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, 2013
Commission File Number: 333-130470
______________________________
Accellent Inc.
(Exact name of registrant as specified in its charter)
______________________________
Maryland | 84-1507827 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
100 Fordham Road Wilmington, Massachusetts | 01887 | |
(Address of registrant’s principal executive offices) | (Zip code) |
(978) 570-6900
Registrant’s Telephone Number, Including Area Code:
______________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
(Note: As a voluntary filer not subject to the filing requirements of Section 13 or 15(d) of the Exchange Act, the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant would have been required to file such reports) as if it were subject to such filing requirements).
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 8, 2013, 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACCELLENT INC.
Unaudited Condensed Consolidated Balance Sheets
As of December 31, 2012 and September 30, 2013
(in thousands, except share and per share data)
December 31, 2012 | September 30, 2013 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash | $ | 59,902 | $ | 64,577 | |||
Accounts receivable, net of allowances of $2,106 and $2,508 as of December 31, 2012 and September 30, 2013, respectively | 49,403 | 56,735 | |||||
Inventory | 57,069 | 63,329 | |||||
Prepaid expenses and other current assets | 10,973 | 3,403 | |||||
Total current assets | 177,347 | 188,044 | |||||
Property, plant and equipment, net | 114,809 | 116,315 | |||||
Assets held for sale | 1,060 | 880 | |||||
Goodwill | 619,443 | 556,315 | |||||
Other intangible assets, net | 134,747 | 123,543 | |||||
Deferred financing costs and other assets, net | 13,766 | 11,634 | |||||
Total assets | $ | 1,061,172 | $ | 996,731 | |||
Liabilities and Stockholders' equity | |||||||
Current liabilities: | |||||||
Current portion of long-term debt | $ | 11 | $ | 7 | |||
Accounts payable | 20,044 | 22,259 | |||||
Accrued payroll and benefits | 6,829 | 11,766 | |||||
Accrued interest | 19,323 | 18,804 | |||||
Accrued expenses and other current liabilities | 17,359 | 15,915 | |||||
Total current liabilities | 63,566 | 68,751 | |||||
Long-term debt | 713,294 | 713,560 | |||||
Other liabilities | 39,905 | 40,984 | |||||
Total liabilities | 816,765 | 823,295 | |||||
Commitments and contingencies (Note 12) | |||||||
Stockholders' equity: | |||||||
Common stock, par value $0.01 per share, 50,000,000 shares authorized; 1,000 shares issued and outstanding at December 31, 2012 and September 30, 2013, respectively | — | — | |||||
Additional paid-in capital | 639,610 | 640,503 | |||||
Accumulated other comprehensive loss | (2,554 | ) | (2,041 | ) | |||
Accumulated deficit | (392,649 | ) | (465,026 | ) | |||
Total stockholders’ equity | 244,407 | 173,436 | |||||
Total liabilities and stockholders’ equity | $ | 1,061,172 | $ | 996,731 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ACCELLENT INC.
Unaudited Condensed Consolidated Statements of Operations
For the three and nine months ended September 30, 2012 and 2013
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Net sales | $ | 125,961 | $ | 135,437 | $ | 376,526 | $ | 386,968 | |||||||
Cost of sales (exclusive of amortization) | 92,250 | 97,561 | 280,370 | 287,819 | |||||||||||
Gross profit | 33,711 | 37,876 | 96,156 | 99,149 | |||||||||||
Operating expenses: | |||||||||||||||
Selling, general and administrative expenses | 12,833 | 12,511 | 41,502 | 39,536 | |||||||||||
Research and development expenses | 419 | 508 | 1,364 | 1,507 | |||||||||||
Impairment of goodwill | — | — | — | 63,128 | |||||||||||
Restructuring expenses | 714 | 66 | 2,552 | (115 | ) | ||||||||||
(Gain) loss on disposal of assets | (221 | ) | 204 | (254 | ) | 896 | |||||||||
Amortization of intangible assets | 3,735 | 3,735 | 11,205 | 11,205 | |||||||||||
Total operating expenses | 17,480 | 17,024 | 56,369 | 116,157 | |||||||||||
Income (loss) from continuing operations | 16,231 | 20,852 | 39,787 | (17,008 | ) | ||||||||||
Other (expense) income, net: | |||||||||||||||
Interest expense, net | (17,379 | ) | (17,288 | ) | (51,879 | ) | (51,865 | ) | |||||||
Other income (expense), net | 592 | (103 | ) | (90 | ) | (283 | ) | ||||||||
Total other expense, net | (16,787 | ) | (17,391 | ) | (51,969 | ) | (52,148 | ) | |||||||
(Loss) income from continuing operations before income taxes | (556 | ) | 3,461 | (12,182 | ) | (69,156 | ) | ||||||||
Provision for income taxes | 999 | 1,035 | 2,717 | 3,158 | |||||||||||
Net (loss) income from continuing operations | (1,555 | ) | 2,426 | (14,899 | ) | (72,314 | ) | ||||||||
Net loss from discontinued operations, net of tax of $111 and $515 for the three and nine months ended September 30, 2012, respectively, and net of tax of $0 for the three and nine months ended September 30, 2013, respectively | (4,925 | ) | (63 | ) | (4,175 | ) | (63 | ) | |||||||
Net (loss) income | $ | (6,480 | ) | $ | 2,363 | $ | (19,074 | ) | $ | (72,377 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
ACCELLENT INC.
Unaudited Condensed Consolidated Statements of Comprehensive (Loss) Income
For the three and nine months ended September 30, 2012 and 2013
(in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Net (loss) income | $ | (6,480 | ) | $ | 2,363 | $ | (19,074 | ) | $ | (72,377 | ) | ||||
Other comprehensive income: | |||||||||||||||
Unrealized (loss) gain on available for sale security | (250 | ) | — | (57 | ) | 32 | |||||||||
Realized gain on available for sale security | — | — | — | (242 | ) | ||||||||||
Cumulative translation adjustment | 344 | 655 | 358 | 723 | |||||||||||
Other comprehensive income | 94 | 655 | 301 | 513 | |||||||||||
Comprehensive (loss) income | $ | (6,386 | ) | $ | 3,018 | $ | (18,773 | ) | $ | (71,864 | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ACCELLENT INC.
Unaudited Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2012 and 2013
(in thousands)
Nine Months Ended | |||||||
September 30, 2012 | September 30, 2013 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (19,074 | ) | $ | (72,377 | ) | |
Less net income from discontinued operations, net of tax | (4,175 | ) | (63 | ) | |||
Net loss from continuing operations | (14,899 | ) | (72,314 | ) | |||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Depreciation and amortization | 29,578 | 24,634 | |||||
Amortization of debt discounts and non-cash interest accrued | 2,329 | 2,449 | |||||
Restructuring charges, net of payments | 1,711 | — | |||||
Impairment of goodwill | — | 63,128 | |||||
(Gain) loss on disposal of assets | (254 | ) | 896 | ||||
Realized gain on available for sale of security | — | (242 | ) | ||||
Deferred income tax expense | 2,099 | 1,785 | |||||
Non-cash compensation expense | 432 | 908 | |||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | (3,853 | ) | (7,319 | ) | |||
Inventory | (2,954 | ) | (6,150 | ) | |||
Prepaid expenses and other current assets | (824 | ) | (757 | ) | |||
Accounts payable, accrued expenses and other liabilities | 381 | 5,599 | |||||
Net cash provided by operating activities of continuing operations | 13,746 | 12,617 | |||||
Net cash provided by (used in) operating activities of discontinued operations | 2,406 | (265 | ) | ||||
Net cash provided by operating activities | 16,152 | 12,352 | |||||
Cash flows from investing activities: | |||||||
Capital expenditures | (13,180 | ) | (16,193 | ) | |||
Proceeds from sale of property and equipment | 264 | 68 | |||||
Proceeds from the sale of available for sale securities | — | 242 | |||||
Net cash used in investing activities of continuing operations | (12,916 | ) | (15,883 | ) | |||
Net cash provided by investing activities of discontinued operations | 7,484 | 7,987 | |||||
Net cash used in investing activities | (5,432 | ) | (7,896 | ) | |||
Cash flows from financing activities: | |||||||
Repayments of long-term debt and capital lease obligations | (16 | ) | (9 | ) | |||
Repurchase of common stock | (43 | ) | — | ||||
Net cash used in financing activities | (59 | ) | (9 | ) | |||
Effect of exchange rate changes | 68 | 228 | |||||
Net increase in cash | 10,729 | 4,675 | |||||
Cash, beginning of period | 38,858 | 59,902 | |||||
Cash, end of period | $ | 49,587 | $ | 64,577 | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for interest | $ | 50,270 | $ | 49,846 | |||
Cash paid for income taxes | $ | 2,749 | $ | 1,165 | |||
Supplemental disclosure of non-cash investing and financing activities: | |||||||
Property and equipment purchases included in accrued expenses | $ | 854 | $ | 997 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2013
1. Summary of significant accounting policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Accellent Inc. and its wholly owned subsidiaries (collectively, the “Company”). All intercompany transactions have been eliminated.
The Company has prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America ("GAAP") for complete financial statements. The Company has prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and in the opinion of management, these financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full fiscal year. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the SEC on April 1, 2013.
During the first quarter of 2013, the Company reorganized its business into two segments. The reorganization changed the reporting structure and changed the composition of the Company's reporting units. During the third quarter of 2013 the Company classified certain long term assets as held for sale (see Note 7). As a result, prior year amounts have been reclassified to conform to the current year’s presentation.
Customer Concentration
During the three and nine months ended September 30, 2012, the Company's ten largest customers accounted for approximately 62% and 64% of its consolidated net sales. During the three and nine months ended September 30, 2013, the Company's ten largest customers accounted for approximately 66% and 67% of its consolidated net sales, respectively.
The actual percentage of net sales derived from each customer whose sales represented 10% or more of the Company's consolidated net sales was as follows for the periods presented:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||
Customer A | 13 | % | 17 | % | 13 | % | 16 | % | |||
Customer B | 15 | % | 14 | % | 16 | % | 14 | % | |||
Customer C | 11 | % | 11 | % | 11 | % | 11 | % | |||
Customer D | * | * | * | 10 | % |
(*) Less than 10%
At September 30, 2013, Customer A accounted for approximately 19% and Customers B and C each accounted for approximately 10% of accounts receivable, net. At December 31, 2012, Customers A and B each accounted for approximately 13% and 12%, respectively, of accounts receivable, net.
2. New Accounting Pronouncements
On February 5, 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This accounting update requires additional disclosure requirements about reclassification adjustments out of accumulated other comprehensive income ("AOCI"). These adjustments include (1) changes in AOCI balances by component and (2) significant items reclassified out of AOCI. The ASU does not change the current requirements for the reporting of comprehensive income. The Company adopted the provisions of this ASU on January 1, 2013 and the adoption did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
7
On July 18, 2013, the FASB issued ASU No. 2013-11, “Presentation of a Liability for an Unrecognized Tax Benefit When a Net Operating Loss or Tax Credit Carryforward Exists." This accounting update requires that an unrecognized tax benefit should be presented as a reduction of a deferred tax asset for a net operating loss (“NOL”) carryforward or other tax credit carryforward when settlement in this manner is available under applicable tax law. This guidance will be effective for the Company’s interim and annual periods beginning January 1, 2014. The Company does not believe the adoption of this guidance will have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
3. Inventories
Inventories consisted of the following at December 31, 2012 and September 30, 2013 (in thousands):
December 31, 2012 | September 30, 2013 | ||||||
Raw materials | $ | 12,100 | $ | 16,147 | |||
Work-in-process | 27,779 | 30,409 | |||||
Finished goods | 17,190 | 16,773 | |||||
Total | $ | 57,069 | $ | 63,329 |
4. Goodwill and intangible assets
Goodwill is the amount by which the cost of acquired net assets in a business combination exceeds the fair value of net identifiable assets acquired. Intangible assets include the value ascribed to trade names and trademarks, developed technology and know-how, as well as customer contracts and relationships obtained in connection with business combinations. During the first quarter of 2013, the Company reorganized its business into two segments: Advanced Surgical ("AS Segment") and Cardio & Vascular ("CV Segment").
The evaluation of the reporting units has also been reassessed and changed to reflect the current structure and operations. During the first quarter of fiscal 2013, goodwill was assigned to the new reporting units based on the relative fair values of the reporting units. This resulted in goodwill of $134 million being assigned to its Advanced Surgical reporting unit, and $485.4 million being assigned to its Cardio & Vascular reporting unit.
After the preliminary allocation of the goodwill, the carrying amount of the Advanced Surgical reporting unit exceeded its fair value by approximately $16 million, which required the Company to perform an interim goodwill impairment test for the Advanced Surgical reporting unit. Pursuant to the next step of impairment testing, the Company calculated an implied fair value of goodwill based on a hypothetical purchase price allocation. During the first quarter of 2013, the Company had not finalized this step of its impairment testing due to the complexities involved in estimating fair value. In accordance with accounting guidance the Company recognized an estimated impairment charge and recorded a pre-tax goodwill impairment charge of $51.0 million in the first quarter of 2013. The Company finalized the second step of the analysis during the second quarter of 2013 and recorded an additional pre-tax goodwill impairment charge of $12.1 million. The Company has recorded a total pre-tax goodwill impairment charge of $63.1 million in the nine months ended September 30, 2013.
The Company has elected October 31st as its annual impairment assessment date for goodwill and the indefinite lived intangible assets and performs additional impairment tests if triggering events occur. No impairment charges were recorded for goodwill and the indefinite lived intangible assets during the year ended December 31, 2012.
The Company reports all amortization expense related to finite lived intangible assets separately within its unaudited condensed consolidated statement of operations. For the three and nine months ended September 30, 2012 and 2013, the Company recorded amortization expense related to intangible assets as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Cost of sales | $ | 497 | $ | 497 | $ | 1,491 | $ | 1,491 | |||||||
Selling, general and administrative | 3,238 | 3,238 | 9,714 | 9,714 | |||||||||||
Total | $ | 3,735 | $ | 3,735 | $ | 11,205 | $ | 11,205 |
8
Intangible assets consisted of the following at September 30, 2013 (in thousands):
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Developed technology and know how | $ | 16,991 | $ | (15,665 | ) | $ | 1,326 | ||||
Customer contracts and relationships | 197,575 | (104,758 | ) | 92,817 | |||||||
Trade names and trademarks | 29,400 | — | 29,400 | ||||||||
Total intangible assets | $ | 243,966 | $ | (120,423 | ) | $ | 123,543 |
Intangible assets consisted of the following at December 31, 2012 (in thousands):
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||
Developed technology and know how | $ | 16,991 | $ | (14,174 | ) | $ | 2,817 | ||||
Customer contracts and relationships | 197,575 | (95,045 | ) | 102,530 | |||||||
Trade names and trademarks | 29,400 | — | 29,400 | ||||||||
Total intangible assets | $ | 243,966 | $ | (109,219 | ) | $ | 134,747 |
Estimated intangible asset amortization expense for the remainder of 2013 is approximately $3.7 million. The estimated annual intangible asset amortization expense approximates $13.8 million in 2014, $13.0 million in each year in 2015, 2016, and 2017, and $37.6 million thereafter.
At December 31, 2012 and September 30, 2013, the remaining weighted-average amortization periods for the Company’s finite lived intangible assets were as follows (in years):
Remaining weighted - average amortization period | |||
December 31, 2012 | September 30, 2013 | ||
Developed technology and know how | 1.4 | 0.7 | |
Customer contracts and relationships | 7.9 | 7.2 | |
Total finite lived intangible assets | 7.7 | 7.1 |
5. Long-term debt
Long-term debt consisted of the following at December 31, 2012 and September 30, 2013 (in thousands):
December 31, 2012 | September 30, 2013 | ||||||
Senior secured notes maturing on February 1, 2017, interest at 8.375% ("Senior Secured Notes") | $ | 400,000 | $ | 400,000 | |||
Senior subordinated notes maturing on November 1, 2017, interest at 10.0% ("Senior Subordinated Notes") | 315,000 | 315,000 | |||||
Capital lease obligations | 20 | 11 | |||||
Total debt | 715,020 | 715,011 | |||||
Less—unamortized discount | (1,715 | ) | (1,444 | ) | |||
Less—current portion | (11 | ) | (7 | ) | |||
Long term debt, excluding current portion | $ | 713,294 | $ | 713,560 |
The Company maintains an asset backed line of credit (the “ABL Revolver”) that provides for up to $75.0 million of borrowing capacity, subject to borrowing base availability. At September 30, 2013, there were no amounts outstanding under the ABL Revolver and the Company’s aggregate borrowing capacity was $38.6 million, after giving effect to outstanding letters of credit totaling $10.9 million and the amount of ineligible accounts receivable and inventories, as defined in the credit agreement governing the ABL Revolver.
9
6. Restructuring
During the nine months ended September 30, 2013, the Company undertook no material restructuring actions.
In December 2011, the Company's Board of Directors approved a plan of closure with respect to the Company's manufacturing facility in Manchester, England. In April of 2012, the Manchester facility was closed, and substantially all employees were terminated. All affected employees were provided with stay-bonuses as well as one-time termination benefits that were received upon cessation of employment, provided they remained with the Company through the closing date. The total one-time termination benefits totaled approximately $0.6 million and were recorded over each employee’s remaining service period as they were required to stay through their termination date to receive the benefits. During the nine months ended September 30, 2012, the Company recorded $1.4 million of restructuring costs related to the facility's closure that are recorded within “Restructuring expenses” in the accompanying unaudited condensed consolidated statement of operations. During the three and nine months ended September 30, 2013, restructuring costs were negligible.
In April 2012, the Company announced a plan to close its manufacturing facility in Englewood, Colorado. The Company completed the facility closure in the first quarter of 2013 upon completion of the transfer of the facility's business to the Company's other facilities. In connection with the closure, the Company provided certain one-time termination benefits to affected employees. These one-time termination benefits were recorded over each employee's remaining service period as employees were required to stay through their termination date to receive the benefits. The Company recorded approximately $0.2 million of restructuring costs related to this facility during the three and nine months ended September 30, 2013.
The following table summarizes the amounts recorded related to restructuring activities, which are included in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2012 (in thousands):
Employee costs | Other exit costs | Total | |||||||||
Balance, January 1, 2012 | $ | 340 | $ | — | $ | 340 | |||||
Restructuring expenses | 1,577 | 975 | 2,552 | ||||||||
Payments | (698 | ) | (143 | ) | (841 | ) | |||||
Balance, September 30, 2012 | $ | 1,219 | $ | 832 | $ | 2,051 |
The following table summarizes the amounts recorded related to restructuring activities, which are included in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2013 (in thousands):
Employee costs | Other exit costs | Total | |||||||||
Balance, January 1, 2013 | $ | 1,329 | 790 | $ | 2,119 | ||||||
Restructuring expenses | (100 | ) | (15 | ) | (115 | ) | |||||
Payments | (1,175 | ) | (119 | ) | (1,294 | ) | |||||
Balance, September 30, 2013 | $ | 54 | $ | 656 | $ | 710 |
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7. Divestitures & Assets Held for Sale
As part of the Company's continuing efforts to better focus its efforts and align with its customers, the Company discontinued certain businesses. The Company has accounted for these businesses as discontinued operations and, accordingly, has presented the results of operations and related cash flows as discontinued operations for all periods presented.
Summary results of the discontinued operations were as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Sales | $ | 2,501 | $ | — | $ | 13,745 | $ | — | |||||||
Costs and expenses | 7,315 | 63 | 17,399 | 63 | |||||||||||
Operating loss from discontinued operations | (4,814 | ) | (63 | ) | (3,654 | ) | (63 | ) | |||||||
Other expenses, net | — | — | (6 | ) | — | ||||||||||
Loss from discontinued operations before income taxes | (4,814 | ) | (63 | ) | (3,660 | ) | (63 | ) | |||||||
Provision for income taxes | 111 | — | 515 | — | |||||||||||
Loss from discontinued operations, net of tax | $ | (4,925 | ) | $ | (63 | ) | $ | (4,175 | ) | $ | (63 | ) |
Assets held for Sale
The Company is in the process of selling its facility located in Huntsville, Alabama. As of September 30, 2013, the property met the requirements to be classified as held for sale in the condensed consolidated balance sheet, and the sale is considered probable within the next twelve months. The assets had a net book value of approximately $1.1 million and $0.9 million as of December 31, 2012 and September 30, 2013, respectively. Assets measured at fair value on a non-recurring basis in the current period include the assets held for sale, as described in Note 11.
8. Stock-based compensation
Employee stock-based compensation
The Company maintains a 2005 Equity Plan for Key Employees of Accellent Holdings Corp. (the “2005 Equity Plan”), which provides for grants of incentive stock options, nonqualified stock options, restricted stock units and stock appreciation rights. Vesting is determined in the applicable stock option agreement and generally occurs either in equal installments over five years from the date of grant (“Time-Based”), or upon achievement of certain performance targets over a five-year period (“Performance-Based”). Targets underlying the vesting of Performance-Based shares are generally achieved upon the attainment of a specified level of Adjusted EBITDA, as defined in the indenture governing the Company’s senior secured notes, measured each calendar year. The vesting requirements for Performance-Based shares permit a catch-up of vesting should the target not be achieved in a calendar year but achieved in a subsequent calendar year, over the five year vesting period. In addition, in connection with the acquisition of the Company in 2005, the Company exchanged fully vested stock options to acquire common shares of its predecessor entities for 4,901,107 fully vested stock options, or “Roll-Over” options, of Accellent Holdings Corp. which are recorded as a liability until such options are exercised, forfeited, expired or settled.
The table below summarizes the activity relating to the Roll-Over options during the three months ended September 30, 2012 and 2013:
Three Months Ended | |||||||||||||
September 30, 2012 | September 30, 2013 | ||||||||||||
Liability (in thousands) | Roll-Over Shares Outstanding | Liability (in thousands) | Roll-Over Shares Outstanding | ||||||||||
Balance at July 1 | $ | 141 | 80,727 | $ | 141 | 80,727 | |||||||
Shares repurchased | — | — | — | — | |||||||||
Options exercised | — | — | — | — | |||||||||
Options forfeited | — | — | — | — | |||||||||
Change in fair value | — | — | — | — | |||||||||
Balance at end of period | $ | 141 | 80,727 | $ | 141 | 80,727 |
11
The table below summarizes the activity relating to the Roll-Over options during the nine months ended September 30, 2012 and 2013:
Nine Months Ended | |||||||||||||
September 30, 2012 | September 30, 2013 | ||||||||||||
Liability (in thousands) | Roll-Over Shares Outstanding | Liability (in thousands) | Roll-Over Shares Outstanding | ||||||||||
Balance at January 1 | $ | 355 | 201,817 | $ | 141 | 80,727 | |||||||
Shares repurchased | (119 | ) | (67,607 | ) | — | — | |||||||
Options exercised | (58 | ) | (33,301 | ) | — | — | |||||||
Options forfeited | (35 | ) | (20,182 | ) | — | — | |||||||
Change in fair value | (2 | ) | — | — | — | ||||||||
Balance at end of period | $ | 141 | 80,727 | $ | 141 | 80,727 |
The Company’s stock-based compensation expense is based on the fair value of stock-based awards measured at the grant date that is recognized over the relevant service period and includes any adjustments to the fair value of the Company’s liability related to the Roll-Over options. For stock based awards, the Company estimates the fair value of each award on the date of grant using the Black-Scholes option valuation model. For Roll-Over options, the Company estimates their fair value at each balance sheet date. The Black-Scholes option pricing model incorporates assumptions regarding stock price volatility, the expected life of the option, a risk-free interest rate, dividend yield, and an estimate of the fair value of Accellent Holdings Corp.'s common stock. The fair value of Accellent Holdings Corp.’s common stock is determined by the Board of Directors of Accellent Holdings Corp. utilizing a market based approach. The volatility of Accellent Holdings Corp.’s common stock is estimated utilizing a weighted average stock price volatility of its publicly traded peer companies, adjusted for the Company’s financial performance and the risks associated with the illiquid nature of Accellent Holdings Corp.'s common stock. The expected life of an option is estimated based on past exercise experience. The Company used the following assumptions as of September 30, 2013 to determine the fair value of the Roll-Over options:
September 30, 2013 | ||
Expected term to exercise | 0.50 years | |
Expected volatility | 24.72 | % |
Risk-free rate | 0.33 | % |
Dividend yield | — | % |
During the three months ended September 30, 2012 and 2013, the Company granted stock options to employees to purchase approximately 2,347,500 and 2,102,500 shares, respectively, of Accellent Holdings Corp.'s common stock. Of the total stock options granted during the three months ended September 30, 2012,1,173,750 were Performance-Based awards. During the three months ended September 30, 2013, the Company issued no Performance-Based awards to employees. Stock options granted during the three months ended September 30, 2012 and 2013 had a weighted average grant date fair value of $0.79 and $0.68 per share, respectively. During the three months ended September 30, 2012 and 2013, 125,000 and 90,500 shares, respectively, were forfeited by employees.
During the nine months ended September 30, 2012 and 2013, the Company granted stock options to employees to purchase approximately 2,772,500 and 2,367,500 shares, respectively, of Accellent Holdings Corp.'s common stock. Of the total stock options granted during the nine months ended September 30, 2012 and 2013, 1,386,250 and 132,500, respectively, were Performance-Based awards. Stock options granted during the nine months ended September 30, 2012 and 2013 had a weighted average grant date fair value of $0.79 and $0.69 per share, respectively. During the nine months ended September 30, 2012 and 2013, 857,916 and 782,000 shares, respectively, were forfeited by employees.
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The following tables summarize the classification of recorded stock-based compensation in the unaudited condensed consolidated statements of operations and the recorded stock-based compensation by type of award for the three and nine months ended September 30, 2012 and 2013.
Classification of expense (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Cost of sales | $ | 43 | $ | 158 | $ | 81 | $ | 269 | |||||||
Selling, general and administrative | 139 | 260 | 283 | 549 | |||||||||||
Total | $ | 182 | $ | 418 | $ | 364 | $ | 818 |
Stock-based compensation related to stock awards by type of award (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Time-based vesting options | $ | 130 | $ | 316 | $ | 314 | $ | 508 | |||||||
Restricted stock awards | 52 | 102 | 52 | 310 | |||||||||||
Roll-over options | — | — | (2 | ) | — | ||||||||||
Total expense | $ | 182 | $ | 418 | $ | 364 | $ | 818 |
At September 30, 2013, the Company determined that attainment of certain of the targets through 2013 necessary for Performance-Based options to vest is not probable. Accordingly, the Company has not recorded stock-based compensation expense for Performance-Based stock awards during the three and nine months ended September 30, 2013.
The total unvested Performance-Based shares and their aggregate fair values were 4,923,067 and 4,707,355, and $5.1 million and $4.9 million, at September 30, 2012 and 2013, respectively. The total unvested Time-Based shares and their aggregate fair values were 3,131,850 and 4,243,550, and $3.0 million and $3.4 million, at September 30, 2012 and 2013, respectively.
During the nine months ended September 30, 2012, the Company granted 837,500 shares of Restricted Stock to employees, of which 160,000 were vested and 60,000 were forfeited at September 30, 2013. The awards vest annually each year over a five year period beginning on the grant date. The aggregate grant date fair value was $2,039,750, or $2.50 per share. During the nine months ended September 30, 2013, the Company granted 50,000 shares of Restricted Stock to employees, none of which were vested at September 30, 2013. The awards vest annually each year over a five year period beginning on the grant date. The aggregate grant date fair value was $125,000, or $2.50 per share. The Company recorded approximately $0.1 million of stock-based compensation expense for the three and nine months ended September 30, 2012 related to restricted stock. The Company recorded approximately $0.1 million and $0.3 million of stock-based compensation expense during the three and nine months ended September 30, 2013 related to restricted stock.
Non-employee stock-based compensation During the three months ended September 30, 2012 and 2013, the Company recognized approximately $22,500 and $30,000, respectively, of non-employee stock-based compensation related to fees paid to members of the Company’s Board of Directors. These fees are recorded as a liability and recorded in “Other liabilities” in the unaudited condensed consolidated balance sheets.
During the nine months ended September 30, 2012 and 2013, the Company recognized approximately $67,500 and $90,000, respectively, of non-employee stock-based compensation related to fees paid to members of the Company’s Board of Directors. These fees are recorded as a liability and recorded in “Other liabilities” in the unaudited condensed consolidated balance sheets.
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9. Income taxes
The Company provides for deferred income taxes resulting from temporary differences between financial and taxable income as well as current taxes attributable to the states and foreign jurisdictions in which the Company is required to pay income taxes. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. The Company has not provided for U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries, as these earnings have been permanently reinvested or would be offset by foreign tax credits or net operating losses.
Income tax expense for the three and nine months ended September 30, 2012 was $1.0 million and $2.7 million, respectively, and included $0.7 million and $2.1 million, respectively, of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.3 million and $0.6 million, respectively, in state, foreign, and other taxes.
Income tax expense for the three and nine months ended September 30, 2013 was $1.0 million and $3.2 million, respectively, and included $0.7 million and $2.0 million, respectively, related to the book and tax treatment of goodwill and approximately $0.3 million and $1.2 million, respectively, of state, foreign, and other taxes.
The Company believes that it is more likely than not that the Company will not recognize the benefits of its domestic federal and state deferred tax assets. As a result, the Company continues to provide a full valuation allowance on those deferred tax assets. The Company’s deferred tax assets are not offset by the tax liabilities related to non-deductible goodwill when determining the need for a valuation allowance. The Company had $29.9 million and $31.9 million of net deferred tax liabilities included in “Other liabilities” in the accompanying unaudited condensed consolidated balance sheets as of December 31, 2012 and September 30, 2013, respectively, relating to goodwill basis differences.
The Company is subject to income taxes in the U.S. Federal jurisdiction, and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax law and regulations and require significant judgment to apply. The Company is currently under examination by the State of New York for income tax years ended December 31, 2008 through 2010. The Company is currently under examination by the State of Massachusetts for excise tax year ended December 31, 2011. There are no other current income tax audits. The tax years ended December 31, 2005 through 2011 remain subject to examination by major tax jurisdictions. However, since the Company has net operating loss carryforwards, which may be utilized in future years to offset taxable income, those years may also be subject to review by relevant taxing authorities if utilized, notwithstanding that the statute for assessment may have closed.
In September 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations relating to guidance on applying tax rules to amounts paid to acquire, produce or improve tangible personal property as well as rules for materials and supplies. The Company is currently assessing these rules and the impacts to the financial statements, if any.
10. Related party transactions
The Company maintains a management services agreement with its principal equity owner, Kohlberg, Kravis, Roberts & Co., (“KKR”) pursuant to which KKR provides certain structuring, consulting and management advisory services. During the three and nine months ended September 30, 2012 and 2013, the Company incurred management fees and related expenses pursuant to this agreement of $0.3 million and $1.0 million, respectively. As of December 31, 2012 and September 30, 2013, the Company owed KKR $0.4 million and $0.3 million for each period, respectively for unpaid management fees which are included in “Accrued expenses and other current liabilities” in the accompanying unaudited condensed consolidated balance sheets. The Company has also historically utilized the services of Capstone Consulting LLC (“Capstone”), an entity affiliated with KKR. No fees or expenses related to Capstone were incurred during the three and nine months ended September 30, 2012 and September 30, 2013. At December 31, 2012 the Company owed Capstone $0.3 million, and had no outstanding payables as of September 30, 2013.
In addition to the above, entities affiliated with KKR Asset Management (“KKR-AM”), an affiliate of KKR, owned approximately $14.0 million principal amount of the Company’s Senior Secured Notes and approximately $23.4 million principal amount of the Company’s Senior Subordinated Notes at September 30, 2013. At December 31, 2012, entities affiliated with KKR-AM owned approximately $14.7 million principal amount of the Company’s Senior Secured Notes and approximately $23.4 million principal amount of the Company’s Senior Subordinated Notes.
The Company sells products to Biomet, Inc., which is privately owned by a consortium of private equity sponsors, including KKR. Net sales resulting from product shipments to Biomet, Inc. during the three and nine months ended September 30, 2012 totaled $0.1 million and $0.3 million, respectively. Net sales resulting from product shipments to Biomet, Inc. during the three and nine months ended September 30, 2013 were approximately $0.1 million, respectively. At
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December 31, 2012, accounts receivable from Biomet, Inc. aggregated $0.1 million. At September 30, 2013, accounts receivable from Biomet were negligible.
The Company utilizes the services of SunGard Data Systems, Inc. (“SunGard”), a provider of software and information processing solutions, which is privately owned by a consortium of private equity sponsors, including KKR and Bain Capital. The Company maintains an agreement with SunGard to provide information systems hosting services for the Company. The Company incurred approximately $0.2 million and $0.6 million in fees in connection with this agreement for the three and nine month periods ended September 30, 2012 and September 30, 2013, respectively. At December 31, 2012 and September 30, 2013, the Company owed SunGard approximately $0.1 million.
11. Fair value measurements
The Company determines fair value utilizing a fair value hierarchy that ranks the quality and reliability of the information used to determine fair value. In general, fair values determined using Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Fair values determined using Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
The Company uses the Black-Scholes option pricing model to value its liability for Roll-Over option awards. A roll-forward of the change in fair value of this financial instrument and information regarding the inputs used in the Black-Scholes model, that are determined by management, that is used to derive the Roll-Over options fair value, is included in Note 8.
The following tables provide a summary of the financial assets and liabilities recorded at fair value at December 31, 2012 and September 30, 2013 (in thousands):
Fair Value Measurements at December 31, 2012 determined using | |||||||||||||||
Total Carrying Value at December 31, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Investment in Available for Sale Security | $ | 210 | $ | 210 | $ | — | $ | — | |||||||
Liability for Roll-Over options | $ | 141 | $ | — | $ | — | $ | 141 |
Fair Value Measurements at September 30, 2013 determined using | |||||||||||||||
Total Carrying Value at September 30, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||
Liability for Roll-Over options | $ | 141 | $ | — | $ | — | $ | 141 |
For other instruments, the estimated fair value has been determined by the Company using available market information; however, considerable judgment is required in interpreting market data to develop these estimates. The methods and assumptions used to estimate the fair value of each class of financial instruments is as set forth below:
• | Accounts receivable and accounts payable—The carrying amounts of these items are a reasonable estimate of their fair values at December 31, 2012 and September 30, 2013 based on the short-term nature of these items. |
• | Borrowings under the Senior Secured Notes due 2017—Borrowings under the Senior Secured Notes have a fixed rate. The Company intends to carry the Senior Secured Notes until their maturity. At September 30, 2013, the fair value of the Senior Secured Notes, which is Level 2 in the fair value hierarchy, was approximately 104.9%, or $419.6 million, compared to their carrying value of $400 million. |
• | Borrowings under the Senior Subordinated Notes due 2017—Borrowings under the Senior Subordinated Notes due 2017 have a fixed rate. The Company intends to carry the Senior Subordinated Notes until their maturity. At September 30, 2013 the fair value of the Senior Subordinated Notes, which is Level 2 in the fair value hierarchy, was approximately 92.4%, or $291.1 million, compared to their carrying value of $315 million. |
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Nonrecurring Fair Value Measurements
The Company evaluated the assets held for sale using a market approach related to the divestiture of the building in Huntsville, Alabama, which is classified as a Level 2 input within the fair value hierarchy. As bid and transaction values become apparent during the marketing and divestiture process, the fair values of the assets held for sale was established based on the Company's expectations of a sale price. The carrying value of approximately $1.1 million as of December 31, 2012 was written down to fair value, less costs to sell, resulting in a loss of approximately $0.2 million. The loss was recorded in income (loss) from continuing operations.
12. Commitments and Contingencies
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.
Product liability claims or product recalls with respect to the Company’s components or the end-products of the Company’s customers into which the Company’s components are incorporated, could require the Company to pay significant damages or to spend significant time and money in litigation or responding to investigations or requests for information. Expenditures on litigation or damages, to the extent not covered by insurance, and declines in revenue could impair the Company’s earnings and the Company’s financial condition. There is no recall or litigation pending or, to the knowledge of the Company, threatened, that the Company expects to have a material effect on the Company’s consolidated financial position, results of operations or cash flow.
13. Environmental matters
The Pennsylvania Department of Environmental Protection (“DEP”) filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (“EPA”) National Air Emissions Standards for hazardous air pollutants from halogenated solvent cleaning operations. These revised standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning machines) from facility emission limits for Trichloroethylene (“TCE”) and other degreaser emissions. The EPA has agreed to reconsider the exemption. The Company’s Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since the Company manufactures narrow tubes. As part of efforts to lower TCE emissions, the Company has begun to implement a process that will reduce the Company’s TCE emissions generated by its Collegeville facility. However, this process will not reduce TCE emissions to the levels required should a new standard become law.
At each of December 31, 2012 and September 30, 2013, the Company maintained a reserve for environmental liabilities of approximately $1.6 million and $1.4 million. The Company expects to pay $0.1 million during the balance of 2013.
14. Supplemental guarantor condensed consolidating financial statements
All of the Company's domestic subsidiaries (the “Subsidiary Guarantors”) that are 100% owned by the Company, directly or indirectly, guarantee on a joint and several, full and unconditional basis, the obligations of Accellent Inc. under the Senior Secured Notes and the Senior Subordinated Notes (collectively, the "Notes"). Foreign subsidiaries of Accellent Inc. (the “Non-Guarantor Subsidiaries”) have not guaranteed the Notes.
The following tables present the unaudited condensed consolidating statements of operations and the unaudited condensed consolidating statements of comprehensive (loss) income for the three and nine months ended September 30, 2012 and 2013, the unaudited condensed consolidating balance sheets as of December 31, 2012 and September 30, 2013, and the unaudited condensed consolidating statements of cash flows for the nine months ended September 30, 2012 and 2013, of Accellent Inc. (the “Parent”), the Subsidiary Guarantors and the Non-Guarantor Subsidiaries.
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Unaudited Condensed Consolidating Statements of Operations —
Three months ended September 30, 2012 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | — | $ | 115,587 | $ | 10,939 | $ | (565 | ) | $ | 125,961 | ||||||||
Cost of sales (exclusive of amortization) | — | 85,095 | 7,720 | (565 | ) | 92,250 | |||||||||||||
Selling, general and administrative expenses | 23 | 11,918 | 892 | — | 12,833 | ||||||||||||||
Research and development expenses | — | 210 | 209 | — | 419 | ||||||||||||||
Restructuring expenses | — | 714 | — | — | 714 | ||||||||||||||
Amortization of intangible assets | 3,735 | — | — | — | 3,735 | ||||||||||||||
(Gain) loss on disposal of assets | — | (223 | ) | 2 | — | (221 | ) | ||||||||||||
(Loss) income from continuing operations | (3,758 | ) | 17,873 | 2,116 | — | 16,231 | |||||||||||||
Interest (expense) income, net | (17,363 | ) | 656 | (672 | ) | — | (17,379 | ) | |||||||||||
Other income, net | — | 167 | 425 | — | 592 | ||||||||||||||
Equity in earnings (losses) of affiliates | 19,772 | 1,313 | — | (21,085 | ) | — | |||||||||||||
(Loss) income from continuing operations before income taxes | (1,349 | ) | 20,009 | 1,869 | (21,085 | ) | (556 | ) | |||||||||||
Provision for income taxes | — | 443 | 556 | — | 999 | ||||||||||||||
Net (loss) income from continuing operations | (1,349 | ) | 19,566 | 1,313 | (21,085 | ) | (1,555 | ) | |||||||||||
Net (loss) income from discontinued operations, net of tax | (5,131 | ) | 206 | — | — | (4,925 | ) | ||||||||||||
Net (loss) income | $ | (6,480 | ) | $ | 19,772 | $ | 1,313 | $ | (21,085 | ) | $ | (6,480 | ) |
Unaudited Condensed Consolidating Statements of Operations —
Three months ended September 30, 2013 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | — | $ | 123,983 | $ | 11,864 | $ | (410 | ) | $ | 135,437 | ||||||||
Cost of sales (exclusive of amortization) | — | 89,848 | 8,123 | (410 | ) | 97,561 | |||||||||||||
Selling, general and administrative expenses | 30 | 11,594 | 887 | — | 12,511 | ||||||||||||||
Research and development expenses | — | 294 | 214 | — | 508 | ||||||||||||||
Impairment of goodwill | — | — | — | — | — | ||||||||||||||
Restructuring expenses | — | 66 | — | — | 66 | ||||||||||||||
Amortization of intangible assets | 3,735 | — | — | — | 3,735 | ||||||||||||||
Loss on disposal of assets | — | 148 | 56 | — | 204 | ||||||||||||||
(Loss) income from continuing operations | (3,765 | ) | 22,033 | 2,584 | — | 20,852 | |||||||||||||
Interest (expense) income, net | (17,287 | ) | 715 | (716 | ) | — | (17,288 | ) | |||||||||||
Other income (expense), net | — | 1,160 | (1,263 | ) | — | (103 | ) | ||||||||||||
Equity in earnings of affiliates | 23,415 | 202 | — | (23,617 | ) | — | |||||||||||||
Income (loss) from continuing operations before income taxes | 2,363 | 24,110 | 605 | (23,617 | ) | 3,461 | |||||||||||||
Provision for income taxes | — | 632 | 403 | — | 1,035 | ||||||||||||||
Net income (loss) from continuing operations | 2,363 | 23,478 | 202 | (23,617 | ) | 2,426 | |||||||||||||
Net loss from discontinued operations, net of tax | — | (63 | ) | — | — | (63 | ) | ||||||||||||
Net income (loss) | $ | 2,363 | $ | 23,415 | $ | 202 | $ | (23,617 | ) | $ | 2,363 |
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Unaudited Condensed Consolidating Statements of Operations —
Nine months ended September 30, 2012 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | — | $ | 346,842 | $ | 31,397 | $ | (1,713 | ) | $ | 376,526 | ||||||||
Cost of sales (exclusive of amortization) | — | 260,184 | 21,899 | (1,713 | ) | 280,370 | |||||||||||||
Selling, general and administrative expenses | 69 | 38,702 | 2,731 | — | 41,502 | ||||||||||||||
Research and development expenses | — | 707 | 657 | — | 1,364 | ||||||||||||||
Restructuring expenses | — | 2,552 | — | — | 2,552 | ||||||||||||||
Amortization of intangible assets | 11,205 | — | — | — | 11,205 | ||||||||||||||
(Gain) loss on disposal of assets | — | (264 | ) | 10 | — | (254 | ) | ||||||||||||
(Loss) income from continuing operations | (11,274 | ) | 44,961 | 6,100 | — | 39,787 | |||||||||||||
Interest (expense) income, net | (51,812 | ) | 1,997 | (2,064 | ) | — | (51,879 | ) | |||||||||||
Other (expense) income, net | — | (1,154 | ) | 1,064 | — | (90 | ) | ||||||||||||
Equity in earnings of affiliates | 49,143 | 3,273 | — | (52,416 | ) | — | |||||||||||||
(Loss) income from continuing operations before income taxes | (13,943 | ) | 49,077 | 5,100 | (52,416 | ) | (12,182 | ) | |||||||||||
Provision for income taxes | — | 890 | 1,827 | — | 2,717 | ||||||||||||||
Net (loss) income from continuing operations | (13,943 | ) | 48,187 | 3,273 | (52,416 | ) | (14,899 | ) | |||||||||||
Net (loss) income from discontinued operations, net of tax | (5,131 | ) | 956 | — | — | (4,175 | ) | ||||||||||||
Net (loss) income | $ | (19,074 | ) | $ | 49,143 | $ | 3,273 | $ | (52,416 | ) | $ | (19,074 | ) |
Unaudited Condensed Consolidating Statements of Operations —
Nine months ended September 30, 2013 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | — | $ | 355,194 | $ | 32,827 | $ | (1,053 | ) | $ | 386,968 | ||||||||
Cost of sales (exclusive of amortization) | — | 265,785 | 23,087 | (1,053 | ) | 287,819 | |||||||||||||
Selling, general and administrative expenses | 92 | 36,746 | 2,698 | — | 39,536 | ||||||||||||||
Research and development expenses | — | 919 | 588 | — | 1,507 | ||||||||||||||
Impairment of goodwill | 63,128 | — | — | — | 63,128 | ||||||||||||||
Restructuring expenses | — | (115 | ) | — | — | (115 | ) | ||||||||||||
Amortization of intangible assets | 11,205 | — | — | — | 11,205 | ||||||||||||||
Loss on disposal of assets | — | 814 | 82 | — | 896 | ||||||||||||||
(Loss) income from continuing operations | (74,425 | ) | 51,045 | 6,372 | — | (17,008 | ) | ||||||||||||
Interest (expense) income, net | (51,867 | ) | 2,123 | (2,121 | ) | — | (51,865 | ) | |||||||||||
Other income (expense), net | 923 | 306 | (1,512 | ) | — | (283 | ) | ||||||||||||
Equity in earnings of affiliates | 52,992 | 1,649 | — | (54,641 | ) | — | |||||||||||||
(Loss) income from continuing operations before income taxes | (72,377 | ) | 55,123 | 2,739 | (54,641 | ) | (69,156 | ) | |||||||||||
Provision for income taxes | — | 2,068 | 1,090 | — | 3,158 | ||||||||||||||
Net (loss) income from continuing operations | (72,377 | ) | 53,055 | 1,649 | (54,641 | ) | (72,314 | ) | |||||||||||
Net loss from discontinued operations, net of tax | — | (63 | ) | — | — | (63 | ) | ||||||||||||
Net (loss) income | $ | (72,377 | ) | $ | 52,992 | $ | 1,649 | $ | (54,641 | ) | $ | (72,377 | ) |
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Unaudited Condensed Consolidating Balance Sheets
December 31, 2012 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash | $ | — | $ | 53,812 | $ | 6,090 | $ | — | $ | 59,902 | |||||||||
Accounts receivable, net | — | 46,992 | 2,929 | (518 | ) | 49,403 | |||||||||||||
Inventories | — | 52,807 | 4,262 | — | 57,069 | ||||||||||||||
Prepaid expenses and other current assets | 215 | 10,399 | 359 | — | 10,973 | ||||||||||||||
Total current assets | 215 | 164,010 | 13,640 | (518 | ) | 177,347 | |||||||||||||
Property, plant and equipment, net | — | 89,413 | 25,396 | — | 114,809 | ||||||||||||||
Assets held for sale | — | 1,060 | — | — | 1,060 | ||||||||||||||
Intercompany receivables, net | — | 365,713 | — | (365,713 | ) | — | |||||||||||||
Investment in subsidiaries | 554,794 | 9,143 | — | (563,937 | ) | — | |||||||||||||
Goodwill | 619,443 | — | — | — | 619,443 | ||||||||||||||
Other intangible assets, net | 134,747 | — | — | — | 134,747 | ||||||||||||||
Deferred financing costs and other assets, net | 13,269 | (8 | ) | 505 | — | 13,766 | |||||||||||||
Total assets | $ | 1,322,468 | $ | 629,331 | $ | 39,541 | $ | (930,168 | ) | $ | 1,061,172 | ||||||||
Current portion of long-term debt | $ | — | $ | 11 | $ | — | $ | — | $ | 11 | |||||||||
Accounts payable | 1 | 18,613 | 1,948 | (518 | ) | 20,044 | |||||||||||||
Accrued expenses and other current liabilities | 19,317 | 20,267 | 3,927 | — | 43,511 | ||||||||||||||
Total current liabilities | 19,318 | 38,891 | 5,875 | (518 | ) | 63,566 | |||||||||||||
Long-term debt | 1,057,832 | — | 21,175 | (365,713 | ) | 713,294 | |||||||||||||
Other long-term liabilities | 911 | 35,646 | 3,348 | — | 39,905 | ||||||||||||||
Total liabilities | 1,078,061 | 74,537 | 30,398 | (366,231 | ) | 816,765 | |||||||||||||
Equity | 244,407 | 554,794 | 9,143 | (563,937 | ) | 244,407 | |||||||||||||
Total liabilities and equity | $ | 1,322,468 | $ | 629,331 | $ | 39,541 | $ | (930,168 | ) | $ | 1,061,172 |
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Unaudited Condensed Consolidating Balance Sheets
September 30, 2013 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash | $ | — | $ | 56,651 | $ | 7,926 | $ | — | $ | 64,577 | |||||||||
Accounts receivable, net | — | 52,603 | 4,559 | (427 | ) | 56,735 | |||||||||||||
Inventories | — | 58,232 | 5,097 | — | 63,329 | ||||||||||||||
Prepaid expenses and other current assets | 24 | 3,095 | 284 | — | 3,403 | ||||||||||||||
Total current assets | 24 | 170,581 | 17,866 | (427 | ) | 188,044 | |||||||||||||
Property, plant and equipment, net | — | 87,721 | 28,594 | — | 116,315 | ||||||||||||||
Assets held for sale | — | 880 | — | — | 880 | ||||||||||||||
Intercompany receivables, net | — | 417,205 | — | (417,205 | ) | — | |||||||||||||
Investment in subsidiaries | 608,507 | 11,523 | — | (620,030 | ) | — | |||||||||||||
Goodwill | 556,315 | — | — | — | 556,315 | ||||||||||||||
Other intangible assets, net | 123,543 | — | — | — | 123,543 | ||||||||||||||
Deferred financing costs and other assets, net | 11,090 | 64 | 480 | — | 11,634 | ||||||||||||||
Total assets | $ | 1,299,479 | $ | 687,974 | $ | 46,940 | $ | (1,037,662 | ) | $ | 996,731 | ||||||||
Current portion of long-term debt | $ | — | $ | 7 | $ | — | $ | — | $ | 7 | |||||||||
Accounts payable | — | 20,845 | 1,841 | (427 | ) | 22,259 | |||||||||||||
Accrued expenses and other current liabilities | 18,804 | 22,098 | 5,583 | — | 46,485 | ||||||||||||||
Total current liabilities | 18,804 | 42,950 | 7,424 | (427 | ) | 68,751 | |||||||||||||
Long-term debt | 1,106,313 | — | 24,452 | (417,205 | ) | 713,560 | |||||||||||||
Other long-term liabilities | 926 | 36,517 | 3,541 | — | 40,984 | ||||||||||||||
Total liabilities | 1,126,043 | 79,467 | 35,417 | (417,632 | ) | 823,295 | |||||||||||||
Equity | 173,436 | 608,507 | 11,523 | (620,030 | ) | 173,436 | |||||||||||||
Total liabilities and equity | $ | 1,299,479 | $ | 687,974 | $ | 46,940 | $ | (1,037,662 | ) | $ | 996,731 |
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Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Three months ended September 30, 2012 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net (loss) income | $ | (6,480 | ) | $ | 19,772 | $ | 1,313 | $ | (21,085 | ) | $ | (6,480 | ) | ||||||
Other comprehensive income (loss): | |||||||||||||||||||
Unrealized gain on available for sale security | (250 | ) | — | — | — | (250 | ) | ||||||||||||
Cumulative translation adjustment | 344 | 163 | 181 | (344 | ) | 344 | |||||||||||||
Comprehensive (loss) income | $ | (6,386 | ) | $ | 19,935 | $ | 1,494 | $ | (21,429 | ) | $ | (6,386 | ) |
Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Three months ended September 30, 2013 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net income | $ | 2,363 | $ | 23,415 | $ | 202 | $ | (23,617 | ) | $ | 2,363 | ||||||||
Other comprehensive income (loss): | |||||||||||||||||||
Cumulative translation adjustment | 655 | 269 | 386 | (655 | ) | 655 | |||||||||||||
Comprehensive income | $ | 3,018 | $ | 23,684 | $ | 588 | $ | (24,272 | ) | $ | 3,018 |
Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Nine months ended September 30, 2012 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net (loss) income | $ | (19,074 | ) | $ | 49,143 | $ | 3,273 | $ | (52,416 | ) | $ | (19,074 | ) | ||||||
Other comprehensive income (loss): | |||||||||||||||||||
Unrealized gain on available for sale security | (57 | ) | — | — | — | (57 | ) | ||||||||||||
Cumulative translation adjustment | 358 | 218 | 140 | (358 | ) | 358 | |||||||||||||
Comprehensive (loss) income | $ | (18,773 | ) | $ | 49,361 | $ | 3,413 | $ | (52,774 | ) | $ | (18,773 | ) |
Unaudited Condensed Consolidating Statements of Comprehensive (Loss) Income
Nine months ended September 30, 2013 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net (loss) income | $ | (72,377 | ) | $ | 52,992 | $ | 1,649 | $ | (54,641 | ) | $ | (72,377 | ) | ||||||
Other comprehensive income (loss): | |||||||||||||||||||
Unrealized gain on available for sale security | 32 | — | — | — | 32 | ||||||||||||||
Realized gain on available for sale security | (242 | ) | — | — | — | (242 | ) | ||||||||||||
Cumulative translation adjustment | 723 | (8 | ) | 731 | (723 | ) | 723 | ||||||||||||
Comprehensive (loss) income | $ | (71,864 | ) | $ | 52,984 | $ | 2,380 | $ | (55,364 | ) | $ | (71,864 | ) |
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Unaudited Condensed Consolidating Statements of Cash Flows —
Nine months ended September 30, 2012 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities of continuing operations | $ | (49,930 | ) | $ | 59,628 | $ | 4,048 | $ | — | $ | 13,746 | ||||||||
Net cash provided by operating activities of discontinued operations | — | 2,406 | — | — | 2,406 | ||||||||||||||
Net cash (used in) provided by operating activities | (49,930 | ) | 62,034 | 4,048 | — | 16,152 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Capital expenditures | — | (4,552 | ) | (8,628 | ) | — | (13,180 | ) | |||||||||||
Proceeds from disposition of assets | — | 264 | — | — | 264 | ||||||||||||||
Net cash used in investing activities of continuing operations | — | (4,288 | ) | (8,628 | ) | — | (12,916 | ) | |||||||||||
Net cash provided by investing activities of discontinued operations | — | 7,484 | — | — | 7,484 | ||||||||||||||
Net cash provided by (used in) investing activities | — | 3,196 | (8,628 | ) | — | (5,432 | ) | ||||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Repayments of long-term debt and capital lease obligations | — | (14 | ) | (2 | ) | — | (16 | ) | |||||||||||
Intercompany receipts (advances) | 49,973 | (53,379 | ) | 3,406 | — | — | |||||||||||||
Repurchase of parent company stock | (43 | ) | — | — | — | (43 | ) | ||||||||||||
Cash flows provided by (used in) financing activities | 49,930 | (53,393 | ) | 3,404 | — | (59 | ) | ||||||||||||
Effect of exchange rate changes in cash | — | 86 | (18 | ) | — | 68 | |||||||||||||
Net increase (decrease) in cash | — | 11,923 | (1,194 | ) | — | 10,729 | |||||||||||||
Cash, beginning of period | — | 32,627 | 6,231 | — | 38,858 | ||||||||||||||
Cash, end of period | $ | — | $ | 44,550 | $ | 5,037 | $ | — | $ | 49,587 |
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Unaudited Condensed Consolidating Statements of Cash Flows —
Nine months ended September 30, 2013 (in thousands):
Parent | Subsidiary Guarantors | Non- Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities of continuing operations | $ | (48,325 | ) | $ | 56,307 | $ | 4,635 | $ | — | $ | 12,617 | ||||||||
Net cash used in operating activities of discontinued operations | — | (265 | ) | — | — | (265 | ) | ||||||||||||
Net cash (used in) provided by operating activities | (48,325 | ) | 56,042 | 4,635 | — | 12,352 | |||||||||||||
Cash flows from investing activities: | |||||||||||||||||||
Capital expenditures | — | (9,877 | ) | (6,316 | ) | — | (16,193 | ) | |||||||||||
Proceeds from sale of equipment | — | 61 | 7 | — | 68 | ||||||||||||||
Proceeds from the sale of available for sale securities | 242 | — | — | — | 242 | ||||||||||||||
Net cash provided by (used in) investing activities of continuing operations | 242 | (9,816 | ) | (6,309 | ) | — | (15,883 | ) | |||||||||||
Net cash provided by investing activities of discontinued operations | — | 7,987 | — | — | 7,987 | ||||||||||||||
Net cash provided by (used in) investing activities | 242 | (1,829 | ) | (6,309 | ) | — | (7,896 | ) | |||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Repayments of long-term debt and capital lease obligations | — | (9 | ) | — | — | (9 | ) | ||||||||||||
Intercompany receipts (advances) | 48,083 | (51,357 | ) | 3,274 | — | — | |||||||||||||
Cash flows provided by (used in) financing activities | 48,083 | (51,366 | ) | 3,274 | — | (9 | ) | ||||||||||||
Effect of exchange rate changes in cash | — | (8 | ) | 236 | — | 228 | |||||||||||||
Net increase in cash | — | 2,839 | 1,836 | — | 4,675 | ||||||||||||||
Cash, beginning of period | — | 53,812 | 6,090 | — | 59,902 | ||||||||||||||
Cash, end of period | $ | — | $ | 56,651 | $ | 7,926 | $ | — | $ | 64,577 |
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15. Changes in Stockholders' Equity
The following table summarizes the changes in stockholders’ equity during the nine months ended September 30, 2013 (in thousands except share data):
Common Stock | Additional Paid-In Capital | Accumulated other comprehensive income (loss) | Accumulated (deficit) | Total Equity | ||||||||||||||||||
Shares | Amount | |||||||||||||||||||||
Balance, January 1, 2013 | 1,000 | $ | — | $ | 639,610 | $ | (2,554 | ) | $ | (392,649 | ) | $ | 244,407 | |||||||||
Comprehensive loss: | ||||||||||||||||||||||
Net loss | — | — | — | (72,377 | ) | (72,377 | ) | |||||||||||||||
Unrealized gain on available for sale security | — | — | 32 | — | 32 | |||||||||||||||||
Realized gain on available for sale security | — | — | (242 | ) | — | (242 | ) | |||||||||||||||
Cumulative translation adjustment | — | — | 723 | — | 723 | |||||||||||||||||
Total comprehensive loss | (71,864 | ) | ||||||||||||||||||||
Stock-based compensation and other | — | 893 | — | — | 893 | |||||||||||||||||
Balance, September 30, 2013 | 1,000 | $ | — | $ | 640,503 | $ | (2,041 | ) | $ | (465,026 | ) | $ | 173,436 |
16. Changes in Accumulated Other Comprehensive Loss
The following table summarizes the changes in accumulated other comprehensive (loss) income for the three months ended September 30, 2012 (in thousands):
Defined Benefit Pension Items | Unrealized Gains and Losses on Available-for-Sale Securities | Foreign Currency Items | Total | ||||||||||||
Balance at July 1, 2012 | $ | (317 | ) | $ | 1,348 | $ | (2,090 | ) | $ | (1,059 | ) | ||||
Other comprehensive (loss) income before reclassifications | — | (250 | ) | 344 | 94 | ||||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | — | |||||||||||
Net current-period other comprehensive (loss) income | — | (250 | ) | 344 | 94 | ||||||||||
Balance at September 30, 2012 | $ | (317 | ) | $ | 1,098 | $ | (1,746 | ) | $ | (965 | ) |
The following table summarizes the changes in accumulated other comprehensive income (loss) for the three months ended September 30, 2013 (in thousands):
Defined Benefit Pension Items | Unrealized Gains and Losses on Available-for-Sale Securities | Foreign Currency Items | Total | ||||||||||||
Balance at July 1, 2013 | $ | (1,159 | ) | $ | — | $ | (1,537 | ) | $ | (2,696 | ) | ||||
Other comprehensive income before reclassifications | — | — | 655 | 655 | |||||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | — | |||||||||||
Net current-period other comprehensive income | — | — | 655 | 655 | |||||||||||
Balance at September 30, 2013 | $ | (1,159 | ) | $ | — | $ | (882 | ) | $ | (2,041 | ) |
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The following table summarizes the changes in accumulated other comprehensive (loss) income for the nine months ended September 30, 2012 (in thousands):
Defined Benefit Pension Items | Unrealized Gains and Losses on Available-for-Sale Securities | Foreign Currency Items | Total | ||||||||||||
Balance at January 1, 2012 | $ | (317 | ) | $ | 1,155 | $ | (2,104 | ) | $ | (1,266 | ) | ||||
Other comprehensive (loss) income before reclassifications | — | (57 | ) | 358 | 301 | ||||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | — | |||||||||||
Net current-period other comprehensive (loss) income | — | (57 | ) | 358 | 301 | ||||||||||
Balance at September 30, 2012 | $ | (317 | ) | $ | 1,098 | $ | (1,746 | ) | $ | (965 | ) |
The following table summarizes the changes in accumulated other comprehensive (loss) income for the nine months ended September 30, 2013 (in thousands):
Defined Benefit Pension Items | Unrealized Gains and Losses on Available-for-Sale Securities | Foreign Currency Items | Total | ||||||||||||
Balance at January 1, 2013 | $ | (1,159 | ) | $ | 210 | $ | (1,605 | ) | $ | (2,554 | ) | ||||
Other comprehensive (loss) income before reclassifications | — | (210 | ) | 723 | 513 | ||||||||||
Amounts reclassified from accumulated other comprehensive income | — | — | — | — | |||||||||||
Net current-period other comprehensive (loss) income | — | (210 | ) | 723 | 513 | ||||||||||
Balance at September 30, 2013 | $ | (1,159 | ) | $ | — | $ | (882 | ) | $ | (2,041 | ) |
17. Segment Information
Operating segments, as defined under GAAP, are components of an enterprise that engage in business activities for which discrete financial information is available and regularly reviewed by the chief operating decision maker in deciding how to allocate resources and assess performance. From 2007 to 2012, the Company has operated centrally with separate and distinct functional leaders for operations, sales, engineering, quality and technology along with information systems, finance and human resources. Through December 31, 2012, the Company operated its facilities under common management reporting on a functional basis to various functional leaders with the Company's Chief Executive Officer with the role chief operating decision maker.
During the first quarter of 2013, the Company reorganized its business into two segments: Advanced Surgical ("AS" or "AS Segment") and Cardio & Vascular ("CV" or "CV Segment"). The AS Segment is led by the president of AS who reports to the Chief Executive Officer. This segment produces products for (1) orthopaedics that include joint, spinal, arthroscopy, and trauma products, and (2) endoscopy that include gastrointestinal, urology, and laparoscopy products. The CV Segment is also led by the president of CV who reports to the Chief Executive Officer. This segment produces products for (1) cardiac rhythm management that includes pacemakers, implantable defribillators, tools and accessories, (2) cardiovascular that includes cardiac and peripheral stents, guide wires, catheters and delivery systems, and (3) cardiac surgery that includes heart valves, perfusion cannulae kits, vein grafting and bypass instruments. As a result, the Company's reportable segment information has been restated to reflect the current structure.
The Company allocates resources based on revenues as well as earnings before interest, taxes, depreciation, amortization, and other specific and non-recurring items ("Adjusted EBITDA") of each segment. Those expenses not allocable to each segment include non-allocable overhead costs, selling, general and administrative expenses, including human resources, legal, finance, information technology, general and administrative expenses. Non-allocable expenses also include the
25
amortization of intangible assets and certain restructuring expenses. Corporate services assets include intangible assets, deferred tax assets and liabilities, cash and cash equivalents, debt and other non-allocated assets.
The Company's net sales and Adjusted EBITDA by segment as well as a reconciliation of Total Adjusted EBITDA to the consolidated loss from continuing operations before provision for income taxes is as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Net sales: | |||||||||||||||
Cardio & Vascular | $ | 79,550 | $ | 83,337 | $ | 236,235 | $ | 240,505 | |||||||
Advanced Surgical | 48,996 | 53,169 | 147,170 | 148,827 | |||||||||||
Intersegment | (2,585 | ) | (1,069 | ) | (6,879 | ) | (2,364 | ) | |||||||
Total net sales | $ | 125,961 | $ | 135,437 | $ | 376,526 | $ | 386,968 | |||||||
Adjusted EBITDA: | |||||||||||||||
Cardio & Vascular | $ | 25,307 | $ | 26,852 | $ | 72,758 | $ | 72,568 | |||||||
Advanced Surgical | 8,470 | 9,493 | 22,586 | 22,638 | |||||||||||
Corporate Services | (5,625 | ) | (5,761 | ) | (19,400 | ) | (18,569 | ) | |||||||
Total Adjusted EBITDA | $ | 28,152 | $ | 30,584 | $ | 75,944 | $ | 76,637 | |||||||
Reconciliation of Adjusted EBITDA to income (loss) from continuing operations before provision for income taxes | |||||||||||||||
Impairment of goodwill | $ | — | $ | — | $ | — | $ | (63,128 | ) | ||||||
Interest expense, net | (17,379 | ) | (17,288 | ) | (51,879 | ) | (51,865 | ) | |||||||
Depreciation and amortization | (10,090 | ) | (8,406 | ) | (29,578 | ) | (24,634 | ) | |||||||
Stock-based compensation - employees | (182 | ) | (418 | ) | (364 | ) | (818 | ) | |||||||
Stock-based compensation - non-employees | (23 | ) | (30 | ) | (68 | ) | (90 | ) | |||||||
Employee severance and relocation | (500 | ) | (152 | ) | (1,870 | ) | (971 | ) | |||||||
Restructuring expenses | (714 | ) | (66 | ) | (2,552 | ) | 115 | ||||||||
Plant closure costs & other | (194 | ) | (27 | ) | (517 | ) | (1,244 | ) | |||||||
Currency gain (loss) | 568 | (111 | ) | (152 | ) | (1,231 | ) | ||||||||
Gain (loss) on disposal of property and equipment | 221 | (204 | ) | 254 | (896 | ) | |||||||||
Other taxes | (80 | ) | (70 | ) | (395 | ) | (218 | ) | |||||||
Management fees to stockholder | (335 | ) | (351 | ) | (1,005 | ) | (1,055 | ) | |||||||
Realized gain on available for sale security | — | — | — | 242 | |||||||||||
Total adjustments | $ | (28,708 | ) | $ | (27,123 | ) | $ | (88,126 | ) | $ | (145,793 | ) | |||
Income (loss) from continuing operations before provision for income taxes | $ | (556 | ) | $ | 3,461 | $ | (12,182 | ) | $ | (69,156 | ) |
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The Company's capital expenditures by segment at September 30, 2012 and September 30, 2013 are as follows (in thousands):
Nine Months Ended | |||||||
September 30, 2012 | September 30, 2013 | ||||||
Capital expenditures: | |||||||
Cardio & Vascular | $ | 6,191 | $ | 8,144 | |||
Advanced Surgical | 6,279 | 7,769 | |||||
Corporate | 710 | 280 | |||||
Total capital expenditures | $ | 13,180 | $ | 16,193 |
The Company's assets by segment at December 31, 2012 and September 30, 2013 are as follows (in thousands):
December 31, 2012 | September 30, 2013 | ||||||
Assets: | |||||||
Cardio & Vascular | $ | 606,304 | $ | 619,541 | |||
Advanced Surgical | 245,619 | 181,577 | |||||
Corporate Services | 209,249 | 195,613 | |||||
Total assets | $ | 1,061,172 | $ | 996,731 |
18. Subsequent Events
The Company has evaluated the period from September 30, 2013, the date of the unaudited condensed consolidated financial statements, through the date of the issuance and filing of the unaudited consolidated financial statements, and has determined that no material subsequent events have occurred that would affect the information presented in these unaudited condensed consolidated financial statements or require additional disclosure.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Some of the information in this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, certain statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements. In some cases you can identify these “forward-looking statements” by words like “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continues” or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading “Risk Factors” contained in our Annual Report on Form 10-K filed on April 1, 2013 with the Securities and Exchange Commission (File No. 333-130470) for the Company’s fiscal year ended December 31, 2012. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.
We undertake no obligation to update publicly or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Unless the context otherwise requires, references in this Form 10-Q to “Accellent,” "the Company", “we,” “our” and “us” refer to Accellent Inc. and its consolidated subsidiaries.
Overview
We believe that we are a leading provider of outsourced precision manufacturing and engineering services in our target markets 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 services for the products we provide to our customers.
We primarily focus on leading companies in large and growing markets within the medical device industry including cardiology, endoscopy, and orthopaedics. Our customers include many of the leading medical device companies including Abbott Laboratories, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, St. Jude Medical, and Stryker. While sales are aggregated by us to the ultimate parent of a customer, we typically generate diversified revenue streams within these large customers across separate customer divisions and multiple products.
During each of the three and nine months ended September 30, 2012, our ten largest customers accounted for approximately 62% and 64% of our consolidated net sales, respectively. During the three and nine months ended September 30, 2013, our ten largest customers accounted for approximately 66% and 67% of our consolidated net sales, respectively. Three customers each accounted for 10% or more of our consolidated net sales during the three and nine months ended September 30, 2012 and the three months ended September 30, 2013, and four customers accounted for 10% or more of our consolidated net sales during the nine months ended September 30, 2013. We expect net sales from our largest customers to continue to constitute a significant portion of our net sales in the future.
The actual percentage of net sales derived from each customer whose sales represented 10% or more of our consolidated net sales were as follows for the periods presented:
Three Months Ended | Nine Months Ended | ||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||
Customer A | 13 | % | 17 | % | 13 | % | 16 | % | |||
Customer B | 15 | % | 14 | % | 16 | % | 14 | % | |||
Customer C | 11 | % | 11 | % | 11 | % | 11 | % | |||
Customer D | * | * | * | 10 | % |
(*) Less than 10%
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Recent Developments
Segment Reporting
During the first quarter of 2013, we reorganized our business into two segments: Advanced Surgical ("AS" or "AS Segment") and Cardio & Vascular ("CV" or "CV Segment"). The AS Segment produces products for (1) orthopaedics that include joint, spinal, arthroscopy, and trauma products, and (2) endoscopy that include gastrointestinal, urology, and laparoscopy products. The CV Segment produces products for (1) cardiac rhythm management that includes pacemakers, implantable defibrillators, tools and accessories, (2) cardiovascular that includes cardiac and peripheral stents, guide wires, catheters and delivery systems, and (3) cardiac surgery that includes heart valves, perfusion cannula kits, vein grafting and bypass instruments. We have presented prior period information for 2012 to conform to the current year presentation of our reportable segments.
Discontinued Operations
As part of our continuing efforts to better focus its efforts and align with its customers, we discontinued certain businesses. We accounted for these businesses as discontinued operations and, accordingly, have presented the results of operations and related cash flows as discontinued operations for all periods presented. As of December 31, 2012, the assets of these businesses were sold.
We recorded the following amounts as net loss on discontinued operations during the periods ended (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Loss on disposition of discontinued operations | $ | (4,925 | ) | $ | (63 | ) | $ | (4,175 | ) | $ | (63 | ) | |||
Income from discontinued operations | — | — | — | — | |||||||||||
Net loss from discontinued operations, net of tax | $ | (4,925 | ) | $ | (63 | ) | $ | (4,175 | ) | $ | (63 | ) |
Change in Fiscal Year
On October 22, 2013, the Board of Directors approved a change to the Company’s fiscal year end from December 31 to the date determined by an annual reporting cycle whereby each fiscal year will typically consist of four 13-week quarters. The change in the Company’s fiscal year end will become effective for the Company’s 2014 fiscal year, which will begin January 1, 2014 and end January 3, 2015. In fiscal year 2014, the Company will report an additional week in the fourth quarter resulting in a 53-week fiscal year with 368 days. Because there will be no gap between the end of the Company’s 2013 fiscal year and the beginning of its 2014 fiscal year, the Company will not file a transition report.
Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2013
The following table sets forth our operating data derived from the unaudited condensed consolidated statements of continuing operations for the three months ended September 30, 2012 and 2013, presented as a percentage of net sales.
Three Months Ended | |||||
September 30, 2012 | September 30, 2013 | ||||
STATEMENT OF OPERATIONS DATA: | |||||
Net sales | 100.0 | % | 100.0 | % | |
Cost of sales | 73.2 | 72.0 | |||
Gross profit | 26.8 | 28.0 | |||
Selling, general and administrative expenses | 10.2 | 9.2 | |||
Research and development expenses | 0.3 | 0.4 | |||
Impairment of goodwill | — | — | |||
Restructuring expenses and other | 0.4 | 0.2 | |||
Amortization of intangible assets | 3.0 | 2.8 | |||
Income from continuing operations | 12.9 | % | 15.4 | % |
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Net Sales
The following table shows the net sales by segment for the three months ended September 30, 2012 and September 30, 2013 (in thousands):
Three Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | Increase | % Change | |||||||||||
Net Sales: | ||||||||||||||
Cardio & Vascular segment | $ | 78,719 | $ | 82,772 | $ | 4,053 | 5.1 | % | ||||||
Advanced Surgical segment | 47,242 | 52,665 | 5,423 | 11.5 | % | |||||||||
Total net sales | $ | 125,961 | $ | 135,437 | $ | 9,476 | 7.5 | % |
Net sales for the three months ended September 30, 2013 were $135.4 million, an increase of $9.5 million, or 7.5%, compared to net sales of $126.0 million for the three months ended September 30, 2012. The increase in net sales was a result of an increase in shipments in both segments of approximately $12.0 million, offset in part by price decreases of $1.6 million, as well as $0.9 million related to decreased sales of platinum.
Net sales for the three months ended September 30, 2013 for the CV Segment were $82.8 million, an increase of $4.1 million, or 5.1%, compared to net sales of $78.7 million for the three months ended September 30, 2012. The increase in net sales for the CV Segment is primarily attributed to increased volume of approximately $5.8 million, offset by price decreases of $0.8 million and $0.9 million related to decreased sales of platinum.
Net sales for the three months ended September 30, 2013 for the AS Segment were $52.7 million, an increase of $5.4 million, or 11.5%, as compared to net sales of $47.2 million for the three months ended September 30, 2012. The increase in net sales for the AS Segment is primarily related to increases in volume of $6.2 million, offset by decreases in price of $0.8 million.
Cost of sales
The following table shows the cost of sales by segment for the three months ended September 30, 2012 and September 30, 2013 (in thousands):
Three Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | Increase | % Change | |||||||||||
Cost of Sales: | ||||||||||||||
Cardio & Vascular segment | $ | 53,513 | $ | 55,336 | $ | 1,823 | 3.4 | % | ||||||
Advanced Surgical segment | 38,737 | 42,225 | 3,488 | 9.0 | % | |||||||||
Total cost of sales | $ | 92,250 | $ | 97,561 | $ | 5,311 | 5.8 | % |
Cost of sales were $97.6 million for the three months ended September 30, 2013 compared to $92.3 million for the three months ended September 30, 2012, an increase of $5.3 million, or 5.8%. Cost of sales reflects our variable manufacturing and fixed overhead costs necessary to produce products for our customers. The increase in cost of sales is primarily attributable to higher costs from increased volume comprised of the following: material increases of $4.1 million, which included $0.9 million of platinum cost pass through, $2.4 million related to increased manufacturing staffing, $1.0 million due to increased overhead support staffing and $0.3 million related to increased medical benefit expense. These increases were offset by $1.5 million of lower depreciation and $1.0 million due to utilization of our fixed cost infrastructure.
Cost of sales for the CV Segment for the three months ended September 30, 2013 were $55.3 million compared to $53.5 million for the three months ended September 30, 2012, an increase of $1.8 million, or 3.4%. The increase in cost of sales for the CV Segment was primarily attributable to material increases of $0.9 million, which included $0.9 million of platinum cost pass through, and $0.7 million related to increased manufacturing staffing, $0.2 million related to increased medical benefit expense and $0.9 million due to increased overhead support staffing. These increases were offset by $0.8 million of lower depreciation and $0.1 million due to utilization of our fixed cost infrastructure.
Cost of sales for the AS Segment for the three months ended September 30, 2013 were $42.2 million compared to $38.7 million for the three months ended September 30, 2012, an increase of $3.5 million, or 9.0%. The increase in cost of sales for the AS Segment was primarily attributable to material increases of $3.2 million, $1.7 million related to increased manufacturing staffing, $0.1 million related to increased medical benefit expense and $0.1 million due to increased overhead
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support staffing. These increases were offset by $0.7 million of lower depreciation and $0.9 million due to utilization of our fixed cost infrastructure.
Gross profit
The following table shows the gross profit by segment for the three months ended September 30, 2013 and September 30, 2012 (in thousands):
Three Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | Increase | % Change | |||||||||||
Gross Profit: | ||||||||||||||
Cardio & Vascular segment | $ | 25,206 | $ | 27,436 | $ | 2,230 | 8.8 | % | ||||||
Advanced Surgical segment | 8,505 | 10,440 | 1,935 | 22.8 | % | |||||||||
Total gross profit | $ | 33,711 | $ | 37,876 | $ | 4,165 | 12.4 | % |
Gross profit was $37.9 million, or 28.0%, of net sales, for the three months ended September 30, 2013 compared to $33.7 million, or 26.8%, of net sales for the three months ended September 30, 2012. As a percentage of sales, gross profit increased 1.2% during the three months ended September 30, 2013 compared to the three months ended September 30, 2012 primarily due to increased sales volume.
Gross profit for the CV Segment for the three months ended September 30, 2013 was $27.4 million compared to $25.2 million for the three months ended September 30, 2012, an increase of $2.2 million, or 8.8%, primarily attributable to increased sales volume, offset in part by higher manufacturing costs.
Gross profit for the AS Segment for the three months ended September 30, 2013 was $10.4 million compared to $8.5 million for the three months ended September 30, 2012, an increase of $1.9 million, or 22.8%, primarily attributable to increased sales volume, offset in part by higher manufacturing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, were $12.5 million for the three months ended September 30, 2013 compared to $12.8 million for the three months ended September 30, 2012. The $0.3 million decrease in SG&A expenses were primarily attributable to lower professional fees, depreciation, and other operating expenses.
Research and Development Expenses
Research and development, or R&D, expenses for each of the three months ended September 30, 2013 and September 30, 2012 were approximately $0.5 million and $0.4 million, respectively. R&D expenses represent costs related to the development of new or improved manufacturing technologies.
Interest Expense, net
Interest expense, net, was $17.3 million and $17.4 million for each of the three month periods ended September 30, 2013 and September 30, 2012, respectively, due primarily to interest related to the Senior Secured Notes and Senior Subordinated Notes.
Other (Expense) Income, net
Other (expense) income, net was ($0.1) million and 0.6 million for the three month periods ended September 30, 2013 and September 30, 2012, respectively. Included in other (expense) income, net are foreign currency gains and losses. During the three months ended September 30, 2013, we recorded a currency loss of approximately $0.1 million compared to a gain of approximately $0.6 million during the three months ended September 30, 2012. The change is due to fluctuation in foreign currency exchange rates during the three months ended September 30, 2013 compared to the three months ended September 30, 2012.
Income Tax Expense
Income tax expense for the three months ended September 30, 2013 was $1.0 million and included $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.3 million in state, foreign, and other taxes. Income tax expense for the three months ended September 30, 2012 was $1.0 million and included approximately $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.3 million in state, foreign, and other taxes.
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Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
The following table sets forth our operating data derived from the unaudited condensed consolidated statements of continuing operations for the nine months ended September 30, 2012 and 2013, presented as a percentage of net sales.
Nine Months Ended | |||||
September 30, 2012 | September 30, 2013 | ||||
STATEMENT OF OPERATIONS DATA: | |||||
Net sales | 100.0 | % | 100.0 | % | |
Cost of sales | 74.5 | 74.4 | |||
Gross profit | 25.5 | 25.6 | |||
Selling, general and administrative expenses | 11.0 | 10.2 | |||
Research and development expenses | 0.4 | 0.4 | |||
Impairment of goodwill | — | 16.3 | |||
Restructuring expenses and other | 0.6 | 0.2 | |||
Amortization of intangible assets | 3.0 | 2.9 | |||
Income from continuing operations | 10.5 | % | (4.4 | )% |
Net Sales
The following table shows the net sales by segment for the nine months ended September 30, 2012 and September 30, 2013 (in thousands):
Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | Increase | % Change | |||||||||||
Net Sales: | ||||||||||||||
Cardio & Vascular segment | $ | 234,630 | $ | 239,351 | $ | 4,721 | 2.0 | % | ||||||
Advanced Surgical segment | 141,896 | 147,617 | 5,721 | 4.0 | % | |||||||||
Total net sales | $ | 376,526 | $ | 386,968 | $ | 10,442 | 2.8 | % |
Net sales for the nine months ended September 30, 2013 were $387.0 million, an increase of approximately $10.4 million, or 2.8%, compared to net sales of $376.5 million for the nine months ended September 30, 2012. The increase in net sales was a result of an increase in shipments in both segments of approximately $17.8 million, offset in part by price decreases of $5.6 million as well as $1.8 million related to decreased sales of platinum.
Net sales for the nine months ended September 30, 2013 for the CV Segment were $239.4 million, an increase of $4.7 million, or 2.0%, compared to net sales of $234.6 million for the nine months ended September 30, 2012. The increase in net sales for the CV Segment is primarily attributed to increased volume of $10.1 million offset by price decreases of $3.6 million and $1.8 million related to decreased sales of platinum.
Net sales for the nine months ended September 30, 2013 for the AS Segment were $147.6 million, an increase of $5.7 million, or 4.0%, as compared to net sales of $141.9 million for the nine months ended September 30, 2012. The increase in net sales for the AS Segment is primarily related to increases in volume of $7.7 million offset by decreases in price of $2.0 million.
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Cost of sales
The following table shows the cost of sales by segment for the nine months ended September 30, 2012 and September 30, 2013 (in thousands):
Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | Increase | % Change | |||||||||||
Cost of Sales: | ||||||||||||||
Cardio & Vascular segment | $ | 161,946 | $ | 165,772 | $ | 3,826 | 2.4 | % | ||||||
Advanced Surgical segment | 118,424 | 122,047 | 3,623 | 3.1 | % | |||||||||
Total cost of sales | $ | 280,370 | $ | 287,819 | $ | 7,449 | 2.7 | % |
Cost of sales were $287.8 million for the nine months ended September 30, 2013 compared to $280.4 million for the nine months ended September 30, 2012, an increase of $7.4 million, or 2.7%. Cost of sales reflects our variable manufacturing and fixed overhead costs necessary to produce products for our customers. The increase in cost of sales is primarily attributable to higher costs from increased volume comprised of the following: material increases of $4.4 million which included $1.8 million of platinum cost pass through, $3.4 million related to increased manufacturing staffing, approximately $2.2 million of increased medical benefit expense, $1.4 million due to lower utilization of our fixed cost infrastructure and $0.4 million related to increased overhead staffing. These increases were offset by $4.4 million of lower depreciation.
Cost of sales for the CV Segment for the nine months ended September 30, 2013 was $165.8 million compared to $161.9 million for the nine months ended September 30, 2012, an increase of $3.8 million, or 2.4%. The increase in cost of sales for the CV Segment was primarily attributable to overhead staffing increases of $2.0 million, $1.2 million of increased medical benefit expense, material increases of $1.2 million which included $1.8 million of platinum cost pass through, $1.0 million due to lower utilization of our fixed cost infrastructure, and $0.4 million related to increased manufacturing staffing. These increases were offset by $2.0 million of lower depreciation.
Cost of sales for the AS Segment for the nine months ended September 30, 2013 was $122.0 million compared to $118.4 million for the nine months ended September 30, 2012, an increase of $3.6 million, or 3.1%. The increase in cost of sales for the AS Segment was primarily attributable to increased material cost of $3.2 million, $3.0 million related to increased manufacturing staffing, $1.0 million of increased medical benefit expense, and $0.4 million due to lower utilization of our fixed cost infrastructure. These increases were offset by $2.4 million of lower depreciation and $1.6 million of lower overhead staffing costs.
Gross profit
The following table shows the gross profit by segment for the nine months ended September 30, 2013 and September 30, 2012 (in thousands):
Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | Increase | % Change | |||||||||||
Gross Profit: | ||||||||||||||
Cardio & Vascular segment | $ | 72,684 | $ | 73,579 | $ | 895 | 1.2 | % | ||||||
Advanced Surgical segment | 23,472 | 25,570 | 2,098 | 8.9 | % | |||||||||
Total gross profit | $ | 96,156 | $ | 99,149 | $ | 2,993 | 3.1 | % |
Gross profit was $99.1 million, or 25.6%, of net sales, for the nine months ended September 30, 2013 compared to $96.2 million, or 25.5%, of net sales for the nine months ended September 30, 2012. As a percentage of sales, gross profit increased 0.1% during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 driven primarily by the AS Segment.
Gross profit for the CV Segment for the nine months ended September 30, 2013 was $73.6 million compared to $72.7 million for the nine months ended September 30, 2012, an increase of approximately $0.9 million, or 1.2%. The increase in gross profit for the CV Segment was primarily a result of the increase in sales offset in part by higher cost of sales.
Gross profit for the AS Segment for the nine months ended September 30, 2013 was $25.6 million compared to $23.5 million for the nine months ended September 30, 2012, an increase of $2.1 million, or 8.9%. The increase in gross profit for the AS Segment was primarily a result of the increase in sales offset in part by higher cost of sales.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, were $39.5 million for the nine months ended September 30, 2013 compared to $41.5 million for the nine months ended September 30, 2012. The $2.0 million decrease in SG&A expenses was primarily attributable to lower professional fees, depreciation, travel expenses, utilities and other operating expenses.
Research and Development Expenses
Research and development, or R&D, expenses for the nine months ended September 30, 2013 were approximately $1.5 million and $1.4 million for each of the nine months ended September 30, 2013 and September 30, 2012, respectively. R&D expenses represent costs related to the development of new or improved manufacturing technologies.
Impairment of Goodwill
During the first quarter of 2013, we reorganized our business into two segments, as noted above. As a result, our reportable segment information has been restated to reflect the current structure. The evaluation of the reporting units has also been reassessed and changed to reflect the current structure and operations. During the first quarter of fiscal 2013, goodwill was reassigned to the new reporting units based on the relative fair values of the reporting units. This resulted in goodwill of $134.0 million being assigned to its AS reporting unit, and $485.4 million being assigned to its CV reporting unit.
After preliminary allocation of the goodwill, the carrying amount of the AS reporting unit exceeds its fair value by approximately $16 million, which required us to perform an interim goodwill impairment test for the AS reporting unit. Pursuant to the next step of impairment testing, we calculated an implied fair value of goodwill based on a hypothetical purchase price allocation. During the first quarter of 2013, the Company had not finalized this step of its impairment testing due to the complexities involved in estimating fair value. In accordance with accounting guidance, the Company recognized an estimated impairment charge and recorded a pre-tax goodwill impairment charge of $51.0 million during the first quarter of 2013. The Company finalized the second step of the analysis in the second quarter of 2013 and recorded an additional pre-tax goodwill impairment charge of $12.1 million. The Company has recorded a total pre-tax goodwill impairment charge of $63.1 million as of September 30, 2013.
Goodwill impairment charges are excluded by management for purposes of evaluating operating performance and assessing liquidity.
Interest Expense, net
Interest expense, net, was $51.9 million for each of the nine month periods ended September 30, 2013 and September 30, 2012, due primarily to interest related to the Senior Secured Notes and Senior Subordinated Notes.
Other (Expense) Income, net
Other (expense) income, net was ($0.3) million and ($0.1) million for the nine month periods ended September 30, 2013 and September 30, 2012, respectively. Included in other (expense) income, net are foreign currency gains and losses. During the nine months ended September 30, 2013, we recorded a currency loss of approximately $1.2 million compared to a loss of approximately $0.1 million during the nine months ended September 30, 2012. The change is due to fluctuation in foreign currency exchange rates during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. In addition, we recorded income of $0.9 million during the nine months ended September 30, 2013 related to a distribution from the demutualization of an insurance company that carries our product liability insurance and sales of available for sale securities in 2013.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2013 was $3.2 million and included $2.0 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $1.2 million in state, foreign, and other taxes. Income tax expense for the nine months ended September 30, 2012 was $2.7 million and included approximately $2.1 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.6 million in state, foreign, and other taxes.
Liquidity and Capital Resources
Our principal sources of liquidity are our cash flows from continuing operations and borrowings available to us under our ABL Revolver that provides for up to $75.0 million of borrowing capacity, subject to borrowing base availability. At September 30, 2013, there were no amounts outstanding under the ABL Revolver and the Company's aggregate borrowing
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capacity was $38.6 million, after giving effect to letters of credit totaling $10.9 million. As of September 30, 2013, our total indebtedness amounted to approximately $715.0 million.
Cash provided by operating activities of continuing operations was $12.6 million during the nine months ended September 30, 2013 compared to cash provided by continuing operations of $13.7 million during the nine months ended September 30, 2012, a decrease of $1.1 million of cash provided by operating activities of continuing operations. The decrease was driven primarily by higher working capital requirements. We expect working capital to fluctuate from quarter to quarter due to various factors including inventory requirements and timing of payments from our customers and to our vendors.
Cash used in investing activities of continuing operations was $15.9 million during the nine months ended September 30, 2013 compared to $12.9 million during the nine months ended September 30, 2012. The increase in cash used for investing activities of continuing operations was primarily related to an increase in spending on capital expenditures. Cash provided by investing activities of discontinued operations was $8.0 million during the nine months ended September 30, 2013 while cash provided by investing activities of discontinued operations was $7.5 million for the nine months ended September 30, 2012. The increase in cash provided by investing activities of discontinued operations was primarily related to the receipt of proceeds from the sale of our Watertown, CT facility, during the nine months ended September 30, 2013.
The Company's cash used in financing activities for the nine months ended September 30, 2013 and September 30, 2012 was not significant.
Our planned capital expenditures for 2013 include investments related to new business opportunities, upgrades of our existing equipment infrastructure and information technology enhancements. We expect that these investments will be financed from cash flows from continuing operations.
As of September 30, 2013, we have a liability of $1.4 million, of which the Company expects to pay $0.1 million during 2013, for environmental clean-up matters. The United States Environmental Protection Agency, or EPA, issued an Administrative Consent Order in July 1988 requiring UTI, our subsidiary, to study and, if necessary, remediate the groundwater and soil beneath and around its plant in Collegeville, Pennsylvania. Since that time, UTI has implemented and is operating successfully a TCE contamination well pumping treatment system approved by the EPA. We expect to pay approximately $0.1 million of ongoing annual operating costs during each of the next five years relating to this remediation effort. Our environmental accrual at September 30, 2013 includes $1.4 million related to our Collegeville location.
Our ability to make payments on our indebtedness and to fund planned capital expenditures, other expenditures and long-term liabilities, and necessary working capital will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from continuing operations and available borrowings under the ABL Revolver will be adequate to meet our liquidity requirements for the next 12 months. However, no assurance can be given that this will be the case.
Indebtedness
At September 30, 2013, our aggregate debt was approximately $715.0 million, substantially all of which is due in 2017. Our debt consisted of our senior secured notes bearing interest at 8.375% (the “Senior Secured Notes”) and our senior subordinated notes that bear interest at 10% (the “Senior Subordinated Notes”). In addition, we have a $75 million asset based revolving credit facility. Our revolving credit facility afforded us borrowing capacity of $38.6 million at September 30, 2013, after collateralizing approximately $10.9 million of letters of credit. No amounts have been drawn under the facility since it was put in place in January 2010. As of September 30, 2013, we were in compliance with the covenants of our debt agreements.
Other Key Indicators of Financial Condition and Operating Performance
EBITDA and Adjusted EBITDA presented on a continuing operations basis in this Quarterly Report on Form 10-Q are supplemental measures of our performance that are not required by, or presented in accordance with generally accepted accounting principles in the United States, or GAAP. EBITDA and Adjusted EBITDA are not measures of our financial performance under GAAP and should not be considered as alternatives to net loss or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity.
EBITDA represents net loss before net interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA further adjusted to give effect to unusual items, non-cash items and other adjustments, all of which are defined in the indentures governing the Senior Subordinated Notes and the Senior Secured Notes and the credit agreement governing the ABL Revolver. We believe that the inclusion of EBITDA and Adjusted EBITDA in this Quarterly
35
Report on Form 10-Q is appropriate to provide additional information to investors regarding certain thresholds based on Adjusted EBITDA that we may be required to meet in certain cases that are included in the indentures governing the Senior Subordinated Notes and the Senior Secured Notes and the credit agreement governing the ABL Revolver. There are no material differences in the manner in which EBITDA and Adjusted EBITDA were determined in the past under our credit agreement, as amended.
We also present EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. We believe EBITDA facilitates operating performance comparison from period to period and company to company by backing out differences caused by variations in capital structures, tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).
In determining Adjusted EBITDA, as permitted by the terms of our indebtedness, we eliminate the impact of a number of items. For the reasons indicated herein, you are encouraged to evaluate each adjustment and whether you consider it appropriate. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• | they do not reflect our cash expenditures for capital expenditure or contractual commitments; |
• | they do not reflect changes in, or cash requirements for, our working capital requirements; |
• | they do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness; |
• | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; |
• | Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, as discussed in our presentation of “Adjusted EBITDA” in this report; and |
• | other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or reduce our indebtedness. For these purposes, we rely on our GAAP results. For more information, see our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q.
The following table sets forth a reconciliation of net (loss) income to EBITDA for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
RECONCILIATION OF NET (LOSS) INCOME TO EBITDA: | |||||||||||||||
Net (loss) income | $ | (6,480 | ) | $ | 2,363 | $ | (19,074 | ) | $ | (72,377 | ) | ||||
Interest expense, net | 17,379 | 17,288 | 51,879 | 51,865 | |||||||||||
Provision for income taxes | 999 | 1,035 | 2,717 | 3,158 | |||||||||||
Depreciation and amortization | 10,090 | 8,406 | 29,578 | 24,634 | |||||||||||
EBITDA | $ | 21,988 | $ | 29,092 | $ | 65,100 | $ | 7,280 |
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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, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
EBITDA | $ | 21,988 | $ | 29,092 | $ | 65,100 | $ | 7,280 | |||||||
Adjustments: | |||||||||||||||
Impairment of goodwill | — | — | — | 63,128 | |||||||||||
Stock-based compensation – employees | 182 | 418 | 364 | 818 | |||||||||||
Stock-based compensation - non-employees | 23 | 30 | 68 | 90 | |||||||||||
Employee severance and relocation | 500 | 152 | 1,870 | 971 | |||||||||||
Loss from discontinued operations, net | 4,925 | 63 | 4,175 | 63 | |||||||||||
Restructuring expenses | 714 | 66 | 2,552 | (115 | ) | ||||||||||
Plant closure costs & other | 194 | 27 | 517 | 1,244 | |||||||||||
Currency (gain) loss | (568 | ) | 111 | 152 | 1,231 | ||||||||||
(Gain) loss on disposal of assets | (221 | ) | 204 | (254 | ) | 896 | |||||||||
Other taxes | 80 | 70 | 395 | 218 | |||||||||||
Management fees to stockholder | 335 | 351 | 1,005 | 1,055 | |||||||||||
Realized gain on available for sale security | — | — | — | (242 | ) | ||||||||||
Adjusted EBITDA | $ | 28,152 | $ | 30,584 | $ | 75,944 | $ | 76,637 |
The differences between Adjusted EBITDA and cash flows used in operating activities are summarized as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 30, 2012 | September 30, 2013 | September 30, 2012 | September 30, 2013 | ||||||||||||
Adjusted EBITDA | $ | 28,152 | $ | 30,584 | $ | 75,944 | $ | 76,637 | |||||||
Net changes in operating assets and liabilities | (3,072 | ) | (2,759 | ) | (7,250 | ) | (8,237 | ) | |||||||
Interest expense, net | (17,379 | ) | (17,288 | ) | (51,879 | ) | (51,865 | ) | |||||||
Deferred tax provision | 620 | 290 | 2,099 | 1,394 | |||||||||||
Income tax (expense) | (999 | ) | (1,035 | ) | (2,717 | ) | (3,158 | ) | |||||||
Amortization of debt discount and non-cash interest | 796 | 830 | 2,329 | 2,449 | |||||||||||
Other items, net | (186 | ) | (933 | ) | (2,374 | ) | (4,868 | ) | |||||||
Net cash provided by operating activities | $ | 7,932 | $ | 9,689 | $ | 16,152 | $ | 12,352 | |||||||
Net cash provided by (used in) investing activities | $ | 5,507 | $ | (5,924 | ) | $ | (5,432 | ) | $ | (7,896 | ) | ||||
Net cash used in financing activities | $ | (5 | ) | $ | (2 | ) | $ | (59 | ) | $ | (9 | ) |
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.
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Contractual Obligations and Commitments
The following table sets forth our long-term contractual obligations as of September 30, 2013 (in thousands):
Payment due by Period | |||||||||||||||||||
Contractual Obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||||
Senior Secured Notes (1) | $ | 517,250 | $ | 33,500 | $ | 67,000 | $ | 416,750 | $ | — | |||||||||
Senior Subordinated Notes (1) | 456,750 | 31,500 | 63,000 | 362,250 | — | ||||||||||||||
Capital leases (1) | 11 | 7 | 4 | — | — | ||||||||||||||
Operating leases | 21,067 | 5,884 | 9,070 | 4,810 | 1,303 | ||||||||||||||
Purchase obligations (2) | 60,634 | 30,413 | 30,221 | — | — | ||||||||||||||
Other obligations (3) | 41,475 | 632 | 1,145 | 973 | 38,725 | ||||||||||||||
Total | $ | 1,097,187 | $ | 101,936 | $ | 170,440 | $ | 784,783 | $ | 40,028 |
(1) | Includes interest and principal payments. Interest is determined using the instrument’s fixed rate of interest. |
(2) | Purchase obligations consist of commitments for materials, supplies, machinery and equipment. |
(3) | Other obligations include share based payment obligations of $0.1 million payable to employees and $0.8 million payable to non-employees, environmental remediation obligations of $1.4 million, accrued compensation and pension benefits of $5.1 million, deferred income taxes of $32.8 million, accrued restructuring fees of $0.7 million and other obligations of $0.6 million. |
Critical Accounting Policies
Our unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and rules and regulations of the Securities and Exchange Commission for interim financial reporting. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates and assumptions on historical experience and other factors that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. Our most critical accounting policies are listed below:
• | Revenue recognition; |
• | Allowance for doubtful accounts; |
• | Valuation of goodwill, trade names and trademarks; |
• | Valuation of long-lived assets; |
• | Self Insurance reserves; |
• | Environmental reserves; |
• | Share Based Payments; and |
• | Income Taxes |
During the nine months ended September 30, 2013, and in connection with our reorganization into operating our business into two segments, we applied the relative fair value method to assigning goodwill to our reporting units.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During the nine months ended September 30, 2013, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission on April 1, 2013 for a more complete discussion of the market risks we encounter.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-15(b) and Rule 15d-15 under the Securities Exchange Act of 1934 and Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.
Evaluation of Disclosure Controls and Procedures: Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2013. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2013, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting: There were no changes in our internal controls over financial reporting during the nine months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.
The Pennsylvania Department of Environmental Protection (“DEP”) has filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (“EPA”) National Air Emissions Standards for hazardous air pollutants from halogenated solvent cleaning operations. These revised standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning machines) from facility emission limits for TCE and other degreaser emissions. The EPA has agreed to reconsider the exemption. Our Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since we manufacture narrow tubes. Nevertheless, we have implemented systems and controls that limit TCE emissions generated by our Collegeville facility. However, these systems and controls will not reduce our TCE emissions to the levels expected to be required should a new standard become law.
We are subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these other claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
ITEM 1A. RISK FACTORS
For a discussion of our potential risks or uncertainties, please see Part I, Item 1A, of Accellent Inc.’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 1, 2013. There have been no material changes to the risk factors disclosed in Part I, Item 1A, of Accellent Inc.’s 2012 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
No unregistered equity securities of the registrant were sold and no repurchases of equity securities were made during the nine months ended September 30, 2013.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibit Number | Description of Exhibits | |
31.1* | Rule 13a-14(a) Certification of Principal Executive Officer | |
31.2* | Rule 13a-14(a) Certification of Principal Financial Officer | |
32.1* | Section 1350 Certification of Principal Executive Officer | |
32.2* | Section 1350 Certification of Principal Financial Officer | |
Exhibit 101.INS | XBRL Instance Document. | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document. | |
Exhibit 101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |
Exhibit 101.LAB | XBRL Taxonomy Label Linkbase Document. | |
Exhibit 101.PRE | XBRL Taxonomy Presentation Linkbase Document | |
Exhibit 101.DEF | Taxonomy Definition Linkbase Document |
______________
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Accellent Inc. | ||
November 8, 2013 | By: | /s/ Donald J. Spence |
Donald J. Spence | ||
President and Chief Executive Officer (Principal Executive Officer) |
Accellent Inc. | ||
November 8, 2013 | By: | /s/ Richard E. Johnson |
Richard E. Johnson | ||
Interim Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit Number | Description of Exhibits | |
31.1* | Rule 13a-14(a) Certification of Principal Executive Officer | |
31.2* | Rule 13a-14(a) Certification of Principal Financial Officer | |
32.1* | Section 1350 Certification of Principal Executive Officer | |
32.2* | Section 1350 Certification of Principal Financial Officer | |
Exhibit 101.INS | XBRL Instance Document. | |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document. | |
Exhibit 101.CAL | XBRL Taxonomy Calculation Linkbase Document. | |
Exhibit 101.LAB | XBRL Taxonomy Label Linkbase Document. | |
Exhibit 101.PRE | XBRL Taxonomy Presentation Linkbase Document | |
Exhibit 101.DEF | Taxonomy Definition Linkbase Document |
______________
* Filed herewith.
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