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)
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Delaware |
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1-16137 |
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16-1531026 |
(State or Other Jurisdiction
of incorporation) |
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(Commission
File Number) |
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(IRS Employer
Identification No.) |
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2595 Dallas Parkway, Suite 310, Frisco, Texas |
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75034 |
(Address of principal executive offices) |
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(Zip Code) |
Registrants 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) |
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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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. |
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(a) |
Financial statements of business acquired. |
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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: |
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i. |
Independent Auditors Report; |
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ii. |
Consolidated Balance Sheets as of January 3, 2015 and December 31, 2013; |
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iii. |
Consolidated Statements of Operations for each of the three fiscal years in the period ended January 3, 2015; |
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iv. |
Consolidated Statements of Comprehensive Loss for each of the three fiscal years in the period ended January 3, 2015; |
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v. |
Consolidated Statements of Stockholders Equity for each of the three fiscal years in the period ended January 3, 2015; |
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vi. |
Consolidated Statements of Cash Flows for each of the three fiscal years in the period ended January 3, 2015; and |
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vii. |
Notes to Consolidated Financial Statements. |
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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: |
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i. |
Unaudited Condensed Consolidated Balance Sheets as of July 4, 2015 and January 3, 2015; |
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ii. |
Unaudited Condensed Consolidated Statements of Operations for the six months ended July 4, 2015 and June 28, 2014; |
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iii. |
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the six months ended July 4, 2015 and June 28, 2014; |
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iv. |
Unaudited Condensed Consolidated Statements of Stockholders Equity for the six months ended July 4, 2015; |
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v. |
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended July 4, 2015 and June 28, 2014; and |
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vi. |
Notes to Unaudited Condensed Consolidated Financial Statements. |
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(b) |
Pro forma financial information. |
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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: |
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i. |
Unaudited Pro Forma Condensed Combined Statement of Operations for the twelve months ended January 2, 2015; |
1
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ii. |
Unaudited Pro Forma Condensed Combined Statement of Operations for the six months ended July 3, 2015; |
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iii. |
Unaudited Pro Forma Condensed Combined Balance Sheet as of July 3, 2015; and |
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iv. |
Notes to Unaudited Pro Forma Condensed Combined Financial Statements. |
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Exhibit
Number |
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Description of Exhibit |
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23 |
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Consent of Deloitte & Touche LLP. |
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99.1 |
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The audited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(1). |
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99.2 |
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The unaudited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(2). |
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99.3 |
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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.
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Date: |
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January 11, 2016 |
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GREATBATCH, INC. |
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By: |
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/s/ Michael Dinkins |
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Michael Dinkins |
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Executive Vice President & Chief Financial Officer |
EXHIBIT INDEX
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Exhibit
Number |
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Description of Exhibit |
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23 |
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Consent of Deloitte & Touche LLP. |
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99.1 |
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The audited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(1). |
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99.2 |
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The unaudited financial statements of Lake Region Medical Holdings, Inc. and subsidiaries listed in Item 9.01(a)(2). |
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99.3 |
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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.
Managements 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 auditors 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 Companys 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 Companys 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)
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As of |
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January 3, 2015 |
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December 31, 2013 |
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Assets |
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Current assets: |
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Cash |
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$ |
44,191 |
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$ |
72,240 |
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Accounts receivable, net of allowances of $5,119 and $2,601 at January 3, 2015 and December 31, 2013, respectively |
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78,078 |
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59,624 |
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Inventory |
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89,191 |
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61,688 |
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Deferred income taxes |
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4,404 |
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Prepaid expenses and other current assets |
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6,192 |
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2,973 |
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Total current assets |
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222,056 |
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196,525 |
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Property, plant and equipment, net |
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186,637 |
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116,957 |
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Goodwill |
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719,842 |
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556,315 |
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Other intangible assets, net |
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193,782 |
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119,808 |
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Deferred financing costs and other assets, net |
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23,443 |
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11,625 |
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Total assets |
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$ |
1,345,760 |
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$ |
1,001,230 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
8,350 |
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$ |
7 |
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Accounts payable |
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27,531 |
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19,229 |
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Accrued payroll and benefits |
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20,865 |
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11,928 |
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Customer deposits |
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5,238 |
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6,846 |
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Accrued interest |
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3,460 |
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19,303 |
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Derivative liabilities |
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3,253 |
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Accrued expenses and other current liabilities |
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23,356 |
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14,081 |
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Total current liabilities |
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92,053 |
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71,394 |
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Long-term debt |
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1,040,388 |
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713,652 |
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Deferred income taxes |
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38,936 |
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33,925 |
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Other liabilities |
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9,480 |
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7,783 |
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Total liabilities |
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1,180,857 |
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826,754 |
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Commitments and contingencies (Note 19) |
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Stockholders equity: |
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Preferred stock, par value $0.01 per share, 50,000 shares authorized; no shares outstanding |
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Common stock, par value $0.01 per share, 200,000 shares authorized; 155,898 and 127,949 shares issued and outstanding at
January 3, 2015 and December 31, 2013, respectively, excluding 630 shares subject to forfeiture at December 31, 2013 |
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1,559 |
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1,279 |
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Additional paid-in capital |
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715,786 |
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639,424 |
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Accumulated other comprehensive loss |
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|
(41,071 |
) |
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|
(1,186 |
) |
Accumulated deficit |
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|
(511,371 |
) |
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|
(465,041 |
) |
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Total stockholders equity |
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164,903 |
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174,476 |
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Total liabilities and stockholders equity |
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$ |
1,345,760 |
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$ |
1,001,230 |
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See notes to consolidated financial statements.
2
LAKE REGION MEDICAL HOLDINGS, INC.
Consolidated Statements of Operations
(in thousands)
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Fiscal Years |
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2014 |
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2013 |
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2012 |
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Net sales |
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$ |
752,264 |
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$ |
525,712 |
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$ |
498,627 |
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Cost of sales (exclusive of amortization) |
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573,616 |
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389,766 |
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375,975 |
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Gross profit (exclusive of amortization) |
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178,648 |
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135,946 |
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122,652 |
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Operating expenses: |
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Selling, general and administrative |
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82,676 |
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52,105 |
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52,402 |
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Research and development |
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8,763 |
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2,027 |
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1,695 |
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Impairment of intangible assets and goodwill |
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26,800 |
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63,128 |
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Restructuring |
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3,138 |
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280 |
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2,866 |
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Amortization of intangible assets |
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25,039 |
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14,939 |
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14,939 |
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Loss (gain) on disposal of property and equipment |
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40 |
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1,088 |
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(261 |
) |
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Total operating expenses |
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146,456 |
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133,567 |
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71,641 |
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Income from operations |
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32,192 |
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2,379 |
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51,011 |
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Other expense, net: |
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Interest expense, net |
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(63,096 |
) |
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(69,145 |
) |
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(69,096 |
) |
Loss on debt extinguishment |
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(53,421 |
) |
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Other, net |
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(887 |
) |
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(1,036 |
) |
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1,100 |
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Total other expense, net |
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(117,404 |
) |
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(70,181 |
) |
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(67,996 |
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Loss from operations before income taxes |
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(85,212 |
) |
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(67,802 |
) |
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(16,985 |
) |
Provision (benefit) for income taxes |
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(38,882 |
) |
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4,527 |
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1,784 |
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Net loss from continuing operations |
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(46,330 |
) |
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(72,329 |
) |
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(18,769 |
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Net loss from discontinued operations |
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(63 |
) |
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(3,601 |
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Net loss |
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$ |
(46,330 |
) |
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$ |
(72,392 |
) |
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$ |
(22,370 |
) |
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See notes to consolidated financial statements.
3
LAKE REGION MEDICAL HOLDINGS, INC.
Consolidated Statements of Comprehensive Loss
(in thousands)
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Fiscal Years |
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2014 |
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2013 |
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2012 |
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Net loss |
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$ |
(46,330 |
) |
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$ |
(72,392 |
) |
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$ |
(22,370 |
) |
Other comprehensive income (loss), net of income taxes: |
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Foreign currency translation adjustments |
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(34,884 |
) |
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1,374 |
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499 |
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Pension actuarial gain (loss) |
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(2,123 |
) |
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170 |
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(935 |
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Amortization of pension actuarial loss |
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38 |
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34 |
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93 |
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Curtailment of pension |
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338 |
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Unrealized loss on derivatives |
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(3,254 |
) |
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Unrealized gain (loss) on investment |
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32 |
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(265 |
) |
Realized gain on investment |
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(242 |
) |
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(680 |
) |
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Other comprehensive income (loss), net of income taxes |
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(39,885 |
) |
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1,368 |
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(1,288 |
) |
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Comprehensive loss |
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$ |
(86,215 |
) |
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$ |
(71,024 |
) |
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$ |
(23,658 |
) |
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|
|
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|
|
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See notes to consolidated financial statements.
4
LAKE REGION MEDICAL HOLDINGS, INC.
Consolidated Statements of Stockholders Equity
(in thousands, except per share data)
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Common Stock $0.01 par value |
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Additional Paid-in Capital |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Deficit |
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Total Stockholders Equity |
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Shares |
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Amount |
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Balance, January 1, 2012 |
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127,720 |
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$ |
1,277 |
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$ |
637,168 |
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$ |
(1,266 |
) |
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$ |
(370,279 |
) |
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$ |
266,900 |
|
Stock issuance |
|
|
56 |
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|
1 |
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192 |
|
|
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193 |
|
Vesting of restricted stock |
|
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150 |
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150 |
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Stock-based compensation |
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561 |
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561 |
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Forfeiture of rollover options |
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127 |
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127 |
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Exercise of employee stock options |
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|
33 |
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|
|
|
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|
|
177 |
|
|
|
|
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|
|
|
|
|
|
177 |
|
Repurchase of common stock |
|
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|
|
|
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(43 |
) |
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|
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(43 |
) |
Other comprehensive loss, net |
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|
|
|
|
|
|
|
|
|
|
|
|
|
(1,288 |
) |
|
|
|
|
|
|
(1,288 |
) |
Net loss |
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|
|
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|
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|
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|
|
|
|
|
|
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|
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(22,370 |
) |
|
|
(22,370 |
) |
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|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys most recent long-term financial projections. The Companys 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 Companys 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 Companys 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 Companys employees participate in share-based compensation and incentive plans and accounts for these
arrangements in the Companys 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 entitys 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 options expected term. The dividend yield assumption of 0.0% is based on the Companys 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 Companys 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 Companys 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 Companys financial instruments, including accounts receivable and accounts payable, approximate their fair values due to their short maturities. The Companys
financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. A financial asset or liabilitys 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 managements 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 brands 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
brands 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.
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 |
|
LessAccumulated 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 Companys 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 Companys 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
Other liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
January 3, 2015 |
|
|
December 31, 2013 |
|
Pension and other retirement plan liabilities |
|
$ |
6,288 |
|
|
$ |
4,826 |
|
Environmental liabilities |
|
|
1,273 |
|
|
|
1,334 |
|
Deferred compensation |
|
|
590 |
|
|
|
501 |
|
Restructuring liabilities |
|
|
886 |
|
|
|
736 |
|
Other long-term liabilities |
|
|
443 |
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,480 |
|
|
$ |
7,783 |
|
|
|
|
|
|
|
|
|
|
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
January 3, 2015 |
|
|
December 31, 2013 |
|
First Lien Loan maturing on March 12, 2021, interest at 4.5% |
|
$ |
828,738 |
|
|
$ |
|
|
Second Lien Loan maturing on March 12, 2022, interest at 7.5% |
|
|
220,000 |
|
|
|
|
|
Senior secured notes maturing on February 1, 2017, interest at 8.375% (Senior Secured Notes) |
|
|
|
|
|
|
400,000 |
|
Senior subordinated notes maturing on November 1, 2017, interest at 10.0% (Senior Subordinated Notes) |
|
|
|
|
|
|
315,000 |
|
Capital lease obligations |
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
1,048,738 |
|
|
|
715,009 |
|
Lessunamortized discount |
|
|
|
|
|
|
(1,350 |
) |
Lesscurrent 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 Companys domestic subsidiaries. All obligations under these notes, and the guarantees of those obligations, were secured,
subject to certain exceptions, by substantially all of the Companys 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
Companys ability, and the ability of the Companys 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 Companys 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 Companys assets; and (viii) enter into certain transactions with the Companys 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 Companys 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 Companys 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 Companys 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 Companys obligations under the First Lien are jointly and severally guaranteed on a secured basis by the Company and all of the
Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 Companys obligations under the Second Lien are jointly and severally guaranteed on a secured basis by the Company and all of the
Companys 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 Companys 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 Companys ability, and the ability of the Companys 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 Companys 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 Companys capital stock or make other restricted payments; (vii) make certain investments; (viii) enter into certain transactions with the Companys affiliates.
Annual minimum principal payments on the Companys 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 |
|
|
|
|
|
|
The Companys 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 Companys 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 Companys Board of Directors approved
a plan of closure with respect to the Companys 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 employees 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 facilitys business to other of the
Companys 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 employees 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 facilitys 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 Companys 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 Companys 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 Companys 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 Companys board of directors
utilizing weighted market-based and discounted cash flow approaches and applying a variety of factors, including the entitys financial position, historical financial performance, projected financial performance, valuations of publicly traded
peer companies, the illiquid nature of the common stock, and arms 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 Companys 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 |
|
|
|
% |
|
|
|
% |
Directors 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 directors 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 Companys 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 Companys 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 sponsors fiscal year end. As of January 3, 2015 and December 31, 2013, the Accumulated Benefit Obligation of the Companys 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 Companys 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 Companys Domestic Plans 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 Plans 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 Companys 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 Companys contributions vest over a five-year period. The Company matches 50% of an employees contributions for the first 6% of the
employees gross salary at a maximum contribution rate per employee of 3% of the employees gross salary. The Companys 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 employees contributions for the first 6% of the employees gross salary at a maximum contribution rate per employee of 3% of the employees
gross salary. The Companys 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 Companys 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 employees employment term
based upon actual and estimated years of service. As of January 3, 2015 and December 31, 2013, the accrued benefits aggregated $1.0 million and $0.9 million, respectively, and are included in accrued payroll and benefits in the
accompanying consolidated balance sheets.
28
The provision for income taxes includes federal, state and foreign taxes
currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The components of the provision(benefit) for income taxes for fiscal years 2014, 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 Companys 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 Companys deferred income tax expense results primarily from the different book and tax treatment for
a portion of the Companys goodwill and the Companys 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 NOLs 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 Companys 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
Companys 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 Companys 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 Companys then outstanding Senior Secured Notes and approximately $26.4 million principal amount of the
Companys 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 Companys 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 2021Borrowings 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 Companys 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 2022Borrowings 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 Companys 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 2017Borrowings 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 2017Borrowings 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 Companys 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 Companys 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 Companys 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 Companys 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 NJDEPs 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
Companys 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 Companys 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 |
% |
|
|
|
* |
34
Customers with 10% or greater concentration in accounts receivable are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
January 3, 2015 |
|
|
December 31, 2013 |
|
Customer A |
|
|
14 |
% |
|
|
18 |
% |
Customer B |
|
|
11 |
% |
|
|
12 |
% |
Customer C |
|
|
|
* |
|
|
12 |
% |
19. |
Commitments and Contingencies |
The Company is obligated on various lease agreements for
office space, automobiles and equipment, expiring through 2020, which are accounted for as operating leases.
Aggregate rental expense for
fiscal years 2014, 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 Companys 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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys credit agreements as described in Note 8.
37
The Companys 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 Companys 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 Companys 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 |
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys 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 Companys 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 Companys 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 brands 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 brands 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 |
|
LessAccumulated 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 Companys 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 Companys 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 |
|
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 |
|
Lesscurrent 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 Companys 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 Companys long-term debt arrangements at July 4, 2015.
First Lien
Loan
The First Lien Loan (First Lien) administered by UBS AGStamford (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 Companys 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 Companys obligations under the First Lien are jointly and severally guaranteed on
a secured basis by the Company and all of the Companys 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 Companys
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 Companys 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 Companys 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 Companys 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 Companys 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 Companys obligations under the Second Lien are jointly and severally guaranteed on a secured basis by
the Company and all of the Companys 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 Companys 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
Companys ability, and the ability of the Companys 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 Companys 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 Companys capital stock or
make other restricted payments; (vii) make certain investments; (viii) enter into certain transactions with the Companys 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 Companys 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 Companys 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 Companys 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 Companys board of directors utilizing
weighted market-based and discounted cash flow approaches and applying a variety of factors, including the entitys financial position, historical financial performance, projected financial performance, valuations of publicly traded peer
companies, the illiquid nature of the common stock, and arms 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 Companys 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.
Directors 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 directors 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 Companys 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 Companys 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 Companys 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 payableThe 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 2021Borrowings 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 Companys 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 2022Borrowings 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 Companys 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
Companys 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 Companys 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 Companys 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 Companys 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 Companys 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 NJDEPs
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 Companys 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 Companys 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 Companys 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 Companys sales were derived from medical device manufacturing companies. For the six months ended July 4,
2015 and June 28, 2014, the Companys 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 |
|
|
|
|
* |
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 Companys 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
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 Regions 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 Greatbatchs 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 Greatbatchs accounting policies related to the classification of other operating expenses. |
Adjustments made to Lake Regions 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 Greatbatchs 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 Greatbatchs 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 Greatbatchs presentation. |
|
|
|
A reclassification of $15.2 million from amortizing intangible assets, net to indefinite-lived intangible assets to conform with Greatbatchs accounting policies related to the classification of trademarks and
tradenames. |
5
The following reclassification was made to Greatbatchs historical financial statements to
remain consistent across all periods presented:
Adjustments made to Greatbatchs 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 Regions 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 managements 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
assets 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 Regions historical deferred financing costs as the debt was revalued under acquisition accounting. Refer to adjustment 4(k) for the elimination of Greatbatchs 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 managements 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 Regions 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 Companys 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 Regions 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 Greatbatchs 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 Greatbatchs 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 Greatbatchs 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 Greatbatchs 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 Greatbatchs 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 Greatbatchs 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
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