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1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Greatbatch, Inc. and its wholly-owned subsidiary, Greatbatch Ltd. (collectively “Greatbatch” or the “Company”), for the periods presented. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates. The December 28, 2012 condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 28, 2012. The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. The second quarter and year-to-date periods of 2013 and 2012 each contained 13 weeks and 26 weeks, respectively, and ended on June 28, and June 29, respectively.
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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. The aggregate purchase price of NeuroNexus was $13.2 million. Total assets acquired from NeuroNexus were $14.6 million, of which $2.9 million were amortizing intangible assets and $8.9 million was allocated to goodwill.
This transaction was accounted for under the acquisition method of accounting. Accordingly, the operating results of NeuroNexus were included in the Company's Implantable Medical segment from the date of acquisition and the purchase price 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. 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 valuation of the assets acquired and liabilities assumed from NeuroNexus was finalized during the first quarter of 2013 and did not result in a material adjustment to the original valuation of net assets acquired, including goodwill.
Pro Forma Results (Unaudited)
The following unaudited pro forma information presents the consolidated results of operations of the Company and NeuroNexus as if that acquisition occurred as of the beginning of fiscal year 2012 (in thousands, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Sales | $ | 171,331 | $ | 166,548 | $ | 319,596 | $ | 326,091 | ||||||
Net income | 9,752 | 3,851 | 15,415 | 8,144 | ||||||||||
Earnings per share: | ||||||||||||||
Basic | $ | 0.41 | $ | 0.16 | $ | 0.65 | $ | 0.35 | ||||||
Diluted | $ | 0.39 | $ | 0.16 | $ | 0.62 | $ | 0.34 |
The unaudited pro forma information presents the combined operating results of Greatbatch and NeuroNexus, with the results prior to the acquisition date adjusted to include the pro forma impact of the amortization of acquired intangible assets based on the purchase price allocations, the adjustment to interest expense reflecting the amount borrowed in connection with the acquisition 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 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 cost 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
Six Months Ended | ||||||||
June 28, | June 29, | |||||||
(in thousands) | 2013 | 2012 | ||||||
Noncash investing and financing activities: | ||||||||
Common stock contributed to 401(k) Plan | $ | 2,477 | $ | 4,793 | ||||
Property, plant and equipment purchases included | ||||||||
in accounts payable | 825 | 5,624 | ||||||
Cash paid during the period for: | ||||||||
Interest | $ | 2,926 | $ | 2,909 | ||||
Income taxes | 18,895 | 983 | ||||||
Acquisition of noncash assets | $ | - | $ | 14,379 | ||||
Liabilities assumed | 0 | 1,226 |
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4. INVENTORIES
Inventories are comprised of the following (in thousands): | |||||||
As of | |||||||
June 28, | December 28, | ||||||
2013 | 2012 | ||||||
Raw materials | $ | 68,016 | $ | 58,204 | |||
Work-in-process | 35,162 | 30,022 | |||||
Finished goods | 18,984 | 18,386 | |||||
Total | $ | 122,162 | $ | 106,612 |
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5. INTANGIBLE ASSETS
Amortizing intangible assets are comprised of the following (in thousands): | |||||||||||||
At | June 28, 2013 | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net Carrying Amount | ||||||||
Technology and patents | $ | 95,576 | $ | (65,470) | $ | 1,701 | $ | 31,807 | |||||
Customer lists | 68,257 | (21,797) | 838 | 47,298 | |||||||||
Other | 4,434 | (4,370) | 804 | 868 | |||||||||
Total amortizing intangible assets | $ | 168,267 | $ | (91,637) | $ | 3,343 | $ | 79,973 | |||||
At | December 28, 2012 | ||||||||||||
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 |
Aggregate intangible asset amortization expense is comprised of the following (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Cost of sales | $ | 1,759 | $ | 1,900 | $ | 3,539 | $ | 3,795 | ||||
Selling, general and administrative expenses | 1,445 | 1,579 | 2,897 | 3,140 | ||||||||
Research, development and engineering costs, net | 136 | 137 | 272 | 273 | ||||||||
Total intangible asset amortization expense | $ | 3,340 | $ | 3,616 | $ | 6,708 | $ | 7,208 |
Estimated future intangible asset amortization expense based on the current carrying value is as follows (in thousands): | |||||
Estimated | |||||
Amortization | |||||
Expense | |||||
Remainder of | 2013 | $ | 6,435 | ||
2014 | 13,372 | ||||
2015 | 12,320 | ||||
2016 | 10,026 | ||||
2017 | 8,903 | ||||
Thereafter | 28,917 | ||||
Total estimated amortization expense | $ | 79,973 |
Indefinite-lived intangible assets are comprised of the following (in thousands): | ||||||||||
Trademarks and Tradenames | IPR&D | Total | ||||||||
At | June 28, 2013 | $ | 20,288 | $ | 540 | $ | 20,828 | |||
The change in goodwill is as follows (in thousands): | ||||||||||
Implantable Medical | Electrochem | Total | ||||||||
At | December 28, 2012 | $ | 307,201 | $ | 41,834 | $ | 349,035 | |||
Goodwill disposed (Note 9) | (2,771) | 0 | (2,771) | |||||||
Foreign currency translation | (1,355) | 0 | (1,355) | |||||||
At | June 28, 2013 | $ | 303,075 | $ | 41,834 | $ | 344,909 |
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6. DEBT
Long-term debt is comprised of the following (in thousands): | |||||||
As of | |||||||
June 28, | December 28, | ||||||
2013 | 2012 | ||||||
Revolving line of credit | $ | 237,000 | $ | 33,000 | |||
2.25% convertible subordinated notes | - | 197,782 | |||||
Unamortized discount | - | (5,368) | |||||
Total long-term debt | $ | 237,000 | $ | 225,414 |
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 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.
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 (defined below). 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 a result of the repayment of CSN during the first quarter of 2013 (discussed below), as of June 28, 2013, the Company's ability to engage in these activities was reduced to the aggregate limit of $49 million.
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 June 28, 2013, 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.
As of June 28, 2013, the weighted average interest rate on borrowings under the Credit Facility, which does not take into account the impact of the Company's interest rate swap, was 1.97%. As of June 28, 2013, the Company had $163 million of borrowing capacity available under the Credit Facility. This borrowing capacity may vary from period to period based upon the debt levels of the Company and the level of EBITDA, which impacts the covenant calculations described above.
Interest Rate Swap – 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 borrowings on the Credit Facility. The variable rate received on 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. During 2012, the Company entered into a three-year $150 million interest rate swap, which amortizes $50 million per year and became effective on February 20, 2013. This swap was entered into in order to hedge against potential changes in cash flows on the outstanding Credit Facility borrowings, which are also indexed to the one-month LIBOR rate. This swap is being accounted for as a cash flow hedge. Information regarding the Company's outstanding interest rate swap as of June 28, 2013 is as follows (dollars in thousands):
Current | Fair | ||||||||||||||||||
Pay | Receive | Value | Balance | ||||||||||||||||
Type of | Notional | Start | End | Fixed | Floating | June 28, | Sheet | ||||||||||||
Instrument | Hedge | Amount | Date | Date | Rate | Rate | 2013 | Location | |||||||||||
Interest rate swap | Cash flow | $ | 150,000 | Feb-13 | Feb-16 | 0.573% | 0.192% | $ | (284) | 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. No portion of the change in fair value of the Company's interest rate swap during the six months ended June 28, 2013 was considered ineffective. The amount recorded as Interest Expense during the three and six months ended June 28, 2013 related to the Company's interest rate swaps was $0.1 million and $0.2 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 accrued interest at 2.25% per annum, payable semi-annually, and were due on June 15, 2013. The effective interest rate of CSN, which took into consideration the amortization of the discount and deferred fees related to the issuance of these notes, was 8.5%. The discount on CSN was being amortized to the redemption date utilizing the effective interest method. On February 20, 2013, the Company redeemed all outstanding CSN using funds borrowed under the Credit Facility.
The contractual interest and discount amortization for CSN were as follows (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Contractual interest | $ | - | $ | 1,113 | $ | 634 | $ | 2,225 | ||||
Discount amortization | - | 2,735 | 5,368 | 5,424 |
Deferred Financing Fees - The change in deferred financing fees is as follows (in thousands):
At | December 28, 2012 | $ | 2,056 | |
Amortization during the period | (520) | |||
At | June 28, 2013 | $ | 1,536 |
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7. 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 plan provided to employees located in Switzerland is a funded contributory plan while the plans that provide benefits to 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 the third quarter of 2012. In accordance with ASC 715, the gain recognized in connection with this curtailment is realized as the related employees are terminated. As nearly all of the Swiss pension liability is expected to be paid in 2013, 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. During 2013, the Company settled approximately $7.7 million of its defined benefit obligation.
The change in net defined benefit plan liability is as follows (in thousands): | |||||
At | December 28, 2012 | $ | 3,946 | ||
Service cost | 151 | ||||
Interest cost | 103 | ||||
Curtailment | (1,581) | ||||
Actuarial gain | (171) | ||||
Benefit payments | (109) | ||||
Foreign currency translation | (67) | ||||
At | June 28, 2013 | $ | 2,272 |
Amounts recognized in Accumulated Other Comprehensive Income are as follows (in thousands): | ||||||||||
Six Months Ended | ||||||||||
June 28, 2013 | ||||||||||
Net gain occurring during the period | $ | (171) | ||||||||
Amortization of losses | (581) | |||||||||
Prior service cost | 155 | |||||||||
Pre-tax adjustment | (597) | |||||||||
Taxes | - | |||||||||
Net gain | $ | (597) |
Net defined benefit (income) cost is comprised of the following (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Service cost | $ | 69 | $ | 278 | $ | 151 | $ | 563 | ||||
Interest cost | 40 | 103 | 103 | 207 | ||||||||
Curtailment gain (Other Operating Expenses, Net) | - | - | (1,150) | - | ||||||||
Amortization of net loss | - | 31 | - | 62 | ||||||||
Expected return on plan assets | - | (107) | - | (215) | ||||||||
Net defined benefit (income) cost | $ | 109 | $ | 305 | $ | (896) | $ | 617 |
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8. STOCK-BASED COMPENSATION
The components and classification of stock-based compensation expense were as follows (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Stock options | $ | 705 | $ | 689 | $ | 1,410 | $ | 1,367 | ||||
Restricted stock and units | 1,482 | 1,527 | 2,945 | 3,036 | ||||||||
401(k) stock contribution | 2,729 | 1,130 | 2,992 | 1,130 | ||||||||
Total stock-based compensation expense | $ | 4,916 | $ | 3,346 | $ | 7,347 | $ | 5,533 | ||||
Cost of sales | $ | 1,707 | $ | 1,104 | $ | 2,129 | $ | 1,367 | ||||
Selling, general and administrative | 2,587 | 1,909 | 4,454 | 3,726 | ||||||||
Research, development and engineering | 622 | 333 | 764 | 440 | ||||||||
Total stock-based compensation expense | $ | 4,916 | $ | 3,346 | $ | 7,347 | $ | 5,533 |
The weighted average fair value and assumptions used to value options granted are as follows: | ||||||
Six Months Ended | ||||||
June 28, | June 29, | |||||
2013 | 2012 | |||||
Weighted average fair value | $ | 8.38 | $ | 8.19 | ||
Risk-free interest rate | 0.73% | 0.83% | ||||
Expected volatility | 39% | 40% | ||||
Expected life (in years) | 5 | 5 | ||||
Expected dividend yield | 0% | 0% |
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 | December 28, 2012 | 1,775,847 | $ | 23.17 | |||||||||||
Granted | 372,676 | 23.33 | |||||||||||||
Exercised | (92,549) | 22.99 | |||||||||||||
Forfeited or expired | (41,887) | 24.02 | |||||||||||||
Outstanding at | June 28, 2013 | 2,014,087 | $ | 23.19 | 6.3 | $ | 19.6 | ||||||||
Exercisable at | June 28, 2013 | 1,409,348 | $ | 23.26 | 5.1 | $ | 13.7 |
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 | December 28, 2012 | 284,925 | $ | 23.26 | |||||||||||
Granted | 0 | 0 | |||||||||||||
Exercised | (19,489) | 23.12 | |||||||||||||
Forfeited or expired | - | - | |||||||||||||
Outstanding at | June 28, 2013 | 265,436 | $ | 23.27 | 3.8 | $ | 2.5 | ||||||||
Exercisable at | June 28, 2013 | 265,436 | $ | 23.27 | 3.8 | $ | 2.5 |
The following table summarizes time-vested restricted stock and unit activity: | |||||||||
Time-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | December 28, 2012 | 80,269 | $ | 23.48 | |||||
Granted | 61,202 | 25.56 | |||||||
Vested | (24,562) | 22.27 | |||||||
Forfeited | (3,335) | 21.11 | |||||||
Nonvested at | June 28, 2013 | 113,574 | $ | 24.93 |
The following table summarizes performance-vested restricted stock and unit activity: | |||||||||
Performance-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | December 28, 2012 | 782,446 | $ | 16.02 | |||||
Granted | 318,169 | 15.86 | |||||||
Vested | (49,139) | 14.68 | |||||||
Forfeited | (220,909) | 15.22 | |||||||
Nonvested at | June 28, 2013 | 830,567 | $ | 16.38 |
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9. OTHER OPERATING EXPENSES, NET
Other Operating Expenses, Net is comprised of the following (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
2013 operating unit realignment | $ | 852 | $ | - | $ | 852 | $ | - | ||||
Orthopaedic facility optimization | 2,667 | 1,978 | 5,303 | 2,322 | ||||||||
Medical device facility optimization | 125 | 565 | 230 | 894 | ||||||||
ERP system upgrade | 64 | 1,912 | 385 | 2,807 | ||||||||
Acquisition and integration costs | 71 | 112 | 182 | 1,055 | ||||||||
Asset dispositions, severance and other | 43 | 1,356 | 108 | 1,590 | ||||||||
$ | 3,822 | $ | 5,923 | $ | 7,060 | $ | 8,668 |
2013 operating unit realignment. In June 2013, the Company initiated a plan to realign its operating structure in order to optimize its continued focus on profitable growth. As part of this initiative, the sales & marketing and operations groups of its Implantable Medical and Electrochem segments were combined into one sales & marketing and one operations group serving the entire Company. Total restructuring charges expected to be incurred in connection with this realignment is between $4.2 million and $5.0 million, of which $0.9 million has been incurred to date. Expenses related to this initiative will be recorded within the applicable segment and corporate cost centers that the expenditures relate to and include the following:
Other costs primarily consist of relocation, recruitment and travel expenditures expected to be incurred in connection with the 2013 operating unit realignment.
The change in accrued liabilities related to the 2013 operating unit realignment is as follows (in thousands): | ||||||||||||||||
Severance and Retention | Other | Total | ||||||||||||||
At | December 28, 2012 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Restructuring charges | 402 | 450 | 852 | |||||||||||||
Cash payments | (5) | 0 | (5) | |||||||||||||
At | June 28, 2013 | $ | 397 | $ | 450 | $ | 847 |
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 the manufacturing operations being performed at its Columbia City, IN facility 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 assets related to certain non-core Swiss orthopaedic product lines to an independent third party including inventory, machinery, equipment, customer lists and technology related to these product lines. As these product lines were considered a business, goodwill was allocated to the transaction. As these product lines 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. This transaction closed in the first quarter of 2013 and no additional loss on sale was recognized. During 2013, the Company received payments totaling $3.2 million in connection with this transaction and the third party assumed $2.4 million of severance liabilities.
The total capital investment expected for these initiatives is between $25 million and $30 million, of which $21.8 million has been expended to date. Total expense expected to be incurred for these initiatives is between $39 million and $40 million, of which $38.4 million has been incurred to date. All expenses will be recorded within the Implantable Medical segment and are expected to include the following:
Other costs include production inefficiencies, moving, revalidation, personnel, training and travel costs associated with these consolidation projects.
The change in accrued liabilities related to the orthopaedic facility optimization is as follows (in thousands): | |||||||||||||||||||
Severance and Retention | Accelerated Depreciation/Asset Write-offs | Other | Total | ||||||||||||||||
At | December 28, 2012 | $ | 9,567 | $ | - | $ | - | $ | 9,567 | ||||||||||
Restructuring charges | 482 | 48 | 4,773 | 5,303 | |||||||||||||||
Write-offs | - | (48) | - | (48) | |||||||||||||||
Liability assumed by third party | (2,398) | - | - | (2,398) | |||||||||||||||
Cash payments | (7,074) | - | (3,859) | (10,933) | |||||||||||||||
At | June 28, 2013 | $ | 577 | $ | - | $ | 914 | $ | 1,491 |
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 years. Total capital investment under these initiatives is expected to be between $15 million and $20 million of which approximately $11.8 million has been expended to date. Total expenses expected to be incurred on these projects is between $2.0 million and $3.0 million, of which $1.8 million has been incurred to date. All expenses 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 28, 2012 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Restructuring charges | 19 | 2 | 209 | 230 | |||||||||||||||
Cash payments | (19) | (2) | (209) | (230) | |||||||||||||||
At | June 28, 2013 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
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 $3.9 million has been expended to date. Total expenses expected to be incurred on this initiative is between $6 million to $7 million, of which $5.4 million has been incurred to date. Expenses related to this initiative will be recorded within the applicable segment and corporate cost centers that the expenditures relate to 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 28, 2012 | $ | 169 | $ | 0 | $ | 169 | ||||||
Charges | 385 | - | 385 | ||||||||||
Cash payments | (538) | 0 | (538) | ||||||||||
At | June 28, 2013 | $ | 16 | $ | 0 | $ | 16 |
Acquisition and integration costs. During 2013 and 2012, the Company incurred costs related to the integration of Micro Power Electronics, Inc. and NeuroNexus, which were acquired in December 2011 and February 2012, respectively. These expenses were primarily for retention bonuses, travel costs in connection with integration efforts, training, severance, and the change in fair value of the contingent consideration recorded in connection with these acquisitions.
Asset dispositions, severance and other. During 2013 and 2012, the Company recorded write-downs in connection with various asset disposals, net of insurance proceeds received, if any. Additionally, during the second quarter of 2012, the Company incurred $1.2 million of costs related to the relocation of its global headquarters to Frisco, Texas.
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10. INCOME TAXES
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations.
As of June 28, 2013, the balance of unrecognized tax benefits is approximately $1.1 million. It is reasonably possible that a reduction of up to $0.2 million of the balance of unrecognized tax benefits may occur within the next twelve months as a result of potential audit settlements. Approximately $0.9 million of the balance of unrecognized tax benefits would favorably impact the effective tax rate, net of federal benefit on state issues, if recognized.
As a result of the repayment of CSN during the first quarter of 2013, the Company reclassified $30.4 million of Long-Term Deferred Income Taxes to Income Taxes Payable of which approximately $11.5 million was paid in the second quarter of 2013.
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11. COMMITMENTS AND CONTINGENCIES
Litigation – The Company is a party to various legal actions arising in the normal course of business. While the Company does not believe that the ultimate resolution of any such pending actions will have a material effect on its results of operations, financial position, or cash flows, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material impact in the period in which the ruling occurs.
During 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 believes that no liability will be incurred on this litigation, that it has meritorious defenses and it 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.
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 aggregate product warranty liability is as follows (in thousands):
At | December 28, 2012 | $ | 2,626 | |
Additions to warranty reserve | 860 | |||
Warranty claims paid | (52) | |||
At | June 28, 2013 | $ | 3,434 |
Contractual Obligations – Contractual obligations are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum obligations; fixed or minimum price provisions; and the approximate timing of the transaction. The Company's contractual obligations are normally fulfilled within short time horizons. The Company also enters into blanket orders with vendors that have preferred pricing and terms, however these orders are normally cancelable by us without penalty. As of June 28, 2013, the total contractual obligations of the Company are approximately $26.9 million and will primarily be funded by existing cash and cash equivalents, cash flow 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.
Operating Leases – The Company is a party to various operating lease agreements for buildings, equipment and software. Estimated future operating lease expense is as follows (in thousands):
Remainder of | 2013 | $ | 2,656 | |
2014 | 5,067 | |||
2015 | 4,447 | |||
2016 | 3,815 | |||
2017 | 1,425 | |||
Thereafter | 1,933 | |||
Total estimated operating lease expense | $ | 19,343 |
Foreign Currency Contracts - The Company enters 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):
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Reduction in Cost of Sales | $ | (390) | $ | (97) | $ | (562) | $ | (19) | ||||
Ineffective portion of change in fair value | 0 | 0 | 0 | 0 |
Instrument | Type of Hedge | Aggregate Notional Amount | Start Date | End Date | $/Peso | Fair Value | Balance Sheet Location | ||||||||
FX Contract | Cash flow | $ | 3,000 | Jan-13 | Dec-13 | 0.0727 | $ | 152 | Current Assets | ||||||
FX Contract | Cash flow | 3,000 | Jan-13 | Dec-13 | 0.0693 | 310 | Current Assets |
Self-Insured Medical Plan – The Company self-funds the medical insurance coverage provided to its U.S. based employees. The risk to the Company is being limited through the use of stop loss insurance, which 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 June 28, 2013, the Company has $1.7 million accrued related to the self-insurance of its medical plan, which is recorded in Accrued Expenses in the Condensed Consolidated Balance Sheet, and is primarily based upon claim history.
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13. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated Other Comprehensive Income for the quarter and year to date periods are as follows (in thousands): | ||||||||||||||||||
Three Month Period | Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | ||||||||||||
At | March 29, 2013 | $ | (365) | $ | 533 | $ | 10,368 | $ | 10,536 | $ | 214 | $ | 10,750 | |||||
Unrealized loss on cash flow hedges | - | (107) | - | (107) | 37 | (70) | ||||||||||||
Realized gain on foreign currency hedges | - | (390) | - | (390) | 137 | (253) | ||||||||||||
Realized loss on interest rate swap hedges | - | 142 | - | 142 | (50) | 92 | ||||||||||||
Foreign currency translation gain | - | - | 631 | 631 | 0 | 631 | ||||||||||||
At | June 28, 2013 | $ | (365) | $ | 178 | $ | 10,999 | $ | 10,812 | $ | 338 | $ | 11,150 |
Six Month Period | Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | ||||||||||||
At | December 28, 2012 | $ | (962) | $ | 120 | $ | 13,431 | $ | 12,589 | $ | 358 | $ | 12,947 | |||||
Unrealized gain on cash flow hedges | - | 421 | - | 421 | (147) | 274 | ||||||||||||
Realized gain on foreign currency hedges | - | (562) | - | (562) | 197 | (365) | ||||||||||||
Realized loss on interest rate swap hedges | - | 199 | - | 199 | (70) | 129 | ||||||||||||
Net defined benefit plan gain (Note 7) | 597 | - | - | 597 | - | 597 | ||||||||||||
Foreign currency translation loss | - | - | (2,432) | (2,432) | - | (2,432) | ||||||||||||
At | June 28, 2013 | $ | (365) | $ | 178 | $ | 10,999 | $ | 10,812 | $ | 338 | $ | 11,150 |
The realized (gain) loss relating to the Company's foreign currency and interest rate swap hedges was reclassified from Accumulated Other Comprehensive Income and included in Cost of Sales and Interest Expense, respectively, in the Condensed Consolidated Statement of Operations.
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14. 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 receives 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 $0.5 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 June 28, 2013 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. The fair value of the Company's interest rate swap will be realized as Interest Expense as interest on the Company's Credit Facility is accrued.
Accrued contingent consideration – 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 milestones.
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's accrued contingent consideration is categorized in Level 3 of the fair value hierarchy. Changes in accrued contingent consideration were as follows (in thousands):
At | December 28, 2012 | $ | 1,530 | |
Fair value adjustments | 110 | |||
At | June 28, 2013 | $ | 1,640 |
The recurring Level 3 fair value measurements of the Company's contingent consideration liability include the following significant unobservable inputs (dollars in thousands):
Fair | |||||||||
Contingent | Value at | ||||||||
Consideration | June 28, | Valuation | Unobservable | ||||||
Liability | 2013 | Technique | Inputs | ||||||
Financial milestones | $ | 920 | Discounted cash flow | Discount rate | 12% | ||||
Projected year | |||||||||
of payment | 2014 | ||||||||
Development milestones | 720 | Discounted cash flow | Discount rate | 20% | |||||
Projected year | |||||||||
of payment | 2015 |
The following table provides information regarding assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheet (in thousands): | |||||||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
June 28, | Assets | Inputs | Inputs | ||||||||||
Description | 2013 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Foreign currency contracts (Note 11) | $ | 462 | $ | 0 | $ | 462 | $ | 0 | |||||
Liabilities | |||||||||||||
Interest rate swap (Note 6) | $ | 284 | $ | 0 | $ | 284 | $ | 0 | |||||
Accrued contingent consideration | 1,640 | 0 | 0 | 1,640 |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Fair value standards also apply to certain nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis. A summary of the valuation methodologies for the Company's assets and liabilities measured on a nonrecurring basis is as follows:
Long-lived assets - The Company reviews the carrying amount of its long-lived assets to be held and used, other than goodwill and indefinite-lived intangible assets, for potential impairment whenever certain indicators are present such as; a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which the 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 the long-lived asset or 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 of the asset; 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 the long-lived asset or asset group; or a current expectation that it is more likely than not the 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.
If an indicator is present, potential recoverability is measured by comparing the carrying amount of the long-lived 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, which is determined by using independent appraisals or discounted cash flow models. The discounted cash flow model requires inputs such as a risk-adjusted discount rate, terminal values, operating budgets, long-term strategic plans and remaining useful lives of the asset or asset group. If the carrying value of the long-lived asset or asset group exceeds the fair value, the carrying value is written down to the fair value in the period identified. The Company did not record any impairment charge related to its long-lived assets, during the first six months of 2013 and 2012.
Goodwill and indefinite-lived intangible assets – The Company assess the impairment of goodwill and other indefinite-lived intangible assets on the last day of each fiscal year, or more frequently if certain indicators are present as described above under long-lived assets. The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts. 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 flow models and market multiples. The discounted cash flow model requires inputs such as a risk-adjusted discount rate, terminal values, operating budgets, and long-term strategic plans. The fair value from the discounted cash flow model is then combined, based on certain weightings, with market multiples in order to determine the fair value of the reporting unit. These market multiples include revenue multiples and multiples of earnings before interest, taxes, depreciation and amortization.
Indefinite-lived intangible assets are assessed for impairment by comparing the fair value of the intangible asset to its carrying value. If the carrying value of the indefinite-lived intangible asset exceeds the fair value, the carrying value is written down to the fair value in the period identified. The fair value of indefinite-lived intangible assets is determined by using a discounted cash flow model. The discounted cash flow model requires inputs such as a risk-adjusted discount rate, royalty rates, operating budgets, and long-term strategic plans.
The Company did not record any impairment charge related to its goodwill or indefinite-lived intangible assets, during the first six months of 2013 and 2012. Note 5 “Intangible Assets” contains additional information on the Company's intangible assets.
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 and 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 (Income) Expense, Net, unless separately stated. The aggregate recorded amount of cost and equity method investments at June 28, 2013 and December 28, 2012 was $9.7 million and $9.1 million, respectively. The Company recorded losses related to its cost and equity method investments of $0.6 million and $0 during the first six months of 2013 and 2012, respectively.
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15. 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 Greatbatch Medical and QiG Group 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 individual components for implantable medical devices as well as value-added assembly and design engineering services for its component products. Examples of these components include batteries, capacitors, filtered and un-filtered feedthroughs, machined components, enclosures, leads, introducers, catheters, as well as orthopaedic implants, instruments and cases and trays.
Electrochem is an industry leader in designing and manufacturing total power solutions for critical applications with market-leading OEMs, largely in the portable medical and energy space. Electrochem offers its customers components, consultation, design, development and testing for medical device applications, in high-value markets, including those that support the transition of delivery of health care from clinical to outpatient and home settings, as well as those that enhance the quality of life for an aging population. Examples of these devices include powered surgical tools, automated external defibrillators, portable ultrasound devices, portable oxygen concentrators, and ventilators, among others. Electrochem provides cell and battery pack configurations for rechargeable and non-rechargeable battery power systems, charging and docking stations, and power supplies, for devices where failure is not an option.
As discussed further in Note 9 “Other Operating Expenses, Net,” in June 2013, the Company initiated a plan to realign its operating structure in order to optimize its continued focus on profitable growth. As part of this initiative, the sales & marketing and operations groups of its Implantable Medical and Electrochem segments were combined into one sales & marketing and one operations group serving the entire Company. As a result of this realignment initiative, which includes changing the management and reporting structure, the Company is re-evaluating its operating and reportable segments.
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 headquarters 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 Condensed Consolidated Financial Statements follows. Sales by geographic area are presented by allocating sales from external customers based on the location to which products are shipped (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
Sales: | 2013 | 2012 | 2013 | 2012 | ||||||||||
Implantable Medical | ||||||||||||||
Cardiac/Neuromodulation | $ | 84,014 | $ | 80,025 | $ | 155,181 | $ | 155,160 | ||||||
Orthopaedic | 32,341 | 32,860 | 61,964 | 63,906 | ||||||||||
Vascular | 12,249 | 12,481 | 22,873 | 24,117 | ||||||||||
Total Implantable Medical | 128,604 | 125,366 | 240,018 | 243,183 | ||||||||||
Electrochem | ||||||||||||||
Portable Medical | 22,167 | 20,407 | 41,056 | 39,127 | ||||||||||
Energy | 13,107 | 13,201 | 25,400 | 27,970 | ||||||||||
Other | 7,453 | 7,574 | 13,122 | 15,371 | ||||||||||
Total Electrochem | 42,727 | 41,182 | 79,578 | 82,468 | ||||||||||
Total sales | $ | 171,331 | $ | 166,548 | $ | 319,596 | $ | 325,651 |
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Segment income from operations: | ||||||||||||||
Implantable Medical | $ | 16,640 | $ | 11,396 | $ | 30,983 | $ | 21,508 | ||||||
Electrochem | 5,828 | 6,199 | 10,644 | 10,670 | ||||||||||
Total segment income from operations | 22,468 | 17,595 | 41,627 | 32,178 | ||||||||||
Unallocated operating expenses | (5,333) | (6,504) | (10,153) | (9,889) | ||||||||||
Operating income as reported | 17,135 | 11,091 | 31,474 | 22,289 | ||||||||||
Unallocated other expense | (2,124) | (4,221) | (9,397) | (9,300) | ||||||||||
Income before provision for income taxes | $ | 15,011 | $ | 6,870 | $ | 22,077 | $ | 12,989 |
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Sales by geographic area: | ||||||||||||||
United States | $ | 89,234 | $ | 84,378 | $ | 160,568 | $ | 166,784 | ||||||
Non-Domestic locations: | ||||||||||||||
Puerto Rico | 27,158 | 26,681 | 55,656 | 50,221 | ||||||||||
Belgium | 17,277 | 15,053 | 34,948 | 30,391 | ||||||||||
Rest of world | 37,662 | 40,436 | 68,424 | 78,255 | ||||||||||
Total sales | $ | 171,331 | $ | 166,548 | $ | 319,596 | $ | 325,651 |
Three customers accounted for a significant portion of the Company’s sales as follows: | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Customer A | 19% | 18% | 19% | 19% | ||||||||||
Customer B | 16% | 15% | 17% | 14% | ||||||||||
Customer C | 12% | 10% | 14% | 10% | ||||||||||
Total | 47% | 43% | 50% | 43% |
Long-lived tangible assets by geographic area are as follows (in thousands): | ||||||
As of | ||||||
June 28, | December 28, | |||||
2013 | 2012 | |||||
United States | $ | 119,292 | $ | 123,104 | ||
Rest of world | 29,922 | 27,789 | ||||
Total | $ | 149,214 | $ | 150,893 |
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16. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”), Securities and Exchange Commission, Emerging Issues Task Force, American Institute of Certified Public Accountants or other authoritative accounting bodies to determine the potential impact they may have on the Company's Condensed 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 Condensed 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 added new disclosure requirements regarding 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 gave 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 was effective prospectively for annual and interim reporting periods beginning after December 15, 2012. This ASU was adopted during the first quarter of 2013 and did not have a material impact on the Company's Condensed Consolidated Financial Statements as it only changed 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 simplified the guidance for testing the decline in the realizable value (impairment) of indefinite-lived intangible assets other than goodwill. The amendment allowed 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 were effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. This ASU did not have a material impact on the Company's Condensed Consolidated Financial Statements as it only impacted the timing of when the Company was required to perform the two-step impairment test 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 expanded disclosures about trading in financial instruments and related derivatives, and 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. This ASU did not have a material impact on the Company's Condensed Consolidated Financial Statements as it only changes the disclosures surrounding the Company's offsetting assets and liabilities.
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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information (Accounting Standards Codification (“ASC”) 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of Greatbatch, Inc. and its wholly-owned subsidiary, Greatbatch Ltd. (collectively “Greatbatch” or the “Company”), for the periods presented.
The December 28, 2012 condensed consolidated balance sheet data was derived from audited consolidated financial statements but does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 28, 2012.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, sales, expenses, and related disclosures at the date of the financial statements and during the reporting period. Actual results could differ materially from these estimates.
The Company utilizes a fifty-two, fifty-three week fiscal year ending on the Friday nearest December 31st. The second quarter and year-to-date periods of 2013 and 2012 each contained 13 weeks and 26 weeks, respectively, and ended on June 28, and June 29, respectively.
The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to several factors, including changes in the mix of the pre-tax income and the jurisdictions to which it relates, changes in tax laws and foreign tax holidays, business reorganizations, settlements with taxing authorities and foreign currency fluctuations.
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 milestones.
The Company reviews the carrying amount of its long-lived assets to be held and used, other than goodwill and indefinite-lived intangible assets, for potential impairment whenever certain indicators are present such as; a significant decrease in the market price of the asset or asset group; a significant change in the extent or manner in which the 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 the long-lived asset or 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 of the asset; 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 the long-lived asset or asset group; or a current expectation that it is more likely than not the 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.
If an indicator is present, potential recoverability is measured by comparing the carrying amount of the long-lived 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
The Company assess the impairment of goodwill and other indefinite-lived intangible assets on the last day of each fiscal year, or more frequently if certain indicators are present as described above under long-lived assets. The Company assesses goodwill for impairment by comparing the fair value of its reporting units to their carrying amounts. 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.
Indefinite-lived intangible assets are assessed for impairment by comparing the fair value of the intangible asset to its carrying value. If the carrying value of the indefinite-lived intangible asset exceeds the fair value, the carrying value is written down to the fair value in the period identified.
The Company holds investments in equity and other securities that are accounted for as either cost or equity method investments and 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.
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Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Sales | $ | 171,331 | $ | 166,548 | $ | 319,596 | $ | 326,091 | ||||||
Net income | 9,752 | 3,851 | 15,415 | 8,144 | ||||||||||
Earnings per share: | ||||||||||||||
Basic | $ | 0.41 | $ | 0.16 | $ | 0.65 | $ | 0.35 | ||||||
Diluted | $ | 0.39 | $ | 0.16 | $ | 0.62 | $ | 0.34 |
|
Six Months Ended | ||||||||
June 28, | June 29, | |||||||
(in thousands) | 2013 | 2012 | ||||||
Noncash investing and financing activities: | ||||||||
Common stock contributed to 401(k) Plan | $ | 2,477 | $ | 4,793 | ||||
Property, plant and equipment purchases included | ||||||||
in accounts payable | 825 | 5,624 | ||||||
Cash paid during the period for: | ||||||||
Interest | $ | 2,926 | $ | 2,909 | ||||
Income taxes | 18,895 | 983 | ||||||
Acquisition of noncash assets | $ | - | $ | 14,379 | ||||
Liabilities assumed | 0 | 1,226 |
|
Inventories are comprised of the following (in thousands): | |||||||
As of | |||||||
June 28, | December 28, | ||||||
2013 | 2012 | ||||||
Raw materials | $ | 68,016 | $ | 58,204 | |||
Work-in-process | 35,162 | 30,022 | |||||
Finished goods | 18,984 | 18,386 | |||||
Total | $ | 122,162 | $ | 106,612 |
|
Amortizing intangible assets are comprised of the following (in thousands): | |||||||||||||
At | June 28, 2013 | Gross Carrying Amount | Accumulated Amortization | Foreign Currency Translation | Net Carrying Amount | ||||||||
Technology and patents | $ | 95,576 | $ | (65,470) | $ | 1,701 | $ | 31,807 | |||||
Customer lists | 68,257 | (21,797) | 838 | 47,298 | |||||||||
Other | 4,434 | (4,370) | 804 | 868 | |||||||||
Total amortizing intangible assets | $ | 168,267 | $ | (91,637) | $ | 3,343 | $ | 79,973 | |||||
At | December 28, 2012 | ||||||||||||
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 |
Aggregate intangible asset amortization expense is comprised of the following (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Cost of sales | $ | 1,759 | $ | 1,900 | $ | 3,539 | $ | 3,795 | ||||
Selling, general and administrative expenses | 1,445 | 1,579 | 2,897 | 3,140 | ||||||||
Research, development and engineering costs, net | 136 | 137 | 272 | 273 | ||||||||
Total intangible asset amortization expense | $ | 3,340 | $ | 3,616 | $ | 6,708 | $ | 7,208 |
Estimated future intangible asset amortization expense based on the current carrying value is as follows (in thousands): | |||||
Estimated | |||||
Amortization | |||||
Expense | |||||
Remainder of | 2013 | $ | 6,435 | ||
2014 | 13,372 | ||||
2015 | 12,320 | ||||
2016 | 10,026 | ||||
2017 | 8,903 | ||||
Thereafter | 28,917 | ||||
Total estimated amortization expense | $ | 79,973 |
Indefinite-lived intangible assets are comprised of the following (in thousands): | ||||||||||
Trademarks and Tradenames | IPR&D | Total | ||||||||
At | June 28, 2013 | $ | 20,288 | $ | 540 | $ | 20,828 | |||
The change in goodwill is as follows (in thousands): | ||||||||||
Implantable Medical | Electrochem | Total | ||||||||
At | December 28, 2012 | $ | 307,201 | $ | 41,834 | $ | 349,035 | |||
Goodwill disposed (Note 9) | (2,771) | 0 | (2,771) | |||||||
Foreign currency translation | (1,355) | 0 | (1,355) | |||||||
At | June 28, 2013 | $ | 303,075 | $ | 41,834 | $ | 344,909 |
|
Long-term debt is comprised of the following (in thousands): | |||||||
As of | |||||||
June 28, | December 28, | ||||||
2013 | 2012 | ||||||
Revolving line of credit | $ | 237,000 | $ | 33,000 | |||
2.25% convertible subordinated notes | - | 197,782 | |||||
Unamortized discount | - | (5,368) | |||||
Total long-term debt | $ | 237,000 | $ | 225,414 |
Current | Fair | ||||||||||||||||||
Pay | Receive | Value | Balance | ||||||||||||||||
Type of | Notional | Start | End | Fixed | Floating | June 28, | Sheet | ||||||||||||
Instrument | Hedge | Amount | Date | Date | Rate | Rate | 2013 | Location | |||||||||||
Interest rate swap | Cash flow | $ | 150,000 | Feb-13 | Feb-16 | 0.573% | 0.192% | $ | (284) | Other Long-Term Liabilities |
The contractual interest and discount amortization for CSN were as follows (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Contractual interest | $ | - | $ | 1,113 | $ | 634 | $ | 2,225 | ||||
Discount amortization | - | 2,735 | 5,368 | 5,424 |
At | December 28, 2012 | $ | 2,056 | |
Amortization during the period | (520) | |||
At | June 28, 2013 | $ | 1,536 |
|
The change in net defined benefit plan liability is as follows (in thousands): | |||||
At | December 28, 2012 | $ | 3,946 | ||
Service cost | 151 | ||||
Interest cost | 103 | ||||
Curtailment | (1,581) | ||||
Actuarial gain | (171) | ||||
Benefit payments | (109) | ||||
Foreign currency translation | (67) | ||||
At | June 28, 2013 | $ | 2,272 |
Amounts recognized in Accumulated Other Comprehensive Income are as follows (in thousands): | ||||||||||
Six Months Ended | ||||||||||
June 28, 2013 | ||||||||||
Net gain occurring during the period | $ | (171) | ||||||||
Amortization of losses | (581) | |||||||||
Prior service cost | 155 | |||||||||
Pre-tax adjustment | (597) | |||||||||
Taxes | - | |||||||||
Net gain | $ | (597) |
Net defined benefit (income) cost is comprised of the following (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Service cost | $ | 69 | $ | 278 | $ | 151 | $ | 563 | ||||
Interest cost | 40 | 103 | 103 | 207 | ||||||||
Curtailment gain (Other Operating Expenses, Net) | - | - | (1,150) | - | ||||||||
Amortization of net loss | - | 31 | - | 62 | ||||||||
Expected return on plan assets | - | (107) | - | (215) | ||||||||
Net defined benefit (income) cost | $ | 109 | $ | 305 | $ | (896) | $ | 617 |
|
The components and classification of stock-based compensation expense were as follows (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Stock options | $ | 705 | $ | 689 | $ | 1,410 | $ | 1,367 | ||||
Restricted stock and units | 1,482 | 1,527 | 2,945 | 3,036 | ||||||||
401(k) stock contribution | 2,729 | 1,130 | 2,992 | 1,130 | ||||||||
Total stock-based compensation expense | $ | 4,916 | $ | 3,346 | $ | 7,347 | $ | 5,533 | ||||
Cost of sales | $ | 1,707 | $ | 1,104 | $ | 2,129 | $ | 1,367 | ||||
Selling, general and administrative | 2,587 | 1,909 | 4,454 | 3,726 | ||||||||
Research, development and engineering | 622 | 333 | 764 | 440 | ||||||||
Total stock-based compensation expense | $ | 4,916 | $ | 3,346 | $ | 7,347 | $ | 5,533 |
The weighted average fair value and assumptions used to value options granted are as follows: | ||||||
Six Months Ended | ||||||
June 28, | June 29, | |||||
2013 | 2012 | |||||
Weighted average fair value | $ | 8.38 | $ | 8.19 | ||
Risk-free interest rate | 0.73% | 0.83% | ||||
Expected volatility | 39% | 40% | ||||
Expected life (in years) | 5 | 5 | ||||
Expected dividend yield | 0% | 0% |
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 | December 28, 2012 | 1,775,847 | $ | 23.17 | |||||||||||
Granted | 372,676 | 23.33 | |||||||||||||
Exercised | (92,549) | 22.99 | |||||||||||||
Forfeited or expired | (41,887) | 24.02 | |||||||||||||
Outstanding at | June 28, 2013 | 2,014,087 | $ | 23.19 | 6.3 | $ | 19.6 | ||||||||
Exercisable at | June 28, 2013 | 1,409,348 | $ | 23.26 | 5.1 | $ | 13.7 |
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 | December 28, 2012 | 284,925 | $ | 23.26 | |||||||||||
Granted | 0 | 0 | |||||||||||||
Exercised | (19,489) | 23.12 | |||||||||||||
Forfeited or expired | - | - | |||||||||||||
Outstanding at | June 28, 2013 | 265,436 | $ | 23.27 | 3.8 | $ | 2.5 | ||||||||
Exercisable at | June 28, 2013 | 265,436 | $ | 23.27 | 3.8 | $ | 2.5 |
The following table summarizes time-vested restricted stock and unit activity: | |||||||||
Time-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | December 28, 2012 | 80,269 | $ | 23.48 | |||||
Granted | 61,202 | 25.56 | |||||||
Vested | (24,562) | 22.27 | |||||||
Forfeited | (3,335) | 21.11 | |||||||
Nonvested at | June 28, 2013 | 113,574 | $ | 24.93 |
The following table summarizes performance-vested restricted stock and unit activity: | |||||||||
Performance-Vested Activity | Weighted Average Fair Value | ||||||||
Nonvested at | December 28, 2012 | 782,446 | $ | 16.02 | |||||
Granted | 318,169 | 15.86 | |||||||
Vested | (49,139) | 14.68 | |||||||
Forfeited | (220,909) | 15.22 | |||||||
Nonvested at | June 28, 2013 | 830,567 | $ | 16.38 |
|
Other Operating Expenses, Net is comprised of the following (in thousands): | ||||||||||||
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
2013 operating unit realignment | $ | 852 | $ | - | $ | 852 | $ | - | ||||
Orthopaedic facility optimization | 2,667 | 1,978 | 5,303 | 2,322 | ||||||||
Medical device facility optimization | 125 | 565 | 230 | 894 | ||||||||
ERP system upgrade | 64 | 1,912 | 385 | 2,807 | ||||||||
Acquisition and integration costs | 71 | 112 | 182 | 1,055 | ||||||||
Asset dispositions, severance and other | 43 | 1,356 | 108 | 1,590 | ||||||||
$ | 3,822 | $ | 5,923 | $ | 7,060 | $ | 8,668 |
The change in accrued liabilities related to the 2013 operating unit realignment is as follows (in thousands): | ||||||||||||||||
Severance and Retention | Other | Total | ||||||||||||||
At | December 28, 2012 | $ | 0 | $ | 0 | $ | 0 | |||||||||
Restructuring charges | 402 | 450 | 852 | |||||||||||||
Cash payments | (5) | 0 | (5) | |||||||||||||
At | June 28, 2013 | $ | 397 | $ | 450 | $ | 847 |
The change in accrued liabilities related to the orthopaedic facility optimization is as follows (in thousands): | |||||||||||||||||||
Severance and Retention | Accelerated Depreciation/Asset Write-offs | Other | Total | ||||||||||||||||
At | December 28, 2012 | $ | 9,567 | $ | - | $ | - | $ | 9,567 | ||||||||||
Restructuring charges | 482 | 48 | 4,773 | 5,303 | |||||||||||||||
Write-offs | - | (48) | - | (48) | |||||||||||||||
Liability assumed by third party | (2,398) | - | - | (2,398) | |||||||||||||||
Cash payments | (7,074) | - | (3,859) | (10,933) | |||||||||||||||
At | June 28, 2013 | $ | 577 | $ | - | $ | 914 | $ | 1,491 |
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 28, 2012 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Restructuring charges | 19 | 2 | 209 | 230 | |||||||||||||||
Cash payments | (19) | (2) | (209) | (230) | |||||||||||||||
At | June 28, 2013 | $ | 0 | $ | 0 | $ | 0 | $ | 0 |
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 28, 2012 | $ | 169 | $ | 0 | $ | 169 | ||||||
Charges | 385 | - | 385 | ||||||||||
Cash payments | (538) | 0 | (538) | ||||||||||
At | June 28, 2013 | $ | 16 | $ | 0 | $ | 16 |
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At | December 28, 2012 | $ | 2,626 | |
Additions to warranty reserve | 860 | |||
Warranty claims paid | (52) | |||
At | June 28, 2013 | $ | 3,434 |
Remainder of | 2013 | $ | 2,656 | |
2014 | 5,067 | |||
2015 | 4,447 | |||
2016 | 3,815 | |||
2017 | 1,425 | |||
Thereafter | 1,933 | |||
Total estimated operating lease expense | $ | 19,343 |
Three Months Ended | Six Months Ended | |||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||
2013 | 2012 | 2013 | 2012 | |||||||||
Reduction in Cost of Sales | $ | (390) | $ | (97) | $ | (562) | $ | (19) | ||||
Ineffective portion of change in fair value | 0 | 0 | 0 | 0 |
Instrument | Type of Hedge | Aggregate Notional Amount | Start Date | End Date | $/Peso | Fair Value | Balance Sheet Location | ||||||||
FX Contract | Cash flow | $ | 3,000 | Jan-13 | Dec-13 | 0.0727 | $ | 152 | Current Assets | ||||||
FX Contract | Cash flow | 3,000 | Jan-13 | Dec-13 | 0.0693 | 310 | Current Assets |
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Accumulated Other Comprehensive Income for the quarter and year to date periods are as follows (in thousands): | ||||||||||||||||||
Three Month Period | Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | ||||||||||||
At | March 29, 2013 | $ | (365) | $ | 533 | $ | 10,368 | $ | 10,536 | $ | 214 | $ | 10,750 | |||||
Unrealized loss on cash flow hedges | - | (107) | - | (107) | 37 | (70) | ||||||||||||
Realized gain on foreign currency hedges | - | (390) | - | (390) | 137 | (253) | ||||||||||||
Realized loss on interest rate swap hedges | - | 142 | - | 142 | (50) | 92 | ||||||||||||
Foreign currency translation gain | - | - | 631 | 631 | 0 | 631 | ||||||||||||
At | June 28, 2013 | $ | (365) | $ | 178 | $ | 10,999 | $ | 10,812 | $ | 338 | $ | 11,150 |
Six Month Period | Defined Benefit Plan Liability | Cash Flow Hedges | Foreign Currency Translation Adjustment | Total Pre-Tax Amount | Tax | Net-of-Tax Amount | ||||||||||||
At | December 28, 2012 | $ | (962) | $ | 120 | $ | 13,431 | $ | 12,589 | $ | 358 | $ | 12,947 | |||||
Unrealized gain on cash flow hedges | - | 421 | - | 421 | (147) | 274 | ||||||||||||
Realized gain on foreign currency hedges | - | (562) | - | (562) | 197 | (365) | ||||||||||||
Realized loss on interest rate swap hedges | - | 199 | - | 199 | (70) | 129 | ||||||||||||
Net defined benefit plan gain (Note 7) | 597 | - | - | 597 | - | 597 | ||||||||||||
Foreign currency translation loss | - | - | (2,432) | (2,432) | - | (2,432) | ||||||||||||
At | June 28, 2013 | $ | (365) | $ | 178 | $ | 10,999 | $ | 10,812 | $ | 338 | $ | 11,150 |
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At | December 28, 2012 | $ | 1,530 | |
Fair value adjustments | 110 | |||
At | June 28, 2013 | $ | 1,640 |
Fair | |||||||||
Contingent | Value at | ||||||||
Consideration | June 28, | Valuation | Unobservable | ||||||
Liability | 2013 | Technique | Inputs | ||||||
Financial milestones | $ | 920 | Discounted cash flow | Discount rate | 12% | ||||
Projected year | |||||||||
of payment | 2014 | ||||||||
Development milestones | 720 | Discounted cash flow | Discount rate | 20% | |||||
Projected year | |||||||||
of payment | 2015 |
The following table provides information regarding assets and liabilities recorded at fair value on a recurring basis in the Condensed Consolidated Balance Sheet (in thousands): | |||||||||||||
Fair Value Measurements Using | |||||||||||||
Quoted | |||||||||||||
Prices in | Significant | ||||||||||||
Active Markets | Other | Significant | |||||||||||
At | for Identical | Observable | Unobservable | ||||||||||
June 28, | Assets | Inputs | Inputs | ||||||||||
Description | 2013 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Foreign currency contracts (Note 11) | $ | 462 | $ | 0 | $ | 462 | $ | 0 | |||||
Liabilities | |||||||||||||
Interest rate swap (Note 6) | $ | 284 | $ | 0 | $ | 284 | $ | 0 | |||||
Accrued contingent consideration | 1,640 | 0 | 0 | 1,640 |
|
Long-lived tangible assets by geographic area are as follows (in thousands): | ||||||
As of | ||||||
June 28, | December 28, | |||||
2013 | 2012 | |||||
United States | $ | 119,292 | $ | 123,104 | ||
Rest of world | 29,922 | 27,789 | ||||
Total | $ | 149,214 | $ | 150,893 |
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Sales by geographic area: | ||||||||||||||
United States | $ | 89,234 | $ | 84,378 | $ | 160,568 | $ | 166,784 | ||||||
Non-Domestic locations: | ||||||||||||||
Puerto Rico | 27,158 | 26,681 | 55,656 | 50,221 | ||||||||||
Belgium | 17,277 | 15,053 | 34,948 | 30,391 | ||||||||||
Rest of world | 37,662 | 40,436 | 68,424 | 78,255 | ||||||||||
Total sales | $ | 171,331 | $ | 166,548 | $ | 319,596 | $ | 325,651 |
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
Sales: | 2013 | 2012 | 2013 | 2012 | ||||||||||
Implantable Medical | ||||||||||||||
Cardiac/Neuromodulation | $ | 84,014 | $ | 80,025 | $ | 155,181 | $ | 155,160 | ||||||
Orthopaedic | 32,341 | 32,860 | 61,964 | 63,906 | ||||||||||
Vascular | 12,249 | 12,481 | 22,873 | 24,117 | ||||||||||
Total Implantable Medical | 128,604 | 125,366 | 240,018 | 243,183 | ||||||||||
Electrochem | ||||||||||||||
Portable Medical | 22,167 | 20,407 | 41,056 | 39,127 | ||||||||||
Energy | 13,107 | 13,201 | 25,400 | 27,970 | ||||||||||
Other | 7,453 | 7,574 | 13,122 | 15,371 | ||||||||||
Total Electrochem | 42,727 | 41,182 | 79,578 | 82,468 | ||||||||||
Total sales | $ | 171,331 | $ | 166,548 | $ | 319,596 | $ | 325,651 |
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Segment income from operations: | ||||||||||||||
Implantable Medical | $ | 16,640 | $ | 11,396 | $ | 30,983 | $ | 21,508 | ||||||
Electrochem | 5,828 | 6,199 | 10,644 | 10,670 | ||||||||||
Total segment income from operations | 22,468 | 17,595 | 41,627 | 32,178 | ||||||||||
Unallocated operating expenses | (5,333) | (6,504) | (10,153) | (9,889) | ||||||||||
Operating income as reported | 17,135 | 11,091 | 31,474 | 22,289 | ||||||||||
Unallocated other expense | (2,124) | (4,221) | (9,397) | (9,300) | ||||||||||
Income before provision for income taxes | $ | 15,011 | $ | 6,870 | $ | 22,077 | $ | 12,989 |
Three customers accounted for a significant portion of the Company’s sales as follows: | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 28, | June 29, | June 28, | June 29, | |||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||
Customer A | 19% | 18% | 19% | 19% | ||||||||||
Customer B | 16% | 15% | 17% | 14% | ||||||||||
Customer C | 12% | 10% | 14% | 10% | ||||||||||
Total | 47% | 43% | 50% | 43% |
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