Full Press Release Details
LAKE REGION MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
| October 3, 2015 | January 3, 2015 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 52,362 | $ | 44,191 | ||||
| Accounts receivable, net of allowances of $5,037 and $5,119 as of October 3, 2015 and January 3, 2015, respectively | 87,876 | 78,078 | ||||||
| Inventory | 97,816 | 89,191 | ||||||
| Deferred income taxes | 4,407 | 4,404 | ||||||
| Prepaid expenses and other current assets | 9,014 | 6,192 | ||||||
| Total current assets | 251,475 | 222,056 | ||||||
| Property, plant and equipment, net | 184,353 | 186,637 | ||||||
| Goodwill | 711,681 | 719,842 | ||||||
| Other intangible assets, net | 173,565 | 193,782 | ||||||
| Deferred financing costs and other assets, net | 20,784 | 23,443 | ||||||
| Total assets | $ | 1,341,858 | $ | 1,345,760 | ||||
| Liabilities and Stockholders Equity | ||||||||
| Current liabilities: | ||||||||
| Current portion of long-term debt | $ | 8,350 | $ | 8,350 | ||||
| Accounts payable | 30,037 | 27,531 | ||||||
| Accrued payroll and benefits | 25,336 | 20,865 | ||||||
| Derivative liabilities | 8,836 | 3,253 | ||||||
| Accrued interest | 2,988 | 3,460 | ||||||
| Customer deposits | 2,227 | 5,238 | ||||||
| Accrued expenses and other current liabilities | 26,364 | 23,356 | ||||||
| Total current liabilities | 104,138 | 92,053 | ||||||
| Long-term debt | 1,034,125 | 1,040,388 | ||||||
| Deferred income taxes | 38,802 | 38,936 | ||||||
| Other liabilities | 9,802 | 9,480 | ||||||
| Total liabilities | 1,186,867 | 1,180,857 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders equity: | ||||||||
| Preferred stock, par value $0.01 per share, 50,000 shares authorized; no shares outstanding | ||||||||
| Common stock, par value $0.01 per share, 200,000 shares authorized; 156,053 and 155,898 shares issued and outstanding at October 3, 2015 and January 3, 2015, respectively | 1,561 | 1,559 | ||||||
| Additional paid-in capital | 717,339 | 715,786 | ||||||
| Accumulated other comprehensive loss | (60,957 | ) | (41,071 | ) | ||||
| Accumulated deficit | (502,952 | ) | (511,371 | ) | ||||
| Total stockholders equity | 154,991 | 164,903 | ||||||
| Total liabilities and stockholders equity | $ | 1,341,858 | $ | 1,345,760 |
See notes to unaudited condensed consolidated financial statements.
LAKE REGION MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Operations
| Nine Months Ended | ||||||||
| October 3, 2015 | September 27, 2014 | |||||||
| Net sales | $ | 606,347 | $ | 549,095 | ||||
| Cost of sales (exclusive of amortization) | 456,440 | 418,586 | ||||||
| Gross profit (exclusive of amortization) | 149,907 | 130,509 | ||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | 62,146 | 61,864 | ||||||
| Research and development expenses | 7,913 | 6,308 | ||||||
| Impairment of trade name | 26,800 | |||||||
| Restructuring expenses | 3,021 | 1,652 | ||||||
| Loss (gain) on disposal of assets | 333 | (16 | ) | |||||
| Amortization of intangible assets | 16,528 | 18,320 | ||||||
| Total operating expenses | 89,941 | 114,928 | ||||||
| Income from operations | 59,966 | 15,581 | ||||||
| Other expense, net: | ||||||||
| Loss on debt extinguishment | (53,422 | ) | ||||||
| Interest expense, net | (44,578 | ) | (47,082 | ) | ||||
| Other expense, net | (3,908 | ) | (282 | ) | ||||
| Total other expense, net | (48,486 | ) | (100,786 | ) | ||||
| Income (loss) before income taxes | 11,480 | (85,205 | ) | |||||
| Provision (benefit) for income taxes | 3,061 | (40,035 | ) | |||||
| Net income (loss) | $ | 8,419 | $ | (45,170 | ) |
See notes to unaudited condensed consolidated financial statements.
LAKE REGION MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)
| Nine Months Ended | ||||||||
| October 3, 2015 | September 27, 2014 | |||||||
| Net income (loss) | $ | 8,419 | $ | (45,170 | ) | |||
| Other comprehensive income (loss), net of income taxes | ||||||||
| Unrealized loss on derivatives | (6,110 | ) | (468 | ) | ||||
| Realized loss on derivatives | 527 | |||||||
| Cumulative translation adjustment | (14,303 | ) | (21,756 | ) | ||||
| Other comprehensive loss, net of income taxes | (19,886 | ) | (22,224 | ) | ||||
| Comprehensive loss | $ | (11,467 | ) | $ | (67,394 | ) |
See notes to unaudited condensed consolidated financial statements.
LAKE REGION MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statement of Stockholders Equity
For the Nine Months Ended October 3, 2015
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total Equity | ||||||||||||||||||||
| Shares | Amount | |||||||||||||||||||||||
| Balance, January 4, 2015 | 155,898 | $ | 1,559 | $ | 715,786 | $ | (41,071 | ) | $ | (511,371 | ) | $ | 164,903 | |||||||||||
| Issuance of shares upon vesting of restricted stock units | 155 | 2 | (2 | ) | ||||||||||||||||||||
| Other comprehensive loss, net | (19,886 | ) | (19,886 | ) | ||||||||||||||||||||
| Share-based compensation and other | 1,555 | 1,555 | ||||||||||||||||||||||
| Net income | 8,419 | 8,419 | ||||||||||||||||||||||
| Balance, October 3, 2015 | 156,053 | $ | 1,561 | $ | 717,339 | $ | (60,957 | ) | $ | (502,952 | ) | $ | 154,991 |
See notes to unaudited condensed consolidated financial statements.
LAKE REGION MEDICAL HOLDINGS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
| Nine Months Ended | ||||||||
| October 3, 2015 | September 27, 2014 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | 8,419 | $ | (45,170 | ) | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities (net of acquisition): | ||||||||
| Depreciation and amortization | 36,394 | 37,057 | ||||||
| Amortization of debt discounts and non-cash interest | 2,482 | 2,491 | ||||||
| Impact of inventory valuation step-up for an acquisition | 6,263 | |||||||
| Impairment of trade name | 26,800 | |||||||
| Loss on debt extinguishment | 53,422 | |||||||
| Loss (gain) on disposal of assets | 333 | (16 | ) | |||||
| Deferred income taxes | 346 | (42,367 | ) | |||||
| Non-cash compensation expense | 2,125 | 1,220 | ||||||
| Changes in operating assets and liabilities (net of effects of an acquisition): | ||||||||
| Accounts receivable | (12,868 | ) | (5,642 | ) | ||||
| Inventory | (9,641 | ) | (9,922 | ) | ||||
| Prepaid expenses and other current assets | (2,743 | ) | 1,572 | |||||
| Accounts payable, accrued expenses and other liabilities | 13,769 | (13,728 | ) | |||||
| Net cash provided by operating activities | 38,616 | 11,980 | ||||||
| Cash flows from investing activities: | ||||||||
| Capital expenditures | (23,129 | ) | (22,178 | ) | ||||
| Proceeds from sale of property and equipment | 144 | 351 | ||||||
| Cash paid for acquisition, net of cash acquired | (303,871 | ) | ||||||
| Net cash used in investing activities | (22,985 | ) | (325,698 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from long-term debt | 1,055,000 | |||||||
| Repayments of long-term debt | (6,262 | ) | (717,093 | ) | ||||
| Other | (441 | ) | ||||||
| Payment of debt prepayment fees | (42,400 | ) | ||||||
| Deferred financing costs | (23,982 | ) | ||||||
| Net cash provided by (used in) financing activities | (6,262 | ) | 271,084 | |||||
| Effect of exchange rate changes | (1,198 | ) | (701 | ) | ||||
| Net increase (decrease) in cash | 8,171 | (43,335 | ) | |||||
| Cash, beginning of period | 44,191 | 72,240 | ||||||
| Cash, end of period | $ | 52,362 | $ | 28,905 | ||||
| Supplemental cash flow information: | ||||||||
| Cash paid for interest | $ | 42,452 | $ | 61,239 | ||||
| Cash paid for income taxes | $ | 2,340 | $ | 11,112 | ||||
| Issuance of common stock in acquisition | $ | $ | 75,000 | |||||
| Property and equipment purchases included in accrued expenses | $ | 2,065 | $ | 1,406 |
See notes to unaudited condensed consolidated financial statements.
LAKE REGION MEDICAL HOLDINGS, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
1. Description of Business and Basis of Presentation
Description of Business
Lake Region Medical Holdings, Inc. ( LRM Holdings ) provides, through its operating subsidiaries, customers in the medical device
industry design and engineering, precision component manufacturing, device assembly and supply chain management services and is a manufacturer of interventional and diagnostic wire-formed medical devices and components specializing in minimally
invasive devices for cardiovascular, endovascular and neurovascular applications for customers worldwide. LRM Holdings has extensive resources focused on providing its customers with reliable, high-quality,
cost-efficient, integrated outsourced solutions. Sales are focused primarily in the United States of America ( U.S. ) and Western European markets. Headquartered in Wilmington, Massachusetts, LRM
Holdings has manufacturing facilities in North America, Europe, and Asia and operates in two segments: Advanced Surgical ( AS Segment ) and Cardio & Vascular ( C&V Segment ).
As discussed in Note 3, on March 12, 2014, LRM Holdings, along with its subsidiaries, completed the acquisition of Lake Region
Manufacturing, Inc. ( Lake Region ), a Minnesota entity doing business as Lake Region Medical (the Lake Region Medical Acquisition ). In September 2014, all LRM Holding subsidiaries commenced doing business as Lake Region
Basis of Presentation
LRM Holdings was formed by Accellent Holdings Corp. ( Accellent Holdings ) in February 2014 as a wholly owned subsidiary for the
purpose of consummating the Lake Region Medical Acquisition. In connection with the Lake Region Medical Acquisition, all of the outstanding voting stock of Accellent Holdings was exchanged on a 1:1 basis for voting stock of LRM Holdings and LRM
Holdings issued approximately 18% of its voting stock to former stockholders of Lake Region Medical as further discussed in Note 3. The former stockholders of Accellent Holdings controlled 100% of Accellent Holdings immediately prior to the Lake
Region Medical Acquisition and approximately 82% of LRM Holdings immediately after the transaction. Further, a single stockholder controlled the voting stock of Accellent Holdings prior to the Lake Region Medical Acquisition and the voting stock of
LRM Holdings immediately after the acquisition. The exchange of shares between Accellent Holdings and LRM Holdings is deemed a reorganization and Accellent Holdings is the deemed acquirer of Lake Region for the purpose of financial statement
presentation. Reference to the Company within the notes to these consolidated financial statements refer to the consolidated financial statements of Accellent Holdings through March 12, 2014 and to the consolidated financial
statements of LRM Holdings since March 12, 2014.
The Company s fiscal year ends on the date determined by an annual reporting
cycle whereby each fiscal year will typically consist of four 13-week quarters. The nine-month periods ended October 3, 2015 included 273 days, whereas the nine months ended September 27, 2014 included 270 days.
2. Recent Accounting Pronouncements
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 outlines a single comprehensive model for entities to use in
accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In July 2015, the FASB deferred the effective date so that it becomes effective for the
Company for annual fiscal periods commencing after December 15, 2017 and for fiscal interim periods after December 15, 2018, with earlier adoption permitted. Entities have the option of using either a full retrospective or a modified
approach to adopt the guidance. This update could impact the timing and amounts of revenue recognized. The Company is currently evaluating the effect that implementation of this update will have on its consolidated financial position and results of
operations upon adoption.
In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance
Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This standard is effective for fiscal periods beginning after December 15, 2015. Early adoption is
permitted. Once adopted, the impact of this standard on the Company s consolidated financial statements will be limited to a reclassification of deferred financing costs from an asset balance to inclusion as an offset against the carrying value
of long-term obligations.
In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of
Inventory, which requires an entity to measure inventory at the lower of cost and net realizable value, which is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The standard requires prospective adoption and is effective for annual fiscal periods beginning after December 15, 2016 and interim fiscal periods beginning after December 15, 2017, with earlier adoption
permitted for interim periods in the year of adoption. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements when adopted.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which amends the current
requirement for organizations to present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. Organizations will now be required to classify all deferred tax assets and liabilities as noncurrent. ASU
2015-17 is effective for entities other than public business entities for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. The amendments may be applied
prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements when adopted.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires companies to recognize all leases as assets and
liabilities on the consolidated balance sheet. This ASU retains a distinction between finance leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are substantially similar to
the classification criteria for distinguishing between capital leases and operating leases in the current accounting literature. The result of retaining a distinction between finance leases and operating leases is that under the lessee accounting
model in Topic 842, the effect of leases in a consolidated statement of comprehensive income and a consolidated statement of cash flows is largely unchanged from previous accounting. The amendments in this ASU are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Earlier application is permitted. The Company is currently evaluating the impact that the adoption of this ASU will have on its consolidated financial
statements and results of operations upon adoption.
3. Acquisition of Lake Region
As discussed in Note 1, on March 12, 2014, the Company completed the Lake Region Medical Acquisition. The Lake Region Medical Acquisition
was completed through a Contribution and Merger Agreement among Accellent Holdings, LRM Holdings ( Buyer ), Accellent Inc., Lake Region and the other parties thereto (the Contribution and Merger Agreement ). Accellent Holdings
formed Buyer and Accellent Inc. formed Lake Region Merger Sub Inc. ( Merger Sub ) for purposes of consummating the transaction. Pursuant to the Contribution and Merger Agreement, Merger Sub merged with and into Lake Region, with Lake
Region surviving as a wholly owned subsidiary of Accellent Inc. ( Lake Region Merger ). Immediately prior to closing the transaction, i) certain stockholders of Lake Region, severally and not jointly, contributed certain of their shares of
Lake Region common stock to Buyer in exchange for, and in the aggregate, 27.778 million shares of Buyer common stock at $2.70 per share for a value of $75.0 million and ii) certain stockholders of Accellent Holdings, severally and not jointly
contributed their respective shares of Accellent Holdings to Buyer in exchange for an equal number of shares of Buyer. Following the contribution of those certain shares of Lake Region common stock to Buyer, the Company paid $315.0 million in cash
consideration to the remaining former Lake Region stockholders ( Seller ) for the remaining outstanding shares of Lake Region common stock, which were acquired via the Lake Region Merger, subject to adjustments in respect of outstanding
indebtedness, cash, change in control payments and certain expenses of Lake Region. Subsequent to the closing, $3.2 million of working capital adjustments, to the benefit of the Buyer, were identified, reviewed and agreed to by the Seller and
received by the Company in June 2014 of the $25.0 million initially held in escrow. In September 2014, the Company received $1.5 million of $2.3 million held in a second escrow. The Company made no further claims under the escrow arrangements and
the remaining amounts were released in June 2015 upon expiration of the escrow arrangements. The acquisition of Lake Region supports the Company s strategic intent to grow its C&V Segment and to create a leading interventional vascular
business with more scale, a broader product offering and deeper customer relationships.
The transaction has been accounted for as a
business combination. The results of the acquired business are included in the C&V Segment.
The Company generally employs the income
method to estimate the fair value of intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets. Significant estimates and assumptions inherent in the valuations reflect a consideration of
other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles, economic barriers to entry, a brand s relative market position and
the discount rate applied to the cash flows, among others.
Significant judgment is required in estimating the fair value of intangible assets acquired in a
business combination and in assigning their respective useful lives. The fair value estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management. Significant estimates and
assumptions inherent in the valuations reflect a consideration of other marketplace participants, and include the amount and timing of future cash flows (including expected growth rates and profitability), the underlying product life cycles,
economic barriers to entry, a brand s relative market position and the discount rate applied to the cash flows, among others. Any resultant allocation of purchase price consideration paid in excess of the fair value of assets assessed and
acquired less liabilities assumed was identified accordingly and recognized as goodwill. The Company recognized $181.1 million of goodwill, which is not tax deductible and primarily due the inherent long-term value anticipated from
the synergies and business opportunities expected to be achieved as a result of the transaction. A summary of the purchase price allocation for the acquisition of Lake Region is as follows:
Consideration transferred (in thousands):
| Cash | $ | 315,000 | ||
| Fair value of equity securities issued by LRM Holdings to seller | 75,000 | |||
| Reimbursement of transaction costs to seller | 1,669 | |||
| Working capital adjustment | (3,264 | ) | ||
| Total fair value of consideration transferred | $ | 388,405 |
As of January 3, 2015, the Company finalized the purchase accounting for the acquisition.
Fair value measurement of the assets acquired and liabilities assumed (in thousands):
| Preliminary Allocation | Measurement Period Adjustments | As Adjusted | ||||||||||
| Cash | $ | 9,534 | $ | $ | 9,534 | |||||||
| Accounts receivable | 22,613 | 22,613 | ||||||||||
| Inventories | 27,575 | 5,257 | 32,832 | |||||||||
| Prepaid expenses and other assets | 15,012 | 1,064 | 16,076 | |||||||||
| Property, plant and equipment | 67,301 | 7,568 | 74,869 | |||||||||
| Definitive life intangible assets | ||||||||||||
| Trade name | 16,700 | 16,700 | ||||||||||
| Developed technology and know-how | 38,000 | 38,000 | ||||||||||
| Backlog | 1,200 | 1,200 | ||||||||||
| Customer relationships | 78,000 | 78,000 | ||||||||||
| Goodwill | 291,418 | (110,333 | ) | 181,085 | ||||||||
| Accounts payable, accrued expenses and other liabilities | (35,964 | ) | (1,608 | ) | (37,572 | ) | ||||||
| Deferred tax liabilities | (5,820 | ) | (39,112 | ) | (44,932 | ) | ||||||
| Total net assets acquired | $ | 391,669 | $ | (3,264 | ) | $ | 388,405 |
Net cash paid (in thousands):
| Cash paid at the closing date | $ | (315,000 | ) | |
| Cash held by Lake Region | 9,534 | |||
| Reimbursement of transaction costs to Seller | (1,669 | ) | ||
| Working capital adjustment received | 3,264 | |||
| Net cash paid in the nine months ended September 27, 2014 | $ | (303,871 | ) |
The Company incurred transaction related costs of $5.7 million during the nine months ended September 27,
2014, consisting primarily of legal and accounting fees included in selling, general and administrative expenses.