Attached files
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EX-31.1 - SECTION 302 PEO CERTIFICATION - ACCELLENT INC | dex311.htm |
EX-32.2 - SECTION 906 PFO CERTIFICATION - ACCELLENT INC | dex322.htm |
EX-32.1 - SECTION 906 PEO CERTIFICATION - ACCELLENT INC | dex321.htm |
EX-31.2 - SECTION 302 PFO CERTIFICATION - ACCELLENT INC | dex312.htm |
Table of Contents
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 March 31, 2011
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 registrants principal executive offices) | (Zip code) |
(978) 570-6900
Registrants Telephone Number, Including Area Code:
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 ¨ 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 May 12, 2011 1,000 shares of the Registrants common stock were outstanding. The registrant is a wholly owned subsidiary of Accellent Holdings Corp.
Table of Contents
PART I FINANCIAL INFORMATION | 3 | |||||||
ITEM 1. | 3 | |||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
Notes to Unaudited Condensed Consolidated Financial Statements |
6 | |||||||
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
19 | ||||||
ITEM 3. | 26 | |||||||
ITEM 4. | 27 | |||||||
PART II OTHER INFORMATION | 27 | |||||||
ITEM 1. | 27 | |||||||
ITEM 1A. | 27 | |||||||
ITEM 2. | 28 | |||||||
ITEM 3. | 28 | |||||||
ITEM 4. | 28 | |||||||
ITEM 5. | 28 | |||||||
ITEM 6. | 28 | |||||||
Signatures | 29 |
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ITEM 1. | FINANCIAL STATEMENTS |
Unaudited Condensed Consolidated Balance Sheets
As of March 31, 2011 and December 31, 2010
(in thousands, except share and per share data)
March 31, 2011 |
December 31, 2010 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 30,031 | $ | 40,787 | ||||
Accounts receivable, net of allowances of $2,163 and $2,002 as of March 31, 2011 and December 31, 2010, respectively |
58,439 | 54,011 | ||||||
Inventory |
75,893 | 66,028 | ||||||
Prepaid expenses and other current assets |
3,829 | 2,650 | ||||||
Total current assets |
168,192 | 163,476 | ||||||
Property, plant and equipment, net |
121,678 | 121,037 | ||||||
Goodwill |
629,854 | 629,854 | ||||||
Other intangible assets, net |
160,891 | 164,626 | ||||||
Deferred financing costs and other assets, net |
18,456 | 19,083 | ||||||
Total assets |
$ | 1,099,071 | $ | 1,098,076 | ||||
Liabilities and Stockholders equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 21 | $ | 9 | ||||
Accounts payable |
25,489 | 24,025 | ||||||
Accrued payroll and benefits |
10,979 | 9,102 | ||||||
Accrued interest |
19,514 | 19,787 | ||||||
Accrued expenses and other current liabilities |
18,651 | 17,793 | ||||||
Total current liabilities |
74,654 | 70,716 | ||||||
Long-term debt |
712,747 | 712,675 | ||||||
Other liabilities |
36,681 | 34,177 | ||||||
Total liabilities |
824,082 | 817,568 | ||||||
Stockholders equity: |
||||||||
Common stock, par value $0.01 per share, 50,000,000 shares authorized; 1,000 shares issued and outstanding at March 31, 2011 and December 31, 2010 |
| | ||||||
Additional paid-in capital |
637,537 | 637,290 | ||||||
Accumulated other comprehensive income (loss) |
963 | (1,442 | ) | |||||
Accumulated deficit |
(363,511 | ) | (355,340 | ) | ||||
Total stockholders equity |
274,989 | 280,508 | ||||||
Total liabilities and stockholders equity |
$ | 1,099,071 | $ | 1,098,076 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Unaudited Condensed Consolidated Statements of Operations
For the three months ended March 31, 2011 and 2010
(in thousands)
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Net sales |
$ | 129,889 | $ | 122,680 | ||||
Cost of sales (exclusive of amortization) |
98,318 | 90,405 | ||||||
Gross profit |
31,571 | 32,275 | ||||||
Operating expenses: |
||||||||
Selling, general and administrative expenses |
14,112 | 13,251 | ||||||
Research and development expenses |
747 | 679 | ||||||
Amortization of intangible assets |
3,735 | 3,735 | ||||||
Total operating expenses |
18,594 | 17,665 | ||||||
Income from operations |
12,977 | 14,610 | ||||||
Other (expense) income, net: |
||||||||
Interest expense, net |
(17,249 | ) | (17,424 | ) | ||||
Loss on debt extinguishment |
| (5,791 | ) | |||||
Other (expense) income, net |
(1,934 | ) | 2,267 | |||||
Total other (expense) income, net |
(19,183 | ) | (20,948 | ) | ||||
Loss before income taxes |
(6,206 | ) | (6,338 | ) | ||||
Provision for income taxes |
1,965 | 1,481 | ||||||
Net loss |
$ | (8,171 | ) | $ | (7,819 | ) | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Unaudited Condensed Consolidated Statements of Cash Flows
For the three months ended March 31, 2011 and 2010
(in thousands)
March 31, 2011 |
March 31, 2010 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (8,171 | ) | $ | (7,819 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Depreciation and amortization |
9,441 | 9,345 | ||||||
Amortization of debt discounts and non-cash interest accrued |
720 | 958 | ||||||
Change in allowance for bad debts |
| 15 | ||||||
Restructuring charges, net of payments |
| (1,009 | ) | |||||
Change in fair value of derivative instruments |
| (909 | ) | |||||
Gain on disposal of property and equipment |
(1 | ) | | |||||
Deferred income tax expense |
740 | 731 | ||||||
Non-cash compensation expense |
271 | 40 | ||||||
Loss on debt extinguishment |
| 5,791 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(4,148 | ) | (9,342 | ) | ||||
Inventory |
(9,650 | ) | (7,197 | ) | ||||
Prepaid expenses and other current assets |
(1,171 | ) | 340 | |||||
Accounts payable, accrued expenses and other operating liabilities |
6,967 | 18,770 | ||||||
Net cash (used in) provided by operating activities |
(5,002 | ) | 9,714 | |||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(5,596 | ) | (3,807 | ) | ||||
Proceeds from sale of property and equipment |
11 | | ||||||
Net cash used in investing activities |
(5,585 | ) | (3,807 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from borrowings on long-term debt |
| 397,396 | ||||||
Repayments of long-term debt and capital lease obligations |
(6 | ) | (381,626 | ) | ||||
Payment of deferred financing fees |
(369 | ) | (11,646 | ) | ||||
Net cash (used in) provided by financing activities |
(375 | ) | 4,124 | |||||
Effect of exchange rate changes |
206 | (157 | ) | |||||
Net (decrease) increase in cash |
(10,756 | ) | 9,874 | |||||
Cash, beginning of period |
40,787 | 33,785 | ||||||
Cash, end of period |
$ | 30,031 | $ | 43,659 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 16,795 | $ | 3,597 | ||||
Cash paid for income taxes |
$ | 52 | $ | 149 | ||||
Supplemental disclosure of non-cash investing and financing activities: |
||||||||
Property and equipment purchases included in accrued expenses |
$ | 1,039 | $ | 495 | ||||
Deferred financing fees unpaid and included in accounts payable and accrued expenses |
$ | 201 | $ | 396 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2011
1. | Summary of significant accounting policies |
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Accellent Inc. and its wholly owned subsidiaries (collectively, the Company). All intercompany transactions have been eliminated.
We have 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 for complete financial statements. We have prepared the accompanying unaudited condensed consolidated financial statements on the same basis as the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, 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 financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.
There have been no significant changes in the application of our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, nor were there any significant changes resulting from the adoption of new accounting pronouncements.
Customer Concentration
During the three months ended March 31, 2011 and 2010, our ten largest customers accounted for approximately 66% and 65% of our consolidated net sales, respectively.
The actual percentage of net sales derived from each customer whose sales represented more than 10% or more of our consolidated net sales was as follows for the periods presented:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Customer A |
17 | % | 21 | % | ||||
Customer B |
15 | % | 15 | % | ||||
Customer C |
12 | % | 10 | % |
At March 31, 2011, Customers A and B each comprised approximately 11% and 13%, respectively, of Accounts receivable, net. At December 31, 2010, Customers A and B each comprised approximately 11% of Accounts receivable, net.
2. | Inventories |
Inventories consisted of the following at March 31, 2011 and December 31, 2010 (in thousands):
March 31, 2011 |
December 31, 2010 |
|||||||
Raw materials |
$ | 22,379 | $ | 16,563 | ||||
Work-in-process |
32,515 | 29,439 | ||||||
Finished goods |
20,999 | 20,026 | ||||||
Total |
$ | 75,893 | $ | 66,028 | ||||
3. | 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.
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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 three months ended March 31, 2011 and 2010.
The Company reports all amortization expense related to finite lived intangible assets separately within its unaudited condensed consolidated statement of operations. For the three months ended March 31, 2011 and 2010, the Company recorded amortization expense related to intangible assets as follows (in thousands):
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Cost of sales |
$ | 497 | $ | 497 | ||||
Selling, general and administrative |
3,238 | 3,238 | ||||||
Total |
$ | 3,735 | $ | 3,735 | ||||
Intangible assets consisted of the following at March 31, 2011 (in thousands):
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Developed technology and know how |
$ | 16,991 | $ | (10,695 | ) | $ | 6,296 | |||||
Customer contracts and relationships |
197,575 | (72,380 | ) | 125,195 | ||||||||
Trade names and trademarks |
29,400 | | 29,400 | |||||||||
Total intangible assets |
$ | 243,966 | $ | (83,075 | ) | $ | 160,891 | |||||
Intangible assets consisted of the following at December 31, 2010 (in thousands):
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||
Developed technology and know how |
$ | 16,991 | $ | (10,198 | ) | $ | 6,793 | |||||
Customer contracts and relationships |
197,575 | (69,142 | ) | 128,433 | ||||||||
Trade names and trademarks |
29,400 | | 29,400 | |||||||||
Total intangible assets |
$ | 243,966 | $ | (79,340 | ) | $ | 164,626 | |||||
Estimated intangible asset amortization expense for the remainder of 2011 will be approximately $11.2 million. The estimated annual intangible asset amortization expense in 2012 and 2013 approximates $14.9 million per year. Estimated intangible asset amortization expense approximates $13.8 million in 2014 and $13.0 million in 2015.
At March 31, 2011 and December 31, 2010, the remaining weighted-average amortization periods for the Companys finite lived intangible assets were as follows:
Remaining weighted - average amortization period | ||||||||
Finite lived intangible asset |
March 31, 2011 | December 31, 2010 | ||||||
Developed technology and know how |
3.2 | 3.4 | ||||||
Customer contracts and relationships |
9.7 | 9.9 | ||||||
Total finite lived intangible asset |
9.4 | 9.6 |
4. | Long-term debt |
Long-term debt consisted of the following at March 31, 2011 and December 31, 2010 (in thousands):
March 31, 2011 |
December 31, 2010 |
|||||||
Senior secured notes maturing on February 1, 2017, interest at 8.375% |
$ | 400,000 | $ | 400,000 | ||||
Senior subordinated notes maturing on November 1, 2017, interest at 10.0% |
315,000 | 315,000 | ||||||
Capital lease obligations |
43 | 33 | ||||||
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March 31, 2011 |
December 31 2010 |
|||||||
Total debt |
715,043 | 715,033 | ||||||
Lessunamortized discount |
(2,275 | ) | (2,349 | ) | ||||
Lesscurrent portion |
(21 | ) | (9 | ) | ||||
Long term debt, excluding current portion |
$ | 712,747 | $ | 712,675 | ||||
In January 2010, the Company repaid the entire balance then outstanding of its term loan totaling $381.6 million plus accrued interest with proceeds received from a $400 million sale of Senior Secured Notes (the Refinancing). As part of the Refinancing, the Company terminated its revolving credit facility and replaced it with a new senior secured asset-based revolving credit facility (the ABL Revolver). In connection with the Refinancing, the Company wrote off existing deferred financing costs, paid premiums and certain other fees to holders of the refinanced old obligations resulting in a loss on the extinguishment of these old obligations of approximately $5.8 million.
The following describes the significant terms and conditions of the Companys long-term debt arrangements in place at March 31, 2011.
Senior Secured Notes and Revolving Credit Facility
The Senior Secured Notes bear interest at 8.375% per annum and mature on February 1, 2017. Interest is payable semi-annually on August 1 and February 1. Prior to February 1, 2013, the Company may redeem the Senior Secured Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium. Additionally, during any 12-month period commencing on the issue date, the Company may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemption price equal to 103.00% of the principal amount thereof plus accrued and unpaid interest, if any. The Company may also redeem any of the Senior Secured Notes at any time on or after February 1, 2013, in whole or in part, at the redemption price plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to February 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the Senior Secured Notes with the net proceeds of certain equity offerings, provided at least 65% of the aggregate principal amount of the Senior Secured Notes remains outstanding immediately after such redemption. Upon a change of control, the Company would be required to offer to purchase all of the outstanding Senior Secured Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.
The Senior Secured Notes are subject to certain restrictions. The Senior Secured Notes and related guarantees are the Companys and the guarantors senior secured obligations and 1) rank senior in right of payment to the existing and any future subordinated and unsecured indebtedness, including the Companys existing senior subordinated notes; and 2) rank equally in right of payment with all of the Companys and guarantors existing and future senior indebtedness, including any amounts outstanding under the ABL Revolver. The Companys obligations under the Senior Secured Notes are jointly and severally guaranteed on a senior secured basis by the Company and all of the Companys domestic subsidiaries (refer to Note 14). All obligations under the Senior Secured Notes, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Companys assets and the assets of the guarantors. Further, the Senior Secured Notes have a second-party interest in the ABL Revolver Collateral described below.
Coincident with the issuance of the Senior Secured Notes in January 2010, the Company entered into the ABL Revolver pursuant to a credit agreement among the Company and a syndicate of financial institutions. The ABL Revolver provides for revolving credit financing of up to $75.0 million, subject to borrowing base availability, and matures in January 2015. The borrowing base at any time is limited to a percentage of eligible accounts receivable and inventories. Borrowings under the ABL Revolver bear interest at a rate per annum equal to, at the Companys option: either (a) a base rate determined by reference to the highest of (1) the prime rate of the administrative agent, (2) the federal funds effective rate plus 1/2 of 1% or (3) the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for a three month interest period plus 1%; or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin set at 2.25% per annum with respect to base rate borrowings and 3.25% per annum with respect to LIBOR borrowings. In addition to interest on any outstanding borrowings under the ABL Revolver, the Company is required to pay a commitment fee of 0.50% per annum related to unutilized commitments. The Company must also pay customary administrative agency fees and customary letter of credit fees equal to the applicable margin on LIBOR loans. Total amount of commitment, administrative agency and letter of credit fees incurred under the ABL Revolver for the three months ended March 31, 2011 and 2010, amount to $0.2 million and $0.2 million, respectively and are included within Interest expense, net in the accompanying consolidated statements of.
All outstanding loans under the ABL Revolver are due and payable in full in January 2015. All obligations under the ABL Revolver are unconditionally guaranteed jointly and severally on a senior secured basis by all the Companys existing and subsequently acquired or organized, direct or indirect U.S. restricted subsidiaries and in any event by all subsidiaries that
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guarantee the Senior Secured Notes. All obligations under the ABL Revolver, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Companys assets and the assets of the guarantors (the ABL Revolver Collateral).
Under the ABL Revolver, if the Companys borrowing availability falls below 15% of the lesser of (i) the commitment amount and (ii) the borrowing base for 5 consecutive business days, the Company will be required to satisfy and maintain a fixed charge coverage ratio not less than 1.1 to 1 until the first day thereafter on which excess availability has been greater than 15% of the lesser of (i) the commitment amount and (ii) the borrowing base for 30 consecutive days. A breach of any of these restrictions or failure to satisfy the fixed charge coverage ratio requirement, should the Company be in such a scenario, could result in an event of default under the credit agreement that governs the ABL Revolver and indentures that govern the Senior Secured Notes and the 2017 Subordinated Notes described below in which case all amounts outstanding could become immediately due and payable.
At March 31, 2011, there were no amounts outstanding under the ABL Revolver and the Companys aggregate borrowing capacity was $31.2 million, after giving effect to outstanding letters of credit totaling $12.2 million and the amount of the ineligible accounts receivable and inventories, as defined in the credit agreement governing the ABL Revolver.
Senior Subordinated Notes
The Senior Subordinated Notes bear interest at 10.0% per annum and mature on November 1, 2017. Interest is payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2011. Prior to November 1, 2013, the Company may redeem the Senior Subordinated Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any, to the date of redemption. The Company may also redeem any of the Senior Subordinated Notes at any time on or after November 1, 2013, in whole or in part, at the redemption prices set forth in the indenture agreement under which the Senior Subordinated Notes were issued plus accrued and unpaid interest, if any, to the date of redemption. In addition, prior to November 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the Senior Subordinated Notes issued under the indenture with the net proceeds of certain equity offerings, provided at least 65% of the aggregate principal amount of the Senior Subordinated Notes remain outstanding immediately after such redemption. Upon a change of control, the Company will be required to offer to purchase the Senior Subordinated Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.
The Senior Subordinated Notes are subject to certain restrictions. The Companys obligations under the Senior Subordinated Notes are jointly and severally guaranteed on a senior subordinated basis by all of the Companys domestic restricted subsidiaries (refer to Note 14). The Senior Subordinated Notes and related guarantees are the Companys and the guarantors senior subordinated obligations and 1) rank equally in right of payment with all senior subordinated indebtedness of the Company and the guarantors; and 2) rank senior in right of payment to any future indebtedness of the Company and guarantors that is, by its term, expressly subordinated in right of payment to the Senior Subordinated Notes; and 3) are subordinated in the right of payment to all existing and future senior indebtedness of the Company and the guarantors (including the ABL Revolver and Senior Secured Notes and guarantees with respect thereto); and 4) are effectively subordinated in right of payment to all secured indebtedness of the Company and the guarantors (including the ABL Revolver and Senior Secured Notes and guarantees with respect thereto) to the extent of the value of the assets securing such indebtedness; and 5) are structurally subordinated to all existing and future indebtedness and other liabilities of the Companys non-guarantor subsidiaries (other than indebtedness and liabilities owed to the Company or one of its guarantor subsidiaries).
The indentures that govern the Senior Secured Notes, the Senior Subordinated Notes and the credit agreement that governs the ABL Revolver, contain restrictions on the Companys ability, and the ability of the Companys subsidiaries: to (i) incur additional indebtedness or issue preferred stock; (ii) repay subordinated indebtedness prior to its stated maturity; (iii) pay dividends on, repurchase or make distributions in respect of the Companys capital stock or make other restricted payments; (iv) make certain investments; (v) sell certain assets; (vi) create liens; (vii) consolidate, merge, sell or otherwise dispose of all or substantially all of the Companys assets; and (viii) enter into certain transactions with the Companys affiliates.
5. | Derivative instruments |
The Company maintained an interest rate swap agreement (the swap or the swap agreement) that, through January 29, 2010, the closing date of the Refinancing, was used to mitigate its exposure to changes in cash flows from movements in variable interest rates on its long term debt. In connection with the Refinancing, the swap was amended as to the counter-party and the Company was required to collateralize the fair value of the swap with the ABL Revolver.
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The interest rate swap agreement was designated as a cash flow hedge effective November 30, 2006. The Company used the dollar off-set method for measuring hedge effectiveness, the application of which included the Hypothetical Derivative Method. Upon designation as a cash flow hedge, changes in the fair value of the interest rate swap which related to the effective portion of the hedge were recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged cash flows affected earnings. Changes in the fair value of the interest rate swap which related to the ineffective portion of the interest rate swap were recorded in other (expense) income, net. On February 27, 2010, the notional amount of the Companys swap contract decreased to $125.0 million and the swap contract expired on November 27, 2010. The Company was receiving variable rate payments (equal to the three-month LIBOR rate) during the term of the swap contract and was obligated to pay fixed interest rate payments at 4.85% during the term of the contract.
At September 30, 2009, the Company determined that hedge accounting was no longer appropriate, as the hedged forecasted cash flow transactions were no longer probable of occurring due to the anticipation of the refinancing of the underlying debt which occurred in January 2010.
The Company did not have any derivative instruments at December 31, 2010 and March 31, 2011.
The following table summarizes the change in the Companys liability for its interest rate swap contract for the three months ended March 31, 2010 (in thousands):
March 31, 2010 |
||||
Liability balance at beginning of period |
$ | 4,511 | ||
Cash paid to settle derivative liability |
(1,818 | ) | ||
Unrealized gain included in other (expense) income, net |
909 | |||
Liability balance at March 31 |
$ | 3,602 | ||
Cash paid to settle the derivative liability has been reported as a component of interest expense, net in the accompanying condensed consolidated statements of operations for the three months ended March 31, 2010.
The following table summarizes the activity related to the Companys derivative instruments during the periods they were not designated as hedging instruments during the three months ended March 31, 2010 (in thousands):
Location of gain(loss) on derivative instrument recognized in consolidated statements of operations |
Amount of gain recognized in income Three months ended March 31, 2010 |
|||||
Interest rate swap contracts |
Other (expense) income, net | $ | 909 |
6. | Restructuring charges |
During the three months ended March 31, 2011 and 2010, the Company undertook no restructuring actions.
The following table summarizes the amounts recorded related to restructuring activities, which are included in the accompanying unaudited condensed consolidated statements of operations for the three months ended March 31, 2010 (in thousands):
Employee costs |
Other exit costs |
Total | ||||||||||
Balance, January 1, 2010 |
$ | 1,525 | $ | 72 | $ | 1,597 | ||||||
Payments |
(1,009 | ) | | (1,009 | ) | |||||||
Balance at March 31, 2010 |
$ | 516 | $ | 72 | $ | 588 | ||||||
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All previously taken restructuring actions were completed as of December 31, 2010. The Company had no amounts recorded related to restructuring actions as of March 31, 2011 and December 31, 2011.
7. | 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 Companys 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 March 31, 2011 and 2010:
March 31, 2011 | March 31, 2010 | |||||||||||||||
Liability (in thousands) |
Roll-Over Options Outstanding |
Liability (in thousands) |
Roll-Over Options Outstanding |
|||||||||||||
Balance at January 1 |
$ | 448 | 250,049 | $ | 1,024 | 576,390 | ||||||||||
Change in fair value |
1 | | | | ||||||||||||
Balance at end of period |
$ | 449 | 250,049 | $ | 1,024 | 576,390 | ||||||||||
The Companys 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 Companys 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 its 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. 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 Companys financial performance and the risks associated with the illiquid nature of Accellent Holdings Corp. common stock. The expected life of an option is estimated based on past exercise experience.
During the three months ended March 31, 2011 and March 31, 2010, the Company granted stock options to employees to purchase approximately 165,000 and 40,000 shares, respectively, of Accellent Holdings Corp. common stock, Of the total stock options granted during the three months ended March 31, 2011 and March 31, 2010, 82,500 and 40,000, respectively, related to Performance-Based awards. All stock options granted during the three months ended March 31, 2011 and March 31, 2010 had a weighted average grant date fair value of $3.00 per share.
The following tables summarizes 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 months ended March 31, 2011 and 2010:
Classification of expense (in thousands):
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Cost of sales |
$ | 28 | $ | 44 | ||||
Selling, general and administrative |
220 | (28 | ) | |||||
Total |
$ | 248 | $ | 16 | ||||
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Stock-based compensation related to stock awards by type of award (in thousands):
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Time-based vesting awards |
$ | 225 | $ | (89 | ) | |||
Performance-based vesting awards |
| 78 | ||||||
Restricted stock awards |
22 | 27 | ||||||
Roll-over options |
1 | | ||||||
Total expense |
$ | 248 | $ | 16 | ||||
At March 31, 2011, the Company determined that attainment of certain of the 2011 targets necessary for Performance-Based options to vest is not probable. Accordingly, we have not recorded stock-based compensation expense for Performance-Based Stock Awards during the three months ended March 31, 2011. At March 31, 2010, the Company determined that attainment of certain of the 2010 targets necessary for Performance Based options to vest was likely to be achieved. Accordingly, $0.1 million of expense related to Performance Based options was recorded during the three months ended March 31, 2010.
The total unvested Performance-Based shares and their aggregate fair values were 3,546,885 and 1,875,508 and $4.2 million and $2.2 million at March 31, 2011 and 2010, respectively. The total unvested Time-Based shares and their aggregate fair values were 2,989,353 and 1,555,792 and $3.4 million and $1.7 million at March 31, 2011 and 2010, respectively. The total unvested Restricted Stock awards and their aggregate fair value are 58,667 and 120,000 and $0.2 million and $0.4 million at March 31, 2011 and 2010, respectively.
Non-employee stock-based compensation During the three months ended March 31, 2011 and 2010, the Company recognized approximately $23,000 and $24,000 of non-employee stock-based compensation related to fees paid to members of the Companys Board of Directors. These fees are recorded as a liability and recorded in Other liabilities in the unaudited condensed consolidated balance sheets.
8. | Income taxes |
The Company provides for deferred income taxes resulting from temporary differences between financial and taxable income as well as current taxes attributable to the states and foreign jurisdictions in which we are 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.
Income tax expense for the three months ended March 31, 2011 was $2.0 million and included $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $1.3 million in state and foreign income taxes. Income tax expense for the three months ended March 31, 2010 was $1.5 million and included $0.7 million of deferred income taxes for differences in the book and tax treatment of goodwill and $0.8 million in state and foreign income taxes.
The Company believes that it is more likely than not that the Company will not recognize the benefits of its domestic federal and state deferred tax assets. As a result, the Company continues to provide a full valuation allowance on those deferred tax assets. The Companys deferred tax assets are not offset by the tax liabilities related to non-deductible goodwill when determining the need for a valuation allowance. The Company has $26.8 million and $26.1 million of net deferred tax liabilities included in other liabilities in the accompanying unaudited condensed consolidated balance sheets as of March 31, 2011 and December 31, 2010, respectively, relating to goodwill basis differences.
The Company is subject to income taxes in the U.S. Federal jurisdiction, and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax law and regulations and require significant judgment to apply. The Company is not currently under any examination by U.S. Federal, state and local, or non-U.S. tax authorities. The tax years ended December 31, 2005 through 2010, 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.
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9. | Related party transactions |
The Company maintains a management services agreement with its principal equity owner, Kohlberg, Kravis, Roberts & Co., (KKR) pursuant to which KKR will provide certain structuring, consulting and management advisory services. During the three months ended March 31, 2011 and 2010, the Company incurred management fees and related expenses pursuant to this agreement of $0.3 million in each three month period. As of March 31, 2011 and December 31, 2010, the Company owed KKR $0.3 million and $1.2 million, respectively, for unpaid management fees which are included in accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheets. The Company has also historically utilized the services of Capstone Consulting LLC (Capstone), an entity affiliated with KKR. During the three months ended March 31, 2011 and 2010, the Company incurred consulting fees and related expenses of $0.1 million and $0.2 million, respectively. At March 31, 2011 and December 31, 2010, the Company owed Capstone $0.3 million.
In addition to the above, entities affiliated with KKR Asset Management (KKR-AM), an affiliate of KKR, owned approximately $37.0 million principal amount of the Companys Senior Secured Notes and approximately $12.1 million principal amount of the Companys 2017 Subordinated Notes at March 31, 2011. Entities affiliated with KKR-AM, an affiliate of KKR, owned approximately $15 million principal amount of the Companys Senior Secured Notes and approximately $36 million principal amount of the Companys 2017 Subordinated Notes at December 31, 2010.
The Company sells products to Biomet, Inc., which in September 2007 became privately owned by a consortium of private equity sponsors, including KKR. Net sales resulting from product shipments to Biomet, Inc. during the three months ended March 31, 2011 and 2010 totaled $0.1 million in each period. At March 31, 2011 and December 31, 2010, accounts receivable from Biomet aggregated $0.1 million at each date.
The Company utilizes the services of SunGard Data Systems, Inc. (SunGard), a provider of software and information processing solutions, which is privately owned by a consortium of private equity sponsors, including KKR and Bain Capital. The Company maintains an agreement with SunGard to provide information systems hosting services for the Company. The Company incurred approximately $0.1 million and $0.1 million in fees in connection with this agreement for the three months ended March 31, 2011 and 2010, respectively.
10. | 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 7.
The following tables provide a summary of the financial assets and liabilities recorded at fair value at March 31, 2011 and December 31, 2010:
Fair Value Measurements at March 31, 2011 determined using |
||||||||||||||||
Total Carrying Value at March 31, 2011 |
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 |
$ | 449 | $ | | $ | | $ | 449 |
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Fair Value Measurements at December 31, 2010 determined using |
||||||||||||||||
Total Carrying Value at December 31, 2010 |
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 |
$ | 448 | $ | | $ | | $ | 448 |
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 March 31, 2011 and December 31, 2010 based on the short-term nature of these items. |
| Borrowings under the Senior Secured Notes due 2017Borrowings under the Senior Secured Notes due 2017 have a fixed rate. The Company intends to carry the Senior Secured Notes until their maturity. At March 31, 2011 and December 21, 2010, the fair value of the Senior Secured Notes due 2017, based on a quoted market price , was approximately 106.5% or $426 million and 103% or $412 million, respectively, compared to the carrying value of $400 million. |
| Borrowings under the Senior Subordinated Notes due 2017Borrowings under the Senior Subordinated Notes due 2017 have a fixed rate. At March 31, 2011 and December 31, 2010, the carrying amount of this debt was consistent with the fair value based on active trades in the secondary market. |
11. | Contingencies |
The Company is subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
12. | Comprehensive loss |
Comprehensive loss represents net loss plus or minus any changes in stockholders equity related to currency translation adjustments. For the three months ended March 31, 2011 and 2010, the Company recorded a comprehensive loss as follows (in thousands):
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Net loss |
$ | (8,171 | ) | $ | (7,819 | ) | ||
Cumulative translation adjustments |
2,405 | (2,079 | ) | |||||
Comprehensive loss |
$ | (5,766 | ) | $ | (9,898 | ) | ||
13. | Environmental matters |
The Pennsylvania Department of Environmental Protection (DEP) has filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (EPA) National Air Emissions Standards for hazardous air pollutants from halogenated solvent cleaning operations. These revised standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning machines) from facility emission limits for Trichloroethylene (TCE) and other degreaser emissions. The EPA has agreed to reconsider the exemption. The Companys Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since the Company manufactures narrow tubes. As part of efforts to lower TCE emissions, the Company has begun to implement a process that will reduce the Companys TCE emissions generated by its Collegeville facility. However, this process will not reduce TCE emissions to the levels required should a new standard become law.
At March 31, 2011 and December 31, 2010, the Company maintained reserves for environmental liabilities of approximately $1.8 million and $1.9 million, respectively of which the Company expects to pay $0.1 million during 2011.
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14. | Supplemental guarantor condensed consolidating financial statements |
In connection with the Companys issuance of the Senior Secured Notes and Senior Subordinated Notes (refer to Note 4) (collectively the Notes), all of our domestic subsidiaries (the Subsidiary Guarantors) which are 100% owned, guaranteed on a joint and several, full and unconditional basis, the repayment by Accellent Inc. of such 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 for the three months ended March 31, 2011 and 2010 the unaudited condensed consolidating balance sheets as of March 31, 2011 and December 31, 2010, and the unaudited condensed consolidating statements of cash flows for the three months ended March 31, 2011 and 2010, of Accellent Inc. (the Parent), the Subsidiary Guarantors and the Non-Guarantor Subsidiaries.
Unaudited Consolidating Statements of Operations
Three months ended March 31, 2011 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 121,145 | $ | 9,184 | $ | (440 | ) | $ | 129,889 | |||||||||
Cost of sales (exclusive of amortization) |
| 93,126 | 5,632 | (440 | ) | 98,318 | ||||||||||||||
Selling, general and administrative expenses |
22 | 13,300 | 790 | | 14,112 | |||||||||||||||
Research and development expenses |
| 490 | 257 | | 747 | |||||||||||||||
Amortization of intangibles |
3,735 | | | | 3,735 | |||||||||||||||
(Loss) income from operations |
(3,757 | ) | 14,229 | 2,505 | | 12,977 | ||||||||||||||
Interest expense, net |
(17,221 | ) | (28 | ) | | | (17,249 | ) | ||||||||||||
Other (expense) income, net |
(1 | ) | (161 | ) | (1,772 | ) | | (1,934 | ) | |||||||||||
Equity in earnings of affiliates |
12,808 | 400 | | (13,208 | ) | | ||||||||||||||
Provision for income taxes |
| (1,632 | ) | (333 | ) | | (1,965 | ) | ||||||||||||
Net (loss) income |
$ | (8,171 | ) | $ | 12,808 | $ | 400 | $ | (13,208 | ) | $ | (8,171 | ) | |||||||
Unaudited Consolidating Statements of Operations
Three months ended March 31, 2010 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 116,892 | $ | 6,017 | $ | (229 | ) | $ | 122,680 | |||||||||
Cost of sales (exclusive of amortization) |
| 86,533 | 4,101 | (229 | ) | 90,405 | ||||||||||||||
Selling, general and administrative expenses |
23 | 12,520 | 708 | | 13,251 | |||||||||||||||
Research and development expenses |
| 490 | 189 | | 679 | |||||||||||||||
Amortization of intangible assets |
3,735 | | | | 3,735 | |||||||||||||||
(Loss) income from operations |
(3,758 | ) | 17,349 | 1,019 | | 14,610 | ||||||||||||||
Interest expense, net |
(17,407 | ) | (17 | ) | | | (17,424 | ) | ||||||||||||
Loss on debt extinguishment |
(5,791 | ) | | | | (5,791 | ) | |||||||||||||
Other (expense) income, net |
910 | 99 | 1,258 | | 2,267 | |||||||||||||||
Equity in earnings of affiliates |
19,298 | 1,994 | | (21,292 | ) | | ||||||||||||||
Provision for income taxes |
(1,071 | ) | (127 | ) | (283 | ) | | (1,481 | ) | |||||||||||
Net (loss) income |
$ | (7,819 | ) | $ | 19,298 | $ | 1,994 | $ | (21,292 | ) | $ | (7,819 | ) | |||||||
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Unaudited Condensed Consolidating Balance Sheets
March 31, 2011 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Cash |
$ | | $ | 26,437 | $ | 3,594 | $ | | $ | 30,031 | ||||||||||
Accounts receivable, net |
| 54,897 | 4,420 | (878 | ) | 58,439 | ||||||||||||||
Inventories |
| 72,371 | 3,522 | | 75,893 | |||||||||||||||
Prepaid expenses and other current assets |
(3 | ) | 3,564 | 268 | | 3,829 | ||||||||||||||
Total current assets |
(3 | ) | 157,269 | 11,804 | (878 | ) | 168,192 | |||||||||||||
Property, plant and equipment, net |
| 107,569 | 14,109 | | 121,678 | |||||||||||||||
Intercompany receivables, net |
| 228,949 | 21,934 | (250,883 | ) | | ||||||||||||||
Investment in subsidiaries |
441,407 | 38,803 | | (480,210 | ) | | ||||||||||||||
Goodwill |
629,854 | | | | 629,854 | |||||||||||||||
Other intangible assets, net |
160,891 | | | | 160,891 | |||||||||||||||
Deferred financing costs and other assets, net |
17,783 | 362 | 311 | | 18,456 | |||||||||||||||
Total assets |
$ | 1,249,932 | $ | 532,952 | $ | 48,158 | $ | (731,971 | ) | $ | 1,099,071 | |||||||||
Current portion of long-term debt |
$ | | $ | 21 | $ | | $ | | $ | 21 | ||||||||||
Accounts payable |
| 24,168 | 1,880 | (559 | ) | 25,489 | ||||||||||||||
Accrued expenses and other current liabilities |
19,735 | 24,446 | 4,967 | (4 | ) | 49,144 | ||||||||||||||
Total current liabilities |
19,735 | 48,635 | 6,847 | (563 | ) | 74,654 | ||||||||||||||
Long-term debt |
953,883 | 10,062 | | (251,198 | ) | 712,747 | ||||||||||||||
Other long-term liabilities |
1,325 | 32,848 | 2,508 | | 36,681 | |||||||||||||||
Total liabilities |
974,943 | 91,545 | 9,355 | (251,761 | ) | 824,082 | ||||||||||||||
Equity |
274,989 | 441,407 | 38,803 | (480,210 | ) | 274,989 | ||||||||||||||
Total liabilities and equity |
$ | 1,249,932 | $ | 532,952 | $ | 48,158 | $ | (731,971 | ) | $ | 1,099,071 | |||||||||
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Unaudited Condensed Consolidating Balance Sheets
December 31, 2010 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Cash |
$ | | $ | 38,392 | $ | 2,395 | $ | | $ | 40,787 | ||||||||||
Accounts receivable, net |
| 51,816 | 3,175 | (980 | ) | 54,011 | ||||||||||||||
Inventories |
| 63,028 | 3,000 | | 66,028 | |||||||||||||||
Prepaid expenses and other current assets |
2 | 2,537 | 111 | | 2,650 | |||||||||||||||
Total current assets |
2 | 155,773 | 8,681 | (980 | ) | 163,476 | ||||||||||||||
Property, plant and equipment, net |
| 107,655 | 13,382 | | 121,037 | |||||||||||||||
Intercompany receivables, net |
| 212,206 | 21,504 | (233,710 | ) | | ||||||||||||||
Investment in subsidiaries |
426,194 | 36,197 | | (462,391 | ) | | ||||||||||||||
Goodwill |
629,854 | | | | 629,854 | |||||||||||||||
Other intangible assets, net |
164,626 | | | | 164,626 | |||||||||||||||
Deferred financing costs and other assets, net |
18,430 | 353 | 300 | | 19,083 | |||||||||||||||
Total assets |
$ | 1,239,106 | $ | 512,184 | $ | 43,867 | $ | (697,081 | ) | $ | 1,098,076 | |||||||||
Current portion of long-term debt |
$ | $ | 9 | $ | | $ | | $ | 9 | |||||||||||
Accounts payable |
55 | 22,784 | 1,596 | (410 | ) | 24,025 | ||||||||||||||
Accrued expenses and other current liabilities |
20,375 | 22,579 | 3,741 | (13 | ) | 46,682 | ||||||||||||||
Total current liabilities |
20,430 | 45,372 | 5,337 | (423 | ) | 70,716 | ||||||||||||||
Long-term debt |
936,877 | 10,065 | | (234,267 | ) | 712,675 | ||||||||||||||
Other long-term liabilities |
1,291 | 30,553 | 2,333 | | 34,177 | |||||||||||||||
Total liabilities |
958,598 | 85,990 | 7,670 | (234,690 | ) | 817,568 | ||||||||||||||
Equity |
280,508 | 426,194 | 36,197 | (462,391 | ) | 280,508 | ||||||||||||||
Total liabilities and equity |
$ | 1,239,106 | $ | 512,184 | $ | 43,867 | $ | (697,081 | ) | $ | 1,098,076 | |||||||||
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Unaudited Condensed Consolidating Statements of Cash Flows
Three months ended March 31, 2011 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (16,563 | ) | $ | 9,101 | $ | 2,460 | $ | | $ | (5,002 | ) | ||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property and equipment |
| (4,607 | ) | (989 | ) | | (5,596 | ) | ||||||||||||
Proceeds from the sale of property and equipment |
| 11 | | | 11 | |||||||||||||||
Net cash used in investing activities |
| (4,596 | ) | (989 | ) | | (5,585 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Principal payments on long-term debt |
(6 | ) | | | (6 | ) | ||||||||||||||
Intercompany (advances) receipts |
16,932 | (16,501 | ) | (431 | ) | | | |||||||||||||
Payment of deferred financing fees |
(369 | ) | | | | (369 | ) | |||||||||||||
Cash flows provided by (used in) financing activities |
16,563 | (16,507 | ) | (431 | ) | | (375 | ) | ||||||||||||
Effect of exchange rate changes |
| 47 | 159 | | 206 | |||||||||||||||
Net (decrease) increase in cash |
| (11,955 | ) | 1,199 | | (10,756 | ) | |||||||||||||
Cash, beginning of period |
| 38,392 | 2,395 | | 40,787 | |||||||||||||||
Cash, end of period |
$ | | $ | 26,437 | $ | 3,594 | $ | | $ | 30,031 | ||||||||||
Unaudited Consolidating Statements of Cash Flows Three months ended March 31, 2010 (in thousands):
|
| |||||||||||||||||||
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (2,370 | ) | $ | 10,682 | $ | 1,402 | $ | | $ | 9,714 | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Purchases of property and equipment |
| (3,451 | ) | (356 | ) | | (3,807 | ) | ||||||||||||
Proceeds from the sale of property and equipment |
| | | | | |||||||||||||||
Net cash used in investing activities |
| (3,451 | ) | (356 | ) | | (3,807 | ) | ||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Proceeds from borrowings on long-term debt |
397,396 | | | | 397,396 | |||||||||||||||
Principal payments on long-term debt |
(381,624 | ) | (2 | ) | | | (381,626 | ) | ||||||||||||
Intercompany (advances) receipts |
(1,756 | ) | 2,981 | (1,225 | ) | | | |||||||||||||
Payment of deferred financing fees |
(11,646 | ) | | | | (11,646 | ) | |||||||||||||
Cash flows provided by (used in) financing activities |
2,370 | 2,979 | (1,225 | ) | | 4,124 | ||||||||||||||
Effect of exchange rate changes |
| (50 | ) | (107 | ) | | (157 | ) | ||||||||||||
Net increase (decrease) in cash |
| 10,160 | (286 | ) | | 9,874 | ||||||||||||||
Cash, beginning of period |
| 31,739 | 2,046 | | 33,785 | |||||||||||||||
Cash, end of period |
$ | | $ | 41,899 | $ | 1,760 | $ | | $ | 43,659 | ||||||||||
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15. | Changes in Stockholders Equity |
The following table summarizes the changes in stockholders equity during the three months ended March 31, 2011:
Common Stock | Additional Paid-In Capital |
Accumulated other comprehensive income (loss) |
Accumulated (deficit) |
Total Equity |
||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance, January 1, 2011 |
1,000 | $ | | $ | 637,290 | $ | (1,442 | ) | $ | (355,340 | ) | $ | 280,508 | |||||||||||
Comprehensive loss: |
||||||||||||||||||||||||
Net loss |
| | | (8,171 | ) | (8,171 | ) | |||||||||||||||||
Cumulative translation adjustment |
| | 2,405 | | 2,405 | |||||||||||||||||||
Total comprehensive loss |
(5,766 | ) | ||||||||||||||||||||||
Stock-based compensation |
| 247 | | | 247 | |||||||||||||||||||
Balance at March 31, 2011 |
1,000 | $ | | $ | 637,537 | $ | 963 | $ | (363,511 | ) | $ | 274,989 | ||||||||||||
ITEM 2. | MANAGEMENTS 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 Managements Discussion and Analysis of Financial Condition and Results of Operations, may constitute forward-looking statements. In some cases you can identify these forward-looking statements by words like may, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of those words and other comparable words. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those indicated in these statements as a result of certain factors as more fully discussed under the heading Risk Factors contained in our annual report on Form 10-K filed on March 25, 2011 with the Securities and Exchange Commission (File No. 333-130470) for the Companys fiscal year ended December 31, 2010. The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included herein.
We undertake no obligation to update publicly or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Unless the context otherwise requires, references in this Form 10-Q to Accellent, we, our and us refer to Accellent Inc. and its consolidated subsidiaries.
Overview
We believe that we are a leading provider of outsourced precision manufacturing services in our target markets within the medical device industry. We offer our customers design and engineering, precision component manufacturing, device assembly and supply chain management services. We have extensive resources focused on providing our customers with reliable, high quality, cost-efficient, integrated outsourced solutions. Based on discussions with our customers, we believe we often become the sole supplier of manufacturing and engineering services for the products we provide to our customers.
We primarily focus on leading companies in large and growing markets within the medical device industry including cardiology, endoscopy, and orthopaedics. Our customers include many of the leading medical device companies including Abbott Laboratories, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, St. Jude Medical, Stryker and Zimmer. 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 the three months ended March 31, 2011 and 2010, our 10 largest customers accounted for approximately 66% and 65% of our consolidated net sales, respectively. Three customers each accounted for 10% or more of consolidated net sales during the three months ended March 31, 2011 and 2010. We expect net sales from our largest customers to continue to constitute a significant portion of our net sales in the future.
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The actual percentage of net sales derived from each customer whose sales represented more than 10% or more of our consolidated net sales were as follows for the periods presented:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Customer A |
17 | % | 21 | % | ||||
Customer B |
15 | % | 15 | % | ||||
Customer C |
12 | % | 10 | % |
Results of Operations
The following table sets forth percentages derived from the unaudited condensed consolidated statements of operations for the three months ended March 31, 2011 and 2010, presented as a percentage of net sales.
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
STATEMENT OF OPERATIONS DATA: |
||||||||
Net sales |
100.0 | % | 100.0 | % | ||||
Cost of sales |
75.7 | 73.7 | ||||||
Gross profit |
24.3 | 26.3 | ||||||
Selling, general and administrative expenses |
10.8 | 10.8 | ||||||
Research and development expenses |
0.6 | 0.6 | ||||||
Amortization of intangibles |
2.9 | 3.0 | ||||||
Income from Operations |
10.0 | % | 11.9 | % | ||||
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
Net Sales
Net sales for the three months ended March 31, 2011 were $129.9 million, an increase of $7.2 million, or 5.9%, compared to net sales of $122.7 million for the three months ended March 31, 2010. Net sales were impacted by increased sales volume totaling $4.9 million, net of price decreases of $1.7 million, and $2.3 million related to increased sales of platinum resulting primarily from passing through to our customers, increases in precious metal prices which do not benefit gross profit.
Cost of goods sold and gross profit
Cost of goods sold was $98.3 million for the three months ended March 31, 2011 compared to $90.4 million for the three months ended March 31, 2010, an increase of $7.9 million, or 8.7%. Cost of goods sold reflects our variable manufacturing costs and our fixed overhead costs necessary to produce product for our customers. The increase in cost of goods sold is primarily attributable to increased material costs resulting from the sales increase related to platinum, of approximately $2.3 million, increases in material costs related to increased new product introduction sales that generally have a higher material content, of approximately $1.4 million, increases in metal costs, of approximately $0.7 million, increased variable labor costs resulting primarily from wage inflation, of approximately $2.4 million, and lower productivity, of approximately $0.6 million, lower leverage of our fixed costs, of approximately $1.9 million, all of which were offset by lower costs for manufacturing supplies, of approximately $1.4 million.
Gross profit was $31.6 million, or 24.3% of net sales, for the three months ended March 31, 2011 compared to $32.3 million, or 26.3% of net sales for the three months ended March 31, 2010. As a percent of sales, gross profit declined 2.0% during the three months ended March 31, 2011, compared to March 31, 2010 primarily due to the increase in platinum sales and lower leverage of our fixed cost infrastructure.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, were $14.1 million for the three months ended March 31, 2011 compared to $13.3 million for the three months ended March 31, 2010. The $0.8 million increase in SG&A expenses was primarily attributable to increased labor and sales commission costs totaling approximately $0.6 million and $0.2 million, respectively.
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Research and Development Expenses
Research and development expenses for the three months ended March 31, 2011 and 2010 were $0.7 million. R&D expenses represent costs related to the development of new, or improved, manufacturing technologies.
Interest Expense, net
Interest expense, net, decreased $0.2 million to $17.2 million for the three months ended March 31, 2011, compared to $17.4 million for the three months ended March 31, 2010. The decrease was attributable to lower non-cash interest expense resulting from the refinancing of the Companys term debt in January 2010.
Loss on Debt Extinguishment
In January 2010, the Company repaid the entire balance then outstanding of its term loan totaling $381.6 million plus accrued interest with proceeds received from a $400 million sale of Senior Secured Notes (the Refinancing). As part of the Refinancing, the Company terminated its revolving credit facility and replaced it with a new senior secured asset-based revolving credit facility (the ABL Revolver). In connection with the Refinancing, deferred financing fees in the amount of $11.7 million, net of accumulated amortization of $5.9 million, related to the loans that were paid or terminated were written off as a charge to expense during the three months ended March 31, 2010 resulting in a loss on debt extinguishment of $5.8 million during the three months ended March 31, 2010.
Other (Expense) Income, net
Included in other (expense) income, net are foreign currency gains and losses. During the three months ended March 31, 2011, we realized no gain or loss on derivative instruments compared to a $0.9 million gain on our derivative instruments during the three months ended March 31, 2010. In addition, we recorded a currency exchange loss of approximately $2.0 million during the three months ended March 31, 2011 compared to a gain of approximately $1.3 million during the three months ended March 31, 2010. This difference is due to larger changes in foreign currency exchange rates during the three months ended March 31, 2011 compared to the three months ended March 31, 2010.
Income Tax Expense
Income tax expense for the three months ended March 31, 2011 was $2.0 million and included $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $1.3 million in state and foreign income taxes. Income tax expense for the three months ended March 31, 2010 was $1.5 and included $0.7 million of deferred income tax expense for differences in the book and tax treatment of goodwill and $0.8 million in state and foreign income taxes. The increase in deferred income tax expense during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 is attributable to increases in estimated state taxes resulting from higher taxable income in certain states and increased profits in the Companys foreign subsidiaries during the three months ended March 31, 2011 compared to the three months ended March 31, 2010.
Liquidity and Capital Resources
Our principal source of liquidity is our cash flow from operations and borrowings available to us under our $75 million ABL Revolver. At March 31, 2011, we had $12.2 million of letters of credit outstanding and no outstanding loans under the ABL Revolver. As of March 31, 2011, our total indebtedness amounted to $715.0 million.
Cash (used in) provided by operations was $(5.0) million during the three months ended March 31, 2011, compared to $9.7 million during the three months ended March 31, 2010. The decrease in cash provided by operating activities of $14.7 million is primarily attributable to working capital investments and increased cash paid for interest during 2011.
Cash used in investing activities was $5.6 million during the three months ended March 31, 2011 compared to $3.8 million during the three months ended March 31, 2010. The increase in cash used for investing activities of $1.8 million is attributable to higher capital asset acquisitions primarily related to our expansion in Malaysia during the three months ended March 31, 2011.
During the three months ended March 31, 2011, cash used in financing activities was $(0.4) million compared to cash provided by financing activities of $4.1 million during the three months ended March 31, 2010. During the three months ended March 31, 2011 we paid approximately $0.4 million of deferred financing costs related to its refinancing of transactions in 2010. During the three months ended March 31, 2010 we generated approximately $4.1 million from the refinancing of our term debt.
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Our planned capital expenditures for 2011 include investments related to new business opportunities, upgrades of our existing equipment infrastructure and information technology enhancements. We expect that these investments will be financed from operating cash flow.
As of March 31, 2011, we have a liability of $1.8 million, of which the Company expects to pay $0.1 million during 2011, 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 March 31, 2011 includes $1.7 million related to our Collegeville location. The remaining environmental accrual, related to our other locations, was $0.1 million at March 31, 2011.
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 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 March 31, 2011, our aggregate debt was approximately $715.0 million substantially all of which was due in 2017. Our debt at March 31, 2011 consisted of our Senior Secured Notes bearing interest at 8.375% and our 10% Senior Subordinated 2017 Notes. In addition, we have a $75 million asset based revolving credit facility. Our revolving credit facility afforded us borrowing capacity of $31.2 million at March 31, 2011. No amounts have been drawn under the facility since it was put in place in January 2010. Our Senior Secured Notes were issued in January 2010.
ABL Revolver
In January 2010 in connection with the Refinancing, the Company entered into its ABL Revolver pursuant to a credit agreement among the Company, a syndicate of financial institutions, and certain institutional lenders.
The ABL Revolver provides for revolving credit financing of up to $75.0 million, subject to borrowing base availability, with a maturity of five years. The borrowing base at any time is limited to certain percentages of eligible accounts receivable and inventories. All borrowings under the ABL Revolver are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings, and undrawn letters of credit under the ABL Revolver exceeds the lesser of (i) the commitment amount and (ii) the borrowing base, the Company will be required to repay outstanding loans and cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.
During 2010, the Company refinanced both its term loan and its 2013 Senior Subordinated Notes each of which were outstanding at December 31, 2009. The term loan was refinanced in January 2010 with proceeds from the issuance of the 2017 Senior Secured Notes and the 2013 Senior Subordinated Notes were redeemed using proceeds from the issuance of the 2017 Senior Subordinated Notes. The 2013 Senior Subordinated Notes were re-purchased in part, through a tender offer in which holders of the then outstanding 2013 Senior Subordinated Notes were offered a 0.3% premium which included a 0.2% redemption premium and a 0.1% consent premium for holders who tendered during an early tender period. Approximately 78% of the 2013 Senior Subordinated Notes were tendered and redeemed in October and the remaining 2013 Senior Subordinated Notes were redeemed in December. A summary of each of the 2017 Senior Secured Notes and the 2017 Senior Subordinated Notes is provided below.
Senior Notes
8 3/8% Senior Secured Notes due 2017
In January 2010, the Company issued $400 million aggregate principal amount of its 2017 Senior Secured Notes to refinance the term loan outstanding under its then existing credit facility.
The 2017 Senior Secured Notes bear interest at 8.375% per annum and mature on February 1, 2017. Interest is payable on a semi-annual basis on August 1 and February 1. Prior to February 1, 2013, the Company may redeem the 2017 Senior
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Secured Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any. Additionally, during any 12-month period commencing on the issue date, the Company may redeem up to 10% of the aggregate principal amount of the notes at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. The Company may also redeem any of the 2017 Senior Secured Notes at any time on or after February 1, 2013, in whole or in part, at specified redemption prices plus accrued and unpaid interest, if any. In addition, prior to February 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 2017 Senior Secured Notes with the net proceeds of certain equity offerings, provided at least 65% of the aggregate principal amount of the 2017 Senior Secured Notes remains outstanding immediately after such redemption. Upon a change of control, the Company will be required to make an offer to purchase each holders 2017 Senior Secured Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any.
10% Senior Subordinated Notes due 2017
In October 2010, the Company issued $315 million aggregate principal amount of its 2017 Senior Subordinated Notes. The 2017 Subordinated Notes bear interest at 10.0% per annum and mature on November 1, 2017. Interest is payable semi-annually on May 1 and November 1, commencing on May 1, 2011. Prior to November 1, 2013, the Company may redeem the 2017 Senior Subordinated Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any. The Company may also redeem any of the 2017 Senior Subordinated Notes at any time on or after November 1, 2013, in whole or in part, at specified redemption prices plus accrued and unpaid interest, if any. In addition, prior to November 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 2017 Senior Subordinated Notes with the net proceeds of certain equity offerings, provided at least 65% of the aggregate principal amount of the 2017 Senior Subordinated Notes remain outstanding immediately after such redemption. Upon a change of control, the Company will be required to offer to purchase the 2017 Senior Subordinated Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.
Other Key Indicators of Financial Condition and Operating Performance
EBITDA and Adjusted EBITDA presented 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 income before net interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA further adjusted to give effect to unusual items, non-cash items and other adjustments, all of which are defined in the indentures governing the Senior Subordinated Notes, our Senior Secured Notes and our ABL Revolver. We believe that the inclusion of EBITDA and Adjusted EBITDA in this Quarterly Report on Form 10-Q is appropriate to provide additional information to investors regarding certain thresholds based on Adjusted EBITDA that we may be required to meet in certain cases that are included in the indentures governing the Senior Subordinated Notes, our Senior Secured Notes or our 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; |
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| 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 to EBITDA for the periods indicated:
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
RECONCILIATION OF NET LOSS TO EBITDA: |
||||||||
Net loss |
$ | (8,171 | ) | $ | (7,819 | ) | ||
Interest expense, net |
17,249 | 17,424 | ||||||
Provision for income taxes |
1,965 | 1,481 | ||||||
Depreciation and amortization |
9,441 | 9,345 | ||||||
EBITDA |
$ | 20,484 | $ | 20,431 | ||||
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The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods indicated:
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
EBITDA |
$ | 20,484 | $ | 20,431 | ||||
Adjustments: |
||||||||
Stock-based compensation - employees |
248 | 16 | ||||||
Stock-based compensation - non-employees |
23 | 24 | ||||||
Employee severance and relocation |
335 | 305 | ||||||
Executive recruiting costs |
221 | | ||||||
Plant closure costs |
| 18 | ||||||
Currency transaction loss (gain) |
2,020 | (1,300 | ) | |||||
Change in fair value of derivative instruments |
| (909 | ) | |||||
Other taxes |
190 | 41 | ||||||
Loss on debt extinguishment |
| 5,791 | ||||||
Management fees to stockholder |
319 | 304 | ||||||
Adjusted EBITDA |
$ | 23,840 | $ | 24,721 | ||||
The differences between Adjusted EBITDA and cash flows provided by operating activities are summarized as follows:
Three Months Ended | ||||||||
March 31, 2011 |
March 31, 2010 |
|||||||
Adjusted EBITDA |
$ | 23,840 | $ | 24,721 | ||||
Net changes in operating assets and liabilities |
(8,002 | ) | 2,571 | |||||
Interest expense, net |
(17,249 | ) | (17,424 | ) | ||||
Cash payment of restructuring charges |
| (1,009 | ) | |||||
Cash paid for taxes |
(52 | ) | (149 | ) | ||||
Other items, net |
(3,539 | ) | 1,004 | |||||
Net cash (used in) provided by operating activities |
$ | (5,002 | ) | $ | 9,714 | |||
Net cash used in investing activities |
$ | (5,585 | ) | $ | (3,807 | ) | ||
Net cash (used in) provided by financing activities |
$ | (375 | ) | $ | 4,124 | |||
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Obligations and Commitments
The following table sets forth our long-term contractual obligations as of March 31, 2011 (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) |
$ | 601,000 | $ | 33,500 | $ | 67,000 | $ | 67,000 | $ | 433,500 | ||||||||||
Senior Subordinated Notes (1) |
535,500 | 39,375 | 63,000 | 63,000 | 370,125 | |||||||||||||||
Capital leases (1) |
49 | 25 | 15 | 9 | | |||||||||||||||
Operating leases |
24,077 | 5,999 | 9,236 | 5,331 | 3,511 | |||||||||||||||
Purchase obligations (2) |
58,908 | 58,908 | | | | |||||||||||||||
Other obligations (3) |
34,066 | 495 | 700 | 970 | 31,901 | |||||||||||||||
Total |
$ | 1,253,600 | $ | 138,302 | $ | 139,951 | $ | 136,310 | $ | 839,037 | ||||||||||
(1) | Includes interest and principal payments. Interest is determined using the instruments 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 $0.4 million payable to employees and $0.8 million payable to non-employees, environmental remediation obligations of $1.9 million, accrued compensation and pension benefits of $4.5 million, deferred income taxes of $25.7 million and other obligations of $0.8 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 three months ended March 31, 2011, there were no significant changes in our critical accounting policies or estimates.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
During the three months ended March 31 2011, 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, 2010 for a more complete discussion of the market risks we encounter.
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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 March 31, 2011. 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 SECs 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 companys 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 March 31, 2011, 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: We are in the process of implementing the Oracle ERP system throughout the entire company. The implementation of Oracle during the first three months of 2011 modified our existing controls at one manufacturing location as they migrated to the Oracle ERP system.
There have been no additional changes in our internal controls over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2011. There have been no material changes to the risk factors disclosed in Part I, Item 1A, of Accellent Inc.s 2010 Annual Report on Form 10-K.
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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 three months ended March 31, 2011.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | REMOVED AND RESERVED |
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 |
* | Filed herewith. |
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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. | ||||
May 16, 2011 | By: | /s/ Donald J. Spence | ||
Donald J. Spence | ||||
Executive Chairman and Acting Chief Executive Officer | ||||
Accellent Inc. | ||||
May 16, 2011 | By: | /s/ Jeremy A. Friedman | ||
Jeremy A. Friedman | ||||
Chief Financial Officer (Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit Number |
Description of Exhibits | |
31.1* | Rule 13a-14(a) Certification of Principal Executive Officer | |
31.2* | Rule 13a-14(a) Certification of Principal Financial Officer | |
32.1* | Section 1350 Certification of Principal Executive Officer | |
32.2* | Section 1350 Certification of Principal Financial Officer |
* | Filed herewith. |
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