
|
|
$ |
— |
|
|
$ |
717,345 |
|
|
$ |
(41,071 |
) |
|
$ |
(511,371 |
) |
|
$ |
164,903 |
|
| Other comprehensive loss, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,755 |
) |
|
|
— |
|
|
|
(21,755 |
) |
| Share-based compensation and other |
|
|
— |
|
|
|
— |
|
|
|
1,085 |
|
|
|
— |
|
|
|
— |
|
|
|
1,085 |
|
| Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
8,465 |
|
|
|
8,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, July 4, 2015 |
|
|
1 |
|
|
$ |
— |
|
|
$ |
718,430 |
|
|
$ |
(62,826 |
) |
|
$ |
(502,906 |
) |
|
$ |
152,698 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
5
ACCELLENT INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| |
|
|
|
|
(As Adjusted) |
|
| Cash flows from operating activities: |
|
|
|
|
|
|
|
|
| Net income (loss) |
|
$ |
8,465 |
|
|
$ |
(45,062 |
) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities (net of acquisition): |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
24,460 |
|
|
|
23,505 |
|
| Amortization of debt discounts and non-cash interest |
|
|
1,654 |
|
|
|
1,664 |
|
| Impact of inventory valuation step-up for an acquisition |
|
|
— |
|
|
|
6,263 |
|
| Impairment of trade name |
|
|
— |
|
|
|
26,800 |
|
| Loss on debt extinguishment |
|
|
— |
|
|
|
53,422 |
|
| Loss (gain) on disposal of assets |
|
|
202 |
|
|
|
(45 |
) |
| Deferred income taxes |
|
|
(526 |
) |
|
|
(42,048 |
) |
| Non-cash compensation expense |
|
|
1,375 |
|
|
|
788 |
|
| Changes in operating assets and liabilities (net of effects of an acquisition): |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
|
(8,431 |
) |
|
|
(8,045 |
) |
| Inventory |
|
|
(9,870 |
) |
|
|
(8,099 |
) |
| Prepaid expenses and other current assets |
|
|
(2,224 |
) |
|
|
(851 |
) |
| Accounts payable, accrued expenses and other liabilities |
|
|
6,925 |
|
|
|
(14,753 |
) |
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) operating activities |
|
|
22,030 |
|
|
|
(6,461 |
) |
| Cash flows from investing activities: |
|
|
|
|
|
|
|
|
| Capital expenditures |
|
|
(15,199 |
) |
|
|
(14,928 |
) |
| Proceeds from sale of property and equipment |
|
|
137 |
|
|
|
338 |
|
| Cash paid for acquisition, net of cash acquired |
|
|
— |
|
|
|
(303,871 |
) |
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
|
(15,062 |
) |
|
|
(318,461 |
) |
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds from long-term debt |
|
|
— |
|
|
|
1,055,000 |
|
| Repayments of long-term debt |
|
|
(4,175 |
) |
|
|
(715,004 |
) |
| Other |
|
|
— |
|
|
|
(536 |
) |
| Payment of debt prepayment fees |
|
|
— |
|
|
|
(42,400 |
) |
| Deferred financing costs |
|
|
— |
|
|
|
(23,982 |
) |
|
|
|
|
|
|
|
|
|
| Net cash provided by (used in) financing activities |
|
|
(4,175 |
) |
|
|
273,078 |
|
|
|
|
|
|
|
|
|
|
| Effect of exchange rate changes |
|
|
(1,276 |
) |
|
|
(118 |
) |
|
|
|
|
|
|
|
|
|
| Net increase (decrease) in cash |
|
|
1,517 |
|
|
|
(51,962 |
) |
| Cash, beginning of period |
|
|
44,191 |
|
|
|
72,240 |
|
|
|
|
|
|
|
|
|
|
| Cash, end of period |
|
$ |
45,708 |
|
|
$ |
20,278 |
|
|
|
|
|
|
|
|
|
|
| Supplemental cash flow information: |
|
|
|
|
|
|
|
|
| Cash paid for interest |
|
$ |
27,831 |
|
|
$ |
47,096 |
|
|
|
|
|
|
|
|
|
|
| Cash paid for income taxes |
|
$ |
1,962 |
|
|
$ |
10,475 |
|
|
|
|
|
|
|
|
|
|
| Issuance of parent company stock in acquisition |
|
$ |
— |
|
|
$ |
75,000 |
|
|
|
|
|
|
|
|
|
|
| Property and equipment purchases included in accrued expenses |
|
$ |
2,351 |
|
|
$ |
1,656 |
|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial statements.
6
ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Description of Business
Accellent Inc. (the “Company”) is a wholly owned subsidiary of Accellent Acquisition Corp., which in turn is a wholly owned
subsidiary of Accellent Holdings Corp. (“Accellent Holdings”), which in turn is a wholly owned subsidiary of Lake Region Medical Holdings, Inc. (“LRM Holdings”). On March 12, 2014, the Company completed the acquisition of
Lake Region Manufacturing, Inc. (“Lake Region”), a Minnesota entity doing business as Lake Region Medical (the “Lake Region Medical Acquisition”). The Lake Region Medical Acquisition was completed through a Contribution and
Merger Agreement, among the Company, Accellent Holdings, LRM Holdings (“Buyer”), Lake Region and the other parties thereto (the “Contribution and Merger Agreement”). Accellent Holdings formed Buyer and Accellent Inc. formed Lake
Region Merger Sub Inc. (“Merger Sub”) for purposes of consummating the transaction. Pursuant to the Contribution and Merger Agreement, Merger Sub merged with and into Lake Region, with Lake Region surviving as a wholly owned subsidiary of
the Company (“Lake Region Merger”). In September 2014, the Company commenced doing business as Lake Region Medical. LRM Holdings, since its formation, and Accellent Holdings, prior to the formation of LRM Holdings, is referred to herein as
the “parent company”.
The Company provides its customers in the medical device industry design and engineering, precision
component manufacturing, device assembly and supply chain management services and is a manufacturer of interventional and diagnostic wire-formed medical devices and components specializing in minimally invasive devices for cardiovascular,
endovascular and neurovascular applications for customers worldwide. The Company has extensive resources focused on providing its customers with reliable, high-quality, cost-efficient, integrated outsourced solutions. Sales are focused primarily in
the United States of America (“U.S.”) and Western European markets. Headquartered in Wilmington, Massachusetts, the Company has manufacturing facilities in North America, Europe, and Asia. The Company operates in two segments: Advanced
Surgical (“AS Segment”) and Cardio & Vascular (“C&V Segment”).
Basis of Presentation
These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, including
those of Lake Region since March 13, 2014. All intercompany transactions have been eliminated in consolidation. The Company has prepared the accompanying unaudited condensed consolidated financial statements in accordance with interim reporting
standards based on accounting principles generally accepted in the U.S. (“GAAP”). Accordingly, they do not include all of the information and disclosures required for complete financial statements prepared in accordance with GAAP. The
Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements for the fiscal year ended January 3, 2015, and in the opinion of management, these financial
statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily
indicative of the results expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the fiscal year ended January 3, 2015
issued on April 17, 2015.
The Company’s fiscal year ends on the date determined by an annual reporting cycle whereby each
fiscal year will typically consist of four 13-week quarters. The three and six month periods ended July 4, 2015 included 91 and 182 days, respectively, whereas the three and six months ended June 28, 2014 included 91 days and 179 days,
respectively.
The previously issued condensed consolidated financial statements as of and for the three and six months ended
June 28, 2014 have been adjusted for purchase price measurement period adjustments related to the acquisition of Lake Region Medical as disclosed in Note 3. Any prior period amounts that were recast as a result of purchase price measurement
period adjustments related to the Lake Region Medical acquisition have been labeled “As Adjusted” herein.
7
2. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In July 2015, the FASB deferred the effective date so that it becomes effective for the Company for annual fiscal periods commencing after
December 15, 2017 and for fiscal interim periods after December 15, 2018, with earlier adoption permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the guidance. This update could impact
the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of operations upon adoption.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which requires debt issuance
costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard is effective for fiscal periods beginning after December 15, 2015. Early adoption is permitted. Once adopted, the impact of this
standard on the Company’s consolidated financial statements will be limited to a reclassification of deferred financing costs from an asset balance to inclusion as an offset against the carrying value of long term obligations.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”, which requires an entity to measure inventory
at the lower of cost and net realizable value, which is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standard requires prospective
adoption and is effective for annual fiscal periods beginning after December 15, 2016 and interim fiscal periods beginning after December 15, 2017, with earlier adoption permitted for interim periods in the year of adoption. The Company
does not expect the adoption of this guidance to have a material impact on its consolidated financial statements when adopted.
3. Acquisition of Lake
Region
As discussed in Note 1, on March 12, 2014, the Company completed the Lake Region Medical Acquisition. Immediately prior to
closing the transaction, i) certain stockholders of Lake Region, severally and not jointly, contributed certain of their shares of Lake Region common stock to Buyer in exchange for, and in the aggregate, 27.778 million shares of Buyer
common stock at $2.70 per share for a value of $75.0 million and ii) certain stockholders of Accellent Holdings, severally and not jointly contributed their respective shares of Accellent Holdings to Buyer in exchange for an equal number of
shares of Buyer. Following the contribution of those certain shares of Lake Region common stock to Buyer, the Company paid $315.0 million in cash consideration to the remaining former Lake Region stockholders (“Seller”) for the remaining
outstanding shares of Lake Region common stock, which were acquired via the Lake Region Merger, subject to adjustments in respect of outstanding indebtedness, cash, change in control payments and certain expenses of Lake Region. Subsequent to the
closing, $3.2 million of working capital adjustments, to the benefit of the Buyer, were identified, reviewed and agreed to by the seller and received by the Company in June 2014 out of the $25.0 million initially held in escrow. In
September 2014, the Company received $1.5 million out of $2.3 million held in a second escrow. The Company made no further claims under the escrow arrangements and the remaining amounts were released in June 2015 upon expiration of the escrow
arrangements. The acquisition of Lake Region supports the Company’s strategic intent to grow its C&V Segment and to create a leading interventional vascular business with more scale, a broader product offering and deeper customer
relationships.
The transaction has been accounted for as a business combination. The results of the acquired business are included in the
C&V Segment.
The Company generally employs the income method to estimate the fair value of intangible assets, which is based on
forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of
future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative market position and the discount rate applied to the cash flows, among others.
Significant judgment is required in estimating the fair value of intangible assets acquired in a business combination and in assigning their
respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management. Significant estimates and assumptions inherent in the valuations reflect a
consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand’s relative
market position and the discount rate applied to the cash flows, among others. Any resultant allocation of purchase
8
price consideration paid in excess of the fair value of assets assessed and acquired less liabilities assumed was identified accordingly and recognized as goodwill. The Company recognized $181.1
million of goodwill, which is not tax deductible and primarily due the inherent long-term value anticipated from the synergies and business opportunities expected to be achieved as a result of the transaction. A summary of the purchase price
allocation for the acquisition of Lake Region is as follows:
Consideration transferred (in thousands):
|
|
|
|
|
| Cash |
|
$ |
315,000 |
|
| Fair value of equity securities issued by LRM Holdings to seller |
|
|
75,000 |
|
| Reimbursement of transaction costs to seller |
|
|
1,669 |
|
| Working capital adjustment |
|
|
(3,264 |
) |
|
|
|
|
|
| Total fair value of consideration transferred |
|
$ |
388,405 |
|
|
|
|
|
|
As of January 3, 2015, the Company finalized the purchase accounting for the acquisition. The purchase
accounting measurement period adjustments have been applied retrospectively to the condensed consolidated financial statements as of and for the three and six month periods ended June 28, 2014.
Fair value measurement of the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preliminary
Allocation |
|
|
Measurement
Period
Adjustments |
|
|
As Adjusted |
|
| Cash |
|
$ |
9,534 |
|
|
$ |
— |
|
|
$ |
9,534 |
|
| Accounts receivable |
|
|
22,613 |
|
|
|
— |
|
|
|
22,613 |
|
| Inventories |
|
|
27,575 |
|
|
|
5,257 |
|
|
|
32,832 |
|
| Prepaid expenses and other assets |
|
|
15,012 |
|
|
|
1,064 |
|
|
|
16,076 |
|
| Property, plant and equipment |
|
|
67,301 |
|
|
|
7,568 |
|
|
|
74,869 |
|
| Definitive life intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
| Trade name |
|
|
— |
|
|
|
16,700 |
|
|
|
16,700 |
|
| Developed technology and know-how |
|
|
— |
|
|
|
38,000 |
|
|
|
38,000 |
|
| Backlog |
|
|
— |
|
|
|
1,200 |
|
|
|
1,200 |
|
| Customer relationships |
|
|
— |
|
|
|
78,000 |
|
|
|
78,000 |
|
| Goodwill |
|
|
291,418 |
|
|
|
(110,333 |
) |
|
|
181,085 |
|
| Accounts payable, accrued expenses and other liabilities |
|
|
(35,964 |
) |
|
|
(1,608 |
) |
|
|
(37,572 |
) |
| Deferred tax liabilities |
|
|
(5,820 |
) |
|
|
(39,112 |
) |
|
|
(44,932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net assets acquired |
|
$ |
391,669 |
|
|
$ |
(3,264 |
) |
|
$ |
388,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid (in thousands):
|
|
|
|
|
| Cash paid at the closing date |
|
$ |
(315,000 |
) |
| Cash held by Lake Region |
|
|
9,534 |
|
| Reimbursement of transaction costs to Seller |
|
|
(1,669 |
) |
| Working capital adjustment received |
|
|
3,264 |
|
|
|
|
|
|
| Net cash paid in the six months ended June 28, 2014 |
|
$ |
(303,871 |
) |
|
|
|
|
|
As a result of the retrospective application of the measurement period adjustments, the condensed consolidated
financial statements for the three and six months ended June 28, 2014 were revised to include the effects of the following: i) changes in the amounts of amortization expense related to intangible assets acquired in the acquisition, ii) changes
in costs of sales relating to the changes in the fair value of inventory acquired that was sold in the periods ended June 28, 2014, iii) an increase in deferred income tax benefit of $33.7 million resulting from a release of the valuation
allowance pertaining to the recording of deferred income tax liabilities resulting from the acquisition, and iv) related foreign currency translation adjustments. The net impact of the measurement period adjustments on the condensed consolidated
financial statements for the three months ended June 28, 2014 was to change the previously reported net loss of $0.6 million to net income of $0.3 million. The net impact of the measurement period adjustments on the condensed consolidated
financial statements for the six months ended June 28, 2014 was to reduce the net loss as previously reported by $33.5 million. In addition, consolidated comprehensive loss for the three and six months ended June 28, 2014 was further
increased by $1.7 million and $3.3 million, respectively.
9
The Company incurred transaction related costs of $1.6 million and $5.3 million, respectively
during the three and six months ended June 28, 2014, consisting primarily of legal and accounting fees included in selling, general and administrative expenses.
The acquired definitive life intangible assets is comprised of a trade name, developed technology, backlog and customer relationships with
weighted average amortization periods of 15 years, 11 years, 1 year and 15 years, respectively.
4. Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Raw materials |
|
$ |
22,566 |
|
|
$ |
22,849 |
|
| Work-in-process |
|
|
48,482 |
|
|
|
41,233 |
|
| Finished goods |
|
|
26,910 |
|
|
|
25,109 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
97,958 |
|
|
$ |
89,191 |
|
|
|
|
|
|
|
|
|
|
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Land |
|
$ |
7,855 |
|
|
$ |
7,928 |
|
| Buildings |
|
|
47,178 |
|
|
|
47,469 |
|
| Machinery and equipment |
|
|
213,789 |
|
|
|
209,887 |
|
| Leasehold improvements |
|
|
16,563 |
|
|
|
16,439 |
|
| Computer equipment and software |
|
|
42,433 |
|
|
|
41,991 |
|
| Acquired assets to be placed in service |
|
|
37,511 |
|
|
|
26,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
365,329 |
|
|
|
350,012 |
|
| Less—Accumulated depreciation |
|
|
(181,025 |
) |
|
|
(163,375 |
) |
|
|
|
|
|
|
|
|
|
| Property, plant and equipment, net |
|
$ |
184,304 |
|
|
$ |
186,637 |
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $6.8 million and $6.9 million for each of the three months ended July 4, 2015
and June 28, 2014, respectively. Depreciation expense was $13.4 million and $12.0 million for each of the six months ended July 4, 2015 and June 28, 2014, respectively.
6. Goodwill and Intangible Assets
The
Company reports all amortization expense related to finite lived intangible assets separately within its accompanying condensed consolidated statements of operations. For the three and six months ended July 4, 2015 and June 28, 2014,
amortization expense related to intangible assets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| Cost of sales |
|
$ |
820 |
|
|
$ |
1,189 |
|
|
$ |
1,635 |
|
|
$ |
1,847 |
|
| Selling, general and administrative |
|
|
4,566 |
|
|
|
6,133 |
|
|
|
9,437 |
|
|
|
9,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
5,386 |
|
|
$ |
7,322 |
|
|
$ |
11,072 |
|
|
$ |
11,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Goodwill is the amount by which the cost of acquired net assets in a business combination exceeds
the fair value of net identifiable assets acquired. Intangible assets include the value ascribed to trade names and trademarks, developed technology and know-how, as well as customer relationships and backlog obtained in connection with business
combinations.
Goodwill consisted of the following as of July 4, 2015 and January 3, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Goodwill |
|
$ |
991,073 |
|
|
$ |
1,000,269 |
|
| Accumulated impairment losses |
|
|
(280,427 |
) |
|
|
(280,427 |
) |
|
|
|
|
|
|
|
|
|
| Goodwill carrying amount |
|
$ |
710,646 |
|
|
$ |
719,842 |
|
|
|
|
|
|
|
|
|
|
The Company has elected October 31st as its annual impairment assessment date for goodwill and the
indefinite lived intangible assets and performs additional impairment tests if triggering events occur.
The following table depicts the
change in the Company’s goodwill during the three months ended July 4, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cardio &
Vascular |
|
|
Advanced
Surgical |
|
|
Total |
|
| Balance April 5, 2015 |
|
$ |
637,935 |
|
|
$ |
70,961 |
|
|
$ |
708,896 |
|
| Effect of foreign currency translation |
|
|
1,750 |
|
|
|
— |
|
|
|
1,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at July 4, 2015 |
|
$ |
639,685 |
|
|
$ |
70,961 |
|
|
$ |
710,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table depicts the change in the Company’s goodwill during the six months ended July 4,
2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cardio &
Vascular |
|
|
Advanced
Surgical |
|
|
Total |
|
| Balance January 4, 2015 |
|
$ |
648,881 |
|
|
$ |
70,961 |
|
|
$ |
719,842 |
|
| Effect of foreign currency translation |
|
|
(9,196 |
) |
|
|
— |
|
|
|
(9,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at July 4, 2015 |
|
$ |
639,685 |
|
|
$ |
70,961 |
|
|
$ |
710,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table depicts the change in the Company’s goodwill during the three months
ended June 28, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cardio &
Vascular |
|
|
Advanced
Surgical |
|
|
Total |
|
| Balance March 30, 2014 |
|
$ |
665,268 |
|
|
$ |
70,961 |
|
|
$ |
736,229 |
|
| Effect of foreign currency translation |
|
|
(1,141 |
) |
|
|
— |
|
|
|
(1,141 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at June 28, 2014 |
|
$ |
664,127 |
|
|
$ |
70,961 |
|
|
$ |
735,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table depicts the change in the Company’s goodwill during the six months ended
June 28, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Cardio &
Vascular |
|
|
Advanced
Surgical |
|
|
Total |
|
| Balance January 1, 2014 |
|
$ |
485,354 |
|
|
$ |
70,961 |
|
|
$ |
556,315 |
|
| Acquisition of Lake Region |
|
|
181,085 |
|
|
|
— |
|
|
|
181,085 |
|
| Effect of foreign currency translation |
|
|
(2,312 |
) |
|
|
— |
|
|
|
(2,312 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at June 28, 2014 |
|
$ |
664,127 |
|
|
$ |
70,961 |
|
|
$ |
735,088 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition of Lake Region in March 2014, the Company agreed to change its trade name
to Lake Region Medical and no longer use the trade name “Accellent” (“Accellent Trade Name”). Immediately prior to the business combination, the Company had a carrying value of $29.4 million related to the Accellent Trade Name.
The planned change in name represented a triggering event for impairment testing that resulted in the recording of an impairment charge related to the Accellent Trade Name of $26.8 million in the six months ended June 28, 2014. The remaining
balance of $2.6 million was amortized through the end of fiscal year 2014, its remaining useful life. The Company recorded a tax benefit of $11.1 million on a discrete basis related to the impairment and amortization of the Accellent trade name.
11
The acquired tax basis of goodwill amortizable for federal income tax purposes is approximately
$110.9 million. The remaining amortizable tax basis of goodwill is $15.4 million at January 3, 2015.
Intangible assets consisted of
the following at July 4, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
| Developed technology and know-how |
|
$ |
53,155 |
|
|
$ |
(21,305 |
) |
|
$ |
31,850 |
|
| Customer relationships |
|
|
264,798 |
|
|
|
(133,304 |
) |
|
|
131,494 |
|
| Trade names and trademarks |
|
|
19,300 |
|
|
|
(4,061 |
) |
|
|
15,239 |
|
| Backlog |
|
|
1,060 |
|
|
|
(1,060 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total intangible assets |
|
$ |
338,313 |
|
|
$ |
(159,730 |
) |
|
$ |
178,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets consisted of the following at January 3, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross
Carrying
Amount |
|
|
Accumulated
Amortization |
|
|
Net
Carrying
Amount |
|
| Developed technology and know-how |
|
$ |
53,832 |
|
|
$ |
(19,759 |
) |
|
$ |
34,073 |
|
| Customer relationships |
|
|
268,700 |
|
|
|
(124,992 |
) |
|
|
143,708 |
|
| Trade names and trademarks |
|
|
19,300 |
|
|
|
(3,506 |
) |
|
|
15,794 |
|
| Backlog |
|
|
1,147 |
|
|
|
(940 |
) |
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total intangible assets |
|
$ |
342,979 |
|
|
$ |
(149,197 |
) |
|
$ |
193,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated intangible asset amortization expense for the remainder of fiscal year 2015 is $10.9 million. The
estimated annual intangible asset amortization expense approximates $21.8 million in fiscal years 2016 through 2019 and $80.3 million thereafter.
The remaining weighted-average amortization periods for finite lived intangible assets as of July 4, 2015 and January 3, 2015 were
as follows (in years):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Developed technology and know how |
|
|
9.7 |
|
|
|
9.9 |
|
| Customer relationships |
|
|
9.3 |
|
|
|
9.2 |
|
| Trade names and trademarks |
|
|
13.7 |
|
|
|
14.2 |
|
| Backlog |
|
|
— |
|
|
|
0.2 |
|
| Total finite lived intangible assets |
|
|
9.7 |
|
|
|
9.7 |
|
12
7. Other Liabilities
Other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Pension and other retirement plan liabilities |
|
$ |
6,077 |
|
|
$ |
6,288 |
|
| Environmental liabilities |
|
|
1,210 |
|
|
|
1,273 |
|
| Deferred compensation |
|
|
880 |
|
|
|
590 |
|
| Restructuring liabilities |
|
|
830 |
|
|
|
886 |
|
| Other long-term liabilities |
|
|
434 |
|
|
|
443 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
9,431 |
|
|
$ |
9,480 |
|
|
|
|
|
|
|
|
|
|
8. Long-Term Debt
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| First Lien Loan (“First Lien”) maturing on March 12, 2021, interest at 4.5% |
|
$ |
824,562 |
|
|
$ |
828,738 |
|
| Second Lien Loan (“Second Lien”) maturing on March 12, 2022, interest at 7.5% |
|
|
220,000 |
|
|
|
220,000 |
|
|
|
|
|
|
|
|
|
|
| Total debt |
|
|
1,044,562 |
|
|
|
1,048,738 |
|
| Less—current portion |
|
|
(8,350 |
) |
|
|
(8,350 |
) |
|
|
|
|
|
|
|
|
|
| Long-term debt, excluding current portion |
|
$ |
1,036,212 |
|
|
$ |
1,040,388 |
|
|
|
|
|
|
|
|
|
|
In March 2014, in connection with the acquisition of Lake Region, the Company obtained $1.06 billion of new
debt financing sufficient to finance the acquisition, repay the Company’s Senior Secured Notes and Senior Subordinated Notes (collectively the “Notes”), and pay transaction expenses (the “Refinancing”). On March 12,
2014, the Company completed its cash tender offers for any and all of (i) the $400 million aggregate principal amount of its outstanding Senior Secured Note and (ii) the $315 million aggregate principal amount of its outstanding Senior
Subordinated Notes. A total of $368.7 million in aggregate principal amount, or approximately 92.16%, of the outstanding amount of the Senior Secured Notes, and $244.6 million in aggregate principal amount, or approximately 77.66%, of the
outstanding amount of the Senior Subordinated Notes were repurchased by the Company in tender offers. Additionally on March 12, 2014, the Company transferred $111.7 million to the note paying agent to be held in escrow as payment to the holders
that did not tender on the Senior Secured and Senior Subordinated notes. On April 11, 2014 the note paying agent redeemed all of the Notes remaining outstanding after the consummation of the tender offers, including $31.3 million aggregate
principal amount of the Senior Secured Notes and $70.4 million aggregate principal amount of the Senior Subordinated Notes (the “Redemption”). The Senior Secured Notes were redeemed at a redemption price of 103.0%, together with accrued
and unpaid interest and the Senior Subordinated Notes were redeemed at a redemption price of 107.5%, together with accrued and unpaid interest.
In connection with the early repayment of existing debt, the Company recognized a loss on the debt extinguishment of $53.4 million in the
six months ended June 28, 2014, which included $42.3 million of existing debt prepayment fees, $9.8 million of existing deferred financing fees, net and $1.3 million of existing discount on the Notes. As part of the Refinancing, the Company
terminated its revolving credit facility.
The following describes the significant terms and conditions of the Company’s long-term
debt arrangements at July 4, 2015.
First Lien Loan
The First Lien Loan (“First Lien”) administered by UBS AG - Stamford (“UBS”) totaled $835.0 million at issuance and bears
interest at an all inclusive interest rate of 4.5% which includes a 3.5% margin, and through March 12, 2015, the LIBOR rate was fixed at a 1% floor, after which the rate is the greater of the 1% LIBOR floor or the three month LIBOR. The
alternative base rate (“ABR”) is the Federal prime rate plus a margin of 2.50%. Choosing between the ABR or LIBOR rate for the year is determined at the Company’s discretion.
13
The First Lien matures on March 12, 2021. Interest is payable quarterly, commencing
June 12, 2014. Principal payments of the First Lien Loan are payable in quarterly installments at 0.25% of initial aggregate principal commencing June 30, 2014 that are approximately $2.1 million and running through December 31,
2020, with the remaining principal payment of approximately $778.6 million due at maturity.
The Company’s obligations under the
First Lien are jointly and severally guaranteed on a secured basis by the Company and all of the Company’s domestic subsidiaries. All obligations under the First Lien, and the guarantees of those obligations, are secured, subject to certain
exceptions, by substantially all of the Company’s assets and the assets of the guarantors.
The Company may redeem the First Lien, in
whole or in part, at a price equal to 100.00% of the principal amount thereof plus accrued and unpaid interest, if any, if the payment occurs on September 12, 2014 through March 11, 2021.
Included in the First Lien is a Revolving Credit Commitment (the “Revolver”) with a syndicate of financial institutions. The
Revolver provides for revolving credit financing of up to $75.0 million, which includes a swingline commitment of $15.0 million (“Swingline”), subject to borrowing base availability, and matures on March 12, 2019. Borrowings under the
Revolver bear interest at a rate per annum equal to, at the Company’s option: either (1) the ABR rate of the Federal prime rate plus a margin of 2.5%, or (2) the LIBOR rate determined by reference to the costs of funds for U.S. dollar
deposits for the interest period of intended borrowing plus a margin of 3.5%. In addition to interest on any outstanding borrowings under the Revolver, the Company is required to pay a commitment fee of 0.50% per annum related to unutilized
commitments. The Company must also pay customary administrative agency and customary letter of credit fees equal to the applicable margin on LIBOR loans. Total amount of commitment, administrative agency and letter of credit fees incurred under the
Revolver for the three and six months ended July 4, 2015 were minimal and are included within “Interest expense, net” in the accompanying condensed consolidated statements of operations. The Company’s aggregate borrowing capacity
was $63.6 million, after giving effect to outstanding letters of credit totaling $11.4 million and there were no amounts outstanding under the Revolver at July 4, 2015.
All outstanding borrowings under the Revolver are due and payable in full on March 12, 2019 and are unconditionally guaranteed jointly
and severally on a secured basis by all the Company’s existing and subsequently acquired or organized, direct or indirect U.S. restricted subsidiaries.
Solely with respect to any borrowings under the Revolver, the Company will not be permitted to have a First Lien leverage ratio greater than
7.75 to 1.00 for any trailing twelve month period beginning after June 30, 2014. The First Lien leverage ratio is the ratio of Consolidated First Lien Secured Debt minus cash and cash equivalents of the borrower, then divided by Consolidated
EBITDA as defined in the agreement. The leverage ratio restriction is only applicable in a period during which the sum of (i) the aggregate principal amounts under the Revolver and Swingline and (ii) the aggregate face amount of letters of
credit then outstanding, with certain exclusions, exceeds 30% of the amount of the total Revolver commitment. The leverage ratio restriction was not applicable as of July 4, 2015 or as of January 3, 2015.
Second Lien Loan
The Second Lien Loan (“Second Lien”) administered by Goldman Sachs Bank USA (“Goldman Sachs”) totaling $220.0 million
bears interest at an all-inclusive interest rate of 7.5%, per annum which includes a 6.5% margin for LIBOR loans and through March 12, 2015, the LIBOR rate was fixed at 1% floor, after which the rate is the greater of the 1% LIBOR floor or
the three month LIBOR. The ABR rate is the Federal prime rate plus a margin of 5.50%. Choosing between ABR or LIBOR rate for the year is determined at the Company’s discretion.
The Second Lien matures on March 12, 2022. Interest is payable quarterly, commencing June 12, 2014. Principal payment of the Second
Lien is due at maturity.
The Company’s obligations under the Second Lien are jointly and severally guaranteed on a secured basis by
the Company and all of the Company’s domestic subsidiaries. All obligations under the Second Lien, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company’s assets and the
assets of the guarantors.
The Company may redeem the Second Lien during any 12-month period commencing on the issue date, in whole or in
part, at a price equal to 101.00% of the principal amount thereof plus accrued and unpaid interest, if any, if the prepayment occurs on or after March 12, 2015 through March 11, 2016; and at a price equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, if the prepayment occurs on or after March 12, 2016 through March 11, 2022.
14
The indentures that govern the First Lien and Second Lien and the credit agreement that governs
the Revolver, contain restrictions on the Company’s ability, and the ability of the Company’s subsidiaries: to (i) incur additional indebtedness or issue preferred stock; (ii) create liens; (iii) consolidate, merge, sell or
otherwise dispose of all or substantially all of the Company’s assets; (iv) sell certain assets; (v) repay subordinated indebtedness prior to its stated maturity; (vi) pay dividends on, repurchase or make distributions in respect
of the Company’s capital stock or make other restricted payments; (vii) make certain investments; (viii) enter into certain transactions with the Company’s affiliates.
Costs incurred in connection with the issuance of debt is deferred and amortized over the term of the debt on a straight-line basis as a
component of interest expense. As of July 4, 2015 and January 3, 2015, the unamortized balance of deferred financing costs included in other assets in the accompanying condensed consolidated balance sheets was $19.7 million and $21.3
million, respectively.
9. Restructuring
During the third quarter of 2014, the Company announced the planned closure of its Arvada, Colorado site, the consolidation of its two Galway,
Ireland sites and other restructuring actions that will result in a reduction in staff across both manufacturing and administrative functions at certain locations. All affected employees were offered individually determined severance arrangements.
The decision to close its Arvada site and to consolidate its two Galway, Ireland sites results from the Company’s manufacturing strategy developed as part of the integration resulting from the Lake Region Merger in March 2014. For the three and
six months ended July 4, 2015, the Company recorded a restructuring expense of $0.9 million and $1.9 million relating to planned staff reductions, including obligations for employee severances. The Company will incur additional restructuring
expenses related to the planned staff reductions through the first half of fiscal year 2016, when the planned facilities consolidation and staff reductions are expected to be completed. Additional restructuring expenses related to closing facilities
and relocation of manufacturing equipment are also expected. The cash payments related to these restructuring actions are expected to continue through 2016 and possibly early fiscal year 2017.
The following tables summarizes the amounts recorded related to restructuring activities as of and for the six months ended July 4, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Employee
costs |
|
|
Other exit
costs |
|
|
Total |
|
| Balance at January 4, 2015 |
|
$ |
2,662 |
|
|
$ |
777 |
|
|
$ |
3,439 |
|
| Restructuring expenses |
|
|
1,864 |
|
|
|
47 |
|
|
|
1,911 |
|
| Payments |
|
|
(553 |
) |
|
|
(133 |
) |
|
|
(686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at July 4, 2015 |
|
$ |
3,973 |
|
|
$ |
691 |
|
|
$ |
4,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The restructuring expenses incurred are reflected in the accompanying condensed consolidated statements of
operations and the accrual balances as of July 4, 2015 and January 3, 2015 are included in accrued expenses and other current liabilities or other liabilities in the accompanying condensed consolidated balance sheets as of their respective
periods and depending on timing of the expected cash payments.
10. Share-Based Compensation
The Company’s employees participate under an Amended and Restated 2005 Equity Plan for Key Employees of Lake Region Medical Holdings, Inc.
and its subsidiaries and affiliates (the “2005 Equity Plan”), which provides for grants of parent company stock in the form of incentive stock options, nonqualified stock options, restricted stock, restricted stock units and stock
appreciation rights.
The 2005 Equity Plan requires exercise of stock options within 10 years of grant. Vesting is determined in the
applicable stock option agreement and occurs either in equal installments over 5 years from the date of grant (“Time-Based”), or upon achievement of certain performance targets over a five-year period (“Performance-Based”).
Targets underlying the vesting of Performance-Based awards are achieved upon the attainment of a specified level of targeted adjusted earnings performance “Adjusted EBITDA”, as defined in the Company’s long-term debt agreements and as
measured each calendar year. The vesting requirements for Performance-Based awards permit a catch-up of vesting should the target not be achieved in the specified calendar year but is achieved in a subsequent calendar year within the five-year
vesting period. As of July 4, 2015 and January 3, 2015, the achievement of the underlying performance targets for outstanding Performance-Based awards was not deemed probable. The Company has not granted any Performance-Based awards since 2013.
Certain of the share-based awards granted and outstanding as of July 4, 2015, are subject to accelerated vesting upon a sale of the Company or similar changes in control.
15
At July 4, 2015, the total number of shares authorized under the 2005 Equity Plan is
17.4 million shares and 4.2 million shares were available for future grant.
The fair value of the parent company common stock
is determined by the parent company’s board of directors utilizing weighted market-based and discounted cash flow approaches and applying a variety of factors, including the entity’s financial position, historical financial performance,
projected financial performance, valuations of publicly traded peer companies, the illiquid nature of the common stock, and arm’s length sales of parent company common stock. The estimated fair value of the parent company common stock was $3.50
and $2.70 per share at July 4, 2015 and January 3, 2015, respectively.
Share-based compensation expense
The Company’s share-based compensation expense for the three and six months ended July 4, 2015 and June 28, 2014 was as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4, 2015 |
|
|
June 28, 2014 |
|
|
July 4, 2015 |
|
|
June 28, 2014 |
|
| Restricted stock awards and units |
|
$ |
105 |
|
|
$ |
97 |
|
|
$ |
221 |
|
|
$ |
194 |
|
| Time-Based awards |
|
|
634 |
|
|
|
315 |
|
|
|
863 |
|
|
|
534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
739 |
|
|
$ |
412 |
|
|
$ |
1,084 |
|
|
$ |
728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended July 4, 2015 and June 28, 2014, the Company did not achieve
the performance targets required for outstanding Performance-Based awards to vest and, as of July 4, 2015, any future vesting of the outstanding awards is not probable. Accordingly, no share-based compensation expense related to
Performance-Based awards has been recorded. As of January 3, 2015, Performance-Based awards in the form of options to acquire 4.5 million shares of parent company common stock were outstanding.
The Company canceled Performance Based awards totaling 3.4 million shares of parent company common stock in May 2015. The Company granted
Time Based awards in exchange for the Performance-Based awards and the cancellation and re-granting of awards has been accounted for as a modification of share-based awards. As of July 4, 2015, 1.1 million shares of Performance-Based
awards were outstanding, of which 0.5 million shares are subject to vesting upon the achievement of the performance targets.
Share-based compensation expense was recorded in the accompanying condensed consolidated statements of operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4, 2015 |
|
|
June 28, 2014 |
|
|
July 4, 2015 |
|
|
June 28, 2014 |
|
| Cost of sales |
|
$ |
238 |
|
|
$ |
163 |
|
|
$ |
358 |
|
|
$ |
287 |
|
| Selling, general and administrative |
|
|
502 |
|
|
|
249 |
|
|
|
727 |
|
|
|
441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
740 |
|
|
$ |
412 |
|
|
$ |
1,085 |
|
|
$ |
728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units
Awards of shares of restricted stock units are generally issued for no consideration and are subject to vesting over one to five years.
A summary of restricted stock units activity for the six months ended July 4, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of
Shares |
|
|
Weighted
Average
Contractual
Term (in years) |
|
|
Aggregate
Intrinsic Value
(in thousands) |
|
| Issued and unvested, January 4, 2015 |
|
|
475,000 |
|
|
|
4.0 |
|
|
$ |
1,188 |
|
| Granted |
|
|
— |
|
|
|
|
|
|
|
|
|
| Vested |
|
|
(10,000 |
) |
|
|
2.4 |
|
|
|
|
|
| Forfeited, canceled or expired |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issued and unvested, July 4, 2015 |
|
|
465,000 |
|
|
|
2.2 |
|
|
$ |
1,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Shares expected to vest, July 4, 2015 |
|
|
465,000 |
|
|
|
2.2 |
|
|
$ |
1,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
At July 4, 2015, there is $0.9 million of unrecognized share-based compensation expense yet
to recognize related to restricted stock units, which is expected to be recognized over the next 2.2 years.
Stock options
A summary of stock option activity for the six months ended July 4, 2015 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number of
shares |
|
|
Weighted
average
exercise price
per share |
|
|
Weighted
Average
Remaining
Contractual
Term (in years) |
|
|
Aggregate
Intrinsic Value
(in thousands) |
|
| Outstanding at January 4, 2015 |
|
|
12,708,455 |
|
|
$ |
2.77 |
|
|
|
6.2 |
|
|
$ |
391 |
|
| Granted |
|
|
3,030,000 |
|
|
|
3.49 |
|
|
|
9.9 |
|
|
|
— |
|
| Canceled |
|
|
(3,438,469 |
) |
|
|
2.92 |
|
|
|
5.1 |
|
|
|
|
|
| Forfeited |
|
|
(117,500 |
) |
|
|
2.53 |
|
|
|
7.6 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding at July 4, 2015 |
|
|
12,182,486 |
|
|
$ |
2.91 |
|
|
|
7.1 |
|
|
$ |
7,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vested or expected to vest at July 4, 2015 |
|
|
10,655,472 |
|
|
$ |
2.90 |
|
|
|
7.2 |
|
|
$ |
6,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exercisable at July 4, 2015 |
|
|
4,452,648 |
|
|
$ |
2.95 |
|
|
|
4.8 |
|
|
$ |
2,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average assumptions used for calculating the fair value of stock options granted during the six
months ended July 4, 2015 is as follows:
|
|
|
|
|
| Expected term to exercise (in years) |
|
|
6.5 |
|
| Expected volatility |
|
|
25.93 |
% |
| Risk-free rate |
|
|
1.69 |
% |
| Dividend yield |
|
|
— |
% |
At July 4, 2015, there is $4.1 million of unrecognized share-based compensation expense attributed to
Time-Based awards that is expected to be recognized over 3.9 years, the remaining weighted average vesting period for Time-Based awards. In addition, at July 4, 2015, there is $0.4 million of unrecognized share-based compensation expense
attributed to Performance-Based awards that may be recognized over 2.8 years should the underlying performance targets become probable.
Director’s Deferred Compensation Plan
The parent company maintains a Directors’ Deferred Compensation Plan (the “Directors’ Plan”) for all non-employee
directors. The Plan allows each non-employee director to elect to defer receipt of all or a portion of their annual directors’ fees to a future date or dates. Any amounts deferred under the Directors’ Plan are credited to a phantom stock
account. The number of phantom shares of parent company common stock credited to each director’s phantom stock account is determined based on the amount of the compensation deferred during any given year, divided by the then fair market value
per share of the parent company common stock as determined in the good faith discretion by the parent company’ Board of Directors, or $3.50 at July 4, 2015. During the three and six months ended July 4, 2015, compensation expense related
to the Directors’ Plan of $0.2 million and $0.3 million, respectively, and for the three and six months ended June 28, 2014, compensation expense related to the Directors’ Plan was $0.1 million.
11. Income Taxes
The Company provides
for deferred income taxes resulting from temporary differences between financial and taxable income as well as current taxes attributable to the states and foreign jurisdictions in which the Company is required to pay income taxes. The Company
records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company has not provided for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings have
been permanently reinvested or would be offset by foreign tax credits or net operating losses.
For the three months ended July 4,
2015 and June 28, 2014, the Company recognized income tax benefits of $0.3 million, which included $1.0 million and $0.3 million, respectively, of deferred income tax benefits related to the amortization of goodwill for tax purposes, zero and
$0.4 million, respectively, of deferred income tax benefit from amortization of an intangible asset, and $0.7 million and $0.4 million, respectively, of state, foreign, and other taxes.
17
For the six months ended July 4, 2015 and June 28, 2014, the Company recognized income
tax expense of $1.5 million and income tax benefit of $41.2 million, respectively, which included $0.5 million deferred tax benefit and $2.2 million of deferred tax expense, respectively, related to the amortization of goodwill for tax purposes,
zero and $10.5 million, respectively, of deferred income tax benefit related to the first quarter 2014 impairment of the “Accellent Trade Name” and related amortization, and $2.0 million and $0.8 million, respectively, of state, foreign,
and other taxes. In addition, as discussed in Note 3, as a result of completing the accounting for the Lake Region Medical Acquisition in March 2014, the Company retrospectively recognized a $33.7 million deferred income tax benefit from the partial
release of the previously recorded valuation allowance on its net deferred tax assets in the six months ended June 28, 2014 and, as a result, the previously reported income tax benefit for the period was revised from $7.5 million to $41.2
million.
The Company assessed the positive and negative evidence bearing upon the realizability of its deferred tax assets and, based on
an assessment of this evidence, concluded in the six months ended June 28, 2014 that $33.7 million of deferred tax assets would be recognized as a result of future reversal of deferred tax liabilities associated with definite lived assets
recorded in the accounting for the Lake Region Medical Acquisition. The Company concluded that it is more likely than not that the Company will not recognize the benefits of its federal and state deferred tax assets. As a result, a valuation
allowance on substantially all of the net deferred tax assets has been provided, after considerations for deferred tax liabilities for goodwill, which will not be a future source of income.
The Company continues to believe that it is more likely than not that the Company will not recognize the full benefits of its domestic federal
and state deferred tax assets. As a result, the Company continues to provide a valuation allowance on substantially all of its net deferred tax assets. The Company will continue to assess the ability to generate taxable income during future periods
in which the Company’s deferred tax assets may be realized. If and when the Company believe it is more likely than not that the Company will recover its deferred tax assets, the Company will reverse the valuation allowance as an income tax
benefit in its condensed consolidated statement of operations, which will affect our results of operations.
The Company is subject to
income taxes in the U.S. federal jurisdiction, and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax law and regulations and require significant judgment to apply.
There are no current income tax audits by U.S. federal, state, and local, or non-U.S. tax authorities. The tax years ended December 31, 2006 through 2014 remain subject to examination by major tax jurisdictions. However, since the Company has
net operating loss carryforwards, which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing authorities if utilized, notwithstanding that the statute for assessment may have closed.
12. Related Party Transactions
The
Company maintains a management services agreement with its principal equity owner, KKR & Co. L.P. (“KKR”) pursuant to which KKR provides certain structuring, consulting and management advisory services. The Company incurred
management fees and related expenses pursuant to this agreement of $0.4 million for each of the three months ended July 4, 2015 and June 28, 2014 and $0.8 million for each of the six months ended July 4, 2015 and June 28, 2014.
As of July 4, 2015 and January 3, 2015, the Company owed KKR $0.4 million for each period for unpaid management fees which are included in accrued expenses and other current liabilities in the accompanying condensed consolidated balance
sheets. The Company has also historically utilized the services of Capstone Consulting LLC (“Capstone”), an entity affiliated with KKR. The Company incurred fees and expenses related to Capstone of $0.2 million and $0.5 million for the
three and six months ended July 4, 2015 and $0.4 million and $0.6 million for the six months ended June 28, 2014, respectively. At July 4, 2015 and January 3, 2015, the Company owed Capstone $0.1 million and $0.2 million,
respectively.
In addition to the above, entities affiliated with KKR Asset Management, an affiliate of KKR, held approximately $27.5
million principal amount of the First Lien term loan at July 4, 2015 and $29.8 million and $16.5 million principal amount of the First Lien and Second Lien, respectively, term loans at January 3, 2015.
The Company utilizes the services of SunGard Data Systems, Inc. (“SunGard”), a provider of software and information processing
solutions, which is privately owned by a consortium of private equity sponsors, including KKR and Bain Capital. The Company maintains an agreement with SunGard to provide information systems hosting services for the Company. The Company incurred
$0.2 million and $0.4 million in fees in connection with this agreement for the each of the three and six months ended July 4, 2015, respectively and for each of the three and six months ended June 28, 2014, respectively. At July 4,
2015 and January 3, 2015, the Company owed SunGard zero and $0.1 million, respectively.
18
13. Fair Value Measurements
The Company determines fair value utilizing a fair value hierarchy that ranks the quality and reliability of the information used to determine
fair value. In general, fair values determined using Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined using Level 2 inputs
utilize data points that are observable such as quoted prices, interest rates and yield curves. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the
asset or liability.
The Company determines the fair value of interest rate swap and cap transactions based on forward yield curves.
The following tables provide a summary of the financial liabilities recorded at fair value at July 4, 2015 and January 3, 2015 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements at
July 4, 2015 Determined Using |
|
| |
|
Total Carrying
Value at
July 4, 2015 |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Significant
Other
Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
| Liability for interest rate swap and cap transactions |
|
$ |
6,556 |
|
|
$ |
— |
|
|
$ |
6,556 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Fair Value Measurements at
January 3, 2015 Determined Using |
|
| |
|
Total Carrying
Value at
January 3, 2015 |
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) |
|
|
Significant
Other
Observable
Inputs (Level 2) |
|
|
Significant
Unobservable
Inputs
(Level 3) |
|
| Liability for interest rate swap and cap transactions |
|
$ |
3,253 |
|
|
$ |
— |
|
|
$ |
3,253 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For other instruments, the estimated fair value has been determined by the Company using available market
information; however, considerable judgment is required in interpreting market data to develop these estimates. The methods and assumptions used to estimate the fair value of each class of financial instruments is as set forth below:
| |
• |
|
Accounts receivable and accounts payable—The carrying amounts of these items are a reasonable estimate of their fair values at July 4, 2015 and January 3, 2015 based on the short-term nature of
these items. |
| |
• |
|
Borrowings under the First Lien due 2021—Borrowings under the First Lien bear interest at an all-inclusive interest rate of 4.5% which includes a 3.5% margin, and a 1% LIBOR floor. The Company has entered
into a 3-month LIBOR contract with a 1% LIBOR floor, which expires in September 2015. The Company intends to carry the First Lien until maturity. At July 4, 2015, the fair value of the First Lien was approximately 99.37%, or $819.4 million,
compared to its carrying value of $824.6 million. The fair value of the Company’s First Lien was estimated using inputs derived principally from market observable data, also referred to as Level 2 inputs. |
| |
• |
|
Borrowings under the Second Lien Notes due 2022—Borrowings under the Second Lien bear interest at an all-inclusive interest rate of 7.5% per annum, which includes
a 6.5% margin, and a 1% LIBOR floor. The Company has entered into a 3-month LIBOR contract with a 1% LIBOR floor, which expires in September 2015. The Company intends to carry the Second Lien until maturity. At July 4, 2015, the fair value
of the Second Lien was approximately 92.86%, or $204.3 million, compared to their carrying value of $220.0 million. The fair value of the Company’s Second Lien was estimated using inputs derived principally from market observable data, also
referred to as Level 2 inputs. |
|
14. Commitments and Contingencies
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business,
including with respect to environmental matters. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the
Company’s consolidated financial position, results of operations or cash flows.
In June 2015, the Company entered into a new
facility lease in Trenton, Georgia. The lease term spans 15 years, commencing upon the completion of construction activities, expected to be completed in the fourth quarter of fiscal year 2015. The lease is subject to 3 successive renewal periods of
5 years each. The minimum annual lease commitment ranges from $0.7 million in the first year to $1.0 million in the 15th year for a total minimum lease commitment of $12.7 million. The lease includes certain lease incentives.
19
15. Environmental Matters
The Pennsylvania Department of Environmental Protection (“DEP”) filed a petition for review with the U.S. Court of Appeals for the
District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (“EPA”) National Air Emissions Standards for hazardous air pollutants from halogenated solvent cleaning operations. These revised
standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning machines) from facility emission limits for trichloroethylene (“TCE”) and other
degreaser emissions. The EPA has agreed to reconsider the exemption. The Company’s Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since the Company manufactures
narrow tubes. As part of efforts to lower TCE emissions, the Company is implementing a process that will reduce the Company’s TCE emissions generated by its Collegeville facility. However, this process will not reduce TCE emissions to the
levels required should a new standard become law. In addition, with regard to groundwater matters associated with the Company’s Collegeville facility, the Company has submitted a proposed Post Remediation Care Plan (“PRCP”) with a
corresponding Environmental Covenant (“EC”) to the EPA. Upon EPA approval of the PRCP and EC, the current Administrative Consent Order associated with the Collegeville facility will be terminated. The Company’s obligations under the
proposed PRCP include the continued operation and maintenance of the on-site groundwater extraction and treatment system and annual sampling of a defined set of groundwater wells as a means to monitor contaminant containment within approved
boundaries.
At each of July 4, 2015 and January 3, 2015, the Company maintained a reserve for environmental liabilities of
$1.3 million included in accrued expenses and other liabilities. The Company expects to pay $0.1 million during the balance of 2015.
In January 2015, the Company was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of its intent to revoke
a no further action determination made by the NJDEP in favor of the Company in 2002 pertaining to the property on which the Company operated a manufacturing facility starting in 1971 (the “Kleiner Property”). The Company sold the Kleiner
Property in 2004 and vacated the facility in 2007. The Company is cooperating with the NJDEP and believes the NJDEP’s notice of intent is unwarranted. In December 2014, the current owner of the Kleiner Property commenced litigation against the
Company and an executive officer of the Company, and other unrelated third parties, alleging that the defendants caused or contributed to alleged groundwater contamination beneath the Kleiner Property. The Company denies all of the allegations made
by the current owner, and the Company is presently asserting a vigorous defense to the allegations. The Company has concluded that it is not probable that a liability has been incurred and, as such, no liability has been recorded as of July 4,
2015.
16. Changes in Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive loss for the three months ended July 4, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined Benefit
Pension Items |
|
|
Unrealized
Gains and
Losses on
Derivatives |
|
|
Foreign
Currency Items |
|
|
Total |
|
| Balance at April 5, 2015 |
|
$ |
(2,704 |
) |
|
$ |
(6,943 |
) |
|
$ |
(56,856 |
) |
|
$ |
(66,503 |
) |
| Other comprehensive income before reclassifications |
|
|
— |
|
|
|
125 |
|
|
|
3,291 |
|
|
|
3,416 |
|
| Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
|
261 |
|
|
|
— |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income |
|
|
— |
|
|
|
386 |
|
|
|
3,291 |
|
|
|
3,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at July 4, 2015 |
|
$ |
(2,704 |
) |
|
$ |
(6,557 |
) |
|
$ |
(53,565 |
) |
|
$ |
(62,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
The following table summarizes the changes in accumulated other comprehensive loss for the three
months ended June 28, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined
Benefit
Pension
Items |
|
|
Unrealized
Gains and
Losses on
Derivatives |
|
|
Foreign
Currency
Items |
|
|
Total |
|
| Balance at March 30, 2014 |
|
$ |
(957 |
) |
|
$ |
1,736 |
|
|
$ |
(2,454 |
) |
|
$ |
(1,675 |
) |
| Other comprehensive income (loss) before reclassifications |
|
|
— |
|
|
|
(3,434 |
) |
|
|
(2,273 |
) |
|
|
(5,707 |
) |
| Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net current-period other comprehensive income (loss) |
|
|
— |
|
|
|
(3,434 |
) |
|
|
(2,273 |
) |
|
|
(5,707 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at June 28, 2014 |
|
$ |
(957 |
) |
|
$ |
(1,698 |
) |
|
$ |
(4,727 |
) |
|
$ |
(7,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in accumulated other comprehensive loss for the six months ended
July 4, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined Benefit
Pension Items |
|
|
Unrealized
Gains and
Losses on
Derivatives |
|
|
Foreign
Currency Items |
|
|
Total |
|
| Balance at January 4, 2015 |
|
$ |
(2,704 |
) |
|
$ |
(3,254 |
) |
|
$ |
(35,113 |
) |
|
$ |
(41,071 |
) |
| Other comprehensive loss before reclassifications |
|
|
— |
|
|
|
(3,564 |
) |
|
|
(18,452 |
) |
|
|
(22,016 |
) |
| Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
|
261 |
|
|
|
— |
|
|
|
261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net current-period other comprehensive loss |
|
|
— |
|
|
|
(3,303 |
) |
|
|
(18,452 |
) |
|
|
(21,755 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at July 4, 2015 |
|
$ |
(2,704 |
) |
|
$ |
(6,557 |
) |
|
$ |
(53,565 |
) |
|
$ |
(62,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the changes in accumulated other comprehensive loss for the six months ended
June 28, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined Benefit
Pension Items |
|
|
Unrealized
Gains and
Losses on
Derivatives |
|
|
Foreign
Currency Items |
|
|
Total |
|
| Balance at January 1, 2014 |
|
$ |
(957 |
) |
|
$ |
— |
|
|
$ |
(229 |
) |
|
$ |
(1,186 |
) |
| Other comprehensive income loss before reclassifications |
|
|
— |
|
|
|
(1,698 |
) |
|
|
(4,498 |
) |
|
|
(6,196 |
) |
| Amounts reclassified from accumulated other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net current-period other comprehensive loss |
|
|
— |
|
|
|
(1,698 |
) |
|
|
(4,498 |
) |
|
|
(6,196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at June 28, 2014 |
|
$ |
(957 |
) |
|
$ |
(1,698 |
) |
|
$ |
(4,727 |
) |
|
$ |
(7,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
17. Segments, Geographic Information and Significant Customers
Segments
The
Company has organized its business into the AS Segment and C&V Segment. In the AS Segment, the Company manufactures a broad range of products for its customers, which primarily consist of medical devices, components, and instruments. These
products are used in minimal invasive surgery, endoscopy, orthopedics, drug delivery, and other general surgery applications including spinal surgery, arthroscopy and joint preservation and reconstruction. Advanced surgical instruments typically
consist of a handle/hand-piece, a rigid/flexible tube and an electromechanical or mechanical end piece. In the C&V Segment, the Company manufactures a broad range of products for its customers which primarily consist of devices used in i)
interventional vascular therapies that include cardiovascular, neurovascular and peripheral catheters, guidewires and delivery systems; ii) cardiac rhythm management that includes pacemakers, implantable defibrillators, and cardiac leads; iii)
neuromodulation that includes neurostimulation devices and leads and catheter systems for pain management; and iv) cardiac surgery that includes transcatheter heart valve systems, heart valve components and surgical tools.
Included in the C&V Segment are the results of Lake Region, which was acquired on March 12, 2014. Lake Region is an original
development manufacturer of minimally invasive devices and delivery systems to the cardiology and endovascular markets.
The Company
allocates resources based on revenues as well as earnings before interest, taxes, depreciation, amortization, and other specific and non-recurring items (“Adjusted EBITDA”) of each segment. Those expenses not allocable to each segment
include non-allocable overhead costs, selling, general and administrative expenses, including human resources, legal, finance, information technology, general and administrative expenses. Non-allocable expenses also include the amortization of
intangible assets and certain restructuring expenses. Corporate services assets include intangible assets, deferred tax assets and liabilities, cash and cash equivalents, debt and other non-allocated assets.
22
The Company’s net sales and Adjusted EBITDA by segment as well as a reconciliation of Total
Adjusted EBITDA to the consolidated income (loss) from continuing operations before provision for income taxes for the periods ended July 4, 2015 and June 28, 2014, is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cardio & Vascular |
|
$ |
149,720 |
|
|
$ |
146,997 |
|
|
$ |
296,248 |
|
|
$ |
240,862 |
|
| Advanced Surgical |
|
|
55,649 |
|
|
|
56,568 |
|
|
|
108,784 |
|
|
|
110,764 |
|
| Intersegment |
|
|
(1,077 |
) |
|
|
(1,116 |
) |
|
|
(2,462 |
) |
|
|
(2,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total net sales |
|
$ |
204,292 |
|
|
$ |
202,449 |
|
|
$ |
402,570 |
|
|
$ |
349,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cardio & Vascular |
|
$ |
40,156 |
|
|
$ |
35,598 |
|
|
$ |
80,509 |
|
|
$ |
60,227 |
|
| Advanced Surgical |
|
|
6,754 |
|
|
|
9,247 |
|
|
|
11,692 |
|
|
|
16,874 |
|
| Corporate Services |
|
|
(7,310 |
) |
|
|
(5,565 |
) |
|
|
(15,496 |
) |
|
|
(11,738 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Adjusted EBITDA |
|
$ |
39,600 |
|
|
$ |
39,280 |
|
|
$ |
76,705 |
|
|
$ |
65,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reconciliation of Adjusted EBITDA to income (loss) before provision for income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Impairment of trade name |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(26,800 |
) |
| Interest expense, net |
|
|
(14,943 |
) |
|
|
(14,956 |
) |
|
|
(29,664 |
) |
|
|
(32,347 |
) |
| Depreciation and amortization |
|
|
(12,190 |
) |
|
|
(14,095 |
) |
|
|
(24,460 |
) |
|
|
(23,505 |
) |
| Impact of inventory valuation step-up in an acquisition |
|
|
— |
|
|
|
(5,687 |
) |
|
|
— |
|
|
|
(6,263 |
) |
| Share-based compensation - employees |
|
|
(740 |
) |
|
|
(412 |
) |
|
|
(1,085 |
) |
|
|
(728 |
) |
| Share-based compensation - non-employees |
|
|
(260 |
) |
|
|
(30 |
) |
|
|
(294 |
) |
|
|
(60 |
) |
| Employee severance and relocation |
|
|
(1,210 |
) |
|
|
(502 |
) |
|
|
(1,485 |
) |
|
|
(693 |
) |
| Restructuring expenses |
|
|
(898 |
) |
|
|
— |
|
|
|
(1,911 |
) |
|
|
(2 |
) |
| Merger costs & other |
|
|
(19 |
) |
|
|
(1,665 |
) |
|
|
(36 |
) |
|
|
(5,265 |
) |
| Integration costs |
|
|
(1,596 |
) |
|
|
(1,394 |
) |
|
|
(3,019 |
) |
|
|
(1,462 |
) |
| Plant closure costs & other |
|
|
(1,628 |
) |
|
|
— |
|
|
|
(2,809 |
) |
|
|
— |
|
| Currency loss |
|
|
(423 |
) |
|
|
(75 |
) |
|
|
(331 |
) |
|
|
(185 |
) |
| (Loss) gain on disposal of property and equipment |
|
|
(33 |
) |
|
|
24 |
|
|
|
(202 |
) |
|
|
45 |
|
| Other taxes |
|
|
(83 |
) |
|
|
(84 |
) |
|
|
(210 |
) |
|
|
(182 |
) |
| Loss on debt extinguishment |
|
|
— |
|
|
|
(39 |
) |
|
|
— |
|
|
|
(53,422 |
) |
| Sarbanes-Oxley related preparation |
|
|
(89 |
) |
|
|
— |
|
|
|
(415 |
) |
|
|
(738 |
) |
| Management fees to parent stockholder |
|
|
(388 |
) |
|
|
(369 |
) |
|
|
(776 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total adjustments |
|
|
(34,500 |
) |
|
|
(39,284 |
) |
|
|
(66,697 |
) |
|
|
(151,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Income (loss) before provision for income taxes |
|
$ |
5,100 |
|
|
$ |
(4 |
) |
|
$ |
10,008 |
|
|
$ |
(86,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
The Company’s capital expenditures by segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| Cardio & Vascular |
|
$ |
7,168 |
|
|
$ |
8,508 |
|
| Advanced Surgical |
|
|
6,869 |
|
|
|
6,408 |
|
| Corporate |
|
|
1,162 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
| Total capital expenditures |
|
$ |
15,199 |
|
|
$ |
14,928 |
|
|
|
|
|
|
|
|
|
|
The Company’s assets by segment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Cardio & Vascular |
|
$ |
1,030,166 |
|
|
$ |
1,041,551 |
|
| Advanced Surgical |
|
|
185,601 |
|
|
|
178,709 |
|
| Corporate Services |
|
|
118,765 |
|
|
|
125,500 |
|
|
|
|
|
|
|
|
|
|
| Total assets |
|
$ |
1,334,532 |
|
|
$ |
1,345,760 |
|
|
|
|
|
|
|
|
|
|
Geographic Information
The following table presents net sales by country or geographic region based on the location of the customer and in order of significance for
three and six months ended July 4, 2015 and June 28, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| United States of America |
|
$ |
158,545 |
|
|
$ |
151,154 |
|
|
$ |
308,622 |
|
|
$ |
263,017 |
|
| Ireland |
|
|
9,158 |
|
|
|
11,692 |
|
|
|
18,627 |
|
|
|
21,137 |
|
| Germany |
|
|
10,555 |
|
|
|
10,653 |
|
|
|
20,863 |
|
|
|
19,963 |
|
| Central and South America |
|
|
11,107 |
|
|
|
9,634 |
|
|
|
24,108 |
|
|
|
15,628 |
|
| Belgium |
|
|
4,689 |
|
|
|
3,967 |
|
|
|
9,683 |
|
|
|
5,179 |
|
| Asia Pacific |
|
|
3,134 |
|
|
|
3,027 |
|
|
|
6,248 |
|
|
|
5,086 |
|
| United Kingdom |
|
|
1,346 |
|
|
|
1,961 |
|
|
|
2,770 |
|
|
|
2,855 |
|
| Switzerland |
|
|
16 |
|
|
|
2,719 |
|
|
|
275 |
|
|
|
4,174 |
|
| Eastern Europe |
|
|
1,380 |
|
|
|
1,969 |
|
|
|
2,955 |
|
|
|
2,745 |
|
| Sweden |
|
|
— |
|
|
|
1,857 |
|
|
|
23 |
|
|
|
3,097 |
|
| France |
|
|
1,182 |
|
|
|
1,190 |
|
|
|
2,413 |
|
|
|
2,058 |
|
| Netherlands |
|
|
965 |
|
|
|
367 |
|
|
|
1,669 |
|
|
|
716 |
|
| Rest of World |
|
|
2,215 |
|
|
|
2,259 |
|
|
|
4,314 |
|
|
|
3,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
204,292 |
|
|
$ |
202,449 |
|
|
$ |
402,570 |
|
|
$ |
349,147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Property, plant and equipment, based on the location of the assets, were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Property, plant and equipment, net: |
|
|
|
|
|
|
|
|
| United States |
|
$ |
126,493 |
|
|
$ |
123,012 |
|
| Ireland |
|
|
35,084 |
|
|
|
39,203 |
|
| Germany |
|
|
11,367 |
|
|
|
12,201 |
|
| Asia |
|
|
10,233 |
|
|
|
11,098 |
|
| Mexico |
|
|
1,127 |
|
|
|
1,123 |
|
|
|
|
|
|
|
|
|
|
| Total |
|
$ |
184,304 |
|
|
$ |
186,637 |
|
|
|
|
|
|
|
|
|
|
Customer Concentrations
Substantially all of the Company’s sales were derived from medical device manufacturing companies. For the three and six months ended
July 4, 2015, the Company’s ten largest customers accounted for approximately 74% of its consolidated net sales. For the three and six months ended June 28, 2014, the Company’s ten largest customers accounted for approximately
72% and 74% of its consolidated net sales, respectively.
Percentages of net sales from all greater than 10% customers are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Six Months Ended |
|
| Net Sales |
|
July 4,
2015 |
|
|
June 28,
2014 |
|
|
July 4,
2015 |
|
|
June 28,
2014 |
|
| Customer A |
|
|
18 |
% |
|
|
18 |
% |
|
|
18 |
% |
|
|
19 |
% |
| Customer B |
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
|
|
15 |
|
| Customer C |
|
|
14 |
|
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
| Customer D |
|
|
13 |
|
|
|
12 |
|
|
|
14 |
|
|
|
12 |
|
Customers with 10% or greater concentration in accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
| |
|
As of |
|
| Accounts Receivable |
|
July 4,
2015 |
|
|
January 3,
2015 |
|
| Customer A |
|
|
18 |
% |
|
|
14 |
% |
| Customer B |
|
|
17 |
|
|
|
11 |
|
| Customer C |
|
|
13 |
|
|
|
* |
|
No other customer represented more than 10% of revenue or accounts receivable
in the periods presented in the accompanying condensed consolidated financial statements.
18. Subsequent Events
Management has evaluated subsequent events involving the Company for potential recognition or disclosure in the accompanying consolidated
financial statements through September 2, 2015. Subsequent events are events or transactions that occur after the balance sheet date but before the accompanying consolidated financial statements are issued.
On August 27, 2015, the Company and Greatbatch, Inc. (“Greatbatch”) entered into an Agreement and Plan of Merger (the
“Merger Agreement”), by and among LRM Holdings, Greatbatch and Provenance Merger Sub Inc., a Delaware corporation and an indirect wholly owned subsidiary of Greatbatch, pursuant to which LRM Holdings and its subsidiaries, including the
Company, will be acquired by Greatbatch on the terms and subject to the conditions set forth in the Merger Agreement. Greatbatch will acquire LRM Holdings for approximately $1.73 billion in cash and stock whereby Greatbatch will pay approximately
$478.0 million in cash to LRM Holdings’ equity holders, issue an aggregate of 5.1 million shares of common stock and options to LRM Holdings’ equity holders and assume approximately $1.0 billion of the Company’s net debt. The
transaction is expected to close in the fourth quarter of fiscal year 2015.
25
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