Attached files
file | filename |
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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-31.2 - SECTION 302 PFO CERTIFICATION - ACCELLENT INC | dex312.htm |
EX-32.1 - SECTION 906 PEO CERTIFICATION - ACCELLENT INC | dex321.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 September 30, 2009
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 November 9, 2009, 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. | Financial Statements | 3 | ||||
Unaudited Condensed Consolidated Balance Sheets | 3 | |||||
Unaudited Condensed Consolidated Statements of Operations | 4 | |||||
Unaudited Condensed Consolidated Statements of Cash Flows | 5 | |||||
Notes to Unaudited Condensed Consolidated Financial Statements | 6 | |||||
ITEM 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 23 | ||||
ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk | 31 | ||||
ITEM 4T. | Controls and Procedures | 31 | ||||
PART II | OTHER INFORMATION | |||||
ITEM 1. | Legal Proceedings | 32 | ||||
ITEM 1A. | Risk Factors | 32 | ||||
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 32 | ||||
ITEM 3. | Defaults Upon Senior Securities | 32 | ||||
ITEM 4. | Submission of Matters to a Vote of Security Holders | 32 | ||||
ITEM 5. | Other Information | 32 | ||||
ITEM 6. | Exhibits | 33 | ||||
34 |
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ITEM 1. | FINANCIAL STATEMENTS |
Unaudited Condensed Consolidated Balance Sheets
As of September 30, 2009 and December 31, 2008
(in thousands, except share and per share data)
September 30, 2009 |
December 31, 2008 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 34,572 | $ | 14,525 | ||||
Accounts receivable, net of allowances of $1,209 and $1,154 as of September 30, 2009 and December 31, 2008, respectively |
51,153 | 50,724 | ||||||
Inventories |
55,458 | 64,204 | ||||||
Prepaid expenses and other current assets |
4,078 | 3,954 | ||||||
Total current assets |
145,261 | 133,407 | ||||||
Property and equipment, net |
121,557 | 127,460 | ||||||
Goodwill |
629,854 | 629,854 | ||||||
Intangible assets, net |
183,300 | 194,505 | ||||||
Deferred financing costs and other assets |
14,737 | 17,505 | ||||||
Total assets |
$ | 1,094,709 | $ | 1,102,731 | ||||
Liabilities and stockholders equity |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 631 | $ | 4,007 | ||||
Accounts payable |
23,120 | 23,285 | ||||||
Accrued payroll and benefits |
10,324 | 11,575 | ||||||
Accrued interest |
12,373 | 5,065 | ||||||
Accrued expenses and other current liabilities |
20,633 | 17,497 | ||||||
Total current liabilities |
67,081 | 61,429 | ||||||
Long-term debt |
683,901 | 702,529 | ||||||
Other long-term liabilities |
36,814 | 36,600 | ||||||
Total liabilities |
787,796 | 800,558 | ||||||
Stockholders equity: |
||||||||
Common stock, par value $0.01 per share, 50,000,000 shares authorized and 1,000 shares issued and outstanding as of September 30, 2009 and December 31, 2008 |
| | ||||||
Additional paid-in capital |
635,576 | 633,914 | ||||||
Accumulated other comprehensive income (loss) |
2,546 | (1,974 | ) | |||||
Accumulated deficit |
(331,209 | ) | (329,767 | ) | ||||
Total stockholders equity |
306,913 | 302,173 | ||||||
Total liabilities and stockholders equity |
$ | 1,094,709 | $ | 1,102,731 | ||||
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 and nine months ended September 30, 2009 and 2008
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 |
|||||||||||||
Net sales |
$ | 117,768 | $ | 134,670 | $ | 368,026 | $ | 399,428 | ||||||||
Cost of sales (exclusive of amortization) |
84,387 | 100,031 | 264,848 | 293,998 | ||||||||||||
Gross profit |
33,381 | 34,639 | 103,178 | 105,430 | ||||||||||||
Selling, general and administrative expenses |
11,832 | 15,596 | 38,128 | 45,533 | ||||||||||||
Research and development expenses |
676 | 751 | 2,053 | 2,231 | ||||||||||||
Restructuring charges |
2,362 | 794 | 4,843 | 3,165 | ||||||||||||
Amortization of intangible assets |
3,735 | 3,735 | 11,205 | 11,205 | ||||||||||||
Loss on disposal of property and equipment |
449 | 297 | 804 | 400 | ||||||||||||
Income from operations |
14,327 | 13,466 | 46,145 | 42,896 | ||||||||||||
Interest expense, net |
(13,881 | ) | (16,026 | ) | (43,165 | ) | (49,363 | ) | ||||||||
Other (expense) income |
(1,251 | ) | 1,050 | (2,362 | ) | 8 | ||||||||||
Income (loss) before income tax expense |
(805 | ) | (1,510 | ) | 618 | (6,459 | ) | |||||||||
Income tax expense (benefit) |
15 | (661 | ) | 2,060 | 3,360 | |||||||||||
Net loss |
$ | (820 | ) | $ | (849 | ) | $ | (1,442 | ) | $ | (9,819 | ) | ||||
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 nine months ended September 30, 2009 and 2008
(in thousands)
September 30, 2009 |
September 30, 2008 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (1,442 | ) | $ | (9,819 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
27,601 | 26,630 | ||||||
Amortization of debt discounts, non-cash interest expense and debt issuance costs |
3,153 | 3,148 | ||||||
Non-cash impairment charges |
| 710 | ||||||
Restructuring charges, net of payments |
1,618 | | ||||||
Deferred income taxes |
2,171 | 73 | ||||||
Non-cash compensation expense |
899 | 3,273 | ||||||
Loss on derivative instruments |
1,091 | 528 | ||||||
Loss on disposal of property and equipment |
804 | 400 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(265 | ) | (3,711 | ) | ||||
Inventories |
8,906 | (1,514 | ) | |||||
Prepaid expenses and other current assets |
(115 | ) | 1,385 | |||||
Accounts payable and accrued expenses |
8,834 | 17,417 | ||||||
Net cash provided by operating activities |
53,255 | 38,520 | ||||||
Cash flows from investing activities: |
||||||||
Purchase of property and equipment |
(11,732 | ) | (12,949 | ) | ||||
Proceeds from sale of property and equipment |
103 | 476 | ||||||
Net cash used in investing activities |
(11,629 | ) | (12,473 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from borrowings on long-term debt |
| 39,000 | ||||||
Principal payments on long-term debt |
(22,382 | ) | (53,142 | ) | ||||
Proceeds from sale of parent company stock |
812 | 138 | ||||||
Repurchase of parent company stock |
(16 | ) | (1,984 | ) | ||||
Net cash used in financing activities |
(21,586 | ) | (15,988 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents: |
7 | (154 | ) | |||||
Increase in cash and cash equivalents |
20,047 | 9,905 | ||||||
Cash and cash equivalents at beginning of period |
14,525 | 5,688 | ||||||
Cash and cash equivalents at end of period |
$ | 34,572 | $ | 15,593 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid for interest |
$ | 32,713 | $ | 38,752 | ||||
Cash paid for income taxes |
$ | 1,306 | $ | 1,671 | ||||
Property and equipment purchases unpaid and included in accounts payable |
$ | 1,465 | $ | 1,169 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Table of Contents
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009
1. Summary of significant accounting policies
Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of Accellent Inc. and its subsidiaries (collectively, the Company). All intercompany transactions have been eliminated.
We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (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, 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 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, 2008.
There have been no significant changes pertaining to the adoption of new accounting pronouncements or in our application of our significant accounting policies that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31 2008, other than as discussed below.
In our unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2009, Other (expense) income includes loss on derivative instruments which had been previously disclosed separately in our financial statements on Form 10-Q for the nine months ended September 30, 2008. For the three and nine months ended September 30, 2008 other (expense) income included losses on disposals of property and equipment which are presented separately in the current year unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2009. The prior year presentation has been changed to conform to the current year presentation.
Recent Accounting Pronouncements
The Company evaluates subsequent events through the date the financial statements are issued or are available to be issued. Refer to footnote 15.
Beginning with the three months ended June 30, 2009, we disclose the fair value of all financial instruments as well as the method(s) and significant assumptions used to estimate that fair value. Refer to footnote 9.
Beginning with the three months ended September 30, 2009, the Accounting Standards Codification, which became the source of authoritative generally accepted accounting principles in the United States, is followed by the Company.
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
The Company discloses the fair values of derivative instruments and associated gains and losses that are subject to credit-risk. Refer to footnote 8.
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
2. 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 Companys Amended Credit Agreement, 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, as a result of the acquisition of the Company in 2005, the Company exchanged fully vested stock options to acquire common shares of the Company for 4,901,107 fully vested stock options, or Roll-Over options, of Accellent Holdings Corp. which are recorded as a liability within Other long-term liabilities until such options are exercised, forfeited, expired or settled. As a result of the exercise of Roll-Over options during the nine months ended September 30, 2009, the Company was required to repurchase 8,970 shares at a cost of $15,698 to allow former employees to satisfy tax obligations.
The table below summarizes the activity relating to the Roll-Over options during the nine months ended September 30, 2009 and 2008:
2009 | 2008 | |||||||||||||
Liability (in thousands) |
Roll-Over Shares Outstanding |
Liability (in thousands) |
Roll-Over Shares Outstanding |
|||||||||||
Balance at January 1 |
$ | 1,100 | 619,466 | $ | 6,507 | 2,624,673 | ||||||||
Shares repurchased |
(16 | ) | (8,970 | ) | (1,984 | ) | (1,119,249 | ) | ||||||
Shares exercised |
(35 | ) | (20,364 | ) | (3,158 | ) | (803,738 | ) | ||||||
Shares forfeited |
(24 | ) | (13,742 | ) | (144 | ) | (82,220 | ) | ||||||
Fair value adjustment to liability |
2 | | 338 | | ||||||||||
Balance at September 30 |
$ | 1,027 | 576,390 | $ | 1,559 | 619,466 | ||||||||
Our 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 our liability related to the Roll-Over options. For stock options, we estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option pricing model incorporates assumptions regarding stock price volatility, the expected life of options, a risk-free interest rate and dividend yield.
The following tables summarize the classification of stock-based compensation as reflected in our unaudited condensed consolidated statements of operations and the recorded stock compensation by type of award for the three and nine months ended September 30, 2009 and 2008:
Classification of expense related to stock awards:
Three Months Ended | Nine Months Ended | |||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 | |||||||||
Cost of sales |
$ | 36 | $ | 65 | $ | 77 | $ | 77 | ||||
Selling, general and administrative |
189 | 1,161 | 752 | 1,645 | ||||||||
Total |
$ | 225 | $ | 1,226 | $ | 829 | $ | 1,722 | ||||
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Stock compensation expense related to stock awards by type of award:
Three Months Ended | Nine Months Ended | ||||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 | ||||||||||
Time based vesting awards |
$ | 171 | $ | 345 | $ | 373 | $ | 692 | |||||
Performance based vesting awards |
(14 | ) | 499 | 317 | 499 | ||||||||
Restricted stock awards |
46 | 56 | 137 | 193 | |||||||||
Roll-over options |
22 | 326 | 2 | 338 | |||||||||
Total expense |
$ | 225 | $ | 1,226 | $ | 829 | $ | 1,722 | |||||
In addition to stock awards, during the three and nine months ended September 30, 2008, the Company recognized approximately $209,000 and $627,000, respectively, of employee stock-based compensation costs that related to executive bonuses paid in common stock of AHC. These costs are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2008.
During the three and nine months ended September 30, 2009, the Company determined that attainment of the 2009 targets necessary for Performance Based stock awards to vest is probable. Accordingly the Company has recorded stock compensation expense related to performance shares of $0.3 million during the nine months ended September 30, 2009. Through September 30 2008, the Company had estimated that it would achieve the 2008 targets necessary for the Performance Shares to vest at December 31, 2008. Accordingly, the Company recorded $0.5 million of expense related to performance shares during the three and nine months ended September 30, 2008. The total unvested Performance Based shares and their aggregate grant date fair value are 3,071,460 and $3.6 million at September 30, 2009.
Non-employee stock-based compensation
During the three and nine months ended September 30, 2009, the Company recognized approximately $23,000 and $70,000, respectively, of non-employee stock-based compensation. During the three and nine months ended September 30, 2008, the Company recognized approximately $90,000 and $924,000, respectively, of non-employee stock-based compensation. These costs principally related to consulting fees paid in common stock of Accellent Holdings Corp. (AHC) and approximated the fair value of the services rendered.
3. Restructuring charges
Summary of restructuring actions
For the three and nine months ended September 30, 2009 and 2008, the Company recognized restructuring charges related to initiatives including facility closures and reductions in force. The following table summarizes the recorded liabilities and activity related to restructuring activities for the nine months ended September 30, 2009 (in thousands):
Employee costs |
Other exit costs |
Total | ||||||||||
Balance at January 1, 2009 |
$ | 400 | $ | 69 | $ | 469 | ||||||
Restructuring charges incurred |
4,439 | 404 | 4,843 | |||||||||
Payments |
(2,921 | ) | (304 | ) | (3,225 | ) | ||||||
Balance at September 30, 2009 |
$ | 1,918 | $ | 169 | $ | 2,087 | ||||||
Accrued restructuring costs at September 30, 2009 are expected to be paid in cash within twelve months and are therefore classified as current liabilities within accrued expenses and other current liabilities in the accompanying unaudited condensed consolidated balance sheet at September 30, 2009.
Q3 2009 Reduction in Force
During the three months ended September 30, 2009, the Company eliminated 70 positions across both manufacturing and administrative functions as part of a company wide effort to reduce costs and streamline operations. All affected employees were offered individually determined severance arrangements. As a result of this action, the Company recorded $1.0 million in restructuring charges during the three and nine months ended September 30, 2009.
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Q2 2009 Reductions in Force and Facility Closure
During the three months ended June 30, 2009, the Company eliminated 38 positions in its administrative functions as part of a company wide effort to reduce costs and streamline operations. All affected employees were offered one time termination benefits, which included severance arrangements and, in certain instances, retention bonuses, if they remain with the Company through their proposed termination date. The total one-time termination benefits approximate $1.1 million and are being recorded over the employees remaining service period as employees are required to stay through their termination date to receive benefits. During the three and nine months ended September 30, 2009, the Company recorded $0.6 million and $0.9 million of costs related to these one-time termination benefits. At September 30, 2009, $0.2 million is expected to be incurred in future reporting periods related to this action.
During the three months ended June 30, 2009, the Company eliminated 29 positions across its manufacturing function as part of a company wide effort to reduce costs. All affected employees were offered individually determined severance arrangements. As a result of this action, the Company recorded $0.3 million in restructuring charges during the nine months ended September 30, 2009.
In May 2009, the Companys Board of Directors approved a plan of closure with respect to the Companys manufacturing facility in Huntsville, Alabama. The facility will be closed on or about December 15, 2009. In connection with the plan, all employees will be terminated on or about November 30, 2009. All affected employees were offered both retention bonuses as well as individually determined severance benefits to be received upon termination of employment, should they remain with the Company through that date. The total one-time termination benefits approximate $1.2 million and are being recorded over the employees remaining service period as employees are required to stay through their termination date to receive the benefits. During the three and nine months ended September 30, 2009, the Company recorded $0.5 million and $0.9 million of costs related to these one-time termination benefits. In addition, during the three and nine months ended September 30, 2009 the Company recorded $0.3 million and $0.4 million related to other costs related to the closing of the facility and the consolidation of its operations with other Company facilities. At September 30, 2009, $0.4 million is expected to be incurred in future reporting periods related to this action.
In connection with the closure of the Companys manufacturing facility in Huntsville, Alabama, the Company assessed the potential impairment related to the property and equipment at the facility. As a result, the carrying value of certain assets has been written down to their fair value, less selling costs, of $0.7 million at September 30, 2009. The resulting impairment charges of $0.3 million and $0.5 million for the three and nine months ended September 30, 2009, respectively, are included in loss on disposal of property in the accompanying unaudited condensed consolidated statements of operations. The fair value estimate was determined using a quoted price in a brokered market and is considered a level 2 estimate within the fair value hierarchy as discussed in footnote 9 below.
Q1 2009 Reduction in Force
During the three months ended March 31, 2009, the Company eliminated 207 positions across both manufacturing and administrative functions as part of a company wide effort to reduce costs and streamline operations. All affected employees were offered individually determined severance arrangements. As a result of this action, the Company recorded $1.3 million in restructuring charges during the nine months ended September 30, 2009.
Q2 2008 Reduction in Force and Facility Closure
In June 2008, the Companys Board of Directors approved a plan of closure with respect to the Companys manufacturing facility in Memphis, Tennessee. The facility was closed and the property was sold on October 9, 2008. In connection with the plan, a majority of the employees were terminated on or about September 30, 2008. All affected employees were offered both retention bonuses as well as individually determined severance benefits to be received upon termination of employment, if they remained with the Company through their proposed termination date. The total one-time termination benefits amounted to approximately $0.9 million and were amortized over the employees remaining service period as employees were required to stay through their termination date to receive benefits. During the three and nine months ended September 30, 2008, the Company recorded $0.8 million and $0.9 million, respectively, of costs related to these one-time termination benefits. In connection with the closure, the Company performed an impairment assessment related to the property and equipment at the facility and as a result, recorded $0.7 million of write downs to their fair value which were included as an element of the restructuring charge for the nine months ended September 30, 2008.
Q1 2008 Reduction in Force
During the three months ended March 31, 2008, the Company eliminated 102 positions across both manufacturing and administrative functions as part of an effort to reduce costs. All affected employees were offered individually determined severance arrangements. As a result of this action, the Company recorded $1.6 million in restructuring charges during the nine months ended September 30, 2008.
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
4. Income taxes
We provide 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. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We have 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 and nine months ended September 30, 2009 and 2008 consist principally of deferred income tax expense for differences in the book and tax treatment of goodwill and foreign income taxes, net of research and development tax credits.
The Company believes that it is more likely than not that the Company will not recognize the benefits of its domestic federal and state deferred tax assets. As a result, the Company continues to provide a full valuation allowance to those deferred tax assets. 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 $22.2 million and $19.9 million of net deferred tax liabilities included in other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008, 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. With the exception of two state jurisdictions, 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, 2006, 2007 and 2008 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.
5. Inventories
Inventories at September 30, 2009 and December 31, 2008 consisted of the following (in thousands):
September 30, 2009 |
December 31, 2008 | |||||
Raw materials |
$ | 15,195 | $ | 18,070 | ||
Work-in-process |
22,465 | 27,105 | ||||
Finished goods |
17,798 | 19,029 | ||||
Total |
$ | 55,458 | $ | 64,204 | ||
6. 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 on the date of acquisition. Intangible assets represent the value of the identifiable intangible assets determined in connection with business combinations.
The Company has elected October 31st as its annual impairment testing date for goodwill and indefinite lived intangible assets and performs additional impairment tests if triggering events occur. No triggering events have occurred during the nine months ended September 30, 2009 that would require an impairment test of goodwill or indefinite lived intangible assets.
The Company reports all amortization expense related to intangible assets on a separate line in our unaudited condensed consolidated statement of operations. For the three and nine months ended September 30, 2009 and 2008, the Company incurred intangible asset amortization expense related to cost of sales and selling, general and administrative expenses, respectively, as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 | |||||||||
Cost of sales |
$ | 497 | $ | 497 | $ | 1,491 | $ | 1,491 | ||||
Selling, general and administrative |
3,238 | 3,238 | 9,714 | 9,714 | ||||||||
Total |
$ | 3,735 | $ | 3,735 | $ | 11,205 | $ | 11,205 | ||||
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Intangible assets that are subject to amortization as of September 30, 2009 consisted of the following (in thousands):
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount | ||||||||
Developed technology and know how |
$ | 16,991 | $ | (7,713 | ) | $ | 9,278 | |||
Customer contracts and relationships |
197,575 | (52,953 | ) | 144,622 | ||||||
$ | 214,566 | $ | (60,666 | ) | $ | 153,900 | ||||
Intangible assets that are subject to amortization as of December 31, 2008 consisted of the following (in thousands):
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount | ||||||||
Developed technology and know how |
$ | 16,991 | $ | (6,221 | ) | $ | 10,770 | |||
Customer contracts and relationships |
197,575 | (43,240 | ) | 154,335 | ||||||
$ | 214,566 | $ | (49,461 | ) | $ | 165,105 | ||||
The carrying amount of the Trademark, an indefinite-lived intangible asset, was $29.4 million at September 30, 2009 and December 31, 2008 and is included in intangible assets, net, in the accompanying unaudited condensed consolidated balance sheets.
Estimated intangible asset amortization expense for each of the next four years approximates $14.9 million and $14.6 million in year five.
7. Long-term debt
Long-term debt at September 30, 2009 and December 31, 2008 consisted of the following (in thousands):
September 30, 2009 |
December 31, 2008 |
|||||||
Amended Credit Agreement: |
||||||||
Term loan, interest of 2.87% and 4.70% at September 30, 2009 and December 31, 2008, respectively |
$ | 381,624 | $ | 388,000 | ||||
Revolving loan, interest of 2.71% at December 31, 2008 |
| 16,000 | ||||||
Senior subordinated notes maturing December 1, 2013, interest at 10.5% |
305,000 | 305,000 | ||||||
Capital lease obligations |
11 | 18 | ||||||
Total debt |
686,635 | 709,018 | ||||||
Lessunamortized discount on senior subordinated notes |
(2,103 | ) | (2,482 | ) | ||||
Lesscurrent portion |
(631 | ) | (4,007 | ) | ||||
Long-term debt, excluding current portion |
$ | 683,901 | $ | 702,529 | ||||
In March 2009 we were required to make an excess cash flow payment of $5.4 million on our term loan under our Amended Credit Agreement. Our Amended Credit Agreement allows us to elect to apply this excess cash flow payment to future required quarterly principal payments for the next two years following the date of the excess cash flow payment. Accordingly, no required principal payments are due on our term loan until September 2010.
At September 30, 2009, we had $8.8 million of letters of credit outstanding under our Amended Credit Agreement.
12
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
8. Derivative instruments
The Company maintains an interest rate swap agreement to mitigate exposures to changes in cash flows from movements in variable interest rates on its long-term debt.
The interest rate swap agreement was designated as a cash flow hedge effective November 30, 2006. Upon designation as a cash flow hedge, changes in the fair value of the interest rate swap which relate to the effective portion of the hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged interest expense affects earnings. Changes in the fair value of the interest rate swap which relate to the ineffective portion of the interest rate swap are recorded in other (expense) income. At September 30, 2009, the notional amount of our swap contract was $150.0 million, and will decrease to $125.0 million on February 27, 2010. The swap contract will expire on November 27, 2010. We will receive variable rate payments (equal to the three-month LIBOR rate) during the term of the swap contract and are obligated to pay fixed interest rate payments (4.85%) during the term of the contract. Every three months, coincident with the reset of the variable rate on the Companys long-term debt, an amount is reclassified from accumulated other comprehensive income (loss) to earnings as a result of realized gains or losses from the quarterly contractual settlements on the cash flow hedging instrument. In addition should we determine the cash flow hedge does not meet our requirements for measuring effectiveness, we would reclassify the then current effective portion of the cash flow hedge into earnings over the remaining life of the cash flow hedge.
The Companys policy requires the use of the Hypothetical Derivative Method. In 2008 the interest rate swap agreement did not meet the Companys method for assessing hedge effectiveness at September 30, 2008, as defined by management at the time the instrument was designated as a cash flow hedge on November 30, 2006. As a result of this hedge ineffectiveness, the Company recognized in earnings the full change in fair value of the derivative instrument from the date the hedge was determined to be ineffective, July 1, 2008, through December 31, 2008. As a result of the ineffectiveness of the hedge in 2008, the Company was required to amortize to earnings over the remaining contractual term of the swap the unrealized losses accumulated during the period of historical effectiveness through June 30, 2008. These accumulated losses amounted to $4.1 million and were recorded in accumulated other comprehensive loss. At September 30, 2009, the Company determined that hedge accounting was no longer appropriate. Accordingly, net losses accumulated during the periods of historical effectiveness through September 30, 2009 and the derivative mark-to-market adjustment for the three months ended September 30, 2009, have been recorded in earnings during the three and nine months ended September 30, 2009, which amounted to $0.5 million and $1.4 million, respectively. This is included in other (expense) income in the accompanying unaudited condensed consolidated statements of operations. At September 30, 2009 and December 31, 2008, the fair value of the interest rate swap was $6.0 million and $7.7 million, respectively, and is recorded within Other long-term liabilities in the accompanying unaudited condensed consolidated balance sheet.
Through February 2009, in addition to the swap arrangement detailed above, the Company maintained an interest rate collar agreement to mitigate exposures to changes in cash flows from movements in variable interest rates on its long-term debt. The Companys interest rate collar arrangement expired during the three months ended March 31, 2009, at which time the realized gain of $0.3 million was recorded to other (expense) income.
The following table summarizes the balance sheet presentation of our derivative instruments:
Fair Value of Derivative Instruments | ||||||||||
September 30, 2009 |
December 31, 2008 | |||||||||
Balance Sheet Location |
Fair Value (in thousands) |
Balance Sheet Location |
Fair Value (in thousands) | |||||||
Interest rate contract designated as a hedging instrument |
Other long-term liabilities |
$ | 6,026 | Other long-term liabilities |
$ | 7,689 | ||||
Interest rate contract not designated as a hedging instrument |
| $ | | Other long-term liabilities |
$ | 285 |
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
The following table summarizes the activity related to our derivative instrument designated as a cash flow hedge:
Amount of gain/(loss) recognized in OCI (Effective portion) Three months ended September 30 |
Amount of gain/(loss) reclassified from AOCI (Prior effective portion) Three months ended September 30 |
Amount of gain/(loss) reclassified from AOCI (effective portion) Three months ended September 30 |
Amount of gain/(loss) reclassified from AOCI (Ineffective portion) Three months ended September 30 | |||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
Interest rate contract |
$ | | $ | | $ | (1,122 | ) | $ | (543 | ) | $ | | $ | | $ | | $ | | ||||||||||
Amount of gain/(loss) recognized in OCI (Effective portion) Nine months ended September 30 |
Amount of gain/(loss) reclassified from AOCI (Prior effective portion) Nine months ended September 30 |
Amount of gain/(loss) reclassified from AOCI (effective portion) Nine months ended September 30 |
Amount of gain/(loss) reclassified from AOCI (Ineffective portion) Nine months ended September 30 | |||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
Interest rate contract |
$ | 1,039 | $ | (59 | ) | $ | (3,038 | ) | $ | (543 | ) | $ | 1,076 | $ | (839 | ) | $ | | $ | |
The following table summarizes the activity related to our derivative instrument not designated as a hedge:
Amount of gain/(loss) recognized in income Three months ended September 30 |
Amount of gain/(loss) recognized in income Nine months ended September 30 | |||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||
Interest rate contract gain recognized in other income (expense) |
$ | | $ | 296 | $ | 285 | $ | 1 |
All gains and losses recognized in our statement of operations related to derivative instruments are included within other (expense) income and the cash settlement amounts resulting from the difference between our fixed rate on the swap and the variable rates on our term loan debt are included within interest expense, net. During the three and nine months ended September 30, 2009, the Company recorded $0.5 million and $1.1 million, respectively, of net losses on its derivative instruments. During the three and nine months ended September 30, 2008, the Company recorded $0.2 million and $0.5 million, respectively, of net losses on its derivative instruments.
9. Fair value of financial instruments
The Company determines fair value utilizing the fair value hierarchy which ranks the quality and reliability of the information used to determine fair value. In general, fair values determined by 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 by 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 level 3 financial instrument is also contained in Note 2. The Companys interest rate swap contract is valued using an income approach which consists of a discounted cash flow model that takes into account the present value of future cash flows under the terms of the contracts using current market information as of the reporting date, such as prevailing interest rates. The following tables provide a summary of the carrying amounts and fair values of assets and liabilities recorded at fair value:
Fair Value Measurements at September 30, 2009 using | ||||||||||||
Carrying Amount as of September 30, 2009 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||||||||
Liability for Roll-Over options |
$ | 1,027 | $ | | $ | | $ | 1,027 | ||||
Liability for derivative instruments |
$ | 6,026 | $ | | $ | | $ | 6,026 |
14
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Fair Value Measurements at December 31, 2008 using | ||||||||||||
December 31, 2008 |
Quoted prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
Significant unobservable inputs (Level 3) | |||||||||
Liability for Roll-Over Options |
$ | 1,100 | $ | | $ | | $ | 1,100 | ||||
Liability for derivative instruments |
$ | 7,974 | $ | | $ | | $ | 7,974 |
The change in fair value of our liability for derivative instruments for the three months ended September 30, 2009 was as follows (in thousands):
Fair value, July 1, 2009 |
$ | 6,651 | ||
Total gains or losses (realized or unrealized): |
||||
Realized gain included in earnings |
(625 | ) | ||
Unrealized gain included in accumulated other comprehensive income (loss) |
| |||
Fair value, September 30, 2009 |
$ | 6,026 | ||
The change in fair value of our liability for derivative instruments for the nine months ended September 30, 2009 was as follows (in thousands):
Fair value, January 1, 2009 |
$ | 7,974 | ||
Total gains or losses (realized or unrealized): |
||||
Realized gain included in earnings |
(1,948 | ) | ||
Unrealized gain included in accumulated other comprehensive income (loss) |
| |||
Fair value, September 30, 2009 |
$ | 6,026 | ||
Other financial instruments that are included in our unaudited condensed consolidated balance sheet include accounts receivable, accounts payable and long-term debt. The carrying value of accounts payable and accounts receivable approximate their fair value at September 30, 2009. Borrowings under our Amended Credit Agreement have variable rates that reflect currently available terms and conditions for similar debt. The carrying amount of this debt is a reasonable estimate of its fair value. Borrowings under the Senior Subordinated Notes2013 have a fixed rate. The Company intends to carry the Notes until their maturity. At September 30, 2009, the fair value of the Senior Subordinated Notes2013, based on a quoted market for them, was 96% or $293 million compared to the carrying value of $305 million.
10. Comprehensive income (loss)
Comprehensive income (loss) represents net loss plus the results of any changes in stockholders equity related to currency translation and changes in the carrying value of the effective portion of interest rate hedging instruments. For the three and nine months ended September 30, 2009 and 2008, the Company recorded comprehensive income (loss) as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 |
|||||||||||||
Net loss |
$ | (820 | ) | $ | (849 | ) | $ | (1,442 | ) | $ | (9,819 | ) | ||||
Effect of interest rate hedging instruments |
| 414 | 3,038 | 355 | ||||||||||||
Cumulative translation adjustments |
880 | (2,636 | ) | 1,482 | (941 | ) | ||||||||||
Comprehensive income (loss) |
$ | 60 | $ | (3,071 | ) | $ | 3,078 | $ | (10,405 | ) | ||||||
15
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
11. 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 and nine months ended September 30, 2009, the Company incurred management fees and related expenses pursuant to this agreement of $0.3 million and $0.9 million, respectively. During the three and nine months ended September 30, 2008, the Company incurred management fees and related expenses pursuant to this agreement of $0.3 million and $0.8 million, respectively. The Company has also historically utilized the services of Capstone Consulting LLC (Capstone), an entity affiliated with KKR. No fees related to these services were incurred during the three and nine months ended September 30, 2009. For the three and nine months ended September 30, 2008, the Company incurred $0.2 million and $1.1 million, respectively, of integration consulting fees for the services of Capstone. At September 30, 2009, the Company owed KKR $0.3 million for unpaid fees which are included in accrued expenses and other current liabilities on the accompanying unaudited condensed consolidated balance sheet.
The Company sells medical device equipment to Biomet, Inc., which is privately owned by a consortium of private equity sponsors, including KKR. Sales to Biomet, Inc. during the three and nine months ended September 30, 2009 totaled $0.1 million and $0.8 million, respectively. Sales to Biomet, Inc. during the three and nine months ended September 30, 2008 amounted to $0.4 million and $2.8 million, respectively At September 30, 2009, accounts receivable from Biomet aggregated $0.1 million.
Subsequent to September 30, 2009, the Company began utilizing the services of SunGard Data Systems, Inc (SunGard), a provider of software and information processing solutions that is privately owned by a consortium of private equity sponsors, including KKR and Bain Capital. See Note 15.
12. 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 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. As part of efforts to lower TCE emissions, we have begun to implement a process that will reduce our TCE emissions generated by our Collegeville facility. However, this process will not reduce our TCE emissions to the levels required should a new standard become law.
At September 30, 2009 and December 31, 2008, the Company had a long-term liability of $3.4 million primarily related to environmental remediation at its Collegeville site. The Company prepares estimates of its potential liability based on available information. Changes in EPA standards, improvement in cleanup technology and discovery of additional information, however, could affect the estimated costs associated with these matters in the future.
13. Contingencies
We are subject to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these matters cannot be predicted with certainty, management does not believe that the disposition of any of these legal matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
16
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
14. Supplemental guarantor condensed consolidating financial statements
In connection with Accellent Inc.s issuance of its 10.5% Senior Subordinated Notes due 2013 (the Notes), all of its 100% owned domestic subsidiaries (the Subsidiary Guarantors) guaranteed on a joint and several, full and unconditional basis, the repayment by Accellent Inc. of such Notes. Certain foreign subsidiaries of Accellent Inc. (the Non-Guarantor Subsidiaries) have not guaranteed such indebtedness.
The following tables present the unaudited consolidating statements of operations for the three and nine months ended September 30, 2009 and 2008 of Accellent Inc. (Parent), the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, the unaudited condensed consolidating balance sheets as of September 30, 2009 and December 31, 2008, and the unaudited condensed consolidating statements of cash flows for the nine months ended September 30, 2009 and 2008.
Unaudited Condensed Consolidating Statements of Operations
Three months ended September 30, 2009 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 112,726 | $ | 5,180 | $ | (138 | ) | $ | 117,768 | |||||||||
Cost of sales |
| 80,813 | 3,712 | (138 | ) | 84,387 | ||||||||||||||
Selling, general and administrative expenses |
22 | 11,042 | 768 | | 11,832 | |||||||||||||||
Research and development expenses |
| 461 | 215 | | 676 | |||||||||||||||
Restructuring and other charges |
| 2,789 | 22 | | 2,811 | |||||||||||||||
Amortization of intangibles |
3,735 | | | | 3,735 | |||||||||||||||
(Loss) income from operations |
(3,757 | ) | 17,621 | 463 | | 14,327 | ||||||||||||||
Interest expense, net |
(13,876 | ) | (6 | ) | 1 | | (13,881 | ) | ||||||||||||
Other (expense) income |
(498 | ) | 13 | (766 | ) | | (1,251 | ) | ||||||||||||
Equity in earnings of affiliates |
17,311 | 222 | | (17,533 | ) | | ||||||||||||||
Income tax (expense) benefit |
| (539 | ) | 524 | | (15 | ) | |||||||||||||
Net (loss) income |
$ | (820 | ) | $ | 17,311 | $ | 222 | $ | (17,533 | ) | $ | (820 | ) | |||||||
Unaudited Condensed Consolidating Statements of Operations
Three months ended September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 127,348 | $ | 7,772 | $ | (450 | ) | $ | 134,670 | |||||||||
Cost of sales |
| 95,588 | 4,893 | (450 | ) | 100,031 | ||||||||||||||
Selling, general and administrative expenses |
30 | 14,728 | 838 | | 15,596 | |||||||||||||||
Research and development expenses |
| 526 | 225 | | 751 | |||||||||||||||
Restructuring and other charges |
| 813 | 278 | | 1,091 | |||||||||||||||
Amortization of intangibles |
3,735 | | | | 3,735 | |||||||||||||||
(Loss) income from operations |
(3,765 | ) | 15,693 | 1,538 | | 13,466 | ||||||||||||||
Interest (expense) income, net |
(16,015 | ) | (16 | ) | 5 | | (16,026 | ) | ||||||||||||
Other income (expense) |
(171 | ) | 111 | 1,110 | | 1,050 | ||||||||||||||
Equity in earnings of affiliates |
19,102 | 2,059 | | (21,161 | ) | | ||||||||||||||
Income tax (expense) benefit |
| 1,255 | (594 | ) | | 661 | ||||||||||||||
Net (loss) income |
$ | (849 | ) | $ | 19,102 | $ | 2,059 | $ | (21,161 | ) | $ | (849 | ) | |||||||
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Unaudited Condensed Consolidating Statements of Operations
Nine months ended September 30, 2009 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 350,934 | $ | 17,736 | $ | (644 | ) | $ | 368,026 | |||||||||
Cost of sales |
| 253,419 | 12,073 | (644 | ) | 264,848 | ||||||||||||||
Selling, general and administrative expenses |
70 | 35,948 | 2,110 | | 38,128 | |||||||||||||||
Research and development expenses |
| 1,463 | 590 | | 2,053 | |||||||||||||||
Restructuring and other charges |
| 5,625 | 22 | | 5,647 | |||||||||||||||
Amortization of intangibles |
11,205 | | | | 11,205 | |||||||||||||||
(Loss) income from operations |
(11,275 | ) | 54,479 | 2,941 | | 46,145 | ||||||||||||||
Interest (expense) income, net |
(43,155 | ) | (12 | ) | 2 | | (43,165 | ) | ||||||||||||
Other expense |
(1,090 | ) | (610 | ) | (662 | ) | | (2,362 | ) | |||||||||||
Equity in earnings of affiliates |
54,078 | 2,274 | | (56,352 | ) | | ||||||||||||||
Income tax expense |
| (2,053 | ) | (7 | ) | | (2,060 | ) | ||||||||||||
Net (loss) income |
$ | (1,442 | ) | $ | 54,078 | $ | 2,274 | $ | (56,352 | ) | $ | (1,442 | ) | |||||||
Unaudited Condensed Consolidating Statements of Operations
Nine months ended September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Net sales |
$ | | $ | 375,296 | $ | 24,908 | $ | (776 | ) | $ | 399,428 | |||||||||
Cost of sales |
| 279,150 | 15,624 | (776 | ) | 293,998 | ||||||||||||||
Selling, general and administrative expenses |
90 | 42,918 | 2,525 | | 45,533 | |||||||||||||||
Research and development expenses |
| 1,561 | 670 | | 2,231 | |||||||||||||||
Restructuring and other charges |
| 3,293 | 272 | | 3,565 | |||||||||||||||
Amortization of intangibles |
11,205 | | | | 11,205 | |||||||||||||||
(Loss) income from operations |
(11,295 | ) | 48,374 | 5,817 | | 42,896 | ||||||||||||||
Interest (expense) income, net |
(49,253 | ) | (120 | ) | 10 | | (49,363 | ) | ||||||||||||
Other income (expense) |
(528 | ) | (155 | ) | 691 | | 8 | |||||||||||||
Equity in earnings of affiliates |
51,257 | 4,660 | | (55,917 | ) | | ||||||||||||||
Income tax expense |
| (1,502 | ) | (1,858 | ) | | (3,360 | ) | ||||||||||||
Net (loss) income |
$ | (9,819 | ) | $ | 51,257 | $ | 4,660 | $ | (55,917 | ) | $ | (9,819 | ) | |||||||
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Unaudited Condensed Consolidating Balance Sheets
September 30, 2009 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Cash and cash equivalents |
$ | | $ | 32,768 | $ | 1,804 | $ | | $ | 34,572 | ||||||
Receivables, net |
| 49,470 | 2,092 | (409 | ) | 51,153 | ||||||||||
Inventories |
| 52,407 | 3,051 | | 55,458 | |||||||||||
Prepaid expenses and other |
19 | 3,962 | 97 | | 4,078 | |||||||||||
Total current assets |
19 | 138,607 | 7,044 | (409 | ) | 145,261 | ||||||||||
Property, plant and equipment, net |
| 111,044 | 10,513 | | 121,557 | |||||||||||
Intercompany receivable |
| 139,314 | 18,723 | (158,037 | ) | | ||||||||||
Investment in subsidiaries |
333,341 | 30,644 | | (363,985 | ) | | ||||||||||
Goodwill |
629,854 | | | | 629,854 | |||||||||||
Intangibles, net |
183,300 | | | | 183,300 | |||||||||||
Deferred financing costs and other assets |
13,181 | 1,435 | 121 | | 14,737 | |||||||||||
Total assets |
$ | 1,159,695 | $ | 421,044 | $ | 36,401 | $ | (522,431 | ) | $ | 1,094,709 | |||||
Current portion of long-term debt |
$ | 624 | $ | 7 | $ | | $ | | $ | 631 | ||||||
Accounts payable |
| 22,286 | 950 | (116 | ) | 23,120 | ||||||||||
Accrued liabilities |
12,363 | 28,489 | 2,686 | (208 | ) | 43,330 | ||||||||||
Total current liabilities |
12,987 | 50,782 | 3,636 | (324 | ) | 67,081 | ||||||||||
Note payable and long-term debt |
831,977 | 10,046 | | (158,122 | ) | 683,901 | ||||||||||
Other long-term liabilities |
7,818 | 26,875 | 2,121 | | 36,814 | |||||||||||
Total liabilities |
852,782 | 87,703 | 5,757 | (158,446 | ) | 787,796 | ||||||||||
Equity |
306,913 | 333,341 | 30,644 | (363,985 | ) | 306,913 | ||||||||||
Total liabilities and equity |
$ | 1,159,695 | $ | 421,044 | $ | 36,401 | $ | (522,431 | ) | $ | 1,094,709 | |||||
19
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Unaudited Condensed Consolidating Balance Sheets
December 31, 2008 (in thousands)
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Cash and cash equivalents |
$ | | $ | 12,379 | $ | 2,146 | $ | | $ | 14,525 | ||||||
Receivables, net |
| 48,313 | 2,621 | (210 | ) | 50,724 | ||||||||||
Inventories |
| 61,086 | 3,118 | | 64,204 | |||||||||||
Prepaid expenses and other |
117 | 3,499 | 338 | | 3,954 | |||||||||||
Total current assets |
117 | 125,277 | 8,223 | (210 | ) | 133,407 | ||||||||||
Property, plant and equipment, net |
| 117,201 | 10,259 | | 127,460 | |||||||||||
Intercompany receivable |
| 89,476 | 15,278 | (104,754 | ) | | ||||||||||
Investment in subsidiaries |
285,138 | 27,322 | | (312,460 | ) | | ||||||||||
Goodwill |
629,854 | | | | 629,854 | |||||||||||
Intangibles, net |
194,505 | | | | 194,505 | |||||||||||
Deferred financing costs and other assets |
16,225 | 1,159 | 121 | | 17,505 | |||||||||||
Total assets |
$ | 1,125,839 | $ | 360,435 | $ | 33,881 | $ | (417,424 | ) | $ | 1,102,731 | |||||
Current portion of long-term debt |
$ | 4,000 | $ | 7 | $ | | $ | | $ | 4,007 | ||||||
Accounts payable |
| 21,869 | 1,603 | (187 | ) | 23,285 | ||||||||||
Accrued liabilities |
5,063 | 26,066 | 3,008 | | 34,137 | |||||||||||
Total current liabilities |
9,063 | 47,942 | 4,611 | (187 | ) | 61,429 | ||||||||||
Note payable and long-term debt |
807,295 | 11 | | (104,777 | ) | 702,529 | ||||||||||
Other long-term liabilities |
7,308 | 27,344 | 1,948 | | 36,600 | |||||||||||
Total liabilities |
823,666 | 75,297 | 6,559 | (104,964 | ) | 800,558 | ||||||||||
Equity |
302,173 | 285,138 | 27,322 | (312,460 | ) | 302,173 | ||||||||||
Total liabilities and equity |
$ | 1,125,839 | $ | 360,435 | $ | 33,881 | $ | (417,424 | ) | $ | 1,102,731 | |||||
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Unaudited Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2009 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (31,702 | ) | $ | 80,592 | $ | 4,365 | $ | | $ | 53,255 | ||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Purchase of property and equipment |
| (10,496 | ) | (1,236 | ) | | (11,732 | ) | |||||||||||
Proceeds from sale of equipment |
| 103 | | | 103 | ||||||||||||||
Net cash used in investing activities |
| (10,393 | ) | (1,236 | ) | | (11,629 | ) | |||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Principal payments on long-term debt |
(22,376 | ) | (6 | ) | | | (22,382 | ) | |||||||||||
Intercompany receipts (advances) |
53,282 | (49,837 | ) | (3,445 | ) | | | ||||||||||||
Issuance of parent company stock |
812 | | | | 812 | ||||||||||||||
Repurchase of parent company stock |
(16 | ) | | | | (16 | ) | ||||||||||||
Cash flows provided by (used in) financing activities |
31,702 | (49,843 | ) | (3,445 | ) | | (21,586 | ) | |||||||||||
Effect of exchange rate changes in cash |
| 33 | (26 | ) | | 7 | |||||||||||||
Net increase (decrease) in cash and cash equivalents |
| 20,389 | (342 | ) | | 20,047 | |||||||||||||
Cash and cash equivalents, beginning of period |
| 12,379 | 2,146 | | 14,525 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | 32,768 | $ | 1,804 | $ | | $ | 34,572 | |||||||||
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ACCELLENT INC.
Notes to Unaudited Condensed Consolidated Financial Statements(Continued)
September 30, 2009
Unaudited Condensed Consolidating Statements of Cash Flows
Nine months ended September 30, 2008 (in thousands):
Parent | Subsidiary Guarantors |
Non- Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
Net cash (used in) provided by operating activities |
$ | (35,852 | ) | $ | 65,893 | $ | 8,479 | $ | | $ | 38,520 | ||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Purchases of property and equipment |
| (11,765 | ) | (1,184 | ) | | (12,949 | ) | |||||||||||
Proceeds from sale of equipment |
| 470 | 6 | | 476 | ||||||||||||||
Net cash used in investing activities |
| (11,295 | ) | (1,178 | ) | | (12,473 | ) | |||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Proceeds from long-term debt |
39,000 | | | | 39,000 | ||||||||||||||
Principal payments on long-term debt |
(53,000 | ) | (142 | ) | | | (53,142 | ) | |||||||||||
Intercompany receipts (advances) |
51,698 | (45,192 | ) | (6,506 | ) | | | ||||||||||||
Issuance of stock |
138 | | | | 138 | ||||||||||||||
Repurchase of parent company stock |
(1,984 | ) | | | | (1,984 | ) | ||||||||||||
Cash flows provided by (used in) financing activities |
35,852 | (45,334 | ) | (6,506 | ) | | (15,988 | ) | |||||||||||
Effect of exchange rate changes in cash |
| (48 | ) | (106 | ) | | (154 | ) | |||||||||||
Net increase in cash and cash equivalents |
| 9,216 | 689 | | 9,905 | ||||||||||||||
Cash and cash equivalents, beginning of period |
| 3,976 | 1,712 | | 5,688 | ||||||||||||||
Cash and cash equivalents, end of period |
$ | | $ | 13,192 | $ | 2,401 | $ | | $ | 15,593 | |||||||||
15. Subsequent Events
The Company has evaluated subsequent events through November 13, 2009, the date that these financial statements were issued.
In October 2009, the Company entered into an agreement with SunGard, an entity affiliated with KKR and Bain Capital (see note 11), to provide information systems hosting services for the Company.
On November 6, 2009, the Companys President and Chief Executive Officer tendered his resignation from the Company, effective November 13, 2009.
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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 31, 2009 with the Securities and Exchange Commission (File No. 333-130470) for the Companys fiscal year ended December 31, 2008. 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, drug delivery, endoscopy, neurology 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 revenues are aggregated by us to the ultimate parent of a customer, we typically generate diversified revenue streams within these large customers across separate customer divisions and multiple products.
During the first nine months of 2009, our 10 largest customers accounted for approximately 59% of revenues, with two customers, Medtronic and Johnson & Johnson, each accounting for greater than 10% of revenues. We expect net sales from our largest customers to continue to constitute a significant portion of our net sales in the future.
Results of Operations
The following table sets forth percentages derived from the consolidated statements of operations for the three and nine months ended September 30, 2009 and 2008, presented as a percentage of net sales.
Three Months Ended | Nine Months Ended | |||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 |
|||||||||
STATEMENT OF OPERATIONS DATA: |
||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of sales |
71.7 | 74.3 | 72.0 | 73.6 | ||||||||
Gross profit |
28.3 | 25.7 | 28.0 | 26.4 | ||||||||
Selling, general and administrative expenses |
10.0 | 11.6 | 10.4 | 11.4 | ||||||||
Research and development expenses |
0.6 | 0.5 | 0.6 | 0.6 | ||||||||
Restructuring charges |
2.0 | 0.6 | 1.3 | 0.8 | ||||||||
Amortization of intangibles |
3.1 | 2.8 | 3.0 | 2.8 | ||||||||
Loss on disposal of property and equipment |
0.4 | 0.2 | 0.2 | 0.1 | ||||||||
Income from operations |
12.2 | 10.0 | 12.5 | 10.7 | ||||||||
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Three months ended September 30, 2009 compared to three months ended September 30, 2008
Net Sales
Net sales for the three months ended September 30, 2009 were $117.8 million, a decrease of $16.9 million, or 12.6%, compared to net sales of $134.7 million for the three months ended September 30, 2008. The decrease in net sales is attributable to net price decreases totaling approximately $5.7 million, caused by passing through to our customers, decreases in precious metal prices which do not impact gross profit and $11.2 million related to lower demand for the Companys products, reflective of overall market conditions.
Gross Profit
Gross profit for the three months ended September 30, 2009 was $33.4 million compared to $34.6 million for the three months ended September 30, 2008. The $1.2 million decrease in gross profit was a result of the decrease in volume of net sales, excluding precious metals, during the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, were $11.8 million for the three months ended September 30, 2009 compared to $15.6 million for the three months ended September 30, 2008. The $3.8 million decrease in SG&A expenses was primarily attributable to lower commission costs of approximately $0.8 million related to sales compensation resulting from changes in the manner in which we compensate our sales personnel, lower professional fees of approximately $0.5 million, lower travel and related expenses of approximately $0.4 million, lower stock compensation charges of $1.0 million, lower salary and related costs of $0.4 million and lower discretionary spending overall.
Research and Development Expenses
Research and development, or R&D, expenses for the three months ended September 30, 2009 and 2008 were $0.7 and $0.8 million and reflect the Companys control over discretionary spending overall.
Restructuring Charges
Restructuring charges totaled $2.4 million during the three months ended September 30, 2009 compared to $0.8 million during the three months ended September 30, 2008. The higher costs incurred in the three months ended September 30, 2009 compared to the three months ended September 30, 2008 reflects an increase in the number of restructuring actions taken during 2009. See footnote 3 to our September 30, 2009 unaudited condensed consolidated financial statements for additional data and information regarding our restructuring actions.
During the three months ended September 30, 2009, the Company eliminated 70 positions across both manufacturing and administrative functions as part of a company wide effort to reduce costs and streamline operations. All affected employees were offered individually determined severance arrangements. The Company recorded $1.0 million of costs related to these one-time termination benefits during the three months ended September 30, 2009.
During the three months ended June 30, 2009, the Company eliminated 67 positions in its manufacturing and administrative functions as part of a company wide effort to reduce costs and streamline operations. All affected employees were offered individually determined severance benefits and in certain instances, retention bonuses, if they remain with the Company through their proposed termination date. The Company recorded $0.6 million of costs related to these one-time termination benefits during the three months ended September 30, 2009.
In May 2009, the Company announced a plan to close its manufacturing facility in Huntsville, Alabama. The facility will be closed on or about December 15, 2009. In connection with the planned closure, the Company will provide both retention bonuses and individually determined severance benefits to employees affected by the facility closing. The total one-time termination benefits approximate $1.2 million and are being recorded over the employees remaining service period as employees are required to stay through their termination date to receive benefits. During the three months ended September 30, 2009, the Company recorded $0.8 million of costs related to one-time termination benefits and other costs of closing the facility and the consolidation of its operations with other Company facilities.
In June 2008, the Company announced a plan to close its manufacturing facility in Memphis, Tennessee. The facility was closed in October 2008. In connection with the closure, the Company provided both retention bonuses and individually determined severance benefits to employees affected by the facility closing. The total one-time termination benefits were approximately $0.9 million and were recorded over the remaining service period as employees were required to stay through their termination date to receive benefits. During the three months ended September 30, 2008, the Company recorded $0.8 million of costs related to one-time termination benefits.
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Loss on Disposal of Property and Equipment
During the three months ended September 30, 2009, the Company recorded $0.4 million of losses related to the disposal of property and equipment compared to $0.3 million during the three months ended September 30, 2008. The increase during the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is primarily due to impairment charges of $0.3 million that were recorded in the three months ended September 30, 2009 related to the Companys planned closure of its facility in Huntsville, Alabama.
Interest Expense, net
Interest expense, net, decreased $2.1 million to $13.9 million for the three months ended September 30, 2009, compared to $16.0 million for the three months ended September 30, 2008. The decrease was primarily the result of lower borrowings outstanding and lower interest rates on our term loan during the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Other (Expense) Income
Included in other (expense) income includes gains and losses on our derivative instruments and foreign currency translation gains and losses. We maintain an interest rate swap agreement to reduce our exposure to variable interest rates on our outstanding term loan borrowings. During the three months ended September 30, 2009, we realized a $0.5 million loss on our interest rate swap agreement compared to a $0.2 million loss during the three months ended September 30, 2008. In addition, we recorded a currency exchange loss of approximately $0.5 million during the three months ended September 30, 2009 compared to a currency exchange gain of $1.2 million during the three months ended September 30, 2008. This difference of $1.7 million is due to more significant changes in foreign currency exchange rates during the three months ended September 30, 2009 compared to the three months ended September 30, 2008.
Income Tax Expense
Income tax expense for the three months ended September 30, 2009 was $15,000 and consisted of a $0.7 million deferred tax provision for differences in the book and tax treatment of goodwill offset by $0.6 million of foreign research and development tax credits received during the three months ending September 30, 2009. Income tax benefit for the three months ended September 30, 2008 was $0.7 million and included $0.3 million of deferred income tax benefit for differences in the book and tax treatment of goodwill, a $0.2 million in foreign tax benefit and $0.2 million of state tax benefit.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net Sales
Net sales for the nine months ended September 30, 2009 were $368.0 million, a decrease of $31.4 million, or 7.9%, compared to net sales of $399.4 million for the nine months ended September 30, 2008. The decrease in net sales is attributable to net price decreases totaling approximately $13.2 million, caused by passing through to our customers, decreases in precious metal prices which do not impact gross profit and lower demand for the Companys products, reflective of overall market conditions.
Gross Profit
Gross profit for the nine months ended September 30, 2009 was $103.2 million compared to $105.4 million for the nine months ended September 30, 2008. The $2.2 million decrease resulted from the decrease in demand for the Companys products, excluding precious metals, during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, or SG&A, were $38.1 million for the nine months ended September 30, 2009 compared to $45.5 million for the nine months ended September 30, 2008. The $7.4 million decrease in SG&A expenses was primarily attributable to lower commission costs of approximately $2.5 million related to sales compensation resulting from changes in the manner in which we compensate our sales personnel, lower professional fees of approximately $2.3 million, lower stock compensation costs of $0.9 million, lower travel and related expenses of approximately $0.7 million, lower salaried and related costs of $0.3 million, and lower discretionary spending of $0.7 million.
Research and Development Expenses
Research and development, or R&D, expenses for the nine months ended September 30, 2009 were $2.1 million compared to $2.2 million for the nine months ended September 30, 2008 and reflect the Companys control over discretionary spending overall.
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Restructuring Charges
Restructuring charges totaled $4.8 million during the nine months ended September 30, 2009 compared to $3.2 million during the nine months ended September 30, 2008. The higher costs incurred in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 reflect an increase in the number of restructuring actions taken during the nine months ended September 30, 2009. See footnote 3 to our September 30, 2009 unaudited condensed consolidated financial statements for additional data and information regarding our restructuring actions.
Loss on Disposal of Property and Equipment
During the nine months ended September 30, 2009 and 2008, the Company recorded $0.8 million and $0.4 million of losses, respectively, related to the disposal of property and equipment. The increase during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is primarily due to impairment charges of $0.5 million that were recorded in the nine months ended September 30, 2009 related to the Companys planned closure of its facility in Huntsville, Alabama.
Interest Expense, net
Interest expense, net, decreased $6.2 million to $43.2 million for the nine months ended September 30, 2009, compared to $49.4 million for the nine months ended September 30, 2008. The decrease was primarily the result of lower borrowings outstanding and lower interest rates on our term loan.
Other (Expense) Income
Included in other (expense) income are gains and losses on our derivative instruments and foreign currency translation gains and losses. We have entered into an interest rate swap agreement and maintained an interest rate collar agreement to reduce our exposure to variable interest rates on our outstanding term loan borrowings. During the nine months ended September 30, 2009, we realized a $1.1 million loss on our derivative instruments compared to a $0.6 million loss during the nine months ended September 30, 2008. In addition, we recorded a currency exchange loss of approximately $1.1 million during the nine months ended September 30, 2009 compared to a currency exchange gain of $0.5 million during the nine months ended September 30, 2008.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2009 was $2.1 million and included $2.2 million of deferred income tax expense primarily related to differences in the book and tax treatment of goodwill and a $0.1 million foreign income tax benefit, which consists of $0.5 million of foreign income tax expense, offset by $0.6 million of foreign research and development tax credits received during the nine months ended September 30, 2009. Income tax expense for the nine months ended September 30, 2008 was $3.4 million and included $1.5 million of deferred income taxes for differences in the book and tax treatment of goodwill, $1.3 million of foreign income taxes and $0.4 million of state income taxes. The decrease in our income tax expense for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is due to the effects of our legal entity re-organization in July 2008 which reduced our state income tax exposures, as well as lower foreign income tax expense resulting from lower taxable income in those jurisdictions.
Liquidity and Capital Resources
Our principal source of liquidity is our cash flows from operations and borrowings under our senior secured credit facility, entered into in connection with the acquisition of the Company by KKR and Bain Capital in 2005, which includes a $75.0 million revolving credit facility and a seven-year $400.0 million term facility (as amended, the Amended Credit Agreement). At September 30, 2009, we had $8.8 million of letters of credit outstanding under the revolving portion of our credit facility. In 2008, a member of the Companys lending syndicate entered bankruptcy proceedings under the United States bankruptcy protection provisions. That members revolving loan commitment is $8.0 million. As of September 30, 2009, the Company has not received notice regarding this members commitment, however, we believe that the amount of this members commitment is not available for future borrowing under the revolver. At September 30, 2009, we had $58.2 million available to borrow under the revolving portion of our senior secured credit facility.
Cash provided by operations was $53.3 million during the nine months ended September 30, 2009, compared to $38.5 million during the nine months ended September 30, 2008. The increase of $14.8 in cash provided by operating activities is primarily attributable to improved cash flow generated from working capital amounting to $3.9 million and $10.9 million of cash generated from improvements in our profitability.
Cash used in investing activities was $11.6 million during the nine months ended September 30, 2009 compared to $12.5 million during the nine months ended September 30, 2008. The decrease in cash used in investing activities period over period is primarily due to lower capital expenditures related to the Companys ERP system implementation.
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During the nine months ended September 30, 2009, cash used in financing activities was $21.6 million compared to cash used in financing activities of $16.0 million during the nine months ended September 30, 2008. The change in cash used in financing activities was primarily due to increased net payments on our long-term debt and revolver totaling $8.2 million, offset by $0.7 million of incremental cash generated from investments in parent company common stock and lower repurchases of parent company common stock amounting to $1.9 million. Cash used in financing activities reflects a required excess cash flow payment made during the nine months ended September 30, 2009, totaling $5.4 million. Our credit agreement allows us to apply this excess cash flow payment toward future required quarterly amortization payments for the next two years following the date of the excess cash flow payment. Accordingly, no required amortization payments are due on our term loan until September 2010.
Our senior secured credit facility contains restrictions on our ability to make capital expenditures. Based on current estimates, management believes that the amount of capital expenditures permitted to be made under the facility will be adequate to grow our business according to our business strategy and to maintain our continuing operations.
Our debt agreements, as amended, contain various covenants, including a maximum ratio of consolidated net debt to consolidated adjusted EBITDA (Leverage Ratio) and a minimum ratio of consolidated adjusted EBITDA to consolidated interest expense (Coverage Ratio). Both of these ratios are calculated at the end of each fiscal quarter based on our trailing twelve month financial results.
The Leverage Ratio may not exceed 8.0 to 1.0 for any four fiscal quarter period ending on or up to September 30, 2009, with such maximum permitted Leverage Ratio decreasing to 7.0 to 1.0, 6.0 to 1.0, and 5.0 to 1.0 for each quarter in the consecutive four quarter periods ending on September 30, 2010, September 30, 2011, and September 30, 2012, respectively, and to 4.5 to 1.0 for each fiscal quarter thereafter. The Interest Coverage Ratio may not be less than 1.35 to 1.00 for any four fiscal quarter period ending on or up to September 30, 2009, and increases to 1.55 to 1.00, 1.75 to 1.00 and 2.00 to 1.00 for each quarter in the consecutive four quarter periods ending on September 30, 2010, September 30, 2011, September 30, 2012, respectively, and to 2.10x for each quarter thereafter. At September 30, 2009, the Company was in compliance with these covenants and we expect to remain in compliance based on current and expected future operating results.
Based on our current level of operations, we believe our cash flow from operations and available borrowings under our Amended Credit Agreement will be adequate to meet our liquidity requirements for the next 12 months. However, no assurance can be given that this will be the case.
Other Key Indicators of Financial Condition and Operating Performance
EBITDA and Adjusted EBITDA presented in this Form 10-Q are supplemental measures of our performance that are not required by, or presented in accordance with generally accepted accounting principles in the United States, or GAAP. EBITDA and Adjusted EBITDA are not measures of our financial performance under GAAP and should not be considered as alternatives to net income or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity.
EBITDA represents net income (loss) before net interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA further adjusted to give effect to unusual items, non-cash items and other adjustments, all of which are required in calculating covenant ratios and compliance under the indenture governing our 10.5% Senior Subordinated Notes due 2013 (the Senior Subordinated Notes) and under our Amended Credit Agreement.
We believe that the inclusion of EBITDA and Adjusted EBITDA in this Form 10-Q is appropriate to provide additional information to investors and debt holders about the calculation of certain financial covenants in the indenture governing the senior subordinated notes and under our Amended Credit Agreement. Adjusted EBITDA is a material component of these covenants. For instance, the indenture governing the senior subordinated notes and our Amended Credit Agreement contain financial covenant ratios, specifically total leverage and interest coverage ratios that are calculated by reference to Adjusted EBITDA. Non-compliance with the financial ratio maintenance covenants contained in our Amended Credit Agreement could result in the requirement to immediately repay all amounts outstanding under such facility, while non-compliance with the debt incurrence ratios contained in the indenture governing the Senior Subordinated notes would prohibit us from being able to incur additional indebtedness other than pursuant to specified exceptions.
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We also present EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. Measures similar to EBITDA are also widely used by us and others in our industry to evaluate and price potential acquisition candidates. We believe EBITDA facilitates operating performance comparison from period to period and company to company by backing out potential differences caused by variations in capital structures (affecting relative interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).
In calculating Adjusted EBITDA, as permitted by the terms of our indebtedness, we eliminate the impact of a number of items we do not consider indicative of our ongoing operations and for the other reasons noted above. For the reasons indicated herein, you are encouraged to evaluate each adjustment and whether you consider it appropriate. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
| they do not reflect our cash expenditures for capital expenditure or contractual commitments; |
| they do not reflect changes in, or cash requirements for, our working capital requirements; |
| they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness; |
| although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; |
| Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, as discussed in our presentation of Adjusted EBITDA in this report; and |
| other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or reduce our indebtedness. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA only as a supplemental measure. For more information, see our unaudited condensed consolidated financial statements and the notes to those statements included elsewhere in this report.
The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the periods indicated (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 |
|||||||||||||
RECONCILIATION OF NET LOSS TO EBITDA: |
||||||||||||||||
Net loss |
$ | (820 | ) | $ | (849 | ) | $ | (1,442 | ) | $ | (9,819 | ) | ||||
Interest expense, net |
13,881 | 16,026 | 43,165 | 49,363 | ||||||||||||
Income tax expense (benefit) |
15 | (661 | ) | 2,060 | 3,360 | |||||||||||
Depreciation and amortization |
9,245 | 9,122 | 27,601 | 26,630 | ||||||||||||
EBITDA |
$ | 22,321 | $ | 23,638 | $ | 71,384 | $ | 69,534 | ||||||||
Adjustments: |
||||||||||||||||
Restructuring charges |
2,362 | 794 | 4,843 | 3,165 | ||||||||||||
Stock-based compensation employees |
225 | 1,435 | 829 | 2,349 | ||||||||||||
Stock-based compensation non-employees |
23 | 90 | 70 | 924 | ||||||||||||
Employee severance and relocation |
912 | 131 | 1,579 | 729 | ||||||||||||
Chief executive recruiting costs |
| | | (26 | ) | |||||||||||
Currency translation (gain) / loss |
530 | (1,220 | ) | 1,097 | (534 | ) | ||||||||||
Loss on derivative instruments |
498 | 171 | 1,091 | 528 | ||||||||||||
Loss on disposals of property and equipment |
449 | 297 | 804 | 400 | ||||||||||||
Other plant closure costs |
765 | 463 | 1,664 | 533 | ||||||||||||
Management fees to stockholder |
289 | 276 | 868 | 931 | ||||||||||||
Adjusted EBITDA |
$ | 28,374 | $ | 26,075 | $ | 84,229 | $ | 78,533 | ||||||||
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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. At September 30, 2009, we had $8.8 million of letters of credit outstanding under the revolving portion of our credit facility.
Contractual Obligations and Commitments
The following table sets forth our long-term contractual obligations as of September 30, 2009 (in thousands):
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years | |||||||||||
Senior secured credit facility (1) |
$ | 416,253 | $ | 11,727 | $ | 29,950 | $ | 374,576 | $ | | |||||
Senior subordinated notes (1) |
440,484 | 32,470 | 65,029 | 342,985 | | ||||||||||
Capital leases (1) |
11 | 7 | 4 | | | ||||||||||
Operating leases |
24,157 | 6,262 | 7,995 | 4,413 | 5,487 | ||||||||||
Purchase obligations (2) |
27,277 | 27,277 | | | | ||||||||||
Other long-term obligations (3) |
36,814 | | 420 | 8,215 | 28,179 | ||||||||||
Total |
$ | 944,996 | $ | 77,743 | $ | 103,398 | $ | 730,189 | $ | 33,666 | |||||
(1) | Includes principal and interest payments. |
(2) | Purchase obligations consist of commitments for material, supplies and machinery and equipment incidental to the ordinary conduct of business. |
(3) | Other long-term obligations include share-based payment obligations of $1.8 million, environmental remediation obligations of $3.4 million, accrued compensation and pension benefits of $3.0 million, deferred income taxes of $22.2 million, accrued swap liability of $6.0 million and other obligations of $0.4 million. |
Critical Accounting Policies
Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. Estimates and assumptions are reviewed on an ongoing basis and the effects of revisions are reflected in the unaudited consolidated financial statements in the period they are determined to be necessary. Actual results could differ materially from those estimates under different assumptions or conditions. We believe the following critical accounting policies impact our judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. The amount of product revenue recognized in a given period is impacted by our judgments made in establishing our reserve for potential future product returns. We provide a reserve for our estimate of future returns against revenue in the period the revenue is recorded. Our estimate of future returns is based on such factors as historical return data and current economic condition of our customer base. The amount of revenue we recognize will be directly impacted by our estimates made to establish the reserve for potential future product returns. Our provision for sales returns was $2.2 million and $2.6 million for the three months ended September 30, 2009 and 2008, respectively. Our provision for sales returns was $8.5 million and $7.2 million for the nine months ended September 30, 2009 and 2008, respectively.
Allowance for Doubtful Accounts. We estimate the collectibility of our accounts receivable and the related amount of bad debts that may be incurred in the future. The allowance for doubtful accounts results from an analysis of specific customer accounts, historical experience, credit ratings and current economic trends. Based on this analysis, we provide allowances for specific accounts when collectibility becomes uncertain. Our provision for bad debts was ($0.1) and $0.2 million, respectively, for the three months ended September 30, 2009 and 2008. There provision for bad debts recorded for the nine months ended September 30, 2009 was not significant. Our provision for bad debts was $0.3 million for the nine months ended September 30, 2008.
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Provision for Inventory Valuation. Inventory purchases and commitments are based upon future demand forecasts. Excess and obsolete inventory are valued at their net realizable value, which may be zero. We periodically experience variances between the amount of inventory purchased and contractually committed to, and our demand forecasts, resulting in excess and obsolete inventory valuation charges.
Valuation of Goodwill, Trade Names and Trademarks. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and certain of our other intangible assets, specifically trade names and trademarks, have indefinite lives. Goodwill and other indefinite life intangible assets are subject to an annual impairment test, or more often if impairment indicators arise. In assessing the fair value of goodwill and other indefinite life intangible assets, we make projections regarding future cash flow and other estimates based on comparable company market information. If either of these change, we may be required to record an impairment charge. In 2008, the fair value of the reporting unit significantly exceeded its carrying value.
Valuation of Long-lived Assets. Long-lived assets are comprised of property, plant and equipment and intangible assets with finite lives. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted cash flows expected to be generated by the asset. When we determine that the carrying value of intangible assets and fixed assets may not be recoverable, we measure impairment by the amount by which the carrying value of the asset exceeds the related fair value. Estimated fair value is generally based on projections of future cash flows and other estimates.
Self Insurance Reserves. We accrue for costs to provide self-insured benefits under our workers compensation and employee health benefits programs. We determine the accrual for workers compensation losses based on estimated costs to resolve each claim. We accrue for self-insured health benefits based on historical claims experience. We maintain insurance coverage to prevent financial losses from catastrophic workers compensation or employee health benefit claims. Our financial position or results of operations could be materially impacted in a fiscal quarter due to a material increase in claims. Our accruals for self-insured workers compensation and employee health benefits at September 30, 2009 and December 31, 2008 were $4.9 million and $4.2 million, respectively.
Environmental Reserves. We accrue for environmental remediation costs when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. Our remediation cost estimates are based on the facts known at the current time including consultation with a third-party environmental specialist and external legal counsel. Changes in environmental laws, improvements in remediation technology and discovery of additional information concerning known or new environmental matters could affect our operating results.
Pension and Other Employee Benefits. Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans. These assumptions include the weighted average discount rate, rates of increase in compensation levels and expected long-term rates of return on assets. If actual results are less favorable than those projected by management, additional expense may be required.
Share Based Payments. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating the underlying value of the common stock, the expected term of stock options, expected volatility of the underlying stock, and the number of stock-based awards expected to be forfeited due to future terminations. In addition, for stock-based awards where vesting is dependent upon achieving certain operating performance goals, we estimate the likelihood of achieving the performance goals. Differences between actual results and these estimates could have a material impact on our financial results.
Income Taxes. We estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as goodwill amortization, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we increase or decrease our income tax provision in our consolidated statement of operations. If any of our estimates of our prior period taxable income or loss require change, material differences could impact the amount and timing of income tax benefits or payments for any period.
The Company provides liabilities for uncertain tax positions which requires that we evaluate positions taken or expected to be taken in our income tax filings in all jurisdictions where we are required to file, and provide a liability for any positions that do not meet a more likely than not threshold of being sustained if examined by tax authorities.
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New Accounting Pronouncements
Recent Accounting Pronouncements
The Company evaluates subsequent events through the date the financial statements are issued or are available to be issued. Refer to footnote 15.
Beginning with the three months ended June 30, 2009, we disclose the fair value of all financial instruments as well as the method(s) and significant assumptions used to estimate that fair value. Refer to footnote 9.
Beginning with the three months ended September 30, 2009, the Accounting Standards Codification, which became the source of authoritative generally accepted accounting principles in the United States, is followed by the Company.
The Company discloses the fair values of derivative instruments and associated gains and losses that are subject to credit-risk. Refer to footnote 8.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk
We are subject to market risk associated with change in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for trading or speculative purposes.
Interest Rate Risk
We are subject to market risk associated with change in the London Interbank Offered Rate (LIBOR) and the Federal Funds Rate published by the Federal Reserve Bank of New York in connection with outstanding term loans under our senior secured credit facility for which we have an outstanding balance at September 30, 2009 of $381.6 million with an interest rate of 2.87%. We have entered into interest rate agreements to limit our exposure to variable interest rates. At September 30, 2009, the notional amount of our swap contract was $150.0 million, and will decrease to $125.0 million on February 27, 2010. The swap contract will expire on November 27, 2010. We will receive variable rate payments (equal to the three-month LIBOR rate) during the term of the swap contract and are obligated to pay fixed interest rate payments (4.85%) during the term of the contract. During the period when our interest rate swap is in place, a 1% change in interest rates would result in a change in interest expense of approximately $2.3 million per year. Upon the expiration of the swap agreement, a 1% change in interest rates would result in change in interest of approximately $3.8 million per year.
Foreign Currency Risk
We operate manufacturing facilities in foreign countries. Our principal currency exposures relate to the Euro, British pound and Mexican peso. We consider the currency risk to be low, as the majority of the transactions at these locations are denominated in the local currency.
ITEM 4T. | CONTROLS AND PROCEDURES |
The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) under the Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Form 10-Q. The disclosures set forth in this Item 4T contain information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4T for a more complete understanding of the matters covered by the certifications.
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(a) Evaluation of Disclosure Controls and Procedures: Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is properly recorded, processed, summarized and reported, within the time periods specified in the 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. Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our third fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 six 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. As part of efforts to lower TCE emissions, we have begun to implement a process that will reduce our TCE emissions generated by our facility in Collegeville, PA. However, this process will not reduce our TCE emissions to the levels required should a new standard become law. If the narrow tube exemption were no longer available to us, we may not be able to reduce our Collegeville facility TCE emissions to the levels required by the new EPA standard, resulting in a reduction in our ability to manufacture narrow tubes, which could have a material adverse impact on our financial position and results of operations.
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 other legal matters will have a material adverse effect on our consolidated financial position or results of operations.
ITEM 1A. | RISK FACTORS |
For a discussion of our potential risks or uncertainties, please see Part I, Item 1A, of Accellent Inc.s 2008 Annual Report on Form 10-K filed with the Securities and Exchange Commission. There have been no material changes to the risk factors disclosed in Part I, Item 1A, of Accellent Inc.s 2008 Annual Report on Form 10-K.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
No unregistered equity securities of the registrant were sold and no repurchases of equity securities were made during the nine months ended September 30, 2009.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not applicable.
ITEM 5. | OTHER INFORMATION |
Not applicable.
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ITEM 6. | EXHIBITS |
Exhibit |
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. | ||||
November 13, 2009 | By: | /S/ ROBERT E. KIRBY | ||
Robert E. Kirby | ||||
Chief Executive Officer (Principal Executive Officer) | ||||
Accellent Inc. | ||||
November 13, 2009 | By: | /S/ JEREMY A. FRIEDMAN | ||
Jeremy A. Friedman | ||||
Chief Financial Officer (Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit |
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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