Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 ______________________________
x
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20122013

Commission File Number: 333-130470

Accellent Inc.

(Exact name of registrant as specified in its charter)

Maryland 84-1507827

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

100 Fordham Road

Wilmington, Massachusetts

 01887
(Address of registrant’s principal executive offices) (Zip code)

(978) 570-6900

Registrant’s Telephone Number, Including Area Code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ¨    No  x

(Note: As a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant would have been required to file such reports) as if it were subject to such filing requirements).

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨  Accelerated filer ¨
Non-accelerated filer 
x  (Do not check if a smaller reporting company)
  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No x

As of August 13, 2012,14, 2013, 1,000 shares of the Registrant’sregistrant’s common stock were outstanding. The registrant is a wholly ownedwholly-owned subsidiary of Accellent Holdings Corp.



Table of Contents


Table of Contents

 3 

ITEM 1.

Financial Statements

3

 7 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 22 

Quantitative and Qualitative Disclosures About Market Risk

 28 

Controls and Procedures

 29 

 29 

ITEM 1.

Legal Proceedings

29 

ITEM 1A.

Risk Factors

29 

Unregistered Sales of Equity Securities and Use of Proceeds

 29 

Defaults Upon Senior Securities

 30 

Mine Safety Disclosures

 30 

ITEM 5.

Other Information

30 

ITEM 6.

Exhibits

30 

31



2


PART I. FINANCIAL INFORMATION


ITEM 1.FINANCIAL STATEMENTS

ITEM 1.    FINANCIAL STATEMENTS

ACCELLENT INC.

Unaudited Condensed Consolidated Balance Sheets

As of December 31, 20112012 and June 30, 20122013

(in thousands, except share and per share data)

   December 31,
2011
  June 30,
2012
 

Assets

   

Current assets:

   

Cash

  $38,858   $46,970  

Accounts receivable, net of allowances of $1,983 and $2,035 as of December 31, 2011 and June 30, 2012, respectively

   54,763    54,722  

Inventory

   65,962    68,174  

Prepaid expenses and other current assets

   4,481    5,447  
  

 

 

  

 

 

 

Total current assets

   164,064    175,313  

Property, plant and equipment, net

   126,992    118,122  

Goodwill

   629,854    629,854  

Other intangible assets, net

   149,687    142,217  

Deferred financing costs and other assets, net

   16,825    15,189  
  

 

 

  

 

 

 

Total assets

  $1,087,422   $1,080,695  
  

 

 

  

 

 

 

Liabilities and Stockholder’s equity

   

Current liabilities:

   

Current portion of long-term debt

  $22   $19  

Accounts payable

   22,580    25,766  

Accrued payroll and benefits

   8,221    10,781  

Accrued interest

   19,519    19,897  

Accrued expenses and other current liabilities

   18,747    15,874  
  

 

 

  

 

 

 

Total current liabilities

   69,089    72,337  

Long-term debt

   712,967    713,129  

Other liabilities

   38,466    40,363  
  

 

 

  

 

 

 

Total liabilities

   820,522    825,829  
  

 

 

  

 

 

 

Stockholder’s equity:

   

Common stock, par value $0.01 per share, 50,000,000 shares authorized; 1,000 shares issued and outstanding at December 31, 2011 and June 30, 2012, respectively

   —      —    

Additional paid-in capital

   638,445    638,798  

Accumulated other comprehensive (loss)

   (1,266  (1,059

Accumulated deficit

   (370,279  (382,873
  

 

 

  

 

 

 

Total stockholder’s equity

   266,900    254,866  
  

 

 

  

 

 

 

Total liabilities and stockholder’s equity

  $1,087,422   $1,080,695  
  

 

 

  

 

 

 

 December 31,
2012
 June 30,
2013
Assets   
Current assets:   
Cash$59,902
 $60,486
Accounts receivable, net of allowances of $2,106 and $2,241 as of December 31, 2012 and June 30, 2013, respectively49,403
 56,505
Inventory57,069
 60,551
Prepaid expenses and other current assets10,973
 3,388
Total current assets177,347
 180,930
Property, plant and equipment, net115,869
 116,423
Goodwill619,443
 556,315
Other intangible assets, net134,747
 127,277
Deferred financing costs and other assets, net13,766
 12,385
Total assets$1,061,172
 $993,330
Liabilities and Stockholders' equity   
Current liabilities:   
Current portion of long-term debt$11
 $7
Accounts payable20,044
 23,766
Accrued payroll and benefits6,829
 9,803
Accrued interest19,323
 19,303
Accrued expenses and other current liabilities17,359
 16,378
Total current liabilities63,566
 69,257
Long-term debt713,294
 713,470
Other liabilities39,905
 40,678
Total liabilities816,765
 823,405
Commitments and contingencies (Note 12)

 

Stockholders' equity:   
Common stock, par value $0.01 per share, 50,000,000 shares authorized; 1,000 shares issued and outstanding at December 31, 2012 and June 30, 2013, respectively
 
Additional paid-in capital639,610
 640,010
Accumulated other comprehensive loss(2,554) (2,696)
Accumulated deficit(392,649) (467,389)
Total stockholders’ equity244,407
 169,925
Total liabilities and stockholders’ equity$1,061,172
 $993,330
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


3


ACCELLENT INC.

Unaudited Condensed Consolidated Statements of Operations

For the three and six months ended June 30, 20112012 and 2012

2013

(in thousands)

   Three Months Ended  Six Months Ended 
   June 30,
2011
  June 30,
2012
  June 30,
2011
  June 30,
2012
 

Net sales

  $142,793   $130,231   $272,681   $261,809  

Cost of sales (exclusive of amortization)

   104,301    96,881    202,618    197,849  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   38,492    33,350    70,063    63,960  

Operating expenses:

     

Selling, general and administrative expenses

   14,549    13,974    28,661    29,024  

Research and development expenses

   733    472    1,479    945  

Restructuring expenses

   —      1,486    —      1,838  

Loss (gain) on disposal of assets

   47    (33  47    (34

Amortization of intangible assets

   3,735    3,735    7,470    7,470  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   19,064    19,634    37,657    39,243  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income from operations

   19,428    13,716    32,406    24,717  

Other (expense) income, net:

     

Interest expense, net

   (17,179  (17,259  (34,428  (34,501

Other income (expense), net

   (715  (864)  (2,650  (687
  

 

 

  

 

 

  

 

 

  

 

 

 

Total other (expense) income, net

   (17,894  (18,123  (37,078  (35,188
  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes

   1,534    (4,407  (4,672  (10,471

Provision for income taxes

   523    1,201    2,488    2,123  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $1,011   $(5,608 $(7,160 $(12,594
  

 

 

  

 

 

  

 

 

  

 

 

 

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Net sales$125,998
 $130,733
 $250,565
 $251,531
Cost of sales (exclusive of amortization)93,014
 95,330
 188,120
 190,258
Gross profit32,984
 35,403
 62,445
 61,273
Operating expenses:       
Selling, general and administrative expenses13,814
 12,778
 28,669
 27,025
Research and development expenses472
 547
 945
 999
Impairment of goodwill
 12,128
 
 63,128
Restructuring expenses1,485
 (170) 1,838
 (181)
(Gain) loss on disposal of assets(32) 736
 (33) 692
Amortization of intangible assets3,735
 3,735
 7,470
 7,470
Total operating expenses19,474
 29,754
 38,889
 99,133
Income (loss) from continuing operations13,510
 5,649
 23,556
 (37,860)
Other (expense) income, net:       
Interest expense, net(17,258) (17,271) (34,500) (34,577)
Other expense, net(858) (31) (682) (180)
Total other expense, net(18,116) (17,302) (35,182) (34,757)
Loss from continuing operations before income taxes(4,606) (11,653) (11,626) (72,617)
Provision for income taxes1,131
 1,018
 1,718
 2,123
Net loss from continuing operations(5,737) (12,671) (13,344) (74,740)
Net income from discontinued operations, net of tax of $69 and $404 for the three and six months ended June 30, 2012, respectively, and net of tax of $0 for the three and six months ended June 30, 2013, respectively129
 
 750
 
Net loss$(5,608) $(12,671) $(12,594) $(74,740)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4


ACCELLENT INC.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

Loss

For the three and six months ended June 30, 20112012 and 2012

2013

(in thousands)

   Three Months Ended  Six Months Ended 
   June 30,
2011
   June 30,
2012
  June 30,
2011
  June 30,
2012
 

Net income (loss)

  $1,011    $(5,608 $(7,160 $(12,594

Other comprehensive income (loss)

      

Unrealized gain on available for sale security

   —       193    —      193  

Cumulative translation adjustment

   789     (541  3,195    14  
  

 

 

   

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $1,800    $(5,956 $(3,965 $(12,387
  

 

 

   

 

 

  

 

 

  

 

 

 

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Net loss$(5,608) $(12,671) $(12,594) $(74,740)
Other comprehensive income (loss):       
Unrealized gain (loss) on available for sale security193
 (3) 193
 32
Realized gain on available for sale security
 (242) 
 (242)
Cumulative translation adjustment(540) 325
 14
 68
Other comprehensive (loss) income(347) 80
 207
 (142)
Comprehensive loss$(5,955) $(12,591) $(12,387) $(74,882)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5


ACCELLENT INC.

Unaudited Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 20112012 and 2012

2013

(in thousands)

   June 30,
2011
  June 30,
2012
 

Cash flows from operating activities:

   

Net loss

  $(7,160 $(12,594

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

   

Depreciation and amortization

   19,047    20,130  

Amortization of debt discounts and non-cash interest accrued

   1,449    1,533  

Restructuring charges, net of payments

   —      1,031  

Loss (gain) on disposal of assets

   47    (34

Deferred income tax expense

   2,979    1,479  

Non-cash compensation expense

   535    227  

Changes in operating assets and liabilities:

   

Accounts receivable

   (9,199  (59

Inventory

   (12,806  (5,371

Prepaid expenses and other current assets

   (2,211  (609

Accounts payable, accrued expenses and other operating liabilities

   4,301    2,487  
  

 

 

  

 

 

 

Net cash (used in) provided by operating activities

   (3,018  8,220  
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Capital expenditures

   (16,773  (7,984

Proceeds from sale of property and equipment

   163    25  

Proceeds from business divestitures

   —      8,034  
  

 

 

  

 

 

 

Net cash (used in) provided by investing activities

   (16,610  75  
  

 

 

  

 

 

 

Cash flows from financing activities:

   

Repurchase of common stock

   —      (43

Payment of deferred financing fees

   (498  —    

Repayments of long-term debt and capital lease obligations

   (12  (11

Proceeds from exercise of options in common stock

   16    —    
  

 

 

  

 

 

 

Net cash used in financing activities

   (494  (54
  

 

 

  

 

 

 

Effect of exchange rate changes

   290    (129
  

 

 

  

 

 

 

Net (decrease) increase in cash

   (19,832  8,112  

Cash, beginning of period

   40,787    38,858  
  

 

 

  

 

 

 

Cash, end of period

  $20,955   $46,970  
  

 

 

  

 

 

 

Supplemental disclosure of cash flow information:

   

Cash paid for interest

  $32,828   $32,574  

Cash paid for income taxes

  $1,132   $1,414  

Supplemental disclosure of non-cash investing and financing activities:

   

Property and equipment purchases included in accrued expenses

  $1,727   $1,853  

Deferred financing fees unpaid and included in accounts payable and accrued expenses

  $72   $—    

 Six Months Ended
 June 30,
2012
 June 30,
2013
Cash flows from operating activities:   
Net loss$(12,594) $(74,740)
Less net income from discontinued operations, net of tax750
 
Net loss from continuing operations(13,344) (74,740)
Adjustments to reconcile net loss to net cash provided by operating activities:   
Depreciation and amortization19,488
 16,228
Amortization of debt discounts and non-cash interest accrued1,533
 1,619
Restructuring charges, net of payments1,031
 
Impairment of goodwill
 63,128
(Gain) Loss on disposal of assets(33) 692
Gain on sale of securities
 (242)
Deferred income tax expense1,479
 1,104
Non-cash compensation expense227
 460
Changes in operating assets and liabilities:   
Accounts receivable(2,119) (7,237)
Inventory(4,427) (3,559)
Prepaid expenses and other current assets(630) (684)
Accounts payable, accrued expenses and other liabilities2,998
 6,002
Net cash provided by operating activities of continuing operations6,203
 2,771
Net cash provided by (used in) operating activities of discontinued operations2,017
 (108)
Net cash provided by operating activities8,220
 2,663
Cash flows from investing activities:   
Capital expenditures(7,477) (10,264)
Proceeds from sale of property and equipment24
 63
Proceeds from the sale of available for sale securities
 242
Net cash used in investing activities of continuing operations(7,453) (9,959)
Net cash provided by investing activities of discontinued operations7,528
 7,987
Net cash provided by (used in) investing activities75
 (1,972)
Cash flows from financing activities:   
Repayments of long-term debt and capital lease obligations(11) (7)
Repurchase of common stock(43) 
Net cash used in financing activities(54) (7)
Effect of exchange rate changes(129) (100)
Net increase in cash8,112
 584
Cash, beginning of period38,858
 59,902
Cash, end of period$46,970
 $60,486
Supplemental disclosure of cash flow information:   
Cash paid for interest$32,574
 $32,910
Cash paid for income taxes$1,414
 $816
Supplemental disclosure of non-cash investing and financing activities:   
Property and equipment purchases included in accrued expenses$1,853
 $1,615
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6


ACCELLENT INC.

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 20122013

1.Summary of significant accounting policies


1. Summary of significant accounting policies
Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Accellent Inc. and its wholly owned subsidiaries (collectively, the “Company”). All intercompany transactions have been eliminated.

We have

The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. We haveThe Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in ourits Annual Report on Form 10-K for the fiscal year ended December 31, 2011,2012, and in the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in ourits Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

There2012 filed with the SEC on April 1, 2013.


During the first quarter of 2013, the Company reorganized its business into two segments. The reorganization changed the reporting structure and changed the composition of the Company's reporting units. As a result, prior year amounts have been no significant changes inreclassified to conform to the application of our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, nor were there any significant changes resulting from the adoption of new accounting pronouncements.

current year’s presentation. (See Note 4 and Note 17)

Customer Concentration

During the three and six months ended June 30, 2011 and 2012 our , the Company's ten largest customers accounted for approximately 66% and 65% of ourits consolidated net sales, respectively.sales. During the three and six months ended June 30, 2011 and 2012, our 2013, the Company's ten largest customers accounted for approximately 66%68% and 65%67% of ourits consolidated net sales, respectively.

The actual percentage of net sales derived from each customer whose sales represented more than 10% or more of our consolidated net sales was as follows for the periods presented:

   Three Months Ended June 30,  Six Months Ended June 30, 
   2011  2012  2011  2012 

Customer A

   17%  16%  16%  16%

Customer B

   16%  14%  17%  14%

Customer C

   10%  11%  11%  10%

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Customer A13% 17% 13% 16%
Customer B16% 14% 17% 14%
Customer C11% 11% 11% 11%
Customer D*
 10% *
 10%
At June 30, 2012,2013, Customer A comprisedand B accounted for approximately 13 %17% and 12%, respectively, and Customers C and D each accounted for approximately 10% of accounts receivable, net. At December 31, 2011,2012, Customers A and B each comprisedaccounted for approximately 13% and 12%, respectively, of Accountsaccounts receivable, net.

2.New Accounting Pronouncements

In June 2011,


2. New Accounting Pronouncements
On February 5, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (ASC Topic 220):Presentation2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (“ASU 2011-05”) which amends current comprehensive income guidance.Income."  This accounting update eliminates the option to present the componentsrequires additional disclosure requirements about reclassification adjustments out of accumulated other comprehensive income (loss) as part("AOCI"). These adjustments include (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The ASU does not change the statement of stockholders’ equity. Instead,current requirements for the Company must report comprehensive income (loss) in either a single continuous statementreporting of comprehensive income (loss) which contains two sections, net income (loss) and other comprehensive income (loss), or in two separate but consecutive statements.income. The Company adopted the provisions of this standardASU on January 1, 20122013 and elected to present comprehensive income (loss) in a separate statement. Thethe adoption of this standard did not have ana significant impact on the Company’s consolidated financial position, results of operations or cash flows.


7


On July 18, 2013, the FASB issued ASU No. 2013-11, “Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists."  This accounting update requires that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward or other tax credit carryforward when settlement in this manner is available under applicable tax law. This guidance will be effective for the Company’s interim and annual periods beginning January 1, 2014. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

3. Inventories
3.
Inventories

Inventories consisted of the following at December 31, 20112012 and June 30, 20122013 (in thousands):

   December 31,
2011
   June 30,
2012
 

Raw materials

  $16,056    $17,457  

Work-in-process

   27,420     32,784  

Finished goods

   22,486     17,933  
  

 

 

   

 

 

 

Total

  $65,962    $68,174  
  

 

 

   

 

 

 

 December 31,
2012
 June 30,
2013
Raw materials$12,100
 $15,999
Work-in-process27,779
 28,850
Finished goods17,190
 15,702
Total$57,069
 $60,551

4. Goodwill and intangible assets
4.
Goodwill and intangible assets

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 contracts and relationships obtained in connection with business combinations.

During the first quarter of 2013, the Company reorganized its business into two segments: Advanced Surgical ("AS Segment") and Cardio & Vascular ("CV Segment").

The evaluation of the reporting units has 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 reporting units based on the relative fair values of the reporting units. This resulted in goodwill of $134 million being assigned to its Advanced Surgical reporting unit, and $485.4 million being assigned to its Cardio & Vascular reporting unit.
After the preliminary allocation of the goodwill, the carrying amount of the Advanced Surgical reporting unit exceeded its fair value by approximately $16 million, which required the Company to perform an interim goodwill impairment test for the Advanced Surgical 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. During the first quarter of 2013, the Company had not finalized this step of its impairment testing due to the complexities involved in estimating fair value. In accordance with accounting guidance the Company recognized an estimated impairment charge and recorded a pre-tax goodwill impairment charge of $51.0 million in the first quarter of 2013. The Company finalized the second step of the analysis in the second quarter of 2013 and recorded an additional pre-tax goodwill impairment charge of $12.1 million for a total pre-tax goodwill impairment charge of $63.1 million as of June 30, 2013.
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. No impairment charges were recorded for goodwill and the indefinite lived intangible assets during the six monthsyear ended June 30, 2011 and 2012.

December 31, 2012.

The Company reports all amortization expense related to finite lived intangible assets separately within its unaudited condensed consolidated statement of operations.  For the three and six months ended June 30, 20112012 and 2012,2013, the Company recorded amortization expense related to intangible assets as follows (in thousands):

   Three Months Ended   Six Months Ended 
   June 30,
2011
   June 30,
2012
   June 30,
2011
   June 30,
2012
 

Cost of sales

  $497    $497    $994    $994  

Selling, general and administrative

   3,238     3,238     6,476     6,476  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $3,735    $3,735    $7,470    $7,470  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Cost of sales$497
 $497
 $994
 $994
Selling, general and administrative3,238
 3,238
 6,476
 6,476
Total$3,735
 $3,735
 $7,470
 $7,470

8

Table of Contents

Intangible assets consisted of the following at December 31, 2011June 30, 2013 (in thousands):

   Gross
Carrying
Amount
   Accumulated
Amortization
  Net
Carrying
Amount
 

Developed technology and know how

  $16,991    $(12,186 $4,805  

Customer contracts and relationships

   197,575     (82,093  115,482  

Trade names and trademarks

   29,400     —      29,400  
  

 

 

   

 

 

  

 

 

 

Total intangible assets

  $243,966    $(94,279 $149,687  
  

 

 

   

 

 

  

 

 

 

 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology and know how$16,991
 $(15,168) $1,823
Customer contracts and relationships197,575
 (101,521) 96,054
Trade names and trademarks29,400
 
 29,400
Total intangible assets$243,966
 $(116,689) $127,277
Intangible assets consisted of the following at June 30,December 31, 2012 (in thousands):

   Gross
Carrying
Amount
   Accumulated
Amortization
  Net
Carrying
Amount
 

Developed technology and know how

  $16,991    $(13,180 $3,811  

Customer contracts and relationships

   197,575     (88,569  109,006  

Trade names and trademarks

   29,400     —      29,400  
  

 

 

   

 

 

  

 

 

 

Total intangible assets

  $243,966    $(101,749 $142,217  
  

 

 

   

 

 

  

 

 

 

 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Developed technology and know how$16,991
 $(14,174) $2,817
Customer contracts and relationships197,575
 (95,045) 102,530
Trade names and trademarks29,400
 
 29,400
Total intangible assets$243,966
 $(109,219) $134,747
Estimated intangible asset amortization expense for the remainder of 20122013 is approximately $7.5 million.$7.5 million. The estimated annual intangible asset amortization expense approximates $14.9$13.8 million in 2013, $13.82014, $13.0 million in 2014 and $13.0 million in each of year in 2015, 2016, and 2016.

2017, and $37.8 million thereafter.

At December 31, 20112012 and June 30, 2012,2013, the remaining weighted-average amortization periods for the Company’s finite lived intangible assets were as follows:

   Remaining weighted  -
average amortization period
 

Finite lived intangible asset

  December 31,
2011
   June 30,
2012
 

Developed technology and know how

   2.4     1.9  

Customer contracts and relationships

   8.9     8.4  

Total finite lived intangible asset

   8.7     8.2  

follows (in years):
 
Remaining weighted -
average amortization period

December 31,
2012
 June 30,
2013
Developed technology and know how1.4 0.9
Customer contracts and relationships7.9 7.4
Total finite lived intangible asset7.7 7.3


5. Long-term debt
5.
Long-term debt

Long-term debt consisted of the following at December 31, 20112012 and June 30, 20122013 (in thousands):

   December 31,
2011
  June 30,
2012
 

Senior secured notes maturing on February 1, 2017, interest at 8.375%

  $400,000   $400,000  

Senior subordinated notes maturing on November 1, 2017, interest at 10.0%

   315,000    315,000  

Capital lease obligations

   34    31  
  

 

 

  

 

 

 

Total debt

   715,034    715,031  

Less—unamortized discount

   (2,045  (1,883

Less—current portion

   (22  (19
  

 

 

  

 

 

 

Long term debt, excluding current portion

  $712,967   $713,129  
  

 

 

  

 

 

 

 December 31,
2012
 June 30,
2013
Senior secured notes maturing on February 1, 2017, interest at 8.375% ("Senior Secured Notes")$400,000
 $400,000
Senior subordinated notes maturing on November 1, 2017, interest at 10.0% ("Senior Subordinated Notes")315,000
 315,000
Capital lease obligations20
 13
Total debt715,020
 715,013
Less—unamortized discount(1,715) (1,536)
Less—current portion(11) (7)
Long term debt, excluding current portion$713,294
 $713,470
The Company maintains an asset backed line of credit (the “ABL Revolver”) that provides for up to $75.0$75.0 million of borrowing capacity, subject to borrowing base availability. At June 30, 2012,2013, there were no amounts outstanding under the ABL Revolver and the Company’s aggregate borrowing capacity was $27.1$33.2 million, after giving effect to outstanding letters of credit totaling $12.5$10.9 million and the amount of ineligible accounts receivable and inventories, as defined in the credit agreement governing the ABL Revolver.



9


6. Restructuring
6.
Restructuring

During the six months ended June 30, 2011,2013, the Company undertook no restructuring actions. During

In December 2011, the six months ended June 30, 2012,Company's Board of Directors approved a plan of closure with respect to the Company completed the closure of itsCompany's manufacturing facility in Manchester, England. In April of 2012, the Manchester facility was closed, and substantially all employees were terminated. All affected employees were provided with 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$0.6 million and were recorded over each employee’s remaining service period as they were required to stay through their termination date to receive the benefits. During the six months ended June 30, 2012, the Company recorded $1.3$1.3 million of restructuring costs including $0.9 million related to lease termination costs and $0.4 million related to one-time termination benefitsthe facility's closure that are recorded within “Restructuring expenses” in the accompanying unaudited condensed consolidated statement of operations foroperations. During the three and six months ended June 30, 2012.

2013, restructuring costs were negligible.

In April 2012, the Company announced a plan to close its manufacturing facility in Englewood, Colorado and theColorado. The Company expectscompleted the facility to be closed no later thanclosure in the first quarter of 2013 upon completion of the transfer of the facility’sfacility's business to other of the Company’sCompany's other facilities. In connection with the planned closure, the Company will provideprovided certain one-time termination benefits to affected employees. These one-time termination benefits are beingwere recorded over each employee’semployee's remaining service period as employees will bewere required to stay through their termination date to receive the benefits. During the six months ended June 30, 2012, theThe Company recorded $0.5$0.2 million of restructuring costs related to this facility during the facility’s planned closure, which consisted primarily of costs related to one-time termination benefits,three and are recorded within “Restructuring expenses” in the accompanying unaudited condensed consolidated statement of operations for the six months ended June 30, 2012.

2013.

The following table summarizes the amounts recorded related to restructuring activities, which are included in the accompanying unaudited condensed consolidated statementsbalance sheet as of operations for the six months ended June 30, 2012 (in thousands):

   Employee
costs
  Other exit
costs
  Total 

Balance, January 1, 2012

  $340    —     $340  

Restructuring expenses

   874    964    1,838  

Payments

   (698  (108  (806
  

 

 

  

 

 

  

 

 

 

Balance at June 30, 2012

  $516   $856   $1,372  
  

 

 

  

 

 

  

 

 

 

7.Divestitures

 
Employee
costs
 
Other exit
costs
 Total
Balance, January 1, 2012$340
 $
 $340
Restructuring expenses874
 964
 1,838
Payments(698) (108) (806)
Balance, June 30, 2012$516
 $856
 $1,372
In May 2012,The following table summarizes the amounts recorded related to restructuring activities, which are included in the accompanying unaudited condensed consolidated balance sheet as of June 30, 2013 (in thousands):
 
Employee
costs
 
Other exit
costs
 Total
Balance, January 1, 2013$1,329
 790
 $2,119
Restructuring expenses(170) (11) (181)
Payments(1,024) (121) (1,145)
Balance, June 30, 2013$135
 $658
 $793

7. Divestitures
As part of the Company's continuing efforts to better focus its efforts and align with its customers, the Company completeddiscontinued certain businesses. The Company has accounted for these businesses as discontinued operations and, accordingly, has presented the sale of substantially all of the assets of its facility in Pittsburgh, Pennsylvania for a purchase price of approximately $8.0 million in cash which was received upon closing. The results of operations and related cash flows as discontinued operations for the Pittsburgh facility are not material to all periods presented. The Company recorded a pre-tax gain

10

Table of approximately $54 thousand associated with this sale.

8.Stock-based compensation

Contents


Summary results of the discontinued operations were as follows (in thousands):

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Sales$4,233
 $
 $11,244
 $
Costs and expenses4,027
 
 10,084
 
Operating income from discontinued operations206
 
 1,160
 
Other expenses, net(8) 
 (6) 
Income from discontinued operations before income taxes198
 
 1,154
 
Provision for income taxes69
 
 404
 
Income from discontinued operations, net of tax$129
 $
 $750
 $

8. Stock-based compensation
Employee stock-based compensation

The Company maintains a 2005 Equity Plan for Key Employees of Accellent Holdings Corp. (the “2005 Equity Plan”), which provides for grants of incentive stock options, nonqualified stock options, restricted stock units and stock appreciation rights. Vesting is determined in the applicable stock option agreement and generally occurs either in equal installments over five years from the date of grant (“Time-Based”), or upon achievement of certain performance targets over a five-yearfive-year period (“Performance-Based”). Targets underlying the vesting of Performance-Based shares are generally achieved upon the attainment of a specified level of Adjusted EBITDA, as defined in the indenture governing the Company’s senior secured notes, measured each calendar year. The vesting requirements for Performance-Based shares permit a catch-up of vesting should the target not be achieved in a calendar year but achieved in a subsequent calendar year, over the five year vesting period. In addition, in connection with the acquisition of the Company in 2005, the Company exchanged fully vested stock options to acquire common shares of its predecessor entities for 4,901,107 fully vested stock options, or “Roll-Over” options, of Accellent Holdings Corp. which are recorded as a liability until such options are exercised, forfeited, expired or settled.

The table below summarizes the activity relating to the Roll-Over options during the three months ended June 30, 2012and2013:
 Three Months Ended
 June 30, 2012 June 30, 2013
 
Liability
(in thousands)
 
Roll-Over
Shares
Outstanding
 
Liability
(in thousands)
 
Roll-Over
Shares
Outstanding
Balance at January 1$143
 80,727
 $141
 80,727
Shares repurchased
 
 
 
Options exercised
 
 
 
Options forfeited
 
 
 
Change in fair value(2) 
 
 
Balance at end of period$141
 80,727
 $141
 80,727

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Table of Contents

The table below summarizes the activity relating to the Roll-Over options during the six months ended June 30, 20112012 and 2012:

   Three months ended   Six months ended 
   June 30, 2011  June 30, 2012   June 30, 2011  June 30, 2012 
   Liability
(in  thousands)
  Roll-Over
Shares
Outstanding
  Liability
(in  thousands)
  Roll-Over
Shares
Outstanding
   Liability
(in  thousands)
  Roll-Over
Shares
Outstanding
  Liability
(in  thousands)
  Roll-Over
Shares
Outstanding
 

Balance at January 1

  $449    250,049   $143    80,727    $448    250,049   $355    201,817  

Shares repurchased

   —      —      —      —       —      —      (119  (67,607

Shares exercised

   (23)  (12,995)  —      —       (23)  (12,995)  (58  (33,301

Options forfeited

   (61)  (35,237  —      —       (61)  (35,237)  (35  (20,182

Change in fair value

   (7)  —      (2  —       (6)  —      (2  —    
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of period

  $358    201,817   $141    80,727    $358    201,817   $141    80,727  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

2013:

 Six Months Ended
 June 30, 2012 June 30, 2013
 
Liability
(in thousands)
 
Roll-Over
Shares
Outstanding
 
Liability
(in thousands)
 
Roll-Over
Shares
Outstanding
Balance at January 1$355
 201,817
 $141
 80,727
Shares repurchased(119) (67,607) 
 
Options exercised(58) (33,301) 
 
Options forfeited(35) (20,182) 
 
Change in fair value(2) 
 
 
Balance at end of period$141
 80,727
 $141
 80,727
The Company’s stock-based compensation expense is based on the fair value of stock-based awards measured at the grant date that is recognized over the relevant service period and includes any adjustments to the fair value of the Company’s liability related to the Roll-Over options. For stock based awards, the Company estimates the fair value of each award on the date of grant using the Black-Scholes option valuation model. For Roll-Over options, the Company estimates their fair value at each balance sheet date. The Black-Scholes option pricing model incorporates assumptions regarding stock price volatility, the expected life of the option, a risk-free interest rate, dividend yield, and an estimate of the fair value of Accellent Holdings Corp.'s common stock. The fair value of Accellent Holdings Corp.’s common stock is determined by the Board of Directors of Accellent Holdings Corp. utilizing a market based approach. The volatility of Accellent Holdings Corp.’s common stock is estimated utilizing a weighted average stock price volatility of its publicly traded peer companies, adjusted for the Company’s financial performance and the risks associated with the illiquid nature of Accellent Holdings Corp.'s common stock. The expected life of an option is estimated based on past exercise experience. The Company used the following assumptions as of June 30, 20122013 to determine the fair value of the Roll-Over Options:

options:
 June 30,
2012
2013

Expected term to exercise

1.70.67 years

Expected volatility

26.725.84%

Risk-free rate

0.370.36%

Dividend yield

0.0%

During the three months ended June 30, 20112012 and 2012,2013, the Company granted stock options to employees to purchase approximately 155,00010,000 and 10,00040,000 shares, respectively, of Accellent Holdings Corp.'s common stock. Of the total stock options granted during the three months ended June 30, 20112012 and 2012, 77,5002013, 5,000 and 5,000,20,000, respectively, were Performance-Based awards. Stock options granted during the three months ended June 30, 20112012 and 20122013 had a weighted average grant date fair value of $1.02$0.79 and $0.79$0.78 per share, respectively.

During the three months ended June 30, 2012 and 2013, 23,950 and 241,000 shares, respectively, were forfeited by employees.

During the six months ended June 30, 20112012 and 2012,2013, the Company granted stock options to employees to purchase approximately 320,000425,000 and 425,000265,000 shares, respectively, of Accellent Holdings Corp.'s common stock. Of the total stock options granted during the six months ended June 30, 20112012 and 2012, 160,0002013, 212,500 and 212,500,132,500, respectively, were Performance-Based awards. Stock options granted during the six months ended June 30, 20112012 and 20122013 had a weighted average grant date fair value of $1.02$0.80 and $0.80$0.77 per share, respectively.

During the six months ended June 30, 2012 and 2013, 732,916 and 691,500 shares, respectively, were forfeited by employees.


12

Table of Contents

The following tables summarizessummarize the classification of recorded stock-based compensation in the unaudited condensed consolidated statements of operations and the recorded stock-based compensation by type of award for the three and six months ended June 30, 20112012 and 2012:

2013 (in thousands):

Classification of expense (in thousands):

   Three Months Ended   Six Months Ended 
   June 30,
2011
   June 30,
2012
   June 30,
2011
   June 30,
2012
 

Cost of sales

  $26    $30    $54    $38  

Selling, general and administrative

   216     112     436     144  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $242    $142    $490    $182  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Cost of sales$30
 $49
 $38
 $111
Selling, general and administrative112
 136
 144
 289
Total$142
 $185
 $182
 $400
Stock-based compensation related to stock awards by type of award (in thousands):

   Three Months Ended  Six Months Ended 
   June 30,
2011
  June 30,
2012
  June 30,
2011
  June 30,
2012
 

Time-based vesting options

  $227   $144   $452   $184  

Performance-based vesting options

   —      —      —      —    

Restricted stock awards

   22    —      44    —    

Roll-over options

   (7)  (2  (6)  (2
  

 

 

  

 

 

  

 

 

  

 

 

 

Total expense

  $242   $142   $490   $182  
  

 

 

  

 

 

  

 

 

  

 

 

 

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Time-based vesting options$144
 $79
 $184
 $192
Performance-based vesting options
 
 
 
Restricted stock awards
 106
 
 208
Roll-over options(2) 
 (2) 
Total expense$142
 $185
 $182
 $400
At June 30, 2012,2013, the Company determined that attainment of certain of the targets through 20122013 necessary for Performance-Based options to vest is not probable. Accordingly, the Company has not recorded stock-based compensation expense for Performance-Based Stock Awardsstock awards during the three and six months ended June 30, 2012.

2013.

The total unvested Performance-Based shares and their aggregate fair values were 3,570,2713,808,901 and 3,808,9014,750,105, and $4.2$4.3 million and $4.3$4.9 million, at June 30, 20112012 and 2012,2013, respectively. The total unvested Time-Based shares and their aggregate fair values were 2,629,0002,314,550 and 2,314,5502,566,250, and $2.9$2.4 million and $2.4$2.4 million, at June 30, 20112012 and 2012,2013, respectively.
During the six months ended June 30, 2013, the Company granted 50,000 shares of Restricted Stock to employees, none of which were vested at June 30, 2013. The total unvested restricted stock awards and theirvest annually each year over a five year period beginning on the grant date. The aggregate grant date fair value were 58,677 and $0.2 million at June 30, 2011. No Restricted Stock awards were outstanding at June 30, 2012.

was Non-employee$125,000, or $2.50 per share. The Company did not record any stock-based compensationDuring each of expense during the three and six months ended June 30, 20112012 related to restricted stock. The Company recorded approximately $0.1 million and $0.2 million of stock-based compensation expense during the three and six months ended June 30, 2013 related to restricted stock.

Non-employee stock-based compensation During the three months ended June 30, 2012 and 2013, the Company recognized approximately $22,500$22,500 and $45,000$30,000, respectively, of non-employee stock-based compensation related to fees paid to members of the Company’s Board of Directors. These fees are recorded as a liability and recorded in “Other liabilities” in the unaudited condensed consolidated balance sheets.

9.Income taxes

During the six months ended June 30, 2012 and 2013, the Company recognized approximately $45,000 and $60,000, respectively, of non-employee stock-based compensation related to fees paid to members of the Company’s Board of Directors. These fees are recorded as a liability and recorded in “Other liabilities” in the unaudited condensed consolidated balance sheets.

9. 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 we arethe 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.

credits or net operating losses.

Income tax expense for the three and six months ended June 30, 20112012 was $0.5$1.1 million and $2.5$1.7 million, respectively, and included $0.8$0.7 million and $1.5$1.5 million, respectively, of deferred income tax expense for differences in the book and tax treatment of goodwill offset in part by $0.4 millionand $(0.3)$0.2 million and $1.0 million, respectively, in state and foreign income taxes.

taxes refund.


13

Table of Contents

Income tax expense for the three and six months ended June 30, 20122013 was $1.2$1.0 million and $2.1$2.1 million, respectively, and included $0.7$0.7 million and $1.5$1.1 million, respectively, of deferred income tax expense for differences inwhich included $0.7 million and $1.3 million, respectively, related to the book and tax treatment of goodwill offset in part by other taxes of approximately $0.3 millionand $0.5$0.8 million. The income tax expense also included $0.3 million and $0.6$0.6 million in state, foreign and foreignother income taxes.

The Company believes that it is more likely than not that the Company will not recognize the benefits of its domestic federal and state deferred tax assets. As a result, the Company continues to provide a full valuation allowance on those deferred tax assets. The Company’s deferred tax assets are not offset by the tax liabilities related to non-deductible goodwill when determining the need for a valuation allowance. The Company has $29.4had $29.9 million and $30.3$31.2 million of net deferred tax liabilities included in “Other liabilities” in the accompanying unaudited condensed consolidated balance sheets as of December 31, 20112012 and June 30, 2012,2013, respectively, relating to goodwill basis differences.

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.the State of New York for income tax authorities.years ended December 31, 2008 through 2010. There are no other current income tax audits. The tax years ended December 31, 2005 through 2011 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.


10. Related party transactions
10.
Related party transactions

The Company maintains a management services agreement with its principal equity owner, Kohlberg, Kravis, Roberts & Co., (“KKR”) pursuant to which KKR will provideprovides certain structuring, consulting and management advisory services. During the three and six months ended June 30, 2011,2012 and 2013, the Company incurred management fees and related expenses pursuant to this agreement of $0.3$0.3 million and $0.6$0.7 million respectively. During the three and six months ended June 30, 2012, the Company incurred management fees and related expenses pursuant to this agreement of $0.3 million and $0.7 million,, respectively. As of December 31, 20112012 and June 30, 2012,2013, the Company owed KKR $0.3$0.4 million and $0.3 million, for each period respectively for unpaid management fees which are included in “Accrued expenses and other current liabilities” in the accompanying unaudited condensed consolidated balance sheets. The Company has also historically utilized the services of Capstone Consulting LLC (“Capstone”), an entity affiliated with KKR. During the three and six months ended June 30, 2011, the Company incurred consulting fees and related expenses of $0.1 million and $0.2 million, respectively. No fees or expenses related to Capstone were incurred during the three and six months ended June 30, 2012. At December 31, 2011 and June 30, 2012 and June 30, 2013. At December 31, 2012 the Company owed Capstone $0.3$0.3 million, and $0.3 million, respectively.

had no outstanding payables as of June 30, 2013.

In addition to the above, entities affiliated with KKR Asset Management (“KKR-AM”), an affiliate of KKR, owned approximately $31.7$14.0 million principal amount of the Company’s Senior Secured Notes and approximately $35.5$23.4 million principal amount of the Company’s 2017Senior Subordinated Notes at June 30, 2012. Entities2013. At December 31, 2012, entities affiliated with KKR-AM an affiliate of KKR, owned approximately $31.3$14.7 million principal amount of the Company’s Senior Secured Notes and approximately $27.9$23.4 million principal amount of the Company’s 2017Senior Subordinated Notes at December 31, 2011.

Notes.

The Company sells products to Biomet, Inc., which in September 2007 becameis privately owned by a consortium of private equity sponsors, including KKR. Net sales resulting from product shipments to Biomet, Inc. during the three and six months ended June 30, 20112012 totaled $0.1$0.1 million and $0.2$0.3 million, respectively. Net sales resulting from product shipments to Biomet, Inc. during the three and six months ended June 30, 2012 totaled $0.12013 were approximately $0.1 million and $0.3 million,, respectively. At December 31, 2011 and June 30, 2012, accounts receivable from Biomet, Inc. aggregated $0.1$0.1 million and $36 thousand, respectively.

. At June 30, 2013, accounts receivable from Biomet were negligible.

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 approximately $0.1$0.2 million and $0.2$0.4 million in fees in connection with this agreement for the three and six month periods ended June 30, 2011. The Company incurred approximately $0.2 million2012 and $0.4 million in fees in connection with this agreement for the three and six month periods ended June 30, 2012.

11.Fair value measurements

2013, respectively. At December 31, 2012 and June 30, 2013, the amount due to SunGard totaled approximately $0.1 million.


11. 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.


14

Table of Contents

The Company uses the Black-Scholes option pricing model to value its liability for Roll-Over option awards. A roll-forward of the change in fair value of this financial instrument and information regarding the inputs used in the Black-Scholes model, that are determined by management, that is used to derive the Roll-Over options fair value, is included in Note 8.

The following tables provide a summary of the financial assets and liabilities recorded at fair value at December 31, 20112012 and June 30, 2012:

       Fair Value Measurements at
December 31, 2011 determined using
 
   Total Carrying
Value at
December 31,
2011
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant  Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Investment in Available for Sale Security

  $1,155    $1,155    $—      $—    

Liability for Roll-Over options

  $355    $—      $—      $355  

       Fair Value Measurements at
June 30, 2012 determined using
 
   Total Carrying
Value at
June 30,
2012
   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 

Investment in Available for Sale Security

  $1,348    $1,348    $—      $—    

Liability for Roll-Over options

  $141    $—      $—      $141  

2013 (in thousands):

   
Fair Value Measurements at
December 31, 2012 determined using
 
Total Carrying
Value at
December 31,
2012
 
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant  Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Investment in Available for Sale Security$210
 $210
 $
 $
Liability for Roll-Over options$141
 $
 $
 $141
   
Fair Value Measurements at
June 30, 2013 determined using
 
Total Carrying
Value at
June 30,
2013
 
Quoted Prices in
Active  Markets
for Identical
Assets (Level 1)
 
Significant  Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Liability for Roll-Over options$141
 $
 $
 $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 December 31, 2011 and June 30, 2012 based on the short-term nature of these items.

Borrowings under the Senior Secured Notes due 2017—Borrowings under the Senior Secured Notes due 2017 have a fixed rate. The Company intends to carry the Senior Secured Notes until their maturity. At June 30, 2012, the fair value of the Senior Secured Notes due 2017, which is Level 2 in the fair value hierarchy, was approximately 104% or $416 million compared to their carrying value of $400 million.

Borrowings under the Senior Subordinated Notes due 2017—Borrowings under the Senior Subordinated Notes due 2017 have a fixed rate. The Company intends to carry the Senior Subordinated Notes until their maturity. At June 30, 2012 the fair value of the Senior Subordinated Notes due 2017, which is Level 2 in the fair value hierarchy, was approximately 84% or $264.6 million compared to their carrying value of $315 million.

12.Contingencies


Accounts receivable and accounts payable—The carrying amounts of these items are a reasonable estimate of their fair values at December 31, 2012 and June 30, 2013 based on the short-term nature of these items.

Borrowings under the Senior Secured Notes due 2017—Borrowings under the Senior Secured Notes have a fixed rate. The Company intends to carry the Senior Secured Notes until their maturity. At June 30, 2013, the fair value of the Senior Secured Notes, which is Level 2 in the fair value hierarchy, was approximately 103.5%, or $414 million, compared to their carrying value of $400 million.

Borrowings under the Senior Subordinated Notes due 2017—Borrowings under the Senior Subordinated Notes due 2017 have a fixed rate. The Company intends to carry the Senior Subordinated Notes until their maturity. At June 30, 2013 the fair value of the Senior Subordinated Notes, which is Level 2 in the fair value hierarchy, was approximately 92%, or $289.8 million, compared to their carrying value of $315 million.

12. 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. 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 our consolidated financial position, results of operations or cash flows.

Product liability claims or product recalls with respect to the Company’s components or the end-products of the Company’s customers into which the Company’s components are incorporated, could require the Company to pay significant damages or to spend significant time and money in litigation or responding to investigations or requests for information. Expenditures on litigation or damages, to the extent not covered by insurance, and declines in revenue could impair the

Company’s earnings and the Company’s financial condition. There is no recall or litigation pending or, to the knowledge of the Company, threatened, that the Company expects to have a material effect on the Company’s consolidated financial position, results of operations or cash flow.



15


13. Environmental matters
13.
Environmental matters

The Pennsylvania Department of Environmental Protection (“DEP”) has filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (“EPA”) National Air Emissions Standards for hazardous air pollutants from halogenated solvent cleaning operations. These revised standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning machines) from facility emission limits for Trichloroethylene (“TCE”) and other degreaser emissions. The EPA has agreed to reconsider the exemption. The Company’s Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since the Company manufactures narrow tubes. As part of efforts to lower TCE emissions, the Company has begun to implement a process that will reduce the Company’s TCE emissions generated by its Collegeville facility. However, this process will not reduce TCE emissions to the levels required should a new standard become law.

At each of December 31, 20112012 and June 30, 2012,2013, the Company maintained a reserve for environmental liabilities of approximately $1.8$1.6 million and $1.7$1.4 million respectively.. The Company expects to pay $0.1$0.1 million during 2012.

14.Supplemental guarantor condensed consolidating financial statements

In connection with the Company’s borrowing arrangements (collectivelybalance of 2013.


14. Supplemental guarantor condensed consolidating financial statements
All of the “Notes”), all of itsCompany's domestic subsidiaries (the “Subsidiary Guarantors”) that are 100% owned guaranteedby the Company, directly or indirectly, guarantee on a joint and several, full and unconditional basis, the repayment byobligations of Accellent Inc. of such Notes.under the Senior Secured Notes and the Senior Subordinated Notes (collectively, the "Notes"). Foreign subsidiaries of Accellent Inc. (the “Non-Guarantor Subsidiaries”) have not guaranteed the Notes.

The following tables present the unaudited condensed consolidating statements of operations and the unaudited condensed consolidating statements of comprehensive (loss) income (loss) for the three and six months ended June 30, 20112012 and 20122013 the unaudited condensed consolidating balance sheets as of December 31, 20112012 and June 30, 2012,2013, and the unaudited condensed consolidating statements of cash flows for the six months ended June 30, 20112012 and 2012,2013, of Accellent Inc. (the “Parent”), the Subsidiary Guarantors and the Non-Guarantor Subsidiaries.

Unaudited Condensed Consolidating Statements of Operations —

Three months ended June 30, 20112012 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

  $—     $133,572   $9,724   $(503) $142,793  

Cost of sales (exclusive of amortization)

   —      98,394    6,448    (541)  104,301  

Selling, general and administrative expenses

   23    13,601    925    —      14,549  

Research and development expenses

   —      456    277    —      733  

Amortization of intangible assets

   3,735    —      —      —      3,735  

Loss on disposal of assets

   —      47    —      —      47  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from operations

   (3,758)  21,074    2,074    38    19,428  

Interest expense, net

   (17,159)  (22)  2    —      (17,179)

Other (expense) income, net

   —      (167)  (510)  (38)  (715)

Equity in earnings (losses) of affiliates

   21,928    1,163    —      (23,091)  —    

Provision for income taxes

   —      (120)  (403)  —      (523)
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $1,011   $21,928   $1,163   $(23,091) $1,011  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$
 $116,546
 $10,208
 $(756) $125,998
Cost of sales (exclusive of amortization)
 86,723
 7,047
 (756) 93,014
Selling, general and administrative expenses23
 12,877
 914
 
 13,814
Research and development expenses
 243
 229
 
 472
Restructuring expenses
 1,485
 
 
 1,485
Amortization of intangible assets3,735
 
 
 
 3,735
(Gain) loss on disposal of assets
 (40) 8
 
 (32)
(Loss) income from continuing operations(3,758) 15,258
 2,010
 
 13,510
Interest (expense) income, net(17,232) 663
 (689) 
 (17,258)
Other (expense) income, net
 (2,116) 1,258
 
 (858)
Equity in earnings (losses) of affiliates15,382
 1,795
 
 (17,177) 
(Loss) income from continuing operations before income taxes(5,608) 15,600
 2,579
 (17,177) (4,606)
Provision for income taxes
 347
 784
 
 1,131
Net (loss) income from continuing operations(5,608) 15,253
 1,795
 (17,177) (5,737)
Net income from discontinued operations, net of tax
 129
 
 
 129
Net (loss) income$(5,608) $15,382
 $1,795
 $(17,177) $(5,608)


16


Unaudited Condensed Consolidating Statements of Operations —

Three months ended June 30, 20122013 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

  $—     $120,779  $10,208  $(756) $130,231 

Cost of sales (exclusive of amortization)

   —      90,590    7,047    (756  96,881  

Selling, general and administrative expenses

   23    13,037    914    —      13,974  

Research and development expenses

   —      243    229    —      472  

Restructuring expenses

   —      1,486    —      —      1,486  

Amortization of intangible assets

   3,735    —      —      —      3,735  

(Gain) loss on disposal of assets

   —      (41  8    —      (33
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from operations

   (3,758  15,464    2,010    —      13,716  

Interest (expense) income, net

   (17,232  662    (689  —      (17,259

Other (expense) income, net

   —      (2,122  1,258    —      (864

Equity in earnings of affiliates

   15,382    1,795    —      (17,177  —    

Provision for income taxes

   —      (417  (784  —      (1,201
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income

  $(5,608 $15,382   $1,795   $(17,177 $(5,608
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$
 $120,112
 $10,898
 $(277) $130,733
Cost of sales (exclusive of amortization)
 87,727
 7,880
 (277) 95,330
Selling, general and administrative expenses30
 11,908
 840
 
 12,778
Research and development expenses
 327
 220
 
 547
Impairment of goodwill12,128
 
 
 
 12,128
Restructuring expenses
 (170) 
 
 (170)
Amortization of intangible assets3,735
 
 
 
 3,735
Loss on disposal of assets
 708
 28
 
 736
(Loss) income from continuing operations(15,893) 19,612
 1,930
 
 5,649
Interest (expense) income, net(17,277) 714
 (708) 
 (17,271)
Other income (expense), net242
 256
 (529) 
 (31)
Equity in earnings of affiliates20,257
 415
 
 (20,672) 
(Loss) income from continuing operations before income taxes(12,671) 20,997
 693
 (20,672) (11,653)
Provision for income taxes
 740
 278
 
 1,018
Net (loss) income from continuing operations(12,671) 20,257
 415
 (20,672) (12,671)
Net income from discontinued operations, net of tax
 
 
 
 
Net (loss) income$(12,671) $20,257
 $415
 $(20,672) $(12,671)


Unaudited Condensed Consolidating Statements of Operations —

Six months ended June 30, 20112012 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

  $—     $254,717   $18,908   $(944) $272,681  

Cost of sales (exclusive of amortization)

   —      191,520    12,080    (982)  202,618  

Selling, general and administrative expenses

   45    26,900    1,716    —      28,661  

Research and development expenses

   —      946    533    —      1,479  

Amortization of intangible assets

   7,470    —      —      —      7,470  

Loss on disposal of assets

   —      47    —      —      47  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from operations

   (7,515)  35,304    4,579    38    32,406  

Interest (expense) income, net

   (34,381)  (49)  2    —      (34,428)

Other (expense) income, net

   —      (330)  (2,282)  (38  (2,650)

Equity in earnings of affiliates

   34,736    1,563    —      (36,299)  —    

Provision for income taxes

   —      (1,752)  (736)  —      (2,488)
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income

  $(7,160) $34,736   $1,563   $(36,299) $(7,160)
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$
 $231,254
 $20,458
 $(1,147) $250,565
Cost of sales (exclusive of amortization)
 175,089
 14,178
 (1,147) 188,120
Selling, general and administrative expenses48
 26,782
 1,839
 
 28,669
Research and development expenses
 497
 448
 
 945
Restructuring expenses
 1,838
 
 
 1,838
Amortization of intangible assets7,470
 
 
 
 7,470
(Gain) loss on disposal of assets
 (41) 8
 
 (33)
(Loss) income from continuing operations(7,518) 27,089
 3,985
 
 23,556
Interest (expense) income, net(34,448) 1,340
 (1,392) 
 (34,500)
Other (expense) income, net
 (1,321) 639
 
 (682)
Equity in earnings (losses) of affiliates29,372
 1,961
 
 (31,333) 
(Loss) income from continuing operations before income taxes(12,594) 29,069
 3,232
 (31,333) (11,626)
Provision for income taxes
 447
 1,271
 
 1,718
Net (loss) income from continuing operations(12,594) 28,622
 1,961
 (31,333) (13,344)
Net income from discontinued operations, net of tax
 750
 
 
 750
Net (loss) income$(12,594) $29,372
 $1,961
 $(31,333) $(12,594)

17



Unaudited Condensed Consolidating Statements of Operations —
Six months ended June 30, 2013

(in thousands):

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$
 $231,211
 $20,963
 $(643) $251,531
Cost of sales (exclusive of amortization)
 175,937
 14,964
 (643) 190,258
Selling, general and administrative expenses62
 25,152
 1,811
 
 27,025
Research and development expenses
 625
 374
 
 999
Impairment of goodwill63,128
 
 
 
 63,128
Restructuring expenses
 (181) 
 
 (181)
Amortization of intangible assets7,470
 
 
 
 7,470
Loss on disposal of assets
 666
 26
 
 692
(Loss) income from continuing operations(70,660) 29,012
 3,788
 
 (37,860)
Interest (expense) income, net(34,580) 1,408
 (1,405) 
 (34,577)
Other income (expense), net923
 (854) (249) 
 (180)
Equity in earnings of affiliates29,577
 1,447
 
 (31,024) 
(Loss) income from continuing operations before income taxes(74,740) 31,013
 2,134
 (31,024) (72,617)
Provision for income taxes
 1,436
 687
 
 2,123
Net (loss) income from continuing operations(74,740) 29,577
 1,447
 (31,024) (74,740)
Net income from discontinued operations, net of tax
 
 
 
 
Net (loss) income$(74,740) $29,577
 $1,447
 $(31,024) $(74,740)




18


Unaudited Condensed Consolidating Balance Sheets
December 31, 2012 (in thousands):
 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Cash$
 $53,812
 $6,090
 $
 $59,902
Accounts receivable, net
 46,992
 2,929
 (518) 49,403
Inventories
 52,807
 4,262
 
 57,069
Prepaid expenses and other current assets215
 10,399
 359
 
 10,973
Total current assets215
 164,010
 13,640
 (518) 177,347
Property, plant and equipment, net
 90,473
 25,396
 
 115,869
Intercompany receivables, net
 365,713
 
 (365,713) 
Investment in subsidiaries554,794
 9,143
 
 (563,937) 
Goodwill619,443
 
 
 
 619,443
Other intangible assets, net134,747
 
 
 
 134,747
Deferred financing costs and other assets, net13,269
 (8) 505
 
 13,766
Total assets$1,322,468
 $629,331
 $39,541
 $(930,168) $1,061,172
Current portion of long-term debt$
 $11
 $
 $
 $11
Accounts payable1
 18,613
 1,948
 (518) 20,044
Accrued expenses and other current liabilities19,317
 20,267
 3,927
 
 43,511
Total current liabilities19,318
 38,891
 5,875
 (518) 63,566
Long-term debt1,057,832
 
 21,175
 (365,713) 713,294
Other long-term liabilities911
 35,646
 3,348
 
 39,905
Total liabilities1,078,061
 74,537
 30,398
 (366,231) 816,765
Equity244,407
 554,794
 9,143
 (563,937) 244,407
Total liabilities and equity$1,322,468
 $629,331
 $39,541
 $(930,168) $1,061,172

19


Unaudited Condensed Consolidating Balance Sheets
June 30, 2013 (in thousands):
 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Cash$
 $52,397
 $8,089
 $
 $60,486
Accounts receivable, net
 52,688
 4,089
 (272) 56,505
Inventories
 55,641
 4,910
 
 60,551
Prepaid expenses and other current assets44
 3,078
 266
 
 3,388
Total current assets44
 163,804
 17,354
 (272) 180,930
Property, plant and equipment, net
 89,488
 26,935
 
 116,423
Intercompany receivables, net
 398,943
 
 (398,943) 
Investment in subsidiaries584,438
 10,934
 
 (595,372) 
Goodwill556,315
 
 
 
 556,315
Other intangible assets, net127,277
 
 
 
 127,277
Deferred financing costs and other assets, net11,828
 70
 487
 
 12,385
Total assets$1,279,902
 $663,239
 $44,776
 $(994,587) $993,330
Current portion of long-term debt$
 $7
 $
 $
 $7
Accounts payable
 21,011
 3,027
 (272) 23,766
Accrued expenses and other current liabilities19,303
 21,447
 4,734
 
 45,484
Total current liabilities19,303
 42,465
 7,761
 (272) 69,257
Long-term debt1,089,703
 
 22,710
 (398,943) 713,470
Other long-term liabilities971
 36,336
 3,371
 
 40,678
Total liabilities1,109,977
 78,801
 33,842
 (399,215) 823,405
Equity169,925
 584,438
 10,934
 (595,372) 169,925
Total liabilities and equity$1,279,902
 $663,239
 $44,776
 $(994,587) $993,330

20



Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Three months ended June 30, 2012 (in thousands):
 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net (loss) income$(5,608) $15,382
 $1,795
 $(17,177) $(5,608)
Other comprehensive income (loss):         
Unrealized gain on available for sale security193
 
 
 
 193
Cumulative translation adjustment(540) (139) (401) 540
 (540)
Comprehensive (loss) income$(5,955) $15,243
 $1,394
 $(16,637) $(5,955)

Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Three months ended June 30, 2013 (in thousands):
 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net (loss) income$(12,671) $20,257
 $415
 $(20,672) $(12,671)
Other comprehensive income (loss):         
Unrealized loss on available for sale security(3) 
 
 
 (3)
Realized gain on available for sale security(242) 
 
 
 (242)
Cumulative translation adjustment325
 2
 323
 (325) 325
Comprehensive (loss) income$(12,591) $20,259
 $738
 $(20,997) $(12,591)

Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Six months ended June 30, 2012 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

  $—     $242,499  $20,458  $(1,148) $261,809 

Cost of sales (exclusive of amortization)

   —      184,665    14,332    (1,148)  197,849  

Selling, general and administrative expenses

   47    27,138    1,839    —      29,024  

Research and development expenses

   —      497    448    —      945  

Restructuring expenses

   —      1,838    —      —      1,838  

Amortization of intangible assets

   7,470    —      —      —      7,470  

(Gain) loss on disposal of assets

   —      (42  8    —      (34
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(Loss) income from operations

   (7,517  28,403    3,831    —      24,717  

Interest (expense) income, net

   (34,449  1,341    (1,393  —      (34,501

Other (expense) income, net

   —      (1,480  793    —      (687

Equity in earnings of affiliates

   29,372    1,960    —      (31,332  —    

Provision for income taxes

   —      (852  (1,271  —      (2,123
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net (loss) income

  $(12,594 $29,372   $1,960   $(31,332 $(12,594
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Unaudited Condensed Consolidating Balance Sheets

June 30, 2012 (in thousands):

   Parent   Subsidiary
Guarantors
   Non-
Guarantor
Subsidiaries
   Eliminations  Consolidated 

Cash

  $—      $41,447    $5,523    $—     $46,970  

Accounts receivable, net

   —       51,445     4,115     (838  54,722  

Inventories

   —       63,587     4,587     —      68,174  

Prepaid expenses and other current assets

   1,343     3,883     221     —      5,447  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current assets

   1,343     160,362     14,446     (838  175,313  

Property, plant and equipment, net

   —       95,836     22,286     —      118,122  

Intercompany receivables, net

   —       340,890     —       (340,890  —    

Investment in subsidiaries

   523,471     7,343     —       (530,814  —    

Goodwill

   629,854     —       —       —      629,854  

Other intangible assets, net

   142,217     —       —       —      142,217  

Deferred financing costs and other assets, net

   14,662     162     365     —      15,189  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  $1,311,547    $604,593    $37,097    $(872,542 $1,080,695  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Current portion of long-term debt

  $—      $19    $—      $—     $19  

Accounts payable

   —       23,831     2,773     (838  25,766  

Accrued expenses and other current liabilities

   19,901     20,461     6,190     —      46,552  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current liabilities

   19,901     44,311     8,963     (838  72,337  

Long-term debt

   1,035,628     —       18,391     (340,890  713,129  

Other long-term liabilities

   1,152     36,811     2,400     —      40,363  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

   1,056,681     81,122     29,754     (341,728  825,829  

Equity

   254,866     523,471     7,343     (530,814  254,866  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities and equity

  $1,311,547    $604,593    $37,097    $(872,542 $1,080,695  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Unaudited Condensed Consolidating Balance Sheets

December 31, 2011 (in thousands):

   Parent   Subsidiary
Guarantors
   Non-
Guarantor
Subsidiaries
   Eliminations  Consolidated 

Cash

  $—      $32,627    $6,231    $—     $38,858  

Accounts receivable, net

   —       52,073     3,014     (324  54,763  

Inventories

   —       62,528     3,434     —      65,962  

Prepaid expenses and other current assets

   879     3,385     217     —      4,481  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current assets

   879     150,613     12,896     (324  164,064  

Property, plant and equipment, net

   —       110,251     16,741     —      126,992  

Intercompany receivables, net

   —       300,148     21,728     (321,876  —    

Investment in subsidiaries

   493,405     42,612     —       (536,017  —    

Goodwill

   629,854     —       —       —      629,854  

Other intangible assets, net

   149,687     —       —       —      149,687  

Deferred financing costs and other assets, net

   16,310     155     352     8    16,825  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total assets

  $1,290,135    $603,779    $51,717    $(858,209 $1,087,422  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Current portion of long-term debt

  $—      $22    $—      $—     $22  

Accounts payable

   15     21,236     1,764     (435  22,580  

Accrued expenses and other current liabilities

   19,517     21,919     4,932     119    46,487  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total current liabilities

   19,532     43,177     6,696     (316  69,089  

Long-term debt

   1,003,063     31,780     —       (321,876  712,967  

Other long-term liabilities

   1,321     34,736     2,409     —      38,466  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities

   1,023,916     109,693     9,105     (322,192  820,522  

Equity

   266,219     494,086     42,612     (536,017  266,900  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total liabilities and equity

  $1,290,135    $603,779    $51,717    $(858,209 $1,087,422  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net (loss) income$(12,594) $29,372
 $1,961
 $(31,333) $(12,594)
Other comprehensive income (loss):         
Unrealized gain on available for sale security193
 
 
 
 193
Cumulative translation adjustment14
 55
 (41) (14) 14
Comprehensive (loss) income$(12,387) $29,427
 $1,920
 $(31,347) $(12,387)

Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income (Loss)

Three months ended June 30, 2011 (in thousands):

   Parent   Subsidiary
Guarantors
   Non-
guarantor
subsidiaries
   Eliminations  Consolidated 

Net income (loss)

  $1,011    $21,928    $1,163    $(23,091 $1,011  

Other comprehensive income (loss):

        ��

Cumulative translation adjustment

   789     789     789     (1,578  789  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Comprehensive income (loss)

  $1,800    $22,717    $1,952    $(24,669 $1,800  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Unaudited Condensed Consolidating Statements of Comprehensive Income (Loss)

Three months ended June 30, 2012 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
guarantor
subsidiaries
  Eliminations  Consolidated 

Net income (loss)

  $(5,608 $15,382   $1,795   $(17,177 $(5,608

Other comprehensive income (loss):

      

Unrealized gain on available for sale security

   193    —      —      —      193  

Cumulative translation adjustment

   (541  (541  (541  1,082    (541
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $(5,956 $14,841   $1,254   $(16,095 $(5,956
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Unaudited Condensed Consolidating Statements of Comprehensive Income (Loss)

Six months ended June 30, 20112013 (in thousands):

   Parent  Subsidiary
Guarantors
   Non-
guarantor
subsidiaries
   Eliminations  Consolidated 

Net income (loss)

  $(7,160 $34,736    $1,563    $(36,299 $(7,160

Other comprehensive income (loss):

        

Cumulative translation adjustment

   3,195    3,195     3,195     (6,390  3,195  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Comprehensive income (loss)

  $(3,965 $37,931    $4,758    $(42,689 $(3,965
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net (loss) income$(74,740) $29,577
 $1,447
 $(31,024) $(74,740)
Other comprehensive income (loss):         
Unrealized gain on available for sale security32
 
 
 
 32
Realized gain on available for sale security(242) 
 
 
 (242)
Cumulative translation adjustment68
 (277) 345
 (68) 68
Comprehensive (loss) income$(74,882) $29,300
 $1,792
 $(31,092) $(74,882)


21


Unaudited Condensed Consolidating Statements of Comprehensive Income (Loss)

Cash Flows —

Six months ended June 30, 2012 (in thousands):

   Parent  Subsidiary
Guarantors
   Non-guarantor
subsidiaries
   Eliminations  Consolidated 

Net income (loss)

  $(12,594 $29,372    $1,960    $(31,332 $(12,594

Other comprehensive income (loss):

        

Unrealized gain on available for sale security

   193    —       —       —      193  

Cumulative translation adjustment

   14    14     14     (28  14  
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

Comprehensive income (loss)

  $(12,387 $29,386    $1,974    $(31,360 $(12,387
  

 

 

  

 

 

   

 

 

   

 

 

  

 

 

 

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net cash (used in) provided by operating activities of continuing operations$(32,360) $34,588
 $3,975
 $
 $6,203
Net cash provided by operating activities of discontinued operations
 2,017
 
 
 2,017
Net cash (used in) provided by operating activities(32,360) 36,605
 3,975
 
 8,220
Cash flows from investing activities:
 
 
 
  
Capital expenditures
 (257) (7,220) 
 (7,477)
Proceeds from disposition of assets
 24
 
 
 24
Net cash used in investing activities of continuing operations
 (233) (7,220) 
 (7,453)
Net cash provided by investing activities of discontinued operations
 7,528
 
 
 7,528
Net cash provided by (used in) investing activities
 7,295
 (7,220) 
 75
Cash flows from financing activities:
 
 
 
  
Repayments of long-term debt and capital lease obligations
 (11) 
 
 (11)
Intercompany receipts (advances)32,403
 (35,097) 2,694
 
 
Repurchase of parent company stock(43) 
 
 
 (43)
Cash flows provided by (used in) financing activities32,360
 (35,108) 2,694
 
 (54)
Effect of exchange rate changes in cash
 28
 (157) 
 (129)
Net increase (decrease) in cash
 8,820
 (708) 
 8,112
Cash, beginning of period
 32,627
 6,231
 
 38,858
Cash, end of period$
 $41,447
 $5,523
 $
 $46,970


22


Unaudited Condensed Consolidating Statements of Cash Flows—

Flows —

Six months ended June 30, 20112013 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated 

Net cash (used in) provided by operating activities

  $(32,295) $24,650   $4,627   $—      $(3,018
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash flows from investing activities:

       

Capital expenditures

   —      (13,118)  (3,655)  —       (16,773)

Proceeds from disposition of assets

   —      163    —      —       163  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net cash used in investing activities

   —      (12,955)  (3,655)  —       (16,610)
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash flows from financing activities:

       

Repayments of long-term debt and capital lease obligations

   —      (12  —      —       (12)

Intercompany receipts (advances)

   32,792    (32,597)  (195)  —       —    

Proceeds from exercise of options in parent company stock

   —      16   —      —       16  

Payment of debt issuance costs

   (498)  —      —      —       (498)
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

   32,294    (32,593)  (195)  —       (494)
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Effect of exchange rate changes in cash

   —      47    243    —       290  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net increase (decrease) in cash

   —      (20,851  1,020    —       (19,832

Cash, beginning of period

   —      38,392    2,395    —       40,787  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash, end of period

  $—     $17,541   $3,415   $—      $20,955  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Unaudited Condensed Consolidating Statements

 Parent 
Subsidiary
Guarantors
 
Non-
Guarantor
Subsidiaries
 Eliminations Consolidated
Net cash (used in) provided by operating activities of continuing operations$(32,424) $30,583
 $4,612
 $
 $2,771
Net cash used in operating activities of discontinued operations
 (108) 
 
 (108)
Net cash (used in) provided by operating activities(32,424) 30,475
 4,612
 
 2,663
Cash flows from investing activities:         
Capital expenditures
 (6,265) (3,999) 
 (10,264)
Proceeds from sale of equipment
 56
 7
 
 63
Proceeds from the sale of available for sale securities242
 
 
 
 242
Net cash provided by (used in) investing activities of continuing operations242
 (6,209) (3,992) 
 (9,959)
Net cash provided by investing activities of discontinued operations
 7,987
 
 
 7,987
Net cash provided by (used in) investing activities242
 1,778
 (3,992) 
 (1,972)
Cash flows from financing activities:         
Repayments of long-term debt and capital lease obligations
 (7) 
 
 (7)
Intercompany receipts (advances)32,182
 (33,633) 1,451
 
 
Cash flows provided by (used in) financing activities32,182
 (33,640) 1,451
 
 (7)
Effect of exchange rate changes in cash
 (28) (72) 
 (100)
Net (decrease) increase in cash
 (1,415) 1,999
 
 584
Cash, beginning of period
 53,812
 6,090
 
 59,902
Cash, end of period$
 $52,397
 $8,089
 $
 $60,486


23


15. Changes in Stockholders' Equity
Six months ended June 30, 2012 (in thousands):

   Parent  Subsidiary
Guarantors
  Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated 

Net cash (used in) provided by operating activities

  $(32,360 $36,605   $3,975   $—      $8,220  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash flows from investing activities:

       

Purchases of property and equipment

   —      (764  (7,220  —       (7,984

Proceeds from the disposition of assets

   —      8,059    —      —       8,059  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

   —      7,295    (7,220  —       75  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash flows from financing activities:

       

Principal payments on long-term debt

   —      (11  —      —       (11

Intercompany (advances) receipts

   32,403    (35,097  2,694    —       —    

Repurchase of parent company stock

   (43  —      —      —       (43
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash flows provided by (used in) financing activities

   32,360    (35,108  2,694    —       (54
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Effect of exchange rate changes

   —      28    (157  —       (129
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Net increase (decrease) in cash

   —      8,820    (708  —       8,112  

Cash, beginning of period

   —      32,627    6,231    —       38,858  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

Cash, end of period

  $—     $41,447   $5,523   $—      $46,970  
  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

 

15.Changes in Stockholder’s Equity

The following table summarizes the changes in stockholders’ equity during the six months ended June 30, 2012:

   Common Stock       Accumulated       
       Additional
Paid-In
Capital
   other
comprehensive
income (loss)
  Accumulated
(deficit)
  Total
Equity
 
   Shares   Amount       

Balance, January 1, 2012

   1,000    $—      $638,445    $(1,266 $(370,279 $266,900  

Comprehensive loss:

          

Net loss

     —       —       —      (12,594  (12,594

Unrealized gain on available for sale security

     —       —       193    —      193  

Cumulative translation adjustment

     —       —       14    —      14  
          

 

 

 

Total comprehensive loss

           (12,387

Stock-based compensation and other

     —       353     —      —      353  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Balance at June 30, 2012

   1,000    $—      $638,798    $(1,059 $(382,873 $254,866  
  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

2013:
 Common Stock 
Additional
Paid-In
Capital
 
Accumulated
other
comprehensive
income (loss)
 
Accumulated
(deficit)
 
Total
Equity
 Shares Amount    
Balance, January 1, 20131,000
 $
 $639,610
 $(2,554) $(392,649) $244,407
Comprehensive loss:           
Net loss  
 
 
 (74,740) (74,740)
Unrealized gain on available for sale security  
 
 32
 
 32
Realized gain on available for sale security
 
 
 (242) 
 (242)
Cumulative translation adjustment  
 
 68
 
 68
Total comprehensive loss          (74,882)
Stock-based compensation and other  
 400
 
 
 400
Balance, June 30, 20131,000
 $
 $640,010
 $(2,696) $(467,389) $169,925

16. Changes in Accumulated Other Comprehensive Loss

16.
Subsequent Events

The Company has evaluatedfollowing table summarizes the period from changes in accumulated other comprehensive loss for the three months ended June 30, 2012 (in thousands):

 Defined Benefit Pension Items Unrealized Gains and Losses on Available-for-Sale Securities Foreign Currency Items Total
Balance at April 1, 2012$(317) $1,155
 $(1,550) $(712)
Other comprehensive income before reclassifications
 193
 (540) (347)
Amounts reclassified from accumulated other comprehensive income
 
 
 
Net current-period other comprehensive income
 193
 (540) (347)
Balance at June 30, 2012$(317) $1,348
 $(2,090) $(1,059)

The following table summarizes the datechanges in accumulated other comprehensive income (loss) for the three months ended June 30, 2013 (in thousands):
 Defined Benefit Pension Items Unrealized Gains and Losses on Available-for-Sale Securities Foreign Currency Items Total
Balance at April 1, 2013$(1,159) $245
 $(1,862) $(2,776)
Other comprehensive (loss) income before reclassifications
 (245) 325
 80
Amounts reclassified from accumulated other comprehensive income
 
 
 
Net current-period other comprehensive income
 (245) 325
 80
Balance at June 30, 2013$(1,159) $
 $(1,537) $(2,696)


24

Table of Contents

The following table summarizes the changes in accumulated other comprehensive loss for the six months ended June 30, 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$(317) $1,155
 $(2,104) $(1,266)
Other comprehensive income before reclassifications
 193
 14
 207
Amounts reclassified from accumulated other comprehensive income
 
 
 
Net current-period other comprehensive income
 193
 14
 207
Balance at June 30, 2012$(317) $1,348
 $(2,090) $(1,059)

The following table summarizes the changes in accumulated other comprehensive income (loss) for the six months ended June 30, 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$(1,159) $210
 $(1,605) $(2,554)
Other comprehensive (loss) income before reclassifications
 (210) 68
 (142)
Amounts reclassified from accumulated other comprehensive income
 
 
 
Net current-period other comprehensive income
 (210) 68
 (142)
Balance at June 30, 2013$(1,159) $
 $(1,537) $(2,696)

17. Segment Information

Operating segments, as defined under GAAP, are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. From 2007 to 2012, the Company has operated centrally with separate and distinct functional leaders for operations, sales, engineering, quality and technology along with information systems, finance and human resources. Through December 31, 2012, the Company operated its facilities under common management reporting on a functional basis to various functional leaders with the Company's Chief Executive Officer with the role chief operating decision maker.

During the first quarter of 2013, the Company reorganized its business into two segments: Advanced Surgical ("AS Segment") and Cardio & Vascular ("CV Segment"). The AS Segment is led by a vice president and general manager who reports to the Chief Executive Officer. This segment produces products for (1) orthopaedics that include joint, spinal, anthroscopy, and trauma products, and (2) endoscopy that include products for gastrointestinal, urology, and laparoscopy products. The CV Segment is also led by a vice president and general manager who reports to the Chief Executive Officer. This segment produces products for (1) cardiac rhythm management that includes pacemakers, implantable defribillators, tools and accessories, (2) cardiovascular that includes cardiac and peripheral stents, guide wires, catheters and delivery systems, and (3) cardiac surgery that includes heart valves, perfusion cannulae kits, vein grafting and bypass instruments. As a result, the Company's reportable segment information has been restated to reflect the current structure.

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.

25

Table of Contents


The Company's net sales and Adjusted EBITDA by segment as well as a reconciliation of Total Adjusted EBITDA to the consolidated loss from continuing operations before provision for income taxes is as follows (in thousands):
 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Net sales:       
  Cardio & Vascular$79,497
 $81,193
 $156,685
 $157,168
  Advanced Surgical49,057
 50,467
 98,174
 95,658
  Intersegment(2,556) (927) (4,294) (1,295)
Total net sales$125,998
 $130,733
 $250,565
 $251,531
        
Adjusted EBITDA:       
  Cardio & Vascular$23,515
 $23,833
 $47,451
 $45,716
  Advanced Surgical8,016
 8,422
 14,116
 13,145
  Corporate Services(5,364) (4,716) (13,775) (12,808)
Total Adjusted EBITDA$26,167
 $27,539
 $47,792
 $46,053

       
Reconciliation of Adjusted EBITDA to income from continuing operations before provision for income taxes       
  Impairment of goodwill$
 $(12,128) $
 $(63,128)
  Interest expense, net(17,258) (17,271) (34,500) (34,577)
  Depreciation and amortization(9,838) (8,102) (19,488) (16,228)
  Stock-based compensation - employees(142) (185) (182) (400)
  Stock-based compensation - non-employees(22) (30) (45) (60)
  Employee severance and relocation(556) (417) (1,370) (819)
  Restructuring expenses(1,485) 170
 (1,838) 181
  Plant closure costs(154) (47) (323) (1,217)
  Currency (loss)(905) (272) (720) (1,120)
  Gain (loss) on disposal of property and equipment32
 (736) 33
 (692)
  Other taxes(110) (64) (315) (148)
  Management fees to stockholder(335) (352) (670) (704)
  Gain from the sale of available for sale securities
 242
 
 242
Total adjustments$(30,773) $(39,192) $(59,418) $(118,670)
        
Loss from continuing operations before provision for income taxes$(4,606) $(11,653) $(11,626) $(72,617)



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The Company's capital expenditures by segment at June 30, 2012 and June 30, 2013 are as follows (in thousands):
 Six Months Ended
 June 30,
2012
 June 30,
2013
Capital expenditures:   
Cardio & Vascular$3,787
 $5,590
Advanced Surgical2,467
 4,659
Corporate1,223
 15
Total capital expenditures$7,477
 $10,264

The Company's assets by segment at December 31, 2012 and June 30, 2013 are as follows (in thousands):

 December 31,
2012
 June 30,
2013
Assets:   
Cardio & Vascular$606,304
 $620,850
Advanced Surgical245,619
 177,671
Corporate Services209,249
 194,809
Total assets$1,061,172
 $993,330

18. Subsequent Events
On July 19, 2013, Dean Schauer notified the Company that he will resign from his position as the Company's Executive Vice President, General Manager, Cardio & Vascular Segment, effective August 16, 2013. A search is underway to identify and hire a replacement. Until a replacement is found, Donald J. Spence, the Company's Chairman and Chief Executive Officer, will serve as interim General Manager of the consolidated financial statements, through the dateCardio & Vascular Group.


27

Table of the issuance and filing of the consolidated financial statements, and has determined that no material subsequent events have occurred that would affect the information presented in these consolidated financial statements or require additional disclosure.

Contents


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue”“continues” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” contained in our annual reportAnnual Report on Form 10-K filed on March 29, 2012April 1, 2013 with the Securities and Exchange Commission (File No. 333-130470) for the Company’s fiscal year ended December 31, 2011.2012. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.

We undertake no obligation to update publicly or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Unless the context otherwise requires, references in this Form 10-Q to “Accellent,” "the Company", “we,” “our” and “us” refer to Accellent Inc. and its consolidated subsidiaries.

Overview

We believe that we are a leading provider of outsourced precision manufacturing and engineering services in our target markets withinof the medical device industry. We offer our customers design and engineering, precision component manufacturing, device assembly and supply chain management services. We have extensive resources focused on providing our customers with reliable, high quality, cost-efficient, integrated outsourced solutions. Based on discussions with our customers, we believe we often become the sole supplier of manufacturing and engineering services for the products we provide to our customers.

We primarily focus on leading companies in large and growing markets within the medical device industry including cardiology, endoscopy, and orthopaedics. Our customers include many of the leading medical device companies including Abbott Laboratories, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, St. Jude Medical, Stryker and Zimmer.Stryker. While sales are aggregated by us to the ultimate parent of a customer, we typically generate diversified revenue streams within these large customers across separate customer divisions and multiple products.

During each of the three and six months ended June 30, 2011 and 2012, our 10ten largest customers accounted for approximately 66% and 65% of our consolidated net sales, respectively.sales. During the three and six months ended June 30, 2011 and 2012,2013, our 10ten largest customers accounted for approximately 66%68% and 65%67% of our consolidated net sales, respectively. Three customers each accounted for 10% or more of our consolidated net sales during the three and six months ended June 30, 2012 and four customers each accounted for 10% or more of our consolidated net sales during the three and six months ended June 30, 2011 and 2012.2013. We expect net sales from our largest customers to continue to constitute a significant portion of our net sales in the future.

The actual percentage of net sales derived from each customer whose sales represented 10% or more of the Company’sour consolidated net sales were as follows for the periods presented:

   Three Months Ended June 30,  Six Months Ended June 30, 
   2011  2012  2011  2012 

Customer A

   17%  16%  16%  16%

Customer B

   16%  14%  17%  14%

Customer C

   10%  11%  11%  10%

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Customer A13% 17% 13% 16%
Customer B16% 14% 17% 14%
Customer C11% 11% 11% 11%
Customer D*
 10% *
 10%

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Table of Contents

Recent Developments

Segment Reporting

During the first quarter of 2013, we reorganized our business into two segments: Advanced Surgical ("AS Segment") and Cardio & Vascular ("CV Segment"). The AS Segment produces products for (1) orthopaedics that include joint, spinal, anthroscopy, and trauma products, and (2) endoscopy that include products for gastrointestinal, urology, and laparoscopy products. The CV Segment produces products for (1) cardiac rhythm management that includes pacemakers, implantable defribillators, tools and accessories, (2) cardiovascular that includes cardiac and peripheral stents, guide wires, catheters and delivery systems, and (3) cardiac surgery that includes heart valves, perfusion cannulae kits, vein grafting and bypass instruments. We have presented prior period information for 2012 to conform to current year presentation of our reportable segments.

Discontinued Operations

As part of our continuing efforts to better focus its efforts and align with its customers, we discontinued certain businesses. We accounted for these businesses as discontinued operations and, accordingly, have presented the results of operations and related cash flows as discontinued operations for all periods presented. As of December 31, 2012, the assets of these businesses were sold.

We recorded the following amounts as net income on discontinued operations during the periods ended (in thousands):
 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Loss on disposition of discontinued operations$
 $
 $
 $
Income from discontinued operations129
 
 750
 
Net income from discontinued operations, net of tax$129
 $
 $750
 $

Results of Operations

Three Months Ended

June 30, 2013 Compared to Three Months Ended June 30, 2012

The following table sets forth percentagesour operating data derived from the unaudited condensed consolidated statements of continuing operations for the three and six months ended June 30, 20112012 and 2012,2013, presented as a percentage of net sales.

   Three Months Ended  Six Months Ended 
   June 30,
2011
  June 30,
2012
  June 30,
2011
  June 30,
2012
 

STATEMENT OF OPERATIONS DATA:

     

Net sales

   100.0%  100.0%  100.0%  100.0%

Cost of sales

   73.0    74.4    74.3    75.6  
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

   27.0    25.6    25.7    24.4  

Selling, general and administrative expenses

   10.2    10.7    10.5    11.1  

Research and development expenses

   0.5    0.4    0.5    0.4  

Restructuring expenses

   —      1.1    —      0.7  

Amortization of intangible assets

   2.7    2.9    2.8    2.8  
  

 

 

  

 

 

  

 

 

  

 

 

 

Income from operations

   13.6%  10.5%  11.9%  9.4%
  

 

 

  

 

 

  

 

 

  

 

 

 

 Three Months Ended
 June 30,
2012
 June 30,
2013
STATEMENT OF OPERATIONS DATA:   
Net sales100.0% 100.0%
Cost of sales73.8
 72.9
Gross profit26.2
 27.1
Selling, general and administrative expenses11.0
 9.8
Research and development expenses0.4
 0.4
Impairment of goodwill
 9.3
Restructuring expenses and other1.1
 0.4
Amortization of intangible assets3.0
 2.9
Income from continuing operations10.7% 4.3%


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Table of Contents

Net Sales

Three Months Ended The following table shows the net sales by segment for the three months ended June 30, 2012 Compared to Three Months Ended and June 30, 20112013

Net Sales (in thousands):

 Three Months Ended
 June 30,
2012
 June 30,
2013
 Increase(Decrease) % Change
Net Sales:       
  Cardio & Vascular segment$79,010
 $80,726
 $1,716
 2.2%
  Advanced Surgical segment46,988
 50,007
 3,019
 6.4%
Total Net Sales$125,998
 $130,733
 $4,735
 3.8%
Net sales for the three months ended June 30, 20122013 were $130.2$130.7 million, a decreasean increase of $12.6$4.7 million, or 8.8%3.8%, compared to net sales of $142.8$126.0 million for the three months ended June 30, 2011.2012. Net sales were impacted by lower salespositive volume totaling $8.6 million, exclusiveincreases in both segments of approximately $7.1 million. Increases in volume were offset by price decreases of $1.3$2.1 million, $1.2 million related to lower foreign currency values and $1.5$0.3 million related to decreased sales of platinum, resulting primarily from passing through to our customers, changes in precious metal prices which do not benefit gross profit.

Net sales were also impacted by minimal fluctuations in foreign currency values.

CostNet sales for the three months ended June 30, 2013 for the CV Segment were $80.7 million, an increase of goods sold and gross profit

Cost$1.7 million, or 2.2%, compared to net sales of goods sold was $96.9$79.0 million for the three months ended June 30, 2012. The increase in net sales for the CV Segment is primarily attributed to increased volume of approximately $3.4 million, offset by price decreases of $1.4 million and $0.3 million related to decreased sales of platinum. Net sales were also impacted by minimal fluctuations in foreign currency values.

Net sales for the three months ended June 30, 2013 for the AS Segment were $50.0 million, an increase of $3.0 million, or 6.4%, as compared to $104.3net sales of $47.0 million for the three months ended June 30, 2011, a decrease2012. The increase in net sales for the AS Segment is primarily related to increases in volume of $7.4$3.7 million, offset by decreases in price of $0.7 million.

Cost of sales
The following table shows the cost of sales by segment for the three months ended June 30, 2012 and June 30, 2013 (in thousands):
 Three Months Ended
 June 30,
2012
 June 30,
2013
 Increase (Decrease) % Change
Cost of Sales:       
  Cardio & Vascular segment$55,043
 $55,223
 $180
 0.3%
  Advanced Surgical segment37,971
 40,107
 2,136
 5.6%
Total cost of sales$93,014
 $95,330
 $2,316
 2.5%
Cost of sales were $95.3 million for the three months ended June 30, 2013 compared to $93.0 million for the three months ended June 30, 2012, an increase of $2.3 million, or 7.1%2.5%. Cost of goods soldsales reflects our variable manufacturing and fixed overhead costs necessary to produce productproducts for our customers. The decreaseincrease in cost of goods soldsales is primarily attributable to lowerhigher costs from increased volume comprised of the following: material costs resulting from the sales decrease related toincreases of $2.1 million, which included $0.3 million of platinum totaling approximately $1.5 million, decreases in material costs totaling approximately $3.3cost pass through, $0.8 million related to lower raw material procurement costs primarily associated with lower sales volume,increased manufacturing staffing, and $3.1$1.0 million resulting from lower variable manufacturing costs attributable primarily to lower sales volume but including approximately $0.5 million related to cost reduction and productivity improvement activities, all of which were offset by increased fixed manufacturing costs due to lower utilization of our fixed cost infrastructure withinfrastructure. These increases were offset by $1.6 million of lower depreciation.

Cost of sales totaling approximately $0.5 million.

for the CV Segment for the three months ended June 30, 2013 were $55.2 million compared to $55.0 million for the three months ended June 30, 2012, an increase of $0.2 million, or 0.3%. The increase in cost of sales for the CV Segment was primarily attributable to material increases of $0.4 million, which included $0.3 million of platinum cost pass through, and $0.6 million due to lower utilization of our fixed cost infrastructure. These increases were offset by $0.1 million related to decreased manufacturing staffing, and $0.7 million of lower depreciation.


Cost of sales for the AS Segment for the three months ended June 30, 2013 were $40.1 million compared to $38.0 million for the three months ended June 30, 2012, an increase of $2.1 million, or 5.6%. The increase in cost of sales for the AS Segment was primarily attributable to material increases of $1.7 million, $0.9 million related to increased manufacturing staffing and $0.4 million due to lower utilization of our fixed cost infrastructure. These increases were offset by $0.9 million of lower depreciation.

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Table of Contents

Gross profit
The following table shows the gross profit by segment for the three months ended June 30, 2013 and June 30, 2012 (in thousands):
 Three Months Ended
 June 30,
2012
 June 30,
2013
 Increase (Decrease) % Change
Gross Profit:       
  Cardio & Vascular segment$23,967
 $25,503
 $1,536
 6.4%
  Advanced Surgical segment9,017
 9,900
 883
 9.8%
Total gross profit$32,984
 $35,403
 $2,419
 7.3%
Gross profit was $33.4$35.4 million, or 25.6%27.1%, of net sales, for the three months ended June 30, 20122013 compared to $38.5$33.0 million, or 27.0%26.2%, of net sales for the three months ended June 30, 2011.2012. As a percentpercentage of sales, gross profit declined 1.4%increased 0.9% during the three months ended June 30, 20122013 compared to the three months ended June 30, 20112012 primarily due to lower leverageincreased sales volume.
Gross profit for the CV Segment for the three months ended June 30, 2013 was $25.5 million compared to $24.0 million for the three months ended June 30, 2012, an increase of our fixed cost infrastructure resulting from lower sales.

$1.5 million, or 6.4%, primarily attributable to increased sales volume, offset in part by higher manufacturing costs.

Gross profit for the A for the three months ended June 30, 2013 was $9.9 million compared to $9.0 million for the three months ended June 30, 2012, an increase of $0.9 million, or 9.8%, primarily attributable to increased sales volume, offset in part by higher manufacturing costs.
Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, were $14.0$12.8 million for the three months ended June 30, 20122013 compared to $14.5$13.8 million for the three months ended June 30, 2011.2012.  The $0.5$1.0 million decrease in SG&A expenses waswere primarily attributable to lower compensation and benefits of $1.1 million, inclusive of $0.7 million related to management incentive plans, lower travel and related costs, of $0.3 million, offset by higher costs related to professional fees and outside services of $0.6 million, increased depreciation costs of $0.2 million and higher utility costs of $0.1 million during the three months ended June 30, 2012 compared to the three months ended June 30, 2011.

depreciation.

Research and Development Expenses

Research and development, or R&D, expenses for each of the three months ended June 30, 2013 and June 30, 2012 were approximately $0.5 million, $0.2 million lower than the $0.7 million in the three months ended June 30, 2011.million. R&D expenses represent costs related to the development of new or improved manufacturing technologiestechnologies.
Impairment of Goodwill
During the first quarter of 2013, we reorganized our business into two segments, as noted above. As a result, our reportable segment information has been restated to reflect the current structure. The evaluation of the reporting units has also been reassessed and changed to reflect the declinecurrent structure and operations. During the first quarter of $0.2fiscal 2013, goodwill was reassigned to the new reporting units based on the relative fair values of the reporting units. This resulted in goodwill of $134.0 million is attributable primarilybeing assigned to lower headcount duringits AS reporting unit, and $485.4 million being assigned to its CV reporting unit.
After preliminary allocation of the three months endedgoodwill, the carrying amount of the AS reporting unit exceeds its fair value by approximately $16 million, which required us to perform an interim goodwill impairment test for the AS reporting unit. Pursuant to the next step of impairment testing, we calculated an implied fair value of goodwill based on a hypothetical purchase price allocation. During the first quarter of 2013, the Company had not finalized this step of its impairment testing due to the complexities involved in estimating fair value. In accordance with accounting guidance, the Company recognized an estimated impairment charge and recorded a pre-tax goodwill impairment charge of $51.0 million in the first quarter of 2013. The Company finalized the second step of the analysis in the second quarter of 2013 and recorded an additional pre-tax goodwill impairment charge of $12.1 million for a total pre-tax goodwill impairment charge of $63.1 million as of June 30, 2012 compared to the three months ended June 30, 2011.

2013.

Goodwill impairment charges are excluded by management for purposes of evaluating operating performance and assessing liquidity.



31


Interest Expense, net

Interest expense, net, was $17.2 million and $17.3 million for each of the three month periods ended June 30, 2013 and June 30, 2012 and June 30, 2011, respectively.

.

Other (Expense) Income, net
Other (expense) income, net was ($0.1) million and ($0.9) million for the three month periods ended

June 30, 2013 and June 30, 2012, respectively. Included in other (expense) income, net are foreign currency gains and losses. During the three months ended June 30, 2012,2013, we recorded a currency loss of approximately $0.9$0.3 million compared to a loss of approximately $0.7$0.9 million during the three months ended June 30, 2011.2012. The increasechange is due to changesfluctuation in foreign currency exchange rates during the three months ended June 30, 20122013 compared to the three months ended June 30, 2011.

2012. In addition, we recorded an income of $0.2 million during the three months ended June 30, 2013 related to sales of available for sales securities.

Income Tax Expense

Income tax expense for the three months ended June 30, 2013 was $1.0 million and included $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.3 million in state and foreign income taxes. Income tax expense for the three months ended June 30, 2012 was $1.2$1.1 million and included approximately $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.5offset in part by $0.4 million in state and foreign income taxes. Income tax expense for the three months ended June 30, 2011 was $0.5 million and included approximately $0.8 million of deferred income tax expense for differences in the book and tax treatment of goodwill and an income tax benefit of approximately $0.3 million in state and foreign income taxes. The change in income tax expense during the three months ended June 30, 2012 compared to the three months ended June 30, 2011 is attributable to higher profitability in the Company’s foreign operations during the three months ended June 30, 2012.

taxes refund.


Six Months Ended June 30, 20122013 Compared to Six Months Ended June 30, 20112012

The following table sets forth our operating data derived from the unaudited condensed consolidated statements of continuing operations for the six months ended June 30, 2012 and 2013, presented as a percentage of net sales.
 Six Months Ended
 June 30,
2012
 June 30,
2013
STATEMENT OF OPERATIONS DATA:   
Net sales100.0% 100.0 %
Cost of sales75.1
 75.6
Gross profit24.9
 24.4
Selling, general and administrative expenses11.4
 10.7
Research and development expenses0.4
 0.4
Impairment of goodwill
 25.1
Restructuring expenses and other0.7
 0.2
Amortization of intangible assets3.0
 3.0
Income from continuing operations9.4% (15.0)%

Net Sales

The following table shows the net sales by segment for the six months ended

June 30, 2012 and June 30, 2013 (in thousands):

 Six Months Ended
 June 30,
2012
 June 30,
2013
 Increase(Decrease) % Change
Net Sales:       
  Cardio & Vascular segment$155,911
 $156,579
 $668
 0.4%
  Advanced Surgical segment94,654
 94,952
 298
 0.3%
Total Net Sales$250,565
 $251,531
 $966
 0.4%
Net sales for the six months ended June 30, 20122013 were $261.8$251.5 million, a decreasean increase of $10.9approximately $1.0 million, or 4.0%0.4%, compared to net sales of $272.7$250.6 million for the six months ended June 30, 2011.2012. Net sales were impacted by lower salespositive volume totaling $6.4 million, exclusiveincreases in both segments of approximately $5.9 million. Increases in volume were offset by price decreases of $2.4$4.0 million $1.2 million related to lower foreign currency values and $0.9 million related to decreased sales of platinum, resulting primarily from passing through to our customers, changes in precious metal prices which do not benefit gross profit.

Cost Net sales were also impacted by minimal fluctuations in foreign currency values.


32


Net sales for the six months ended

CostJune 30, 2013 for the CV Segment were $156.6 million, an increase of goods sold was $197.8$0.7 million, or 0.4%, compared to net sales of $155.9 million for the six months ended June 30, 2012. The increase in net sales for the CV Segment is primarily attributed to increased volume of $4.4 million offset by price decreases of $2.8 million and $0.9 million related to decreased sales of platinum.

Net sales for the six months ended June 30, 2013 for the AS Segment were $95.0 million, an increase of $0.3 million, or 0.3%, as compared to $202.6net sales of $94.7 million for the six months ended June 30, 2011, a decrease2012. The increase in net sales for the AS Segment is primarily related to increases in volume of $4.8$1.5 million offset by decreases in price of $1.2 million.

Cost of sales
The following table shows the cost of sales by segment for the six months ended June 30, 2012 and June 30, 2013 (in thousands):
 Six Months Ended
 June 30,
2012
 June 30,
2013
 Increase (Decrease) % Change
Cost of Sales:       
  Cardio & Vascular segment$108,433
 $110,436
 $2,003
 1.8%
  Advanced Surgical segment79,687
 79,822
 135
 0.2%
Total cost of sales$188,120
 $190,258
 $2,138
 1.1%
Cost of sales were $190.3 million for the six months ended June 30, 2013 compared to $188.1 million for the six months ended June 30, 2012, an increase of $2.1 million, or 2.4%1.1%. Cost of goods soldsales reflects our variable manufacturing and fixed overhead costs necessary to produce productproducts for our customers. The decreaseincrease in cost of goods soldsales is primarily attributable to decreasedhigher costs from increased volume comprised of the following: material costs resulting from lower salesincreases of $0.3 million which included $0.9 million of platinum totaling approximatelycost pass through, $0.9 million decreases in material costs totalingrelated to increased manufacturing staffing, approximately $1.3$1.9 million resulting from lower sales volume , lower variable manufacturing costs totaling approximately $3.9of increased medical benefit expense, and $2.0 million primarily attributabledue to lower sales volume, all of which were offset by higher fixed costs resulting from lower utilization of our fixed cost infrastructure totaling approximately $1.3infrastructure. These increases were offset by $3.0 million of lower depreciation.

Cost of sales for the CV Segment for the six months ended June 30, 2013 was $110.4 million compared to $108.4 million for the six months ended June 30, 2012, an increase of $2.0 million, or 1.8%.

The increase in cost of sales for the CV Segment was primarily attributable to overhead staffing increases of $1.0 million, $1.1 million of increased medical benefit expense, and $1.6 million due to lower utilization of our fixed cost infrastructure. These increases were offset by material decreases of $0.2 million which included $0.9 million of platinum cost pass through, $0.3 million related to decreased manufacturing staffing, and $1.2 million of lower depreciation.


Cost of sales for the AS Segment for the six months ended June 30, 2013 was $79.8 million compared to $79.7 million for the six months ended June 30, 2012, an increase of $0.1 million, or 0.2%. The increase in cost of sales for the AS Segment was primarily attributable to increased material cost of $0.5 million, $1.2 million related to increased manufacturing staffing, $0.8 million of increased medical benefit expense, and $0.4 million due to lower utilization of our fixed cost infrastructure. These increases were offset by lower overhead staffing costs of $1.0 million, and $1.8 million of lower depreciation.

Gross profit
The following table shows the gross profit by segment for the six months ended June 30, 2013 and June 30, 2012 (in thousands):
 Six Months Ended
 June 30,
2012
 June 30,
2013
 Increase (Decrease) % Change
Gross Profit:       
  Cardio & Vascular segment$47,478
 $46,143
 $(1,335) (2.8)%
  Advanced Surgical segment14,967
 15,130
 163
 1.1 %
Total gross profit$62,445
 $61,273
 $(1,172) (1.9)%

33


Gross profit was $64.0$61.3 million, or 24.4%, of net sales, for the six months ended June 30, 20122013 compared to $70.1$62.4 million, or 25.7%24.9%, of net sales for the six months ended June 30, 2011.2012. As a percentpercentage of sales, gross profit declined 1.3%decreased 0.5% during the six months ended June 30, 20122013 compared to the six months ended June 30, 20112012 driven primarily dueby the CV Segment.
Gross profit for the CV Segment for the six months ended June 30, 2013 was $46.1 million compared to lower leverage$47.5 million for the six months ended June 30, 2012, a decrease of our fixedapproximately $1.3 million, or 2.8%. The decrease in gross profit for the CV Segment was primarily a result of cost infrastructure.

of sales growth, as described above, at a higher rate than revenue growth.

Gross profit for the AS Segment for the six months ended June 30, 2013 was $15.1 million compared to $15.0 million for the six months ended June 30, 2012, an increase of $0.1 million, or 1.1%. The increase in gross profit for the AS Segment was primarily a result the increase in sales offset in part by higher cost of sales.
Selling, General and Administrative Expenses

Selling, general and administrative expenses, or SG&A, were $29.0$27.0 million for the six months ended June 30, 20122013 compared to $28.7 million for the six months ended June 30, 2011.2012.  The $0.3$1.7 million increasedecrease in SG&A expenses was primarily attributable to one time contractually obligated severance charges recorded during the six months ended June 30, 2012 totaling approximately $0.4 million, lower costs of $0.8 million related to management incentive plans and stock compensation costs, lower travel and related costs of $0.2 million, lower costs related to recruiting and relocation totaling $0.3 million, offset by higher costs related toutility expenses, professional fees and outside services of $0.7 million, increased depreciation costs of $0.3 million and higher utility costs of $0.2 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011.

depreciation.

Research and Development Expenses

Research and development, or R&D, expenses for the six months ended June 30, 20122013 were $0.9approximately $1.0 million $0.6 million lower than the $1.5 million infor each of the six months ended June 30, 2011.2013 and June 30, 2012. R&D expenses represent costs related to the development of new or improved manufacturing technologiestechnologies.
Impairment of Goodwill
During the first quarter of 2013, we reorganized our business into two segments, as noted above. As a result, our reportable segment information has been restated to reflect the current structure. The evaluation of the reporting units has also been reassessed and changed to reflect the declinecurrent structure and operations. During the first quarter of $0.6fiscal 2013, goodwill was reassigned to the new reporting units based on the relative fair values of the reporting units. This resulted in goodwill of $134.0 million is attributable primarilybeing assigned to lower headcountits AS reporting unit, and $485.4 million being assigned to its CV reporting unit.
After preliminary allocation of the goodwill, the carrying amount of the AS reporting unit exceeds its fair value by approximately $16 million, which required us to perform an interim goodwill impairment test for the AS reporting unit. Pursuant to the next step of impairment testing, we calculated an implied fair value of goodwill based on a hypothetical purchase price allocation. During the first quarter of 2013, the Company had not finalized this step of its impairment testing due to the complexities involved in estimating fair value. In accordance with accounting guidance, the Company recognized an estimated impairment charge and recorded a pre-tax goodwill impairment charge of $51.0 million during the six months endedfirst quarter of 2013. The Company finalized the second step of the analysis in the second quarter of 2013 and recorded an additional pre-tax goodwill impairment charge of $12.1 million for a total pre-tax goodwill impairment charge of $63.1 million as of June 30, 2012 compared to the six months ended June 30, 2011.

2013.

Goodwill impairment charges are excluded by management for purposes of evaluating operating performance and assessing liquidity.

Interest Expense, net

Interest expense, net, was $34.4$34.6 million and $34.5 million for each of the six month periods ended June 30, 2013 and June 30, 2012 and June 30, 2011,, respectively.

Other (Expense) Income, net
Other (expense) income, net was ($0.2) million and ($0.7) million for the six month periods ended

June 30, 2013 and June 30, 2012, respectively. Included in other (expense) income, net are foreign currency gains and losses. During the six months ended June 30, 2012,2013, we recorded a currency loss of approximately $0.7$1.1 million compared to a loss of approximately $3.1$0.7 million during the six months ended June 30, 2011. This difference2012. The change is due to smaller changesfluctuation in foreign currency exchange rates during the six months ended June 30, 20122013 compared to the six months ended June 30, 2011.

2012. In addition, we recorded income of $0.9 million during the six months ended June 30, 2013 related to a distribution from the demutualization of an insurance company that carries our product liability insurance and sales of available for sale securities in 2013.



34


Income Tax Expense

Income tax expense for the six months ended June 30, 20122013 was $2.1$2.1 million and included $1.5$1.3 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.6$0.6 million in state and foreign income taxes. Income tax expense for the six months ended June 30, 20112012 was $2.5$1.7 million and included approximately $1.5$1.5 million of deferred income tax expense for differences in the book and tax treatment of goodwill and approximately $1.0offset in part by $0.2 million in state and foreign income taxes. The change in income tax expense during the six months ended June 30, 2012 compared to the six months ended June 30, 2011 is attributable to higher profitability in the Company’s foreign operations offset by the effect of changes in the Company’s entity structure that became effective in January of 2012.

taxes refund.


Liquidity and Capital Resources

Our principal source of liquidity is our cash flow from continuing operations and borrowings available to us under our $75 million ABL Revolver. At June 30, 2012,2013, we had $12.5$10.9 million of letters of credit outstanding and no outstanding loans under the ABL Revolver. As of June 30, 2012,2013, our total indebtedness amounted to $715.0 million.

Cash provided by operating activities of continuing operations was $8.2$2.8 million during the six months ended June 30, 2013 compared to cash provided by continuing operations of $6.2 million during the six months ended June 30, 2012, an increase of $3.4 million used by operating activities of continuing operations.
Cash used in investing activities of continuing operations was $10.0 million during the six months ended June 30, 2013 compared to $7.5 million during the six months ended June 30, 2012. The increase in cash used for investing activities of continuing operations was primarily related to an increase in capital expenditures. Cash provided by investing activities of discontinued operations was $8.0 million during the six months ended June 30, 2013 while cash provided by investing activities of discontinued operations was $7.5 million for the six months ended June 30, 2012. The increase in cash provided by investing activities of discontinued operations was primarily related to the receipt of proceeds from the sale of our Watertown, CT facility, during the six months ended June 30, 2012 compared to $(3.0) million used in operations during the six months ended June 30, 2011, an improvement of $11.2 million. 2013.
The increase in cash used in operations is primarily a result of working capital improvements offset by a higher net loss. Our net cash invested in working capital was $16.3 million lower while our net loss was ($5.4) million higher during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. In addition, aggregate adjustments for non-cash items positively impacted operating cash flows by $0.3 million primarily due to an increase in depreciation costs and restructuring charges offset by lower deferred income tax expense and stock compensation.

Cash used in investing activities was $0.1 million during the six months ended June 30, 2012 compared to $(16.6) million during the six months ended June 30, 2011. The decrease in cash used for investing activities of $16.7 million is attributable to lower capital asset acquisitions of $8.8 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011 as we completed the build-out of our facility in Penang, Malaysia during 2011. Additionally, the sale of certain assets of our former site in Pittsburgh, PA plant generated $8.0 million of cash.

During the six months ended June 30, 2012,Company's cash used in financing activities was approximately $(0.1) million compared to $(0.5) million duringfor the six months ended June 30, 2011. During the six months ended 2013 and June 30, 2011 we paid approximately $0.5 million of deferred financing costs related to our 2010 refinancing transactions.

2012 was not significant.

Our planned capital expenditures for 20122013 include investments related to new business opportunities, upgrades of our existing equipment infrastructure and information technology enhancements. We expect that these investments will be financed from operating cash flow.

flows from continuing operations.

As of June 30, 2012,2013, we have a liability of $1.7$1.4 million, of which the Company expects to pay $0.1 million during 2012,2013, for environmental clean-up matters. The United States Environmental Protection Agency, or EPA, issued an Administrative Consent Order in July 1988 requiring UTI, our subsidiary, to study and, if necessary, remediate the groundwater and soil beneath and around its plant in Collegeville, Pennsylvania. Since that time, UTI has implemented and is operating successfully a TCE contamination well pumping treatment system approved by the EPA. We expect to pay approximately $0.1 million of ongoing annual operating costs during each of the next five years relating to this remediation effort. Our environmental accrual at June 30, 20122013 includes $1.5$1.4 million related to our Collegeville location. The remaining environmental accrual, related to our other locations, was $0.2 million at June 30, 2012.

Our ability to make payments on our indebtedness and to fund planned capital expenditures, other expenditures and long-term liabilities, and necessary working capital will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from continuing operations and available borrowings under the ABL Revolver will be adequate to meet our liquidity requirements for the next 12 months. However, no assurance can be given that this will be the case.


Indebtedness
Indebtedness

At June 30, 2012,2013, our aggregate debt was approximately $715.0 million, substantially all of which is due in 2017. Our debt at June 30, 2012 consisted of our senior secured notes bearing interest at 8.375% (the “Senior Secured Notes”) and our senior subordinated notes that bear interest at 10% (the “Senior Subordinated Notes”). In addition, we have a $75 million asset based revolving credit facility. Our revolving credit facility afforded us borrowing capacity of $27.1$33.2 million at June 30, 2012.2013, after collaterlizing approximately $10.9 million of letters of credit. No amounts have been drawn under the facility since it was put in place in January 2010. As of June 30, 2012,2013, we were in compliance with the covenants of our debt agreements.

Other Key Indicators of Financial Condition and Operating Performance

EBITDA and Adjusted EBITDA presented on a continuing operations basis in this Quarterly Report on Form 10-Q are supplemental measures of our performance that are not required by, or presented in accordance with generally accepted accounting principles in the United States, or GAAP. EBITDA and Adjusted EBITDA are not measures of our financial

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performance under GAAP and should not be considered as alternatives to net loss or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity.

EBITDA represents net loss income before net interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA further adjusted to give effect to unusual items, non-cash items and other adjustments, all of which are defined in the indentures governing the Senior Subordinated Notes and the Senior Secured Notes and the credit agreement governing the ABL Revolver. We believe that the inclusion of EBITDA and Adjusted EBITDA in this Quarterly Report on Form 10-Q is appropriate to provide additional information to investors regarding certain thresholds based on Adjusted EBITDA that we may be required to meet in certain cases that are included in the indentures governing the Senior Subordinated Notes and the Senior Secured Notes and the credit agreement governing the ABL Revolver. There are no material differences in the manner in which EBITDA and Adjusted EBITDA were determined in the past under our credit agreement, as amended.

We also present EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. We believe EBITDA facilitates operating performance comparison from period to period and company to company by backing out differences caused by variations in capital structures, tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).

In determining Adjusted EBITDA, as permitted by the terms of our indebtedness, we eliminate the impact of a number of items. For the reasons indicated herein, you are encouraged to evaluate each adjustment and whether you consider it appropriate. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

they do not reflect our cash expenditures for capital expenditure or contractual commitments;

they do not reflect changes in, or cash requirements for, our working capital requirements;

they do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness;

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;

Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, as discussed in our presentation of “Adjusted EBITDA” in this report; and

other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or reduce our indebtedness. For these purposes, we rely on our GAAP results. For more information, see our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.

The following table sets forth a reconciliation of net income (loss)loss to EBITDA for the periods indicated:

   Three Months Ended  Six Months Ended 
   June 30,
2011
   June 30,
2012
  June 30,
2011
  June 30,
2012
 

RECONCILIATION OF NET INCOME (LOSS) TO EBITDA:

      

Net income (loss)

  $1,011    $(5,608 $(7,160) $(12,594

Interest expense, net

   17,179     17,259    34,428    34,501  

Provision for income taxes

   523     1,201    2,488    2,123  

Depreciation and amortization

   9,606     10,047    19,047    20,130  
  

 

 

   

 

 

  

 

 

  

 

 

 

EBITDA

  $28,319    $22,899   $48,803   $44,160  
  

 

 

   

 

 

  

 

 

  

 

 

 

indicated (in thousands):

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
RECONCILIATION OF NET LOSS TO EBITDA:       
Net loss$(5,608) $(12,671) $(12,594) $(74,740)
Interest expense, net17,258
 17,271
 34,500
 34,577
Provision for income taxes1,131
 1,018
 1,718
 2,123
Depreciation and amortization9,838
 8,102
 19,488
 16,228
EBITDA$22,619
 $13,720
 $43,112
 $(21,812)

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The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods indicated:

   Three Months Ended  Six Months Ended 
   June 30,
2011
   June 30,
2012
  June 30,
2011
   June 30,
2012
 

EBITDA

  $28,319    $22,899   $48,803    $44,160  

Adjustments:

       

Stock-based compensation – employees

   242     142    490     182  

Stock-based compensation - non-employees

   22     22    45     45  

Employee severance and relocation

   479     555    814     1,370  

Restructuring expenses

   —       1,486    —       1,838  

Executive recruiting costs

   43     —      264     —    

Plant closure costs

   —       154    —       323  

Currency loss

   687     906    2,707     721  

(Gain) loss on disposal of assets

   47     (33  47     (34

Other taxes

   56     109    246     315  

Management fees to stockholder

   319     335    638     670  
  

 

 

   

 

 

  

 

 

   

 

 

 

Adjusted EBITDA

  $30,214    $26,575   $54,054    $49,590  
  

 

 

   

 

 

  

 

 

   

 

 

 

indicated (in thousands):

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
EBITDA$22,619
 $13,720
 $43,112
 $(21,812)
Adjustments:
 
    
Impairment of goodwill
 12,128
 
 63,128
Stock-based compensation – employees142
 185
 182
 400
Stock-based compensation - non-employees22
 30
 45
 60
Employee severance and relocation556
 417
 1,370
 819
Income from discontinued operations, net(129) 
 (750) 
Restructuring expenses1,485
 (170) 1,838
 (181)
Plant closure costs154
 47
 323
 1,217
Currency loss905
 272
 720
 1,120
(Gain) loss on disposal of assets(32) 736
 (33) 692
Other taxes110
 64
 315
 148
Management fees to stockholder335
 352
 670
 704
Gain from the sale of available for sale securities
 (242) 
 (242)
Adjusted EBITDA$26,167
 $27,539
 $47,792
 $46,053
The differences between Adjusted EBITDA and cash flows used in operating activities are summarized as follows:

   Three Months Ended  Six Months Ended 
   June 30,
2011
  June 30,
2012
  June 30,
2011
  June 30,
2012
 

Adjusted EBITDA

  $30,214   $26,575   $54,054   $49,590  

Net changes in operating assets and liabilities

   (11,913)  2,054    (19,915)  (3,552

Interest expense, net

   (17,179)  (17,259  (34,428)  (34,501

Cash payment of restructuring charges

   —      (363  —      (806

Deferred tax provision

   739    741    2,979    1,479  

Income tax (expense)

   (523)  (1,201  (2,488)  (2,123

Amortization of debt discount and non-cash interest

   729    767    1,449    1,533  

Other items, net

   (83  (2,051  (4,669)  (3,400
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

  $1,984   $9,263   $(3,018) $8,220  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash (used in) provided by investing activities

  $(11,025) $2,949   $(16,610) $75  
  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used in financing activities

  $(119) $(6 $(494) $(54
  

 

 

  

 

 

  

 

 

  

 

 

 

follows (in thousands):

 Three Months Ended Six Months Ended
 June 30,
2012
 June 30,
2013
 June 30,
2012
 June 30,
2013
Adjusted EBITDA$26,167
 $27,539
 $47,792
 $46,053
Net changes in operating assets and liabilities1,411
 884
 (4,178) (5,478)
Interest expense, net(17,258) (17,271) (34,500) (34,577)
Deferred tax provision741
 682
 1,479
 1,104
Income tax (expense)(1,131) (1,018) (1,718) (2,123)
Amortization of debt discount and non-cash interest777
 819
 1,533
 1,619
Other items, net(1,444) (1,031) (2,188) (3,935)
Net cash provided by operating activities$9,263
 $10,604
 $8,220
 $2,663
Net cash provided by (used in) investing activities$2,949
 $(4,839) $75
 $(1,972)
Net cash used in financing activities$(6) $(2) $(54) $(7)

Off-Balance Sheet Arrangements

We do not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.



37



Contractual Obligations and Commitments

The following table sets forth our long-term contractual obligations as of June 30, 20122013 (in thousands):

   Payment due by Period 

Contractual Obligations

  Total   Less than
1  year
   1-3 years   3-5 years   More than
5  years
 

Senior Secured Notes (1)

  $567,500    $33,500    $67,000    $467,000    $—    

Senior Subordinated Notes (1)

   488,250     31,500     63,000     63,000     330,750  

Capital leases (1)

   31     19     12     —       —    

Operating leases

   21,218     6,065     9,210     4,645     1,298  

Purchase obligations (2)

   51,226     51,226     —       —       —    

Other obligations (3)

   40,003     315     953     877     37,858  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,168,228    $122,625    $140,175    $535,522    $369,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 Payment due by Period
Contractual ObligationsTotal 
Less than
1 year
 1-3 years 3-5 years 
More than
5 years
Senior Secured Notes (1)$534,000
 $33,500
 $67,000
 $433,500
 $
Senior Subordinated Notes (1)456,750
 31,500
 63,000
 362,250
 
Capital leases (1)13
 7
 6
 
 
Operating leases19,179
 5,852
 8,502
 4,461
 364
Purchase obligations (2)64,159
 56,975
 7,184
 
 
Other obligations (3)41,265
 693
 1,041
 989
 38,542
Total$1,115,366
 $128,527
 $146,733
 $801,200
 $38,906

(1)Includes interest and principal payments. Interest is determined using the instrument’s fixed rate of interest.
(2)Purchase obligations consist of commitments for materials, supplies, machinery and equipment.
(3)Other obligations include share based payment obligations of $0.1 million payable to employees and $1.1$0.9 million payable to non-employees, environmental remediation obligations of $1.7$1.4 million, accrued compensation and pension benefits of $4.0$5.0 million, deferred income taxes of $32.4$32.5 million, accrued restructuring fees of $0.8 million and other obligations of $0.7$0.6 million.

Critical Accounting Policies

Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are listed below:

Revenue recognition;

Allowance for doubtful accounts;

Valuation of goodwill, trade names and trademarks;

Valuation of long-lived assets;

Self Insurance reserves;

Environmental reserves;

Share Based Payments; and

Income Taxes

During the six months ended June 30, 2012, there were no significant changes2013, and in connection with our reorganization into operating our critical accounting policies or estimates.

business into two segments, we applied the relative fair value method to assigning goodwill to our reporting units.




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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the six months ended June 30, 2012,2013, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 20112012 filed with the Securities and Exchange Commission on March 29, 2012April 1, 2013 for a more complete discussion of the market risks we encounter.



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ITEM 4.CONTROLS AND PROCEDURES

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-15(b) and Rule 15d-15 under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

Evaluation of Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2012.2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2012,2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in internal control over financial reporting:There were no changes in our internal controls over financial reporting during the six months ended June 30, 20122013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION


ITEM 1.Legal Proceedings.

ITEM 1.    Legal Proceedings.

The Pennsylvania Department of Environmental Protection (“DEP”) has 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 TCE and other degreaser emissions. The EPA has agreed to reconsider the exemption. Our Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since we manufacture narrow tubes. Nevertheless, we have implemented systems and controls that limit TCE emissions generated by our Collegeville facility. However, these systems and controls will not reduce our TCE emissions to the levels expected to be required should a new standard become law.

We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other 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 our consolidated financial position, results of operations or cash flows.

ITEM 1A.     RISK FACTORS
ITEM 1A.
RISK FACTORS

For a discussion of our potential risks or uncertainties, please see Part I, Item 1A, of Accellent Inc.’s 20112012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2012.April 1, 2013. There have been no material changes to the risk factors disclosed in Part I, Item 1A, of Accellent Inc.’s 20112012 Annual Report on Form 10-K.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

No unregistered equity securities of the registrant were sold and no repurchases of equity securities were made during the six months ended June 30, 2012.

2013.


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Table of Contents

ITEM 3.DEFAULTS UPON SENIOR SECURITIES

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

Not applicable.


ITEM 4.MINE SAFETY DISCLOSURES

ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

ITEM 5.    OTHER INFORMATION

Not applicable.


ITEM 6.     EXHIBITS

ITEM 6.EXHIBITS

Exhibit

Number

  

Description of Exhibits

31.1*  Rule 13a-14(a) Certification of Principal Executive Officer
31.2*  Rule 13a-14(a) Certification of Principal Financial Officer
32.1*  Section 1350 Certification of Principal Executive Officer
32.2*  Section 1350 Certification of Principal Financial Officer
Exhibit 101.INS  XBRL Instance Document.
Exhibit 101.SCH  XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL  XBRL Taxonomy Calculation Linkbase Document.
Exhibit 101.LAB  XBRL Taxonomy Label Linkbase Document.
Exhibit 101.PRE  XBRL Taxonomy Presentation Linkbase Document
Exhibit 101.DEF  Taxonomy Definition Linkbase Document

*Filed herewith.

______________
*    Filed herewith.


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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.

Accellent Inc.
Accellent Inc.
August 14, 20122013By:

/s/ Donald J. Spence

 Donald J. Spence
 

President and Chief Executive Officer

(Principal Executive Officer)

Accellent Inc.
Accellent Inc.
August 14, 20122013By:

/s/ Jeremy A. Friedman

 Jeremy A. Friedman
 

Chief Financial Officer

(Principal Financial Officer)


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EXHIBIT INDEX

Exhibit

Number

  

Description of Exhibits

31.1*  Rule 13a-14(a) Certification of Principal Executive Officer
31.2*  Rule 13a-14(a) Certification of Principal Financial Officer
32.1*  Section 1350 Certification of Principal Executive Officer
32.2*  Section 1350 Certification of Principal Financial Officer
Exhibit 101.INS  XBRL Instance Document.
Exhibit 101.SCH  XBRL Taxonomy Extension Schema Document.
Exhibit 101.CAL  XBRL Taxonomy Calculation Linkbase Document.
Exhibit 101.LAB  XBRL Taxonomy Label Linkbase Document.
Exhibit 101.PRE  XBRL Taxonomy Presentation Linkbase Document
Exhibit 101.DEF  Taxonomy Definition Linkbase Document

*Filed herewith.

32

______________
*    Filed herewith.


44