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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation – The consolidated financial statements include the accounts of Greatbatch, Inc. and its wholly owned subsidiary Greatbatch Ltd. (collectively, the “Company” or “Greatbatch”). All intercompany balances and transactions have been eliminated in consolidation.
Nature of Operations – The Company operates its business in two reportable segments – Implantable Medical and Electrochem Solutions (“Electrochem”). The Company's customers include large multi-national original equipment manufacturers (“OEMs”). The Implantable Medical segment is comprised of our Greatbatch Medical and QiG Group brands and designs and manufactures medical devices and components for the cardiac, neuromodulation, vascular and orthopaedic markets. The Implantable Medical segment offers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution, which is facilitated through the QiG Group and leverages the component technology of Greatbatch Medical. The devices designed and developed by the QiG Group are manufactured by Greatbatch Medical. The Implantable Medical segment also offers value-added assembly and design engineering services for its component products.
Electrochem designs, manufactures and distributes primary and rechargeable batteries, and battery packs for demanding applications in the portable medical, energy, environmental monitoring and security markets among others.
Fiscal Year End – The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. Fiscal years 2012, 2011 and 2010 ended on December 28, 2012, December 30, 2011 and December 31, 2010, respectively. Fiscal years 2012, 2011 and 2010 all contained fifty-two weeks.
Fair Value Measurements – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. Accounting Standards Codification (“ASC”) establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 valuations do not entail a significant degree of judgment.
Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3 — Valuation is based on unobservable inputs that are significant to the overall fair value measurement. The degree of judgment in determining fair value is greatest for Level 3 valuations.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the valuation. To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date. Note 18 “Fair Value Measurements” contains additional information on assets and liabilities recorded at fair value in the consolidated financial statements.
Cash and Cash Equivalents – Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less. The carrying amount of cash and cash equivalents approximated their fair value as of December 28, 2012 and December 30, 2011 based upon the short-term nature of these instruments.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. A significant portion of the Company's sales are to four customers, all in the medical device industry, and, as such, the Company is directly affected by the condition of those customers and that industry. However, the credit risk associated with trade receivables is partially mitigated due to the stability of those customers. The Company performs on-going credit evaluations of its customers. Note 19 “Business Segment, Geographic and Concentration Risk Information” contains information on sales and accounts receivable for these customers. The Company maintains cash deposits with major banks, which from time to time may exceed insured limits. The Company performs on-going credit evaluations of its banks.
Allowance for Doubtful Accounts – The Company provides credit, in the normal course of business, to its customers in the form of trade receivables. Credit is extended based on evaluation of a customer's financial condition and collateral is not required. The Company maintains an allowance for those customer receivables that it does not expect to collect. The Company accrues its estimated losses from uncollectable accounts receivable to the allowance based upon recent historical experience, the length of time the receivable has been outstanding and other specific information as it becomes available. Provisions to the allowance for doubtful accounts are charged to current operating expenses. Actual losses are charged against this allowance when incurred. The carrying amount of trade receivables approximated their fair value as of December 28, 2012 based upon the short-term nature of these assets.
Inventories – Inventories are stated at the lower of cost, determined using the first-in first-out method, or market. Write-downs for excess, obsolete or expired inventory are based primarily on how long the inventory has been held as well as our estimates of forecasted net sales of that product. A significant change in the timing or level of demand for our products may result in recording additional write-downs for excess, obsolete or expired inventory in the future. Note 4 “Inventories” contains additional information on the Company's inventory.
Property, Plant and Equipment (“PP&E”) – PP&E is carried at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, as follows: buildings and building improvements 7-40 years; machinery and equipment 3-8 years; office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term, if less. The cost of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization is removed from the accounts and any gain or loss is recorded in operating income or expense. Note 6 “Property, Plant and Equipment, Net” contains additional information on the Company's PP&E.
Business Combinations – The Company records its business combinations under the acquisition method of accounting. Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management. Any excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired is allocated to goodwill. All direct acquisition-related costs are expensed as incurred.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through Other Operating Expenses, Net. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing, amount of, or the likelihood of achieving the applicable contingent consideration. See Note 18 “Fair Value Measurements” for additional information. Note 2 “Acquisitions” contains additional information on the Company's acquisitions.
Amortizing Intangible Assets – Amortizing intangible assets consists primarily of purchased technology, patents and customer lists. The Company amortizes its definite-lived intangible assets over their estimated useful lives utilizing an accelerated or straight-line method of amortization, which approximates the projected distribution of cash flows used to fair value those intangible assets at the time of acquisition. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure that recognition of amortization expense corresponds with the distribution of expected cash flows. The amortization period for the Company's amortizing intangible assets are as follows: purchased technology and patents 5-15 years; customer lists 7-20 years and other intangible assets 1-10 years. Note 7 “Intangible Assets” contains additional information on the Company's amortizing intangible assets.
Impairment of Long-Lived Assets – The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: A significant decrease in the market price of the asset or asset group; A significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; A significant change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an action or assessment by a regulator; An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group's carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.
Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for impairment. The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts on the last day of each fiscal year, or more frequently if certain events occur as described above. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for reporting units are determined based on discounted cash flows and market multiples. Other indefinite lived intangible assets are assessed for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above, by comparing the fair value of the intangible asset to its carrying value. The fair value is determined by using the income approach. Note 7 “Intangible Assets” contains additional information on the Company's long-lived intangible assets.
Other Long-Term Assets – Other long-term assets includes deferred financing fees incurred in connection with the Company's issuance of its convertible subordinated notes and revolving line of credit. These fees are amortized to Interest Expense using the effective interest method over the period from the date of issuance to the put option date (if applicable) or the maturity date, whichever is earlier. The amortization of deferred fees is included in Debt Related Amortization Included in Interest Expense in the Consolidated Statements of Cash Flows. Note 9 “Debt” contains additional information on the Company's deferred financing fees.
Other long-term assets also include investments in equity securities of entities that are not publicly traded and which do not have readily determinable fair values. We account for investments in these entities under the cost or equity method depending on the type of ownership interest, as well as the Company's ability to exercise influence over these entities. Equity method investments are initially recorded at cost, and are subsequently adjusted to reflect the Company's share of earnings or losses of the investee. Cost method investments are recorded at cost. Each reporting period, management evaluates these cost and equity method investments to determine if there are any events or circumstances that are likely to have a significant effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to: a recent sale or offering of similar shares of the investment at a price below the Company's cost basis; a significant deterioration in earnings performance; a significant change in the regulatory, economic or technological environment of the investee; or a significant doubt about an investee's ability to continue as a going concern. If an impairment indicator is identified, management will estimate the fair value of the investment and compare it to its carrying value. The estimation of fair value considers all available financial information related to the investee, including, but not limited to, valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and a determination as to whether the impairment is other-than-temporary is made. Impairment is deemed to be other-than-temporary unless the Company has the ability and intent to hold the investment for a period sufficient for a market recovery up to the carrying value of the investment. Further, evidence must indicate that the carrying value of the investment is recoverable within a reasonable period. For other-than-temporary impairments, an impairment loss is recognized equal to the difference between the investment's carrying value and its fair value. The Company has determined that these investments are not considered variable interest entities. The Company's exposure related to these entities is limited to its recorded investment. These investments are in start-up research and development companies whose fair value is highly subjective in nature and subject to future fluctuations, which could be significant.
Income Taxes – The consolidated financial statements of the Company have been prepared using the asset and liability approach in accounting for income taxes, which requires the recognition of deferred income taxes for the expected future tax consequences of net operating losses, credits, and temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.
The Company accounts for uncertain tax positions using a more likely than not recognition threshold. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. These tax positions are evaluated on a quarterly basis. The Company recognizes interest expense related to uncertain tax positions as Provision for Income Taxes. Penalties, if incurred, are recognized as a component of Selling, General and Administrative Expenses (“SG&A”).
The Company and its subsidiary file a consolidated U.S. federal income tax return. State tax returns are filed on a combined or separate basis depending on the applicable laws in the jurisdictions where tax returns are filed. The Company also files foreign tax returns on a separate company basis in the countries in which it operates. See Note 14 “Income Taxes” for additional information.
Convertible Subordinated Notes (“CSN”) – For convertible debt instruments that may be settled in cash upon conversion, the Company accounts for the liability and equity components of those instruments in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
Upon issuance, the Company determined the carrying amount of the liability component of CSN by measuring the fair value of a similar liability that does not have the associated conversion option. The carrying amount of the conversion option was then determined by deducting the fair value of the liability component from the initial proceeds received from the issuance of CSN.
The carrying amount of the conversion option was recorded in Additional Paid-In Capital with an offset to Long-Term Debt and is being amortized using the effective interest method over the period from the date of issuance to the maturity date. Deferred financing fees incurred in connection with the issuance of CSN, were allocated proportionally to the proceeds of the liability and equity components. The deferred financing fees allocated to the debt component are being amortized using the effective interest method over the period from the date of issuance to the maturity date. The deferred financing fees allocated to the equity component were recorded as an offset to Additional Paid-In Capital. The amortization of discount and deferred fees related to the Company's convertible debt instruments is included in Depreciation and Amortization in the Consolidated Statements of Cash Flows. See Note 9 “Debt” for additional information.
Derivative Financial Instruments – The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value. Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The Company designates its interest rate swaps (See Note 9 “Debt”) and foreign currency contracts (See Note 15 “Commitments and Contingencies”) entered into as cash flow hedges. The effective portion of the changes in fair value of these cash flow hedges is recorded each period, net of tax, in Accumulated Other Comprehensive Income until the related hedged transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges is recorded in earnings. In the event the hedged cash flow for forecasted transactions does not occur, or it becomes probable that they will not occur, the Company would reclassify the amount of any gain or loss on the related cash flow hedge to income (expense) at that time. Cash flows related to these derivative financial instruments are included in cash flows from operating activities.
Revenue Recognition – The Company recognizes revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, the buyer is obligated to pay us (i.e., not contingent on a future event), the risk of loss is transferred, there is no obligation of future performance, collectability is reasonably assured and the amount of future returns can reasonably be estimated. With regards to the Company's customers (including distributors), those criteria are met at the time of shipment when title passes. The Company includes shipping and handling fees billed to customers in Sales. Shipping and handling costs associated with inbound and outbound freight are recorded in Cost of Sales. In certain instances the Company obtains component parts for sub-assemblies from its customers that are included in the final product sold back to the same customer. These amounts are excluded from Sales and Cost of Sales recognized by the Company. The cost of these customer supplied component parts amounted to $32.6 million, $27.9 million and $29.9 million in 2012, 2011 and 2010, respectively.
Product Warranties – The Company allows customers to return defective or damaged products for credit, replacement, or exchange. The Company warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company accrues its estimated exposure to warranty claims, through Cost of Sales, based upon recent historical experience and other specific information as it becomes available. Note 15 “Commitments and Contingencies” contains additional information on the Company's product warranties.
Research, Development and Engineering Costs, Net (“RD&E”) – RD&E costs are expensed as incurred. The primary costs are salary and benefits for personnel, material costs used in development projects and subcontracting costs. Cost reimbursements for engineering services from customers for whom the Company designs products are recorded as an offset to engineering costs upon achieving development milestones specified in the contracts. These reimbursements do not cover the complete cost of the development projects. Additionally, the technology developed under these cost reimbursement projects is owned by the Company and is utilized for future products developed for other customers.
In-process research and development (“IPR&D”) represents research projects acquired in a business combination which are expected to generate cash flows but have not yet reached technological feasibility. The primary basis for determining the technological feasibility of these projects is whether or not regulatory approval has been obtained. The Company classifies IPR&D acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated projects. Upon completion, the Company would determine the useful life of the IPR&D and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, the remaining carrying amount of the associated IPR&D would be written-off. The Company tests the IPR&D acquired for impairment at least annually, and more frequently if events or changes in circumstances indicate that the assets may be impaired. The impairment test consists of a comparison of the fair value of the intangible assets with their carrying amount. If the carrying amount exceeds its fair value, the Company would record an impairment loss in an amount equal to the excess.
Note 12 “Research, Development and Engineering Costs, Net” and Note 7 “Intangible Assets” contains additional information on the Company's RD&E activities.
Stock-Based Compensation – The Company records compensation costs related to stock-based awards granted to employees based upon their estimated fair value on the grant date. Compensation cost for service-based awards is recognized ratably over the applicable vesting period. Compensation cost for nonmarket-based performance awards is reassessed each period and recognized based upon the probability that the performance targets will be achieved. Compensation cost for market-based performance awards is expensed ratably over the applicable vesting period and is recognized each period whether the performance metrics are achieved or not.
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock options granted. For service-based and nonmarket-based performance restricted stock and restricted stock unit awards, the fair market value of the award is determined based upon the closing value of the Company's stock price on the grant date. For market-based performance restricted stock unit awards, the fair market value of the award is determined utilizing a Monte Carlo simulation model, which projects the value of the Company's stock under numerous scenarios and determines the value of the award based upon the present value of those projected outcomes.
The amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest, excluding market and nonmarket performance award considerations. Note 11 “Stock-Based Compensation” contains additional information on the Company's stock-based compensation.
Foreign Currency Translation – The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of this translation is recorded in the consolidated financial statements as Accumulated Other Comprehensive Income. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company's foreign subsidiaries.
Net foreign currency transaction gains and losses are included in Other Expense, Net and amounted to a loss of $0.3 million for 2012, $0.1 million for 2011 and $0.9 million for 2010.
Defined Benefit Plans – The Company recognizes in its balance sheet as an asset or liability the overfunded or underfunded status of its defined benefit plans provided to its employees located in Mexico, Switzerland and France. This asset or liability is measured as the difference between the fair value of plan assets and the benefit obligation of those plans. For these plans, the benefit obligation is the projected benefit obligation, which is calculated based on actuarial computations of current and future benefits for employees. Actuarial gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense, are recognized as a component of Accumulated Other Comprehensive Income. Defined benefit expenses are charged to Cost of Sales, SG&A and RD&E expenses as applicable. Note 10 “Defined Benefit Plans” contains additional information on these costs.
Earnings (Loss) Per Share (“EPS”) – Basic EPS is calculated by dividing Net Income (Loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of shares outstanding for potential common shares, which consist of stock options, unvested restricted stock and restricted stock units and contingently convertible instruments.
Holders of the Company's CSN may convert them into shares of the Company's common stock under certain circumstances – See Note 9 “Debt.” The Company includes the effect of the conversion of these convertible notes in the calculation of diluted EPS using the if-converted method or the treasury method for instruments that may be settled in cash at the Company's election and which the Company has the ability and intent to settle them in cash, as long as the effect is dilutive. For computation of EPS under conversion conditions, the number of diluted shares outstanding increases by the amount of shares that are potentially convertible during that period. Also, Net Income (Loss) is adjusted for the calculation to add back interest expense on the convertible notes as well as unamortized discount and deferred financing fee amortization recorded during the period. Note 16 “Earnings (Loss) Per Share” contains additional information on the computation of the Company's EPS.
Comprehensive Income (Loss) – The Company's comprehensive income (loss) as reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) includes net income (loss), foreign currency translation adjustments, the net change in cash flow hedges, and defined benefit plan liability adjustments. The Consolidated Statements of Operations and Comprehensive Income (Loss) and Note 17 “Accumulated Other Comprehensive Income” contains additional information on the computation of the Company's comprehensive income (loss).
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates.
Recently Issued Accounting Pronouncements – In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting bodies to determine the potential impact they may have on the Company's Consolidated Financial Statements. Based upon this review, except as noted below, Management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's Consolidated Financial Statements.
On February 5, 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU adds new disclosure requirements either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income (“AOCI”) based on its source and the income statement line items affected by the reclassification. This ASU gives companies the flexibility to present the information either in the notes or parenthetically on the face of the financial statements provided that all of the required information is presented in a single location. This ASU is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. When adopted, this ASU will not have a material impact on the Company's Consolidated Financial Statements as it only changes the disclosures surrounding AOCI.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. When adopted, this ASU will not have a material impact on the Company's Consolidated Financial Statements as it only impacts the timing of when the Company is required to perform the two-step impairment tests of its indefinite-lived intangible assets other than goodwill.
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires companies to provide information about trading in financial instruments and related derivatives in expanded disclosures, creates new disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. When adopted, this ASU will not have a material impact on the Company's Consolidated Financial Statements as it only changes the disclosures surrounding the Company's offsetting assets and liabilities.
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2. ACQUISITIONS
NeuroNexus Technologies, Inc.
On February 16, 2012, the Company purchased all of the outstanding common stock of NeuroNexus Technologies, Inc. (“NeuroNexus”) headquartered in Ann Arbor, MI. NeuroNexus is an active implantable medical device design firm specializing in developing and commercializing neural interface technology, components and systems for neuroscience and clinical markets. NeuroNexus has an extensive intellectual property portfolio, core technologies and capabilities to support the development and manufacturing of neural interface devices across a wide range of applications including neuromodulation, sensing, optical stimulation and targeted drug delivery.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the operating results of NeuroNexus have been included in the Company's Implantable Medical segment from the date of acquisition. For 2012, NeuroNexus added approximately $2.5 million to the Company's revenue and decreased the Company's net loss by $0.2 million. The purchase price of NeuroNexus consisted of cash payments of $11.7 million and potential future payments of up to an additional $2 million. These future payments are contingent upon the achievement of certain financial and development-based milestones and had an estimated fair value of $1.5 million as of the acquisition date.
The cost of the acquisition was preliminarily allocated to the assets acquired and liabilities assumed from NeuroNexus based on their fair values as of the close of the acquisition, with the amount exceeding the fair value of the net assets acquired being recorded as goodwill. The value assigned to certain assets and liabilities are preliminary and are subject to adjustment as additional information is obtained, including, but not limited to, the finalization of pre-acquisition tax positions. The valuation is expected to be finalized during the first quarter of 2013. When the valuation is finalized, any changes to the preliminary valuation of assets acquired or liabilities assumed may result in material adjustments to the fair value of the intangible assets acquired, as well as goodwill.
The following table summarizes the preliminary allocation of the NeuroNexus purchase price to the assets acquired and liabilities assumed as of the acquisition date (in thousands): | |||||||
Assets acquired | |||||||
Current assets | $ | 618 | |||||
Property, plant and equipment | 35 | ||||||
Amortizing intangible assets | 2,927 | ||||||
Indefinite-lived intangible assets | 540 | ||||||
Goodwill | 8,875 | ||||||
Other assets | 1,576 | ||||||
Total assets acquired | 14,571 | ||||||
Liabilities assumed | |||||||
Current liabilities | 420 | ||||||
Deferred income taxes | 940 | ||||||
Total liabilities assumed | 1,360 | ||||||
$ | 13,211 |
The preliminary fair values of the assets acquired were determined using one of three valuation approaches: market, income and cost. The selection of a particular method for a given asset depended on the reliability of available data and the nature of the asset, among other considerations.
The market approach estimates the value for a subject asset based on available market pricing for comparable assets. The income approach estimates the value for a subject asset based on the present value of cash flows projected to be generated by the asset. The projected cash flows were discounted at a required rate of return that reflects the relative risk of the asset and the time value of money. The projected cash flows for each asset considered multiple factors from the perspective of a marketplace participant including revenue projections from existing customers, attrition trends, product life-cycle assumptions, marginal tax rates and expected profit margins giving consideration to historical and expected margins. The cost approach estimates the value for a subject asset based on the cost to replace the asset and reflects the estimated reproduction or replacement cost for the asset, less an allowance for loss in value due to depreciation or obsolescence, with specific consideration given to economic obsolescence if indicated. These fair value measurement approaches are based on significant unobservable inputs, including management estimates and assumptions.
Current assets and liabilities - The fair value of current assets and liabilities was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities.
Intangible assets - The purchase price was preliminarily allocated to specific intangible assets as follows (dollars in thousands):
Weighted | Weighted | |||||||||
Fair | Average | Estimated | Average | |||||||
Value | Amortization | Useful | Discount | |||||||
Assigned | Period (Years) | Life (Years) | Rate | |||||||
Amortizing Intangible Assets | ||||||||||
Technology and patents | $ | 1,058 | 6 | 10 | 14% | |||||
Customer lists | 1,869 | 7 | 15 | 13% | ||||||
2,927 | 7 | 13 | 13% | |||||||
Indefinite-lived Intangible Assets | ||||||||||
In-process research and development | 540 | N/A | 12 | 26% | ||||||
The weighted average amortization period is less than the estimated useful life due to the Company using an accelerated amortization method, which approximates the projected cash flows used to determine the fair value of those intangible assets.
Technology and patents - Technology and patents consists of technical processes, patented and unpatented technology, manufacturing know-how, trade secrets and the understanding with respect to products or processes that have been developed by NeuroNexus and that will be leveraged in current and future products. The fair value of technology and patents acquired was determined utilizing the relief from royalty method, a form of the income approach, with royalty rates that ranged from 2% to 6%. The estimated useful life of the technology and patents is based upon management's estimate of the product life cycle associated with technology and patents before they will be replaced by new technologies.
Customer lists – Customer lists represent the estimated fair value of non-contractual customer relationships NeuroNexus has as of the acquisition date. The primary customers of NeuroNexus include numerous scientists and researchers from various geographic locations around the world. These relationships were valued separately from goodwill at the amount which an independent third party would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer was based upon historical customer attrition as well as management's understanding of the industry and product life cycles.
IPR&D – IPR&D represents research projects which are expected to generate cash flows but have not yet reached technological feasibility. The Company used the income approach to determine the fair value of the IPR&D acquired. In arriving at the value of the IPR&D, management considered, among other factors: the projects' stage of completion; the complexity of the work to be completed as of the acquisition date; the projected costs to complete the projects; the contribution of other acquired assets; and the estimated useful life of the technology. The Company applied a market-participant risk-adjusted discount rate to arrive at a present value as of the date of acquisition. The value assigned to IPR&D related to the development of micro-electrodes for deep brain mapping and electrocorticography, and is expected to be commercialized by 2014. For purposes of valuing the IPR&D, the Company estimated total costs to complete the projects to be approximately $1.5 million. If the projects are not successful or completed in a timely manner, the Company may not realize the financial benefits expected for these projects.
Goodwill - The excess of the purchase price over the fair value of net tangible and intangible assets acquired and liabilities assumed was allocated to goodwill. Various factors contributed to the establishment of goodwill, including: the value of NeuroNexus's highly trained assembled work force and management team; the incremental value that NeuroNexus's technology will bring to the Company's neuromodulation platform currently in development; and the expected revenue growth over time that is attributable to increased market penetration from future products and customers. The goodwill acquired in connection with the NeuroNexus acquisition was allocated to the Implantable Medical business segment and is not deductible for tax purposes.
Micro Power Electronics, Inc.
On December 15, 2011, Electrochem acquired all of the outstanding common and preferred stock of Micro Power Electronics, Inc. (“Micro Power”) headquartered in Beaverton, OR. Micro Power is a leading supplier of custom battery solutions, serving the portable medical, military and handheld automatic identification and data collection markets. The aggregate purchase price consisted of the amount paid to Micro Power shareholders ($57.6 million), payments to Micro Power's creditors at closing ($6.6 million) and certain Micro Power transaction-related expenses ($7.6 million). The Company financed this acquisition with cash on hand and borrowed $45 million under its revolving credit facility. As of December 30, 2011, the Company had accrued $5.7 million of Micro Power transaction-related expenses, which were paid during 2012. During 2012, the Company completed the valuation and made adjustments to the Micro Power opening balance sheet based upon the receipt of information that was needed in order to complete the valuation of certain assets and liabilities. As a result, the Company reduced the fair value recorded for the Micro Power amortizing intangible assets acquired by $0.4 million and increased the amount of goodwill recorded by $0.4 million. The impact of these adjustments, individually and in the aggregate, was not considered material and therefore has not been reflected as a retrospective adjustment of the historical financial statements.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the operating results of Micro Power have been included in the Company's Electrochem segment from the date of acquisition and the cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their fair values as of the close of the acquisition, with the amount exceeding the fair value of net assets acquired being recorded as goodwill. For 2011, the Micro Power acquisition added approximately $2.5 million to revenue and was neutral to net income.
The following table summarizes the allocation of the Micro Power purchase price to the assets acquired and liabilities assumed as of the acquisition date (in thousands): | |||||||
Assets acquired | |||||||
Current assets | $ | 25,620 | |||||
Property, plant and equipment | 1,650 | ||||||
Amortizing intangible assets | 28,914 | ||||||
Goodwill | 31,891 | ||||||
Other assets | 94 | ||||||
Total assets acquired | 88,169 | ||||||
Liabilities assumed | |||||||
Current liabilities | 13,679 | ||||||
Long-term liabilities | 2,688 | ||||||
Total liabilities assumed | 16,367 | ||||||
$ | 71,802 |
Current assets and liabilities - The fair value of current assets (excluding inventory) and current liabilities was assumed to approximate their carrying value as of the acquisition date due to the short-term nature of these assets and liabilities. The fair value of in-process and finished goods inventory acquired was estimated by applying a version of the market approach called the comparable sales method. This approach estimates the fair value of the assets by calculating the potential revenue generated from selling the inventory and subtracting from it the costs related to the completion and sale of that inventory and a reasonable profit allowance. Based upon this methodology, the Company recorded the inventory acquired at fair value resulting in an increase in inventory of $0.7 million.
Intangible assets – The purchase price was allocated to specific intangible assets as follows (dollars in thousands):
Weighted | Weighted | |||||||||
Fair | Average | Estimated | Average | |||||||
Value | Amortization | Useful | Discount | |||||||
Amortizing Intangible Assets | Assigned | Period (Years) | Life (Years) | Rate | ||||||
Technology and patents | $ | 8,051 | 4 | 10 | 14% | |||||
Customer lists | 19,569 | 5 | 14 | 12% | ||||||
Noncompete agreement | 915 | 4 | 8 | 14% | ||||||
Trademarks and tradenames | 379 | 2 | 2 | 13% | ||||||
$ | 28,914 | 4 | 13 | 13% |
The weighted average amortization period is less than the estimated useful life due to the Company using an accelerated amortization method, which approximates the projected cash flows used to determine the fair value those intangible assets.
Technology and patents - Technology and patents consists of technical processes, patented and unpatented technology, manufacturing know-how, trade secrets and the understanding with respect to products or processes that have been developed by Micro Power and that will be leveraged in current and future products. The fair value of technology and patents acquired was determined utilizing the relief from royalty method, a form of the income approach, with royalty rates that ranged from 2% to 4%. The estimated useful life of the technology and patents was based upon management's estimate of the product life cycle associated with technology and patents before they will be replaced by new technologies.
Customer lists – Customer lists represent the estimated fair value of both the contractual and non-contractual customer relationships Micro Power has as of the acquisition date. These relationships were valued separately from goodwill at the amount which an independent third party would be willing to pay for these relationships. The fair value of customer lists was determined using the multi-period excess-earnings method, a form of the income approach. The estimated useful life of the existing customer was based upon historical customer attrition as well as management's understanding of the industry and product life cycles.
Trademarks and tradenames – Trademarks and tradenames represent the estimated fair value of corporate and product names acquired from Micro Power. These tradenames were valued separately from goodwill at the amount which an independent third party would be willing to pay for use of these names. The fair value of the trademarks and tradenames was determined by utilizing the relief from royalty method, a form of the income approach, with a 0.5% royalty rate.
Goodwill - The excess of the purchase price over the fair value of net tangible and intangible assets acquired was allocated to goodwill. Various factors contributed to the establishment of goodwill, including: the value of Micro Power's highly trained assembled work force and management team; the expected revenue growth over time that is attributable to increased market penetration from future products and customers; and the incremental value to the Company's Electrochem business from expanding and diversifying its revenues. The goodwill acquired in connection with the Micro Power acquisition was allocated to the Electrochem business segment and is not deductible for tax purposes.
Pro Forma Results (Unaudited) - The following unaudited pro forma information presents the consolidated results of operations of the Company, NeuroNexus and Micro Power as if those acquisitions occurred as of the beginning of fiscal years 2011 (NeuroNexus) and 2010 (Micro Power) (in thousands, except per share amounts):
Year Ended | ||||||||
December 28, | December 30, | |||||||
2012 | 2011 | |||||||
Sales | $ | 646,617 | $ | 636,502 | ||||
Net (loss) income | (4,973) | 32,306 | ||||||
Earnings (loss) per share: | ||||||||
Basic | $ | (0.21) | $ | 1.39 | ||||
Diluted | $ | (0.21) | $ | 1.37 |
The unaudited pro forma information presents the combined operating results of Greatbatch, NeuroNexus and Micro Power, with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisitions at Greatbatch's interest rate, and the impact of income taxes on the pro forma adjustments utilizing the applicable statutory tax rate. The unaudited pro forma consolidated basic and diluted earnings (loss) per share calculations are based on the consolidated basic and diluted weighted average shares of Greatbatch. The unaudited pro forma results are presented for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain costs savings may result from the acquisition; however, there can be no assurance that these cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future.
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3. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
(in thousands) | 2012 | 2011 | 2010 | ||||||||
Noncash investing and financing activities: | |||||||||||
Common stock contributed to 401(k) Plan | $ | 4,793 | $ | - | $ | - | |||||
Property, plant and equipment purchases | |||||||||||
included in accounts payable | 2,522 | 4,455 | 2,614 | ||||||||
Cash paid during the year for: | |||||||||||
Interest | 6,230 | 6,148 | 8,498 | ||||||||
Income taxes | 4,909 | 5,259 | 3,826 | ||||||||
Acquisition of noncash assets | 14,396 | 87,766 | 350 | ||||||||
Liabilities assumed | 1,244 | 16,483 | - |
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4. INVENTORIES
Inventories are comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Raw materials | $ | 58,204 | $ | 49,773 | |||
Work-in-process | 30,022 | 36,603 | |||||
Finished goods | 18,386 | 23,537 | |||||
Total | $ | 106,612 | $ | 109,913 |
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5. ASSETS HELD FOR SALE
Assets held for sale, which are included in Prepaid Expenses and Other Current Assets, is comprised of the following (in thousands): | ||||||||||||
At | ||||||||||||
Disposal | Business | December 28, | December 30, | |||||||||
Asset | Group | Segment | 2012 | 2011 | ||||||||
Inventory | Wireless sensing | Electrochem | $ | 288 | $ | - | ||||||
Technology | Wireless sensing | Electrochem | 655 | - | ||||||||
Inventory | Swiss orthopaedic product line | Implantable Medical | 2,552 | - | ||||||||
PP&E | Swiss orthopaedic product line | Implantable Medical | 1,471 | - | ||||||||
Technology | Swiss orthopaedic product line | Implantable Medical | 476 | - | ||||||||
$ | 5,442 | $ | - |
During 2012, the Company transferred inventory and technology related to Electrochem's wireless sensing product line to held for sale. These assets are expected to be sold within the next year.
In connection with the sale of certain non-core Swiss orthopaedic product lines to an independent third party in the first quarter of 2013, during 2012, the Company transferred certain inventory, PP&E and technology to held for sale. Additionally, as the disposal group was considered a business, $2.9 million of goodwill was allocated to the disposal group in the first quarter of 2013 when the transaction closed. In connection with the transfer of these orthopaedic product lines to held for sale, the Company recognized a $3.6 million loss in Other Operating Expenses, Net in 2012 based upon the sales price to the third party. As this disposal group did not have cash flows that were clearly distinguishable, both operationally and for financial reporting purposes, from the rest of the Company, they were not considered discontinued operations in accordance with ASC 205. See Note 13 “Other Operating Expenses, Net.”
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6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment are comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Manufacturing machinery and equipment | $ | 150,344 | $ | 149,136 | |||
Buildings and building improvements | 87,357 | 75,229 | |||||
Information technology hardware and software | 29,823 | 33,881 | |||||
Leasehold improvements | 20,520 | 17,426 | |||||
Furniture and fixtures | 13,414 | 11,282 | |||||
Land and land improvements | 12,499 | 11,075 | |||||
Construction work in process | 15,441 | 13,302 | |||||
Other | 676 | 993 | |||||
330,074 | 312,324 | ||||||
Accumulated depreciation | (179,181) | (166,518) | |||||
Total | $ | 150,893 | $ | 145,806 |
Depreciation expense for property, plant and equipment was as follows (in thousands): | |||||||||||
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Depreciation expense | $ | 31,575 | $ | 25,672 | $ | 26,104 |
Construction work in process at December 28, 2012 and December 30, 2011 primarily relates to the transfer of the Company's orthopaedic operations performed at the Orvin and Corgemont, Switzerland facilities to existing facilities located in Fort Wayne, IN and Tijuana, Mexico; the expansion of the Company's manufacturing infrastructure in order to support its medical device strategy; and the relocation of the Company's global headquarters to Frisco, Texas. See Note 13 “Other Operating Expenses, Net” for a description of the Company's significant capital investment projects.
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7. INTANGIBLE ASSETS
Amortizing intangible assets, net are comprised of the following (in thousands): | |||||||||||||
At | December 28, 2012 | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net Carrying Amount | ||||||||
Purchased technology and patents | $ | 95,576 | $ | (61,659) | $ | 1,932 | $ | 35,849 | |||||
Customer lists | 68,257 | (18,929) | 1,270 | 50,598 | |||||||||
Other | 4,434 | (4,341) | 805 | 898 | |||||||||
Total amortizing intangible assets | $ | 168,267 | $ | (84,929) | $ | 4,007 | $ | 87,345 | |||||
At | December 30, 2011 | ||||||||||||
Purchased technology and patents | $ | 97,324 | $ | (54,054) | $ | 842 | $ | 44,112 | |||||
Customer lists | 66,388 | (14,009) | 1,807 | 54,186 | |||||||||
Other | 5,174 | (4,019) | 805 | 1,960 | |||||||||
Total amortizing intangible assets | $ | 168,886 | $ | (72,082) | $ | 3,454 | $ | 100,258 |
Aggregate intangible asset amortization expense is comprised of the following (in thousands): | |||||||||||
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Cost of sales | $ | 7,489 | $ | 6,163 | $ | 5,897 | |||||
SG&A | 6,227 | 3,926 | 3,765 | ||||||||
RD&E | 545 | 367 | - | ||||||||
Total intangible asset amortization expense | $ | 14,261 | $ | 10,456 | $ | 9,662 |
Estimated future intangible asset amortization expense based upon the current carrying value is as follows (in thousands): | |||
Estimated | |||
Amortization | |||
Expense | |||
2013 | $ | 13,189 | |
2014 | 13,424 | ||
2015 | 12,373 | ||
2016 | 10,078 | ||
2017 | 8,956 | ||
Thereafter | 29,325 | ||
Total estimated amortization expense | $ | 87,345 |
During 2011, the Company made various asset purchases of technology and patents totaling $6.3 million, which is being amortized over a weighted average period of approximately 11 years. In connection with these purchases, the Company recorded a $3.0 million contingent liability, which will only be paid if certain sales targets for products that utilize that technology are achieved. This contingent liability is currently classified in Other Long-Term Liabilities.
The change in indefinite-lived assets during 2012 is as follows (in thousands): | ||||||||||
Trademarks and Tradenames | IPR&D | Total | ||||||||
At | December 30, 2011 | $ | 20,288 | $ | - | $ | 20,288 | |||
Indefinite-lived assets acquired | - | 540 | 540 | |||||||
At | December 28, 2012 | $ | 20,288 | $ | 540 | $ | 20,828 |
The change in goodwill during 2012 is as follows (in thousands): | ||||||||||
Implantable Medical | Electrochem | Total | ||||||||
At | December 30, 2011 | $ | 297,232 | $ | 41,421 | $ | 338,653 | |||
Goodwill acquired | 8,875 | 413 | 9,288 | |||||||
Foreign currency translation | 1,094 | 0 | 1,094 | |||||||
At | December 28, 2012 | $ | 307,201 | $ | 41,834 | $ | 349,035 |
As of December 28, 2012, no accumulated impairment loss has been recognized for the goodwill allocated to the Company's Implantable Medical or Electrochem segments.
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8. ACCRUED EXPENSES
Accrued expenses are comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Salaries and benefits | $ | 12,704 | $ | 13,618 | |||
Profit sharing and bonuses | 12,488 | 19,971 | |||||
Warranty | 2,626 | 2,013 | |||||
Swiss orthopaedic consolidation severance | 9,567 | - | |||||
Micro Power purchase price payable | - | 5,690 | |||||
Other | 8,130 | 11,247 | |||||
Total | $ | 45,515 | $ | 52,539 |
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9. DEBT
Long-term debt is comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Revolving line of credit | $ | 33,000 | $ | 55,000 | |||
2.25% convertible subordinated notes | 197,782 | 197,782 | |||||
Unamortized discount | (5,368) | (16,832) | |||||
Total long-term debt | $ | 225,414 | $ | 235,950 |
Revolving Line of Credit – The Company has a revolving credit facility (the “Credit Facility”), which provides a $400 million secured revolving credit facility, and can be increased by $200 million upon the Company's request and approval by a majority of the lenders. The Credit Facility also contains a $15 million letter of credit subfacility and a $15 million swingline subfacility. The Credit Facility has a maturity date of June 24, 2016; provided, however, if CSN are not repaid in full, modified or refinanced before March 1, 2013, the maturity date of the Credit Facility is March 1, 2013. On February 20, 2013, the Company redeemed all outstanding CSN, which was funded with availability under the Credit Facility.
The Credit Facility is secured by the Company's non-realty assets including cash, accounts receivable and inventories. Interest rates under the Credit Facility are, at the Company's option either at: (i) the prime rate plus the applicable margin, which ranges between 0.0% and 1.0%, based on the Company's total leverage ratio or (ii) the applicable LIBOR rate plus the applicable margin, which ranges between 1.5% and 3.0%, based on the Company's total leverage ratio. Loans under the swingline subfacility will bear interest at the prime rate plus the applicable margin, which ranges between 0.0% and 1.0%, based on the Company's total leverage ratio. The Company is also required to pay a commitment fee which, varies between 0.175% and 0.25% depending on the Company's total leverage ratio.
The Credit Facility contains limitations on the incurrence of indebtedness, liens and licensing of intellectual property, investments and certain payments. The Credit Facility permits the Company to engage in the following activities up to an aggregate amount of $250 million: 1) engage in permitted acquisitions in the aggregate not to exceed $250 million; 2) make other investments in the aggregate not to exceed $60 million; 3) make stock repurchases not to exceed $60 million in the aggregate; and 4) retire up to $198 million of CSN. At any time that the total leverage ratio of the Company for the two most recently ended fiscal quarters is less than 2.75 to 1.0, the Company may make an election to reset each of the amounts specified above. Additionally, these limitations can be waived upon the Company's request and approval of a majority of the lenders. As of December 28, 2012, the Company had available to it 100% of the above limits as the Company reset these limits during 2012, except for the aggregate limit and other investments limit which are now $248 million and $58 million, respectively.
The Credit Facility requires the Company to maintain a rolling four quarter ratio of adjusted EBITDA to interest expense of at least 3.0 to 1.0, and a total leverage ratio of not greater than 4.0 to 1.0. The calculation of adjusted EBITDA and total leverage ratio excludes non-cash charges, extraordinary, unusual, or non-recurring expenses or losses, non-cash stock-based compensation, and non-recurring expenses or charges incurred in connection with permitted acquisitions. As of December 28, 2012, the Company was in compliance with all covenants.
The Credit Facility contains customary events of default. Upon the occurrence and during the continuance of an event of default, a majority of the lenders may declare the outstanding advances and all other obligations under the Credit Facility immediately due and payable.
The weighted average interest rate on borrowings under the Credit Facility as of December 28, 2012, was 2.07%. As of December 28, 2012, the Company had $367 million of borrowing capacity available under the Credit Facility. This amount may vary from period to period based upon the debt levels of the Company as well as the level of EBITDA, which impacts the covenant calculations as described above.
Interest Rate Swaps – From time to time, the Company enters into interest rate swap agreements in order to hedge against potential changes in cash flows on the outstanding debt on the Credit Facility. The receive variable leg of the interest rate swaps and the variable rate paid on the debt have the same rate of interest, excluding the credit spread, and resets and pays interest on the same date. In 2008, the Company entered into three receive floating-pay fixed interest rate swaps indexed to the six-month LIBOR rate, in order to hedge against potential changes in cash flows on the Company's outstanding debt, which was also indexed to the six-month LIBOR rate. As of December 28, 2012, none of these interest rate swaps remain outstanding. During 2012, the Company entered into a three-year $150 million interest rate swap, which amortizes $50 million per year and will be effective in February 2013. For the outstanding debt being hedged, the Company intends to continue electing the one-month LIBOR as the benchmark interest rate. Information regarding the Company's outstanding interest rate swap as of December 28, 2012 is as follows (dollars in thousands):
Current | Fair | ||||||||||||||||||
Pay | Receive | Value | Balance | ||||||||||||||||
Type of | Notional | Start | End | Fixed | Floating | December 28, | Sheet | ||||||||||||
Instrument | Hedge | Amount | Date | Date | Rate | Rate | 2012 | Location | |||||||||||
Interest rate swap | Cash flow | $ | 150,000 | Feb-13 | Feb-16 | 0.573% | $ | N/A | $ | (638) | Other Long-Term Liabilities |
The estimated fair value of the interest rate swap agreement represents the amount the Company expects to receive (pay) to terminate the contract. The Company accounts for its interest rate swaps as cash flow hedges. No portion of the change in fair value of the Company's interest rate swaps during 2012, 2011 or 2010 was considered ineffective. The amount recorded as Interest Expense in 2012, 2011 and 2010 related to the Company's interest rate swaps was $0.0 million, $0.4 million and $1.7 million, respectively.
Convertible Subordinated Notes – In March 2007, the Company completed a private placement of $197.8 million of convertible subordinated notes (“CSN”) at a 5% discount. CSN bear interest at 2.25% per annum, payable semi-annually, are due on June 15, 2013. The Company redeemed all outstanding CSN on February 20, 2013, which was funded with availability under the Credit Facility. As such, CSN is classified as long-term in the December 28, 2012 Consolidated Balance Sheet in accordance with ASC 470.
The holders of CSN were able to convert the notes into shares of the Company's common stock at a conversion price of $34.70 per share, which was equivalent to a conversion ratio of 28.8219 shares per $1,000 of principal. The conversion price and the conversion ratio adjusted automatically upon certain changes to the Company's capitalization. The fair value of CSN as of December 28, 2012 was approximately $197.8 million and is based on recent sales prices.
The effective interest rate of CSN, which takes into consideration the amortization of the discount and deferred fees related to the issuance of these notes, is 8.5%. The discount on CSN was being amortized to the call date utilizing the effective interest method. As of December 28, 2012, the carrying amount of the discount related to the CSN conversion option was $4.6 million. As of December 28, 2012, the if-converted value of the CSN notes does not exceed their principal amount as the Company's closing stock price of $22.89 per share did not exceed the conversion price of CSN.
The contractual interest and discount amortization for CSN were as follows (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Contractual interest | $ | 4,450 | $ | 4,450 | $ | 4,450 | |||
Discount amortization | 11,464 | 10,320 | 9,657 |
CSN were convertible at the option of the holders at such time as: (i) the closing price of the Company's common stock exceeds 150% of the conversion price of the notes for 20 out of 30 consecutive trading days; (ii) the trading price per $1,000 of principal is less than 98% of the product of the closing sale price of common stock for each day during any five consecutive trading day period and the conversion rate per $1,000 of principal; (iii) CSN have been called for redemption; (iv) the Company distributes to all holders of common stock rights or warrants entitling them to purchase additional shares of common stock at less than the average closing price of common stock for the ten trading days immediately preceding the announcement of the distribution; (v) the Company distributes to all holders of common stock any form of dividend which has a per share value exceeding 5% of the price of the common stock on the day prior to such date of distribution; (vi) the Company effects a consolidation, merger, share exchange or sale of assets pursuant to which its common stock is converted to cash or other property; (vii) the occurrence of the period beginning 60 days prior to but excluding June 15, 2013; and (viii) certain fundamental changes, as defined in the indenture governing the notes, occur or are approved by the Board of Directors.
Conversions in connection with corporate transactions that constitute a fundamental change required the Company to pay a premium make-whole amount, based upon a predetermined table as set forth in the indenture agreement, whereby the conversion ratio on the notes would be increased by up to 6.3 shares per $1,000 of principal. The premium make-whole amount would have been paid in shares of common stock upon any such conversion, subject to the net share settlement feature of the notes described below.
CSN contained a net share settlement feature that required the Company to pay cash for each $1,000 of principal to be converted. Any amounts in excess of $1,000 would be settled in shares of the Company's common stock, or at the Company's option, cash. The Company had a one-time irrevocable election to pay the holders in shares of its common stock, which it did not exercise.
CSN were redeemable by the Company at any time on or after June 20, 2012, or at the option of a holder upon the occurrence of certain fundamental changes, as defined in the indenture, affecting the Company. CSN were subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all debts and other liabilities of the Company's subsidiaries.
Deferred Financing Fees - The change in deferred financing fees is as follows (in thousands): | |||||
At | December 31, 2010 | $ | 2,005 | ||
Financing costs deferred | 2,213 | ||||
Write-off during the period | (51) | ||||
Amortization during the period | (1,018) | ||||
At | December 30, 2011 | 3,149 | |||
Amortization during the period | (1,093) | ||||
At | December 28, 2012 | $ | 2,056 |
|
10. DEFINED BENEFIT PLANS
Savings Plan – The Company sponsors a defined contribution 401(k) plan, which covers substantially all of its U.S. based employees. The plan provides for the deferral of employee compensation under Section 401(k) and a discretionary Company match. In 2012, 2011, and 2010, this match was 35% per dollar of participant deferral, up to 6% of the total compensation for each participant. Net costs related to this defined contribution plan were $2.0 million in 2012, $1.6 million in 2011, and $1.5 million in 2010.
In addition to the above, under the terms of the 401(k) plan document there is an annual discretionary defined contribution of up to 4% of each employee's eligible compensation based upon the achievement of certain performance targets. This amount is contributed to the 401(k) plan in the form of Company stock. Compensation cost recognized related to the defined contribution plan was $1.9 million and $5.1 million in 2012 and 2011, respectively. No discretionary contribution was made for fiscal year 2010 as the Company did not achieve the applicable performance targets for that year. As of December 28, 2012, the 401(k) Plan held 653,455 shares of Company stock.
Education Assistance Program – The Company reimburses tuition, textbooks and laboratory fees for college or other job related programs for all of its U.S. based employees. The Company also reimburses college tuition for the dependent children of certain full-time U.S. based employees hired prior to 2012, which vests on a straight-line basis over ten years, up to the applicable local state university tuition rate. For certain employees and executives, the dependent children benefit is not limited. Minimum academic achievement is required in order to receive reimbursement under both programs. Aggregate expenses under the programs were $2.2 million, $1.5 million and $1.3 million in 2012, 2011 and 2010, respectively.
Defined Benefit Plans – The Company is required to provide its employees located in Switzerland, Mexico, and France certain statutorily mandated defined benefits. Under these plans, benefits accrue to employees based upon years of service, position, age and compensation. The defined benefit pension plan provided to the Company's employees located in Switzerland is a funded contributory plan while the plans that provide benefits to the Company's employees located in Mexico and France are unfunded and noncontributory. The liability and corresponding expense related to these benefit plans is based on actuarial computations of current and future benefits for employees.
During 2012, the Company transferred most major functions performed at its facilities in Switzerland into other existing facilities. As a result, the Company curtailed its defined benefit plan provided to employees at those Swiss facilities during 2012. The Company has estimated that a net curtailment gain will be recognized as a result of this curtailment. In accordance with ASC 715, this gain will be recognized as the related employees are terminated. Additionally, as nearly all of the Swiss pension liability is expected to be paid off in the next year, the Company moved all Swiss pension plan assets into cash accounts during 2012. Swiss Plan assets are expected to be sufficient to cover plan liabilities.
Information relating to the funding position of the Company's defined benefit plans as of the plans measurement date of December 28, 2012 and December 30, 2011 were as follows (in thousands):
Year Ended | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Change in projected benefit obligation: | |||||||
Projected benefit obligation at beginning of year | $ | 17,053 | $ | 15,961 | |||
Service cost | 1,115 | 1,127 | |||||
Interest cost | 409 | 483 | |||||
Prior service cost and plan amendments | 0 | (457) | |||||
Plan participants' contribution | 976 | 999 | |||||
Actuarial loss | 958 | 393 | |||||
Benefits paid | 229 | (1,396) | |||||
Settlements/curtailments | (4,934) | - | |||||
Foreign currency translation | 409 | (57) | |||||
Projected benefit obligation at end of year | 16,215 | 17,053 | |||||
Change in fair value of plan assets: | |||||||
Fair value of plan assets at beginning of year | 11,484 | 11,314 | |||||
Employer contributions | 1,050 | 1,041 | |||||
Plan participants' contributions | 976 | 999 | |||||
Actual gain (loss) on plan assets | 644 | (443) | |||||
Benefits paid | 229 | (1,380) | |||||
Settlements | (2,424) | - | |||||
Foreign currency translation | 310 | (47) | |||||
Fair value of plan assets at end of year | 12,269 | 11,484 | |||||
Projected benefit obligation in excess of plan | |||||||
assets at end of year | $ | 3,946 | $ | 5,569 | |||
Defined benefit liability classified as other current liabilities | $ | 23 | $ | 21 | |||
Defined benefit liability classified as long-term liabilities | $ | 3,923 | $ | 5,548 | |||
Accumulated benefit obligation at end of year | $ | 14,606 | $ | 14,962 |
Amounts recognized in Accumulated Other Comprehensive Income are as follows (in thousands): | ||||||||
Year Ended | ||||||||
December 28, | December 30, | |||||||
2012 | 2011 | |||||||
Net loss occurring during the year | $ | 740 | $ | 1,306 | ||||
Amortization of losses | (3,064) | (59) | ||||||
Prior service cost | 342 | (459) | ||||||
Amortization of prior service cost | (10) | (137) | ||||||
Foreign currency translation | 294 | (5) | ||||||
Pre-tax adjustment | (1,698) | 646 | ||||||
Taxes | 13 | (80) | ||||||
Net (gain) loss | $ | (1,685) | $ | 566 |
The amortization of amounts in Accumulated Other Comprehensive Income expected to be recognized as components of net periodic benefit expense during 2013 are as follows (in thousands):
Amortization of net prior service credit | $ | 31 | |
Amortization of net loss | 7 |
Net pension cost is comprised of the following (in thousands): | ||||||
Year Ended | ||||||
December 28, | December 30, | |||||
2012 | 2011 | |||||
Service cost | $ | 1,115 | $ | 1,127 | ||
Interest cost | 409 | 483 | ||||
Expected return on assets | (425) | (470) | ||||
Recognized net actuarial loss | 222 | 200 | ||||
Net pension cost | $ | 1,321 | $ | 1,340 | ||
The weighted-average rates used in the actuarial valuations were as follows: | ||||||||||
Projected Benefit Obligation | Net Pension Cost | |||||||||
December 28, | December 30, | |||||||||
2012 | 2011 | 2012 | 2011 | 2010 | ||||||
Discount rate | 2.1% | 2.5% | 2.5% | 2.9% | 3.0% | |||||
Salary growth | 2.4% | 2.3% | 2.3% | 2.5% | 2.5% | |||||
Expected rate of return on assets | 0.0% | 3.5% | 3.5% | 3.8% | 4.0% |
The discount rate used is based on the yields of Switzerland AA bonds with a duration matching the duration of the liabilities plus approximately 50 basis points to reflect the risk of investing in corporate bonds. The expected rate of return on plan assets reflects earnings expectations on existing plan assets, which as a result of the Swiss pension plan curtailment, were all in cash as of the end of the current plan year.
Plan assets were comprised of the following (in thousands): | ||||||||||||
Fair Value Measurements Using | ||||||||||||
December 28, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||
2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Cash | $ | 12,269 | $ | 12,269 | $ | - | $ | - | ||||
Total | $ | 12,269 | $ | 12,269 | $ | - | $ | - |
Fair Value Measurements Using | ||||||||||||
December 30, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Cash | $ | 179 | $ | 179 | $ | - | $ | - | ||||
Equity securities: | ||||||||||||
U.S. companies | 1,019 | 1,019 | - | - | ||||||||
International companies | 2,155 | 2,155 | - | - | ||||||||
Emerging markets | 415 | 415 | - | - | ||||||||
Fixed income: | ||||||||||||
Government & government agencies | 4,057 | 4,057 | - | - | ||||||||
Corporate | 1,860 | 1,860 | - | - | ||||||||
Real-estate | 1,064 | - | 1,064 | - | ||||||||
Other | 735 | 735 | - | - | ||||||||
Total | $ | 11,484 | $ | 10,420 | $ | 1,064 | $ | - |
The fair value of Level 1 plan assets are obtained by reference to the last quoted price of the identical security on the active market which it trades. The fair value of Level 2 plan assets are obtained from quoted market prices in inactive markets or valuation models with observable market data inputs to estimate fair value. These observable market data inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data.
Estimated benefit payments over the next ten years are as follows (in thousands): | ||||||||
2013 | $ | 8,813 | ||||||
2014 | 272 | |||||||
2015 | 289 | |||||||
2016 | 307 | |||||||
2017 | 364 | |||||||
2018-2022 | 1,738 |
|
11. STOCK-BASED COMPENSATION
The components and classification of stock-based compensation expense were as follows (in thousands): | ||||||||||
Year Ended | ||||||||||
December 28, | December 30, | December 31, | ||||||||
2012 | 2011 | 2010 | ||||||||
Stock options | $ | 2,786 | $ | 2,511 | $ | 2,617 | ||||
Restricted stock and units | 6,233 | 4,526 | 4,267 | |||||||
401(k) stock contribution | 1,885 | 5,045 | - | |||||||
Total stock-based compensation expense | $ | 10,904 | $ | 12,082 | $ | 6,884 | ||||
Cost of sales | $ | 2,620 | $ | 4,184 | $ | 509 | ||||
Selling, general and administrative | 7,684 | 6,630 | 5,982 | |||||||
Research, development and engineering | 600 | 1,268 | 393 | |||||||
Total stock-based compensation expense | $ | 10,904 | $ | 12,082 | $ | 6,884 |
During 2010, the Company recorded $0.7 million of stock-based compensation expense related to the accelerated vesting of equity awards issued to the Company's former Senior Vice President - Orthopaedics, who died during the year.
Summary of Plans
The Company's 1998 Stock Option Plan, 2002 Restricted Stock Plan and Non-Employee Directors Plan have been frozen to any new award issuances. Stock option and restricted stock awards remain outstanding under these plans.
The Company's 2005 Stock Incentive Plan (“2005 Plan”), as amended, authorizes the issuance of up to 2,450,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject to the terms of the 2005 Plan. The 2005 Plan limits the amount of restricted stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 850,000 shares of the 2,450,000 shares authorized by the 2005 Plan.
The Company's 2009 Stock Incentive Plan (“2009 Plan”) authorizes the issuance of up to 1,350,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights subject to the terms of the 2009 Plan. The 2009 Plan limits the amount of restricted stock, restricted stock units and stock bonuses that may be awarded in the aggregate to 200,000 shares of the 1,350,000 shares authorized.
The Company's 2011 Stock Incentive Plan (“2011 Plan”) authorizes the issuance of up to 1,000,000 shares of equity incentive awards including nonqualified and incentive stock options, restricted stock, restricted stock units, stock bonuses and stock appreciation rights, subject to the terms of the 2011 Plan. The 2011 Plan does not limit the amount of restricted stock, restricted stock units or stock bonuses that may be awarded.
As of December 28, 2012, there were 508,233, 789,262 and 59,426 shares available for future grants under the 2011 Plan, 2009 Plan and 2005 Plan, respectively. Due to plan sub-limits, of the shares available for grant, only 731 shares and 54,307 shares may be awarded under the 2009 Plan and the 2005 Plan, respectively, in the form of restricted stock, restricted stock units or stock bonuses.
Stock Options
Stock options granted generally vest over a three or four year period, expire 10 years from the date of grant, and are granted at exercise prices equal to or greater than the fair value of the Company's common stock on the date of grant. Performance-based stock options only vest if certain performance metrics are achieved. The performance metrics generally cover a three-year performance period beginning in the year of grant and include the achievement of revenue, adjusted operating earnings and adjusted operating cash flow targets. In 2010, the Company began issuing all performance stock-based awards in the form of restricted stock units.
The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock options. Management is required to make certain assumptions with respect to selected model inputs. Expected volatility is based on the historical volatility of the Company's stock over the most recent period commensurate with the estimated expected life of the stock options. The expected life of stock options, which represents the period of time that the stock options are expected to be outstanding, is based on historical data. The expected dividend yield is based on the Company's history and expectation of future dividend payouts. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the estimated expected life. If factors change and result in different assumptions, the stock option expense that the Company records for future grants may differ significantly from what the Company recorded in the current period. Stock-based compensation expense is only recorded for those awards that are expected to vest. Pre-vesting forfeiture estimates for determining appropriate stock-based compensation expense are estimated at the time of grant based on historical experience. Revisions are made to those estimates in subsequent periods if actual forfeitures differ from estimated forfeitures.
The weighted-average fair value and assumptions used are as follows: | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Weighted average grant date fair value | $ | 8.20 | $ | 9.37 | $ | 8.24 | |||
Risk-free interest rate | 0.83% | 2.02% | 2.62% | ||||||
Expected volatility | 40% | 40% | 40% | ||||||
Expected life (in years) | 5.3 | 5.3 | 5.4 | ||||||
Expected dividend yield | 0% | 0% | 0% | ||||||
Annual prevesting forfeiture rate | 9% | 9% | 9% |
The following table summarizes time-vested stock option activity: | |||||||||||||||
Number of Time-Vested Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value (In Millions) | ||||||||||||
Outstanding at January 1, 2010 | 1,362,123 | $ | 23.94 | ||||||||||||
Granted | 243,155 | 20.57 | |||||||||||||
Exercised | (34,196) | 19.26 | |||||||||||||
Forfeited or expired | (107,526) | 24.43 | |||||||||||||
Outstanding at December 31, 2010 | 1,463,556 | 23.46 | |||||||||||||
Granted | 306,449 | 23.98 | |||||||||||||
Exercised | (84,237) | 21.41 | |||||||||||||
Forfeited or expired | (126,997) | 26.47 | |||||||||||||
Outstanding at December 30, 2011 | 1,558,771 | 23.42 | |||||||||||||
Granted | 395,978 | 22.19 | |||||||||||||
Exercised | (52,683) | 20.77 | |||||||||||||
Forfeited or expired | (126,219) | 24.21 | |||||||||||||
Outstanding at December 28, 2012 | 1,775,847 | $ | 23.17 | 6.0 | $ | 2.2 | |||||||||
Expected to vest at December 28, 2012 | 1,725,786 | $ | 23.22 | 6.0 | $ | 2.1 | |||||||||
Exercisable at December 28, 2012 | 1,458,885 | $ | 23.32 | 5.4 | $ | 1.9 |
The following table summarizes performance-vested stock option activity: | |||||||||||||||
Number of Performance-Vested Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value (In Millions) | ||||||||||||
Outstanding at January 1, 2010 | 1,001,984 | $ | 24.48 | ||||||||||||
Forfeited or expired | (257,461) | 26.81 | |||||||||||||
Outstanding at December 31, 2010 | 744,523 | 23.68 | |||||||||||||
Exercised | (26,478) | 22.53 | |||||||||||||
Forfeited or expired | (239,681) | 22.29 | |||||||||||||
Outstanding at December 30, 2011 | 478,364 | 24.44 | |||||||||||||
Exercised | (7,657) | 22.04 | |||||||||||||
Forfeited or expired | (185,782) | 26.35 | |||||||||||||
Outstanding at December 28, 2012 | 284,925 | $ | 23.26 | 4.3 | $ | 0.1 | |||||||||
Expected to vest at December 28, 2012 | 284,925 | $ | 23.26 | 4.3 | $ | 0.1 | |||||||||
Exercisable at December 28, 2012 | 284,925 | $ | 23.26 | 4.3 | $ | 0.1 |
Intrinsic value is calculated for in-the-money options (exercise price less than market price) outstanding and/or exercisable as the difference between the market price of the Company's common shares as of December 28, 2012 ($22.89) and the weighted average exercise price of the underlying stock options, multiplied by the number of options outstanding and/or exercisable. As of December 28, 2012, $2.3 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 2 years. Shares are distributed from the Company's authorized but unissued reserve upon the exercise of stock options or treasury stock if available. The Company does not intend to purchase treasury shares to fund the future exercises of stock options.
Proceeds from the exercise of stock options are credited to common stock at par value and the excess is credited to additional paid-in capital. A portion of the options outstanding qualify as incentive stock options (“ISO”) for income tax purposes. As such, a tax benefit is not recorded at the time the compensation cost related to the stock options is recorded for book purposes due to the fact that an ISO does not ordinarily result in a tax benefit unless there is a disqualifying disposition. Stock option grants of non-qualified stock options result in the creation of a deferred tax asset, which is a temporary difference, until the time that the option is exercised.
The following table provides certain information relating to the exercise of stock options (in thousands):
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Intrinsic value | $ | 148 | $ | 501 | $ | 112 | |||
Cash received | 1,263 | 2,401 | 659 | ||||||
Tax expense realized | (132) | (146) | (41) |
Restricted Stock and Restricted Stock Units
Time-vested restricted stock and restricted stock unit awards granted typically vest in equal annual installments over a four year period. The fair value of time-based as well as nonmarket-based performance restricted stock and restricted stock unit awards is equal to the fair value of the Company's stock on the date of grant. The following table summarizes time-vested restricted stock and unit activity:
Time-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | January 1, 2010 | 160,998 | $ | 24.82 | |||||
Granted | 124,747 | 21.11 | |||||||
Vested | (147,434) | 23.05 | |||||||
Forfeited | (14,925) | 23.45 | |||||||
Nonvested at | December 31, 2010 | 123,386 | 22.57 | ||||||
Granted | 31,625 | 23.49 | |||||||
Vested | (80,825) | 22.80 | |||||||
Forfeited | (4,244) | 22.98 | |||||||
Nonvested at | December 30, 2011 | 69,942 | 22.69 | ||||||
Granted | 92,265 | 23.49 | |||||||
Vested | (74,901) | 22.83 | |||||||
Forfeited | (7,037) | 22.56 | |||||||
Nonvested at | December 28, 2012 | 80,269 | $ | 23.48 |
Performance-vested restricted stock granted prior to 2010 vests upon the achievement of certain annual diluted EPS targets by the Company, or the seventh anniversary date of the award.
The performance-based restricted stock units granted only vest if certain market-based performance metrics are achieved. The amount of shares that ultimately vest range from 0 shares to 781,446 shares based upon the total shareholder return of the Company relative to the Company's compensation peer group over a three year performance period beginning in the year of grant. The fair value of the restricted stock units was determined by utilizing a Monte Carlo simulation model, which projects the value of Greatbatch stock versus the peer group under numerous scenarios and determines the value of the award based upon the present value of these projected outcomes. The following table summarizes performance-vested restricted stock and stock unit activity related to the Company's plans:
Performance-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | January 1, 2010 | 24,000 | $ | 23.07 | |||||
Granted | 289,654 | 14.43 | |||||||
Vested | (21,558) | 15.12 | |||||||
Forfeited | (8,299) | 14.56 | |||||||
Nonvested at | December 31, 2010 | 283,797 | 15.10 | ||||||
Granted | 279,415 | 18.21 | |||||||
Vested | (6,600) | 17.94 | |||||||
Forfeited | (26,869) | 15.85 | |||||||
Nonvested at | December 30, 2011 | 529,743 | 16.68 | ||||||
Granted | 332,918 | 15.30 | |||||||
Vested | (15,500) | 24.64 | |||||||
Forfeited | (64,715) | 15.72 | |||||||
Nonvested at | December 28, 2012 | 782,446 | $ | 16.02 |
The realized tax benefit (expense) from the vesting of restricted stock and restricted stock units was ($0.02 million), $0.008 million and $0.01 million for 2012, 2011 and 2010, respectively. As of December 28, 2012, there was $6.2 million of total unrecognized compensation cost related to the restricted stock and restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of approximately 2 years. The fair value of shares vested in 2012, 2011 and 2010 was $1.5 million, $1.9 million and $4.1 million, respectively.
|
12. RESEARCH, DEVELOPMENT AND ENGINEERING COSTS, NET
Research, Development and Engineering Costs, Net are comprised of the following (in thousands): | |||||||||||
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Research and development costs | $ | 24,071 | $ | 19,014 | $ | 17,378 | |||||
Engineering costs | 38,777 | 35,472 | 34,208 | ||||||||
Less: cost reimbursements | (10,358) | (8,973) | (6,567) | ||||||||
Total research, development and | |||||||||||
engineering costs, net | $ | 52,490 | $ | 45,513 | $ | 45,019 |
|
13. OTHER OPERATING EXPENSES, NET
Other Operating Expenses, Net is comprised of the following (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Orthopaedic facility optimization | $ | 32,482 | $ | 425 | $ | 225 | |||
Medical device facility optimization | 1,525 | - | - | ||||||
ERP system upgrade | 5,041 | - | - | ||||||
2007 & 2008 facility shutdowns and consolidations | - | - | 1,348 | ||||||
Integration costs | 1,460 | - | 42 | ||||||
Asset dispositions, severance and other | 1,838 | 168 | 2,943 | ||||||
$ | 42,346 | $ | 593 | $ | 4,558 |
Orthopaedic facility optimization. In 2010, the Company began updating its Indianapolis, IN facility to streamline operations, consolidate two buildings, increase capacity, further expand capabilities and reduce dependence on outside suppliers. This initiative was completed in 2011.
In 2011, the Company began construction on an orthopaedic manufacturing facility in Fort Wayne, IN and transferred manufacturing operations being performed at its Columbia City, IN location into this new facility. This initiative was completed in 2012.
During 2012, the Company transferred most major functions performed at its facilities in Orvin and Corgemont, Switzerland into existing facilities in Fort Wayne, IN and Tijuana, Mexico. In connection with this consolidation, in 2012, the Company entered into an agreement to sell certain non-core Swiss orthopaedic product lines to an independent third party including inventory, PP&E and technology on hand related to these product lines. This transaction closed in the first quarter of 2013. See Note 5 “Assets Held for Sale.”
The total capital investment expected to be incurred for these initiatives is between $25 million and $35 million, of which $20.9 million has been expended to date. Total expense expected to be incurred for these initiatives is between $30 million and $36 million, of which $33.1 million has been incurred to date. All expenses have been and will be recorded within the Implantable Medical segment and are expected to include the following:
All expenses are cash expenditures, except accelerated depreciation and asset write-offs.
The change in accrued liabilities related to the Orthopaedic facility optimizations is as follows (in thousands): | ||||||||||||||
Severance and Retention | Accelerated Depreciation/Asset Write-offs | Other | Total | |||||||||||
At | December 30, 2011 | $ | - | $ | - | $ | - | $ | - | |||||
Restructuring charges | 10,049 | 14,759 | 7,674 | 32,482 | ||||||||||
Write-offs | - | (14,759) | - | (14,759) | ||||||||||
Cash payments | (482) | - | (7,674) | (8,156) | ||||||||||
At | December 28, 2012 | $ | 9,567 | $ | - | $ | - | $ | 9,567 |
Medical device facility optimization. Near the end of 2011, the Company initiated plans to upgrade and expand its manufacturing infrastructure in order to support its medical device strategy. This includes the transfer of certain product lines to create additional capacity for the manufacture of medical devices, expansion of two existing facilities, as well as the purchase of equipment to enable the production of medical devices. These initiatives are expected to be completed over the next two to three years. Total capital investment under these initiatives is expected to be between $15 million to $20 million of which approximately $9.9 million has been expended to date. Total expenses expected to be incurred on these projects is between $2 million to $3 million of which $1.5 million has been incurred to date. All expenses have been and will be recorded within the Implantable Medical segment and are expected to include the following:
The change in accrued liabilities related to the medical device facility optimization is as follows (in thousands): | ||||||||||||||
Production Inefficiencies, Moving and Revalidation | Personnel | Other | Total | |||||||||||
At | December 30, 2011 | $ | - | $ | - | $ | - | $ | - | |||||
Restructuring charges | 652 | 630 | 243 | 1,525 | ||||||||||
Cash payments | (652) | (630) | (243) | (1,525) | ||||||||||
At | December 28, 2012 | $ | - | $ | - | $ | - | $ | - |
ERP system upgrade. In 2011, the Company initiated plans to upgrade its existing global ERP system. This initiative is expected to be completed over the next year. Total capital investment under this initiative is expected to be between $4 million to $5 million of which approximately $3.0 million has been expended to date. Total expenses expected to be incurred on this initiative is between $5 million to $7 million of which $5.0 million has been incurred to date. All expenses are cash expenditures, except accelerated depreciation and asset write-offs. Expenses related to this initiative are recorded within the corporate cost center and include the following:
The change in accrued liabilities related to the ERP system upgrade is as follows (in thousands): | |||||||||||
Training & Consulting Costs | Accelerated Depreciation/ Asset Write-offs | Total | |||||||||
At | December 30, 2011 | $ | - | $ | - | $ | - | ||||
Charges | 2,875 | 2,166 | 5,041 | ||||||||
Write-offs | - | (2,166) | (2,166) | ||||||||
Cash payments | (2,706) | - | (2,706) | ||||||||
At | December 28, 2012 | $ | 169 | $ | - | $ | 169 |
2007 & 2008 facility shutdowns and consolidations. From 2007 to 2010, the Company completed the following facility shutdowns and consolidation initiatives:
The total expenses incurred for these facility shutdowns and consolidations was $17.3 million and included the following:
All categories of costs are considered to be cash expenditures, except accelerated depreciation and asset write-offs. For 2010, costs relating to these initiatives of $0.3 million and $1.0 million were included in the Implantable Medical and Electrochem business segments, respectively.
As a result of these consolidation initiatives, one Implantable Medical and one Electrochem facility were sold in 2010, which resulted in net cash proceeds of $2.4 million. For 2010, write-downs of $1.0 million were recorded relating to these facilities and were included in Other Operating Expenses, Net.
Integration costs. During 2012, the Company incurred costs related to the integration of Micro Power and NeuroNexus. These expenses were primarily for retention bonuses, travel cost in connection with integration efforts, training and severance, which will not be required or incurred after the integrations are completed. During 2010, the Company incurred costs related to the integration of the companies acquired in 2007 and 2008.
Asset dispositions, severance and other. During 2012, 2011 and 2010, the Company recorded write-downs in connection with various asset disposals, net of insurance proceeds received, if any. Additionally, during 2012 the Company incurred $1.2 million of costs related to the relocation of its global headquarters to Frisco, Texas. During 2011, the Company incurred $0.6 million of due diligence related costs in connection with its purchase of Micro Power. During 2010, we realigned resources within Implantable Medical, which included the elimination of certain positions globally. Severance charges associated with this realignment were $2.3 million.
|
14. INCOME TAXES
The U.S. and international components of income before provision for income taxes were as follows (in thousands):
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
U.S. | $ | 36,057 | $ | 43,610 | $ | 46,217 | |||
International | (29,327) | 4,782 | 3,108 | ||||||
$ | 6,730 | $ | 48,392 | $ | 49,325 |
The provision for income taxes was comprised of the following (in thousands): | ||||||||||
Year Ended | ||||||||||
December 28, | December 30, | December 31, | ||||||||
2012 | 2011 | 2010 | ||||||||
Current: | ||||||||||
Federal | $ | 4,747 | $ | 5,150 | $ | (671) | ||||
State | 381 | (40) | 179 | |||||||
International | 668 | 1,384 | 1,260 | |||||||
5,796 | 6,494 | 768 | ||||||||
Deferred: | ||||||||||
Federal | 6,615 | 8,028 | 15,409 | |||||||
State | 175 | 599 | 300 | |||||||
International | (1,057) | 149 | (290) | |||||||
5,733 | 8,776 | 15,419 | ||||||||
$ | 11,529 | $ | 15,270 | $ | 16,187 |
The provision for income taxes differs from the U.S. statutory rate due to the following: | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
Change in tax rate - loss of Swiss tax holiday | 25.6 | - | - | ||||||
Federal tax credits | - | (3.7) | (2.6) | ||||||
Foreign rate differential | 50.7 | 0.3 | (0.8) | ||||||
Uncertain tax positions | (10.1) | (1.3) | (1.3) | ||||||
State taxes, net of federal benefit | 4.9 | 0.3 | (0.3) | ||||||
Valuation allowance | 67.6 | 0.1 | 1.7 | ||||||
Other | (2.4) | 0.9 | 1.1 | ||||||
Effective tax rate | 171.3 | % | 31.6 | % | 32.8 | % |
Deferred tax assets (liabilities) consist of the following (in thousands): | ||||||
At | ||||||
December 28, | December 30, | |||||
2012 | 2011 | |||||
Tax credits | $ | 6,884 | $ | 7,362 | ||
Net operating loss carryforwards | 14,637 | 11,106 | ||||
Inventories | 3,911 | 4,441 | ||||
Accrued expenses | 4,129 | 2,961 | ||||
Stock-based compensation | 8,502 | 6,378 | ||||
Other | 465 | 1,052 | ||||
Gross deferred tax assets | 38,528 | 33,300 | ||||
Less valuation allowance | (12,768) | (7,775) | ||||
Net deferred tax assets | 25,760 | 25,525 | ||||
Property, plant and equipment | (2,648) | (2,572) | ||||
Intangible assets | (59,774) | (54,874) | ||||
Convertible subordinated notes | (36,462) | (33,849) | ||||
Gross deferred tax liabilities | (98,884) | (91,295) | ||||
Net deferred tax liability | $ | (73,124) | $ | (65,770) | ||
Presented as follows: | ||||||
Current deferred tax asset | $ | 7,678 | $ | 7,828 | ||
Current deferred tax liability | (874) | (845) | ||||
Noncurrent deferred tax asset | 2,534 | 2,450 | ||||
Noncurrent deferred tax liability | (82,462) | (75,203) | ||||
$ | (73,124) | $ | (65,770) |
As of December 28, 2012, the Company has the following carryforwards available:
Tax | Amount | Begin to | |||||
Jurisdiction | Attribute | (in millions) | Expire | ||||
U.S. | Net Operating Loss | $ | 11.2(1) | 2025 | |||
International | Net Operating Loss | 38.1(1) | 2013 | ||||
State | Net Operating Loss | 29.5(1) | Various | ||||
U.S. and State | R&D Tax Credit | 1.7(1) | Various | ||||
State | Investment Tax Credit | 5.4 | Various |
Certain federal tax credits reported on filed income tax returns included uncertain tax positions taken in prior years. Due to the application of the accounting for uncertain tax positions, the actual tax attributes are larger than the tax credits for which a deferred tax asset is recognized for financial statement purposes.
In assessing the realizability of deferred tax assets, management considers, within each taxing jurisdiction, whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the consideration of the weight of both positive and negative evidence, management has determined that a portion of the deferred tax assets as of December 28, 2012 and December 30, 2011 related to certain state investment tax credits and net operating losses will not be realized.
The Company files annual income tax returns in the U.S., various state and local jurisdictions, and in various foreign jurisdictions. A number of years may elapse before an uncertain tax position, for which the Company has unrecognized tax benefits, is examined and finally settled. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, the Company believes that its unrecognized tax benefits reflect the most probable outcome. The Company adjusts these unrecognized tax benefits, as well as the related interest, in light of changing facts and circumstances. The resolution of a matter could be recognized as an adjustment to the Provision for Income Taxes and the effective tax rate in the period of resolution.
Below is a summary of changes to the unrecognized tax benefit (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Balance, beginning of year | $ | 1,580 | $ | 2,756 | $ | 3,418 | |||
Additions based upon tax positions related to the current year | - | 300 | 300 | ||||||
Additions recorded as part of business combinations | - | 260 | - | ||||||
Additions related to prior period tax positions, net | 210 | - | 222 | ||||||
Reductions relating to settlements with tax authorities | (522) | - | - | ||||||
Reductions as a result of a lapse of applicable | |||||||||
statute of limitations | (298) | (1,736) | (1,184) | ||||||
Balance, end of year | $ | 970 | $ | 1,580 | $ | 2,756 |
The tax years that remain open and subject to tax audits varies depending on the tax jurisdiction. An audit of the consolidated federal 2009 and 2010 tax returns were completed during 2012. It is reasonably possible that a reduction of approximately $0.1 million of the balance of unrecognized tax benefits may occur within the next 12 months as a result of the lapse of the statute of limitations and potential audit settlements. As of December 28, 2012, approximately $0.8 million of unrecognized tax benefits would favorably impact the effective tax rate (net of federal impact on state issues), if recognized.
The American Taxpayer Relief Act of 2012 (the “Act”) was signed into law on January 2, 2013. The Act retroactively restored several expired business tax provisions, including the Section 41 research and experimentation credit that had expired on December 31, 2011. Under the American Taxpayer Relief Act of 2012, the section 41 research tax credit is extended for two years retroactively from January 1, 2012 through December 31, 2013. As the Act was signed into law on January 2, 2013, Greatbatch will record a benefit for the section 41 research tax credits earned in 2012 as a discrete item in the first quarter of fiscal 2013 and credits earned in 2013 will be recognized through the fiscal 2013 effective rate.
|
15. COMMITMENTS AND CONTINGENCIES
Litigation – On December 21, 2012, Electrochem and several other unaffiliated parties were named as defendants in a personal injury and wrongful death action filed in the 113th Judicial District Court of Harris County, Texas. The complaint seeks damages alleging marketing defects and failure to warn, negligence and gross negligence relating to a product Electrochem manufactured and sold to a customer, one of the other named defendants, which, in turn, incorporated the Electrochem product into its own product which it sold to its customer, another named defendant. The cost of defense in this matter is the responsibility of Electrochem's customer. Electrochem also has product liability insurance coverage. Electrochem has meritorious defenses and intends to vigorously defend the matter. Given the early stages of this action, the amount of loss or range of possible loss cannot be reasonably estimated at this time.
As previously reported, in 2002, a former Electrochem customer, Input/Output, Inc., now known as ION Geophysical Corporation (“Input/Output”), commenced an action against the Company. After trial in September 2009, a jury found in favor of Input/Output on fraud, unfair trade practices and breach of contract claims. The final judgment in the matter included an award of prejudgment interest bringing the total judgment to approximately $33 million. During 2009, the Company accrued $34.5 million in connection with the Electrochem Litigation. The Company's post-trial motion for a new trial was denied, and the Company appealed the judgment to the Louisiana Court of Appeal. In December 2010, the Company entered into a settlement agreement with Input/Output. Under terms of this agreement, Input/Output released the Company of any liability in connection with the jury verdict and in return for that release, the Company paid Input/Output $25 million. In the fourth quarter of 2010, the Company recognized a gain for the remaining $9.5 million of the previous accrual which was recognized within the Electrochem segment.
The Company is a party to various other legal actions arising in the normal course of business. While the Company does not expect that the ultimate resolution of any of these pending actions will have a material effect on its consolidated results of operations, financial position, or cash flows, litigation is subject to inherent uncertainties. However, litigation is subject to inherent uncertainties and there can be no assurance that any pending legal action, which the Company currently believes to be immaterial, does not become material in the future.
License agreements – The Company is a party to various license agreements for technology that is utilized in certain of its products. The most significant of these agreements are the licenses for basic technology used in the production of wet tantalum capacitors, filtered feedthroughs and MRI compatible lead systems. Expenses related to license agreements were $3.1 million, $2.8 million and $2.5 million, for 2012, 2011 and 2010, respectively, and are included in Cost of Sales.
Product Warranties – The Company generally warrants that its products will meet customer specifications and will be free from defects in materials and workmanship.
The change in product warranty liability was comprised of the following (in thousands): | |||||||
Year Ended | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Beginning balance | $ | 2,013 | $ | 2,313 | |||
Warranty reserves acquired | - | 210 | |||||
Additions to warranty reserve | 1,681 | 375 | |||||
Warranty claims paid | (1,068) | (887) | |||||
Foreign currency effect | - | 2 | |||||
Ending balance | $ | 2,626 | $ | 2,013 |
Operating Leases – The Company is a party to various operating lease agreements for buildings, equipment and software. The Company primarily leases buildings, which accounts for the majority of the future lease payments. Lease expense includes the effect of escalation clauses and leasehold improvement incentives which are accounted for ratably over the lease term.
Operating lease expense was as follows (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Operating lease expense | $ | 4,024 | $ | 2,704 | $ | 3,114 |
Minimum future estimated annual operating lease expense are as follows (in thousands): | ||||
2013 | $ | 4,601 | ||
2014 | 4,368 | |||
2015 | 3,766 | |||
2016 | 3,176 | |||
2017 | 1,203 | |||
Thereafter | 1,930 | |||
Total estimated operating lease expense | $ | 19,044 |
Self-Insured Medical Plan – The Company self-funds the medical insurance coverage provided to its U.S. based employees. For 2012, the risk to the Company was limited through the use of stop loss insurance, which had an annual maximum aggregate loss of $13.5 million with a maximum benefit of $1.0 million. For 2013, the Company has specific stop loss coverage per associate for claims in the year exceeding $225 thousand per associate with no annual maximum aggregate stop loss coverage. As of December 28, 2012 and December 30, 2011, the Company had $1.4 million and $1.6 million accrued related to the self-insurance of its medical plan, respectively. This accrual is recorded in Accrued Expenses in the Consolidated Balance Sheet, and is primarily based upon claim history.
Purchase Commitments – Contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The Company's purchase orders are normally based on its current manufacturing needs and are fulfilled by its vendors within short time horizons. The Company enters into blanket orders with vendors that have preferred pricing and terms, however these orders are normally cancelable by us without penalty. As of December 28, 2012, the total contractual obligation related to such expenditures is approximately $24.7 million and will primarily be financed by existing cash and cash equivalents, cash generated from operations, or the Credit Facility. The Company also enters into contracts for outsourced services; however, the obligations under these contracts were not significant and the contracts generally contain clauses allowing for cancellation without significant penalty.
Foreign Currency Contracts – The Company has entered into forward contracts to purchase Mexican pesos in order to hedge the risk of peso-denominated payments associated with the operations at its Tijuana, Mexico facility.
The impact to the Company's results of operations from these forward contracts was as follows (in thousands): | ||||||||||
Year Ended | ||||||||||
December 28, | December 30, | December 31, | ||||||||
2012 | 2011 | 2010 | ||||||||
Reduction in Cost of Sales | $ | 79 | $ | 556 | $ | 483 | ||||
Ineffective portion of change in fair value | 0 | 0 | 0 |
Information regarding the Company's outstanding foreign currency contracts as of December 28, 2012 is as follows (dollars in thousands): | |||||||||||||||||
Aggregate | |||||||||||||||||
Type of | Notional | Start | End | Fair | Balance Sheet | ||||||||||||
Instrument | Hedge | Amount | Date | Date | $/Peso | Value | Location | ||||||||||
FX Contract | Cash flow | 6,000 | Jan-13 | Dec-13 | 0.0727 | 222 | Current Assets | ||||||||||
FX Contract | Cash flow | 6,000 | Jan-13 | Dec-13 | 0.0693 | 535 | Current Assets | ||||||||||
$ | 757 |
Workers' Compensation Trust – The Company was a member of a group self-insurance trust that provided workers' compensation benefits to employees of the Company in Western New York (the “Trust”). Under the Trust agreement, each participating organization has joint and several liability for Trust obligations if the assets of the Trust are not sufficient to cover those obligations. During 2011, the Company was notified by the Trust of its intentions to cease operations at the end of 2011 and was assessed $0.6 million as an estimate of its pro-rata share of future costs related to the Trust. This amount was accrued and paid in 2011. Based on actual experience, the Company could receive a refund or be assessed additional contributions for workers' compensation claims. In 2012, the Company utilized traditional insurance to provide workers' compensation benefits.
|
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income is comprised of the following (in thousands): | ||||||||||||||||||
Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | |||||||||||||
At | December 30, 2011 | $ | (2,660) | $ | (538) | $ | 11,526 | $ | 8,328 | $ | 601 | $ | 8,929 | |||||
Unrealized gain on cash flow hedges | - | 737 | - | 737 | (258) | 479 | ||||||||||||
Realized gain on cash flow hedges | - | (79) | - | (79) | 28 | (51) | ||||||||||||
Net defined benefit plan | ||||||||||||||||||
liability adjustments | 1,698 | - | - | 1,698 | (13) | 1,685 | ||||||||||||
Foreign currency translation gain | - | - | 1,905 | 1,905 | - | 1,905 | ||||||||||||
At | December 28, 2012 | $ | (962) | $ | 120 | $ | 13,431 | $ | 12,589 | $ | 358 | $ | 12,947 |
|
18. FAIR VALUE MEASUREMENTS
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Fair value measurement standards apply to certain financial assets and liabilities that are measured at fair value on a recurring basis (each reporting period). For the Company, these financial assets and liabilities include its derivative instruments and accrued contingent consideration. The Company does not have any nonfinancial assets or liabilities that are measured at fair value on a recurring basis.
Foreign currency contracts - The fair value of foreign currency contracts are determined through the use of cash flow models that utilize observable market data inputs to estimate fair value. These observable market data inputs include foreign exchange rate and credit spread curves. In addition to the above, the Company received fair value estimates from the foreign currency contract counterparty to verify the reasonableness of the Company's estimates. The Company's foreign currency contracts are categorized in Level 2 of the fair value hierarchy. The fair value of the Company's foreign currency contracts will be realized as Cost of Sales as the inventory, which the contracts are hedging the cash flows to produce, is sold, of which approximately $0.8 million is expected to be realized within the next twelve months.
Interest rate swap - The fair value of the Company's interest rate swap outstanding at December 28, 2012 was determined through the use of a cash flow model that utilizes observable market data inputs. These observable market data inputs include LIBOR, swap rates, and credit spread curves. In addition to the above, the Company received a fair value estimate from the interest rate swap counterparty to verify the reasonableness of the Company's estimate. This fair value calculation was categorized in Level 2 of the fair value hierarchy.
Accrued contingent consideration – The fair value of accrued contingent consideration recorded by the Company represents the estimated fair value of the contingent consideration the Company expects to pay to the former shareholders of NeuroNexus based upon the achievement of certain financial and development-based milestones. The fair value of the contingent consideration liability was estimated by discounting to present value, contingent payments expected to be made. The Company used risk-adjusted discount rates to derive the fair value of the expected obligations as of the acquisition date, which the Company believes are representative of market participant assumptions. Changes in accrued contingent consideration were as follows (in thousands):
At | December 30, 2011 | $ | - | |
Contingent consideration liability recorded | 1,500 | |||
Fair value adjustments | 30 | |||
At | December 28, 2012 | $ | 1,530 |
The recurring Level 3 fair value measurements of the Company's contingent consideration liability include the following significant unobservable inputs (dollars in thousands): | |||||||||
Contingent Consideration Liability | Fair Value at December 28, 2012 | Valuation Technique | Unobservable Inputs | ||||||
Financial milestones | $ | 870 | Discounted cash flow | Discount rate | 12% | ||||
Projected year of payment | 2014 | ||||||||
Development milestones | $ | 660 | Discounted cash flow | Discount rate | 20% | ||||
Projected year of payment | 2015 |
The following tables provide information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands): | |||||||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
December 28, | Assets | Inputs | Inputs | ||||||||||
Description | 2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Foreign currency contracts (Note 15) | $ | 757 | $ | - | $ | 757 | $ | - | |||||
Liabilities | |||||||||||||
Accrued contingent consideration | $ | 1,530 | $ | - | $ | - | $ | 1,530 | |||||
Interest rate swap | 638 | - | 638 | - | |||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
December 30, | Assets | Inputs | Inputs | ||||||||||
Description | 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Liabilities | |||||||||||||
Foreign currency contracts | $ | 538 | $ | - | $ | 538 | $ | - | |||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain assets and liabilities that are measured at fair value on a nonrecurring basis. A summary of the valuation methodologies for assets and liabilities measured on a nonrecurring basis is as follows:
Cost and equity method investments - The Company holds investments in equity and other securities that are accounted for as either cost or equity method investments, which are classified as Other Assets. The total carrying value of these investments is reviewed quarterly for changes in circumstance or the occurrence of events that suggest the Company's investment may not be recoverable. The fair value of cost or equity method investments is not adjusted if there are no identified events or changes in circumstances that may have a material effect on the fair value of the investments. Gains and losses realized on cost and equity method investments are recorded in Other Expense, Net, unless separately stated. The aggregate recorded amount of cost and equity method investments at December 28, 2012 and December 30, 2011 was $9.1 million and $5.7 million, respectively.
During 2012, 2011 and 2010, the Company recognized impairment charges related to its cost and equity method investments of $0.1 million, $0.3 million and $0.2 million, respectively. The fair value of these investments was determined by reference to recent sales data of similar shares to independent parties in an inactive market. This fair value calculation was categorized in Level 2 of the fair value hierarchy. On January 5, 2011, the Company sold its cost method investment in IntElect Medical, Inc. (“IntElect”) in conjunction with Boston Scientific's acquisition of IntElect. This transaction resulted in a pre-tax gain of $4.5 million in the first quarter of 2011 and an additional $0.4 million during the third quarter of 2012. Cost and equity method investment impairment charges, gains and losses are included in (Gain) Loss on Cost and Equity Method Investments, Net in the Consolidated Statement of Operations.
Long-lived assets – The Company reviews the carrying amount of its long-lived assets to be held and used for potential impairment whenever certain indicators are present as described in Note 1 “Summary of Significant Accounting Policies.” In connection with the sale of certain non-core Swiss orthopaedic product lines, during 2012, the Company transferred long-lived assets to held for sale. Refer to Note 5 “Assets Held for Sale” for further discussion. The fair value of this asset group was determined based upon the sales price for the long-lived assets and was categorized in Level 2 of the fair value hierarchy.
The following table provides information regarding assets and liabilities recorded at fair value on a nonrecurring basis (in thousands): | |||||||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
December 28, | Assets | Inputs | Inputs | ||||||||||
Description | 2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Assets Held for Sale - Swiss orthopaedic | |||||||||||||
disposal group (Note 5) | $ | 4,499 | $ | - | $ | 4,499 | $ | - | |||||
Cost method investment | 86 | - | 86 | - |
Fair Value of Other Financial Instruments
Convertible subordinated notes - The fair value of the Company's convertible subordinated notes disclosed in Note 9 “Debt” was determined based upon recent third-party transactions for the Company's notes in an inactive market. The Company's convertible subordinated notes are valued for disclosure purposes utilizing Level 2 measurements of the fair value hierarchy.
Pension plan assets – The fair value of the Company's pension plan assets disclosed in Note 10 “Defined Benefit Plans” are determined based upon quoted market prices in active markets, quoted market prices in inactive markets or multidimensional relational models with observable market data inputs to estimate fair value. These observable market data inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. The Company's pension plan assets are categorized in Level 1 or Level 2 of the fair value hierarchy.
|
19. BUSINESS SEGMENT, GEOGRAPHIC AND CONCENTRATION RISK INFORMATION
The Company operates its business in two reportable segments – Implantable Medical and Electrochem. The Implantable Medical segment is comprised of the Greatbatch Medical and QiG Group brands and designs and manufactures medical devices and components for the cardiac, neuromodulation, vascular and orthopaedic markets. The Implantable Medical segment offers complete medical devices including design, development, manufacturing, regulatory submission and supporting worldwide distribution, which is facilitated through the QiG Group and leverages the component technology of Greatbatch Medical. The devices designed and developed by the QiG Group are manufactured by Greatbatch Medical. The Implantable Medical segment also offers value-added assembly and design engineering services for its component products.
Electrochem designs, manufactures and distributes customized primary (non-rechargeable) and secondary (rechargeable) batteries, and battery packs for demanding applications in the portable medical, energy, environmental monitoring and security markets among others. Portable medical product line sales were primarily obtained through the Micro Power acquisition.
The Company defines segment income from operations as sales less cost of sales including amortization and expenses attributable to segment-specific selling, general, administrative, research, development, engineering and other operating activities. Segment income also includes a portion of non-segment specific selling, general, and administrative expenses based on allocations appropriate to the expense categories. The remaining unallocated operating and other expenses are primarily administrative corporate headquarter expenses and capital costs that are not allocated to reportable segments. Transactions between the two segments are not significant.
An analysis and reconciliation of the Company's business segment, product line and geographic information to the respective information in the Consolidated Financial Statements follows. Sales by geographic area are presented by allocating sales from external customers based on where the products are shipped to (in thousands):
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
Sales: | 2012 | 2011 | 2010 | ||||||||
Implantable Medical | |||||||||||
Cardiac/Neuromodulation | $ | 309,124 | $ | 303,690 | $ | 303,521 | |||||
Vascular | 51,980 | 45,098 | 38,000 | ||||||||
Orthopaedic | 122,061 | 140,277 | 118,748 | ||||||||
Total Implantable Medical | 483,165 | 489,065 | 460,269 | ||||||||
Electrochem | |||||||||||
Portable Medical | 81,659 | 9,609 | 8,432 | ||||||||
Energy/Environmental | 67,046 | 58,934 | 54,668 | ||||||||
Other | 14,307 | 11,214 | 10,056 | ||||||||
Total Electrochem | 163,012 | 79,757 | 73,156 | ||||||||
Total sales | $ | 646,177 | $ | 568,822 | $ | 533,425 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Segment income from operations: | |||||||||||
Implantable Medical | $ | 24,908 | $ | 62,461 | $ | 62,477 | |||||
Electrochem | 21,631 | 14,965 | 22,195 | ||||||||
Total segment income from operations | 46,539 | 77,426 | 84,672 | ||||||||
Unallocated operating expenses | (20,718) | (15,727) | (15,678) | ||||||||
Operating income as reported | 25,821 | 61,699 | 68,994 | ||||||||
Unallocated other expense | (19,091) | (13,307) | (19,669) | ||||||||
Income before provision for income taxes as reported | $ | 6,730 | $ | 48,392 | $ | 49,325 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Depreciation and Amortization: | |||||||||||
Implantable Medical | $ | 32,928 | $ | 28,571 | $ | 28,117 | |||||
Electrochem | 7,522 | 2,965 | 2,660 | ||||||||
Total depreciation and amortization included | |||||||||||
in segment income from operations | 40,450 | 31,536 | 30,777 | ||||||||
Unallocated depreciation and amortization | 18,475 | 16,159 | 15,670 | ||||||||
Total depreciation and amortization | $ | 58,925 | $ | 47,695 | $ | 46,447 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Expenditures for tangible long-lived assets, | |||||||||||
excluding acquisitions: | |||||||||||
Implantable Medical | $ | 32,130 | $ | 22,509 | $ | 15,088 | |||||
Electrochem | 4,327 | 1,072 | 763 | ||||||||
Total reportable segments | 36,457 | 23,581 | 15,851 | ||||||||
Unallocated long-lived tangible assets | 4,709 | 741 | 1,120 | ||||||||
Total expenditures | $ | 41,166 | $ | 24,322 | $ | 16,971 |
At | ||||||||
December 28, | December 30, | |||||||
2012 | 2011 | |||||||
Identifiable assets: | ||||||||
Implantable Medical | $ | 670,135 | $ | 653,628 | ||||
Electrochem | 167,505 | 161,904 | ||||||
Total reportable segments | 837,640 | 815,532 | ||||||
Unallocated assets | 52,235 | 65,815 | ||||||
Total assets | $ | 889,875 | $ | 881,347 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Sales by geographic area: | |||||||||||
United States | $ | 330,537 | $ | 256,987 | $ | 243,827 | |||||
Non-Domestic locations: | |||||||||||
Puerto Rico | 105,731 | 94,059 | 88,369 | ||||||||
Belgium | 58,043 | 62,978 | 58,014 | ||||||||
United Kingdom & Ireland | 43,938 | 54,029 | 56,903 | ||||||||
Rest of world | 107,928 | 100,769 | 86,312 | ||||||||
Total sales | $ | 646,177 | $ | 568,822 | $ | 533,425 |
At | ||||||
December 28, | December 30, | |||||
Long-lived tangible assets: | 2012 | 2011 | ||||
United States | $ | 123,104 | $ | 113,693 | ||
Rest of world | 27,789 | 32,113 | ||||
Total | $ | 150,893 | $ | 145,806 |
A significant portion of the Company’s sales and accounts receivable were to four customers as follows: | ||||||||||||
Sales | Accounts Receivable | |||||||||||
Year Ended | At | |||||||||||
December 28, | December 30, | December 31, | December 28, | December 30, | ||||||||
2012 | 2011 | 2010 | 2012 | 2011 | ||||||||
Customer A | 19% | 19% | 21% | 7% | 7% | |||||||
Customer B | 16% | 19% | 19% | 21% | 23% | |||||||
Customer C | 11% | 13% | 12% | 6% | 6% | |||||||
Customer D | 6% | 8% | 10% | 6% | 6% | |||||||
52% | 59% | 62% | 40% | 42% |
|
20. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
4th Qtr. | 3rd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||
(in thousands, except per share data) | ||||||||||||
2012 | ||||||||||||
Sales | $ | 159,186 | $ | 161,340 | $ | 166,548 | $ | 159,103 | ||||
Gross profit | 51,874 | 50,954 | 51,933 | 46,888 | ||||||||
Net income (loss) | (5,556) | (7,561) | 3,851 | 4,467 | ||||||||
EPS - basic | (0.23) | (0.32) | 0.16 | 0.19 | ||||||||
EPS - diluted | (0.23) | (0.32) | 0.16 | 0.19 | ||||||||
2011 | ||||||||||||
Sales | $ | 141,746 | $ | 131,718 | $ | 146,524 | $ | 148,834 | ||||
Gross profit | 44,672 | 41,907 | 46,604 | 47,170 | ||||||||
Net income | 5,639 | 6,989 | 8,550 | 11,944 | ||||||||
EPS - basic | 0.24 | 0.30 | 0.37 | 0.51 | ||||||||
EPS - diluted | 0.24 | 0.30 | 0.36 | 0.51 |
Net income in the third and fourth quarters of 2012 was impacted by charges incurred in connection with the consolidation of the Company's Swiss orthopaedic facilities. See Note 13 “Other Operating Expenses, Net.”
Net income in the 2011 first quarter includes the impact of the gain on sale of a cost method investment. See Note 18 “Fair Value Measurements.”
|
Schedule II - Valuation and Qualifying Accounts | |||||||||||||||||
Col. C - Additions | |||||||||||||||||
Col. B | Charged to | Col. E | |||||||||||||||
Balance at | Charged to | Other | Col. D | Balance at | |||||||||||||
Col. A | Beginning | Costs & | Accounts - | Deductions - | End | ||||||||||||
Description | of Period | Expenses | Describe | Describe | of Period | ||||||||||||
December 28, 2012 | |||||||||||||||||
Allowance for | |||||||||||||||||
doubtful accounts | $ | 1,930 | $ | 484 | $ | 71(3)(4) | $ | (113)(2)(4) | $ | 2,372 | |||||||
Valuation allowance | |||||||||||||||||
for deferred income | |||||||||||||||||
tax assets | $ | 7,775 | $ | 5,145(1) | $ | 124(4) | $ | (276)(5) | $ | 12,768 | |||||||
December 30, 2011 | |||||||||||||||||
Allowance for | |||||||||||||||||
doubtful accounts | $ | 1,830 | $ | 288 | $ | 170(3)(4) | $ | (358)(2) | $ | 1,930 | |||||||
Valuation allowance | |||||||||||||||||
for deferred income | |||||||||||||||||
tax assets | $ | 6,482 | $ | 702(1) | $ | 591(3)(4) | $ | - | $ | 7,775 | |||||||
December 31, 2010 | |||||||||||||||||
Allowance for | |||||||||||||||||
doubtful accounts | $ | 2,452 | $ | (64) | $ | 35(4) | $ | (593)(2) | $ | 1,830 | |||||||
Valuation allowance | |||||||||||||||||
for deferred income | |||||||||||||||||
tax assets | $ | 5,656 | $ | 761(1) | $ | 65(4) | $ | - | $ | 6,482 |
|
Fair Value Measurements – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants at the measurement date. Accounting Standards Codification (“ASC”) establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:
Level 1 — Valuation is based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 1 valuations do not entail a significant degree of judgment.
Level 2 — Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
Level 3 — Valuation is based on unobservable inputs that are significant to the overall fair value measurement. The degree of judgment in determining fair value is greatest for Level 3 valuations.
The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the valuation. To the extent that a valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date. Note 18 “Fair Value Measurements” contains additional information on assets and liabilities recorded at fair value in the consolidated financial statements.
Cash and Cash Equivalents – Cash and cash equivalents consist of cash and highly liquid, short-term investments with maturities at the time of purchase of three months or less. The carrying amount of cash and cash equivalents approximated their fair value as of December 28, 2012 and December 30, 2011 based upon the short-term nature of these instruments.
Concentration of Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consist principally of accounts receivable. A significant portion of the Company's sales are to four customers, all in the medical device industry, and, as such, the Company is directly affected by the condition of those customers and that industry. However, the credit risk associated with trade receivables is partially mitigated due to the stability of those customers. The Company performs on-going credit evaluations of its customers. Note 19 “Business Segment, Geographic and Concentration Risk Information” contains information on sales and accounts receivable for these customers. The Company maintains cash deposits with major banks, which from time to time may exceed insured limits. The Company performs on-going credit evaluations of its banks.
Inventories – Inventories are stated at the lower of cost, determined using the first-in first-out method, or market. Write-downs for excess, obsolete or expired inventory are based primarily on how long the inventory has been held as well as our estimates of forecasted net sales of that product. A significant change in the timing or level of demand for our products may result in recording additional write-downs for excess, obsolete or expired inventory in the future. Note 4 “Inventories” contains additional information on the Company's inventory.
Property, Plant and Equipment (“PP&E”) – PP&E is carried at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets, as follows: buildings and building improvements 7-40 years; machinery and equipment 3-8 years; office equipment 3-10 years; and leasehold improvements over the remaining lives of the improvements or the lease term, if less. The cost of repairs and maintenance are expensed as incurred; renewals and betterments are capitalized. Upon retirement or sale of an asset, its cost and related accumulated depreciation or amortization is removed from the accounts and any gain or loss is recorded in operating income or expense. Note 6 “Property, Plant and Equipment, Net” contains additional information on the Company's PP&E.
Business Combinations – The Company records its business combinations under the acquisition method of accounting. Under the acquisition method of accounting, the Company allocates the purchase price of each acquisition to the tangible and identifiable intangible assets acquired and liabilities assumed based on their respective fair values at the date of acquisition. The fair value of identifiable intangible assets is based upon detailed valuations that use various assumptions made by management. Any excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired is allocated to goodwill. All direct acquisition-related costs are expensed as incurred.
In circumstances where an acquisition involves a contingent consideration arrangement, the Company recognizes a liability equal to the fair value of the contingent payments it expects to make as of the acquisition date. The Company re-measures this liability each reporting period and records changes in the fair value through Other Operating Expenses, Net. Increases or decreases in the fair value of the contingent consideration liability can result from changes in discount periods and rates, as well as changes in the timing, amount of, or the likelihood of achieving the applicable contingent consideration. See Note 18 “Fair Value Measurements” for additional information. Note 2 “Acquisitions” contains additional information on the Company's acquisitions.
Amortizing Intangible Assets – Amortizing intangible assets consists primarily of purchased technology, patents and customer lists. The Company amortizes its definite-lived intangible assets over their estimated useful lives utilizing an accelerated or straight-line method of amortization, which approximates the projected distribution of cash flows used to fair value those intangible assets at the time of acquisition. When the straight-line method of amortization is utilized, the estimated useful life of the intangible asset is shortened to assure that recognition of amortization expense corresponds with the distribution of expected cash flows. The amortization period for the Company's amortizing intangible assets are as follows: purchased technology and patents 5-15 years; customer lists 7-20 years and other intangible assets 1-10 years. Note 7 “Intangible Assets” contains additional information on the Company's amortizing intangible assets.
Impairment of Long-Lived Assets – The Company assesses the impairment of definite-lived long-lived assets or asset groups when events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered in deciding when to perform an impairment review include: A significant decrease in the market price of the asset or asset group; A significant change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; A significant change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an action or assessment by a regulator; An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction; A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.
Potential recoverability is measured by comparing the carrying amount of the asset or asset group to its related total future undiscounted cash flows. If the carrying value is not recoverable, the asset or asset group is considered to be impaired. Impairment is measured by comparing the asset or asset group's carrying amount to its fair value. When it is determined that useful lives of assets are shorter than originally estimated, and no impairment is present, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives.
Goodwill and other indefinite lived intangible assets recorded are not amortized but are periodically tested for impairment. The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts on the last day of each fiscal year, or more frequently if certain events occur as described above. If the fair value of a reporting unit is less than its carrying value, an impairment loss is recorded to the extent that the implied fair value of the goodwill within the reporting unit is less than its carrying value. Fair values for reporting units are determined based on discounted cash flows and market multiples. Other indefinite lived intangible assets are assessed for impairment on the last day of each fiscal year, or more frequently if certain events occur as described above, by comparing the fair value of the intangible asset to its carrying value. The fair value is determined by using the income approach. Note 7 “Intangible Assets” contains additional information on the Company's long-lived intangible assets.
Other Long-Term Assets – Other long-term assets includes deferred financing fees incurred in connection with the Company's issuance of its convertible subordinated notes and revolving line of credit. These fees are amortized to Interest Expense using the effective interest method over the period from the date of issuance to the put option date (if applicable) or the maturity date, whichever is earlier. The amortization of deferred fees is included in Debt Related Amortization Included in Interest Expense in the Consolidated Statements of Cash Flows. Note 9 “Debt” contains additional information on the Company's deferred financing fees.
Other long-term assets also include investments in equity securities of entities that are not publicly traded and which do not have readily determinable fair values. We account for investments in these entities under the cost or equity method depending on the type of ownership interest, as well as the Company's ability to exercise influence over these entities. Equity method investments are initially recorded at cost, and are subsequently adjusted to reflect the Company's share of earnings or losses of the investee. Cost method investments are recorded at cost. Each reporting period, management evaluates these cost and equity method investments to determine if there are any events or circumstances that are likely to have a significant effect on the fair value of the investment. Examples of such impairment indicators include, but are not limited to: a recent sale or offering of similar shares of the investment at a price below the Company's cost basis; a significant deterioration in earnings performance; a significant change in the regulatory, economic or technological environment of the investee; or a significant doubt about an investee's ability to continue as a going concern. If an impairment indicator is identified, management will estimate the fair value of the investment and compare it to its carrying value. The estimation of fair value considers all available financial information related to the investee, including, but not limited to, valuations based on recent third-party equity investments in the investee. If the fair value of the investment is less than its carrying value, the investment is impaired and a determination as to whether the impairment is other-than-temporary is made. Impairment is deemed to be other-than-temporary unless the Company has the ability and intent to hold the investment for a period sufficient for a market recovery up to the carrying value of the investment. Further, evidence must indicate that the carrying value of the investment is recoverable within a reasonable period. For other-than-temporary impairments, an impairment loss is recognized equal to the difference between the investment's carrying value and its fair value. The Company has determined that these investments are not considered variable interest entities. The Company's exposure related to these entities is limited to its recorded investment. These investments are in start-up research and development companies whose fair value is highly subjective in nature and subject to future fluctuations, which could be significant.
Income Taxes – The consolidated financial statements of the Company have been prepared using the asset and liability approach in accounting for income taxes, which requires the recognition of deferred income taxes for the expected future tax consequences of net operating losses, credits, and temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the asset will not be realized.
The Company accounts for uncertain tax positions using a more likely than not recognition threshold. The evaluation of uncertain tax positions is based on factors including, but not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. These tax positions are evaluated on a quarterly basis. The Company recognizes interest expense related to uncertain tax positions as Provision for Income Taxes. Penalties, if incurred, are recognized as a component of Selling, General and Administrative Expenses (“SG&A”).
The Company and its subsidiary file a consolidated U.S. federal income tax return. State tax returns are filed on a combined or separate basis depending on the applicable laws in the jurisdictions where tax returns are filed. The Company also files foreign tax returns on a separate company basis in the countries in which it operates. See Note 14 “Income Taxes” for additional information.
Convertible Subordinated Notes (“CSN”) – For convertible debt instruments that may be settled in cash upon conversion, the Company accounts for the liability and equity components of those instruments in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.
Upon issuance, the Company determined the carrying amount of the liability component of CSN by measuring the fair value of a similar liability that does not have the associated conversion option. The carrying amount of the conversion option was then determined by deducting the fair value of the liability component from the initial proceeds received from the issuance of CSN.
The carrying amount of the conversion option was recorded in Additional Paid-In Capital with an offset to Long-Term Debt and is being amortized using the effective interest method over the period from the date of issuance to the maturity date. Deferred financing fees incurred in connection with the issuance of CSN, were allocated proportionally to the proceeds of the liability and equity components. The deferred financing fees allocated to the debt component are being amortized using the effective interest method over the period from the date of issuance to the maturity date. The deferred financing fees allocated to the equity component were recorded as an offset to Additional Paid-In Capital. The amortization of discount and deferred fees related to the Company's convertible debt instruments is included in Depreciation and Amortization in the Consolidated Statements of Cash Flows. See Note 9 “Debt” for additional information.
Derivative Financial Instruments – The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value. Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The Company designates its interest rate swaps (See Note 9 “Debt”) and foreign currency contracts (See Note 15 “Commitments and Contingencies”) entered into as cash flow hedges. The effective portion of the changes in fair value of these cash flow hedges is recorded each period, net of tax, in Accumulated Other Comprehensive Income until the related hedged transaction occurs. Any ineffective portion of the changes in fair value of these cash flow hedges is recorded in earnings. In the event the hedged cash flow for forecasted transactions does not occur, or it becomes probable that they will not occur, the Company would reclassify the amount of any gain or loss on the related cash flow hedge to income (expense) at that time. Cash flows related to these derivative financial instruments are included in cash flows from operating activities.
Revenue Recognition – The Company recognizes revenue when it is realized or realizable and earned. This occurs when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, the buyer is obligated to pay us (i.e., not contingent on a future event), the risk of loss is transferred, there is no obligation of future performance, collectability is reasonably assured and the amount of future returns can reasonably be estimated. With regards to the Company's customers (including distributors), those criteria are met at the time of shipment when title passes. The Company includes shipping and handling fees billed to customers in Sales. Shipping and handling costs associated with inbound and outbound freight are recorded in Cost of Sales. In certain instances the Company obtains component parts for sub-assemblies from its customers that are included in the final product sold back to the same customer. These amounts are excluded from Sales and Cost of Sales recognized by the Company. The cost of these customer supplied component parts amounted to $32.6 million, $27.9 million and $29.9 million in 2012, 2011 and 2010, respectively.
Product Warranties – The Company allows customers to return defective or damaged products for credit, replacement, or exchange. The Company warrants that its products will meet customer specifications and will be free from defects in materials and workmanship. The Company accrues its estimated exposure to warranty claims, through Cost of Sales, based upon recent historical experience and other specific information as it becomes available. Note 15 “Commitments and Contingencies” contains additional information on the Company's product warranties.
Research, Development and Engineering Costs, Net (“RD&E”) – RD&E costs are expensed as incurred. The primary costs are salary and benefits for personnel, material costs used in development projects and subcontracting costs. Cost reimbursements for engineering services from customers for whom the Company designs products are recorded as an offset to engineering costs upon achieving development milestones specified in the contracts. These reimbursements do not cover the complete cost of the development projects. Additionally, the technology developed under these cost reimbursement projects is owned by the Company and is utilized for future products developed for other customers.
In-process research and development (“IPR&D”) represents research projects acquired in a business combination which are expected to generate cash flows but have not yet reached technological feasibility. The primary basis for determining the technological feasibility of these projects is whether or not regulatory approval has been obtained. The Company classifies IPR&D acquired in a business combination as an indefinite-lived intangible asset until the completion or abandonment of the associated projects. Upon completion, the Company would determine the useful life of the IPR&D and begin amortizing the assets to reflect their use over their remaining lives. Upon permanent abandonment, the remaining carrying amount of the associated IPR&D would be written-off. The Company tests the IPR&D acquired for impairment at least annually, and more frequently if events or changes in circumstances indicate that the assets may be impaired. The impairment test consists of a comparison of the fair value of the intangible assets with their carrying amount. If the carrying amount exceeds its fair value, the Company would record an impairment loss in an amount equal to the excess.
Note 12 “Research, Development and Engineering Costs, Net” and Note 7 “Intangible Assets” contains additional information on the Company's RD&E activities.
Stock-Based Compensation – The Company records compensation costs related to stock-based awards granted to employees based upon their estimated fair value on the grant date. Compensation cost for service-based awards is recognized ratably over the applicable vesting period. Compensation cost for nonmarket-based performance awards is reassessed each period and recognized based upon the probability that the performance targets will be achieved. Compensation cost for market-based performance awards is expensed ratably over the applicable vesting period and is recognized each period whether the performance metrics are achieved or not.
The Company utilizes the Black-Scholes option pricing model to estimate the fair value of stock options granted. For service-based and nonmarket-based performance restricted stock and restricted stock unit awards, the fair market value of the award is determined based upon the closing value of the Company's stock price on the grant date. For market-based performance restricted stock unit awards, the fair market value of the award is determined utilizing a Monte Carlo simulation model, which projects the value of the Company's stock under numerous scenarios and determines the value of the award based upon the present value of those projected outcomes.
The amount of stock-based compensation expense recognized is based on the portion of the awards that are ultimately expected to vest. The Company estimates pre-vesting forfeitures at the time of grant by analyzing historical data and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The total expense recognized over the vesting period will only be for those awards that ultimately vest, excluding market and nonmarket performance award considerations. Note 11 “Stock-Based Compensation” contains additional information on the Company's stock-based compensation.
Foreign Currency Translation – The Company translates all assets and liabilities of its foreign subsidiaries, where the U.S. dollar is not the functional currency, at the period-end exchange rate and translates income and expenses at the average exchange rates in effect during the period. The net effect of this translation is recorded in the consolidated financial statements as Accumulated Other Comprehensive Income. Translation adjustments are not adjusted for income taxes as they relate to permanent investments in the Company's foreign subsidiaries.
Net foreign currency transaction gains and losses are included in Other Expense, Net and amounted to a loss of $0.3 million for 2012, $0.1 million for 2011 and $0.9 million for 2010.
Defined Benefit Plans – The Company recognizes in its balance sheet as an asset or liability the overfunded or underfunded status of its defined benefit plans provided to its employees located in Mexico, Switzerland and France. This asset or liability is measured as the difference between the fair value of plan assets and the benefit obligation of those plans. For these plans, the benefit obligation is the projected benefit obligation, which is calculated based on actuarial computations of current and future benefits for employees. Actuarial gains or losses and prior service costs or credits that arise during the period, but are not included as components of net periodic benefit expense, are recognized as a component of Accumulated Other Comprehensive Income. Defined benefit expenses are charged to Cost of Sales, SG&A and RD&E expenses as applicable. Note 10 “Defined Benefit Plans” contains additional information on these costs.
Earnings (Loss) Per Share (“EPS”) – Basic EPS is calculated by dividing Net Income (Loss) by the weighted average number of shares outstanding during the period. Diluted EPS is calculated by adjusting the weighted average number of shares outstanding for potential common shares, which consist of stock options, unvested restricted stock and restricted stock units and contingently convertible instruments.
Holders of the Company's CSN may convert them into shares of the Company's common stock under certain circumstances – See Note 9 “Debt.” The Company includes the effect of the conversion of these convertible notes in the calculation of diluted EPS using the if-converted method or the treasury method for instruments that may be settled in cash at the Company's election and which the Company has the ability and intent to settle them in cash, as long as the effect is dilutive. For computation of EPS under conversion conditions, the number of diluted shares outstanding increases by the amount of shares that are potentially convertible during that period. Also, Net Income (Loss) is adjusted for the calculation to add back interest expense on the convertible notes as well as unamortized discount and deferred financing fee amortization recorded during the period. Note 16 “Earnings (Loss) Per Share” contains additional information on the computation of the Company's EPS.
Comprehensive Income (Loss) – The Company's comprehensive income (loss) as reported in the Consolidated Statements of Operations and Comprehensive Income (Loss) includes net income (loss), foreign currency translation adjustments, the net change in cash flow hedges, and defined benefit plan liability adjustments. The Consolidated Statements of Operations and Comprehensive Income (Loss) and Note 17 “Accumulated Other Comprehensive Income” contains additional information on the computation of the Company's comprehensive income (loss).
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 reported amounts of sales and expenses during the reporting period. Actual results could differ materially from those estimates.
Recently Issued Accounting Pronouncements – In the normal course of business, Management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission (“SEC”), Emerging Issues Task Force (“EITF”), American Institute of Certified Public Accountants (“AICPA”) or other authoritative accounting bodies to determine the potential impact they may have on the Company's Consolidated Financial Statements. Based upon this review, except as noted below, Management does not expect any of the recently issued accounting pronouncements, which have not already been adopted, to have a material impact on the Company's Consolidated Financial Statements.
On February 5, 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU adds new disclosure requirements either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income (“AOCI”) based on its source and the income statement line items affected by the reclassification. This ASU gives companies the flexibility to present the information either in the notes or parenthetically on the face of the financial statements provided that all of the required information is presented in a single location. This ASU is effective prospectively for annual and interim reporting periods beginning after December 15, 2012. When adopted, this ASU will not have a material impact on the Company's Consolidated Financial Statements as it only changes the disclosures surrounding AOCI.
In July 2012, the FASB issued ASU No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU simplifies the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendments allow an organization the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. An organization electing to perform a qualitative assessment is no longer required to calculate the fair value of an indefinite-lived intangible asset unless the organization determines, based on a qualitative assessment, that it is “more likely than not” that the asset is impaired. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. When adopted, this ASU will not have a material impact on the Company's Consolidated Financial Statements as it only impacts the timing of when the Company is required to perform the two-step impairment tests of its indefinite-lived intangible assets other than goodwill.
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires companies to provide information about trading in financial instruments and related derivatives in expanded disclosures, creates new disclosure requirements about the nature of an entity's rights of offset and related arrangements associated with its financial instruments and derivative instruments. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. When adopted, this ASU will not have a material impact on the Company's Consolidated Financial Statements as it only changes the disclosures surrounding the Company's offsetting assets and liabilities.
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The following table summarizes the preliminary allocation of the NeuroNexus purchase price to the assets acquired and liabilities assumed as of the acquisition date (in thousands): | |||||||
Assets acquired | |||||||
Current assets | $ | 618 | |||||
Property, plant and equipment | 35 | ||||||
Amortizing intangible assets | 2,927 | ||||||
Indefinite-lived intangible assets | 540 | ||||||
Goodwill | 8,875 | ||||||
Other assets | 1,576 | ||||||
Total assets acquired | 14,571 | ||||||
Liabilities assumed | |||||||
Current liabilities | 420 | ||||||
Deferred income taxes | 940 | ||||||
Total liabilities assumed | 1,360 | ||||||
$ | 13,211 |
The following table summarizes the allocation of the Micro Power purchase price to the assets acquired and liabilities assumed as of the acquisition date (in thousands): | |||||||
Assets acquired | |||||||
Current assets | $ | 25,620 | |||||
Property, plant and equipment | 1,650 | ||||||
Amortizing intangible assets | 28,914 | ||||||
Goodwill | 31,891 | ||||||
Other assets | 94 | ||||||
Total assets acquired | 88,169 | ||||||
Liabilities assumed | |||||||
Current liabilities | 13,679 | ||||||
Long-term liabilities | 2,688 | ||||||
Total liabilities assumed | 16,367 | ||||||
$ | 71,802 |
Weighted | Weighted | |||||||||
Fair | Average | Estimated | Average | |||||||
Value | Amortization | Useful | Discount | |||||||
Assigned | Period (Years) | Life (Years) | Rate | |||||||
Amortizing Intangible Assets | ||||||||||
Technology and patents | $ | 1,058 | 6 | 10 | 14% | |||||
Customer lists | 1,869 | 7 | 15 | 13% | ||||||
2,927 | 7 | 13 | 13% | |||||||
Weighted | Weighted | |||||||||
Fair | Average | Estimated | Average | |||||||
Value | Amortization | Useful | Discount | |||||||
Amortizing Intangible Assets | Assigned | Period (Years) | Life (Years) | Rate | ||||||
Technology and patents | $ | 8,051 | 4 | 10 | 14% | |||||
Customer lists | 19,569 | 5 | 14 | 12% | ||||||
Noncompete agreement | 915 | 4 | 8 | 14% | ||||||
Trademarks and tradenames | 379 | 2 | 2 | 13% | ||||||
$ | 28,914 | 4 | 13 | 13% |
Indefinite-lived Intangible Assets | ||||||||||
In-process research and development | 540 | N/A | 12 | 26% | ||||||
Year Ended | ||||||||
December 28, | December 30, | |||||||
2012 | 2011 | |||||||
Sales | $ | 646,617 | $ | 636,502 | ||||
Net (loss) income | (4,973) | 32,306 | ||||||
Earnings (loss) per share: | ||||||||
Basic | $ | (0.21) | $ | 1.39 | ||||
Diluted | $ | (0.21) | $ | 1.37 |
|
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
(in thousands) | 2012 | 2011 | 2010 | ||||||||
Noncash investing and financing activities: | |||||||||||
Common stock contributed to 401(k) Plan | $ | 4,793 | $ | - | $ | - | |||||
Property, plant and equipment purchases | |||||||||||
included in accounts payable | 2,522 | 4,455 | 2,614 | ||||||||
Cash paid during the year for: | |||||||||||
Interest | 6,230 | 6,148 | 8,498 | ||||||||
Income taxes | 4,909 | 5,259 | 3,826 | ||||||||
Acquisition of noncash assets | 14,396 | 87,766 | 350 | ||||||||
Liabilities assumed | 1,244 | 16,483 | - |
|
Inventories are comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Raw materials | $ | 58,204 | $ | 49,773 | |||
Work-in-process | 30,022 | 36,603 | |||||
Finished goods | 18,386 | 23,537 | |||||
Total | $ | 106,612 | $ | 109,913 |
|
Assets held for sale, which are included in Prepaid Expenses and Other Current Assets, is comprised of the following (in thousands): | ||||||||||||
At | ||||||||||||
Disposal | Business | December 28, | December 30, | |||||||||
Asset | Group | Segment | 2012 | 2011 | ||||||||
Inventory | Wireless sensing | Electrochem | $ | 288 | $ | - | ||||||
Technology | Wireless sensing | Electrochem | 655 | - | ||||||||
Inventory | Swiss orthopaedic product line | Implantable Medical | 2,552 | - | ||||||||
PP&E | Swiss orthopaedic product line | Implantable Medical | 1,471 | - | ||||||||
Technology | Swiss orthopaedic product line | Implantable Medical | 476 | - | ||||||||
$ | 5,442 | $ | - |
|
Property, plant and equipment are comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Manufacturing machinery and equipment | $ | 150,344 | $ | 149,136 | |||
Buildings and building improvements | 87,357 | 75,229 | |||||
Information technology hardware and software | 29,823 | 33,881 | |||||
Leasehold improvements | 20,520 | 17,426 | |||||
Furniture and fixtures | 13,414 | 11,282 | |||||
Land and land improvements | 12,499 | 11,075 | |||||
Construction work in process | 15,441 | 13,302 | |||||
Other | 676 | 993 | |||||
330,074 | 312,324 | ||||||
Accumulated depreciation | (179,181) | (166,518) | |||||
Total | $ | 150,893 | $ | 145,806 |
Depreciation expense for property, plant and equipment was as follows (in thousands): | |||||||||||
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Depreciation expense | $ | 31,575 | $ | 25,672 | $ | 26,104 |
|
Amortizing intangible assets, net are comprised of the following (in thousands): | |||||||||||||
At | December 28, 2012 | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net Carrying Amount | ||||||||
Purchased technology and patents | $ | 95,576 | $ | (61,659) | $ | 1,932 | $ | 35,849 | |||||
Customer lists | 68,257 | (18,929) | 1,270 | 50,598 | |||||||||
Other | 4,434 | (4,341) | 805 | 898 | |||||||||
Total amortizing intangible assets | $ | 168,267 | $ | (84,929) | $ | 4,007 | $ | 87,345 | |||||
At | December 30, 2011 | ||||||||||||
Purchased technology and patents | $ | 97,324 | $ | (54,054) | $ | 842 | $ | 44,112 | |||||
Customer lists | 66,388 | (14,009) | 1,807 | 54,186 | |||||||||
Other | 5,174 | (4,019) | 805 | 1,960 | |||||||||
Total amortizing intangible assets | $ | 168,886 | $ | (72,082) | $ | 3,454 | $ | 100,258 |
Aggregate intangible asset amortization expense is comprised of the following (in thousands): | |||||||||||
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Cost of sales | $ | 7,489 | $ | 6,163 | $ | 5,897 | |||||
SG&A | 6,227 | 3,926 | 3,765 | ||||||||
RD&E | 545 | 367 | - | ||||||||
Total intangible asset amortization expense | $ | 14,261 | $ | 10,456 | $ | 9,662 |
Estimated future intangible asset amortization expense based upon the current carrying value is as follows (in thousands): | |||
Estimated | |||
Amortization | |||
Expense | |||
2013 | $ | 13,189 | |
2014 | 13,424 | ||
2015 | 12,373 | ||
2016 | 10,078 | ||
2017 | 8,956 | ||
Thereafter | 29,325 | ||
Total estimated amortization expense | $ | 87,345 |
The change in indefinite-lived assets during 2012 is as follows (in thousands): | ||||||||||
Trademarks and Tradenames | IPR&D | Total | ||||||||
At | December 30, 2011 | $ | 20,288 | $ | - | $ | 20,288 | |||
Indefinite-lived assets acquired | - | 540 | 540 | |||||||
At | December 28, 2012 | $ | 20,288 | $ | 540 | $ | 20,828 |
The change in goodwill during 2012 is as follows (in thousands): | ||||||||||
Implantable Medical | Electrochem | Total | ||||||||
At | December 30, 2011 | $ | 297,232 | $ | 41,421 | $ | 338,653 | |||
Goodwill acquired | 8,875 | 413 | 9,288 | |||||||
Foreign currency translation | 1,094 | 0 | 1,094 | |||||||
At | December 28, 2012 | $ | 307,201 | $ | 41,834 | $ | 349,035 |
|
Accrued expenses are comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Salaries and benefits | $ | 12,704 | $ | 13,618 | |||
Profit sharing and bonuses | 12,488 | 19,971 | |||||
Warranty | 2,626 | 2,013 | |||||
Swiss orthopaedic consolidation severance | 9,567 | - | |||||
Micro Power purchase price payable | - | 5,690 | |||||
Other | 8,130 | 11,247 | |||||
Total | $ | 45,515 | $ | 52,539 |
|
Long-term debt is comprised of the following (in thousands): | |||||||
At | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Revolving line of credit | $ | 33,000 | $ | 55,000 | |||
2.25% convertible subordinated notes | 197,782 | 197,782 | |||||
Unamortized discount | (5,368) | (16,832) | |||||
Total long-term debt | $ | 225,414 | $ | 235,950 |
Current | Fair | ||||||||||||||||||
Pay | Receive | Value | Balance | ||||||||||||||||
Type of | Notional | Start | End | Fixed | Floating | December 28, | Sheet | ||||||||||||
Instrument | Hedge | Amount | Date | Date | Rate | Rate | 2012 | Location | |||||||||||
Interest rate swap | Cash flow | $ | 150,000 | Feb-13 | Feb-16 | 0.573% | $ | N/A | $ | (638) | Other Long-Term Liabilities |
The contractual interest and discount amortization for CSN were as follows (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Contractual interest | $ | 4,450 | $ | 4,450 | $ | 4,450 | |||
Discount amortization | 11,464 | 10,320 | 9,657 |
Deferred Financing Fees - The change in deferred financing fees is as follows (in thousands): | |||||
At | December 31, 2010 | $ | 2,005 | ||
Financing costs deferred | 2,213 | ||||
Write-off during the period | (51) | ||||
Amortization during the period | (1,018) | ||||
At | December 30, 2011 | 3,149 | |||
Amortization during the period | (1,093) | ||||
At | December 28, 2012 | $ | 2,056 |
|
Year Ended | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Change in projected benefit obligation: | |||||||
Projected benefit obligation at beginning of year | $ | 17,053 | $ | 15,961 | |||
Service cost | 1,115 | 1,127 | |||||
Interest cost | 409 | 483 | |||||
Prior service cost and plan amendments | 0 | (457) | |||||
Plan participants' contribution | 976 | 999 | |||||
Actuarial loss | 958 | 393 | |||||
Benefits paid | 229 | (1,396) | |||||
Settlements/curtailments | (4,934) | - | |||||
Foreign currency translation | 409 | (57) | |||||
Projected benefit obligation at end of year | 16,215 | 17,053 |
Change in fair value of plan assets: | |||||||
Fair value of plan assets at beginning of year | 11,484 | 11,314 | |||||
Employer contributions | 1,050 | 1,041 | |||||
Plan participants' contributions | 976 | 999 | |||||
Actual gain (loss) on plan assets | 644 | (443) | |||||
Benefits paid | 229 | (1,380) | |||||
Settlements | (2,424) | - | |||||
Foreign currency translation | 310 | (47) | |||||
Fair value of plan assets at end of year | 12,269 | 11,484 | |||||
Projected benefit obligation in excess of plan | |||||||
assets at end of year | $ | 3,946 | $ | 5,569 | |||
Defined benefit liability classified as other current liabilities | $ | 23 | $ | 21 | |||
Defined benefit liability classified as long-term liabilities | $ | 3,923 | $ | 5,548 | |||
Accumulated benefit obligation at end of year | $ | 14,606 | $ | 14,962 |
Amounts recognized in Accumulated Other Comprehensive Income are as follows (in thousands): | ||||||||
Year Ended | ||||||||
December 28, | December 30, | |||||||
2012 | 2011 | |||||||
Net loss occurring during the year | $ | 740 | $ | 1,306 | ||||
Amortization of losses | (3,064) | (59) | ||||||
Prior service cost | 342 | (459) | ||||||
Amortization of prior service cost | (10) | (137) | ||||||
Foreign currency translation | 294 | (5) | ||||||
Pre-tax adjustment | (1,698) | 646 | ||||||
Taxes | 13 | (80) | ||||||
Net (gain) loss | $ | (1,685) | $ | 566 |
Amortization of net prior service credit | $ | 31 | |
Amortization of net loss | 7 |
Net pension cost is comprised of the following (in thousands): | ||||||
Year Ended | ||||||
December 28, | December 30, | |||||
2012 | 2011 | |||||
Service cost | $ | 1,115 | $ | 1,127 | ||
Interest cost | 409 | 483 | ||||
Expected return on assets | (425) | (470) | ||||
Recognized net actuarial loss | 222 | 200 | ||||
Net pension cost | $ | 1,321 | $ | 1,340 | ||
The weighted-average rates used in the actuarial valuations were as follows: | ||||||||||
Projected Benefit Obligation | Net Pension Cost | |||||||||
December 28, | December 30, | |||||||||
2012 | 2011 | 2012 | 2011 | 2010 | ||||||
Discount rate | 2.1% | 2.5% | 2.5% | 2.9% | 3.0% | |||||
Salary growth | 2.4% | 2.3% | 2.3% | 2.5% | 2.5% | |||||
Expected rate of return on assets | 0.0% | 3.5% | 3.5% | 3.8% | 4.0% |
Plan assets were comprised of the following (in thousands): | ||||||||||||
Fair Value Measurements Using | ||||||||||||
December 28, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||
2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Cash | $ | 12,269 | $ | 12,269 | $ | - | $ | - | ||||
Total | $ | 12,269 | $ | 12,269 | $ | - | $ | - |
Fair Value Measurements Using | ||||||||||||
December 30, | Quoted Prices in Active Markets for Identical Assets | Significant Other Observable Inputs | Significant Unobservable Inputs | |||||||||
2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Cash | $ | 179 | $ | 179 | $ | - | $ | - | ||||
Equity securities: | ||||||||||||
U.S. companies | 1,019 | 1,019 | - | - | ||||||||
International companies | 2,155 | 2,155 | - | - | ||||||||
Emerging markets | 415 | 415 | - | - | ||||||||
Fixed income: | ||||||||||||
Government & government agencies | 4,057 | 4,057 | - | - | ||||||||
Corporate | 1,860 | 1,860 | - | - | ||||||||
Real-estate | 1,064 | - | 1,064 | - | ||||||||
Other | 735 | 735 | - | - | ||||||||
Total | $ | 11,484 | $ | 10,420 | $ | 1,064 | $ | - |
Estimated benefit payments over the next ten years are as follows (in thousands): | ||||||||
2013 | $ | 8,813 | ||||||
2014 | 272 | |||||||
2015 | 289 | |||||||
2016 | 307 | |||||||
2017 | 364 | |||||||
2018-2022 | 1,738 |
|
The components and classification of stock-based compensation expense were as follows (in thousands): | ||||||||||
Year Ended | ||||||||||
December 28, | December 30, | December 31, | ||||||||
2012 | 2011 | 2010 | ||||||||
Stock options | $ | 2,786 | $ | 2,511 | $ | 2,617 | ||||
Restricted stock and units | 6,233 | 4,526 | 4,267 | |||||||
401(k) stock contribution | 1,885 | 5,045 | - | |||||||
Total stock-based compensation expense | $ | 10,904 | $ | 12,082 | $ | 6,884 | ||||
Cost of sales | $ | 2,620 | $ | 4,184 | $ | 509 | ||||
Selling, general and administrative | 7,684 | 6,630 | 5,982 | |||||||
Research, development and engineering | 600 | 1,268 | 393 | |||||||
Total stock-based compensation expense | $ | 10,904 | $ | 12,082 | $ | 6,884 |
The weighted-average fair value and assumptions used are as follows: | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Weighted average grant date fair value | $ | 8.20 | $ | 9.37 | $ | 8.24 | |||
Risk-free interest rate | 0.83% | 2.02% | 2.62% | ||||||
Expected volatility | 40% | 40% | 40% | ||||||
Expected life (in years) | 5.3 | 5.3 | 5.4 | ||||||
Expected dividend yield | 0% | 0% | 0% | ||||||
Annual prevesting forfeiture rate | 9% | 9% | 9% |
The following table summarizes time-vested stock option activity: | |||||||||||||||
Number of Time-Vested Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value (In Millions) | ||||||||||||
Outstanding at January 1, 2010 | 1,362,123 | $ | 23.94 | ||||||||||||
Granted | 243,155 | 20.57 | |||||||||||||
Exercised | (34,196) | 19.26 | |||||||||||||
Forfeited or expired | (107,526) | 24.43 | |||||||||||||
Outstanding at December 31, 2010 | 1,463,556 | 23.46 | |||||||||||||
Granted | 306,449 | 23.98 | |||||||||||||
Exercised | (84,237) | 21.41 | |||||||||||||
Forfeited or expired | (126,997) | 26.47 | |||||||||||||
Outstanding at December 30, 2011 | 1,558,771 | 23.42 | |||||||||||||
Granted | 395,978 | 22.19 | |||||||||||||
Exercised | (52,683) | 20.77 | |||||||||||||
Forfeited or expired | (126,219) | 24.21 | |||||||||||||
Outstanding at December 28, 2012 | 1,775,847 | $ | 23.17 | 6.0 | $ | 2.2 | |||||||||
Expected to vest at December 28, 2012 | 1,725,786 | $ | 23.22 | 6.0 | $ | 2.1 | |||||||||
Exercisable at December 28, 2012 | 1,458,885 | $ | 23.32 | 5.4 | $ | 1.9 |
The following table summarizes performance-vested stock option activity: | |||||||||||||||
Number of Performance-Vested Stock Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (In Years) | Aggregate Intrinsic Value (In Millions) | ||||||||||||
Outstanding at January 1, 2010 | 1,001,984 | $ | 24.48 | ||||||||||||
Forfeited or expired | (257,461) | 26.81 | |||||||||||||
Outstanding at December 31, 2010 | 744,523 | 23.68 | |||||||||||||
Exercised | (26,478) | 22.53 | |||||||||||||
Forfeited or expired | (239,681) | 22.29 | |||||||||||||
Outstanding at December 30, 2011 | 478,364 | 24.44 | |||||||||||||
Exercised | (7,657) | 22.04 | |||||||||||||
Forfeited or expired | (185,782) | 26.35 | |||||||||||||
Outstanding at December 28, 2012 | 284,925 | $ | 23.26 | 4.3 | $ | 0.1 | |||||||||
Expected to vest at December 28, 2012 | 284,925 | $ | 23.26 | 4.3 | $ | 0.1 | |||||||||
Exercisable at December 28, 2012 | 284,925 | $ | 23.26 | 4.3 | $ | 0.1 |
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Intrinsic value | $ | 148 | $ | 501 | $ | 112 | |||
Cash received | 1,263 | 2,401 | 659 | ||||||
Tax expense realized | (132) | (146) | (41) |
Time-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | January 1, 2010 | 160,998 | $ | 24.82 | |||||
Granted | 124,747 | 21.11 | |||||||
Vested | (147,434) | 23.05 | |||||||
Forfeited | (14,925) | 23.45 | |||||||
Nonvested at | December 31, 2010 | 123,386 | 22.57 | ||||||
Granted | 31,625 | 23.49 | |||||||
Vested | (80,825) | 22.80 | |||||||
Forfeited | (4,244) | 22.98 | |||||||
Nonvested at | December 30, 2011 | 69,942 | 22.69 | ||||||
Granted | 92,265 | 23.49 | |||||||
Vested | (74,901) | 22.83 | |||||||
Forfeited | (7,037) | 22.56 | |||||||
Nonvested at | December 28, 2012 | 80,269 | $ | 23.48 |
Performance-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | January 1, 2010 | 24,000 | $ | 23.07 | |||||
Granted | 289,654 | 14.43 | |||||||
Vested | (21,558) | 15.12 | |||||||
Forfeited | (8,299) | 14.56 | |||||||
Nonvested at | December 31, 2010 | 283,797 | 15.10 | ||||||
Granted | 279,415 | 18.21 | |||||||
Vested | (6,600) | 17.94 | |||||||
Forfeited | (26,869) | 15.85 | |||||||
Nonvested at | December 30, 2011 | 529,743 | 16.68 | ||||||
Granted | 332,918 | 15.30 | |||||||
Vested | (15,500) | 24.64 | |||||||
Forfeited | (64,715) | 15.72 | |||||||
Nonvested at | December 28, 2012 | 782,446 | $ | 16.02 |
|
Research, Development and Engineering Costs, Net are comprised of the following (in thousands): | |||||||||||
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Research and development costs | $ | 24,071 | $ | 19,014 | $ | 17,378 | |||||
Engineering costs | 38,777 | 35,472 | 34,208 | ||||||||
Less: cost reimbursements | (10,358) | (8,973) | (6,567) | ||||||||
Total research, development and | |||||||||||
engineering costs, net | $ | 52,490 | $ | 45,513 | $ | 45,019 |
|
Other Operating Expenses, Net is comprised of the following (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Orthopaedic facility optimization | $ | 32,482 | $ | 425 | $ | 225 | |||
Medical device facility optimization | 1,525 | - | - | ||||||
ERP system upgrade | 5,041 | - | - | ||||||
2007 & 2008 facility shutdowns and consolidations | - | - | 1,348 | ||||||
Integration costs | 1,460 | - | 42 | ||||||
Asset dispositions, severance and other | 1,838 | 168 | 2,943 | ||||||
$ | 42,346 | $ | 593 | $ | 4,558 |
The change in accrued liabilities related to the Orthopaedic facility optimizations is as follows (in thousands): | ||||||||||||||
Severance and Retention | Accelerated Depreciation/Asset Write-offs | Other | Total | |||||||||||
At | December 30, 2011 | $ | - | $ | - | $ | - | $ | - | |||||
Restructuring charges | 10,049 | 14,759 | 7,674 | 32,482 | ||||||||||
Write-offs | - | (14,759) | - | (14,759) | ||||||||||
Cash payments | (482) | - | (7,674) | (8,156) | ||||||||||
At | December 28, 2012 | $ | 9,567 | $ | - | $ | - | $ | 9,567 |
The change in accrued liabilities related to the medical device facility optimization is as follows (in thousands): | ||||||||||||||
Production Inefficiencies, Moving and Revalidation | Personnel | Other | Total | |||||||||||
At | December 30, 2011 | $ | - | $ | - | $ | - | $ | - | |||||
Restructuring charges | 652 | 630 | 243 | 1,525 | ||||||||||
Cash payments | (652) | (630) | (243) | (1,525) | ||||||||||
At | December 28, 2012 | $ | - | $ | - | $ | - | $ | - |
The change in accrued liabilities related to the ERP system upgrade is as follows (in thousands): | |||||||||||
Training & Consulting Costs | Accelerated Depreciation/ Asset Write-offs | Total | |||||||||
At | December 30, 2011 | $ | - | $ | - | $ | - | ||||
Charges | 2,875 | 2,166 | 5,041 | ||||||||
Write-offs | - | (2,166) | (2,166) | ||||||||
Cash payments | (2,706) | - | (2,706) | ||||||||
At | December 28, 2012 | $ | 169 | $ | - | $ | 169 |
|
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
U.S. | $ | 36,057 | $ | 43,610 | $ | 46,217 | |||
International | (29,327) | 4,782 | 3,108 | ||||||
$ | 6,730 | $ | 48,392 | $ | 49,325 |
The provision for income taxes was comprised of the following (in thousands): | ||||||||||
Year Ended | ||||||||||
December 28, | December 30, | December 31, | ||||||||
2012 | 2011 | 2010 | ||||||||
Current: | ||||||||||
Federal | $ | 4,747 | $ | 5,150 | $ | (671) | ||||
State | 381 | (40) | 179 | |||||||
International | 668 | 1,384 | 1,260 | |||||||
5,796 | 6,494 | 768 | ||||||||
Deferred: | ||||||||||
Federal | 6,615 | 8,028 | 15,409 | |||||||
State | 175 | 599 | 300 | |||||||
International | (1,057) | 149 | (290) | |||||||
5,733 | 8,776 | 15,419 | ||||||||
$ | 11,529 | $ | 15,270 | $ | 16,187 |
The provision for income taxes differs from the U.S. statutory rate due to the following: | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
Change in tax rate - loss of Swiss tax holiday | 25.6 | - | - | ||||||
Federal tax credits | - | (3.7) | (2.6) | ||||||
Foreign rate differential | 50.7 | 0.3 | (0.8) | ||||||
Uncertain tax positions | (10.1) | (1.3) | (1.3) | ||||||
State taxes, net of federal benefit | 4.9 | 0.3 | (0.3) | ||||||
Valuation allowance | 67.6 | 0.1 | 1.7 | ||||||
Other | (2.4) | 0.9 | 1.1 | ||||||
Effective tax rate | 171.3 | % | 31.6 | % | 32.8 | % |
Deferred tax assets (liabilities) consist of the following (in thousands): | ||||||
At | ||||||
December 28, | December 30, | |||||
2012 | 2011 | |||||
Tax credits | $ | 6,884 | $ | 7,362 | ||
Net operating loss carryforwards | 14,637 | 11,106 | ||||
Inventories | 3,911 | 4,441 | ||||
Accrued expenses | 4,129 | 2,961 | ||||
Stock-based compensation | 8,502 | 6,378 | ||||
Other | 465 | 1,052 | ||||
Gross deferred tax assets | 38,528 | 33,300 | ||||
Less valuation allowance | (12,768) | (7,775) | ||||
Net deferred tax assets | 25,760 | 25,525 | ||||
Property, plant and equipment | (2,648) | (2,572) | ||||
Intangible assets | (59,774) | (54,874) | ||||
Convertible subordinated notes | (36,462) | (33,849) | ||||
Gross deferred tax liabilities | (98,884) | (91,295) | ||||
Net deferred tax liability | $ | (73,124) | $ | (65,770) | ||
Presented as follows: | ||||||
Current deferred tax asset | $ | 7,678 | $ | 7,828 | ||
Current deferred tax liability | (874) | (845) | ||||
Noncurrent deferred tax asset | 2,534 | 2,450 | ||||
Noncurrent deferred tax liability | (82,462) | (75,203) | ||||
$ | (73,124) | $ | (65,770) |
Tax | Amount | Begin to | |||||
Jurisdiction | Attribute | (in millions) | Expire | ||||
U.S. | Net Operating Loss | $ | 11.2(1) | 2025 | |||
International | Net Operating Loss | 38.1(1) | 2013 | ||||
State | Net Operating Loss | 29.5(1) | Various | ||||
U.S. and State | R&D Tax Credit | 1.7(1) | Various | ||||
State | Investment Tax Credit | 5.4 | Various |
Below is a summary of changes to the unrecognized tax benefit (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Balance, beginning of year | $ | 1,580 | $ | 2,756 | $ | 3,418 | |||
Additions based upon tax positions related to the current year | - | 300 | 300 | ||||||
Additions recorded as part of business combinations | - | 260 | - | ||||||
Additions related to prior period tax positions, net | 210 | - | 222 | ||||||
Reductions relating to settlements with tax authorities | (522) | - | - | ||||||
Reductions as a result of a lapse of applicable | |||||||||
statute of limitations | (298) | (1,736) | (1,184) | ||||||
Balance, end of year | $ | 970 | $ | 1,580 | $ | 2,756 |
|
The change in product warranty liability was comprised of the following (in thousands): | |||||||
Year Ended | |||||||
December 28, | December 30, | ||||||
2012 | 2011 | ||||||
Beginning balance | $ | 2,013 | $ | 2,313 | |||
Warranty reserves acquired | - | 210 | |||||
Additions to warranty reserve | 1,681 | 375 | |||||
Warranty claims paid | (1,068) | (887) | |||||
Foreign currency effect | - | 2 | |||||
Ending balance | $ | 2,626 | $ | 2,013 |
Operating lease expense was as follows (in thousands): | |||||||||
Year Ended | |||||||||
December 28, | December 30, | December 31, | |||||||
2012 | 2011 | 2010 | |||||||
Operating lease expense | $ | 4,024 | $ | 2,704 | $ | 3,114 |
Minimum future estimated annual operating lease expense are as follows (in thousands): | ||||
2013 | $ | 4,601 | ||
2014 | 4,368 | |||
2015 | 3,766 | |||
2016 | 3,176 | |||
2017 | 1,203 | |||
Thereafter | 1,930 | |||
Total estimated operating lease expense | $ | 19,044 |
The impact to the Company's results of operations from these forward contracts was as follows (in thousands): | ||||||||||
Year Ended | ||||||||||
December 28, | December 30, | December 31, | ||||||||
2012 | 2011 | 2010 | ||||||||
Reduction in Cost of Sales | $ | 79 | $ | 556 | $ | 483 | ||||
Ineffective portion of change in fair value | 0 | 0 | 0 |
Information regarding the Company's outstanding foreign currency contracts as of December 28, 2012 is as follows (dollars in thousands): | |||||||||||||||||
Aggregate | |||||||||||||||||
Type of | Notional | Start | End | Fair | Balance Sheet | ||||||||||||
Instrument | Hedge | Amount | Date | Date | $/Peso | Value | Location | ||||||||||
FX Contract | Cash flow | 6,000 | Jan-13 | Dec-13 | 0.0727 | 222 | Current Assets | ||||||||||
FX Contract | Cash flow | 6,000 | Jan-13 | Dec-13 | 0.0693 | 535 | Current Assets | ||||||||||
$ | 757 |
|
Accumulated Other Comprehensive Income is comprised of the following (in thousands): | ||||||||||||||||||
Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | |||||||||||||
At | December 30, 2011 | $ | (2,660) | $ | (538) | $ | 11,526 | $ | 8,328 | $ | 601 | $ | 8,929 | |||||
Unrealized gain on cash flow hedges | - | 737 | - | 737 | (258) | 479 | ||||||||||||
Realized gain on cash flow hedges | - | (79) | - | (79) | 28 | (51) | ||||||||||||
Net defined benefit plan | ||||||||||||||||||
liability adjustments | 1,698 | - | - | 1,698 | (13) | 1,685 | ||||||||||||
Foreign currency translation gain | - | - | 1,905 | 1,905 | - | 1,905 | ||||||||||||
At | December 28, 2012 | $ | (962) | $ | 120 | $ | 13,431 | $ | 12,589 | $ | 358 | $ | 12,947 |
|
At | December 30, 2011 | $ | - | |
Contingent consideration liability recorded | 1,500 | |||
Fair value adjustments | 30 | |||
At | December 28, 2012 | $ | 1,530 |
The recurring Level 3 fair value measurements of the Company's contingent consideration liability include the following significant unobservable inputs (dollars in thousands): | |||||||||
Contingent Consideration Liability | Fair Value at December 28, 2012 | Valuation Technique | Unobservable Inputs | ||||||
Financial milestones | $ | 870 | Discounted cash flow | Discount rate | 12% | ||||
Projected year of payment | 2014 | ||||||||
Development milestones | $ | 660 | Discounted cash flow | Discount rate | 20% | ||||
Projected year of payment | 2015 |
The following tables provide information regarding assets and liabilities recorded at fair value on a recurring basis (in thousands): | |||||||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
December 28, | Assets | Inputs | Inputs | ||||||||||
Description | 2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Foreign currency contracts (Note 15) | $ | 757 | $ | - | $ | 757 | $ | - | |||||
Liabilities | |||||||||||||
Accrued contingent consideration | $ | 1,530 | $ | - | $ | - | $ | 1,530 | |||||
Interest rate swap | 638 | - | 638 | - | |||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
December 30, | Assets | Inputs | Inputs | ||||||||||
Description | 2011 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Liabilities | |||||||||||||
Foreign currency contracts | $ | 538 | $ | - | $ | 538 | $ | - | |||||
The following table provides information regarding assets and liabilities recorded at fair value on a nonrecurring basis (in thousands): | |||||||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
December 28, | Assets | Inputs | Inputs | ||||||||||
Description | 2012 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Assets Held for Sale - Swiss orthopaedic | |||||||||||||
disposal group (Note 5) | $ | 4,499 | $ | - | $ | 4,499 | $ | - | |||||
Cost method investment | 86 | - | 86 | - |
|
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
Sales: | 2012 | 2011 | 2010 | ||||||||
Implantable Medical | |||||||||||
Cardiac/Neuromodulation | $ | 309,124 | $ | 303,690 | $ | 303,521 | |||||
Vascular | 51,980 | 45,098 | 38,000 | ||||||||
Orthopaedic | 122,061 | 140,277 | 118,748 | ||||||||
Total Implantable Medical | 483,165 | 489,065 | 460,269 | ||||||||
Electrochem | |||||||||||
Portable Medical | 81,659 | 9,609 | 8,432 | ||||||||
Energy/Environmental | 67,046 | 58,934 | 54,668 | ||||||||
Other | 14,307 | 11,214 | 10,056 | ||||||||
Total Electrochem | 163,012 | 79,757 | 73,156 | ||||||||
Total sales | $ | 646,177 | $ | 568,822 | $ | 533,425 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Segment income from operations: | |||||||||||
Implantable Medical | $ | 24,908 | $ | 62,461 | $ | 62,477 | |||||
Electrochem | 21,631 | 14,965 | 22,195 | ||||||||
Total segment income from operations | 46,539 | 77,426 | 84,672 | ||||||||
Unallocated operating expenses | (20,718) | (15,727) | (15,678) | ||||||||
Operating income as reported | 25,821 | 61,699 | 68,994 | ||||||||
Unallocated other expense | (19,091) | (13,307) | (19,669) | ||||||||
Income before provision for income taxes as reported | $ | 6,730 | $ | 48,392 | $ | 49,325 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Depreciation and Amortization: | |||||||||||
Implantable Medical | $ | 32,928 | $ | 28,571 | $ | 28,117 | |||||
Electrochem | 7,522 | 2,965 | 2,660 | ||||||||
Total depreciation and amortization included | |||||||||||
in segment income from operations | 40,450 | 31,536 | 30,777 | ||||||||
Unallocated depreciation and amortization | 18,475 | 16,159 | 15,670 | ||||||||
Total depreciation and amortization | $ | 58,925 | $ | 47,695 | $ | 46,447 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Expenditures for tangible long-lived assets, | |||||||||||
excluding acquisitions: | |||||||||||
Implantable Medical | $ | 32,130 | $ | 22,509 | $ | 15,088 | |||||
Electrochem | 4,327 | 1,072 | 763 | ||||||||
Total reportable segments | 36,457 | 23,581 | 15,851 | ||||||||
Unallocated long-lived tangible assets | 4,709 | 741 | 1,120 | ||||||||
Total expenditures | $ | 41,166 | $ | 24,322 | $ | 16,971 |
At | ||||||||
December 28, | December 30, | |||||||
2012 | 2011 | |||||||
Identifiable assets: | ||||||||
Implantable Medical | $ | 670,135 | $ | 653,628 | ||||
Electrochem | 167,505 | 161,904 | ||||||
Total reportable segments | 837,640 | 815,532 | ||||||
Unallocated assets | 52,235 | 65,815 | ||||||
Total assets | $ | 889,875 | $ | 881,347 |
Year Ended | |||||||||||
December 28, | December 30, | December 31, | |||||||||
2012 | 2011 | 2010 | |||||||||
Sales by geographic area: | |||||||||||
United States | $ | 330,537 | $ | 256,987 | $ | 243,827 | |||||
Non-Domestic locations: | |||||||||||
Puerto Rico | 105,731 | 94,059 | 88,369 | ||||||||
Belgium | 58,043 | 62,978 | 58,014 | ||||||||
United Kingdom & Ireland | 43,938 | 54,029 | 56,903 | ||||||||
Rest of world | 107,928 | 100,769 | 86,312 | ||||||||
Total sales | $ | 646,177 | $ | 568,822 | $ | 533,425 |
At | ||||||
December 28, | December 30, | |||||
Long-lived tangible assets: | 2012 | 2011 | ||||
United States | $ | 123,104 | $ | 113,693 | ||
Rest of world | 27,789 | 32,113 | ||||
Total | $ | 150,893 | $ | 145,806 |
A significant portion of the Company’s sales and accounts receivable were to four customers as follows: | ||||||||||||
Sales | Accounts Receivable | |||||||||||
Year Ended | At | |||||||||||
December 28, | December 30, | December 31, | December 28, | December 30, | ||||||||
2012 | 2011 | 2010 | 2012 | 2011 | ||||||||
Customer A | 19% | 19% | 21% | 7% | 7% | |||||||
Customer B | 16% | 19% | 19% | 21% | 23% | |||||||
Customer C | 11% | 13% | 12% | 6% | 6% | |||||||
Customer D | 6% | 8% | 10% | 6% | 6% | |||||||
52% | 59% | 62% | 40% | 42% |
|
4th Qtr. | 3rd Qtr. | 2nd Qtr. | 1st Qtr. | |||||||||
(in thousands, except per share data) | ||||||||||||
2012 | ||||||||||||
Sales | $ | 159,186 | $ | 161,340 | $ | 166,548 | $ | 159,103 | ||||
Gross profit | 51,874 | 50,954 | 51,933 | 46,888 | ||||||||
Net income (loss) | (5,556) | (7,561) | 3,851 | 4,467 | ||||||||
EPS - basic | (0.23) | (0.32) | 0.16 | 0.19 | ||||||||
EPS - diluted | (0.23) | (0.32) | 0.16 | 0.19 | ||||||||
2011 | ||||||||||||
Sales | $ | 141,746 | $ | 131,718 | $ | 146,524 | $ | 148,834 | ||||
Gross profit | 44,672 | 41,907 | 46,604 | 47,170 | ||||||||
Net income | 5,639 | 6,989 | 8,550 | 11,944 | ||||||||
EPS - basic | 0.24 | 0.30 | 0.37 | 0.51 | ||||||||
EPS - diluted | 0.24 | 0.30 | 0.36 | 0.51 |
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