UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 27, 2015

 

 

GREATBATCH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   1-16137   16-1531026

(State or Other Jurisdiction

of incorporation)

 

(Commission

File Number)

 

(IRS Employer

Identification No.)

 

2595 Dallas Parkway, Suite 310, Frisco, Texas   75034
(Address of principal executive offices)   (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 2.01 Completion of Acquisition or Disposition of Assets.

On October 27, 2015, Greatbatch, Inc. (the “Company”) completed its acquisition of Lake Region Medical Holdings, Inc. (“Lake Region”), pursuant to an Agreement and Plan of Merger, dated as of August 27, 2015, by and among the Company, Provenance Merger Sub Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Company (“Merger Sub”) and Lake Region (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub was merged with and into Lake Region, with Lake Region continuing as the surviving corporation and an indirect wholly-owned subsidiary of the Company (the “Merger”).

On October 28, 2015, the Company filed a Current Report on Form 8-K (the “Initial Report”) stating that it had completed the Merger and that the financial statements required by Item 9.01(a) and the pro forma financial information required by Item 9.01(b) of Form 8-K would be filed by amendment within 71 calendar days after the date on which the Initial Report was required to be filed. This amended Current Report on Form 8-K contains the required financial statements and pro forma financial information.

 

Item 9.01. Financial Statements and Exhibits.

 

  (a) Financial statements of business acquired.

 

  1. The following audited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries are filed as Exhibit 99.1 hereto and are incorporated herein by reference:

 

  i. Independent Auditors’ Report;

 

  ii. Consolidated Balance Sheets as of January 3, 2015 and December 31, 2013;

 

  iii. Consolidated Statements of Operations for each of the three fiscal years in the period ended January 3, 2015;

 

  iv. Consolidated Statements of Comprehensive Loss for each of the three fiscal years in the period ended January 3, 2015;

 

  v. Consolidated Statements of Stockholders’ Equity for each of the three fiscal years in the period ended January 3, 2015;

 

  vi. Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 3, 2015; and

 

  vii. Notes to Consolidated Financial Statements.

 

  2. The following unaudited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries are filed as Exhibit 99.2 hereto and are incorporated herein by reference:

 

  i. Unaudited Condensed Consolidated Balance Sheets as of July 4, 2015 and January 3, 2015;

 

  ii. Unaudited Condensed Consolidated Statements of Operations for the six months ended July 4, 2015 and June 28, 2014;

 

  iii. Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended July 4, 2015 and June 28, 2014;

 

  iv. Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the six months ended July 4, 2015;

 

  v. Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2015 and June 28, 2014; and

 

  vi. Notes to Unaudited Condensed Consolidated Financial Statements.

 

  (b) Pro forma financial information.

 

  1. The following unaudited pro forma condensed combined financial information required by Item 9.01(b) of Form 8-K is filed as Exhibit 99.3 hereto and is incorporated herein by reference:

 

  i. Unaudited Pro Forma Condensed Combined Statement of Operations for the twelve months ended January 2, 2015;

 

1


  ii. Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended July 3, 2015;

 

  iii. Unaudited Pro Forma Condensed Combined Balance Sheet as of July 3, 2015; and

 

  iv. Notes to Unaudited Pro Forma Condensed Combined Financial Statements.

 

  (d) Exhibits

 

Exhibit

Number

  

Description of Exhibit

23    Consent of Deloitte & Touche LLP.
99.1    The audited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(1).
99.2    The unaudited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(2).
99.3    The unaudited pro forma condensed combined financial information listed in Item 9.01(b)(1).

 

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.

 

Date:   January 11, 2016     GREATBATCH, INC.
      By:  

/s/ Michael Dinkins

        Michael Dinkins
        Executive Vice President & Chief Financial Officer


EXHIBIT INDEX

 

Exhibit

Number

  

Description of Exhibit

23    Consent of Deloitte & Touche LLP.
99.1    The audited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(1).
99.2    The unaudited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(2).
99.3    The unaudited pro forma condensed combined financial information listed in Item 9.01(b)(1).


Exhibit 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement Nos. 333-61476, 333-97209, 333-129002, 333-143519, 333-161159, 333-174559, 333-184604 and 333-196320 on Form S-8 of Greatbatch, Inc. of our report dated January 11, 2016, relating to the consolidated financial statements of Lake Region Medical Holdings, Inc. and subsidiaries for the year ended January 3, 2015, appearing in this Current Report on Form 8-K/A of Greatbatch, Inc. dated January 11, 2016.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

January 11, 2016



Exhibit 99.1

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Lake Region Medical Holdings, Inc.

Wilmington, Massachusetts

We have audited the accompanying consolidated financial statements of Lake Region Medical Holdings, 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, stockholders’ equity, and cash flows for each of the three fiscal years in the period ended January 3, 2015, and the related notes to the consolidated financial statements.

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 their operations and their cash flows for each of the three fiscal years in the period ended January 3, 2015, in accordance with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

January 11, 2016

 

1


LAKE REGION MEDICAL HOLDINGS, INC.

Consolidated Balance Sheets

(in thousands, except per share data)

 

     As of  
     January 3,
2015
    December 31,
2013
 

Assets

    

Current assets:

    

Cash

   $ 44,191      $ 72,240   

Accounts receivable, net of allowances of $5,119 and $2,601 at January 3, 2015 and December 31, 2013, respectively

     78,078        59,624   

Inventory

     89,191        61,688   

Deferred income taxes

     4,404        —     

Prepaid expenses and other current assets

     6,192        2,973   
  

 

 

   

 

 

 

Total current assets

     222,056        196,525   

Property, plant and equipment, net

     186,637        116,957   

Goodwill

     719,842        556,315   

Other intangible assets, net

     193,782        119,808   

Deferred financing costs and other assets, net

     23,443        11,625   
  

 

 

   

 

 

 

Total assets

   $ 1,345,760      $ 1,001,230   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 8,350      $ 7   

Accounts payable

     27,531        19,229   

Accrued payroll and benefits

     20,865        11,928   

Customer deposits

     5,238        6,846   

Accrued interest

     3,460        19,303   

Derivative liabilities

     3,253        —     

Accrued expenses and other current liabilities

     23,356        14,081   
  

 

 

   

 

 

 

Total current liabilities

     92,053        71,394   

Long-term debt

     1,040,388        713,652   

Deferred income taxes

     38,936        33,925   

Other liabilities

     9,480        7,783   
  

 

 

   

 

 

 

Total liabilities

     1,180,857        826,754   
  

 

 

   

 

 

 

Commitments and contingencies (Note 19)

    

Stockholders’ equity:

    

Preferred stock, par value $0.01 per share, 50,000 shares authorized; no shares outstanding

     —          —     

Common stock, par value $0.01 per share, 200,000 shares authorized; 155,898 and 127,949 shares issued and outstanding at January 3, 2015 and December 31, 2013, respectively, excluding 630 shares subject to forfeiture at December 31, 2013

     1,559        1,279   

Additional paid-in capital

     715,786        639,424   

Accumulated other comprehensive loss

     (41,071     (1,186

Accumulated deficit

     (511,371     (465,041
  

 

 

   

 

 

 

Total stockholders’ equity

     164,903        174,476   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,345,760      $ 1,001,230   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

2


LAKE REGION MEDICAL HOLDINGS, INC.

Consolidated Statements of Operations

(in thousands)

 

     Fiscal Years  
     2014     2013     2012  

Net sales

   $ 752,264      $ 525,712      $ 498,627   

Cost of sales (exclusive of amortization)

     573,616        389,766        375,975   
  

 

 

   

 

 

   

 

 

 

Gross profit (exclusive of amortization)

     178,648        135,946        122,652   

Operating expenses:

      

Selling, general and administrative

     82,676        52,105        52,402   

Research and development

     8,763        2,027        1,695   

Impairment of intangible assets and goodwill

     26,800        63,128        —     

Restructuring

     3,138        280        2,866   

Amortization of intangible assets

     25,039        14,939        14,939   

Loss (gain) on disposal of property and equipment

     40        1,088        (261
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     146,456        133,567        71,641   
  

 

 

   

 

 

   

 

 

 

Income from operations

     32,192        2,379        51,011   

Other expense, net:

      

Interest expense, net

     (63,096     (69,145     (69,096

Loss on debt extinguishment

     (53,421     —          —     

Other, net

     (887     (1,036     1,100   
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (117,404     (70,181     (67,996
  

 

 

   

 

 

   

 

 

 

Loss from operations before income taxes

     (85,212     (67,802     (16,985

Provision (benefit) for income taxes

     (38,882     4,527        1,784   
  

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (46,330     (72,329     (18,769

Net loss from discontinued operations

     —          (63     (3,601
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (46,330   $ (72,392   $ (22,370
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

3


LAKE REGION MEDICAL HOLDINGS, INC.

Consolidated Statements of Comprehensive Loss

(in thousands)

 

     Fiscal Years  
     2014     2013     2012  

Net loss

   $ (46,330   $ (72,392   $ (22,370

Other comprehensive income (loss), net of income taxes:

      

Foreign currency translation adjustments

     (34,884     1,374        499   

Pension actuarial gain (loss)

     (2,123     170        (935

Amortization of pension actuarial loss

     38        34        93   

Curtailment of pension

     338        —          —     

Unrealized loss on derivatives

     (3,254     —          —     

Unrealized gain (loss) on investment

     —          32        (265

Realized gain on investment

     —          (242     (680
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of income taxes

     (39,885     1,368        (1,288
  

 

 

   

 

 

   

 

 

 

Comprehensive loss

   $ (86,215   $ (71,024   $ (23,658
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


LAKE REGION MEDICAL HOLDINGS, INC.

Consolidated Statements of Stockholders’ Equity

(in thousands, except per share data)

 

    

 

Common Stock
$0.01 par value

     Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Accumulated
Deficit
    Total
Stockholders’
Equity
 
     Shares      Amount           

Balance, January 1, 2012

     127,720       $ 1,277       $ 637,168      $ (1,266   $ (370,279   $ 266,900   

Stock issuance

     56         1         192        —          —          193   

Vesting of restricted stock

     —           —           150        —          —          150   

Stock-based compensation

     —           —           561        —          —          561   

Forfeiture of rollover options

     —           —           127        —          —          127   

Exercise of employee stock options

     33         —           177        —          —          177   

Repurchase of common stock

     —           —           (43     —          —          (43

Other comprehensive loss, net

     —           —           —          (1,288     —          (1,288

Net loss

     —           —           —          —          (22,370     (22,370
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     127,809         1,278         638,332        (2,554     (392,649     244,407   

Proceeds from issuance of common stock to employees

     —           —           75        —          —          75   

Vesting of restricted stock

     113         1         406        —          —          407   

Share-based compensation

     —           —           651        —          —          651   

Exercise of employee stock options

     27         —           70        —          —          70   

Repurchase of common stock

     —           —           (110     —          —          (110

Other comprehensive income, net

     —           —           —          1,368        —          1,368   

Net loss

     —           —           —          —          (72,392     (72,392
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     127,949         1,279         639,424        (1,186     (465,041     174,476   

Issuance of common stock in acquisition

     27,778         278         74,722        —          —          75,000   

Proceeds from issuance of common stock to employees

     35         1         94        —          —          95   

Vesting of restricted stock

     126         1         386        —          —          387   

Share-based compensation

     —           —           1,143        —          —          1,143   

Repurchase of common stock

     —           —           (12     —          —          (12

Settlement of roll-over stock options

     10         —           29        —          —          29   

Other comprehensive loss, net

     —           —           —          (39,885     —          (39,885

Net loss

     —           —           —          —          (46,330     (46,330
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 3, 2015

     155,898       $ 1,559       $ 715,786      $ (41,071   $ (511,371   $ 164,903   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


LAKE REGION MEDICAL HOLDINGS, INC.

Consolidated Statements of Cash Flows

(in thousands)

 

                                                              
     Fiscal Years  
     2014     2013     2012  

Cash flows from operating activities:

      

Net loss

   $ (46,330   $ (72,392   $ (22,370

Net loss from discontinued operations

     —          (63     (3,601
  

 

 

   

 

 

   

 

 

 

Net loss from continuing operations

     (46,330     (72,329     (18,769

Adjustments to reconcile net loss to net cash flows provided by operating activities (net of acquisition):

      

Depreciation and amortization

     50,803        33,016        39,169   

Amortization of debt discounts and non-cash interest accrued

     3,318        3,289        3,085   

Impact of inventory valuation step-up in an acquisition

     6,263        —          —     

Change in allowance for bad debts

     —          (11     10   

Restructuring charges, net of adjustments and payments

     —          —          1,779   

Impairment of intangible assets and goodwill

     26,800        63,128        —     

Loss (gain) on disposal of property and equipment

     40        1,088        (261

Realized gain on available for sale security

     —          (242     —     

Deferred income tax expense

     (42,837     2,820        392   

Non-cash compensation expense

     1,649        768        799   

Loss on debt extinguishment

     53,421        —          —     

Changes in operating assets and liabilities (net of effects of an acquisition):

      

Accounts receivable

     1,670        (10,140     862   

Inventory

     (3,148     (4,421     5,120   

Prepaid expenses and other assets

     (1,078     (762     1,051   

Accounts payable, accrued expenses and other liabilities

     (10,868     8,092        (6,482
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

     39,703        24,296        26,755   

Net cash provided by (used in) operating activities of discontinued operations

     —          (262     3,828   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     39,703        24,034        30,583   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Acquisition of a business, net of cash acquired

     (303,871     —          —     

Capital expenditures

     (29,825     (21,170     (17,981

Proceeds from the sale of property and equipment

     351        963        310   

Proceeds from the sale of security

     —          242        680   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities of continuing operations

     (333,345     (19,965     (16,991

Net cash provided by investing activities of discontinued operations

     —          7,987        7,291   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (333,345     (11,978     (9,700
  

 

 

   

 

 

   

 

 

 

 

(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     (22

Borrowings under revolving line of credit

     27,000        —          —     

Repayment of principal under revolving line of credit

     (27,000     —          —     

Proceeds from sale of common stock

     95        —          —     

Repurchase of common stock

     (12     (110     (43

Proceeds from the exercise of employee stock options

     —          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     (65
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     (1,312     378        226   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (28,049     12,338        21,044   

Cash, beginning of year

     72,240        59,902        38,858   
  

 

 

   

 

 

   

 

 

 

Cash, end of year

   $ 44,191      $ 72,240      $ 59,902   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Cash paid for interest

   $ 75,342      $ 65,784      $ 66,238   
  

 

 

   

 

 

   

 

 

 

Cash paid for income taxes, net of refunds

   $ 11,988      $ 1,514      $ 3,656   
  

 

 

   

 

 

   

 

 

 

Issuance of common stock in acquisition

   $ 75,000      $ —        $ —     
  

 

 

   

 

 

   

 

 

 

Property and equipment purchases included in accrued expenses

   $ 1,269      $ 1,894      $ 884   
  

 

 

   

 

 

   

 

 

 

Asset sales unpaid and included in other current assets

   $ —        $ —        $ 8,300   
  

 

 

   

 

 

   

 

 

 

(Concluded)

See notes to consolidated financial statements.

 

7


LAKE REGION MEDICAL HOLDINGS, INC.

Notes to Consolidated Financial Statements

 

1. Business and Basis of Presentation

Description of Business

Lake Region Medical Holdings, Inc. (“LRM Holdings”) provides, through its operating subsidiaries, 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 LRM Holdings 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, LRM Holdings has manufacturing facilities in North America, Europe, and Asia and operates in two segments: Advanced Surgical (“AS Segment”) and Cardio & Vascular (“C&V Segment”).

As discussed in Note 3, on March 12, 2014, LRM Holdings, along with its subsidiaries, completed the acquisition of Lake Region Manufacturing, Inc. (“Lake Region”), a Minnesota entity doing business as Lake Region Medical (the “Lake Region Medical Acquisition”). In September 2014, all LRM Holding subsidiaries commenced doing business as Lake Region Medical.

Basis of Presentation

LRM Holdings was formed by Accellent Holdings Corp. (“Accellent Holdings”) in February 2014 as a wholly owned subsidiary for the purpose of consummating the Lake Region Medical Acquisition. In connection with the Lake Region Medical Acquisition, all of the outstanding voting stock of Accellent Holdings was exchanged on a 1:1 basis for voting stock of LRM Holdings and LRM Holdings issued approximately 18% of its voting stock to former stockholders of Lake Region Medical as further discussed in Note 3. The former stockholders of Accellent Holdings controlled 100% of Accellent Holdings immediately prior to the Lake Region Medical Acquisition and approximately 82% of LRM Holdings immediately after the transaction. Further, a single stockholder controlled the voting stock of Accellent Holdings prior to the Lake Region Medical Acquisition and the voting stock of LRM Holdings immediately after the acquisition. The exchange of shares between Accellent Holdings and LRM Holdings is deemed a reorganization and Accellent Holdings is the deemed acquirer of Lake Region for the purpose of financial statement presentation. Reference to the “Company” within the notes to these consolidated financial statements refer to the consolidated financial statements of Accellent Holdings through March 12, 2014 and to the consolidated financial statements of LRM Holdings thereafter.

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 years 2013 and 2012 presented in the accompanying consolidated financial statements included 52 weeks. Unless otherwise indicated, references to fiscal years 2014, 2013 and 2012 are to the Company’s fiscal years ended January 3, 2015, December 31, 2013 and December 31, 2012, respectively.

 

2. Summary of Significant Accounting Policies

Principles of Consolidation

These 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.

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

 

8


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.

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.

 

9


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 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, 2013 or 2012 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, 2013 and 2012.

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 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 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 current assets or 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.

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.

 

12


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, 2013 and 2012 were $0.9 million, $2.1 million and $0.3 million, respectively.

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. The Lake Region Medical Acquisition was completed through a Contribution and Merger Agreement among Accellent Holdings, LRM Holdings (“Buyer”), Accellent Inc., 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 Accellent Inc. (“Lake Region Merger”). 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 of the $25.0 million initially held in escrow. In September 2014, the Company received $1.5 million 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 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.

 

13


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   
  

 

 

 

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

 

14


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.

 

4. Inventories

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, 2013 and 2012, the Company recorded charges for excess and obsolete inventory of $0.7 million, $1.3 million and $0.9 million, respectively.

 

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, $18.1 million and $25.1 million for fiscal years 2014, 2013 and 2012, respectively.

 

15


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, 2013 and 2012, the Company recorded amortization expense related to intangible assets as follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Cost of sales

   $ 3,596       $ 1,988       $ 1,988   

Selling, general and administrative

     21,443         12,951         12,951   
  

 

 

    

 

 

    

 

 

 

Total amortization reported

   $ 25,039       $ 14,939       $ 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. The Company 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.

There were no changes in the carrying value of goodwill in fiscal year 2012. 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 December 31, 2012

   $ —         $ —         $ 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   

Effect of foreign currency translation

     (17,558      —           (17,558
  

 

 

    

 

 

    

 

 

 

Balance at January 3, 2015

   $ 648,881       $ 70,961       $ 719,842   
  

 

 

    

 

 

    

 

 

 

 

16


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   

 

17


7. Other Liabilities

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   
  

 

 

    

 

 

 

 

8. Long-Term Debt

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   
  

 

 

    

 

 

 

As of December 31, 2013, the Company had outstanding $400 million of 8.375% senior secured notes due 2017 (“2017 Senior Secured Notes”) and $315 million of 10% senior subordinated notes due 2017 (“2017 Senior Subordinated Notes”) and had available a $75 million asset based revolver with no outstanding borrowings. The 2017 Senior Secured Notes were issued in 2010 at a price of 99.9349% of par value, representing original issuance discount of $2.6 million. The 2017 Senior Secured Notes and 2017 Senior Subordinated Notes carried redemption rights, were subject to certain restrictions and were jointly and severally guaranteed on a senior secured basis by the Company and all of the Company’s domestic subsidiaries. All obligations under these notes, and the guarantees of those obligations, were secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the guarantors. The indentures that governed these notes and the credit agreement that governed the asset based revolver contained restrictions on the Company’s ability, and the ability of the Company’s subsidiaries: to (i) incur additional indebtedness or issue preferred stock; (ii) repay subordinated indebtedness prior to its stated maturity; (iii) pay dividends on, repurchase or make distributions in respect of the Company’s capital stock, or make other restricted payments; (iv) make certain investments; (v) sell certain assets; (vi) create liens; (vii) consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; and (viii) enter into certain transactions with the Company’s affiliates. The discount and costs incurred on the issuance of these notes and credit agreement were being amortized as a component of interest expense over seven years.

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

 

18


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.

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.

 

19


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.

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, 2013 and 2012 has been offset by interest income of $0.1 million, $47,000 and $0.1 million, respectively.

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 accompanying consolidated 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.

 

20


The Company recorded the following amounts for fiscal years 2013 and 2012, within net loss from discontinued operations - net of tax (in thousands):

 

     2013      2012  

Loss on disposition of discontinued operations

   $ (63    $ (5,194

Income from discontinued operations prior to disposition

     —           1,593   
  

 

 

    

 

 

 

Net loss from discontinued operations - net of tax

   $ (63    $ (3,601
  

 

 

    

 

 

 

In connection with the sale of these businesses during the year ended December 31, 2012, the Company allocated $10.4 million of goodwill to these businesses, using the relative fair value method, which was included in the determination of loss on disposition of discontinued operations - net of tax.

Summary results of the discontinued operations prior to disposition for fiscal year 2012 follows (in thousands):

 

Sales

   $ 15,858   

Costs and expenses

     14,266   
  

 

 

 

Operating income from discontinued operations

     1,592   

Other income, net

     1   
  

 

 

 

Net loss from discontinued operations - net of tax

   $ 1,593   
  

 

 

 

 

10. Capital stock

The Company’s Board of Directors has authorized the issuance of up to 250,000,000 shares of capital stock, consisting of 50,000,000 shares of $0.01 par value preferred stock and 200,000,000 shares of $0.01 par value common stock. 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 on a 1:1 basis 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.

 

11. Restructuring Expenses

In December 2011, the Company’s Board of Directors approved a plan of closure with respect to the Company’s manufacturing facility in Manchester, England. In April of 2012, the Manchester facility was closed, and substantially all employees were terminated. All affected employees were provided stay bonuses as well as one-time termination benefits that were received upon cessation of employment, provided they remained with the Company through the closing date. The total one-time termination benefits totaled approximately $0.6 million and were recorded over each employee’s remaining service period as they were required to stay through their termination date to receive the benefits. During fiscal year 2013, the Company recorded approximately $0.3 million related to lease termination costs. All other restructuring costs related to the Manchester, England facility in fiscal year 2013 were negligible. During fiscal year 2012, the Company recorded $1.4 million of restructuring costs, including $1 million related to lease termination costs and $0.4 million related to one-time termination benefits that are recorded within “Restructuring expenses” in the accompanying consolidated statements of operations.

In April 2012, the Company announced a plan to close its manufacturing facility in Englewood, Colorado. The Company completed the facility closure in fiscal year 2013 upon completion of the transfer of the facility’s business to other of the Company’s facilities. In connection with the closure, the Company provided certain one-time termination benefits to affected employees. These one-time termination benefits were recorded over each employee’s remaining service period as employees were required to stay through their termination date to receive the benefits. During fiscal year 2013 and 2012, the Company recorded $0.2 million and $1.5 million of restructuring costs related to the facility’s closure, which consisted primarily of costs related to one-time termination benefits, and are recorded within “Restructuring expenses” in the accompanying consolidated statements of operations.

 

21


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.

The following table summarizes the amounts recorded related to restructuring activities in fiscal years 2014, 2013 and 2012 (in thousands):

 

     Employee
Costs
     Other Exit
Costs
     Total  

Balance, January 1, 2012

   $ 340       $ —         $ 340   

Restructuring expenses incurred

     1,886         980         2,866   

Cash payments

     (897      (190      (1,087
  

 

 

    

 

 

    

 

 

 

Accrual Balance, December 31, 2012

     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 common 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 common stock is determined by the 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 its common stock. The fair value of the 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, 2013 and 2012 was as follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Roll-over options

   $ (2    $ (65    $ (2

Restricted stock awards and units

     387         407         150   

Time-Based awards

     1,144         651         561   
  

 

 

    

 

 

    

 

 

 
   $ 1,529       $ 993       $ 709   
  

 

 

    

 

 

    

 

 

 

During fiscal years 2014, 2013 and 2012, 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. As of January 3, 2015, Performance-Based awards in the form of options to acquire 4.5 million shares of common stock were outstanding.

Share-based compensation expense was recorded in the consolidated statements of operations for fiscal years 2014, 2013 and 2012 follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Cost of sales

   $ 599       $ 340       $ 158   

Selling, general and administrative

     930         653         551   
  

 

 

    

 

 

    

 

 

 
   $ 1,529       $ 993       $ 709   
  

 

 

    

 

 

    

 

 

 

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, 2013 and 2012, is as follows:

 

     Fiscal Years  
     2014     2013     2012  

Expected term to exercise (in years)

     6.5        6.5        6.5   

Expected volatility

     28.73     28.93     28.98

Risk-free rate

     1.91     1.99     1.14

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, 2013 and 2012:

 

     Fiscal Years  
     2014     2013     2012  
     Liability (in
thousands)
    Roll-Over
Options
Outstanding
    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      $ 355        201,817   

Options exercised

     (29     (20,182     (45     (60,545     (177     (100,908

Options forfeited

     —          —          —          —          (35     (20,182

Change in fair value

     (2     —          (65     —          (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of fiscal year

   $ —          —        $ 31        20,182      $ 141        80,727   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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. Weighted average assumptions used in fiscal year 2013 and 2012 were:

 

     Fiscal Years  
     2013     2012  

Expected term to exercise (in years)

     0.4        1.0   

Expected volatility

     20.9     26.3

Risk-free rate

     0.1     0.3

Dividend yield

     —       —  

Director’s Deferred Compensation Plan

The 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 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 common stock as determined in the good faith discretion by the Company’s Board of Directors, or $2.70 at January 3, 2015. During fiscal years 2014, 2013 and 2012, 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      2012  

Benefit obligation at beginning of year

   $ 5,328       $ 5,053       $ 4,011   

Service cost

     83         76         51   

Interest cost

     177         192         188   

Actuarial loss

     1,250         (16      864   

Currency translation adjustment

     (597      154         71   

Benefits paid

     (80      (131      (132

Settlement/curtailment

     (1,652      —           —     
  

 

 

    

 

 

    

 

 

 

Benefit obligation at end of year

   $ 4,509       $ 5,328       $ 5,053   
  

 

 

    

 

 

    

 

 

 

 

25


The change in Domestic Plan assets during fiscal years 2014, 2013 and 2012 were as follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Fair value of plan assets at beginning of year

   $ 1,381       $ 1,063       $ 883   

Actual return on plan assets

     —           195         123   

Employer contributions

     278         183         114   

Benefits paid

     (7      (60      (57

Settlement/curtailment

     (1,652      —           —     
  

 

 

    

 

 

    

 

 

 

Fair value of plan assets at end of year

   $ —         $ 1,381       $ 1,063   
  

 

 

    

 

 

    

 

 

 

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, 2013 and 2012:

 

     Fiscal Years  
     2014      2013      2012  

Net actuarial pension gain (loss)

   $ (2,123    $ 170       $ (935

Curtailment loss

     338         —           —     

Amortization of net actuarial pension loss

     38         34         93   
  

 

 

    

 

 

    

 

 

 

Total recognized in other comprehensive loss (income)

   $ (1,747    $ 204       $ (842
  

 

 

    

 

 

    

 

 

 

Total recognized in net periodic benefit cost and other comprehensive income (loss)

   $ (2,375    $ (21    $ 1,050   
  

 

 

    

 

 

    

 

 

 

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      2012  

Service cost

   $ 83       $ 76       $ 51   

Interest cost

     177         192         188   

Expected return of plan assets

     (8      (77      (63

Recognized net actuarial loss

     38         34         32   

Settlement/curtailment

     338         —           —     
  

 

 

    

 

 

    

 

 

 

Total net periodic benefit cost

   $ 628       $ 225       $ 208   
  

 

 

    

 

 

    

 

 

 

 

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     2012  

Discount rate

     2.7     3.7     4.7

Expected long term return on plan assets

     —       7.0     7.0

Rate of compensation increase

     3.0     2.2     2.0

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, $2.5 million and $2.4 million for fiscal years 2014, 2013 and 2012, 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, 2013 and 2012. 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, $0.1 million and $0.1 million for fiscal years 2014, 2013 and 2012, 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


14. Income Taxes

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, 2013 and 2012 were as follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Current

        

Federal

   $ —         $ —         $ —     

State

     112         (92      90   

Foreign

     3,843         1,799         1,071   

Deferred

        

Federal

     (39,637      2,502         1,689   

State

     (2,685      287         (1,083

Foreign

     (515      31         17   
  

 

 

    

 

 

    

 

 

 

Total provision

   $ (38,882    $ 4,527       $ 1,784   
  

 

 

    

 

 

    

 

 

 

Income before income taxes included income from foreign operations of $13.5 million, $7.5 million and $6.3 million for fiscal years 2014, 2013 and 2012, 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, 2013 and 2012 were as follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Expected tax benefit at statutory rate

   $ (29,824    $ (23,753    $ (7,205

Change in valuation allowance on deferred tax assets

     7,207         6,036         7,243   

State tax benefit, net of federal benefit

     (2,859      (2,114      (489

Foreign rate differential

     (1,801      256         (784

Repatriation of earnings

     1,225         1,126         2,902   

Changes in reserves for uncertain tax positions

     36         (223      (54

Stock options

     (11      (38      (54

Foreign tax credits

     (1,592      (1,819      —     

Return to provision and other adjustments

     (11,263      2,961         225   

Permanent difference - goodwill impairment

     —           22,095         —     
  

 

 

    

 

 

    

 

 

 

Tax provision

   $ (38,882    $ 4,527       $ 1,784   
  

 

 

    

 

 

    

 

 

 

 

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, $6.0 million and $7.2 million during fiscal years 2014, 2013 and 2012, 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, 2013 and 2012 follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Balance, beginning of year

   $ 7,313       $ 7,536       $ 7,591   

Gross increases for tax positions taken in prior periods

     36         36         46   

Lapse of statute of limitations

     —           (259      (101
  

 

 

    

 

 

    

 

 

 

Balance, end of year

   $ 7,349       $ 7,313       $ 7,536   
  

 

 

    

 

 

    

 

 

 

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, 2013 and 2012, 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. 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, 2013 and 2012, the Company incurred management fees and expenses with KKR of $1.6 million, $1.4 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 years 2013 or 2012. 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 sold products to Biomet, Inc., which was privately owned by a consortium of private equity sponsors, including KKR. Net revenues from sales to Biomet, Inc. during fiscal years 2014, 2013 and 2012 totaled $0.3 million, $0.2 million and $0.2 million, respectively. At January 3, 2015 and December 31, 2013, accounts receivable due from Biomet were immaterial. Biomet, Inc. was sold subsequent to January 3, 2015 to an unrelated party.

 

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 and $0.7 million for fiscal year 2012. 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’s interest rate swap and cap agreements are recorded as derivative liabilities in the accompanying condensed consolidated balance sheets, the fair value of which are determined based upon 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:

           

Derivative liabilities

   $ 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 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 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, 2013 and 2012 (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Net sales:

        

United States of America

   $ 564,849       $ 404,465       $ 390,516   

Ireland

     42,392         33,348         35,561   

Germany

     41,668         35,192         30,341   

Central and South America

     41,291         15,560         13,813   

Belgium

     13,574         3,391         1,447   

Asia Pacific

     10,699         6,363         3,575   

United Kingdom

     5,899         3,034         3,581   

Switzerland

     5,638         7,681         3,265   

Eastern Europe

     5,584         2,229         986   

Sweden

     5,057         4,503         5,334   

France

     4,221         3,286         3,555   

Netherlands

     3,284         1,423         1,860   

Rest of World

     8,108         5,237         4,793   
  

 

 

    

 

 

    

 

 

 

Total

   $ 752,264       $ 525,712       $ 498,627   
  

 

 

    

 

 

    

 

 

 

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, 2013 and 2012, the Company’s ten largest customers in the aggregate accounted for 74%, 68% and 65% of consolidated net sales, respectively. Percentages of net sales from all greater than 10% customers are as follows:

 

     Fiscal Years Ended  
     2014     2013     2012  

Customer A

     18     17     13

Customer B

     15     15     16

Customer C

     14     11     11

Customer D

     12     10      

 

* Less than 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

 

* Less than 10%

 

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, 2013 and 2012 was $7.8 million, $7.2 million and $7.3 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.

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.

 

35


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
  

 

 

    

 

 

    

 

 

    

 

 

 

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
  

 

 

    

 

 

    

 

 

    

 

 

 

 

36


The following table summarizes the changes in accumulated other comprehensive loss for fiscal year 2012 (in thousands):

 

     Defined Benefit
Pension Items
     Unrealized
Gains and
Losses on
Available-for-
Sale Securities
     Foreign
Currency Items
     Total  

Balance at January 1, 2012

   $ (319    $ 1,155       $ (2,102    $ (1,266

Other comprehensive income before reclassifications

     (842      (945      499         (1,288

Amounts reclassified from accumulated other comprehensive income

     —           —           —           —     

Change in fair value

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net current-period other comprehensive income

     (842      (945      499         (1,288
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at December 31, 2012

   $ (1,161    $ 210       $ (1,603    $ (2,554
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21. Segment Information

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 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 (“EBITDA”), 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. EBITDA is adjusted based on the terms of the Company’s credit agreements. Certain costs and expenses incurred in fiscal year 2014 that were not incurred in fiscal years 2013 and 2012, including those related to the acquisition and integration of Lake Region as well as those related to Sarbanes-Oxley related preparation services, were excluded from Adjusted EBITDA for fiscal year 2014 in accordance with the Company’s credit agreements as described in Note 8.

 

37


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      2012  

Net sales:

        

Cardio & Vascular

   $ 533,819       $ 326,769       $ 313,883   

Advanced Surgical

     223,219         202,468         192,216   

Intersegment

     (4,774      (3,525      (7,472
  

 

 

    

 

 

    

 

 

 

Total net sales

   $ 752,264       $ 525,712       $ 498,627   
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA:

        

Cardio & Vascular

   $ 126,618       $ 98,632       $ 94,245   

Advanced Surgical

     33,061         31,859         28,313   

Corporate Services

     (22,234      (24,574      (23,895
  

 

 

    

 

 

    

 

 

 

Total Adjusted EBITDA

   $ 137,445       $ 105,917       $ 98,663   
  

 

 

    

 

 

    

 

 

 

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      (69,096

Depreciation and amortization

     (50,803      (33,016      (39,169

Impact of inventory value step-up

     (6,263      —           —     

Share-based compensation - employees

     (1,529      (993      (709

Share-based compensation - non-employees

     (120      225         (90

Employee severance and relocation

     (2,083      (1,295      (2,698

Restructuring expenses

     (3,138      (280      (2,866

Merger costs and other

     (5,860      —           —     

Integration costs

     (5,386      —           —     

Plant closure costs

     (621      (1,468      (732

Currency gain (loss)

     (936      (2,050      283   

Gain (loss) on disposal of property and equipment

     (40      (1,088      263   

Other taxes

     (231      (299      (157

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      (1,357

Gain from the sale of security

     —           242         680   
  

 

 

    

 

 

    

 

 

 

Total adjustments

     (222,657      (173,719    $ (115,648
  

 

 

    

 

 

    

 

 

 

Loss from operations before income taxes

   $ (85,212    $ (67,802    $ (16,985
  

 

 

    

 

 

    

 

 

 

 

 

38


The Company’s capital expenditures by segment for fiscal years 2014, 2013 and 2012 are as follows (in thousands):

 

     Fiscal Years  
     2014      2013      2012  

Capital expenditures:

        

Cardio & Vascular

   $ 18,359       $ 11,182       $ 9,949   

Advanced Surgical

     10,994         9,683         7,427   

Corporate Services

     472         305         605   
  

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 29,825       $ 21,170       $ 17,981   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

 

 

22. Subsequent Events

Management has evaluated subsequent events involving the Company for potential recognition or disclosure in the accompanying consolidated financial statements through January 11, 2016. Subsequent events are events or transactions that occur after the balance sheet date but before the accompanying consolidated financial statements are issued.

On October 27, 2015, Greatbatch, Inc. (“Greatbatch”) completed an acquisition of the Company pursuant to an Agreement and Plan of Merger, dated as of August 27, 2015, by and among the Greatbatch, Provenance Merger Sub Inc., a Delaware corporation and an indirect wholly owned subsidiary of Greatbatch (“Merger Sub”) and the Company (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub was merged with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly owned subsidiary of Greatbatch (the “Merger”). Greatbatch acquired the Company for approximately $1.7 billion in cash and stock whereby Greatbatch paid approximately $478.5 million in cash to Company stockholders, issued an aggregate of 5.1 million shares of common stock and options to Company stockholders and assumed approximately $1.0 billion of the Company’s net debt.

 

39



Exhibit 99.2

LAKE REGION MEDICAL HOLDINGS, 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 Stockholders’ 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   

Derivative liabilities

     6,556        3,253   

Accrued interest

     3,442        3,460   

Customer deposits

     1,873        5,238   

Accrued expenses and other current liabilities

     24,124        23,356   
  

 

 

   

 

 

 

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)

    

Stockholders’ equity:

    

Preferred stock, par value $0.01 per share, 50,000 shares authorized; no shares outstanding

     —          —     

Common stock, par value $0.01 per share, 200,000 shares authorized; 155,898 shares issued and outstanding at July 4, 2015 and January 3, 2015

     1,559        1,559   

Additional paid-in capital

     716,871        715,786   

Accumulated other comprehensive loss

     (62,826     (41,071

Accumulated deficit

     (502,906     (511,371
  

 

 

   

 

 

 

Total stockholders’ equity

     152,698        164,903   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 1,334,532      $ 1,345,760   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

1


LAKE REGION MEDICAL HOLDINGS, INC.

Unaudited Condensed Consolidated Statements of Operations

(in thousands)

 

     Six Months Ended  
     July 4,
2015
    June 28,
2014
 

Net sales

   $ 402,570      $ 349,147   

Cost of sales (exclusive of amortization)

     301,683        267,177   
  

 

 

   

 

 

 

Gross profit (exclusive of amortization)

     100,887        81,970   
  

 

 

   

 

 

 

Operating expenses:

    

Selling, general and administrative expenses

     42,437        40,219   

Research and development expenses

     5,283        3,721   

Impairment of trade name

     —          26,800   

Restructuring expenses

     1,911        2   

Loss (gain) on disposal of assets

     202        (45

Amortization of intangible assets

     11,072        11,567   
  

 

 

   

 

 

 

Total operating expenses

     60,905        82,264   
  

 

 

   

 

 

 

Income (loss) from operations

     39,982        (294
  

 

 

   

 

 

 

Other expense, net:

    

Loss on debt extinguishment

     —          (53,422

Interest expense, net

     (29,664     (32,347

Other expense, net

     (310     (181
  

 

 

   

 

 

 

Total other expense, net

     (29,974     (85,950
  

 

 

   

 

 

 

Income (loss) before income taxes

     10,008        (86,244

Provision (benefit) for income taxes

     1,543        (41,182
  

 

 

   

 

 

 

Net income (loss)

   $ 8,465      $ (45,062
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

2


LAKE REGION MEDICAL HOLDINGS, INC.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

 

     Six Months Ended  
     July 4,
2015
    June 28,
2014
 

Net income (loss)

   $ 8,465      $ (45,062

Other comprehensive income (loss), net of income taxes

    

Unrealized loss on derivatives

     (3,564     (1,698

Realized loss on derivatives

     261        —     

Cumulative translation adjustment

     (18,452     (4,498
  

 

 

   

 

 

 

Other comprehensive loss, net of income taxes

     (21,755     (6,196
  

 

 

   

 

 

 

Comprehensive loss

   $ (13,290   $ (51,258
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


LAKE REGION MEDICAL HOLDINGS, INC.

Unaudited Condensed Consolidated Statement of Stockholders’ 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

     155,898       $ 1,559       $ 715,786       $ (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

     155,898       $ 1,559       $ 716,871       $ (62,826   $ (502,906   $ 152,698   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

4


LAKE REGION MEDICAL HOLDINGS, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Six Months Ended  
     July 4,
2015
    June 28,
2014
 

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 common 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.

 

5


LAKE REGION MEDICAL HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Basis of Presentation

Description of Business

Lake Region Medical Holdings, Inc. (“LRM Holdings”) provides, through its operating subsidiaries, 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. LRM Holdings 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, LRM Holdings has manufacturing facilities in North America, Europe, and Asia and operates in two segments: Advanced Surgical (“AS Segment”) and Cardio & Vascular (“C&V Segment”).

As discussed in Note 3, on March 12, 2014, LRM Holdings, along with its subsidiaries, completed the acquisition of Lake Region Manufacturing, Inc. (“Lake Region”), a Minnesota entity doing business as Lake Region Medical (the “Lake Region Medical Acquisition”). In September 2014, all LRM Holding subsidiaries commenced doing business as Lake Region Medical.

Basis of Presentation

LRM Holdings was formed by Accellent Holdings Corp. (“Accellent Holdings”) in February 2014 as a wholly owned subsidiary for the purpose of consummating the Lake Region Medical Acquisition. In connection with the Lake Region Medical Acquisition, all of the outstanding voting stock of Accellent Holdings was exchanged on a 1:1 basis for voting stock of LRM Holdings and LRM Holdings issued approximately 18% of its voting stock to former stockholders of Lake Region Medical as further discussed in Note 3. The former stockholders of Accellent Holdings controlled 100% of Accellent Holdings immediately prior to the Lake Region Medical Acquisition and approximately 82% of LRM Holdings immediately after the transaction. Further, a single stockholder controlled the voting stock of Accellent Holdings prior to the Lake Region Medical Acquisition and the voting stock of LRM Holdings immediately after the acquisition. The exchange of shares between Accellent Holdings and LRM Holdings is deemed a reorganization and Accellent Holdings is the deemed acquirer of Lake Region for the purpose of financial statement presentation. Reference to the “Company” within the notes to these consolidated financial statements refer to the consolidated financial statements of Accellent Holdings through March 12, 2014 and to the consolidated financial statements of LRM Holdings since March 12, 2014.

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 six month periods ended July 4, 2015 included 182 days, whereas the six months ended June 28, 2014 included 179 days.

 

6


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. The Lake Region Medical Acquisition was completed through a Contribution and Merger Agreement among Accellent Holdings, LRM Holdings (“Buyer”), Accellent Inc., 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 Accellent Inc. (“Lake Region Merger”). 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 of the $25.0 million initially held in escrow. In September 2014, the Company received $1.5 million 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.

 

7


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 $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.

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
  

 

 

 

The Company incurred transaction related costs of $5.3 million during the 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.

 

8


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 $13.4 million and $12.0 million for 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 six months ended July 4, 2015 and June 28, 2014, amortization expense related to intangible assets was as follows (in thousands):

 

     Six Months Ended  
     July 4,
2015
     June 28,
2014
 

Cost of sales

   $ 1,635       $ 1,847   

Selling, general and administrative

     9,437         9,720   
  

 

 

    

 

 

 

Total

   $ 11,072       $ 11,567   
  

 

 

    

 

 

 

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.

 

9


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 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 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.

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   
  

 

 

    

 

 

    

 

 

 

 

10


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   

 

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

 

11


(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.

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 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.

 

12


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.

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 six months ended July 4, 2015, the Company recorded a restructuring expense of $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.

 

13


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 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.

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 common stock is determined by the 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 common stock. The estimated fair value of the 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 six months ended July 4, 2015 and June 28, 2014 was as follows (in thousands):

 

     Six Months Ended  
     July 4, 2015      June 28, 2014  

Restricted stock awards and units

   $ 221       $ 194   

Time-Based awards

     864         534   
  

 

 

    

 

 

 
   $ 1,085       $ 728   
  

 

 

    

 

 

 

During the 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 common stock were outstanding.

The Company canceled Performance Based awards totaling 3.4 million shares of 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

 

14


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):

 

     Six Months Ended  
     July 4, 2015      June 28, 2014  

Cost of sales

   $ 358       $ 287   

Selling, general and administrative

     727         441   
  

 

 

    

 

 

 
   $ 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   
  

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


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 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 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 common stock as determined in the good faith discretion by the Company’s Board of Directors, or $3.50 at July 4, 2015. During the six months ended July 4, 2015, compensation expense related to the Directors’ Plan of $0.3 million and for the 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 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, the Company 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.

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.

 

16


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 $0.8 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 $0.5 million for the six months ended July 4, 2015 and $0.6 million for the six months ended June 28, 2014. 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 $0.4 million in fees in connection with this agreement for the six months ended July 4, 2015 and June 28, 2014. At July 4, 2015 and January 3, 2015, the Company owed SunGard zero and $0.1 million, respectively.

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’s interest rate swap and cap agreements are recorded as derivative liabilities in the accompanying condensed consolidated balance sheets, the fair value of which are determined based upon 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)
 

Derivative liabilities

   $ 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)
 

Derivative liabilities

   $ 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.

 

17


    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.

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.

 

18


16. Changes in Accumulated Other Comprehensive Loss

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
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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.

 

20


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):

 

     Six Months Ended  
     July 4,
2015
     June 28,
2014
 

Net sales:

     

Cardio & Vascular

   $ 296,248       $ 240,862   

Advanced Surgical

     108,784         110,764   

Intersegment

     (2,462      (2,479
  

 

 

    

 

 

 

Total net sales

   $ 402,570       $ 349,147   
  

 

 

    

 

 

 

Adjusted EBITDA:

     

Cardio & Vascular

   $ 80,509       $ 60,227   

Advanced Surgical

     11,692         16,874   

Corporate Services

     (15,496      (11,738
  

 

 

    

 

 

 

Total Adjusted EBITDA

   $ 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

     (29,664      (32,347

Depreciation and amortization

     (24,460      (23,505

Impact of inventory valuation step-up in an acquisition

     —           (6,263

Share-based compensation - employees

     (1,085      (728

Share-based compensation - non-employees

     (294      (60

Employee severance and relocation

     (1,485      (693

Restructuring expenses

     (1,911      (2

Merger costs & other

     (36      (5,265

Integration costs

     (3,019      (1,462

Plant closure costs & other

     (2,809      —     

Currency loss

     (331      (185

(Loss) gain on disposal of property and equipment

     (202      45   

Other taxes

     (210      (182

Loss on debt extinguishment

     —           (53,422

Sarbanes-Oxley related preparation

     (415      (738

Management fees to stockholder

     (776      —     
  

 

 

    

 

 

 

Total adjustments

     (66,697      (151,607
  

 

 

    

 

 

 

Income (loss) before provision for income taxes

   $ 10,008       $ (86,244
  

 

 

    

 

 

 

 

21


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 the six months ended July 4, 2015 and June 28, 2014 (in thousands):

 

     Six Months Ended  
     July 4,
2015
     June 28,
2014
 

Net sales:

     

United States of America

   $ 308,622       $ 263,017   

Ireland

     18,627         21,137   

Germany

     20,863         19,963   

Central and South America

     24,108         15,628   

Belgium

     9,683         5,179   

Asia Pacific

     6,248         5,086   

United Kingdom

     2,770         2,855   

Switzerland

     275         4,174   

Eastern Europe

     2,955         2,745   

Sweden

     23         3,097   

France

     2,413         2,058   

Netherlands

     1,669         716   

Rest of World

     4,314         3,492   
  

 

 

    

 

 

 

Total

   $ 402,570       $ 349,147   
  

 

 

    

 

 

 

 

22


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 six months ended July 4, 2015 and June 28, 2014, the Company’s ten largest customers accounted for approximately 74% of its consolidated net sales.

Percentages of net sales from all greater than 10% customers are as follows:

 

Net Sales    Six Months Ended  
     July 4,
2015
    June 28,
2014
 

Customer A

     18     19

Customer B

     14        15   

Customer C

     14        14   

Customer D

     14        12   

Customers with 10% or greater concentration in accounts receivable are as follows:

 

Accounts Receivable    As of  
     July 4,
2015
    January 3,
2015
 

Customer A

     18     14

Customer B

     17        11   

Customer C

     13         

 

(*) Less than 10%

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 January 11, 2016. Subsequent events are events or transactions that occur after the balance sheet date but before the accompanying consolidated financial statements are issued.

On October 27, 2015, Greatbatch, Inc. (“Greatbatch”) completed an acquisition of the Company pursuant to an Agreement and Plan of Merger, dated as of August 27, 2015, by and among the Greatbatch, Provenance Merger Sub Inc., a Delaware corporation and an indirect wholly owned subsidiary of Greatbatch (“Merger Sub”) and the Company (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub was merged with and into the Company, with the Company continuing as the surviving corporation and an indirect wholly owned subsidiary of Greatbatch (the “Merger”). Greatbatch acquired the Company for approximately $1.7 billion in cash and stock whereby Greatbatch paid approximately $478.5 million in cash to Company stockholders, issued an aggregate of 5.1 million shares of common stock and options to Company stockholders and assumed approximately $1.0 billion of the Company’s net debt.

 

23



Exhibit 99.3

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

On October 27, 2015 Greatbatch, Inc. (“Greatbatch”, the “Company”, “we” or “our”) completed the acquisition of Lake Region Medical Holdings, Inc. (“Lake Region”) pursuant to an Agreement and Plan of Merger dated August 27, 2015, by and among the Company, Provenance Merger Sub Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Company (“Merger Sub”) and Lake Region (the “Merger Agreement”). Pursuant to the Merger Agreement, Merger Sub was merged with and into Lake Region, with Lake Region continuing as the surviving corporation and an indirect wholly-owned subsidiary of the Company (the “Merger”).

The unaudited pro forma condensed combined financial information presents the pro forma condensed combined balance sheet and statements of operations of the combined company based upon the financial statements of Greatbatch and Lake Region after giving effect to the acquisition of Lake Region and the related financing transactions. The historical consolidated financial information has been adjusted to give effect to pro forma events that are: directly attributable to the aforementioned transactions; factually supportable; and, with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the combined results. The unaudited pro forma condensed combined financial information should be read in conjunction with the accompanying notes to the unaudited pro forma condensed combined financial statements. In addition, the unaudited pro forma condensed combined financial information was based on and should be read in conjunction with the financial statements discussed below.

For purposes of preparing the unaudited pro forma condensed combined balance sheet as of July 3, 2015, we have presented the following information:

 

    The unaudited Greatbatch condensed consolidated balance sheet as of July 3, 2015

 

    The unaudited Lake Region condensed consolidated balance sheet as of July 4, 2015

For purposes of preparing the unaudited pro forma condensed combined statement of operations for the twelve months ended January 2, 2015, we have presented the following information:

 

    The Greatbatch consolidated statement of operations for the year ended January 2, 2015

 

    The Lake Region consolidated statement of operations for the year ended January 3, 2015. The Lake Region consolidated statement of operations for the year ended January 3, 2015 does not include the results of Lake Region Manufacturing, Inc. and its subsidiaries prior to its acquisition by Accellent Holdings Corp. in March 2014.

For purposes of preparing the unaudited pro forma condensed combined statement of operations for the six months ended July 3, 2015 we have presented the following information:

 

    The unaudited Greatbatch condensed consolidated statement of operations for the six months ended July 3, 2015

 

    The unaudited Lake Region condensed consolidated statement of operations for the six months ended July 4, 2015

The unaudited pro forma financial information is presented for informational purposes only. It does not purport to indicate the results that would have actually been attained had the acquisition of Lake Region occurred on the assumed dates or for the periods presented, or which may be realized in the future. To produce the unaudited pro forma financial information, we allocated the estimated purchase price using our best estimates of fair value. These estimates are based on the most recently available information. To the extent that additional information becomes available, and as additional analysis is performed the assumptions and estimates herein could change significantly. There can be no assurances that the final valuation will not result in material changes to the purchase price allocation.

As a result of the Lake Region acquisition, the combined company expects to achieve annual synergies of approximately $25 million in 2016, which is expected to increase to at least $60 million in 2018. The unaudited pro forma financial information does not reflect these potential synergies.

 

1


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

GREATBATCH, INC.

FOR THE TWELVE MONTHS ENDED

JANUARY 2, 2015

 

(in thousands, except per share data)   Greatbatch, Inc.
Historical
    Lake Region
Adjusted
Historical
(Note 1)
    LRM
Reclassifications
(Note 1)
    Merger and
Related

Pro Forma
Adjustments
          Financing and
Related

Pro Forma
Adjustments
          Greatbatch, Inc.
Pro Forma
Combined
 
    A     B     C     D           E           F=A+B+C+D+E  

Sales

  $ 687,787      $ 752,264      $ —        $ (6,839     5a      $ —          $ 1,433,212   

Cost of sales

    456,389        573,616        (1,695     (6,839     5a        —            1,061,736   
          13,201        5b         
          4,064        5c         
          23,000        5d         
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Gross profit (loss)

    231,398        178,648        1,695        (40,265       —            371,476   

Operating expenses:

               

Selling, general and administrative expenses

    90,602        82,676        (13,086     14,023        5b        —            174,677   
          462        5c         

Research, development and engineering costs, net

    49,845        8,763        (4     24        5c        —            58,628   

Other operating expenses (income), net

    15,297        55,017        14,785        (25,039     5b        —            60,060   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total operating expenses (income)

    155,744        146,456        1,695        (10,530       —            293,365   

Operating income (loss)

    75,654        32,192        —          (29,735       —            78,111   

Interest expense (income)

    4,252        63,096        —          —            (4,252     4b        108,023   
              (63,096     4c     
              6,067        4d     
              1,289        4e     
              100,196        4f     
              471        4g     

Gain on cost and equity method investments

    (4,370     —          —          —            —            (4,370

Loss on debt extinguishment

    —          53,421        —          —            —            53,421   

Other (income) expense, net

    (807     887        —          —            —            80   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income (loss) before provision (benefit) for income taxes

    76,579        (85,212     —          (29,735       (40,675       (79,043

Provision (benefit) for income taxes

    21,121        (38,882     —          (9,634     5e        (14,236     4l        (41,631
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net Income (loss)

  $ 55,458      $ (46,330   $ —        $ (20,101     $ (26,439     $ (37,412
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Earnings (loss) per share:

               

Basic

  $ 2.23                  $ (1.26

Diluted

  $ 2.14                  $ (1.26

Weighted average shares outstanding:

               

Basic

    24,825            4,980        5f            29,805   

Diluted

    25,975            4,980        5f            29,805   

 

2


UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

GREATBATCH, INC.

FOR THE SIX MONTHS ENDED

JULY 3, 2015

 

(in thousands, except per share data)   Greatbatch, Inc.
Adjusted Historical
(Note 1)
    Lake Region
Adjusted
Historical
(Note 1)
    LRM
Reclassifications
(Note 1)
    Merger and
Related

Pro Forma
Adjustments
        Financing and
Related

Pro Forma
Adjustments
        Greatbatch, Inc.
Pro Forma
Combined
 
    A     B     C     D         E         F=A+B+C+D+E  

Sales

  $ 336,210      $ 402,570      $ —        $ (2,429   5a   $ —          $ 736,351   

Cost of sales

    225,861        301,683        (3,102     (2,429   5a     —            530,964   
          6,569      5b      
          2,382      5c      
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Gross profit (loss)

    110,349        100,887        3,102        (8,951       —            205,387   

Operating expenses:

               

Selling, general and administrative expenses

    46,713        42,437        (4,590     10,724      5b     —            95,555   
          271      5c      

Research, development and engineering costs, net

    25,608        5,283        (73     14      5c     —            30,832   

Other operating expenses (income), net

    15,605        13,185        7,765        (11,072   5b     —            25,483   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total operating expenses (income)

    87,926        60,905        3,102        (63       —            151,870   

Operating income (loss)

    22,423        39,982        —          (8,888       —            53,517   

Interest expense (income)

    2,326        29,664          —            (2,326   4b     53,638   
              (29,664   4c  
              3,068      4d  
              664      4e  
              49,670      4f  
              236      4g  

Gain on cost and equity method investments, net

    (540     —          —          —            —            (540

Other (income) expense, net

    (1,118     310        —          —            —            (808
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Income (loss) before provision (benefit) for income taxes

    21,755        10,008        —          (8,888       (21,648       1,227   

Provision (benefit) for income taxes

    4,464        1,543          (2,880   5e     (7,577   4l     (4,450
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Net Income (loss)

  $ 17,291      $ 8,465      $ —        $ (6,008     $ (14,071     $ 5,677   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Earnings (loss) per share:

               

Basic

  $ 0.68                  $ 0.19   

Diluted

  $ 0.66                  $ 0.18   

Weighted average shares outstanding:

               

Basic

    25,369            4,980      5f         30,349   

Diluted

    26,264            5,040      5f         31,304   

 

3


UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

GREATBATCH, INC.

AS OF JULY 3, 2015

 

(in thousands)   Greatbatch, Inc.
Historical
    Lake Region
Adjusted
Historical
(Note 1)
    Merger and
Related
Pro Forma
Adjustments
        Financing and
Related
Pro Forma
Adjustments
        Greatbatch, Inc.
Pro Forma
Combined
 
    A     B     C         D         E = A+B+C+D  

Assets

             

Current assets:

             

Cash and cash equivalents

  $ 72,338      $ 45,708      $ (478,490 )   3a   $ 532,938      4a   $ 130,970   
        29,500      3b     (177   4b  
            (3,442   4c  
            (41,701   4d  
            (10,250   4e  
            (4,000   4h  
            (9,254   4i  
            (2,200   4j  

Accounts receivable, net of allowance

    122,101        82,731        —            —            204,832   

Inventories

    140,093        97,958        23,000      3d     —            261,051   

Refundable income taxes

    2,368        —          —            —            2,368   

Deferred income taxes

    6,227        4,407        —            —            10,634   

Prepaid expenses and other current assets

    12,279        8,552        —            —            20,831   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total current assets

    355,406        239,356        (425,990       461,914          630,686   

Property and equipment, net

    152,713        184,304        35,296      3e     —            372,313   

Amortizing intangible assets, net

    58,572        163,344        685,656      3f     —            907,572   

Indefinite-lived intangible assets

    20,288        15,239        54,761      3f     —            90,288   

Goodwill

    354,107        710,646        (25,873   3c     —            1,038,880   

Deferred income taxes

    2,654        —          —            —            2,654   

Other assets

    22,391        21,643        (19,680   3g     4,956      4d     26,610   
            (2,700   4k  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total assets

  $ 966,131      $ 1,334,532      $ 304,170        $ 464,170        $ 3,069,003   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Liabilities and Stockholders’ Equity

             

Current liabilities:

             

Current portion of long-term debt

  $ 13,750      $ 8,350      $ —          $ 6,900      4a   $ 29,000   

Accounts payable

    44,858        33,787        —            —            78,645   

Income taxes payable

    1,761        —           —            —            1,761   

Deferred income taxes

    588        —           7,452      3i     —            8,040   

Accrued expenses

    37,670        56,123        —            (6,556   4i     83,618   
            (177   4b  
            (3,442   4c  
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total current liabilities

    98,627        98,260        7,452          (3,275       201,064   

Long-term debt

    168,750        1,036,212        —            526,038      4a     1,684,005   
            (36,745   4d  
            (10,250   4e  

Deferred income taxes

    51,087        37,931        170,920      3i     —            259,938   

Other long-term liabilities

    6,065        9,431        (880   3h     —            14,616   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities

  $ 324,529      $ 1,181,834      $ 177,492        $ 475,768        $ 2,159,623   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Stockholders’ Equity:

             

Preferred stock

    —          —          —            —            —     

Common stock

    26        1,559        5      3k     —            31   
        (1,559   3j      

Additional paid-in capital

    380,293        716,871        (716,871   3j     —            630,164   
        245,363      3k      
        4,508      3a      

Treasury stock, at cost

    (2,279     —          —            —            (2,279

Retained earnings

    256,739        (502,906     502,906      3j     (4,000   4h     274,641   
            (2,698   4i  
        29,500      3b     (2,200   4j  
            (2,700   4k  

Accumulated other comprehensive income (loss)

    6,823        (62,826     62,826      3j     —            6,823   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total stockholders’ equity

    641,602        152,698        126,678          (11,598       909,380   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

Total liabilities and stockholders’ equity

  $ 966,131      $ 1,334,532      $ 304,170        $ 464,170        $ 3,069,003   
 

 

 

   

 

 

   

 

 

     

 

 

     

 

 

 

 

4


Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

1. Basis of Presentation

The accompanying unaudited pro forma condensed combined financial information presents the pro forma condensed combined balance sheet and statements of operations of the combined company based upon the financial statements of Greatbatch and Lake Region after giving effect to the acquisition of Lake Region and the related financing transactions.

The unaudited pro forma condensed combined statements of operations for the six months ended July 3, 2015 and for the twelve months ended January 2, 2015 combine the historical consolidated statements of operations of Greatbatch and the historical consolidated statements of operations of Lake Region. These unaudited pro forma condensed combined statements of operations give effect to the acquisition of Lake Region and the related financing transactions as if they had been consummated on January 4, 2014, the beginning of the earliest period presented. The unaudited pro forma condensed combined balance sheet combines the historical condensed consolidated balance sheet of Greatbatch and the historical condensed consolidated balance sheet of Lake Region as of July 3, 2015, giving effect to the Lake Region acquisition and the related financing transactions as if they had been consummated on July 3, 2015.

The unaudited pro forma condensed combined financial statements were prepared using the acquisition method of accounting with Greatbatch considered the acquirer of Lake Region. Under the acquisition method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed with any excess allocated to goodwill. The pro forma purchase price allocation was based on an estimate of the fair market value of the tangible and intangible assets acquired and liabilities assumed of Lake Region. In arriving at the estimated fair market values, we considered the appraisals of independent consultants, which were based on a preliminary valuation of the assets and liabilities acquired from Lake Region. The final purchase price allocation may differ significantly from those reflected in these preliminary pro forma purchase price allocations presented herein.

The unaudited pro forma condensed combined financial statements do not reflect the costs of any integration activities or benefits that may result from the realization of future cost savings from operating efficiencies or revenue synergies expected to result from the acquisition of Lake Region.

Certain reclassifications were made to the historical financial statements of Lake Region and Greatbatch, which includes the following:

Adjustments made to Lake Region’s historical consolidated financial statements for the year ended January 3, 2015

 

    A reclassification of $26.8 million, $3.1 million, and $25.0 million from impairment of intangible assets and goodwill, restructuring, and amortization of intangible assets, respectively, to other operating expenses (income), net to conform to Greatbatch’s presentation.

 

    A reclassification of $1.7 million, $13.1 million, and $0.004 million from cost of sales, selling, general and administrative expenses, and research, development and engineering costs, net, respectively, to other operating expenses (income), net to conform to Greatbatch’s accounting policies related to the classification of other operating expenses.

Adjustments made to Lake Region’s historical condensed consolidated financial statements as of or for the six months ended July 4, 2015

 

    A reclassification of $1.9 million, $11.1 million and $0.2 million from restructuring, amortization of intangible assets and loss on disposal of assets, respectively, to other operating expenses (income), net to conform to Greatbatch’s presentation.

 

    A reclassification of $3.1 million, $4.6 million, and $0.073 million from cost of sales, selling, general and administrative expenses, and research, development and engineering costs, net, respectively, to other operating expenses (income), net to conform to Greatbatch’s accounting policies related to the classification of other operating expenses.

 

    A reclassification of $20.1 million and $3.4 million from accrued payroll and benefits, and accrued interest, respectively, to accrued expenses to conform to Greatbatch’s presentation.

 

    A reclassification of $15.2 million from amortizing intangible assets, net to indefinite-lived intangible assets to conform with Greatbatch’s accounting policies related to the classification of trademarks and tradenames.

 

5


The following reclassification was made to Greatbatch’s historical financial statements to remain consistent across all periods presented:

Adjustments made to Greatbatch’s historical condensed consolidated financial statements for the six months ended July 3, 2015

 

    A reclassification of $0.54 million from other (income) expense, net to gain on cost and equity method investments, net to conform to the full year presentation.

 

2. Lake Region Purchase Price and Preliminary Purchase Price Allocation

Purchase price

Upon consummation of the proposed Lake Region acquisition, Lake Region’s stockholders received approximately $478.5 million in cash consideration and approximately $249.9 million in stock consideration of Greatbatch, Inc. and Greatbatch assumed approximately $1.0 billion of Lake Region debt. The stock consideration issued consisted of 4,980,064 shares of Greatbatch common stock and 119,900 rollover options to purchase shares of Greatbatch common stock at $12.41 per share.

 

(in thousands)       

Cash payment to stockholders

   $ 462,213   

Cash payment for deferred compensation and stock awards outstanding

     16,277   
  

 

 

 

Cash consideration to Lake Region stockholders

   $ 478,490   
  

 

 

 

Value of stock consideration to Lake Region stockholders

   $ 245,368   

Value of rollover stock options granted

     4,508   
  

 

 

 

Stock consideration to Lake Region stockholders

   $ 249,876   
  

 

 

 

Total consideration to Lake Region stockholders

   $ 728,366   
  

 

 

 

Preliminary purchase price allocation

The following is a summary of the preliminary purchase price allocation giving effect to the Lake Region acquisition as if it had been consummated on July 3, 2015:

 

(in thousands)       

Cash

   $ 45,708   

Property and equipment

     219,600   

Accounts receivable

     82,731   

Inventory

     120,958   

Other assets

     14,922   

Amortizing intangible assets

     849,000   

Indefinite-lived intangible assets

     70,000   

Goodwill

     684,773   
  

 

 

 

Total assets acquired

     2,087,692   
  

 

 

 

Long-term debt

     1,036,212   

Current liabilities

     98,260   

Deferred tax liability, including current portion

     216,303   

Other long-term liabilities

     8,551   
  

 

 

 

Total liabilities assumed

     1,359,326   
  

 

 

 

Net assets acquired

   $ 728,366   
  

 

 

 

 

6


3. Merger and Related Unaudited Pro Forma Condensed Combined Balance Sheet Adjustments

The following summarizes the pro forma adjustments in connection with the Lake Region acquisition to give effect to the transaction as if it had occurred on July 3, 2015 for purposes of the unaudited pro forma condensed combined balance sheet:

 

a. Reflects the cash consideration paid for the Lake Region acquisition as shown within Note 2: Lake Region Purchase Price and Preliminary Purchase Price Allocation.

 

b. Reflects the recognition of $29.5 million of transaction costs incurred by Greatbatch and Lake Region. These transaction costs are recorded against retained earnings solely for purposes of this presentation. There is no continuing impact of these transaction costs on the combined results of operations and, as such, these transaction costs are not included in the pro forma condensed combined statement of operations.

 

c. Reflects the elimination of the Lake Region historical goodwill and the recognition of goodwill related to the Lake Region acquisition. Goodwill is calculated as the difference between the fair value of the consideration transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed. The estimated goodwill calculation is preliminary and is subject to change based upon final determination of the fair value of assets acquired and liabilities assumed. Goodwill is not amortized, but is assessed at least annually or more frequently if events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable based on management’s assessment.

 

d. Represents the estimated adjustment to step-up inventory to fair value of $121.0 million. The estimated step-up in inventory is preliminary and is subject to change based upon final determination of the fair values of finished goods and work-in-process inventories. We will reflect the fair value of the inventory of Lake Region as the acquired inventory is sold, which for purposes of the unaudited pro forma condensed combined statement of operations is assumed to occur within the first three months after closing.

 

e. Represents the estimated adjustment to step-up property and equipment to fair value of $219.6 million. The fair value of property and equipment acquired was valued primarily using a combination of the trended reproduction cost method and net book value. The fair value approximates the current cost of replacing the asset with another asset of equivalent economic utility adjusted further for obsolescence and physical depreciation.

The estimated useful lives of the property, plant and equipment range from 3 to 20 years. A ten percent change in the fair value of the property and equipment assets would result in a change in depreciation expense of approximately $3.0 million for the twelve months ended January 2, 2015, and approximately $1.6 million for the six months ended July 3, 2015.

 

f. Represents the estimated adjustment to record acquired identifiable intangible assets consisting of tradenames, technology, and customer relationships to fair value of $919.0 million. This adjustment is preliminary and is determined using the “income approach,” which is a valuation technique that calculates an estimate of the fair value of an asset based on market participant expectations of the cash flows an asset would generate over its remaining useful life. Some of the more significant assumptions inherent in the development of the identifiable intangible asset valuations, from the perspective of a market participant, include the estimated net cash flows for each year (including net revenues, cost of sales, research and development costs, selling and marketing costs, and working capital), the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream, attrition rates, royalty rates, and other factors. This estimate is preliminary and subject to change and could vary materially from the final adjustment recorded.

The estimated useful lives of the intangibles range from 19 to 29 years. A one year decrease in the useful lives of the definite-lived intangible assets would result in additional annual amortization expense of approximately $1.3 million for the 12 months ended January 2, 2015, and increase approximately $0.7 million for the six months ended July 3, 2015. These estimates were determined assuming a straight line amortization approach.

 

g. Represents the elimination of Lake Region’s historical deferred financing costs as the debt was revalued under acquisition accounting. Refer to adjustment 4(k) for the elimination of Greatbatch’s historical deferred financing costs.

 

h. Reflects the elimination of the historical deferred compensation liability, as all deferred compensation will be paid out upon consummation of the transaction.

 

i.

The adjustments to deferred taxes result in a net increase to long-term deferred tax liability of $170.9 million and an increase to short-term deferred tax liability of $7.5 million. These adjustments reflect the tax impact of preliminary opening balance sheet purchase accounting adjustments on the unaudited pro forma condensed combined balance sheet, and are

 

7


  computed by applying the statutory tax rates of the relevant jurisdictions to basis differences created by the pro forma adjustments. In addition, the historic Lake Region valuation allowance against certain federal deferred tax assets of $80.4 million was released and is reflected in the net long-term deferred tax liability amount above. This estimate of deferred income tax liabilities is preliminary and is subject to change based upon the final determination of blended statutory tax rate post-acquisition, valuation allowance assessments, and management’s final determination of the fair values of tangible and identifiable intangible assets acquired and liabilities assumed by jurisdiction.

 

j. The adjustments relate to the elimination of Lake Region’s stockholders’ equity.

 

k. This adjustment reflects the increase in Greatbatch, Inc. shares of common stock outstanding due to the 4.98 million shares issued to Lake Region stockholders as part of the transaction consideration.

 

4. Financing & Related Pro Forma Adjustments

The following summarizes the pro forma adjustments in connection with the financing for the acquisition of Lake Region to give effect to the transaction as if it had occurred on January 4, 2014 for purposes of the unaudited pro forma condensed combined statements of operations, and as if it had occurred on July 3, 2015 for purposes of the unaudited pro forma condensed combined balance sheet:

 

a. In connection with the completion of the Merger, the Company and the Company’s wholly-owned subsidiary, Greatbatch Ltd., entered into a new credit agreement (the “Senior Secured Credit Facilities”) with Manufacturers and Traders Trust Company, as administrative agent, consisting of a $375 million term loan A facility (the “TLA Facility”), a $1,025 million term loan B facility (the “TLB Facility” and, together with the TLA Facility, the “Term Loan Facilities”), and a $200 million revolving credit facility (the “Revolving Credit Facility”). The Term Loan Facilities were funded in full on October 27, 2015 and used, together with the net proceeds from the Notes (as defined below), to fund the cash consideration paid to the Lake Region shareholders, the repayment of Greatbatch Ltd.’s outstanding indebtedness, and the repayment of Lake Region’s outstanding indebtedness. No amounts were drawn on the Revolving Credit Facility in connection with the completion of the Merger. Additionally, on October 27, 2015, Greatbatch Ltd. completed an offering (the “Offering”) of $360 million aggregate principal amount of 9.125% Senior Notes due 2023 (the “Notes”). In connection with the closing of the Offering, Greatbatch Ltd. and the guarantors for the Notes (the “Guarantors”) entered into an Indenture, dated as of October 27, 2015 (the “Indenture”), by and among Greatbatch Ltd., the Guarantors from time to time party thereto and Wilmington Trust, National Association, as trustee (the “Trustee”).

The proceeds from the Term Loan Facilities and Notes were used to refinance Greatbatch’s existing debt and Lake Region debt of $182.5 million and $1.0 billion respectively. The Revolving Credit Facility will be used for working capital requirements and no amount was drawn against the Revolving Credit Facility at the closing of the Merger. The following is a reconciliation of the outstanding long-term debt amounts shown in the unaudited pro forma condensed combined balance sheet as of July 3, 2015:

 

(in millions)       

TLA Facility

   $ 375.0   

TLB Facility

     1,025.0   

Notes

     360.0   

Deferred financing fees (Note 4d)

     (36.7

Original issue discount (Note 4e)

     (10.3
  

 

 

 

Total debt

     1,713.0   

Less: current portion

     (29.0
  

 

 

 

Total long-term debt

   $ 1,684.0   
  

 

 

 

 

b. Reflects the elimination of Greatbatch’s existing accrued interest and interest expense on outstanding debt which was refinanced in conjunction with this transaction.

 

c. Reflects the elimination of existing Lake Region accrued interest and interest expense on outstanding debt which was refinanced in conjunction with this transaction.

 

d. Greatbatch incurred approximately $41.7 million of debt issuance costs, of which $33.9 million relate to the Senior Secured Credit Facilities and $7.8 million relate to the Notes. The costs consist of various fees paid to the initial purchasers for their services in arranging and structuring the financing. The fees will be deferred, recorded within the other assets and long-term debt line items for $5.0 million and $36.7 million, respectively, and amortized over the lives of the respective debt, which range from 5-8 years. These fees are being amortized utilizing the effective interest method and amounted to $6.1 million and $3.1 million for the full-year and six month unaudited pro forma condensed combined statements of operations presented, respectively.

 

8


e. The TLB Facility has an original issuance discount of $10.3 million. This discount will be amortized over the 7 year life of the debt based on the effective interest method. The amortization of the discount results in additional interest expense of $1.3 million and $0.7 million for the full-year and six month unaudited pro forma condensed combined statements of operations presented, respectively.

 

f. The pro forma adjustment to interest expense is approximately $100.2 million for the twelve months ended January 2, 2015, and $49.7 million for the six month period ended July 3, 2015. The weighted average interest rate assumed for the TLA Facility, TLB Facility and the Notes was approximately 5.7% for the twelve months ended January 2, 2015 and the six months ended July 3, 2015.

 

g. Reflects the unused commitment fees applied to the Revolving Credit Facility at an annual rate of 0.25% for unused capacity. The pro forma adjustment is approximately $0.5 million per year and $0.24 million for the six month period.

 

h. Reflects the commitment fee applied to the available amount under a bridge facility in connection with the financing transactions. The bridge facility was not utilized as adequate financing was secured under the Offering. The fee was expensed in full over the commitment period in the third and fourth quarters of 2015.

 

i. Reflects the cash settlement of interest rate swap derivatives used to hedge Lake Region debt. As all Lake Region debt was refinanced in conjunction with this transaction, all related derivatives were terminated.

 

j. Reflects the prepayment penalty fees associated with refinancing Lake Region debt.

 

k. Represents the elimination of Greatbatch’s historical deferred financing costs as the debt will be refinanced in conjunction with the acquisition resulting in the write-off of the recorded deferred financing costs.

 

l. Reflects tax expense computed by applying the weighted average statutory tax rate (35%) of the relevant jurisdictions to the respective pro forma adjustments presented in the unaudited pro forma condensed combined statements of operations. These rates do not reflect Greatbatch’s effective tax rate, which includes other items and may be significantly different than the rates assumed for purposes of preparing the unaudited pro forma condensed combined financial statements for a variety of factors.

The estimated interest expense reflected in these unaudited pro forma condensed combined financial statements are estimates only and may differ significantly from actual results. A 0.125 percent change in the interest rate could result in an increase or decrease in the pro forma interest expense of approximately $2.2 million for a full year period.

 

5. Merger and Related Unaudited Pro Forma Condensed Combined Statement of Operations Adjustments

The following summarizes the pro forma adjustments in connection with the Lake Region acquisition to give effect to the transaction as if it had occurred on January 4, 2014 for purposes of the unaudited pro forma condensed combined statements of operations:

 

a. Reflects the elimination of Greatbatch’s sales and related cost of sales to/from Lake Region.

 

b. Represents an increase in amortization expense associated with fair value adjustments to the carrying value of intangible assets. The increase in amortization expense related to the customer relationship intangible assets recorded within the selling, general, and administrative expenses line item. The increase in amortization expense associated with the technology intangible asset was recorded within the cost of sales line item. For purposes of the unaudited pro forma condensed combined statements of operations, amortization expense was determined using a cash flow approach which is based on utilizing a proportion of expected cash flows for the period to the total expected cash flows for the related intangible assets. The calculated amortization expense may be different than what is actually recorded. Amortization expense is recorded as follows:

 

9


                   Amortization Expense  
(in thousands)    Fair Value      Useful
Life
     12 Months
Ended
1/2/2015
     6 Months
Ended
7/3/2015
 

Customer Relationships

   $ 689,000         29         14,023         10,724   

Technology

     160,000         19         13,201         6,569   
  

 

 

       

 

 

    

 

 

 
   $ 849,000          $ 27,224       $ 17,293   
  

 

 

       

 

 

    

 

 

 

Lake Region historical amortization expense

         $ 25,039       $ 11,072   
        

 

 

    

 

 

 

 

c. Represents an increase in depreciation expense associated with fair value adjustments to the carrying value of property and equipment. The increase in depreciation expense is split between the selling, general, and administrative expenses, the cost of sales, and research, development and engineering costs, net line items based upon historical Lake Region depreciation expense. The increase in depreciation expense is recorded as follows:

 

            Depreciation Expense  
(in thousands)    Fair Value      12 Months
Ended
1/2/2015
     6 Months
Ended
7/3/2015
 

Property and equipment

   $ 219,600       $ 30,315       $ 16,055   
  

 

 

    

 

 

    

 

 

 

Lake Region historical depreciation expense

      $ 25,765       $ 13,388   
     

 

 

    

 

 

 

Increase in depreciation expense:

        

Cost of sales

        4,064         2,382   

Selling, general, and administrative expenses

        462         271   

Research, development and engineering costs, net

        24         14   
     

 

 

    

 

 

 
      $ 4,550       $ 2,667   
     

 

 

    

 

 

 

 

d. Represents an adjustment to cost of goods sold for the amortization expense associated with fair value adjustments to the carrying value of inventory. We will amortize the fair value of the inventory of Lake Region as the acquired inventory is sold, which for purposes of the unaudited pro forma condensed combined statement of operations is assumed to occur within the first three months after closing.

 

e. Reflects tax expense computed by applying the weighted average statutory tax rate (32.4%) of the relevant jurisdictions to the respective pro forma adjustments presented in the unaudited pro forma condensed combined statements of operations. These rates do not reflect Greatbatch’s effective tax rate, which includes other items and may be significantly different than the rates assumed for purposes of preparing the unaudited pro forma condensed combined financial statements for a variety of factors.

 

f. Represents the adjustment to weighted average shares outstanding to account for the Greatbatch, Inc. shares of common stock issued to Lake Region stockholders as part of the Merger consideration. Additionally, in order to reflect the dilutive effect of Greatbatch, Inc.’s replacement options issued to Lake Region stockholders, 60,000 shares were added to diluted weighted average shares outstanding for the six month period ended July 3, 2015. For purposes of the unaudited pro forma condensed combined statement of operations for the twelve months ended January 2, 2015, the dilutive impacts of share-based awards have been excluded from the calculation of the pro forma diluted loss per share, as the effect of including them would have been anti-dilutive.

 

10

Integer (NYSE:ITGR)
Historical Stock Chart
From Aug 2024 to Sep 2024 Click Here for more Integer Charts.
Integer (NYSE:ITGR)
Historical Stock Chart
From Sep 2023 to Sep 2024 Click Here for more Integer Charts.