NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
|
|
1.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
– The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270,
Interim Reporting
) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Greatbatch, Inc. and its subsidiaries (collectively “Greatbatch” or the “Company”) for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. The
January 1, 2016
condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended
January 1, 2016
. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31. The
first
quarter of
2016
and
2015
each contained 13 weeks, and ended on
April 1,
and
April 3,
respectively.
Nature of Operations
–
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. (“Lake Region Medical”). As a result, the Company now has
three
reportable segments: Greatbatch Medical, QiG Group (“QiG”) and Lake Region Medical. On March 14, 2016, Greatbatch completed the spin-off of a portion of its QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Greatbatch on a pro rata basis (the “Spin-off”). See Note 2 “Divestiture and Acquisition” for further description of these transactions. As a result of the Lake Region Medical acquisition and the Spin-off, the Company is in the process of re-evaluating its reporting structure, which may change its product line and segment reporting in the future. This process is expected to be finalized in 2016.
Simultaneous with the close of the Lake Region Medical acquisition, the Company announced its intention to rename the combined entity Integer Holdings Corporation. The new name is subject to receipt of Greatbatch stockholder approval at the Company’s annual meeting to be held in May 2016.
Greatbatch Medical designs and manufactures products where Greatbatch either owns the intellectual property or has unique manufacturing and assembly expertise. These products include medical devices and components for the cardiac, neuromodulation, orthopedics, portable medical, vascular and energy markets among others.
The QiG segment focuses on the design and development of complete medical device systems and components. QiG seeks to assist customers in accelerating the velocity of innovation while delivering an optimized supply chain and critical cost efficiencies. The medical devices QiG designs and develops are full product solutions that utilize the medical technology expertise and capabilities residing within Greatbatch Medical. See Note 2 “Divestiture and Acquisition” for further description of the Spin-off and how it impacted the Company’s QiG segment.
Lake Region Medical has operated as a segment for Greatbatch since it was acquired during the fourth quarter of 2015. This segment specializes in the design, development, and manufacturing of products across the medical component and device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management to its customers.
The Company’s customers include large multi-national original equipment manufacturers (“OEMs”) and their affiliated subsidiaries.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
|
|
2.
|
DIVESTITURE AND ACQUISITION
|
Spin-off of Nuvectra Corporation
On March 14, 2016, Greatbatch completed the spin-off of a portion of its QiG segment through a tax-free distribution of all of the shares of its QiG Group, LLC subsidiary to the stockholders of Greatbatch on a pro rata basis. Immediately prior to completion of the Spin-off, QiG Group, LLC was converted into a corporation organized under the laws of Delaware and changed its name to Nuvectra Corporation (“Nuvectra”). On March 14, 2016, each of the Company’s stockholders of record as of the close of business on March 7, 2016 (the “Record Date”) received one share of Nuvectra common stock for every
three
shares of Greatbatch common stock held as of the Record Date. As a result,
Nuvectra is now an independent publicly traded company whose common stock is listed on the NASDAQ stock exchange under the symbol “NVTR.”
The portion of the QiG segment spun-off consisted of QiG Group, LLC and its subsidiaries: (i) Algostim, LLC (“Algostim”), (ii) PelviStim LLC (“PelviStim”), and (iii) Greatbatch’s NeuroNexus Technologies (“NeuroNexus”) subsidiary. The operations of Centro de Construcción de Cardioestimuladores del Uruguay (“CCC”) and certain other existing QiG research and development capabilities were retained by Greatbatch and not included as part of the Spin-off. As the Company continues to focus on the design and development of complete medical device systems and components, and more specifically medical device systems and components in the neuromodulation market, the Spin-off was not considered a strategic shift that had a major effect on the Company’s operations and financial results. Accordingly, the Spin-off is not presented as a discontinued operation in the Condensed Consolidated Financial Statements. The results of Nuvectra are included in the Condensed Consolidated Statement of Operations through the date of the Spin-off.
In connection with the Spin-off, during the first quarter of 2016, the Company made a cash capital contribution of
$75 million
to Nuvectra and divested the following assets and liabilities (in thousands):
|
|
|
|
|
Assets divested
|
|
Cash and cash equivalents
|
$
|
76,256
|
|
Other current assets
|
977
|
|
Property, plant and equipment, net
|
4,407
|
|
Amortizing intangible assets, net
|
1,931
|
|
Goodwill
|
40,830
|
|
Deferred income taxes
|
6,446
|
|
Total assets divested
|
130,847
|
|
Liabilities transferred
|
|
Current liabilities
|
2,119
|
|
Net assets divested
|
$
|
128,728
|
|
For the first quarter of 2016 and 2015, Nuvectra contributed a pre-tax loss of
$5.2 million
and
$5.5 million
, respectively, to the Company’s results of operations.
Lake Region Medical Holdings, Inc.
On October 27, 2015, the Company acquired all of the outstanding common stock of Lake Region Medical Holdings, Inc. for a total purchase price including debt assumed of approximately
$1.77 billion
. Lake Region Medical specializes in the design, development, and manufacturing of products across the medical component and device spectrum primarily serving the cardio, vascular and advanced surgical markets.
The aggregate consideration paid to the stockholders and equity award holders of Lake Region Medical consisted of the following (in thousands):
|
|
|
|
|
Cash
|
$
|
478,490
|
|
Fair value of Greatbatch common stock
|
245,368
|
|
Replacement stock options attributable to pre-acquisition service
|
4,508
|
|
Total purchase consideration
|
$
|
728,366
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
The fair value of the Greatbatch common stock issued as part of the consideration was determined based upon the closing stock price of Greatbatch’s shares as of the acquisition date. The fair value of the Greatbatch stock options issued as part of the consideration was determined utilizing a Black-Scholes option pricing model as of the acquisition date. Concurrently with the closing of the acquisition, the Company repaid all of the outstanding debt of Lake Region Medical of approximately
$1.0 billion
. The cash portion of the purchase price and the repayment of Lake Region Medical’s debt was primarily funded through a new senior secured credit facility and the issuance of senior notes. See Note 6 “Debt” for additional information regarding the Company’s debt.
The Company believes that the combination of Greatbatch and Lake Region Medical brings together two highly complementary organizations that can provide a new level of industry leading capabilities and services to original equipment manufacturer customers while building value for shareholders.
Through this acquisition, the Company believes that it will be at the forefront of innovating technologies and products that help change the face of healthcare, providing its customers with a distinct advantage as they bring complete systems and solutions to market. In turn, Greatbatch’s customers will be able to accelerate patient access to life enhancing therapies. The transaction is consistent with Greatbatch's strategy of achieving profitable growth and continuous improvement to drive margin expansion.
The operating results of Lake Region Medical have been included in the Company’s Lake Region Medical segment from the date of acquisition. For the three months ended April 1, 2016, Lake Region Medical added
$198.3 million
to the Company’s revenue and decreased the Company’s net loss by approximately
$6.7 million
.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the cost of the acquisition was allocated to the Lake Region Medical assets acquired and liabilities assumed based on their fair values as of the closing date of the acquisition, with the amount exceeding the fair value of the net assets acquired recorded as goodwill. The value assigned to certain assets and liabilities are preliminary and are subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed become available. The final allocation may include changes to the acquisition date fair value of intangible assets, goodwill, deferred taxes, as well as operating assets and liabilities, some of which may result in material adjustments. Measurement-period adjustments made during the first quarter of 2016 did not have a material impact to the original valuation of net assets acquired, and did not impact the Company’s Condensed Consolidated Statement of Operations.
The following table summarizes the preliminary allocation of Lake Region Medical purchase price to the assets acquired and liabilities assumed (in thousands):
|
|
|
|
|
Assets acquired
|
|
Current assets
|
$
|
269,815
|
|
Property, plant and equipment
|
216,473
|
|
Amortizing intangible assets
|
849,000
|
|
Indefinite-lived intangible assets
|
70,000
|
|
Goodwill
|
660,487
|
|
Other non-current assets
|
1,629
|
|
Total assets acquired
|
2,067,404
|
|
Liabilities assumed
|
|
Current liabilities
|
103,149
|
|
Debt assumed
|
1,044,675
|
|
Other long-term liabilities
|
191,214
|
|
Total liabilities assumed
|
1,339,038
|
|
Net assets acquired
|
$
|
728,366
|
|
The preliminary fair values of the assets acquired were determined using one of three valuation approaches: market, income or cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, technology life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Current Assets and Liabilities
– The fair value of current assets and liabilities, excluding inventory, was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the market approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of
$23.0 million
.
Property, Plant and Equipment
– The fair value of PP&E acquired was estimated by applying the cost approach for personal property, buildings and building improvements and the market approach for land. The cost approach was applied by developing a replacement cost and adjusting for depreciation and obsolescence. The value of the land acquired was derived from market prices for comparable properties.
Intangible Assets
– The purchase price was allocated to intangible assets as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing Intangible Assets
|
|
Fair Value Assigned
|
|
Weighted Average Amortization Period (Years)
|
|
Estimated Useful Life (Years)
|
|
Weighted Average Discount Rate
|
Technology
|
|
$
|
160,000
|
|
|
7
|
|
19
|
|
11.5%
|
Customer lists
|
|
689,000
|
|
|
14
|
|
29
|
|
11.5%
|
|
|
$
|
849,000
|
|
|
13
|
|
27
|
|
11.5%
|
Indefinite-lived Intangible Assets
|
|
|
|
|
|
|
|
|
Trademarks and tradenames
|
|
$
|
70,000
|
|
|
N/A
|
|
N/A
|
|
11.5%
|
The weighted average amortization period is less than the estimated useful life, as the Company is using an accelerated amortization method, which approximates the distribution of cash flows used to fair value those intangible assets.
Technology
– Technology consists of technical processes, patented and unpatented technology, manufacturing know-how, trade secrets and the understanding with respect to products or processes that have been developed by Lake Region Medical and that will be leveraged in current and future products. The fair value of technology acquired was determined utilizing the relief from royalty method, a form of the income approach, with a royalty rate that ranged from
0.5%
to
7%
. The estimated useful life of the technology is based upon management’s estimate of the product life cycle associated with the technology before it will be replaced by new technologies.
Customer Lists
– Customer lists represent the estimated fair value of non-contractual customer relationships Lake Region Medical had as of the acquisition date. The primary customers of Lake Region Medical include large OEMs in various geographic locations around the world. These relationships were valued separately from goodwill at the amount that an independent third party would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer base was based upon the historical customer annual attrition rate of
5%
, as well as management’s understanding of the industry and product life cycles.
Trademarks and Tradenames
– Trademarks and tradenames represent the estimated fair value of Lake Region Medical’s corporate and product names. These tradenames were valued separately from goodwill at the amount that an independent third party would be willing to pay for use of these names. The fair value of the trademarks and tradenames was determined by utilizing the relief from royalty method, a form of the income approach, with a royalty rate that ranged from
0.25%
to
1%
. Trademarks and tradenames were assumed to have an indefinite useful life based upon the significant value the Lake Region Medical name has with OEMs in the medical component and device industries, their long history
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
of being an industry leader and producing quality and innovative components, and given management’s current intention of using this tradename indefinitely, which was assumed to be consistent with what a reasonable market participant would also assume.
Goodwill
– The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including the value of Lake Region Medical’s highly trained assembled work force and management team, the incremental value resulting from Lake Region Medical’s capabilities and services to OEMs, enhanced synergies, and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. The goodwill acquired in connection with the acquisition was allocated to the Lake Region Medical segment and is not deductible for tax purposes.
Long-term Debt
– The fair value of long-term debt was assumed to be equal to what was paid by Greatbatch at the time of closing of the acquisition in order to retire the debt, including prepayment penalties and fees.
Pro Forma Results (Unaudited)
The following unaudited pro forma information presents the consolidated results of operations of the Company and Lake Region Medical as if that acquisition occurred as of the beginning of fiscal year 2014 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 1, 2016
|
|
April 3, 2015
|
Sales
|
|
$
|
332,238
|
|
|
$
|
358,417
|
|
Net income (loss)
|
|
(12,660
|
)
|
|
966
|
|
Earnings (loss) per share:
|
|
|
|
|
Basic
|
|
$
|
(0.41
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
(0.41
|
)
|
|
$
|
0.03
|
|
The unaudited pro forma results presents the combined operating results of Greatbatch and Lake Region Medical with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisition at Greatbatch’s interest rates, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate. The unaudited pro forma consolidated basic and diluted income (loss) per share calculations are based on the consolidated basic and diluted weighted average shares of Greatbatch. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have been obtained by the combined company, or to be a projection of results that may be obtained in the future by the combined company.
3. SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
(in thousands)
|
April 1, 2016
|
|
April 3, 2015
|
Noncash investing and financing activities:
|
|
|
|
Common stock contributed to 401(k) Plan
|
$
|
—
|
|
|
$
|
3,920
|
|
Property, plant and equipment purchases included in accounts payable
|
4,304
|
|
|
943
|
|
Purchase of technology included in accrued expenses
|
2,000
|
|
|
—
|
|
Divestiture of noncash assets
|
54,591
|
|
|
—
|
|
Divestiture of liabilities
|
2,119
|
|
|
—
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
Inventories are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 1, 2016
|
|
January 1, 2016
|
Raw materials
|
$
|
110,095
|
|
|
$
|
107,296
|
|
Work-in-process
|
104,698
|
|
|
93,729
|
|
Finished goods
|
52,587
|
|
|
51,141
|
|
Total
|
$
|
267,380
|
|
|
$
|
252,166
|
|
Amortizing intangible assets are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Foreign
Currency
Translation
|
|
Net
Carrying
Amount
|
At April 1, 2016
|
|
|
|
|
|
|
|
Purchased technology and patents
|
$
|
256,719
|
|
|
$
|
(87,626
|
)
|
|
$
|
3,270
|
|
|
$
|
172,363
|
|
Customer lists
|
759,987
|
|
|
(45,315
|
)
|
|
7,176
|
|
|
721,848
|
|
Other
|
4,534
|
|
|
(4,995
|
)
|
|
803
|
|
|
342
|
|
Total amortizing intangible assets
|
$
|
1,021,240
|
|
|
$
|
(137,936
|
)
|
|
$
|
11,249
|
|
|
$
|
894,553
|
|
At January 1, 2016
|
|
|
|
|
|
|
|
Purchased technology and patents
|
$
|
255,776
|
|
|
$
|
(83,708
|
)
|
|
$
|
1,444
|
|
|
$
|
173,512
|
|
Customer lists
|
761,857
|
|
|
(40,815
|
)
|
|
(986
|
)
|
|
720,056
|
|
Other
|
4,534
|
|
|
(4,946
|
)
|
|
821
|
|
|
409
|
|
Total amortizing intangible assets
|
$
|
1,022,167
|
|
|
$
|
(129,469
|
)
|
|
$
|
1,279
|
|
|
$
|
893,977
|
|
During the first quarter of 2016, the Company made an asset purchase of technology totaling
$2.0 million
, which is being amortized over a weighted average period of approximately
15
years.
Aggregate intangible asset amortization expense is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Cost of sales
|
$
|
4,240
|
|
|
$
|
1,471
|
|
Selling, general and administrative expenses
|
5,136
|
|
|
1,813
|
|
Research, development and engineering costs, net
|
88
|
|
|
103
|
|
Total intangible asset amortization expense
|
$
|
9,464
|
|
|
$
|
3,387
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
Estimated future intangible asset amortization expense based on the carrying value as of April 1, 2016 is as follows (in thousands):
|
|
|
|
|
|
Estimated
Amortization
Expense
|
Remainder of 2016
|
$
|
28,538
|
|
2017
|
44,249
|
|
2018
|
45,179
|
|
2019
|
45,272
|
|
2020
|
45,876
|
|
Thereafter
|
685,439
|
|
Total estimated amortization expense
|
$
|
894,553
|
|
Indefinite-lived intangible assets are comprised of the following (in thousands):
|
|
|
|
|
|
Trademarks
and
Tradenames
|
At January 1, 2016
|
$
|
90,288
|
|
At April 1, 2016
|
$
|
90,288
|
|
The change in goodwill is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greatbatch Medical
|
|
QiG
|
|
Lake Region Medical
|
|
Total
|
At January 1, 2016
|
$
|
303,929
|
|
|
$
|
50,096
|
|
|
$
|
659,545
|
|
|
$
|
1,013,570
|
|
Goodwill divested (Note 2)
|
—
|
|
|
(40,830
|
)
|
|
—
|
|
|
(40,830
|
)
|
Purchase accounting adjustment (Note 2)
|
—
|
|
|
—
|
|
|
(1,301
|
)
|
|
(1,301
|
)
|
Foreign currency translation
|
172
|
|
|
—
|
|
|
7,890
|
|
|
8,062
|
|
At April 1, 2016
|
$
|
304,101
|
|
|
$
|
9,266
|
|
|
$
|
666,134
|
|
|
$
|
979,501
|
|
Long-term debt is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 1, 2016
|
|
January 1, 2016
|
Senior secured term loan A
|
$
|
370,313
|
|
|
$
|
375,000
|
|
Senior secured term loan B
|
1,022,437
|
|
|
1,025,000
|
|
9.125% senior notes due 2023
|
360,000
|
|
|
360,000
|
|
Revolving line of credit
|
55,000
|
|
|
—
|
|
Less unamortized discount on term loan B and debt issuance costs
|
(45,203
|
)
|
|
(45,947
|
)
|
Total debt
|
1,762,547
|
|
|
1,714,053
|
|
Less current portion of long-term debt
|
29,000
|
|
|
29,000
|
|
Total long-term debt
|
$
|
1,733,547
|
|
|
$
|
1,685,053
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
Senior Secured Credit Facilities
- In connection with the Lake Region Medical acquisition, on October 27, 2015, the Company replaced its existing credit facility with new senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a
$200 million
revolving credit facility (the “Revolving Credit Facility”), (ii) a
$375 million
term loan A facility (the “TLA Facility”), and (iii) a
$1,025 million
term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB facility was issued at a
1%
discount.
Term Loan Facilities
The TLA Facility and TLB Facility mature on
October 27, 2021
and
October 27, 2022
, respectively. Interest rates on the TLA Facility, as well as the Revolving Credit Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between
0.75%
and
2.25%
, based on the Company’s Total Net Leverage Ratio, as defined in the Senior Secured Credit Facilities agreement or (ii) the applicable LIBOR rate plus the applicable margin, which will range between
1.75%
and
3.25%
, based on the Company’s Total Net Leverage Ratio. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus
3.25%
or (ii) the applicable LIBOR rate plus
4.25%
, with LIBOR subject to a
1.00%
floor.
Subject to certain conditions,
one
or more incremental term loan facilities may be added to the Term Loan Facilities so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed
4.25
:1.00.
As of
April 1, 2016
, the estimated fair value of TLB Facility was
$1,021 million
, based on quoted market prices for the debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. The par amount of TLA Facility approximated its fair value as of
April 1, 2016
based upon the debt being variable rate in nature.
Revolving Credit Facility
The Revolving Credit Facility matures on
October 27, 2020
. The Revolving Credit Facility also includes a
$15 million
sublimit for swingline loans and a
$30 million
sublimit for standby letters of credit (which was subsequently decreased to
$25 million
on April 27, 2016). The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between
0.175%
and
0.25%
, depending on the Company’s Total Net Leverage Ratio. As of
April 1, 2016
, the Company had
$55 million
of outstanding borrowings on the Revolving Credit Facility and an available borrowing capacity was
$134.1 million
after giving effect to
$10.9 million
of outstanding standby letters of credit.
Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed
4.25
:1.00.
Covenants
The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of
6.50
:1.00, subject to step downs beginning in the fourth quarter of 2016 and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than
3.00
:1.00. The TLB Facility does not contain any financial maintenance covenants.
The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts to Greatbatch Ltd. from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of
April 1, 2016
, the Company was in compliance with all financial and negative covenants under the Senior Secured Credit Facilities.
The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become immediately due and payable. The Senior Secured Credit Facilities are guaranteed by the Company,
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
as a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries (other than Greatbatch Ltd., non-wholly owned joint ventures and certain other excluded subsidiaries). The Senior Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; i) the present and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except the Company); ii) sixty-six percent (
66%
) of all present and future shares of voting capital stock of each specified first-tier foreign subsidiary; iii) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal property; and iv) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other guarantors.
9.125% Senior Notes due 2023
- On October 27, 2015, the Company completed a private offering of
$360 million
aggregate principal amount of
9.125%
senior notes due on
November 1, 2023
(the “Senior Notes”).
Interest on the Senior Notes is payable on May 1 and November 1 of each year, beginning on May 1, 2016. The Company may redeem the Senior Notes, in whole or in part, prior to November 1, 2018 at a price equal to
100%
of the principal amount thereof plus a “make-whole” premium. Prior to November 1, 2018, the Company may redeem up to
40%
of the aggregate principal amount of the Senior Notes using the proceeds from certain equity offerings at a redemption price equal to
109.125%
of the aggregate principal amount of the Senior Notes. As of
April 1, 2016
, the estimated fair value of the Senior Notes was
$357 million
, based on quoted market prices of these notes, recent sales prices for the Senior Notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.
The Senior Notes are senior unsecured obligations of the Company. The indenture for the Senior Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) incur or guarantee additional indebtedness or issue certain disqualified stock or preferred stock; (ii) create certain liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) make certain other restricted payments; (v) enter into agreements that restrict certain dividends or other payments; (vi) enter into sale-leaseback agreements; (vii) engage in certain transactions with affiliates; and (viii) consolidate or merge with, or sell substantially all of their assets to, another person. These covenants are subject to a number of limitations and exceptions that are described in the indenture for the Senior Notes. The indenture for the Senior Notes provide for customary events of default, subject in certain cases to customary cure periods, in which the Senior Notes and any unpaid interest would become due and payable. As of
April 1, 2016
, the Company was in compliance with all restrictive covenants under the Senior Notes.
As of
April 1, 2016
, the weighted average interest rate on all outstanding borrowings is
5.70%
.
Contractual maturities under the Term Loan Facilities and Senior Notes for the next five years and thereafter, excluding any discounts or premiums, as of
April 1, 2016
are as follows (in thousands):
|
|
|
|
|
Remaining in 2016
|
$
|
21,750
|
|
2017
|
31,344
|
|
2018
|
40,719
|
|
2019
|
47,750
|
|
2020
|
102,750
|
|
Thereafter
|
1,563,437
|
|
Total
|
$
|
1,807,750
|
|
Interest Rate Swaps
– From time to time, the Company enters into interest rate swap agreements in order to hedge against potential changes in cash flows on its outstanding variable rate debt. During 2012, the Company entered into a
three
-year
$150 million
interest rate swap, which amortized
$50 million
per year. During 2014, the Company entered into an additional interest rate swap. The first
$45 million
of notional amount of the swap was effective February 20, 2015 and the second
$45 million
of notional amount was scheduled to be effective February 22, 2016.
These swaps were accounted for as cash flow hedges.
As a result of the Lake Region Medical acquisition, the forecasted cash flows that the Company’s interest rate swaps were hedging were no longer expected to occur. During the fourth quarter of 2015, the Company terminated its outstanding interest rate swap agreements. As of
April 1, 2016
, the Company has no interest rate swap agreements outstanding.
No
portion of the change in fair value of the Company’s interest rate swaps during the
three
months ended
April 3, 2015
was considered ineffective. The amount recorded as Interest Expense during the
three
months ended
April 3, 2015
related to the Company’s interest rate swaps was
$0.2 million
.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
Debt Issuance Costs and Discounts
–
The change in deferred debt issuance costs related to the Company’ Revolving Credit Facility is as follows (in thousands):
|
|
|
|
|
At January 1, 2016
|
$
|
4,791
|
|
Amortization during the period
|
(248
|
)
|
At April 1, 2016
|
$
|
4,543
|
|
The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Issuance Costs
|
|
Unamortized Discount on TLB Facility
|
|
Total
|
At January 1, 2016
|
$
|
35,908
|
|
|
$
|
10,039
|
|
|
$
|
45,947
|
|
Financing costs incurred
|
781
|
|
|
—
|
|
|
781
|
|
Amortization during the period
|
(1,201
|
)
|
|
(324
|
)
|
|
(1,525
|
)
|
At April 1, 2016
|
$
|
35,488
|
|
|
$
|
9,715
|
|
|
$
|
45,203
|
|
The Company is required to provide its employees located in Switzerland, Mexico, France, and Germany certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan provided to the Company’s employees located in Switzerland is a funded contributory plan, while the plans that provide benefits to the Company’s employees located in Mexico, France, and Germany are unfunded and noncontributory. The liability and corresponding expense related to these benefit plans is based on actuarial computations of current and future benefits for employees.
The change in net defined benefit plan liability is as follows (in thousands):
|
|
|
|
|
At January 1, 2016
|
$
|
7,121
|
|
Net defined benefit cost
|
192
|
|
Foreign currency translation
|
288
|
|
At April 1, 2016
|
$
|
7,601
|
|
Net defined benefit cost is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Service cost
|
$
|
108
|
|
|
$
|
79
|
|
Interest cost
|
43
|
|
|
15
|
|
Amortization of net loss
|
46
|
|
|
14
|
|
Expected return on plan assets
|
(5
|
)
|
|
(3
|
)
|
Net defined benefit cost
|
$
|
192
|
|
|
$
|
105
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
|
|
8.
|
STOCK-BASED COMPENSATION
|
In connection with the Spin-off, under the provisions of the Company’s existing stock incentive plans, employee stock option, restricted stock and restricted stock unit awards were adjusted to preserve the fair value of the awards immediately before and after the Spin-off. As such, the Company did not record any modification expense related to the conversion of the awards. Certain awards granted to employees who transferred to Nuvectra in connection with the Spin-off were canceled. As required, the Company accelerated the remaining expense related to these canceled awards of
$0.5 million
during the current quarter, which was classified as Other Operating Expenses, Net. The stock awards held as of March 14, 2016 were modified as follows:
|
|
•
|
Stock options
: Holders of Greatbatch stock option awards continued to hold stock options to purchase the same number of shares of Greatbatch common stock at an adjusted exercise price and one new Nuvectra stock option for every
three
Greatbatch stock options held as of the Record Date, which, in the aggregate, preserved the fair value of the overall awards granted. The adjusted exercise price for Greatbatch stock options was equal to approximately
93%
of the original exercise price. The stock option awards will continue to vest over their original vesting period.
|
|
|
•
|
Restricted stock and restricted stock units
: Holders of Greatbatch restricted stock and restricted stock unit awards received one new share of Nuvectra restricted stock and restricted stock unit awards for every three Greatbatch restricted stock and restricted stock unit awards held as of the Record Date. Greatbatch restricted stock and restricted stock unit awards will continue to vest in accordance with their original performance metrics and over their original vesting period.
|
The components and classification of stock-based compensation expense were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Stock options
|
$
|
609
|
|
|
$
|
619
|
|
Restricted stock and restricted stock units
|
2,226
|
|
|
1,634
|
|
Total stock-based compensation expense
|
$
|
2,835
|
|
|
$
|
2,253
|
|
|
|
|
|
Cost of sales
|
$
|
197
|
|
|
$
|
260
|
|
Selling, general and administrative expenses
|
1,655
|
|
|
1,761
|
|
Research, development and engineering costs, net
|
177
|
|
|
232
|
|
Other operating expenses, net
|
806
|
|
|
—
|
|
Total stock-based compensation expense
|
$
|
2,835
|
|
|
$
|
2,253
|
|
The weighted average fair value and assumptions used to value options granted are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Weighted average fair value
|
$
|
12.81
|
|
|
$
|
12.07
|
|
Risk-free interest rate
|
1.69
|
%
|
|
1.55
|
%
|
Expected volatility
|
26
|
%
|
|
26
|
%
|
Expected life (in years)
|
5
|
|
|
5
|
|
Expected dividend yield
|
—
|
%
|
|
—
|
%
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
The following table summarizes time and performance-vested stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Stock
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(In Years)
|
|
Aggregate
Intrinsic
Value
(In Millions)
|
Outstanding at January 1, 2016
|
1,678,900
|
|
|
$
|
28.32
|
|
|
|
|
|
Granted
|
152,546
|
|
|
51.92
|
|
|
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(16,318
|
)
|
|
(46.53
|
)
|
|
|
|
|
Adjustment due to Spin-off
|
—
|
|
|
(2.02
|
)
|
|
|
|
|
Outstanding at April 1, 2016
|
1,815,128
|
|
|
$
|
28.09
|
|
|
6.2
|
|
$
|
18.2
|
|
Exercisable at April 1, 2016
|
1,472,299
|
|
|
$
|
23.87
|
|
|
5.5
|
|
$
|
18.2
|
|
The following table summarizes time-vested restricted stock and restricted stock unit activity:
|
|
|
|
|
|
|
|
|
Time-Vested
Activity
|
|
Weighted
Average
Fair Value
|
Nonvested at January 1, 2016
|
39,235
|
|
|
$
|
47.40
|
|
Granted
|
46,474
|
|
|
51.48
|
|
Vested
|
(5,057
|
)
|
|
51.00
|
|
Forfeited
|
(6,317
|
)
|
|
49.53
|
|
Nonvested at April 1, 2016
|
74,335
|
|
|
$
|
49.52
|
|
The following table summarizes performance-vested restricted stock and restricted stock unit activity:
|
|
|
|
|
|
|
|
|
Performance-
Vested
Activity
|
|
Weighted
Average
Fair Value
|
Nonvested at January 1, 2016
|
577,825
|
|
|
$
|
25.11
|
|
Granted
|
156,730
|
|
|
31.59
|
|
Vested
|
(249,153
|
)
|
|
15.86
|
|
Forfeited
|
(44,587
|
)
|
|
32.42
|
|
Nonvested at April 1, 2016
|
440,815
|
|
|
$
|
31.89
|
|
|
|
9.
|
OTHER OPERATING EXPENSES, NET
|
Other Operating Expenses, Net is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
2014 investments in capacity and capabilities
|
$
|
4,153
|
|
|
$
|
6,455
|
|
Orthopedic facilities optimization
|
137
|
|
|
473
|
|
Legacy Lake Region Medical consolidations
|
2,359
|
|
|
—
|
|
Acquisition and integration costs
|
9,965
|
|
|
66
|
|
Asset dispositions, severance and other
|
4,526
|
|
|
861
|
|
|
$
|
21,140
|
|
|
$
|
7,855
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
2014 investments in capacity and capabilities.
In 2014, the Company announced several initiatives to invest in capacity and capabilities and to better align its resources to meet its customers’ needs and drive organic growth and profitability. These included the following:
|
|
•
|
Functions performed at the Company’s facility in Plymouth, MN to manufacture catheters and introducers will transfer into the Company’s existing facility in Tijuana, Mexico. This initiative is expected to be substantially completed by the first half of 2016 and is dependent upon our customers’ validation and qualification of the transferred products.
|
|
|
•
|
Functions performed at the Company’s facilities in Beaverton, OR and Raynham, MA to manufacture products for the portable medical market were transferred to a new facility in Tijuana, Mexico. Products manufactured at the Beaverton facility, which do not serve the portable medical market, were transferred to the Company’s Raynham facility. This initiative was substantially completed during the first quarter of 2016.
|
|
|
•
|
The design engineering responsibilities previously performed at the Company’s Cleveland, OH facility were transferred to the Company’s facilities in Minnesota in 2015.
|
|
|
•
|
The realignment of the Company’s commercial sales operations was completed in 2015.
|
The total capital investment expected for these initiatives is between $
25.0 million
and $
28.0 million
, of which
$22.8 million
has been expended through
April 1, 2016
. Total restructuring charges expected to be incurred in connection with this realignment are between $
34.0 million
and $
39.0 million
, of which $
36.1 million
has been incurred through
April 1, 2016
. Expenses related to this initiative are recorded within the applicable segment and corporate cost centers that the expenditures relate to and include the following:
•
Severance and retention: $
6.0 million
- $
7.0 million
;
•
Accelerated depreciation and asset write-offs: $
1.0 million
-
$3.0 million
; and
•
Other: $
27.0 million
- $
29.0 million
Other expenses primarily consist of costs to relocate certain equipment and personnel, duplicate personnel costs, excess overhead, disposal, and travel expenditures. All expenses are cash expenditures except accelerated depreciation and asset write-offs.
The change in accrued liabilities related to the 2014 investments in capacity and capabilities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance and
Retention
|
|
Accelerated
Depreciation/Asset
Write-offs
|
|
Other
|
|
Total
|
At January 1, 2016
|
$
|
1,429
|
|
|
$
|
—
|
|
|
$
|
1,595
|
|
|
$
|
3,024
|
|
Restructuring charges
|
118
|
|
|
—
|
|
|
4,035
|
|
|
4,153
|
|
Cash payments
|
(455
|
)
|
|
—
|
|
|
(3,648
|
)
|
|
(4,103
|
)
|
At April 1, 2016
|
$
|
1,092
|
|
|
$
|
—
|
|
|
$
|
1,982
|
|
|
$
|
3,074
|
|
Orthopedic facilities optimization.
In 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate
two
buildings, increase capacity, further expand capabilities, and reduce dependence on outside suppliers. This initiative was completed in 2011.
In 2011, the Company began construction of an orthopedic manufacturing facility in Fort Wayne, IN and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was completed in 2012.
In 2012, the Company transferred manufacturing and development operations performed at its facilities in Orvin and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. This initiative was completed in 2013.
During 2013, the Company began a project to expand its Chaumont, France facility in order to enhance its capabilities and fulfill larger volume customer supply agreements. This initiative is expected to be completed over the next year.
The total capital investment expected to be incurred for these initiatives is between
$30.0 million
and
$35.0 million
, of which
$29.0 million
has been expended through
April 1, 2016
. Total expense expected to be incurred for these initiatives is between
$45.0 million
and
$48.0 million
, of which
$44.0 million
has been incurred through
April 1, 2016
.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
All expenses have been and will be recorded within the Greatbatch Medical segment and are expected to include the following:
|
|
•
|
Severance and retention: approximately
$11.0 million
;
|
|
|
•
|
Accelerated depreciation and asset write-offs: approximately
$13.0 million
; and
|
|
|
•
|
Other:
$21.0 million
–
$24.0 million
|
Other expenses include production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures except accelerated depreciation and asset write-offs.
The change in accrued liabilities related to the orthopedic facilities optimization is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
and
Retention
|
|
Accelerated
Depreciation/Asset
Write-offs
|
|
Other
|
|
Total
|
At January 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
137
|
|
|
137
|
|
Cash payments
|
—
|
|
|
—
|
|
|
(137
|
)
|
|
(137
|
)
|
At April 1, 2016
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Legacy Lake Region Medical consolidations.
In 2014, Lake Region Medical initiated plans to close its Arvada, CO site, consolidate its
two
Galway, Ireland sites into
one
facility, and other restructuring actions that will result in a reduction in staff across manufacturing and administrative functions at certain locations. This initiative is expected to be substantially completed by the end of 2016. The total capital investment expected for this initiative since the acquisition date is between
$3.0 million
and
$4.0 million
, of which
$1.3 million
has been expended through
April 1, 2016
. Total expense expected to be incurred for this initiative since the acquisition date is between
$13.0 million
and
$15.0 million
, of which
$4.3 million
has been incurred through
April 1, 2016
. All expenses have been and will be recorded within the Lake Region Medical segment and are expected to include the following:
|
|
•
|
Employee costs:
$5.0 million
-
$6.0 million
; and
|
|
|
•
|
Other:
$8.0 million
-
$9.0 million
.
|
Other expenses primarily consist of production inefficiencies, moving, revalidation, personnel, training, consulting, and travel costs associated with these consolidation projects. All expenses are cash expenditures.
The change in accrued liabilities related to these legacy Lake Region Medical consolidation initiatives is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Costs
|
|
Other
|
|
Total
|
At January 1, 2016
|
$
|
3,667
|
|
|
$
|
596
|
|
|
$
|
4,263
|
|
Restructuring charges
|
1,840
|
|
|
519
|
|
|
2,359
|
|
Cash payments
|
(1,382
|
)
|
|
(515
|
)
|
|
(1,897
|
)
|
At April 1, 2016
|
$
|
4,125
|
|
|
$
|
600
|
|
|
$
|
4,725
|
|
Acquisition and integration costs.
During the first quarter of 2016, the Company incurred
$1.4 million
in transaction costs related to the acquisition of Lake Region Medical. These costs primarily relate to professional and consulting fees, of which
$0.2 million
were accrued as of
April 1, 2016
. Expenses related to this initiative were recorded to corporate unallocated expenses. Additionally, during the first quarter of 2016, the Company incurred
$7.3 million
in Lake Region Medical integration costs, which primarily included change-in-control payments to former Lake Region Medical executives, professional, consulting, severance, relocation, and travel costs, of which
$5.1 million
are accrued as of
April 1, 2016
. Total expense expected to be incurred in connection with the integration of Lake Region Medical is between
$40.0 million
and
$50.0 million
, of which
$15.9 million
were incurred through April 1, 2016. Total capital
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
expenditures for this initiative are expected to be between
$20.0 million
and
$25.0 million
, incurrence of which have not been material to date.
Asset dispositions, severance and other
.
During 2016 and 2015, the Company recorded losses in connection with various asset disposals and/or write-downs. In addition, during the first quarter of 2016 and 2015, the Company incurred legal and professional costs in connection with the Spin-off of
$4.3 million
and
$0.5 million
, respectively, of which
$2.2 million
are accrued as of
April 1, 2016
. Total transaction related costs for the Spin-off are estimated to be between
$11 million
and
$12 million
, of which
$10.3 million
have been incurred through April 1, 2016. Expenses related to the Spin-off were primarily recorded within the corporate unallocated and the QiG segment. Refer to Note 2 “Divestiture and Acquisition” for additional information on the Spin-off of Nuvectra.
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations.
As of
April 1, 2016
, the balance of unrecognized tax benefits is approximately
$9.6 million
. It is reasonably possible that a reduction of up to
$0.1 million
of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately
$8.8 million
of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
|
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
Litigation
–
In April 2013, the Company commenced an action against AVX Corporation and AVX Filters Corporation (collectively “AVX”) alleging that AVX had infringed on the Company’s patents by manufacturing and selling filtered feedthrough assemblies used in implantable pacemakers and cardioverter defibrillators that incorporate the Company’s patented technology. On January 26, 2016, a jury in the U.S. District Court for the District of Delaware returned a verdict finding that AVX infringed on
two
Greatbatch patents and awarded Greatbatch
$37.5 million
in damages. The finding is subject to post-trial proceedings, including a possible appeal by AVX. The Company has recorded
no
gains in connection with this litigation as no cash has been received.
In January 2015, Lake Region Medical was notified by the New Jersey Department of Environmental Protection (“NJDEP”) of the NJDEP’s intent to revoke a no further action determination made by the NJDEP in favor of Lake Region Medical in 2002 pertaining to a property on which a subsidiary of Lake Region Medical operated a manufacturing facility in South Plainfield, New Jersey beginning in 1971. Lake Region Medical sold the property in 2004 and vacated the facility in 2007. The Company is cooperating with the NJDEP and believes the NJDEP’s notice of intent to revoke is unwarranted. In December 2014, the current owner of the property commenced litigation against Lake Region Medical, one of its executive officers and other unrelated third parties, alleging that the defendants caused or contributed to alleged groundwater contamination beneath the property.
The Company believes these allegations are without merit and has concluded that any potential loss related to these allegations is not probable
, and as such,
no
liability has been recorded as of April 1, 2016.
The Company is a party to various other legal actions arising in the normal course of business. Other than what is discussed in this note, the Company does not expect that the ultimate resolution of any other pending legal actions will have a material effect on its consolidated results of operations, financial position, or cash flows. However, litigation is subject to inherent uncertainties. As such, there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, will not become material in the future.
Environmental Matters
–
The Company’s Collegeville, PA facility, which was acquired as part of the Lake Region Medical acquisition, is subject to two administrative consent orders entered into with the U.S. Environmental Protection Agency (the “EPA”), which require ongoing groundwater treatment and monitoring at the site as a result of historic leaks from underground storage tanks. Upon approval by the EPA of the Company’s proposed post remediation care plan, which requires a continuation of the groundwater treatment and monitoring process at the site, the Company expects that the consent orders will terminate. During the first half of 2016, the Company expects a decision from the EPA on whether the Company’s post remediation care plan has been approved. The groundwater
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
treatment process at the Collegeville facility consists of a groundwater extraction and treatment system and the performance of annual sampling of a defined set of groundwater wells as a means to monitor containment within approved boundaries. As of April 1, 2016 and January 1, 2016, there was
$1.1 million
recorded in Other Long-Term Liabilities in the Condensed Consolidated Balance Sheets in connection with this matter for the cost of on-going remediation.
Product Warranties
–
The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship.
The Company does not expect future product warranty claims will have a material effect on its consolidated results of operations, financial position, or cash flows. However, there can be no assurance that any future customer complaints or negative regulatory actions regarding the Company’s products, which the Company currently believes to be immaterial, does not become material in the future. The change in product warranty liability was comprised of the following (in thousands):
|
|
|
|
|
At January 1, 2016
|
$
|
3,316
|
|
Additions to warranty reserve
|
294
|
|
Warranty claims paid
|
(24
|
)
|
At April 1, 2016
|
$
|
3,586
|
|
Purchase Commitments
–
Contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum, or variable price provisions, and the approximate timing of the transaction. The Company’s purchase orders are normally based on its current manufacturing needs and are fulfilled by its vendors within short time horizons. The Company also enters into blanket orders with vendors that have preferred pricing and terms; however, these orders are normally cancelable without penalty. The Company also enters into contracts for outsourced services; however, the obligations under these contracts generally contain clauses allowing for cancellation without significant penalty.
As of
April 1, 2016
, these contractual obligations totaled approximately
$60.3 million
and will be financed by existing cash and cash equivalents, cash generated from operations, or the Company’s credit facilities.
Operating Leases
– The Company is a party to various operating lease agreements for buildings, machinery, equipment, and software. The Company primarily leases buildings, which accounts for the majority of the future lease payments. Minimum future estimated operating lease expenses as of April 1, 2016 are as follows (in thousands):
|
|
|
|
|
Remainder of 2016
|
$
|
11,076
|
|
2017
|
13,114
|
|
2018
|
12,147
|
|
2019
|
11,052
|
|
2020
|
9,018
|
|
Thereafter
|
31,272
|
|
Total estimated operating lease expense
|
$
|
87,679
|
|
Foreign Currency Contracts
–
The Company enters into forward contracts to purchase Mexican pesos in order to hedge the risk of peso-denominated payments associated with operations at its facilities in Mexico
. In connection with the Lake Region Medical acquisition, the Company terminated its outstanding forward contracts resulting in a
$2.4 million
payment to the foreign currency contract counterparty during the fourth quarter of 2015. As of April 1, 2016, the Company had
$1.0 million
recorded in Accumulated Other Comprehensive Income related to these contracts, which will be amortized to Cost of Sales as the inventory, which the contracts were hedging the cash flows to produce, is sold.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
The impact to the Company’s results of operations from its forward contract hedges is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
April 1, 2016
|
|
April 3, 2015
|
Addition in cost of sales
|
|
$
|
619
|
|
|
$
|
244
|
|
Ineffective portion of change in fair value
|
|
—
|
|
|
—
|
|
Information regarding outstanding foreign currency contracts as of
April 1, 2016
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instrument
|
|
Type of
Hedge
|
|
Aggregate
Notional
Amount
|
|
Start
Date
|
|
End
Date
|
|
$/Peso
|
|
Fair
Value
|
|
Balance Sheet Location
|
FX Contract
|
|
Cash flow
|
|
$
|
12,360
|
|
|
Jan 2016
|
|
Dec 2016
|
|
0.0584
|
|
|
$
|
(325
|
)
|
|
Accrued Expenses
|
FX Contract
|
|
Cash flow
|
|
$
|
8,386
|
|
|
Apr 2016
|
|
Dec 2016
|
|
0.0565
|
|
|
$
|
62
|
|
|
Other Current Assets
|
Self-Insured Medical Plan
–
The Company self-funds the medical insurance coverage provided to its U.S. based employees. The Company has specific stop loss coverage for claims incurred during 2016 exceeding
$250 thousand
per associate for legacy Greatbatch and exceeding $
275 thousand
per associate for legacy Lake Region Medical with no annual maximum aggregate stop loss coverage. As of
April 1, 2016
and January 1, 2016, the Company had
$3.6 million
and
$4.0 million
accrued related to its self-insurance of its medical plans, respectively. This accrual is recorded in Accrued Expenses in the Condensed Consolidated Balance Sheets and is primarily based upon claim history.
Self-Insured Workers’ Compensation Trust
– Prior to 2011, the Company was a member of a group self-insurance trust that provided workers’ compensation benefits to employees of the Company in Western New York (the “Trust”). Prior to being acquired by Greatbatch, Lake Region Medical self-insured the workers’ compensation benefits provided to its employees. As of April 1, 2016, the Company utilized a traditional insurance provider for workers’ compensation coverage for all associates. During 2015, the Company received an additional assessment from the Trust of
$0.9 million
. As of April 1, 2016 and January 1, 2016, the Company had
$3.4 million
and
$3.9 million
accrued for workers’ compensation claims, respectively. This accrual is recorded in Accrued Expenses in the Condensed Consolidated Balance Sheets and is primarily based upon claim history and assessments received.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
|
|
12.
|
EARNINGS (LOSS) PER SHARE (“EPS”)
|
The following table illustrates the calculation of Basic and Diluted EPS (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Numerator for basic and diluted EPS:
|
|
|
|
Net income (loss)
|
$
|
(12,660
|
)
|
|
$
|
8,008
|
|
Denominator for basic EPS:
|
|
|
|
Weighted average shares outstanding
|
30,718
|
|
|
25,264
|
|
Effect of dilutive securities:
|
|
|
|
Stock options, restricted stock and restricted stock units
|
—
|
|
|
955
|
|
Denominator for diluted EPS
|
30,718
|
|
|
26,219
|
|
Basic EPS
|
$
|
(0.41
|
)
|
|
$
|
0.32
|
|
Diluted EPS
|
$
|
(0.41
|
)
|
|
$
|
0.31
|
|
The diluted weighted average share calculations do not include the following securities, which are not dilutive to the EPS calculations or the performance criteria have not been met:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Time-vested stock options, restricted stock and restricted stock units
|
1,889,500
|
|
|
266,000
|
|
Performance-vested restricted stock units
|
440,800
|
|
|
11,900
|
|
|
|
13.
|
ACCUMULATED OTHER COMPREHENSIVE INCOME
|
Accumulated Other Comprehensive Income is comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit
Plan
Liability
|
|
Cash
Flow
Hedges
|
|
Foreign
Currency
Translation
Adjustment
|
|
Total
Pre-Tax
Amount
|
|
Tax
|
|
Net-of-Tax
Amount
|
At January 1, 2016
|
$
|
(1,179
|
)
|
|
$
|
(2,392
|
)
|
|
$
|
3,609
|
|
|
$
|
38
|
|
|
$
|
1,332
|
|
|
$
|
1,370
|
|
Unrealized loss on cash flow hedges
|
—
|
|
|
(54
|
)
|
|
—
|
|
|
(54
|
)
|
|
19
|
|
|
(35
|
)
|
Realized loss on foreign currency hedges
|
—
|
|
|
619
|
|
|
—
|
|
|
619
|
|
|
(217
|
)
|
|
402
|
|
Foreign currency translation gain
|
—
|
|
|
—
|
|
|
18,760
|
|
|
18,760
|
|
|
—
|
|
|
18,760
|
|
At April 1, 2016
|
$
|
(1,179
|
)
|
|
$
|
(1,827
|
)
|
|
$
|
22,369
|
|
|
$
|
19,363
|
|
|
$
|
1,134
|
|
|
$
|
20,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
Benefit
Plan
Liability
|
|
Cash
Flow
Hedges
|
|
Foreign
Currency
Translation
Adjustment
|
|
Total
Pre-Tax
Amount
|
|
Tax
|
|
Net-of-Tax
Amount
|
At January 2, 2015
|
$
|
(1,181
|
)
|
|
$
|
(2,558
|
)
|
|
$
|
11,450
|
|
|
$
|
7,711
|
|
|
$
|
1,412
|
|
|
$
|
9,123
|
|
Unrealized loss on cash flow hedges
|
—
|
|
|
(1,347
|
)
|
|
—
|
|
|
(1,347
|
)
|
|
470
|
|
|
(877
|
)
|
Realized loss on foreign currency hedges
|
—
|
|
|
244
|
|
|
—
|
|
|
244
|
|
|
(85
|
)
|
|
159
|
|
Realized loss on interest rate swap hedges
|
—
|
|
|
181
|
|
|
—
|
|
|
181
|
|
|
(63
|
)
|
|
118
|
|
Foreign currency translation loss
|
—
|
|
|
—
|
|
|
(1,825
|
)
|
|
(1,825
|
)
|
|
—
|
|
|
(1,825
|
)
|
At April 3, 2015
|
$
|
(1,181
|
)
|
|
$
|
(3,480
|
)
|
|
$
|
9,625
|
|
|
$
|
4,964
|
|
|
$
|
1,734
|
|
|
$
|
6,698
|
|
The realized loss relating to the Company’s foreign currency and interest rate swap hedges were reclassified from Accumulated Other Comprehensive Income and included in Cost of Sales and Interest Expense, respectively, in the Condensed Consolidated Statements of Operations.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
|
|
14.
|
FAIR VALUE MEASUREMENTS
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
Foreign Currency Contracts
– The fair value of foreign currency contracts were determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs included foreign exchange rate and credit spread curves. In addition, the Company received fair value estimates from the foreign currency contract counterparty to verify the reasonableness of the Company’s estimates. The Company’s foreign currency contracts are categorized in Level 2 of the fair value hierarchy. The fair value of the Company’s foreign currency contracts will be realized as Cost of Sales as the inventory, which the contracts are hedging the cash flows to produce, is sold, of which approximately
$1.8 million
is expected to be realized within the next twelve months.
The following table provides information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
At
April 1,
|
|
Quoted
Prices in
Active Markets
for Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
Description
|
|
2016
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
Foreign currency contracts (Note 11)
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Foreign currency contracts (Note 11)
|
|
$
|
325
|
|
|
$
|
—
|
|
|
$
|
325
|
|
|
$
|
—
|
|
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. The carrying amounts of cash, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the short-term nature of these items. Refer to Note 6 “Debt” for further discussion regarding the fair value of the Company’s Senior Secured Credit Facilities and Senior Notes. A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:
Long-lived Assets
– The Company reviews the carrying amount of its long-lived assets to be held and used, other than goodwill and indefinite-lived intangible assets, for potential impairment whenever certain indicators are present such as: a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which the long-lived asset or asset group is being used or in its physical condition; a significant change in legal factors or in the business climate that could affect the value of the long-lived asset or asset group, including an action or assessment by a regulator; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of the long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group’s carrying amount to its fair value. When it is determined that useful lives are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives. The Company did not record any impairment charges related to its long-lived assets during the first
three
months of
2016
or
2015
.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
Goodwill and Indefinite-lived Intangible Assets
– Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for impairment. The Company assesses goodwill for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above. Goodwill is evaluated for impairment through the comparison of the fair value of the reporting units to their carrying values. When evaluating goodwill for impairment, the Company may first perform an assessment of qualitative factors to determine if the fair value of the reporting unit is more-likely-than-not greater than its carrying amount. This qualitative assessment is referred to as a “step zero
”
approach. If, based on the review of the qualitative factors, the Company determines it is more-likely-than-not that the fair value of the reporting unit is greater than its carrying value, the required two-step impairment test can be bypassed. If the Company does not perform a step zero assessment or if the fair value of the reporting unit is more-likely-than-not less than its carrying value, the Company must perform a two-step impairment test, and calculate the estimated fair value of the reporting unit. If, based upon the two-step impairment test, it is determined that the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Under the two-step approach, fair values for reporting units are determined based on discounted cash flows and market multiples.
Other indefinite lived intangible assets are assessed for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above, by comparing the fair value of the intangible asset to its carrying value. The fair value is determined by using the income approach.
The Company did not record any impairment charges related to its indefinite-lived intangible assets, including goodwill, during the first
three
months of
2016
or
2015
, respectively. See Note 5 “Intangible Assets” for additional information on the Company’s intangible assets.
Cost and Equity Method Investments
– The Company holds investments in equity and other securities that are accounted for as either cost or equity method investments, which are classified as Other Assets on the Condensed Consolidated Balance Sheets. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company’s investment may not be recoverable. The fair value of cost or equity method investments is not adjusted if there are no identified events or changes in circumstances that may have a material effect on the fair value of the investments. Gains and losses realized on cost and equity method investments are recorded in Other Income, Net, unless separately stated. The aggregate recorded amount of cost and equity method investments at
April 1, 2016
and January 1, 2016 was
$22.5 million
and
$20.6 million
, respectively. The Company’s equity method investment is in a Chinese venture capital fund focused on investing in life sciences companies. This fund accounts for its investments at fair value with the unrealized change in fair value of these investments recorded as income or loss to the fund in the period of change. As of
April 1, 2016
, the Company owned
6.9%
of this fund.
During the
three
month periods ended
April 1, 2016
and
April 3, 2015
, the Company did not recognize any impairment charges related to its cost method investments. The fair value of these investments is determined by reference to recent sales data of similar shares to independent parties in an inactive market. This fair value calculation is categorized in Level 2 of the fair value hierarchy. During the
three
month periods ended
April 1, 2016
and
April 3, 2015
, the Company recognized a net gain on cost and equity method investments of
$1.3 million
and
$0.5 million
, respectively, which is included in Other Income, Net.
|
|
15.
|
BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION
|
As a result of the acquisition of Lake Region Medical, the Company now has
three
reportable segments: Greatbatch Medical, QiG and Lake Region Medical. During the first quarter of 2016, the Company completed the Spin-off of a portion of its QiG segment. See Note 2 “Divestiture and Acquisition” for further description of these transactions. As a result of the Lake Region Medical acquisition and the Spin-off, the Company is re-evaluating its reporting structure, which may change its product line and segment reporting in the future. This process is expected to be finalized in 2016.
Greatbatch Medical designs and manufactures medical devices and components where Greatbatch either owns the intellectual property or has unique manufacturing and assembly expertise. Greatbatch Medical provides medical devices and components to the cardiac, neuromodulation, orthopedics, portable medical, vascular and energy markets among others. Greatbatch Medical also offers value-added assembly and design engineering services for medical devices that utilize its component products.
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
The QiG segment focuses on the design and development of complete medical device systems and components. The medical devices QiG designs and develops are full product solutions that utilize the medical technology expertise and capabilities residing within Greatbatch Medical. QiG revenue consists primarily of sales of various medical device products such as implantable pulse generators, programmer systems, battery chargers, patient wands and leads to medical device companies. Once the medical devices developed by QiG reach significant production levels, the responsibility for manufacturing these products may be transferred to Greatbatch Medical.
Lake Region Medical has operated as a segment for Greatbatch since it was acquired during the fourth quarter of 2015. This segment specializes in the design, development, and manufacturing of products across the medical component and device spectrum, primarily serving the cardio, vascular and advanced surgical markets. Lake Region Medical offers fully integrated outsourced manufacturing, regulatory and engineering services, contract manufacturing, finished device assembly services, original device development, and supply chain management.
As a result of the Lake Region Medical acquisition and the Spin-off, the Company has recast its product line sales into the following four categories:
|
|
•
|
Advanced Surgical, Orthopedics, and Portable Medical:
Includes legacy Greatbatch Orthopedics and Portable Medical product line sales plus the legacy Lake Region Medical Advanced Surgical product line sales. Products include components, sub-assemblies, finished devices, implants, instruments and delivery systems for a range of surgical technologies to the advanced surgical market, including laparoscopy, orthopedics and general surgery, biopsy and drug delivery, joint preservation and reconstruction, arthroscopy, and engineered tubing solutions. Products also include life-saving and life-enhancing applications comprising of automated external defibrillators, portable oxygen concentrators, ventilators, and powered surgical tools.
|
|
|
•
|
Cardio and Vascular:
Includes the legacy Greatbatch Vascular product line sales plus the legacy Lake Region Medical Cardio and Vascular product line sales less the legacy Lake Region Medical Cardiac/Neuromodulation sales. Products include introducers, steerable sheaths, guidewires, catheters, and stimulation therapy components, subassemblies and finished devices that deliver therapies for various markets such as coronary and neurovascular disease, peripheral vascular disease, interventional radiology, vascular access, atrial fibrillation, and interventional cardiology, plus products for medical imaging and pharmaceutical delivery.
|
|
|
•
|
Cardiac/Neuromodulation:
Includes the legacy Greatbatch Cardiac/Neuromodulation and QiG sales plus the legacy Lake Region Medical Cardiac/Neuromodulation sales previously included in their Cardio and Vascular product line sales. Products include batteries, capacitors, filtered and unfiltered feed-throughs, engineered components, implantable stimulation leads, and enclosures used in implantable medical devices.
|
|
|
•
|
Electrochem:
Includes the legacy Greatbatch Energy, Military and Environmental product line sales. Products include primary and rechargeable batteries and battery packs for demanding applications such as down hole drilling tools.
|
An analysis and reconciliation of the Company’s business segments, product lines and geographic information to the respective information in the Condensed Consolidated Financial Statements follows. Sales by geographic area are presented by allocating sales from external customers based on where the products are shipped (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Product line sales:
|
|
|
|
Advanced Surgical, Orthopedics, and Portable Medical
|
$
|
91,329
|
|
|
$
|
52,638
|
|
Cardio and Vascular
|
133,650
|
|
|
10,356
|
|
Cardiac/Neuromodulation
|
97,075
|
|
|
80,616
|
|
Electrochem
|
11,672
|
|
|
17,710
|
|
Elimination of interproduct line sales
|
(1,488
|
)
|
|
—
|
|
Total sales
|
$
|
332,238
|
|
|
$
|
161,320
|
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Business segment sales:
|
|
|
|
Greatbatch Medical
|
$
|
131,606
|
|
|
$
|
156,977
|
|
QiG
|
3,374
|
|
|
5,047
|
|
Lake Region Medical
|
198,275
|
|
|
—
|
|
Elimination of intersegment sales
(a)
|
(1,017
|
)
|
|
(704
|
)
|
Total sales
|
$
|
332,238
|
|
|
$
|
161,320
|
|
(a) Approximately
$0.2 million
and
$0.8 million
of intersegment sales are included Greatbatch Medical and Lake Region Medical sales respectively for the first quarter of 2016. Intersegment sales for the first quarter of 2015 are included in the Greatbatch Medical segment.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Segment income (loss) from operations:
|
|
|
|
Greatbatch Medical
|
$
|
11,015
|
|
|
$
|
21,753
|
|
QiG
|
(5,209
|
)
|
|
(5,450
|
)
|
Lake Region Medical
|
21,199
|
|
|
—
|
|
Total segment income from operations
|
27,005
|
|
|
16,303
|
|
Unallocated operating expenses
|
(15,871
|
)
|
|
(6,914
|
)
|
Operating income
|
11,134
|
|
|
9,389
|
|
Unallocated other income (expense), net
|
(23,896
|
)
|
|
431
|
|
Income (loss) before provision (benefit) for income taxes
|
$
|
(12,762
|
)
|
|
$
|
9,820
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Sales by geographic area:
|
|
|
|
United States
|
$
|
202,123
|
|
|
$
|
70,516
|
|
Non-Domestic locations:
|
|
|
|
Puerto Rico
|
39,128
|
|
|
34,016
|
|
Belgium
|
18,166
|
|
|
17,367
|
|
Rest of world
|
72,821
|
|
|
39,421
|
|
Total sales
|
$
|
332,238
|
|
|
$
|
161,320
|
|
Three
customers accounted for a significant portion of the Company’s sales as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 1, 2016
|
|
April 3, 2015
|
Customer A
|
19
|
%
|
|
22
|
%
|
Customer B
|
16
|
%
|
|
18
|
%
|
Customer C
|
12
|
%
|
|
14
|
%
|
Total
|
47
|
%
|
|
54
|
%
|
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
Long-lived tangible assets by geographic area are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
April 1, 2016
|
|
January 1, 2016
|
United States
|
$
|
262,109
|
|
|
$
|
264,556
|
|
Rest of world
|
119,351
|
|
|
114,936
|
|
Total
|
$
|
381,460
|
|
|
$
|
379,492
|
|
|
|
16.
|
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
|
In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments,” which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. This update requires acquiring companies to recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance in this ASU became effective for the Company on January 2, 2016 and did not have a material impact on the Company's Condensed Consolidated Financial Statements as no material measurement-period adjustments were made during the first quarter of 2016. See Note 2 “Divestiture and Acquisition” for further description of the Company’s acquisition.
In the normal course of business, management evaluates all new accounting pronouncements issued by the FASB, Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), or other authoritative accounting bodies to determine the potential impact they may have on the Company’s Condensed Consolidated Financial Statements. Based upon this review, except as noted below, management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company’s Condensed Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 changes how companies account for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, including interim periods within those annual periods. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period and the entity must adopt all of the amendments from ASU 2016-09 in the same period. The Company is currently evaluating the impact that the adoption of this ASU will have on its Condensed Consolidated Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which requires companies to recognize all leases as assets and liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. As a result, the effect of leases on the consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous GAAP. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Condensed Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; requires entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset; and requires entities to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option. This ASU is effective for
GREATBATCH. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
public companies for fiscal years beginning after December 15, 2017. Early adoption of the own credit provision is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its Condensed Consolidated Financial Statements.
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory,” which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently assessing the impact of adopting this ASU on its Condensed Consolidated Financial Statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The core principle behind ASU No. 2014-09 is that an entity should recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for delivering goods and services. This model involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies the performance obligations. This ASU allows two methods of adoption; a full retrospective approach where historical financial information is presented in accordance with the new standard, and a modified retrospective approach where this ASU is applied to the most current period presented in the financial statements. In August 2015, the FASB issued ASU No 2015-14 “Revenue from Contracts with Customers: Deferral of the Effective Date,” which deferred the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, with earlier application permitted as of annual reporting periods beginning after December 15, 2016. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” to clarify the implementation guidance on principal versus agent. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” which clarifies the identifying performance obligations and licensing implementation guidance. The Company is currently assessing the financial impact of adopting these ASU’s and the methods of adoption; however, given the scope of the new standard, the Company is currently unable to provide a reasonable estimate regarding the financial impact or which method of adoption will be elected.