UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-Q
_______________
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
Commission File Number: 333-130470
Accellent Inc.
(Exact name of registrant as specified in its charter)
Maryland | 84-1507827 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | 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 x No o
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 o | Accelerated filer o | Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 12, 2008, 1,000 shares of the Registrant’s common stock were outstanding. The registrant is a wholly owned subsidiary of Accellent Holdings Corp.
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 2008 and December 31, 2007
(in thousands, except share and per share data)
September 30, 2008 | December 31, 2007 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 15,593 | $ | 5,688 | |||
Accounts receivable, net of allowances of $1,308 and $1,212, respectively | 54,508 | 50,961 | |||||
Inventories, net | 68,792 | 67,399 | |||||
Prepaid expenses and other current assets | 3,576 | 4,971 | |||||
Total current assets | 142,469 | 129,019 | |||||
Property and equipment, net | 128,892 | 133,045 | |||||
Goodwill | 629,854 | 629,854 | |||||
Intangibles, net | 198,240 | 209,444 | |||||
Deferred financing costs and other assets | 18,234 | 21,003 | |||||
Total assets | $ | 1,117,689 | $ | 1,122,365 | |||
Liabilities and stockholder's equity | |||||||
Current liabilities: | |||||||
Current portion of long-term debt | $ | 4,009 | $ | 4,187 | |||
Accounts payable | 26,118 | 23,571 | |||||
Accrued payroll and benefits | 12,934 | 8,442 | |||||
Accrued interest | 13,176 | 5,615 | |||||
Accrued income taxes | 2,711 | 772 | |||||
Accrued expenses | 13,467 | 11,439 | |||||
Total current liabilities | 72,415 | 54,026 | |||||
Long-term debt | 703,429 | 717,014 | |||||
Other long-term liabilities | 34,461 | 39,330 | |||||
Total liabilities | 810,305 | 810,370 | |||||
Stockholder's equity: | |||||||
Common stock, par value $0.01 per share, 50,000,000 shares authorized and 1,000 shares issued and outstanding at September 30, 2008 and December 31, 2007 | — | — | |||||
Additional paid-in capital | 634,162 | 628,368 | |||||
Accumulated other comprehensive income (loss) | (508 | ) | 78 | ||||
Accumulated deficit | (326,270 | ) | (316,451 | ) | |||
Total stockholder's equity | 307,384 | 311,995 | |||||
Total liabilities and stockholder's equity | $ | 1,117,689 | $ | 1,122,365 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
.
Unaudited Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2008 and 2007
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2008 | September 30, 2007 | September 30, 2008 | September 30, 2007 | |||||||||||||
Net sales | $ | 134,670 | $ | 119,396 | $ | 399,428 | $ | 349,961 | ||||||||
Cost of sales (exclusive of amortization) | 100,031 | 89,904 | 293,998 | 259,007 | ||||||||||||
Gross profit | 34,639 | 29,492 | 105,430 | 90,954 | ||||||||||||
Selling, general and administrative expenses | 15,596 | 14,395 | 45,533 | 38,622 | ||||||||||||
Research and development expenses | 751 | 582 | 2,231 | 1,933 | ||||||||||||
Restructuring charges (recovery) | 794 | (7 | ) | 3,165 | 701 | |||||||||||
Amortization of intangibles | 3,735 | 3,735 | 11,205 | 11,771 | ||||||||||||
Impairment of goodwill and other intangible assets | — | — | — | 82,340 | ||||||||||||
Income (loss) from operations | 13,763 | 10,787 | 43,296 | (44,413 | ) | |||||||||||
Interest expense, net | (16,026 | ) | (17,165 | ) | (49,363 | ) | (50,079 | ) | ||||||||
Loss on derivative instruments | (171 | ) | (122 | ) | (528 | ) | (64 | ) | ||||||||
Other income (expense) | 924 | (420 | ) | 136 | (515 | ) | ||||||||||
Loss before income tax expense (benefit) | (1,510 | ) | (6,920 | ) | (6,459 | ) | (95,071 | ) | ||||||||
Income tax expense (benefit) | (661 | ) | 1,212 | 3,360 | 2,897 | |||||||||||
Net loss | $ | (849 | ) | $ | (8,132 | ) | $ | (9,819 | ) | $ | (97,968 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Unaudited Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2008 and 2007
(in thousands)
September 30, 2008 | September 30, 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (9,819 | ) | $ | (97,968 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 26,630 | 26,537 | ||||||
Amortization of debt discounts and non-cash interest expense | 3,148 | 3,049 | ||||||
Non-cash impairment charges | 710 | 82,340 | ||||||
Deferred income taxes | 73 | 818 | ||||||
Stock-based compensation (credit) expense | 3,273 | (3,391 | ) | |||||
Unrealized loss on derivative instruments | 528 | 64 | ||||||
Loss on disposal of property and equipment | 400 | 5 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,711 | ) | (2,211 | ) | ||||
Inventories | (1,514 | ) | (10,653 | ) | ||||
Prepaid expenses and other current assets | 1,385 | 604 | ||||||
Accounts payable and accrued expenses | 17,417 | 16,292 | ||||||
Settlement of stock based liability awards | — | (1,635 | ) | |||||
Net cash provided by operating activities | 38,520 | 13,851 | ||||||
Cash flows from investing activities: | ||||||||
Purchase of property and equipment | (12,949 | ) | (18,673 | ) | ||||
Proceeds from sale of assets | 476 | 122 | ||||||
Net cash used in investing activities | (12,473 | ) | (18,551 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from borrowings on long-term debt | 39,000 | 44,000 | ||||||
Principal payments on long-term debt | (53,142 | ) | (36,011 | ) | ||||
Proceeds from sale of stock | 138 | — | ||||||
Repurchase of parent company stock | (1,984 | ) | — | |||||
Payment of deferred financing fees | — | (1,657 | ) | |||||
Net cash (used in) provided by financing activities | (15,988 | ) | 6,332 | |||||
Effect of exchange rate changes on cash and cash equivalents: | (154 | ) | 196 | |||||
Increase in cash and cash equivalents | 9,905 | 1,828 | ||||||
Cash and cash equivalents at beginning of period | 5,688 | 2,746 | ||||||
Cash and cash equivalents at end of period | $ | 15,593 | $ | 4,574 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for interest | $ | 38,752 | $ | 38,682 | ||||
Cash paid for income taxes | $ | 1,671 | $ | 2,645 | ||||
Property and equipment purchases included in accounts payable | $ | 1,169 | $ | 1,336 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2008
1. Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Accellent Inc. and its subsidiaries (collectively, the “Company”). All intercompany transactions have been eliminated.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Interim financial reporting does not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information presented herein is unaudited, but reflects all normal adjustments which are, in the opinion of management, necessary to provide a fair statement of results for the interim periods presented. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. The balance sheet data at December 31, 2007 was derived from audited financial statements, but does not include all the disclosures required by GAAP.
The Company is a wholly owned subsidiary of Accellent Acquisition Corp., which is owned by Accellent Holdings Corp. Both of these companies were formed to facilitate the November 22, 2005 merger with Accellent Merger Sub Inc., a corporation formed by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and Bain Capital (“Bain”). The acquisition was accomplished through the merger of Accellent Merger Sub Inc. into Accellent Inc. with Accellent Inc. being the surviving company (the “Transaction”).
Nature of Operations
The Company provides product development and design services, custom manufacturing of components, assembly of finished devices and supply chain management services primarily for the medical device industry. The Company derives revenue from sales in both domestic and foreign markets. Currently, we have one operating and reportable segment which is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance. Our chief operating decision maker is our chief executive officer.
Concentration of Credit Risk
For the nine months ending September 30, 2008 three customers each individually accounted for more than 10% of our revenue.
New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles." This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The Company expects that the adoption of SFAS No. 162 will not have a material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 enhances the disclosure requirements of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” by requiring disclosure of the fair values of derivative instruments and associated gains and losses and requires disclosure of derivative features that are subject to credit-risk. The adoption of SFAS 161 is required for interim periods beginning after November 15, 2008. The company expects that the adoption of SFAS No. 161 will not have a material impact on its consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”), which replaces SFAS No. 141 and issued SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB No. 51.” These standards change the accounting for and the reporting for business combination transactions and noncontrolling (minority) interests in the consolidated financial statements, respectively. SFAS 141(R) changes the accounting for business acquisitions and will impact financial statements both on the acquisition date and in subsequent reporting periods. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and reported as a component of equity. These standards will become effective for the Company in the first quarter of fiscal year 2009. SFAS 141(R) will be applied prospectively. SFAS 160 requires retrospective application of most of the classification and presentation provisions. All other requirements of SFAS No. 160 shall be applied prospectively. Early adoption is prohibited for both standards. The adoption of SFAS 141R will primarily have an impact on accounting for business combinations once adopted, but its effect will be dependent upon acquisitions subsequent to the effective date.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands the required disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of SFAS 157 for non financial assets and non financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with this interpretation, the Company has only adopted the provisions of SFAS 157, effective January 1, 2008, with respect to its financial assets and liabilities that are measured at fair value on a recurring basis within the financial statements as of September 30, 2008. The provisions of SFAS 157 have not been applied to non-financial assets and non-financial liabilities. The adoption of SFAS 157 did not have a material effect on our consolidated results of operations, consolidated cash flows or consolidated financial position. See Note 12
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB No. 115,” (“SFAS 159”). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. This statement is effective beginning after November 15, 2007. The Company adopted SFAS 159 effective January 1, 2008 and has not elected to change its valuation methods for financial instruments in place as of January 1, 2008, the date of adoption or for any financial instruments entered into during the nine months ended September 30, 2008.
2. | Intangible Assets |
The Company has elected October 31st as the annual impairment assessment date for goodwill and intangible assets and performs additional impairment tests if triggering events occur.
During the fourth quarter of 2007 we re-aligned the Company into one operating segment to reflect our efforts to streamline our sales, quality, engineering and customer services into one centrally managed organization to better serve our customers, many of whom service multiple medical device markets. As a result of this realignment we have one operating and reportable segment. Prior to this re-alignment we had been organized into three operating segments to serve our primary target markets: cardiology, endoscopy and orthopedic, which also represented three reporting units in accordance with SFAS No. 142, “Goodwill and Other Intangibles,” (“SFAS 142”).
The Company tested the long-lived assets of our Orthopedic reporting unit for recoverability as of March 31, 2007 and determined that certain intangible assets were not recoverable since the expected future undiscounted cash flows attributable to its assets were below their respective carrying values. The fair value of our Customer Base intangible was determined to be $7.6 million using an excess earnings approach. The carrying value of our Customer Base intangible was $37.7 million, resulting in an impairment charge of $30.1 million. The fair value of our Developed Technology intangible asset was determined to be $0.4 million using the relief from royalty method. The carrying value of our Developed Technology intangible was $0.6 million, resulting in an impairment charge of $0.2 million.
As a result of the triggering event within the Orthopedic reporting unit we also tested goodwill and other indefinite-lived intangible assets related to our Orthopedic reporting unit for impairment as of March 31, 2007. The fair value of the reporting unit was based on both an income approach and market approach, and was determined to be below its carrying value. We then determined the implied fair value of goodwill by determining the fair value of all the assets and liabilities of the reporting unit. As a result of this process, we determined that the fair value of goodwill for the Orthopedic reporting unit was $50.0 million. The carrying value of goodwill was $98.4 million, resulting in an impairment charge of $48.4 million. In addition, our Trademark intangible asset, which has an indefinite life, was revalued in accordance with SFAS 142 using a relief from royalty method. The fair value of the Trademark was determined to be $29.4 million. The carrying value of the Trademark was $33.0 million, resulting in an impairment charge of $3.6 million.
The Company reports all amortization expense related to intangible assets on a separate line in our condensed consolidated statement of operations. For the three and nine months ended September 30, 2008 and 2007, the Company incurred amortization expense related to intangible assets which related to cost of sales and selling, general and administrative expenses as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2008 | September 30, 2007 | September 30, 2008 | September 30, 2007 | ||||||||||||
Cost of sales | $ | 497 | $ | 497 | $ | 1,491 | $ | 1,500 | |||||||
Selling, general and administrative | 3,238 | 3,238 | 9,714 | 10,271 | |||||||||||
Total amortization | $ | 3,735 | $ | 3,735 | $ | 11,205 | $ | 11,771 |
3. Stock-Based Compensation
Employees of the Company have been granted nonqualified stock options under the 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. The plan generally requires exercise of stock options within 10 years of grant. Vesting is determined in the applicable stock option agreement and generally occurs either in equal annual amounts over five years from date of grant (“Time-Based”), or upon the attainment of certain performance targets over a five-year period (“Performance-Based”). The total number of shares authorized under the plan is 14,374,633. Shares issued by Accellent Holdings Corp. (“AHC”) upon exercise are satisfied from shares authorized for issuance, and are not from treasury shares.
As a result of the Transaction, certain employees of the Company exchanged fully vested stock options to acquire common shares of the Company for 4,901,107 fully vested stock options, or “Roll-Over” options, of AHC. The Company may at its option elect to repurchase the Roll-Over options at fair market value from terminating employees within 60 days of termination and provide employees with settlement options to satisfy tax obligations in excess of minimum withholding rates. As a result of these features, Roll-Over options are recorded as a liability under SFAS No. 123R, “Share Based Payment” (“SFAS 123R”), until such options are exercised, forfeited, expired or settled. In accordance with SFAS 123R, the liability for Roll-Over options is recorded at fair value. During the nine months ended September 30, 2008, the carrying value of the Roll-Over option liability decreased by $4.9 million due primarily to the exercise and settlement of certain options awards by terminating employees. As a result of the exercise of Roll-Over options during the nine months ended September 30, 2008, the Company was required to repurchase 1,119,249 shares at a cost of $1,983,774 to allow former employees to satisfy tax obligations. The non-cash shares repurchased were net settled with the employees, with the company paying the employee's tax withholdings to the tax authorities on their behalf. During the three months ending September 30, 2008 there were no exercises of Roll-Over options.
The table below summarizes the activity relating to the Roll-Over options during the nine months ended September 30, 2008:
Amount of Liability | Roll-Over Shares Outstanding | ||||||
Balance at January 1, 2008 | $ | 6,506,553 | 2,624,673 | ||||
Shares repurchased | (1,983,774 | ) | (1,119,249 | ) | |||
Shares exercised | (3,157,923 | ) | (803,738 | ) | |||
Shares forfeited | (143,885 | ) | (82,220 | ) | |||
Fair value adjustment of liability | 337,693 | — | |||||
Balance at September 30, 2008 | $ | 1,558,664 | 619,466 |
The Company’s Roll-Over options have an exercise price of $1.25, and had a fair value of $5.00 at the date of the Transaction. At September 30, 2008 and December 31, 2007, the Roll-Over options had a fair value of $2.52 and $2.48, respectively, based on the Black-Scholes option-pricing model using the following weighted average assumptions:
As of | As of | |||
September 30, | December 31, | |||
2008 | 2007 | |||
Expected term to exercise | 2.6 years | 2.9 years | ||
Expected volatility | 24.79 | % | 23.90 | % |
Risk-free rate | 2.14 | % | 3.18 | % |
Dividend yield | 0 | % | 0 | % |
The Black-Scholes option pricing model used to value the Roll-Over options, Time-Based and Performance-Based options includes an estimate of the fair value of AHC common stock. The fair value of AHC common stock is determined by the Board of Directors of AHC at each stock measurement date based on a variety of factors, including the Company’s financial position, historical financial performance, projected financial performance, valuations of publicly traded peer companies, the illiquid nature of the common stock and arm’s length sales of AHC common stock, if any. Third party valuations are utilized periodically, no less frequently than annually, to validate assumptions made. At September 30, 2008 the Board of Directors of AHC has estimated the fair value of AHC common stock at $3.50 per share.
Expected term to exercise is based on the simplified method as provided by SAB No. 110 “Share Based Payment,” (“SAB 110”). The Company and its parent company have no historical volatility since their shares have never been publicly traded. Accordingly, the volatility used has been estimated by management using volatility information from a peer group of publicly traded companies. The risk free rate is based on the U.S. Treasury rate for notes with a term equal to the option’s expected term. The dividend yield assumption of 0% is based on the Company’s history of not paying dividends on common shares. The requisite service period is five years from the date of grant.
For the three months ended September 30, 2008, the Company recorded employee stock-based compensation expense of $1,225,901 including $64,744 recorded within cost of sales and $1,161,157 recorded within selling, general and administrative expenses. For the nine months ended September 30, 2008, the Company recorded employee stock-based compensation expense of $1,721,658 including $76,731 recorded within cost of sales and $1,644,927 recorded within selling, general and administrative expenses. Employee stock-based compensation expense for the three and nine months ended September 30, 2008 related primarily to time-based options and also includes expense related to restricted stock awards of $56,083 and $192,583, respectively. Compensation expense related to Performance-Based options is recorded when the achievement of performance targets is considered probable. At September 30, 2008 management estimated that it is probable that the Company will achieve the 2008 performance target. For the three and nine months ended September 30, 2008, $498,923 has been recorded as stock-based compensation related to the vesting of performance based options, which is included in the totals noted above.
Stock option activity during the nine months ended September 30, 2008 was as follows:
2005 Equity Plan | Roll-Over Options | ||||||||||
Number of shares | Weighted average exercise price | Number of Shares | Weighted average exercise price | ||||||||
Outstanding at January 1, 2008 | 2,923,860 | $ | 4.08 | 2,624,673 | $ | 1.25 | |||||
Granted | 4,172,500 | 3.00 | — | — | |||||||
Exercised/ repurchased | — | — | (1,922,987 | ) | 1.25 | ||||||
Forfeited | (450,815 | ) | 4.61 | (82,220 | ) | — | |||||
Outstanding at September 30, 2008 | 6,645,545 | $ | 3.14 | 619,466 | $ | 1.25 | |||||
Exercisable at September 30, 2008 | 202,609 | $ | 4.98 | 619,466 | $ | 1.25 |
As of September 30, 2008, the weighted average remaining contractual life of options granted under the 2005 Equity Plan was 8.9 years. Options outstanding under the 2005 Equity Plan had an aggregate intrinsic value of $2.4 million at September 30, 2008.
As of September 30, 2008, the weighted average remaining contractual life of the Roll-Over options was 3.7 years. The aggregate intrinsic value of the Roll-Over options was $1.1 million as of September 30, 2008. The total intrinsic value of Roll-Over options settled during the nine months ended September 30, 2008 was $3.4 million.
As of September 30, 2008, the Company had approximately $2.4 million of unearned stock-based compensation expense that will be recognized over approximately 3.8 years based on the remaining weighted average vesting period of all outstanding stock options.
At September 30, 2008, 7,729,088 shares are available to grant under the 2005 Equity Plan For Key Employees of Accellent Holdings Corp.
During the three months ended September 30, 2008, the Company recorded $90,000 of non-employee stock based compensation, including $30,000 of AHC phantom stock earned by directors of AHC in accordance with the Directors’ Deferred Compensation Plan and $60,000 earned by a third party retained search for executive recruitment services and Capstone Consulting (“Capstone”) for integration consulting services. For a further discussion of Capstone, see Note 11.
During the nine months ended September 30, 2008, the Company recorded $924,000 of non-employee stock-based compensation, including $90,000 of AHC phantom stock earned by directors of AHC in accordance with the Directors’ Deferred Compensation Plan, $705,000 of stock paid to Capstone for integration consulting services and $129,000 paid to a third party retained search firm.
The unvested balance of restricted stock at December 31, 2007 was 130,000 shares. During the nine months ended September 30, 2008 the Company granted 225,000 shares of restricted stock. Total non-cash compensation expense related to restricted stock awards during the three and nine months ended September 30, 2008 was approximately $53,000 and $189,000, respectively. The expense associated with restricted stock grants is amortized over one to five years as the shares vest. Activity of unvested restricted stock for the nine months ended September 30, 2008 was as follows:
Shares of Restricted Stock | Weighted Average Fair Value | ||||
Unvested balance of restricted stock at January 1, 2008 | 130,000 | $3.00 | |||
Restricted stock granted | 225,000 | $3.00 | |||
Restricted stock vested | (56,000 | ) | $3.00 | ||
Unvested balance of restricted stock at September 30, 2008 | 299,000 | $3.00 |
4. Restructuring
In February 2008, the Company eliminated 102 positions across both manufacturing and administrative functions as part of an effort to reduce costs. All affected employees were offered severance benefits. As a result of this action, the Company recorded $1.6 million in restructuring charges during the nine months ended September 30, 2008.
In June 2008, the Company’s Board of Directors approved a plan of closure with respect to the Company’s manufacturing facility in Memphis, Tennessee. The facility was closed and sold on October 9, 2008. In connection with the plan, a majority of the employees were terminated on or about September 30, 2008. All affected employees were offered both stay-bonuses as well as severance benefits to be received upon termination of employment, should they remain with the Company through their proposed termination date. The total one-time termination benefits total approximately $0.8 million and were recorded over the remaining service period as employees were required to stay through their termination date to receive the benefits. During the three months and nine months ended September 30, 2008, the Company recorded $0.8 and $0.9 million, respectively, of costs related to these one-time termination benefits.
The Company performed an impairment assessment related to equipment at the facility and as a result, recorded $0.2 million of write-downs to fair value for machinery and equipment and $0.5 million related to the property and building to record it at its estimated fair value of approximately $1.1 million. These impairment charges are presented as an element of the restructuring charge in the accompanying unaudited condensed consolidated financial statements. On October 9, 2008 the sale of the property and building was completed for substantially the estimated selling price to an unrelated third party.
The following table summarizes the recorded liabilities and activity related to restructuring activities for the nine months ended September 30, 2008 (in thousands):
Severance | Other costs | Total | ||||||||||
Balance at January 1, 2008 | $ | 132 | $ | 69 | $ | 201 | ||||||
Restructuring charges incurred | 2,455 | — | 2,455 | |||||||||
Payments | (1,537) | — | (1,537 | ) | ||||||||
Balance at September 30, 2008 | $ | 1,050 | $ | 69 | $ | 1,119 |
All restructuring actions have been completed and accrued restructuring costs at September 30, 2008 are expected to be paid in cash within twelve months.
5. Comprehensive Loss
Comprehensive loss represents net loss plus the results of any changes in stockholder's equity related to currency translation and changes in the carrying value of the effective portion of interest rate hedging instruments. For the three and nine months ended September 30, 2008 and 2007, the Company recorded comprehensive income (loss) as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||
September 30, 2008 | September 30, 2007 | September 30, 2008 | September 30, 2007 | |||||||||||
Net loss | $ | (849 | ) | $ | (8,132 | ) | $ | (9,819 | ) | $ | (97,968 | ) | ||
Effect of interest rate hedging instruments | 414 | (3,630) | 355 | (2,249 | ) | |||||||||
Cumulative translation adjustments | (2,636) | 1,080 | (941) | 1,437 | ||||||||||
Comprehensive loss | $ | (3,071) | $ | (10,682 | ) | $ | (10,405 | ) | $ | (98,780 | ) |
6. Inventories, net
Inventories at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):
September 30, 2008 | December 31, 2007 | |||||||
Raw materials | $ | 20,507 | $ | 22,229 | ||||
Work-in-process | 29,133 | 23,916 | ||||||
Finished goods | 19,152 | 21,254 | ||||||
Total | $ | 68,792 | $ | 67,399 |
7. Long-term debt
Long-term debt at September 30, 2008 and December 31, 2007 consisted of the following (in thousands):
September 30, 2008 | December 31, 2007 | |||||||
Amended Credit Agreement: | ||||||||
Term loan, interest at 5.29% and 7.79%, respectively | $ | 389,000 | $ | 392,000 | ||||
Revolving loan: | ||||||||
Interest at 6.50% and 8.75%, respectively | 8,000 | 5,000 | ||||||
Interest at 6.08% and 7.35%, respectively | 8,000 | 22,000 | ||||||
Senior subordinated notes maturing December 1, 2013, interest at 10.5% | 305,000 | 305,000 | ||||||
Financing of insurance premiums payable through 2008, interest at 6.5% | 179 | |||||||
Capital lease obligations | 46 | 8 | ||||||
Total debt | 710,046 | 724,187 | ||||||
Less—unamortized discount on senior subordinated notes | (2,608 | ) | (2,986 | ) | ||||
Less—current portion | (4,009 | ) | (4,187 | ) | ||||
Long-term debt, excluding current portion | $ | 703,429 | $ | 717,014 |
The Company’s senior secured credit facility, as amended on April 27, 2007, (the “Amended Credit Agreement”) includes up to $75.0 million available under a revolving credit facility. During the three months ended September 30, 2008, a member of the Company’s lending syndicate for its Amended Credit Agreement entered bankruptcy proceedings under the United States bankruptcy protection provisions. That member’s commitment under the revolving credit facility totaled $8.0 million. The Company has not received notice regarding this member’s commitment, however, we believe that the total amount of this member’s commitment may not be available for future borrowing under the revolver. During the nine months ended September 30, 2008, the Company borrowed $39.0 million in revolving credit loans and repaid $50.0 million in revolving credit loans under the Amended Credit Agreement. As of September 30, 2008 the outstanding balance on the revolving credit facility loan was $16.0 million, while $6.8 million of the revolving credit facility was supporting the Company’s letters of credit, leaving $44.2 million available for additional borrowings and/or letters of credit.
The Company has the option to select borrowing rates for the revolver portion of the Amended Credit Agreement at the Alternative Bank Rate (the “ABR”), as defined under the Amended Credit Agreement as the greater of the Prime Rate or Federal Funds rate plus 0.5%, or LIBOR. As of September 30, 2008 the outstanding revolver balance of $16.0 million included $8.0 million at the ABR rate of 6.5% and $8.0 million at the LIBOR rate of 6.08%. As of December 31, 2007 the outstanding revolver balance of $27.0 million included $5.0 million at the ABR rate of 8.75% and $22.0 million at the LIBOR rate of 7.35%.
Interest expense, net, as presented in the statement of operations for the three months ended September 30, 2008 and 2007 includes interest income of $32,186 and $36,291, respectively.
Borrowings under the Amended Credit Agreement have variable interest rates. The Company has entered into interest rate swap and collar agreements to mitigate exposures to changes in cash flows from movements in variable interest rates. The interest rate swap agreement was designated as a cash flow hedge effective November 30, 2006. Upon designation as an accounting hedge, changes in the fair value of the interest rate swap which relate to the effective portion of the hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged interest expense affects earnings. Changes in the fair value of the interest rate swap which relate to the ineffective portion of the interest rate swap are recorded in other income (expense).
During the three months ended September 30, 2008 the interest rate swap agreement did not meet the Company’s method for assessing hedge effectiveness, as defined by management at the time the instrument was designated as a cash flow hedge on November 30, 2006. The Company’s policy requires the use of the Hypothetical Derivative Method as defined by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” and further defined by Derivatives Implementation Group Issue No. G-7 (“DIG G-7”). As a result of the hedge ineffectiveness experienced during the three months ended September 30, 2008, the Company has recognized in earnings the full change in fair value of the derivative instrument for the three months ended September 30, 2008. The Company is required to amortize to earnings over the remaining contractual term of the swap the unrealized losses accumulated during the period of historical effectiveness through June 30, 2008, when the hedge was last assessed as being effective. These accumulated losses amount to $4.1 million and were previously recorded in Accumulated Other Comprehensive Loss. The mark to market amount recognized in earnings for the three months ended September 30, 2008 totaled a gain of $41,108 and is recorded within Loss on Derivative Instruments in the accompanying unaudited condensed consolidated statement of operations. The amount recorded during the three months ended September 30, 2008 related to the amortization of amounts previously recorded within Accumulated Other Comprehensive Loss through June 30, 2008 totaled $413,656. The fair value of the interest rate swap liability at September 30, 2008 was $5.1 million. Management believes that the hedge will be effective in the future in accordance with its method for measuring hedge effectiveness.
The interest rate collar agreement has not been designated as a cash flow hedge. Therefore, changes in the fair value of the interest rate collar are recorded as other income (expense) as the instrument is marked to market. For the nine months ended September 30, 2008, the Company recorded other income of $11,510 relating to the change in fair value of the interest rate collar. The fair value of the interest rate collar liability at September 30, 2008 was $0.3 million.
8. Income taxes
Income tax benefit for the three months ended September 30, 2008 was $0.7 million and results from adjustments to the Company’s projected effective tax rate for the full year 2008 following a legal entity re-organization on July 1, 2008 and accounting for the deferred taxes associated with the goodwill basis difference as an element of the effective rate. Income tax benefit includes $0.3 million of deferred income tax benefit for differences in the book and tax treatment of goodwill, $0.2 million in foreign tax benefit and $0.3 million of state tax benefit. Income tax expense for the three months ended September 30, 2007 was $1.2 million and included $0.7 million of deferred income taxes for differences in the book and tax treatment of goodwill, $0.2 million of foreign income taxes and $0.4 million of state income taxes.
Income tax expense for the nine months ended September 30, 2008 was $3.4 million and included $1.5 million of deferred income taxes for the differences in the book and tax treatment of goodwill, $1.3 million of foreign income taxes and $.4 million of state income taxes. Income tax expense for the nine months ended September 30, 2007 was $2.9 million and included $2.2 million of deferred income taxes for the differences in the book and tax treatment of goodwill, $1.7 million of foreign income taxes and $0.3 million of state 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 to those deferred tax assets. SFAS No.109, “Accounting for Income Taxes,” prevents the netting of deferred tax assets with deferred tax liabilities related to certain intangible assets when determining the need for a valuation allowance. The Company has $20.5 million and $17.7 million of deferred tax liabilities included in other long-term liabilities on its consolidated condensed balance sheet as of September 30, 2008 and December 31, 2007, respectively, relating to certain intangible assets.
9. Capital Stock
The Company has 50,000,000 shares of common stock authorized and 1,000 shares issued and outstanding, $.01 par value per share. All outstanding shares are owned by Accellent Acquisition Corp., which is owned by Accellent Holdings Corp.
The following table summarizes the activity for amounts recorded as additional paid-in capital for the nine months ended September 30, 2008 (in thousands):
Beginning balance, January 1, 2008 | $ | 628,368 | |
Exercise of stock options | 3,158 | ||
Issuance of stock to non-employees | 934 | ||
Issuance of stock to employees | 138 | ||
Forfeiture of employee stock options | 144 | ||
Restricted stock awards | 153 | ||
Stock-based compensation | 1,267 | ||
Ending balance, September 30, 2008 | $ | 634,162 |
10. Related Party Transactions
In connection with the Transaction, the Company entered into a management services agreement with KKR pursuant to which KKR will provide certain structuring, consulting and management advisory services. Pursuant to this agreement, KKR will receive an annual advisory fee of $1.0 million, such amount to increase by 5% per year. During the three and nine months ended September 30, 2008, the Company incurred KKR management fees and related expenses of $0.3 million and $0.8 million, respectively. During the three and nine months ended September 30, 2007, the Company incurred KKR management fees and related expenses of $0.3 million and $0.8 million, respectively. As of September 30, 2008, the Company owed KKR $0.6 million for unpaid management fees which are included in current accrued expenses on the condensed consolidated balance sheet. In addition, Capstone Consulting LLC and certain of its affiliates (“KKR-Capstone”), provide integration consulting services to the Company. Although neither KKR nor any entity affiliated with KKR owns any equity interest in KKR-Capstone, KKR has provided financing to KKR-Capstone prior to January 1, 2007. For the three and nine months ended September 30, 2008, the Company incurred $0.2 million and $1.1 million, respectively, of integration consulting fees for the services of KKR-Capstone. During the three and nine months ended September 30, 2007, the Company incurred $0.5 million and $1.6 million, respectively, of integration consulting fees for the services of KKR-Capstone. As of September 30, 2008 the Company owed KKR-Capstone $0.5 million, all of which is to be paid in common stock of AHC and is included in other long-term liabilities on the unaudited condensed consolidated balance sheet.
The Company sells medical device equipment to Biomet, Inc., which in September 2007 became privately owned by a consortium of private equity sponsors, including KKR. Sales to Biomet, Inc. during the three and nine months ended September 30, 2008 totaled $0.4 million and $2.8 million, respectively. At September 30, 2008, accounts receivable from Biomet aggregated $0.2 million.
11. Contingencies
On July 23, 2007, the Company was notified by the Citizens for Pennsylvania’s Future and Montgomery Neighbors for a Clean Environment of their intent to file a citizen suit against us and an unrelated party based upon alleged violations of the Pennsylvania Hazardous Site Cleanup Act. To date, no such suit has been filed. Furthermore, on November 6, 2007, People for Clean Air and Water (“PAW”) announced their intention to file a citizen suit against the Company and two unrelated parties based upon alleged violations of the United States Clean Air Act. On March 31, 2008, the Company was served in a lawsuit brought by a member of PAW. The complaint alleged violations related to the emission of trichloroethylene (“TCE”) by our facility in Collegeville, Pennsylvania and seeks a $300 million award. Such emissions are authorized by permit. In July 2008 the plaintiff withdrew the lawsuit. The Company believes that we have complied with all applicable emission limits for TCE, and we intend to vigorously defend this and any other related litigation.
In a separate matter, 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. The Company’s 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 begun to implement a process that will reduce our TCE emissions generated by our facility in Collegeville, PA. However, this process will not reduce our TCE emissions to the levels required by the new standard. If the narrow tube exemption were no longer available to us, we may not be able to reduce our Collegeville facility TCE emissions to the levels required by the new EPA standard, resulting in a reduction in our ability to manufacture narrow tubes, which could have a material adverse impact on our financial position and results of operations.
12. Fair Value of Financial Instruments
For assets and liabilities recorded at fair value on a recurring basis during the period, fair value has been determined in accordance with the provisions of SFAS 157, As discussed in Note 3, 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 level 3 financial instrument is also contained in Note 3. The Company uses an income approach to value the assets and liabilities for outstanding derivative contracts, primarily interest rate swap and collar contracts. These contracts are valued using an income approach which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using current market information as of the reporting date, such as prevailing interest rates. As discussed in Note 1 above, the Company has only adopted the provisions of SFAS 157 with respect to its financial assets and liabilities that are measured at fair value within the unaudited condensed consolidated financial statements. The Company has deferred the application of the provisions of this statement related to its non-financial assets and liabilities in accordance with FSP 157-2. The following table provides a summary of the fair values of assets and liabilities in accordance with SFAS 157:
Fair Value Measurements at September 30, 2008 using | ||||||||||||||||
September 30, 2008 | 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 | $ | 1,559 | $ | — | $ | — | $ | 1,559 | ||||||||
Liability for derivative instruments | $ | 5,413 | $ | — | $ | 5,413 | $ | — |
13. Supplemental Guarantor Condensed Consolidating Financial Statements
In connection with Accellent Inc.’s issuance of the Notes, all of its domestic subsidiaries (the “Subsidiary Guarantors”) guaranteed on a joint and several, full and unconditional basis, the repayment by Accellent Inc. of such Notes. Certain foreign subsidiaries of Accellent Inc. (the “Non-Guarantor Subsidiaries”) have not guaranteed such indebtedness.
The following tables present the unaudited consolidating statements of operations for three and nine months ended September 30, 2008 and 2007 of Accellent Inc. (“Parent”), the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, the unaudited condensed consolidating balance sheets as of September 30, 2008 and December 31, 2007, and the unaudited condensed consolidating statements of cash flows for the nine months ended September 30, 2008 and 2007.
Unaudited Consolidating Statements of Operations —
Three months ended September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
Net sales | $ | — | $ | 127,348 | $ | 7,772 | $ | (450 | ) | $ | 134,670 | ||||
Cost of sales | — | 95,588 | 4,893 | (450 | ) | 100,031 | |||||||||
Selling, general and administrative expenses | 30 | 14,728 | 838 | — | 15,596 | ||||||||||
Research and development expenses | — | 526 | 225 | — | 751 | ||||||||||
Restructuring charges | — | 794 | — | — | 794 | ||||||||||
Amortization of intangibles | 3,735 | — | — | — | 3,735 | ||||||||||
(Loss) income from operations | (3,765 | ) | 15,712 | 1,816 | — | 13,763 | |||||||||
Interest (expense) income, net | (16,015 | ) | (16 | ) | 5 | — | (16,026 | ) | |||||||
Gain on derivative instruments | (171 | ) | — | — | — | (171 | ) | ||||||||
Other (expense) income | — | 92 | 832 | — | 924 | ||||||||||
Equity in earnings of affiliates | 19,102 | 2,059 | — | (21,161 | ) | — | |||||||||
Income tax (expense) benefit | — | 1,255 | (594 | ) | — | 661 | |||||||||
Net (loss) income | $ | (849 | ) | $ | 19,102 | $ | 2,059 | $ | (21,161 | ) | $ | (849 | ) |
Unaudited Consolidating Statements of Operations —
Three months ended September 30, 2007 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
Net sales | $ | — | $ | 112,309 | $ | 7,313 | $ | (226 | ) | $ | 119,396 | ||||
Cost of sales | — | 85,500 | 4,630 | (226 | ) | 89,904 | |||||||||
Selling, general and administrative expenses | 37 | 13,645 | 713 | — | 14,395 | ||||||||||
Research and development expenses | — | 455 | 127 | — | 582 | ||||||||||
Restructuring (benefit) charges | — | (7 | ) | — | — | (7 | ) | ||||||||
Amortization of intangibles | 3,735 | — | — | — | 3,735 | ||||||||||
Impairment of goodwill and other intangible assets | — | — | — | — | — | ||||||||||
(Loss) income from operations | (3,772 | ) | 12,716 | 1,843 | — | 10,787 | |||||||||
Interest expense, net | (17,139 | ) | (26 | ) | — | — | (17,165 | ) | |||||||
Loss on derivative instruments | (122 | ) | — | — | — | (122 | ) | ||||||||
Other (expense) income | — | (516 | ) | 96 | — | (420 | ) | ||||||||
Equity in earnings of affiliates | 12,901 | 1,557 | — | (14,458 | ) | — | |||||||||
Income tax (expense) benefit | — | (830) | (382) | — | (1,212) | ||||||||||
Net (loss) income | $ | (8,132 | ) | $ | 12,901 | $ | 1,557 | $ | (14,458 | ) | $ | (8,132 | ) |
Unaudited Consolidating Statements of Operations —
Nine months ended September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
Net sales | $ | — | $ | 375,296 | $ | 24,908 | $ | (776 | ) | $ | 399,428 | |||||
Cost of sales | — | 279,150 | 15,624 | (776 | ) | 293,998 | ||||||||||
Selling, general and administrative expenses | 90 | 42,918 | 2,525 | — | 45,533 | |||||||||||
Research and development expenses | — | 1,561 | 670 | — | 2,231 | |||||||||||
Restructuring charges | — | 3,165 | — | — | 3,165 | |||||||||||
Amortization of intangibles | 11,205 | — | — | — | 11,205 | |||||||||||
(Loss) income from operations | (11,295 | ) | 48,502 | 6,089 | — | 43,296 | ||||||||||
Interest expense, net | (49,253 | ) | (120 | ) | 10 | — | (49,363 | ) | ||||||||
Loss on derivative instruments | (528 | ) | — | — | — | (528 | ) | |||||||||
Other (expense) income | — | (283 | ) | 419 | — | 136 | ||||||||||
Equity in earnings of affiliates | 51,257 | 4,660 | — | (55,917 | ) | — | ||||||||||
Income tax (expense) benefit | — | (1,502 | ) | (1,858 | ) | — | (3,360 | ) | ||||||||
Net (loss) income | $ | (9,819 | ) | $ | 51,257 | $ | 4,660 | $ | (55,917 | ) | $ | (9,819 | ) |
Unaudited Consolidating Statements of Operations —
Nine months ended September 30, 2007 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
Net sales | $ | — | $ | 329,747 | $ | 20,775 | $ | (561 | ) | $ | 349,961 | ||||
Cost of sales | — | 246,618 | 12,950 | (561 | ) | 259,007 | |||||||||
Selling, general and administrative expenses | 84 | 36,495 | 2,043 | — | 38,622 | ||||||||||
Research and development expenses | — | 1,574 | 359 | — | 1,933 | ||||||||||
Restructuring charges | — | 701 | — | — | 701 | ||||||||||
Amortization of intangibles | 11,771 | — | — | — | 11,771 | ||||||||||
Impairment of goodwill and other intangible assets | 82,340 | — | — | — | 82,340 | ||||||||||
(Loss) income from operations | (94,195 | ) | 44,359 | 5,423 | — | (44,413 | ) | ||||||||
Interest expense, net | (50,054 | ) | (25) | — | — | (50,079 | ) | ||||||||
Loss on derivative instruments | (64 | ) | — | — | — | (64 | ) | ||||||||
Other (expense) income | — | (763 | ) | 248 | — | (515 | ) | ||||||||
Equity in earnings of affiliates | 46,345 | 4,405 | — | (50,750 | ) | — | |||||||||
Income tax (expense) benefit | — | (1,630 | ) | (1,267) | — | (2,897 | ) | ||||||||
Net (loss) income | $ | (97,968 | ) | $ | 46,346 | $ | 4,404 | $ | (50,750 | ) | $ | (97,968 | ) |
Unaudited Condensed Consolidating Balance Sheets
September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
Cash and cash equivalents | $ | — | $ | 13,192 | $ | 2,401 | $ | — | $ | 15,593 | |||||
Receivables, net | — | 51,994 | 2,981 | (467 | ) | 54,508 | |||||||||
Inventories | — | 65,144 | 3,648 | — | 68,792 | ||||||||||
Prepaid expenses and other | 19 | 3,326 | 231 | — | 3,576 | ||||||||||
Total current assets | 19 | 133,656 | 9,261 | (467 | ) | 142,469 | |||||||||
Property, plant and equipment, net | — | 118,401 | 10,491 | — | 128,892 | ||||||||||
Intercompany receivable | — | 65,653 | 14,200 | (79,853 | ) | — | |||||||||
Investment in subsidiaries | 271,882 | 26,423 | — | (298,305 | ) | — | |||||||||
Goodwill | 629,854 | — | — | — | 629,854 | ||||||||||
Intangibles, net | 198,240 | — | — | — | 198,240 | ||||||||||
Deferred financing costs and other assets | 16,939 | 1,144 | 151 | — | 18,234 | ||||||||||
Total assets | $ | 1,116,934 | $ | 345,277 | $ | 34,103 | $ | (378,625 | ) | $ | 1,117,689 | ||||
Current portion of long-term debt | $ | 4,000 | $ | 9 | $ | — | $ | — | $ | 4,009 | |||||
Accounts payable | — | 25,138 | 1,291 | (311 | ) | 26,118 | |||||||||
Accrued liabilities | 14,851 | 23,304 | 4,133 | — | 42,288 | ||||||||||
Total current liabilities | 18,851 | 48,451 | 5,424 | (311 | ) | 72,415 | |||||||||
Note payable and long-term debt | 783,401 | 37 | — | (80,009 | ) | 703,429 | |||||||||
Other long-term liabilities | 7,298 | 24,907 | 2,256 | — | 34,461 | ||||||||||
Total liabilities | 809,550 | 73,395 | 7,680 | (80,320 | ) | 810,305 | |||||||||
Equity | 307,384 | 271,882 | 26,423 | (298,305 | ) | 307,384 | |||||||||
Total liabilities and equity | $ | 1,116,934 | $ | 345,277 | $ | 34,103 | $ | (378,625 | ) | $ | 1,117,689 |
Unaudited Condensed Consolidating Balance Sheets
December 31, 2007 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
Cash and cash equivalents | $ | — | $ | 3,976 | $ | 1,712 | $ | — | $ | 5,688 | |||||
Receivables, net | — | 47,277 | 3,723 | (39 | ) | 50,961 | |||||||||
Inventories | — | 63,733 | 3,666 | — | 67,399 | ||||||||||
Prepaid expenses and other | — | 4,728 | 243 | — | 4,971 | ||||||||||
Total current assets | — | 119,714 | 9,344 | (39 | ) | 129,019 | |||||||||
Property, plant and equipment, net | — | 121,905 | 11,140 | — | 133,045 | ||||||||||
Intercompany receivable | — | 19,451 | 7,695 | (27,146 | ) | — | |||||||||
Investment in subsidiaries | 218,869 | 22,258 | — | (241,127 | ) | — | |||||||||
Goodwill | 629,854 | — | — | — | 629,854 | ||||||||||
Intangibles, net | 209,444 | — | — | — | 209,444 | ||||||||||
Deferred financing costs and other assets | 19,758 | 1,117 | 128 | — | 21,003 | ||||||||||
Total assets | $ | 1,077,925 | $ | 284,445 | $ | 28,307 | $ | (268,312 | ) | $ | 1,122,365 | ||||
Current portion of long-term debt | $ | 4,000 | $ | 187 | $ | — | $ | — | $ | 4,187 | |||||
Accounts payable | — | 22,082 | 1,440 | 49 | 23,571 | ||||||||||
Accrued liabilities | 5,600 | 18,226 | 2,442 | — | 26,268 | ||||||||||
Total current liabilities | 9,600 | 40,495 | 3,882 | 49 | 54,026 | ||||||||||
Note payable and long-term debt | 744,248 | — | — | (27,234 | ) | 717,014 | |||||||||
Other long-term liabilities | 12,082 | 25,081 | 2,167 | — | 39,330 | ||||||||||
Total liabilities | 765,930 | 65,576 | 6,049 | (27,185 | ) | 810,370 | |||||||||
Equity | 311,995 | 218,869 | 22,258 | (241,127 | ) | 311,995 | |||||||||
Total liabilities and equity | $ | 1,077,925 | $ | 284,445 | $ | 28,307 | $ | (268,312 | ) | $ | 1,122,365 |
Unaudited Condensed Consolidating Statements of Cash Flows -
Nine months ended September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities | $ | (35,852 | ) | $ | 65,893 | $ | 8,479 | $ | — | $ | 38,520 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Purchase of property and equipment | — | (11,765 | ) | (1,184 | ) | — | (12,949 | ) | ||||||||||||
Proceeds from sale of equipment | — | 470 | 6 | — | 476 | |||||||||||||||
Net cash used in investing activities | — | (11,295 | ) | (1,178 | ) | — | (12,473 | ) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from long-term debt | 39,000 | — | — | — | 39,000 | |||||||||||||||
Principal payments on long-term debt | (53,000 | ) | (142 | ) | — | — | (53,142 | ) | ||||||||||||
Intercompany receipts (advances) | 51,698 | (45,192 | ) | (6,506 | ) | — | — | |||||||||||||
Issuance of stock | 138 | — | — | 138 | ||||||||||||||||
Repurchase of parent company stock | (1,984 | ) | — | — | — | (1,984 | ) | |||||||||||||
Cash flows provided by (used in) financing activities | 35,852 | (45,334 | ) | (6,506 | ) | — | (15,988 | ) | ||||||||||||
Effect of exchange rate changes in cash | — | (48 | ) | (106 | ) | — | (154 | ) | ||||||||||||
Net increase in cash and cash equivalents | — | 9,216 | 689 | — | 9,905 | |||||||||||||||
Cash and cash equivalents, beginning of period | — | 3,976 | 1,712 | — | 5,688 | |||||||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 13,192 | $ | 2,401 | $ | — | $ | 15,593 |
Unaudited Consolidating Statements of Cash Flows—
Nine months ended September 30, 2007 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||
Net cash (used in) provided by operating activities | $ | (43,607 | ) | $ | 51,949 | $ | 5,509 | $ | — | $ | 13,851 | ||||
Cash flows from investing activities: | |||||||||||||||
Purchase of property and equipment | — | (16,668 | ) | (2,005 | ) | — | (18,673 | ) | |||||||
Proceeds from sale of equipment | — | 122 | — | — | 122 | ||||||||||
Net cash used in investing activities | — | (16,546 | ) | (2,005 | ) | — | (18,551 | ) | |||||||
Cash flows from financing activities: | |||||||||||||||
Proceeds from long-term debt | 44,000 | — | — | — | 44,000 | ||||||||||
Principal payments on long-term debt | (36,000 | ) | (11 | ) | — | — | (36,011 | ) | |||||||
Intercompany receipts (advances) | 37,264 | (34,016 | ) | (3,248 | ) | — | — | ||||||||
Deferred financing fees | (1,657 | ) | — | — | — | (1,657 | ) | ||||||||
Cash flows provided by (used in) financing activities | 43,607 | (34,027 | ) | (3,248 | ) | — | 6,332 | ||||||||
Effect of exchange rate changes in cash | — | 31 | 165 | — | 196 | ||||||||||
Net increase in cash and cash equivalents | — | 1,407 | 421 | — | 1,828 | ||||||||||
Cash and cash equivalents, beginning of year | — | 692 | 2,054 | — | 2,746 | ||||||||||
Cash and cash equivalents, end of period | $ | — | $ | 2,099 | $ | 2,475 | $ | — | $ | 4,574 |
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” 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 report on Form 10-K filed on March 31, 2008 with the Securities and Exchange Commission (File No. 333-130470) for the Company’s fiscal year ended December 31, 2007. 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,” “we,” “our” and “us” refer to Accellent Inc. and its consolidated subsidiaries, which were acquired pursuant to the Transaction (as described below).
Overview
We are a leading provider of outsourced precision manufacturing and engineering services in our target markets of 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 our sales efforts on leading companies in large and growing markets within the medical device industry including cardiology, endoscopy, orthopedics and drug delivery, among others. 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. While revenues 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 the first nine months of 2008, our 10 largest customers accounted for approximately 69% of revenues with three customers, Medtronic, Johnson & Johnson and Boston Scientific each accounting for greater than 10% of revenues. We expect net sales from our largest customers to continue to constitute a significant portion of our net sales in the future.
In November 2007 we re-aligned the Company to reflect our efforts to streamline our sales, quality, engineering and customer services into one centrally managed organization to better serve our customers, many of whom service multiple medical device markets. As a result of this realignment we have one operating and reportable segment which is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance. Prior to this re-alignment we had been organized into three reporting units to serve our primary target markets: cardiology, endoscopy and orthopedic. Our chief operating decision maker is our chief executive officer.
The Company tested the long-lived assets of our Orthopedic reporting unit for recoverability as of March 31, 2007 and determined that certain intangible assets were not recoverable since the expected future undiscounted cash flows attributable to its assets were below their respective carrying values. In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS 144”), we then determined the fair value of these intangible assets to be below their respective carrying values. The fair value of our Customer Base intangible was determined to be $7.6 million using an excess earnings approach. The carrying value of our Customer Base intangible was $37.7 million, resulting in an impairment charge of $30.1 million. The fair value of our Developed Technology intangible asset was determined to be $0.4 million using the relief from royalty method. The carrying value of our Developed Technology intangible was $0.6 million, resulting in an impairment charge of $0.2 million.
As a result of the triggering event within the Orthopedic reporting unit and in accordance with the requirements of SFAS 142, we also tested goodwill and other indefinite-lived intangible assets related to our Orthopedic reporting unit for impairment as of March 31, 2007. The fair value of the reporting unit was based on both an income approach and market approach, and was determined to be below its carrying value. We then determined the implied fair value of goodwill by determining the fair value of all the assets and liabilities of the Orthopedic reporting unit. As a result of this process, we determined that the fair value of goodwill for the Orthopedic reporting unit was $50.0 million. The carrying value of Orthopedic goodwill was $98.4 million, resulting in an impairment charge of $48.4 million. In addition, our Trademark intangible asset, which has an indefinite life, was revalued in accordance with SFAS 142 using a relief from royalty method. The fair value of the Trademark was determined to be $29.4 million. The carrying value of the Trademark was $33.0 million, resulting in an impairment charge of $3.6 million.
A summary of all charges for the impairment of goodwill and other intangible assets during the nine months ended September 30, 2007 is as follows (in thousands):
Intangible Asset | Impairment | ||
Goodwill | $ | 48,386 | |
Trademark | 3,600 | ||
Customer Base | 30,145 | ||
Developed Technology | 209 | ||
Total | $ | 82,340 |
Results of Operations
The following table sets forth percentages derived from the consolidated statements of operations for the three and nine months ended September 30, 2008 and 2007, presented as a percentage of net sales.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2008 | September 30, 2007 | September 30, 2008 | September 30, 2007 | |||||||||||||
STATEMENT OF OPERATIONS DATA: | ||||||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales | 74.3 | 75.3 | 73.6 | 74.0 | ||||||||||||
Gross profit | 25.7 | 24.7 | 26.4 | 26.0 | ||||||||||||
Selling, general and administrative expenses | 11.6 | 12.1 | 11.4 | 11.0 | ||||||||||||
Research and development expenses | 0.5 | 0.5 | 0.6 | 0.6 | ||||||||||||
Restructuring charges | 0.6 | 0.8 | 0.2 | |||||||||||||
Amortization of intangibles | 2.8 | 3.1 | 2.8 | 3.4 | ||||||||||||
Impairment of goodwill and other intangible assets | — | — | — | 23.5 | ||||||||||||
Income (loss) from operations | 10.2 | 9.0 | 10.8 | (12.7 | ) |
Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Net Sales
Net sales for the third quarter of 2008 were $134.7 million, an increase of $15.3 million, or 13%, compared to net sales of $119.4 million for the third quarter of 2007. The increase in net sales is attributable to increased demand for the Company’s products from many of our larger customers totaling approximately $10.0 million, and net price increases totaling approximately $5.2 million, primarily driven by passing through to our customers, increases in precious metal prices which do not benefit gross profit.
Gross Profit
Gross profit for the third quarter of 2008 was $34.6 million compared to $29.5 million for the third quarter of 2007. The $5.1 million increase in gross profit was a result of the increase in volume of net sales adding approximately $3.4 million to gross profit for the three months ended September 30, 2008 compared to the three months ended September 30, 2007, approximately $1.1 million of price increase impacting margin, approximately $0.2 million in manufacturing cost savings, and a favorable change in product mix increasing gross profit by approximately $0.4 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, were $15.6 million for the third quarter of 2008 compared to $14.4 million for the third quarter of 2007. The $1.2 million increase in SG&A expenses was primarily attributable to a difference in the amounts recorded for stock compensation. During the three months ended September 30, 2008, we recorded approximately $1.2 million in stock compensation expense, of which $0.5 million related to performance based stock awards. During the three months ended September 30, 2007, we recorded a reduction of expense, or credit, of $0.2 million related to stock compensation. In addition, during the three months ended September 30, 2008, sales commission costs increased approximately $0.2 million driven by the increase in net sales, and professional fees increased approximately $0.4 million compared to the three months ended September 30, 2007 as we invested in improvements to our manufacturing processes. These increases during the three months ended September 30, 2008 compared to the three months ended September 30, 2007 are offset by headcount related savings totaling $0.2 million, depreciation savings with lower capital spending year to date amounting to approximately $0.4 million, and lower overall discretionary spend amounting to approximately $0.2 million..
Research and Development Expenses
Research and development, or R&D, expenses for the three months ended September 30, 2008 were $0.8 million compared to $0.6 million for the three months ended September 30, 2007, primarily due to higher research material costs during the three months ended September 30, 2008.
Restructuring Charges
In June 2008, the Company announced a plan to close its manufacturing facility in Memphis, Tennessee. The facility was closed in October 2008. In connection with the closure, the Company provided both stay-bonuses and severance benefits to affected employees. The total one-time termination benefits are approximately $0.8 million and were recorded over the remaining service period as employees were required to stay through their termination date to receive benefits. During the three months ended September 30, 2008, the Company recorded $0.8 million of costs related to one-time termination benefits.
Interest Expense, net
Interest expense, net, decreased $1.2 million to $16 million for the third quarter of 2008, compared to $17.2 million for the third quarter of 2007. The decrease was primarily the result of lower interest rates, and lower revolver borrowings on our Amended Credit Agreement.
Derivative Instruments
We have entered into interest rate swap and collar agreements to reduce our exposure to variable interest rates on our term loan under our Amended Credit Agreement. During the three months ended September 30, 2008, we realized a $0.2 million loss on our derivative instruments compared to a $0.1 million loss during the three months ended September 30, 2007.
Income Tax Expense (Benefit)
Income tax benefit for the three months ended September 30, 2008 was $0.7 million and results from adjustments to the Company’s projected effective tax rate for the full year 2008 following a legal entity re-organization on July 1, 2008 and accounting for the deferred taxes associated with the goodwill basis difference as an element of the effective rate. Income tax benefit includes $0.3 million of deferred income tax benefit for differences in the book and tax treatment of goodwill, $0.2 million in foreign tax benefit, and $0.3 million of state tax benefit. Income tax expense for the three months ended September 30, 2007 was $1.2 million and included $0.7 million of deferred income taxes for differences in the book and tax treatment of goodwill, $0.2 million of foreign income taxes and $0.4 million of state income taxes.
Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Net Sales
Net sales for the nine months ended September 30, 2008 were $399.4 million, an increase of $49.4 million, or 14%, compared to net sales of $350.0 million for the nine months ended September 30, 2007. The increase in net sales is attributable to increased demand for the Company’s products from many of our larger customers totaling approximately $40.3 million and net price increases totaling approximately $9.1 million, primarily driven by passing through to our customers, increases in precious metal prices that do not benefit gross profit.
Gross Profit
Gross profit for the nine months ended September 30, 2008 was $105.4 million compared to $91.0 million for nine months ended September 30, 2007. The $14.4 million increase in gross profit was a result of the increase in volume of net sales adding approximately $13.2 million to gross profit for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, approximately $2.1 million of price increase impacting margin and approximately $5.0 million in manufacturing cost savings, offset by an unfavorable change in product mix decreasing gross profit by approximately $5.9 million.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $45.5 million for the first nine months of 2008 compared to $38.6 million for the first nine months of 2007. The $6.9 million increase in SG&A expenses was primarily attributable to a difference in the amounts recorded for stock compensation. During the nine months ended September 30, 2008, we recorded approximately $1.6 million in stock compensation expenses, of which $0.5 million related to performance based stock awards. During the nine months ended September 30, 2007, we recorded a reduction of expense, or credit, of $4.8 million related to stock compensation. In addition, during the nine months ended September 30, 2008, sales commission costs increased approximately $0.9 million driven by the increase in net sales, and labor and related costs increased approximately $1.6 million. These increases were offset by decreased professional fees totaling approximately $0.2 million, lower depreciation costs of $1.0 million and decreased discretionary spending totaling approximately $0.8 million.
Research and Development Expenses
Research and development expenses for the first nine months of 2008 were $2.2 million compared to $1.9 million for the first nine months of 2007.
Restructuring Charges
During the nine months ended September 30, 2008, the Company recorded $3.2 million of restructuring charges consisting of severance costs resulting from both the elimination of 102 positions in manufacturing and administrative functions as part of a company-wide program to reduce costs in February and the closure of the Company’s manufacturing facility in Memphis, Tennessee.
In connection with the closure of the Company’s Memphis facility, in addition to termination benefits, the Company evaluated the property and equipment for impairment. Approximately $0.2 million of machinery and equipment and $0.5 million for the property and building were written down to their fair value which is included as an element of the restructuring charge in the accompanying financial statements for the nine months ended September 30, 2008.
We recognized $0.7 million of restructuring charges during the first nine months of 2007 consisting almost entirely of severance costs to eliminate 18 positions in both manufacturing and administrative areas as part of a company-wide program to reduce costs and centralize certain administrative functions.
Interest Expense, net
Interest expense, net, decreased $0.7 million to $49.4 million for the nine months ended September 30, 2008, compared to $50.1 million for the nine months ended September 30, 2007. The decrease was primarily the result of lower interest rates on our Credit Agreement and lower overall borrowings on our revolver during the nine months ended September 30, 2008 compared to the corresponding period in 2007.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2008 was $3.4 million and included $1.5 million of deferred income taxes for the differences in the book and tax treatment of goodwill, $1.3 million of foreign income taxes and $0.4 million of state income taxes. Income tax expense for the nine months ended September 30, 2007 was $2.9 million and included $2.2 million of deferred income taxes for the differences in the book and tax treatment of goodwill, $1.7 million of foreign income taxes and $0.3 million of state income taxes. Income tax expenses for the nine months ended September 30, 2007 were partially offset by a deferred tax credit of $1.3 million due to the impairment charge of $3.6 million recorded for our Trademark intangible asset.
Derivative Instruments
We have entered into interest rate swap and collar agreements to reduce our exposure to variable interest rates on our term loan under our Amended Credit Agreement. During the nine months ended September 30, 2008, we realized a $0.5 million loss on our derivative instruments, comprised primarily of losses resulting from the changes in fair values of the instruments. During the nine months ended September 30, 2007, we realized $0.1 million of losses on our derivative instruments.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash flows from operations and borrowings under our Amended Credit Agreement, entered into in conjunction with the Transaction, which includes a $75.0 million revolving credit facility (“Revolver”) and a seven-year $400.0 million term facility. During the three months ended September 30, 2008, a member of the our lending syndicate for our Amended Credit Agreement entered bankruptcy proceedings under the United States bankruptcy protection provisions. That member's commitment under the revolving credit facility totaled $8.0 million. We have not received notice regarding this member’s commitment, however, we believe that the total amount of this member’s commitment may not be available for future borrowing under the revolver. We do not believe that any lack of availability of this member's committment would have a material impact on our liquidity. Additionally, we are able to borrow up to $100.0 million in additional term loans, with the approval of participating lenders.
At September 30, 2008, we had $6.8 million of letters of credit outstanding and $16.0 million of outstanding loans which reduced the amounts available under the revolving credit portion of our Amended Credit Agreement resulting in $44.2 million available under the Revolver, net of the $8.0 million reduction referred to above.
During the first nine months of 2008, cash provided by operating activities was $38.5 million compared to $13.9 million for the first nine months of 2007. The increase in cash provided by operating activities of approximately $24.6 million is primarily attributable to improvements in working capital utilization which increased cash provided by operating activities by approximately $9.6 million, $15.0 million of increased cash generated from operating profit and fewer settlements of employee roll-over stock options.
During the first nine months of 2008, cash used in investing activities totaled $12.5 million compared to $18.6 million for the first nine months of 2007. The decrease in cash used in investing activities was attributable to lower capital spending during the first nine months of 2008.
Our Amended Credit Agreement contains restrictions on our ability to make capital expenditures. Based on current estimates, management believes that the amount of capital expenditures permitted to be made under our Amended Credit Agreement will be adequate to grow our business according to our business strategy and to maintain our continuing operations.
During the first nine months of 2008, cash used by financing activities was $16.0 million compared to cash provided by financing activities of $6.3 million for the first nine months of 2007. The decrease was primarily due to $19.0 million in net repayments on the Revolver and required principal amortization of $3.0 million on our term loan.
Our debt agreements, as amended, contain various covenants, including a maximum ratio of consolidated net debt to consolidated adjusted EBITDA (“Leverage Ratio”) and a minimum ratio of consolidated adjusted EBITDA to consolidated interest expense (“Coverage Ratio”). Both of these ratios are calculated at the end of each fiscal quarter based on our trailing twelve month financial results.
The Leverage Ratio may not exceed 8.50 to 1.00 through the quarter ended September 30, 2008, 8.00 to 1.00 for the next four quarters, declines thereafter by 1.00x on an annual basis until September 30, 2012 and declines to 4.50 to 1.00 on October 1, 2012. The Coverage Ratio may not be less than 1.25 to 1.00 through the quarter ended September 30, 2008, and increases on October 1 of each year through 2012 commencing October 1, 2008 to 1.35x, 1.55x, 1.75x, 2.00x and 2.10x. At September 30, 2008, the Company was in compliance with these covenants.
Our ability to make payments on our indebtedness and to fund planned capital expenditures 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 operations and available borrowings under our Amended Credit Agreement 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.
Other Key Indicators of Financial Condition and Operating Performance
EBITDA and Adjusted EBITDA presented in this 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 performance under GAAP and should not be considered as alternatives to net income 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 income (loss) 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 required in calculating covenant ratios and compliance under the indenture governing the senior subordinated notes and under our Amended Credit Agreement.
We believe that the inclusion of EBITDA and Adjusted EBITDA in this Form 10-Q is appropriate to provide additional information to investors and debt holders about the calculation of certain financial covenants in the indenture governing the senior subordinated notes and under our Amended Credit Agreement. Adjusted EBITDA is a material component of these covenants. For instance, the indenture governing the senior subordinated notes and our Amended Credit Agreement contain financial covenant ratios, specifically total leverage and interest coverage ratios that are calculated by reference to Adjusted EBITDA. Non-compliance with the financial ratio maintenance covenants contained in our Amended Credit Agreement could result in the requirement to immediately repay all amounts outstanding under such facility, while non-compliance with the debt incurrence ratios contained in the indenture governing the Amended Credit Agreement would prohibit us from being able to incur additional indebtedness other than pursuant to specified exceptions.
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. Measures similar to EBITDA are also widely used by us and others in our industry to evaluate and price potential acquisition candidates. We believe EBITDA facilitates operating performance comparison from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting relative interest expense), 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 calculating Adjusted EBITDA, as permitted by the terms of our indebtedness, we eliminate the impact of a number of items we do not consider indicative of our ongoing operations and for the other reasons noted above. 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 the significant 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. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only as a supplemental measure. For more information, see our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this report.
The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2008 | September 30, 2007 | September 30, 2008 | September 30, 2007 | |||||||||||||
RECONCILIATION OF NET LOSS TO EBITDA: | ||||||||||||||||
Net loss | $ | (849 | ) | $ | (8,132 | ) | $ | (9,819 | ) | $ | (97,968 | ) | ||||
Interest expense, net | 16,026 | 17,165 | 49,363 | 50,079 | ||||||||||||
Income tax expense (benefit) | (661 | ) | 1,212 | 3,360 | 2,897 | |||||||||||
Depreciation and amortization | 9,122 | 8,802 | 26,630 | 26,537 | ||||||||||||
EBITDA (1) | $ | 23,638 | $ | 19,047 | $ | 69,534 | $ | (18,455 | ) | |||||||
Adjustments: | ||||||||||||||||
Impairment | - | - | - | 82,340 | ||||||||||||
Restructuring and other charges | 1,257 | (7 | ) | 3,697 | 701 | |||||||||||
Stock-based compensation - employees | 1,435 | (151 | ) | 2,349 | (4,912 | ) | ||||||||||
Stock-based compensation - non-employees | 90 | 480 | 924 | 1,521 | ||||||||||||
Employee severance and relocation | 131 | 792 | 729 | 1,228 | ||||||||||||
Chief executive recruiting costs | - | - | (26 | ) | 225 | |||||||||||
Currency transaction (gain) / loss | (1,220 | ) | 404 | (534 | ) | 552 | ||||||||||
Loss on derivative instruments | 171 | 122 | 528 | 64 | ||||||||||||
Loss on sale of property and equipment | 297 | 34 | 401 | 4 | ||||||||||||
Management fees to stockholder | 276 | 291 | 931 | 902 | ||||||||||||
Adjusted EBITDA (1) | $ | 26,075 | $ | 21,012 | $ | 78,533 | $ | 64,170 |
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.
Contractual Obligations and Commitments
The following table sets forth our long-term contractual obligations as of September 30, 2008 (in thousands):
Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||||
Senior secured credit facility (1) | $ | 490,458 | $ | 25,190 | $ | 49,754 | $ | 415,514 | $ | — | ||||||||||
Senior subordinated notes (1) | 472,865 | 32,470 | 64,940 | 64,940 | 310,515 | |||||||||||||||
Capital leases | 46 | 9 | 37 | — | — | |||||||||||||||
Operating leases | 41,780 | 6,384 | 12,376 | 9,876 | 13,144 | |||||||||||||||
Purchase obligations (2) | 34,241 | 34,241 | — | — | — | |||||||||||||||
Other long-term obligations (3) | 35,385 | 241 | 496 | 2,387 | 32,261 | |||||||||||||||
Total | $ | 1,074,775 | $ | 98,535 | $ | 127,603 | $ | 492,717 | $ | 355,920 |
________________________
(1) | Includes principal and interest payments. |
(2) | Purchase obligations consist of commitments for material, supplies and machinery and equipment incident to the ordinary conduct of business. |
(3) | Other long-term obligations include share-based payment obligations of $1.9 million, environmental remediation obligations of $3.5 million, accrued compensation and pension benefits of $2.7 million, deferred income taxes of $21.5 million, accrued swap liability of $5.3 million and other obligations of $0.5 million. |
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. Estimates and assumptions are reviewed on an ongoing basis and the effects of revisions are reflected in the unaudited consolidated financial statements in the period they are determined to be necessary. Actual results could differ materially from those estimates under different assumptions or conditions. We believe the following critical accounting policies impact our judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. The amount of product revenue recognized in a given period is impacted by our judgments made in establishing our reserve for potential future product returns. We provide a reserve for our estimate of future returns against revenue in the period the revenue is recorded. Our estimate of future returns is based on such factors as historical return data and current economic condition of our customer base. The amount of revenue we recognize will be directly impacted by our estimates made to establish the reserve for potential future product returns. To date, the amount of estimated returns has not been material to total net revenues. Our allowance for sales returns was $0.7 million and $0.6 million at September 30, 2008 and December 31, 2007, respectively.
Allowance for Doubtful Accounts. We estimate the collectibility of our accounts receivable and the related amount of bad debts that may be incurred in the future. The allowance for doubtful accounts results from an analysis of specific customer accounts, historical experience, credit ratings and current economic trends. Based on this analysis, we provide allowances for specific accounts where collectibility is not reasonably assured. Our allowance for doubtful accounts was $0.6 million at both September 30, 2008 and December 31, 2007.
Provision for Inventory Valuation. Inventory purchases and commitments are based upon future demand forecasts. Excess and obsolete inventory are valued at their net realizable value, which may be zero. We periodically experience variances between the amount of inventory purchased and contractually committed to and our demand forecasts, resulting in excess and obsolete inventory valuation charges.
Valuation of Goodwill, Trade Names and Trademarks. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and certain of our other intangible assets, specifically trade names and trademarks, have indefinite lives. Goodwill and other indefinite life intangible assets are subject to an annual impairment test, or more often if impairment indicators arise, using a fair-value-based approach. In assessing the fair value of goodwill and other indefinite life intangible assets, we make projections regarding future cash flow and other estimates, and may utilize third-party appraisal services. If these projections or other estimates for one or all of these reporting units change, we may be required to record an impairment charge. We performed an interim impairment test on the goodwill and other indefinite life intangible assets during the first nine months of 2007, and as a result, recorded an impairment charge of $82.3 million.
Valuation of Long-lived Assets. Long-lived assets are comprised of property, plant and equipment and intangible assets with finite lives. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted cash flows expected to be generated by the asset. When we determine that the carrying value of intangible assets and fixed assets may not be recoverable, we measure impairment by the amount by which the carrying value of the asset exceeds the related fair value. Estimated fair value is generally based on projections of future cash flows and other estimates, and guidance from third-party appraisal services. During the nine months ended September 30, 2008, we performed an impairment analysis resulting from the closure of our facility in Memphis, Tennessee which resulted in an impairment charge of $0.7 million.
Self Insurance Reserves. We accrue for costs to provide self-insured benefits under our workers’ compensation and employee health benefits programs. With the assistance of third-party workers’ compensation experts, we determine the accrual for workers’ compensation losses based on estimated costs to resolve each claim. We accrue for self-insured health benefits based on historical claims experience. We maintain insurance coverage to prevent financial losses from catastrophic workers’ compensation or employee health benefit claims. Our financial position or results of operations could be materially impacted in a fiscal quarter due to a material increase in claims. Our accruals for self-insured workers’ compensation and employee health benefits at September 30, 2008 and December 31, 2007 were $4.3 million and $2.9 million, respectively.
Environmental Reserves. We accrue for environmental remediation costs when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. Our remediation cost estimates are based on the facts known at the current time including consultation with a third-party environmental specialist and external legal counsel. Changes in environmental laws, improvements in remediation technology and discovery of additional information concerning known or new environmental matters could affect our operating results.
Pension and Other Employee Benefits. Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans. These assumptions include the weighted average discount rate, rates of increase in compensation levels and expected long-term rates of return on assets. If actual results are less favorable than those projected by management, additional expense may be required.
Share Based Payments. We adopted SFAS 123R on January 1, 2006 using the modified prospective transition method, which requires that we record stock compensation expense for all unvested and new awards as of the adoption date. Under the fair value provisions of SFAS 123R, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating the underlying value of the common stock, the expected term of stock options, expected volatility of the underlying stock, and the number of stock-based awards expected to be forfeited due to future terminations. In addition, for stock-based awards where vesting is dependent upon achieving certain operating performance goals, we estimate the likelihood of achieving the performance goals. Differences between actual results and these estimates could have a material impact on our financial results.
Income Taxes. We estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as goodwill amortization, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we increase or decrease our income tax provision in our consolidated statement of operations. If any of our estimates of our prior period taxable income or loss require change, material differences could impact the amount and timing of income tax benefits or payments for any period.
The Company provides liabilities for uncertain tax positions in accordance with the requirements of FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes.” FIN 48 requires that we evaluate positions taken or expected to be taken in our income tax filings in all jurisdictions where we are required to file, and provide a liability for any positions that do not meet a “more likely than not” threshold of being sustained if examined by tax authorities. At January 1, 2008, we had $9.4 million accrued for uncertain tax positions, and we expect this liability to increase by approximately $0.3 million by December 31, 2008.
Hedge Accounting. We use derivative instruments, including interest rate swaps and collars to reduce our risk to variable interest rates on our Amended Credit Agreement. We have documented our swap agreement as a cash flow hedge in accordance with the requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” As a result, changes in the fair value of our swap agreement are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. Our swap agreement qualifies for this hedge accounting treatment as long as the hedge meets certain effectiveness criteria. We determine the effectiveness of this hedge using the Hypothetical Derivative Method as described in the Derivative Implementation Group Issue No. G-7 (“DIG G-7”). DIG G-7 requires that we create a hypothetical derivative with terms that match our underlying debt agreement. To the extent that changes in the fair value of the hypothetical derivative mirror changes in the fair value of the swap agreement, the hedge will be considered effective. The fair values of the swap agreement and hypothetical derivative are based on a discounted cash flow model which contains a number of variables including estimated future interest rates, projected reset dates, and projected notional amounts. A material change in these assumptions could cause our hedge to be considered ineffective. If our swap agreement is not treated as a hedge, we would be required to record the change in fair value of the swap agreement in our results of operations.
During the three months ended September 30, 2008, management determined that our swap was ineffective during this period, which increased our net loss by $0.4 million for the three and nine months ended September 30, 2008. We expect that, in the future, the swap will regain effectiveness and remain so for the remainder of the swap contract.
New Accounting Pronouncements
In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. The Company expects that the adoption of SFAS No. 162 will not have a material impact on its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 enhances the disclosure requirements of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” by requiring disclosure of the fair values of derivative instruments and associated gains and losses and requires disclosure of derivative features that are subject to credit-risk. The adoption of SFAS 161 is required for interim periods beginning after November 15, 2008.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141R”), which replaces SFAS No. 141 and issued SFAS No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB No. 51.” These standards change the accounting for and the reporting for business combination transactions and noncontrolling (minority) interests in the consolidated financial statements, respectively. SFAS 141(R) changes the accounting for business acquisitions and will impact financial statements both on the acquisition date and in subsequent reporting periods. SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and reported as a component of equity. These standards will become effective for the Company in the first quarter of fiscal year 2009. SFAS 141(R) will be applied prospectively. SFAS 160 requires retrospective application of most of the classification and presentation provisions. All other requirements of SFAS No. 160 shall be applied prospectively. Early adoption is prohibited for both standards. The adoption of SFAS 141R will have an impact on accounting for business combinations once adopted, but its effect will be dependent upon acquisitions subsequent to the effective date.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands the required disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. SFAS 157-2, "Effective Date of FASB Statement No. 157", which provides a one year deferral of the effective date of SFAS 157 for non financial assets and non financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with this interpretation, the Company has only adopted the provisions of SFAS 157, effective January 1, 2008, with respect to its financial assets and liabilities that are measured at fair value on a recurring basis within the financial statements as of March 31, 2008. The provisions of SFAS 157 have not been applied to non-financial assets and non-financial liabilities. The adoption of SFAS 157 did not have a material effect on our consolidated results of operations, consolidated cash flows or consolidated financial position. See Note 12.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB No. 115,” (“SFAS 159”). SFAS 159 permits entities to elect to measure many financial instruments and certain other items at fair value. This statement is effective beginning after November 15, 2007. The Company adopted SFAS 159 effective January 1, 2008 and has not elected to change its valuation methods for financial instruments in place as of January 1, 2008, the date of adoption or for any financial instruments entered into during the quarter ended March 31, 2008.
Market Risk
We are subject to market risk associated with change in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for trading or speculative purposes.
Interest Rate Risk
We are subject to market risk associated with change in the London Interbank Offered Rate (LIBOR) and the Federal Funds Rate published by the Federal Reserve Bank of New York in connection with outstanding term loans under our Amended Credit Agreement for which we have an outstanding balance at September 30, 2008 of $389.0 million with an interest rate of 5.29%. We have entered into interest rate swap and collar agreements to limit our exposure to variable interest rates. At September 30, 2008, the notional amount of the swap contract was $200.0 million, and will decrease to $150.0 million on February 27, 2009, to $125.0 million on February 27, 2010. The swap contract will mature on November 27, 2010. We will receive variable rate payments (equal to the three-month LIBOR rate) during the term of the swap contract and are obligated to pay fixed interest rate payments (4.85%) during the term of the contract. At September 30, 2008, we also had an outstanding interest rate collar agreement to provide an interest rate ceiling and floor on a portion of our LIBOR-based variable rate debt. At September 30, 2008, the notional amount of the collar contract in place was $75.0 million and will mature on February 27, 2009. The Company will receive variable rate payments during the term of the collar contract when and if the three-month LIBOR rate exceeds the 5.84% ceiling. The Company will make variable rate payments during the term of the collar contract when and if the three-month LIBOR rate is below the 3.98% floor. During the period when our interest rate swap and collar agreements are in place, a 1% change in interest rates would result in a change in interest expense of approximately $2.0 million per year. Upon the expiration of the swap agreement, a 1% change in interest rates would result in change in interest of approximately $4.0 million per year.
Foreign Currency Risk
We operate several facilities in foreign countries. Our principal currency exposures relate to the Euro, British pound and Mexican peso. We consider the currency risk to be low, as the majority of the transactions at these locations are denominated in the local currency.
The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) under the Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Form 10-Q. The disclosures set forth in this Item 4T 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 4T 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 principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. 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 properly 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. Because of material weaknesses in our internal control over financial reporting that existed at December 31, 2007, which are more fully detailed in our Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 31, 2008, and which were not fully remediated prior to September 30, 2008, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2008.
As also described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, filed on March 31, 2008, the Company has taken steps to improve its level of technical accounting proficiency within its accounting staff. These steps have included the hiring of a Chief Accounting Officer as well as implementing a process of formal review of technical accounting matters by this individual and their staff. In addition the Company has engaged the services of an external income tax consulting firm. The Company has implemented a process to identify and evaluate all tax matters with the assistance of this firm to ensure that material items are accounted for and reported accurately.
Changes in Internal Control over Financial Reporting. We are in the process of implementing the Oracle ERP system throughout the entire company. The implementation of Oracle during the first nine months of 2008 modified our existing controls at three manufacturing locations as they migrated to the Oracle ERP system.
There were no additional changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our third fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On July 23, 2007, we were notified by the Citizens for Pennsylvania’s Future and Montgomery Neighbors for a Clean Environment of their intent to file a citizen suit against us and an unrelated party based upon alleged violations of the Pennsylvania Hazardous Site Cleanup Act. To date, no such suit has been filed. Furthermore, on November 6, 2007, People for Clean Air and Water (“PAW”) announced their intention to file a citizen suit against the Company and two unrelated parties based upon alleged violations of the United States Clean Air Act. On March 31, 2008, the Company was served in a lawsuit brought by a member of PAW. The complaint alleged violations related to the emission of trichloroethylene (“TCE”) by our facility in Collegeville, Pennsylvania and sought a $300 million award. In July 2008, the plaintiff withdrew this lawsuit.
In a separate matter, 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 begun to implement a process that will reduce our TCE emissions generated by our facility in Collegeville, PA. However, this process will not reduce our TCE emissions to the levels required by the new standard. If the narrow tube exemption were no longer available to us, we may not be able to reduce our Collegeville facility TCE emissions to the levels required by the new EPA standard, resulting in a reduction in our ability to manufacture narrow tubes, which could have a material adverse impact on our financial position and results of operations.
For a discussion of our potential risks or uncertainties, please see Part I, Item 1A, of Accellent Inc.’s 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to the risk factors disclosed in Part I, Item 1A, of Accellent Inc.’s 2007 Annual Report on Form 10-K.
No unregistered equity securities of the registrant were sold and no repurchases of equity securities were made during the three months ended September 30, 2008.
Our ability to pay dividends is restricted by our senior Amended Credit Agreement and the indenture governing the Amended Credit Agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” in Accellent Inc.’s 2007 Annual Report on Form 10-K filed with the Securities and Exchange Commission.
Not applicable.
Not applicable.
Not applicable.
Exhibit Number | Description of Exhibits | |
31.1* | Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2* | Rule 13a-14(a) Certification of Chief Financial Officer | |
32.1* | Section 1350 Certification of Chief Executive Officer | |
32.2* | Section 1350 Certification of Chief Financial Officer |
_________________
* | Filed herewith. |
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. | |||
November 14, 2008 | By: | /s/ Robert E. Kirby | |
Robert E. Kirby | |||
Chief Executive Officer (Principal Executive Officer) |
Accellent Inc. | |||
November 14, 2008 | By: | /s/ Jeremy A. Friedman | |
Jeremy A. Friedman | |||
Chief Financial Officer (Principal Financial Officer) |
EXHIBIT INDEX
Exhibit Number | Description of Exhibits | |
31.1* | Rule 13a-14(a) Certification of Chief Executive Officer | |
31.2* | Rule 13a-14(a) Certification of Chief Financial Officer | |
32.1* | Section 1350 Certification of Chief Executive Officer | |
32.2* | Section 1350 Certification of Chief Financial Officer |
*Filed herewith.