10-K 1 d264865d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-130470

 

 

Accellent Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   84-1507827

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

100 Fordham Road

Wilmington, Massachusetts 01887

(978) 570-6900

(Address, zip code, and telephone number, including

area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨      Accelerated filer   ¨
Non-accelerated filer   x    (Do not check if smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2011: not applicable

As of March 28, 2012, 1,000 shares of the Registrant’s common stock were outstanding. The registrant is a wholly owned subsidiary of Accellent Holdings Corp.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

  PART I   
1.   Business      4   
1A.   Risk Factors      14   
1B.   Unresolved Staff Comments      25   
2.   Properties      25   
3.   Legal Proceedings      26   
4.   Mine Safety Disclosures      26   
  PART II   
5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      27   
6.   Selected Financial Data      27   
7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   
7A.   Quantitative and Qualitative Disclosures About Market Risk      43   
8.   Financial Statements and Supplementary Data      43   
9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      43   
9A.   Controls and Procedures      43   
9B.   Other Information      44   
  PART III   
10.   Directors, Executive Officers and Corporate Governance      45   
11.   Executive Compensation      47   
12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      55   
13.   Certain Relationships and Related Transactions, and Director Independence      56   
14.   Principal Accountant Fees and Services      58   
  PART IV   
15.   Exhibits, Financial Statement Schedules      59   

Signatures

     63   

 

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CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. In some cases, these “forward looking statements” can be identified by the use of words like “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.

By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this report. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.

Important factors that could cause our actual results, performance and achievements or industry results to differ materially from the forward-looking statements are set forth in this report, including under the headings “Item 7—Management Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A—Risk Factors.”

We undertake no obligation to update publicly or publicly revise any forward-looking statement, whether as a result of new information, future events or otherwise.

OTHER INFORMATION

We maintain our principal executive offices at 100 Fordham Road, Wilmington, Massachusetts 01887, and our telephone number is (978) 570-6900. Our internet website address is http://www.accellent.com

We are required to file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (the “SEC”). You can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at www.sec.gov.

 

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PART I

Item 1. Business

Unless the context otherwise requires, references in this Form 10-K to “Accellent,” “we,” “our,” “us” and “the Company” refer to Accellent Inc. and its consolidated subsidiaries.,

Overview

We believe that we are a leading provider of outsourced precision manufacturing and engineering services in our target markets of the medical device industry. We focus on what we believe are the largest and fastest growing segments of the medical device market including cardiology, endoscopy and orthopaedics. Our customers include leading global medical device companies including Abbott Laboratories, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, St. Jude, and Stryker. We provide our customers with reliable, high-quality, cost-efficient integrated outsourcing solutions that span the complete supply chain spectrum.

Our design, development and engineering, precision component manufacturing, device assembly and supply chain capabilities provide multiple strategic benefits to our customers. We help speed our customers’ products to market, lower their manufacturing costs, provide capabilities that they do not possess internally and enable our customers to concentrate their resources where they maximize value, including clinical education, research and sales and marketing.

We have long-term relationships with many of our largest customers and work closely with them as they design, test, prototype, validate and produce their products. In many cases, we have worked with our key customers for over ten years. Based on discussions with our customers, we believe we are considered a preferred strategic supplier by a majority of our top ten customers and often become the sole supplier of the manufacturing and engineering services that we provide to our customers. Many of the end products we produce for our customers are regulated by the U.S. Food and Drug Administration (the “FDA”), which has stringent quality standards for manufacturers of medical devices. Complying with these requirements involves significant investments of money and time, which results in stronger relationships with our customers through the multiple validations of our manufacturing process required to ensure high quality and reliable production. The joint investment of time and process validation by us and our customers, along with the possibility of supply disruptions and quality fluctuations associated with moving a product line, often create high switching costs for transferring product lines once a product is in production. Typically, once our customers have started production of a certain product with us, they do not move this product to another supplier. Further, validation requirements encourage customers to consolidate business with preferred suppliers such as us, whose processes have been previously validated.

We generate significant revenues from a diverse range of products that generally have long product life cycles. The majority of our revenues are generated by high value, single use products that are either regulated for one-time use, implanted into the body or are considered too critical to be re-used. We currently work with our customers on over 12,000 stock keeping units, providing us with tremendous product diversity across our customer base.

Our opportunities for future growth are expected to come from a combination of factors, including market growth, increasing our market share of the overall outsourcing market and increased outsourcing of existing and new products by our customers. This growing revenue base is made up of a diversified product mix with limited technology or product obsolescence risk. We manufacture many products that have been used in medical devices, such as biopsy instruments, joint implants, pacemakers and surgical instruments, for over ten years. As our customers’ end market products experience new product innovation, we continue to supply the base products and services across end market product cycles.

 

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The chart below provides a few examples of target markets, market segments, and the customer products that utilize our products and services.

 

Target Market

  

Market Segment

    

Customer Products

Cardiology

  

•     Cardiac Rhythm Management

    

•     Pacemakers and Implantable Defibrillators

•     Implantable Conductor Leads and Implant Tools

•     Procedure Tools and Accessories

  

•     Cardiovascular

    

•     Cardiac and Peripheral Stents

•       Guide Wires, Guide Gatherers, and Delivery Systems

  

•       Cardiac Surgery

    

•     Heart Valves

•       Perfusion Cannulae and Kits

•     Vein Grafting and Bypass Instruments

Orthopaedics

  

•     Joint

    

•     Hip, Knee and Shoulder Implants

•       Surgical and Navigation Instruments

  

•     Spinal

    

•     Vertebral Body Repair and Fusion

•     Disc Repair and Replacement

•     Procedure Instruments and Accessories

  

•     Arthroscopy

    

•     Arthroscopes

•     Shaver Blades, Suture Anchors, and Tools

  

•     Trauma

    

•     Maxillofacial and Cranial Repair

•       External and Extremity Repair

Endoscopy

  

•       Gastrointestinal

    

•     Biopsy Forceps

•       GERD and pH Diagnostics and Therapy

  

•     Urology

    

•     Stone Retrieval Systems

•     Gynecology and Birth Control Devices

•     Prostate Removal and Care Devices

  

•     Laparoscopy

    

•     Harmonic Scalpel Blades and Surgical Tools

•     Forceps and Biopsy Devices

•     Procedural Tools and Accessories

Our Industry

We focus on the largest and fastest growing end markets within the medical device industry: cardiology, orthopaedics, and endoscopy. These end markets are attractive based on their large size, significant volume growth, strong product pipelines, competitive environment and a demonstrated need for our high-quality manufacturing and engineering services. We believe medical device companies that participate in one or more of these markets will generate demand growth and outsourcing opportunities related to the end markets in which they operate.

We believe that demand growth in the target end markets is driven primarily by the following:

Aging Population

The average age of the U.S. population is expected to increase significantly over the next decade. According to 2010 U.S. Census data, the total U.S. population was projected to grow approximately 5% over the following five years, while the number of individuals in the United States over the age of 65 was projected to grow approximately 16% in that same time. As the average age of the population increases, the demand for medical products and services, including medical devices, is expected to increase as well.

 

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Active Lifestyles

As people live longer, more active lives, the adoption of medical devices such as orthopaedic implants and arthroscopy devices has grown. In addition, in order to maintain this active lifestyle, patients demand more functional, higher technology devices.

Advances in Medical Device Technology

The development of new medical device technology is driving growth in the medical device market. Examples include neurostimulation, minimally invasive spinal repair, vascular stenting and innovative implantable defibrillators, all of which are increasingly being adopted in the medical community because of the significant demonstrated patient benefits.

Increased Global Utilization

The global medical device market is largely concentrated in North America, Western Europe and Japan. As these populations grow and age, medical device volume growth increases. In addition, increased global utilization of medical devices further adds to medical device volume growth. Lastly, emerging countries in Asia, South America and Eastern Europe are also increasing their consumption of medical devices due to enhanced awareness and increasing financial flexibility.

Increase in Minimally Invasive Technologies

The medical device market is witnessing a major shift away from invasive or open surgical procedures to minimally invasive procedures and technologies. Minimally invasive procedures have been developed to reduce the pain, trauma, recovery time and overall costs resulting from open and more invasive procedures. The continued adoption of minimally invasive technologies is expected to continue driving growth in the overall medical device market.

Medical Device Companies in Our Key Target End Markets Are Outsourcing Manufacturing, Design and Engineering

As medical devices have become more technically complex, the demand for precision manufacturing capabilities and related engineering services has increased significantly. Many of the leading medical device companies in our end markets are increasingly utilizing third-party manufacturing and engineering providers as part of their business and manufacturing strategies. Outsourcing allows medical device companies to take advantage of the manufacturing technologies, manufacturing process experience and expertise, economies of scale, and supply chain management of third-party manufacturers. Most importantly, outsourcing enables medical device companies to concentrate their resources to create value including clinical education, research and development and sales and marketing.

We believe our current target market will continue to increase due to both the growth in medical device end markets and an increase in outsourcing by medical device companies. Key factors driving increased penetration in outsourcing include:

Increasing Complexity of Manufacturing Medical Device Products

As medical device companies seek to provide additional functionality in their products, the complexity of the technologies and processes involved in producing medical devices has increased. Medical device outsourcing companies have invested in facilities with comprehensive services and experienced personnel to deliver precision manufacturing services for these increasingly complex products. Medical device companies may also outsource because they do not possess the capabilities to manufacture their new products and/or manufacture them in a cost effective manner.

Desire to Accelerate Time-to-Market with Innovation

The leading medical device companies are focused on clinical education, research and development and sales and marketing in order to maximize the commercial potential for new products. For these new products, the medical device companies are attempting to reduce development time and compete more effectively. Outsourcing enables medical device companies to accelerate time-to-market and clinical adoption.

Reduced Product Development and Manufacturing Costs

We provide comprehensive services, including design and development, raw material sourcing, component manufacturing, final assembly, quality control and sterilization and warehousing and delivery, to our customers, often resulting in lower total product development costs.

 

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Rationalization of Medical Device Companies’ Existing Manufacturing Facilities

Medical device companies are continually looking to reduce costs and improve efficiencies within their organizations. As medical device companies rationalize their manufacturing base as a way to realize cost savings, they are increasingly turning to outsourcing. Through outsourcing, medical device companies can reduce capital requirements and fixed overhead costs, as well as benefit from the economies of scale of the third-party manufacturer.

Increasing Focus on Clinical Education, Research and Development and Sales and Marketing

We believe medical device companies are increasingly focusing resources on clinical education, research and development and sales and marketing. Outsourcing enables medical device companies to focus greater resources on these areas while taking advantage of the manufacturing technologies, economies of scale and supply chain management expertise of third-party manufacturers.

Our Strengths

Our competitive strengths make us a preferred strategic partner for many of the leading medical device companies and position us for profitable growth. Our preferred provider status is evidenced through our long-term customer relationships, sourcing agreements and/or by official designations.

Market Leader

We believe that we are a leading provider of outsourced precision manufacturing services in our target markets. We continue to invest in information technology and quality systems that enable us to meet or exceed the increasingly rigorous standards of our customers and differentiate us from our competitors.

Strong Long-term Strategic Partnerships with Targeted Customers

We believe we are considered a preferred strategic provider of manufacturing services by many of our customers. Our highly focused sales teams are dedicated to serving the leading medical device manufacturers. With our large customers, we generate diversified revenue streams across separate divisions and multiple products. As a result, we are well-positioned to compete for a majority of our customers’ outsourcing needs and benefit as our customers seek to reduce their supplier base.

Breadth of Manufacturing and Engineering Capabilities

We provide a comprehensive range of manufacturing and engineering services, including: design, testing, prototyping, production and device assembly, as well as comprehensive global supply chain management capabilities. We have made significant investments in precision manufacturing equipment, proprietary manufacturing processes, information technology and quality systems. In addition, our internal research and development team has developed innovative automation techniques that create economies of scale that can reduce production costs and enable us to manufacture many products at lower costs than our customers and competitors.

Reputation for Quality

We believe that we have a reputation as a high quality manufacturer. Our manufacturing facilities follow a single uniform quality system and are ISO 13485 certified, a quality standard that is specific to medical devices and the most advanced level attainable. Due to the patient-critical and highly regulated nature of the products our customers provide, strong quality systems are an important factor in our customers’ selection of a strategic manufacturing partner. As a result, our systems and experience provide us with an advantage as large medical device companies partner with successful, proven manufacturers who have the systems necessary to deliver high quality products that meet or exceed their own quality standards.

Strategic Locations

We believe that the proximity of our design, prototyping and engineering centers to our major customers and the advantageous location of our manufacturing centers provide us with a competitive advantage. Our strategic locations allow us to facilitate speed to market, rapid prototyping, low cost assembly and overall customer familiarity. For example, our design, prototyping and engineering centers near Boston, Massachusetts and Minneapolis, Minnesota, and our manufacturing centers in Galway, Ireland, and near Minneapolis, Minnesota are strategically located near our major customers. In addition, our Juarez, Mexico and Penang Malaysia facilities provide our customers with low-cost manufacturing and assembly capabilities.

 

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Recurring Free Cash Flow

We believe that as large medical device companies look to partner with suppliers of significant scale and stability, we are favorably positioned by having steady margins and considerable liquidity. It is our belief that these factors combined with modest capital expenditures and working capital requirements will provide a base from which to generate recurring free cash flow.

Focus on Cost Savings

Since 2007, we have streamlined our sales, finance, quality, engineering and customer service organizations into centrally managed organizations. Since that time, we have also continued to focus on optimizing our operating performance and aligning our service capabilities to more strategically meet our customers’ needs. In the process, we continuously seek to improve capital and facility utilization and enhance our cost structure and recently completed a multi-year deployment of a common enterprise resource planning platform across our manufacturing facilities.

Experienced and Committed Management Team

We have a highly experienced management team with past experience in the healthcare and contract manufacturing industries.

Our Strategy

Our primary objective is to follow a focused and profitable growth strategy. We intend to strengthen our position as a leading provider of outsourced precision manufacturing and engineering services to our target markets through the following activities:

Grow Our Revenues

We are focused on increasing our share of revenues from the leading companies within our target markets and gaining new customers within these markets. We believe the strength of our customer relationships and our customer-focused sales teams, in combination with our comprehensive engineering and operating capabilities put us in a preferred position to capture an increasing percentage of new business with existing customers and gain new customers.

Increase Manufacturing Efficiencies

We are implementing “Lean Manufacturing” focused on improving overall process control and cycle time reduction while substantially increasing our labor, equipment and facility efficiencies. The program is aimed at reducing our overall manufacturing costs and improving our capital and facility utilization necessary to support our continued growth. The program consists of standardized training for all Accellent employees in both lean and six sigma fundamentals including standard tools to support the identification and elimination of waste and variation. We are also deploying customized training for specialized job functions to increase our population of Lean Sigma certified employees.

Leverage Design and Prototyping Capabilities and Presence

We intend to grow revenues from design and prototyping services by continuing to invest in selected strategic locations and equipment. We currently have design facilities near Minneapolis, Minnesota and Boston, Massachusetts. We believe being involved in the initial design and prototyping of medical devices positions us favorably to win the ongoing manufacturing business for these devices as they move to volume production.

Provide an Integrated Supply Chain Solution

We are constantly adding strategic capabilities in order to provide a continuum of service for our customers throughout their product life cycles, thereby allowing them to reduce the number of vendors they deal with and focus their resources on speed to market. These capabilities range from concept validation and design and development, through manufacturing, warehousing and distribution. We are also evaluating other low cost capabilities and partnerships with customers. For example, our established presence in low-cost regions such as Juarez, Mexico and Penang, Malaysia will continue to help us provide our customers with the most cost-effective solutions to meet their needs.

Selectively Pursue Complementary Acquisitions

Our first priority is to strengthen our core competencies and grow the business organically. However, given the fragmented nature of the medical device outsourcing industry and the opportunity this presents, we will selectively pursue complementary acquisitions which would allow us to expand our scope and scale to further enhance our offering to our customers.

 

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Capabilities

As outsourcing by medical device companies continues to grow, we believe that our customers’ reliance upon the breadth of our capabilities increases. Our capabilities include Design and Engineering, Precision Component Manufacturing, Device Assembly and Supply Chain Management.

Design and Engineering We offer design and engineering services that include product design engineering, design for manufacturability, analytical engineering, rapid prototyping and pilot production. We focus on providing design solutions to meet our customers’ functional and cost needs by incorporating reliable manufacturing and assembly methods. Through our engineering design capabilities, we engage our customers early in the product development cycle to reduce their manufacturing costs and accelerate their time to market.

 

Capability

  

Description & Customer Application

Product Design Engineering

   Computer Aided Design (CAD) tool used to model design concepts which supports the design portion of the project, freeing customers’ staff for additional research

Design for Manufacturability

   Experience in manufacturing and process variation analysis ensures reliability and ongoing quality are designed in from the onset which eliminates customers’ need for duplicate quality assurance measures, provides for continuous improvement and assures long-term cost control objectives are met

Analytical Engineering

   Finite Element Analysis (FEA) and Failure Mode and Effect Analysis (FMEA) tools verify function and reliability of a device prior to producing clinical builds, shortening the design cycle and allowing products to reach the market faster and more cost effectively

Physical Models

   Computer Aided Manufacturing (CAM), Stereolithography and “Soft Tooling” concepts which permit rapid prototyping to provide customers with assurance that they have fulfilled the needs of their clinical customers and confirm a transition from design to production

Pilot Production

   Short run manufacturing in a controlled environment utilizing significant engineering support to optimize process prior to production transfer, which provides opportunity to validate manufacturing process before placement in a full scale manufacturing environment

Precision Component Manufacturing We utilize a broad array of manufacturing processes to produce metal and plastic based medical device components. These include metal forming, machining and molding and polymer molding, machining and extrusion processes.

 

Capability

  

Description & Customer Application

Tube Drawing

   Process to manufacture miniature finished tubes or tubular parts used in stents, cardio catheters, endoscopic instruments and orthopedic implants

Wire Drawing

   Process to manufacture specialized clad wires utilized in a variety of cardiology and neurological applications

Wire Grinding & Coiling

   Secondary processing of custom wires to create varying thicknesses or shapes (springs) used in guidewires and catheters for angioplasty and as components in neurological applications

Micro-Laser Cutting

   Process uses a laser to remove material in tubular components resulting in tight tolerances and the ability to create the “net like” shapes used in both cardiology and peripheral stents

CNC Swiss Machining

   Machining process using a predetermined computer controlled path to remove metal or plastic material thereby producing a three dimensional shape. Used in orthopedic implants such as highly specialized bone screws and miniature components used in cardiac rhythm management

 

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Capability

  

Description & Customer Application

High Speed CNC multi-axis Profile Machining

   Machining process using a predetermined computer controlled path to remove metal or plastic material thereby producing a three dimensional shape. Used to produce orthopedic implants where precise mating surfaces are required

Electrical Discharge Machining (EDM)

   Machining process using thermal energy from an electrical discharge to create very accurate, thin delicate shapes and to manufacture complete components used in arthroscopy, laparoscopy and other surgical procedures

Plastic Injection Molding

   Melted plastic flows into a mold which has been machined in the mirror image of the desired shape; process is used throughout the medical industry to create components of assemblies and commonly combined with metal components

Metal Injection Molding

   Metal powders bound by a polymer are injected into a mold to produce a metal part of the desired shape; used in higher volume metal applications to reduce manufacturing costs in orthopaedics, endoscopy, arthroscopy and other procedures

Plastic Extrusion

   Process that forces liquid polymer material between a shaped die and mandrel to produce a continuous length of plastic tubing; used in cardiology catheter applications

Alloy Development

   Product differentiation in the medical device industry is commonly driven by the use of alternative materials; we work with our customers to develop application-specific materials that offer marketable features and demonstrable benefits

Forging

   Process using heat and impact to “hammer” metal shapes and forms. Secondary processing needed to bring to finished form. Most often to fabricate surgical instruments within the medical industry

Device Assembly Device assembly is being driven by medical device companies’ focus on more products being released in shorter timeframes. To fulfill this growing need, we provide contract manufacturing services for complete/finished medical devices at our U.S., Mexico and Ireland facilities. We provide the full range of assembly capabilities defined by our customers’ needs, including packaging, labeling, kitting and sterilization.

 

Capability

  

Description & Customer Application

Mechanical Assembly

   Uses a variety of sophisticated attachment methods such as laser, plasma, ultrasonic welding or adhesives to join components into complete medical device assemblies

Electro-Mechanical Assembly

   Uses a combination of electrical devices such as printed circuit boards, motors and graphical displays with mechanical sub-assemblies to produce a finished medical device

Marking/Labeling & Sterile Packaging

   Use of laser or ink jet marking or pad printing methods for product identification, branding and regulatory compliance; applying packaging methods such as form-fill-seal or pouch-fill-seal to package individual medical products for sterilization and distribution

 

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Supply Chain Management Our supply chain management services encompass the complete order fulfillment process from raw materials to finished devices for entire product lines. This category of capabilities is an umbrella for the capabilities listed above, including design and engineering, component manufacturing, device assembly, raw materials sourcing, quality control/sterilization and warehousing and delivery, described below.

 

Capability

  

Description & Customer Application

Raw Materials Sourcing

   Procurement and consulting on the choice of raw materials, assuring design and material suitability

Quality Control/Sterilization

   The ability to design and validate quality control systems that meet or exceed customer requirements. In addition, we provide validated sterilization services

Warehousing and Delivery

   The ability to provide customer storage and distribution services, including end user distribution

Business Segments

We have aligned the Company to reflect the consolidation of our sales, finance, quality, engineering and customer services into a centrally managed organization designed to better serve our customers, many of whom service multiple medical device markets. We have one operating and reportable segment which is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance. Our chief operating decision maker is our chief executive officer.

Customers

Our customers include leading worldwide medical device manufacturers that concentrate primarily in the cardiology, endoscopy and orthopedic markets. We maintain strong relationships with our customers by delivering highly customized and engineered finished goods, assemblies, and components for their markets. For each of the years ended December 31, 2009, 2010 and 2011, approximately 95% of our net sales were derived from medical device companies. The remaining 5% of our net sales was derived from customers that serve the electronics, computer, industrial equipment and consumer markets for which we manufacture high quality, complex components that are used in such products as high density discharge lamps, fiber optics, motion sensors and power generators.

Our strategy is to focus on leading medical device companies, which we believe represent a substantial portion of the overall market opportunity, and emerging medical device companies. We provide numerous products and services to our customers across their varied business units. For each of the years ended December 31, 2009, 2010 and 2011 our 10 largest medical device customers accounted for approximately 60%, 64% and 65% of our consolidated net sales. In particular, Johnson & Johnson and Medtronic each accounted for more than 10% of our net sales for the years ended December 31, 2009, 2010 and 2011. In addition, Boston Scientific accounted for more than 10% of our net sales for the year ended December 31, 2011.

Our customers are attractive to us based on their large size, significant potential for volume growth, and strong product pipelines. Our customers continuously seek ways to maximize shareholder return, reduce costs, and speed innovation and time to market by outsourcing manufacturing and engineering services. Additionally, they have been increasingly willing to outsource their needs with us based on our proven quality, preferred supplier status, and strong relational partnerships.

Our firm order backlog at December 31, 2010 and 2011 totaled approximately $206.7 million and $233.0 million, respectively. Substantially all of the 2011 orders are expected to be shipped within one year.

International Operations

For the years ended December 31, 2010 and 2011, approximately 17% and 19% of our sales, respectively were to customers outside of the United States. International sales include additional risks such as currency fluctuations, duties and taxation, foreign legal and regulatory requirements, changing labor conditions and longer payment cycles. Refer to Note 14 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for information regarding sales and long-lived assets by country.

 

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During 2011, the Company completed the build-out of its Penang, Malaysia facility. Production commenced in the first quarter of 2012.

Information Technology

We use the Oracle 11i enterprise resource planning, or ERP, system across our primary manufacturing facilities. We believe our ERP platform and related information technology systems enables us to better serve our customers by aiding us in predicting customer demand, utilizing the latest production planning methodologies, taking advantage of economies of scale in purchasing, providing greater flexibility to move product from design to manufacturing at various sites and improving the accuracy of capturing and estimating our manufacturing and engineering costs. In addition, we utilize computer aided design, or CAD, and computer aided manufacturing, or CAM, software at our facilities which allows us to improve our product quality and enhance the interactions between our engineers and our customers. We deploy our systems to provide direct business benefits to us, our customers and our suppliers.

Quality

Due to the patient-critical and highly regulated nature of the products our customers provide, strong quality systems are an important factor in our customers’ selection of a strategic manufacturing partner. In order for our customers to outsource manufacturing to us, our quality program must meet or exceed customer requirements.

Our Quality Management System is based on the standards developed by the International Organization for Standardization (ISO) and the FDA’s Quality System Regulation. These standards specify the requirements necessary for a quality management system to consistently provide product that meet or exceed customer requirements. Also included are requirements for processes to ensure continual improvement and continued effectiveness of the system. Compliance to ISO Standards is assessed by independent audits from an accredited third party (a Registrar) and through internal and customer audits of the quality system at each facility.

We have registered our facilities under a single Quality Management System which conforms to ISO 13485:2003, “Medical Devices—Quality management systems—Requirements for regulatory purposes.”

Supply Arrangements

We have established relationships with many of our materials providers. However, most of the raw materials that are used in our products are subject to fluctuations in market price. In particular, the prices of stainless steel, titanium and platinum have historically fluctuated, and the prices that we pay for these materials, and, in some cases, their availability, are dependent upon general market conditions. In most cases we have pass-through pricing arrangements with our customers that purchase precious metal components or we have established firm-pricing agreements with our suppliers designed to minimize our exposure to market fluctuations.

When manufacturing and assembling medical devices, we may subcontract manufacturing services that we cannot perform in-house. As we provide our customers with a fully integrated supply chain solution, we will continue to rely on third-party suppliers, subcontractors and outside sources for components or services that we cannot provide through our internal resources.

To date, we have not experienced any significant difficulty obtaining necessary raw materials or subcontractor services.

Intellectual Property

The products that we manufacture are made to order based on the customers’ specifications and may be designed using our design and engineering services. Generally, our customers retain ownership of and the rights to their products’ design while we retain the rights to any of our proprietary manufacturing processes.

We continue to develop intellectual property primarily in the areas of process engineering and materials development for the purpose of internal proprietary utilization. Our intellectual property enhances our production capabilities and improves margins in our manufacturing processes while providing competitive differentiation. Examples of technologies developed include improvements in micro profile grinding, polymer micro tube manufacturing, metal injection molding and surface enhancement methods for surgical implants.

 

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We also continue to develop intellectual property for the purpose of licensing certain technologies to our medical device customers. The use of these technologies by our medical device customers in their finished design, component or material solution results in royalty revenues which are recognized at the time the product is shipped. Examples of licensed technologies include improvements to catheter based applications, gastrointestinal surgical devices and vascular stents.

In addition, we are a party to several license agreements with third parties pursuant to which we have obtained, on varying terms, non-exclusive rights to utilize patents held by third parties in connection with precision metal injection manufacturing technology.

Competition

The medical device outsourced manufacturing industry has traditionally been highly fragmented with several thousand companies, many of which we believe have limited manufacturing capabilities and limited sales and marketing expertise. We believe that very few companies offer the scope of manufacturing capabilities and services that we provide to medical device companies, however, we may compete in the future against companies that provide broad manufacturing capabilities and related services. We compete with different companies depending on the type of product or service offered or the geographic area served. We are not aware of a single competitor that operates in all of our target markets or offers the same range of products and services that we offer.

Our existing or potential competitors include suppliers with different subsets of our manufacturing capabilities, suppliers that concentrate in niche markets, and suppliers that have, are developing, or may in the future develop, broad manufacturing capabilities and related services. We compete for new business at all phases of the product lifecycle, which includes development of new products, the redesign of existing products and transfer of mature product lines to outsourced manufacturers. Competition is generally based on reputation, quality, delivery, responsiveness, breadth of capabilities, including design and engineering support, price, customer relationships and increasingly the ability to provide complete supply chain management rather than individual components.

Many of our customers also have the capability to manufacture similar products in house, if they so choose.

Government Regulation

Our business is subject to governmental requirements, including those federal, state and local environmental laws and regulations governing the emission, discharge, use, storage and disposal of hazardous materials and the remediation of contamination associated with the release of these materials at or from our facilities or off-site disposal locations. Many of our manufacturing processes involve the use and subsequent regulated disposal of hazardous materials. We monitor our compliance with all federal and state environmental regulations and have in the past paid civil penalties and taken corrective measures for violations of environmental laws. In anticipation of proposed changes to air emission regulations, we have incorporated advanced air emission control technologies at one of our manufacturing sites which uses a regulated substance. To date, such matters have not had a material impact on our business or financial condition. However, we cannot assure you that such matters will not have a material impact on us in the future.

In prior years, we have entered into several settlements arising from alleged liability as potentially responsible parties for the off-site disposal or treatment of hazardous substances. None of those settlements have had a material impact on our business or financial condition.

Environmental laws have been interpreted to impose strict, joint and several liability on owners and operators of contaminated facilities and parties that arrange for the off-site disposal or treatment of hazardous materials. In 2001 the United States Environmental Protection Agency, or EPA, approved a Final Design Submission submitted by UTI Corporation (“UTI”), our wholly owned subsidiary, to the EPA in respect of a July 1988 Administrative Consent Order issued by the EPA (the “Consent order”). The Consent Order alleged that hazardous substances had been released into the environment from UTI’s Collegeville, Pennsylvania plant and required UTI to study and, if necessary, remediate the groundwater and soil beneath and around the plant. Since that time, UTI has implemented, and has been operating successfully, a contamination treatment system approved by the EPA.

During 2010, the EPA approved an amendment to the Consent Order which eliminated the need to treat potentially elevated chromium levels with an ion exchange treatment system. As a result of the amendment to the Consent Order, the environmental liability related to the Collegeville remediation was reduced by $1.3 million during 2010 to exclude the costs of operating the ion exchange treatment system. Refer to Note 13 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

 

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At December 31, 2011, we have a liability of $1.8 million, of which the Company expects to pay $0.1 million during 2012, related primarily to the Collegeville remediation. We have prepared estimates of our potential liability, if any, based on available information. Changes in EPA standards, improvement in cleanup technology and discovery of additional information, however, could affect the estimated costs associated with these matters in the future.

The Pennsylvania Department of Environmental Protection (“DEP”) has filed a petition for review with the U.S. Court of Appeals for the District of Columbia Circuit challenging recent amendments to the U.S. Environmental Protection Agency (“EPA”) National Air Emissions Standards for hazardous air pollutants from halogenated solvent cleaning operations. These revised standards exempt three industry sectors (aerospace, narrow tube manufacturers and facilities that use continuous web-cleaning and halogenated solvent cleaning machines) from facility emission limits for TCE and other degreaser emissions. The EPA has agreed to reconsider the exemption. The Company’s Collegeville facility meets current EPA control standards for TCE emissions and is exempt from the new lower TCE emission limit since we manufacture narrow tubes. As part of efforts to lower TCE emissions, we have begun to implement a process that will reduce the Company’s TCE emissions generated by its Collegeville facility. However, this process will not reduce TCE emissions to the levels required should a new standard become law.

We are a medical device and component manufacturing and engineering services provider. Some of the products that we manufacture are finished medical devices or components that go into finished medical devices. The manufacturing processes used in the production of these products must comply with FDA regulations, including its Quality System Regulation, or QSR. The QSR requires manufacturers of medical devices to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process. The QSR governs manufacturing activities broadly defined to include activities such as product design, manufacture, testing, packaging, labeling, distribution and installation. Our FDA registered facilities are subject to FDA inspection at any time for compliance with the QSR and other FDA regulatory requirements. Failure to comply with these regulatory requirements may result in civil and criminal enforcement actions, including financial penalties, seizures, injunctions and other measures. In some cases, failure to comply with the QSR could prevent or delay our customers from gaining approval to market their products. Our products must also comply with state and foreign regulatory requirements.

In addition, the FDA and state and foreign governmental agencies regulate many of our customers’ products as medical devices. FDA approval/clearance is required for those products prior to commercialization in the U.S., and approval of regulatory authorities in other countries may also be required prior to commercialization in those jurisdictions. Moreover, in the event that we build or acquire additional facilities outside the U.S., we will be subject to the medical device manufacturing regulations of those countries. Our Mexico facility must comply with U.S. FDA regulations, which we believe are more stringent than the local regulatory requirements that our Mexico facility must also comply with. Some other countries may rely upon compliance with U.S. regulations or upon ISO certification as sufficient to satisfy certain of their own regulatory requirements for a product or the manufacturing process for a product.

In order to comply with regulatory requirements, our customers may wish to audit our operations to evaluate our quality systems. Accordingly, we routinely permit audits by our customers.

Employees

As of December 31, 2011, we had 3,246 employees. We also employ a number of temporary employees to assist with various projects. Other than certain employees at our facility in Aura, Germany, our employees are not represented by any union. We have never experienced a work stoppage or strike and believe that we have good relationships with our employees.

Item 1A. Risk Factors

We may occasionally make forward-looking statements and estimates such as forecasts and projections of our future performance or statements of our plans and objectives. These forward-looking statements may be contained in, among other things, SEC filings, including this Annual Report on Form 10-K, press releases made by us, and in oral statements made by our officers. Actual results could differ materially from those contained in such forward-looking statements. Important factors that could cause our actual results to differ from those contained in such forward-looking statements include, among other things, the risks described below.

We have a substantial amount of indebtedness which may adversely affect our ability to operate our business and our cash flow and make payments on our indebtedness.

As of December 31, 2011, our total indebtedness was $715.0 million, which consists of $400.0 million of 8 3/8% Senior Secured Notes due in 2017 (the “2017 Senior Secured Notes”), $315.0 million of 10% Senior Subordinated Notes, due in 2017 (the “2017 Senior Subordinated Notes”) and an Asset Based Revolving line of credit with an aggregate borrowing

 

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capacity of $75.0 million, subject to borrowing base limitations (the “ABL Revolver”). No amounts were outstanding on the ABL Revolver at December 31, 2011. The 2017 Senior Secured Notes and the 2017 Senior Subordinated Notes are collectively referred to as the “2017 Notes”. The annual cash interest payments on the 2017 Notes total approximately $65.0 million.

Our substantial indebtedness could have important consequences, including the following:

 

   

Our high level of indebtedness could make it more difficult for us to satisfy our obligations with respect to the 2017 Notes and any other indebtedness including any repurchase obligations that may arise thereafter;

 

   

The restrictions imposed on the operation of our business may hinder our ability to take advantage of strategic opportunities to grow our business;

 

   

Our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, restructuring, acquisitions or general corporate or other purposes may be impaired, which could be exacerbated by further volatility in the credit markets;

 

   

We must use substantial portion of our cash flow from operations to pay interest on the 2017 Notes and, to the extent incurred, on the ABL Revolver and any other indebtedness, which will reduce the funds available to us for operations and other purposes;

 

   

Our high level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

 

   

Our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited;

 

   

Our high level of indebtedness makes us more vulnerable to economic downturns and adverse developments in our business;

 

   

We may be vulnerable to interest rate increases, as the interest rate on our ABL Revolver carries a variable rate;

 

   

If we fail to satisfy our obligations under the 2017 Notes or fail to comply with the financial and other restrictive covenants contained in the indentures that govern our 2017 Notes, or the Credit Agreement that governs our ABL Revolver, it could result in an event of default, which could result in all of our indebtedness becoming immediately due and payable and could permit the holders of the 2017 Notes and our ABL Revolver lenders to foreclose on our assets securing such indebtedness.

 

   

We and our subsidiaries may be able to incur substantial additional indebtedness in the future, subject to the restrictions contained in our ABL Revolver and the indentures governing the 2017 Notes. If new indebtedness is added to our current debt levels, the related risks that we now face could increase.

Any of the foregoing could have a material adverse effect on our business, financial condition, results of operations, prospects and ability to satisfy our obligations under the 2017 Notes.

The terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.

The agreements that govern the terms of our debt, including the indentures that govern the 2017 Notes and the credit agreement that governs our ABL Revolver, contain, and any agreements that govern potential future indebtedness may contain, covenants that restrict our ability and the ability of our subsidiaries to:

 

   

Incur and guarantee additional indebtedness or issue preferred stock;

 

   

Repay subordinated indebtedness prior to its stated maturity;

 

   

Pay dividends or make other distributions on or redeem or repurchase our stock;

 

   

Make certain investments or acquisitions;

 

   

Consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

Make certain capital expenditures;

 

   

Create liens;

 

   

Restrict dividends, distributions, or other payments from our subsidiaries;

 

   

Enter into certain transactions with stockholders and affiliates.

 

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In addition, under the ABL Revolver, if our borrowing availability falls below 15% of the lesser of (i) the commitment amount and (ii) the borrowing base for 5 consecutive business days, we will be required to satisfy and maintain a fixed charge coverage ratio not less than 1.1 to 1 until the first day thereafter on which excess availability has been greater than 15% of the lesser of (i) the commitment amount and (ii) the borrowing base for 30 consecutive days. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we may not be able to meet this ratio. A breach of any of these covenants could result in a default under the ABL Revolver.

Moreover, the ABL Revolver provides the ABL collateral agent considerable discretion to impose reserves or availability blocks, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the ABL collateral agent under the ABL Revolver will not impose such actions during the term of the ABL Revolver and further, were it to do so, the resulting impact of this action could materially and adversely impair our ability to make interest payments on our indebtedness.

A breach of the covenants or restrictions under the indentures that govern the 2017 Notes or the credit agreement that governs the ABL Revolver could result in an event of default under the applicable indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under our ABL Revolver would permit the lenders under our ABL Revolver to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our ABL Revolver those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders and note holders accelerate the repayment of our borrowings, we cannot assure that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our plans.

The amount of borrowings permitted under the ABL Revolver may fluctuate significantly, and the maturity of the ABL Revolver may be accelerated under certain circumstances, which may adversely affect our liquidity, financial position and results of operations.

The amount of borrowings permitted at any time under the ABL Revolver is limited to a periodic borrowing base valuation of our inventory and accounts receivable. As a result, our access to credit under the ABL Revolver is potentially subject to significant fluctuations depending on the value of the borrowing base eligible assets as of any measurement date, as well as certain discretionary rights of the agent in respect of the calculation of such borrowing base value. The inability to borrow under or the early termination of the ABL Revolver may adversely affect our liquidity, financial position and results of operations. As of December 31, 2011, our borrowing capacity under the ABL Revolver was approximately $27.6 million, after giving effect to outstanding letters of credit and borrowing base limitations. Because the borrowing base under the ABL Revolver depends, in part, on inventory, accounts receivable and other assets that fluctuate from time to time, such amount may not reflect actual borrowing capacity in the future.

We may not be able to generate sufficient cash to service all of our indebtedness, including the 2017 Notes or borrowings under the ABL Revolver, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on the 2017 Notes or our ABL Revolver, should any become due.

During 2011, cash flows from operating, investing, and financing activities totaled a net decrease in cash and cash equivalents of approximately $1.9 million. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. The ABL Revolver and the indentures governing the 2017 Notes restrict our ability to sell assets and use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.

 

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Repayment of our debt is dependent on cash flow generated by our subsidiaries.

We are a holding company, and all of our tangible assets are owned by our subsidiaries. Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are guarantors of the notes our subsidiaries do not have any obligation to pay amounts due on such notes, or to make funds available for that purpose. Our subsidiaries may not be able to, or be permitted to, make distributions to enable us to make payments in respect of our indebtedness. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the terms of our ABL Revolver and the indentures governing the 2017 Notes limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to important qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.

Quality problems with our processes, products and services could harm our reputation for producing high quality products and erode our competitive advantage.

Quality is extremely important to us and our customers due to the serious and costly consequences of product failure. Many of our customers require us to adopt and comply with specific quality standards, and they periodically audit our performance. Our quality certifications are critical to the marketing success of our products and services. If we fail to meet these standards, our reputation could be damaged, we could lose customers and our sales could decline. Aside from specific customer standards, our success depends generally on our ability to manufacture to exact tolerances precision engineered components, subassemblies and finished devices using multiple materials. If our components fail to meet these standards or fail to adapt to evolving standards, our reputation as a manufacturer of high quality components could be harmed, our competitive advantage could be damaged, and we could lose customers and market share.

Our business could be materially adversely affected as a result of general economic and market conditions, including recent economic uncertainty.

We are subject to the effects of general global economic and market conditions. For example, during 2008 and 2009, disruptions in the banking sector and financial markets resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and volatility in fixed income, credit and equity markets. In addition, the United States and some foreign countries that are markets for our products have recently experienced slow or negative economic growth and downgrades in their sovereign debt ratings. If these conditions persist, spread or deteriorate further, our business, results of operations or financial condition could be materially adversely affected. Possible consequences on our business include reduced customer demand, insolvency of key suppliers resulting in product delays, inability of customers to obtain credit to finance purchases of our products and/or customer insolvencies, increased risk that customers may delay payments, fail to pay or default on credit extended to them, and counterparty failures negatively impacting our treasury operations, could have a material adverse effect on our results of operations or financial condition.

If we experience decreasing prices for our products and services and we are unable to reduce our expenses, our results of operations will suffer.

We may experience decreasing prices for the products and services we offer due to pricing pressure experienced by our customers from managed care organizations and other third party payors, increased market power of our customers as the medical device industry consolidates, and increased competition among medical engineering and manufacturing services providers. If the prices for our products and services decrease and we are unable to reduce our expenses, our results of operations may be materially adversely affected.

Because a significant portion of our net sales comes from a few large customers, any decrease in sales to these customers could harm our operating results.

The medical device industry is concentrated, with relatively few companies accounting for a large percentage of sales in the markets that we target. Accordingly, our net sales and profitability are highly dependent on our relationships with a limited number of large medical device companies. For the year ended December 31, 2011 our ten largest customers accounted for approximately 65% of our net sales. In particular, Johnson & Johnson, Medtronic and Boston Scientific each accounted for more than 10% of our net sales for the year ended December 31, 2011. We are likely to continue to experience a high degree of customer concentration, particularly if there is further consolidation within the medical device industry. We cannot assure you that net sales to customers that have accounted for significant net sales in the past, either individually or as a group, will reach or exceed historical levels in any future period. The loss or a significant reduction of business from any of our major customers would adversely affect our results of operations.

 

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We may not be able to grow our business if the trend by medical device companies to outsource their manufacturing activities does not continue or if our customers decide to manufacture internally products that we currently provide.

Our design, manufacturing and assembly business has grown partly as a result of the increase over the past several years in medical device companies outsourcing these activities. We view the increasing use of outsourcing by medical device companies as an important component of our future growth strategy. While industry analysts expect the outsourcing trend to increase, our current and prospective customers continue to evaluate our capabilities against the merits of internal production. Protecting intellectual property rights and maximizing control over regulatory compliance are among factors that may influence medical device companies to keep production in-house. Any substantial slowing of growth rates or decreases in outsourcing by medical device companies could cause our sales to decline, and we may be limited in our ability, or unable to continue, to grow our business.

Our operating results may fluctuate, which may make it difficult to forecast our future performance.

Fluctuations in our operating results may cause uncertainty concerning our performance and prospects or may result in our failure to meet expectations. Our operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a variety of factors, which include, but are not limited to:

 

   

the fixed nature of a substantial percentage of our costs, which results in our operations being particularly sensitive to fluctuations in sales;

 

   

changes in the relative portion of our sales represented by our various products, which could result in reductions in our profits if the relative portion of our sales represented by lower margin products increases;

 

   

introduction and market acceptance of our customers’ new products and changes in demand for our customers’ existing products;

 

   

the accuracy of our customers’ forecasts for future production requirements;

 

   

timing of orders placed by our principal customers that account for a significant portion of our revenues;

 

   

future price concessions as a result of pressure to compete;

 

   

cancellations by customers which may result in recovery of only our costs;

 

   

the availability of raw materials, including nitinol, elgiloy, tantalum, stainless steel, columbium, zirconium, titanium, gold, silver and platinum;

 

   

increased costs of raw materials, supplies or skilled labor;

 

   

our effectiveness in managing our manufacturing processes; and

 

   

changes in the competitive and economic conditions generally, or in our customers’ markets.

Investors should not rely on results of operations in any past period as an indication of what our results will be for any future period.

Our industry is very competitive. We may face competition from, and we may be unable to compete successfully against, new entrants and established companies with greater resources.

The market for outsourced manufacturing and engineering services to the medical device industry is very competitive and includes thousands of companies. As more medical device companies seek to outsource more of the design, prototyping and manufacturing of their products, we will face increasing competitive pressures to grow our business in order to maintain our competitive position, and we may encounter competition from and lose customers to other companies with design, technological and manufacturing capabilities similar to ours. Some of our potential competitors may have greater name recognition, greater operating revenues, larger customer bases, longer customer relationships and greater financial, technical, personnel and marketing resources than we have. If we are unsuccessful competing with our competitors for our existing and prospective customers’ business, we could lose business and our financial results could suffer.

As we rationalize manufacturing capacity and shift production to more economical facilities, our customers may choose to reallocate their outsource requirements among our competitors or perform such functions internally.

As we rationalize manufacturing capability and shift production to more economical facilities, our customers may evaluate their outsourcing requirements and decide to use the services of our competitors or move design and production work back to their own internal facilities. For some customers, geographic proximity to the outsourced design or manufacturing facility may be an important consideration and changes we may make in manufacturing locations may lead them to no longer use our services for future work. If our customers reallocate work among outsourcing vendors or complete

 

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design or production in their own facilities, we would lose business, which could impair our growth and operating results. Further, unanticipated delays or difficulties in facility consolidation and rationalization of our current and future facilities could cause interruptions in our services which could damage our reputation and relationships with our customers and could result in a loss of customers and market share.

If we do not respond to changes in technology, our manufacturing, design and engineering processes may become obsolete and we may experience reduced sales and lose customers.

We use highly engineered, proprietary processes and highly sophisticated machining equipment to meet the critical specifications of our customers. Without the timely incorporation of new processes and enhancements, particularly relating to quality standards and cost-effective production, our manufacturing, design and engineering capabilities will likely become outdated, which could cause us to lose customers and result in reduced sales or profit margins. In addition, new or revised technologies could render our existing technology less competitive or obsolete or could reduce demand for our products and services. It is also possible that finished medical device products introduced by our customers may require fewer of our components or may require components that we lack the capabilities to manufacture or assemble. In addition, we may expend resources on developing new technologies that do not result in commercially viable processes for our business, which could adversely impact our margins and operating results.

Inability to obtain sufficient quantities of raw materials and production feedstock could cause delays in our production.

Our business depends on a continuous supply of raw materials and production feedstock. Raw materials and production feedstock needed for our business are susceptible to fluctuations in price and availability due to transportation costs, government regulations, price controls, changes in economic climates or other unforeseen circumstances. Failure to maintain our supply of raw materials and production feedstock could cause production delays resulting in a loss of customers and a decline in sales. Due to the supply and demand fundamentals of raw material and production feedstock used by us, we have occasionally experienced extended lead times on purchases and deliveries from our suppliers. Consequently, we have had to adjust our delivery schedule to customers. In addition, fluctuations in the cost of raw materials and production feedstock may increase our expenses and affect our operating results. The principal raw materials and production feedstock used in our business include platinum, stainless steel, titanium, copper, tantalum, cobalt chromium, niobium, nitinol, hydrogen, natural gas and electricity. In particular, tantalum and nitinol are in limited supply. For wire fabrication, we purchase most of our stainless steel wire from an independent, third party supplier. Any supply disruptions from this supplier could interrupt production and harm our business.

Our international operations are subject to a variety of risks that could adversely affect those operations and thus our profitability and operating results.

We have international manufacturing operations in Europe, Mexico and Malaysia. We also receive a portion of our net sales from international customers. During 2011, approximately 19% of our net sales were to foreign customers, of which 12% was generated by exports from our facilities in the United States and the remaining 7% was generated from our international facilities. Although we take measures to minimize risks inherent to our international operations, the following risks may have a negative effect on our profitability and operating results, impair the performance of our foreign operations or otherwise disrupt our business:

 

   

fluctuations in the value of currencies could cause exchange rates to change which would impact our profitability; changes in labor conditions and difficulties in staffing and managing foreign operations, including labor unions, could lead to delays or disruptions in production or transportation of materials or our finished products;

 

   

greater difficulty in collecting accounts receivable due to longer payment cycles, which can be more common in our international operations, could adversely impact our operating results over a particular fiscal period; and

 

   

changes in foreign regulations, export duties, taxation and limitations on imports or exports could increase our operational costs, impose fines or restrictions on our ability to carry on our business or expand our international operations.

We may expand into new geographic or product markets or new products and our expansion may not be successful.

We may expand into new geographic or product markets through the development of new product applications based on our existing specialized manufacturing, design and engineering capabilities and services. For example, we recently established a manufacturing facility in Malaysia. These efforts could require us to make substantial investments, including significant research, development, engineering and capital expenditures

 

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for new, expanded or improved manufacturing facilities which would divert resources from other aspects of our business. Expansion into new markets may be costly without resulting in any benefit to us. Specific risks in connection with expanding into new markets include the inability to transfer our quality standards into new products, the failure of customers in new markets to accept our products, price competition in new markets and unfavorable political, legal and economic environment of the new markets. If our attempts to expand into new markets are unsuccessful, our financial condition could be adversely affected and our business harmed.

We conduct significant operations at our facility in Juarez, Mexico, which could be materially adversely affected as a result of the increased levels of drug-related violence in that city.

Over the past several years fighting amongst rival drug cartels has led to high levels of violent crime in Juarez, Mexico and elsewhere along the U.S.-Mexico border despite increased law-enforcement efforts by the Mexican and U.S. governments. This situation presents several risks to our operations, including, among others, that our employees may be directly affected by the violence, that our employees may elect to relocate out of the Juarez region in order to avoid the risk of violent crime to themselves or their families, and that our customers may become increasingly reluctant to visit our Juarez facility, which could delay product certifications, new business opportunities and other important aspects of our business. If any of these risks materializes, our business may be materially adversely affected.

We are subject to a variety of environmental, health and safety laws that could be costly for us to comply with, and we could incur liability if we fail to comply with such laws or if we are responsible for releases of contaminants to the environment.

Federal, state and local laws impose various environmental, health and safety requirements on our operations, including with respect to the management, handling, generation, emission, release, discharge, manufacturing, transportation, storage, use and disposal of hazardous substances and other materials used or generated in the manufacturing of our products. If we fail to comply with any present or future environmental, health and safety laws, we could be subject to fines, corrective action, other liabilities or the suspension of production. We could also be subject to claims under such laws, including common law, alleging the release of hazardous substances into the environment. We have in the past paid civil penalties for violations of such laws and certain of our permitted air emissions have been in the past (and, although we believe our efforts to lower certain emissions have alleviated this concern, may be in the future) the subject of regulatory scrutiny and community complaints. To date, such matters have not had a material adverse impact on our business or financial condition. However, we cannot assure you that such matters will not have a material impact on us in the future.

In addition, conditions relating to our operations may require expenditures for clean-up of releases of hazardous substances into the environment. For example, we were required and continue to perform remediation as a result of leaks from underground storage tanks at our Collegeville, Pennsylvania facility. In addition, we may have future liability with respect to contamination at our current or former properties or with respect to third party disposal sites. Although we do not anticipate that currently pending matters will have a material adverse effect on our results of operations and financial condition, we cannot assure you that these matters or others that arise in the future will not have such an effect.

Changes in environmental, health and safety laws may result in costly compliance requirements or otherwise subject us to future liabilities. For example, in anticipation of proposed changes to air emission regulations (and in response to past regulatory and community scrutiny), we incorporated new air emission control technologies at one of our manufacturing sites which emits a regulated substance. We cannot assure you, however, that such control technologies will be sufficient to meet the requirements of any future regulations at current production levels.

In that regard, the EPA has agreed to consider making our industry subject to air emissions standards from which we are exempt. In the event that we become subject to such regulations, we may face additional compliance costs or curtail production at this site, which could have material adverse effect on our results of operations and financial condition. In addition, to the extent changes in environmental, health and safety laws affect our customers and require changes to their devices, our customers could have a reduced need for our products and services, and, as a result, our sales could decline.

Our inability to protect our intellectual property could result in a loss of our competitive advantage, and infringement claims by third parties could be costly and distracting to management.

We rely on a combination of patent, copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect our intellectual property. The steps we have taken or will take to protect our proprietary rights may not adequately deter unauthorized disclosure or misappropriation of our intellectual property, technical knowledge, practice or procedures. We may be required to spend significant resources to monitor our intellectual property rights, we may be unable to detect infringement of these rights and we may lose our competitive advantage associated with

 

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our intellectual property rights before we do so. If it becomes necessary for us to resort to litigation to protect our intellectual property rights, any proceedings could be burdensome and costly and we may not prevail. Although we do not believe that any of our products, services or processes infringe the intellectual property rights of third parties, historically, patent applications in the United States and some foreign countries have not been publicly disclosed until the patent is issued (or as of recently, until publication, which occurs eighteen months after filing), and we may not be aware of currently filed patent applications that relate to our products or processes. If patents later issue on these applications, we may in the future be notified that we are infringing patent or other intellectual property rights of third parties and we may be liable for infringement at that time. In the event of infringement of patent or other intellectual property rights, we may not be able to obtain licenses on commercially reasonable terms, if at all, and we may end up in litigation. The failure to obtain necessary licenses or other rights or the occurrence of litigation arising out of infringement claims could disrupt our business and impair our ability to meet our customers’ needs which, in turn, could have a negative effect on our financial condition and results of operations. Infringement claims, even if not substantiated, could result in significant legal and other costs and may be a distraction to management. We also may be subject to significant damages or injunctions against development and sale of our products.

In addition, any infringement claims, significant charges or injunctions against our customers’ products that incorporate our components may result in our customers not needing or having a reduced need for our capabilities and services.

Our earnings and financial condition could suffer if we or our customers become subject to product liability claims or recalls. We may also be required to spend significant time and money responding to investigations or requests for information related to end-products of our customers.

The manufacture and sale of products that incorporate components manufactured or assembled by us exposes us to potential product liability claims and product recalls, including those that may arise from misuse or malfunction of, or design flaws in, our components or use of our components with components or systems not manufactured or sold by us. Product liability claims or product recalls with respect to our components or the end-products of our customers into which our components are incorporated, whether or not such problems relate to the products and services we have provided and regardless of their ultimate outcome, could require us to pay significant damages or to spend significant time and money in litigation or responding to investigations or requests for information. We may also lose revenue from the sale of components if the commercialization of a product that incorporates our components or subassemblies is limited or ceases as a result of such claims or recalls. Certain finished medical devices into which our components were incorporated have been subject to product recalls. Expenditures on litigation or damages, to the extent not covered by insurance, and declines in revenue could impair our earnings and our financial condition. Also, if, as a result of claims or recalls our reputation is harmed, we could lose customers, which would also negatively affect our business.

We cannot assure you that we will be able to maintain our existing insurance coverage or to do so at reasonable cost and on reasonable terms. In addition, if our insurance coverage is not sufficient to cover any costs we may incur or damages we may be required to pay if we are subject to product liability claims or product recalls, we will have to use other resources to satisfy our obligations.

We and our customers are subject to various regulations, as well as political, economic and regulatory changes in the healthcare industry or otherwise, that could force us to modify how we develop and price our components, manufacturing capabilities and services and could harm our business.

The healthcare industry is highly regulated and is influenced by changing political, economic and regulatory factors. Regulations affecting the healthcare industry in general, and the medical device industry in particular, are complex, change frequently and have tended to become more stringent over time. Specifically, the FDA and state and foreign governmental agencies regulate many of our customers’ products and approval/clearance is required for those products prior to commercialization in the U.S. and certain foreign jurisdictions. Some of our facilities are subject to inspection by the FDA and other regulatory agencies for compliance with regulations or regulatory requirements. Our failure to comply with these regulations or regulatory requirements may result in civil and criminal enforcement actions or fines and, in some cases, the prevention or delay of our customers’ ability to gain or maintain approval to market their products. Any failure by us to comply with applicable regulations could also result in the cessation of portions or all of our operations and restrictions on our ability to continue or expand our operations.

The Affordable Healthcare for America Act includes provisions that may adversely affect our business and results of operations, including an excise tax on the sales of most medical devices.

On March 21, 2010, the House of Representatives passed the Affordable Health Care for America Act, which President Obama signed into law on March 23, 2010. This legislation may adversely affect our business and results of operations, possibly materially.

 

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Specifically, one of the new law’s components is a 2.3% excise tax on sales of most medical devices, starting in 2013. This tax may put increased cost pressure on medical device companies, including our customers, and may lead our customers to reduce their orders for products we produce or to request that we reduce the prices we charge for products we produce in order to offset the tax.

Consolidation in the healthcare industry could have an adverse effect on our revenues and results of operations.

Many healthcare industry companies, including medical device companies, are consolidating to create new companies with greater market power. As the healthcare industry consolidates, competition to provide products and services to industry participants will become more intense. These industry participants may try to use their market power to negotiate price concessions or reductions for medical devices that incorporate components produced by us. If we are forced to reduce our prices because of consolidation in the healthcare industry, our revenues would decrease and our business, financial condition and results of operations would suffer.

Our business is indirectly subject to healthcare industry cost containment measures that could result in reduced sales of medical devices containing our components.

Our customers and the healthcare providers to whom our customers supply medical devices rely on third party payors, including government programs and private health insurance plans, to reimburse some or all of the cost of the procedures in which medical devices that incorporate components manufactured or assembled by us are used. The continuing efforts of government, insurance companies and other payors of healthcare costs to contain or reduce those costs could lead to patients being unable to obtain approval for payment from these third party payors. If that were to occur, sales of finished medical devices that include our components may decline significantly, and our customers may reduce or eliminate purchases of our components. The cost containment measures that healthcare providers are instituting, both in the United States and internationally, could harm our ability to operate profitably. For example, managed care organizations have successfully negotiated volume discounts for pharmaceuticals. While this type of discount pricing does not currently exist for medical devices, if managed care or other organizations were able to affect discount pricing for devices, it may result in lower prices to our customers from their customers and, in turn, reduce the amounts we can charge our customers for our design and manufacturing services.

Unanticipated disruptions of our manufacturing operations could adversely affect our ability to manufacture or distribute products and subject us to claims for damages.

Our business could be adversely affected if a significant portion of our, or our suppliers’ facilities, plants, equipment, operations were damaged or interrupted by casualty events, natural disasters, industrial accidents, interruption or loss of power, condemnations, cancellation or non-renewals of leases for our facilities, fire or explosions, acts of terrorism, pandemic, political upheavals, work stoppages or other labor difficulties or other events beyond our control. Such an event or combination of events could impair our ability to manufacture or distribute products and have a material adverse affect on our business, results of operations and financial condition. Furthermore, our business involves complex manufacturing processes and hazardous materials that can be dangerous to our employees. We employ safety procedures in the design and operation of our facilities and may be required to incur additional expenditures for the development of additional safety procedures in the future. There is a risk that an accident or death could occur at our facilities despite such procedures. Any accident could result in significant manufacturing delays, disruption of operations, claims for damages resulting from injuries or additional expenditures on safety procedures, which could result in decreased sales and increased expenses. To date, we have not incurred any such significant delays, disruptions or claims. The potential liability resulting from any accident or death, to the extent not covered by insurance, would require us to use other resources to satisfy our obligations and could cause our business to suffer.

A substantial amount of our assets represents goodwill, and our earnings will be reduced if our goodwill becomes impaired.

As of December 31, 2011, our goodwill represented approximately $629.9 million, or 57.9%, of our total assets. Goodwill is generated in acquisitions where the cost of an acquisition exceeds the fair value of the net tangible and identifiable intangible assets we acquire. Goodwill is subject to an impairment analysis at least annually based on a comparison of the fair value of the reporting unit to its carrying value. If an impairment is indicated from this first step, the implied fair value of the goodwill must be determined. Goodwill impairment charges recognized in prior years amount to $217.3 million through December 31, 2011. We could be required to recognize additional non-cash reductions in our earnings in the future resulting from the impairment of goodwill, which if significantly impaired, could materially and adversely affect our results of operations.

 

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Our inability to access additional capital could have a negative impact on our growth strategy.

Our growth strategy will require additional capital for, among other purposes, completing any acquisitions we enter into, managing any acquired companies, acquiring new equipment and maintaining the condition of existing equipment. If cash generated internally is insufficient to fund capital requirements, or if funds are not available under our ABL Revolver, we will require additional debt or equity financing. Adequate financing may not be available or, if available, may not be available on terms satisfactory to us. If we fail to obtain sufficient additional capital in the future, we could be forced to curtail our growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing our indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2011.

Some of our operations are highly cyclical.

We have established customer relationships with companies outside of the medical device market. These customers incorporate our products and services into their products such as high density discharge lamps, fiber optics, motion sensors and power generators. For the year ended December 31, 2011 these industrial operations accounted for approximately 5% of our net sales. Historically, net sales from these operations have been highly cyclical. Additionally, a significant portion of our orthopedic sales are for instruments used in implant procedures. Our sales from orthopedic instrumentation related products are directly related to the timing of product launches by our customers. Delays in product releases by our orthopedic customers can result in increased volatility in our net sales. We cannot predict when volume volatility will occur and how severely it will impact our results of operations.

We face risks associated with the use and enhancement of our Enterprise Resource Planning System.

We use a third party enterprise resource planning system, or ERP System, across many of our facilities, which enables sharing of customer and supplier operations and engineering data across our company. We continue to enhance this ERP system to improve its capabilities. Enhancement of the ERP system may divert the attention of our information technology professionals and certain members of management from the management of daily operations to the integration of the ERP system. Further, we may experience interruptions in service due to failures of the ERP system. Continuing and uninterrupted performance of our ERP system is critical to the success of our business strategy. Any damage or failure that interrupts or delays operations may dissatisfy customers and could have a material effect on our business, financial condition, results of operations and cash flows.

We license the ERP software from a third party. If these licenses are discontinued, or become invalid or unenforceable, there can be no assurance that we will be able to develop substitutes for this software independently or to obtain alternative sources at acceptable prices or in a timely manner. Any delays in obtaining or developing substitutes for licensed software could have a material effect on our operations.

The loss of the services of members of our senior management could adversely affect our business.

Our success depends upon having a strong senior management team. The loss of services of one or more members of our senior management team could have a material adverse effect on our business, financial condition and results of operations. We do not currently maintain key-man life insurance for any of our employees.

Our business could be materially adversely affected as a result of war or acts of terrorism.

Terrorist acts or acts of war may cause damage or disruption to our employees, facilities, customers, partners, suppliers, distributors and resellers, which could have a material adverse effect on our business, results of operations or financial condition. Such conflicts may also cause damage or disruption to transportation and communication systems and to our ability to manage logistics in such an environment, including receipt of components and distribution of products.

Our business may suffer if we are unable to recruit and retain the experienced engineers and management personnel that we need to compete in the medical device industry.

Our future success depends upon our ability to attract, develop and retain highly skilled engineers and management personnel. We may not be successful in attracting new engineers or management personnel or in retaining or motivating our existing personnel, which may lead to increased recruiting, relocation and compensation costs for such personnel. These increased costs may reduce our profit margins. Some of our manufacturing processes are highly technical in nature. Our ability to maintain or expand existing business with our customers and provide additional services to our existing customers depends on our ability to hire and retain engineers with the skills necessary to keep pace with continuing changes in the medical device industry. We compete with other companies in the medical device industry to recruit engineers.

 

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We depend on outside suppliers and subcontractors, and our production and reputation could be harmed if they are unable to meet our quality and volume requirements and alternative sources are not available.

Although our current internal capabilities are comprehensive, they do not include all elements that are required to satisfy all of our customers’ requirements. As we position ourselves to provide our customers with a single source solution, we may rely increasingly on third party suppliers, subcontractors and other outside sources for components or services. Manufacturing problems may occur with these third parties. A supplier may fail to develop and supply products and components to us on a timely basis, or may supply us with products and components that do not meet our quality, quantity or cost requirements. If any of these problems occur, we may be unable to obtain substitute sources of these products and components on a timely basis or on terms acceptable to us, which could harm our ability to manufacture our own products and components profitably or on time. In addition, if the processes that our suppliers use to manufacture products and components are proprietary, we may be unable to obtain comparable components from alternative suppliers.

We may selectively pursue acquisitions in the future, but, because of the uncertainty involved, we may not be able to identify suitable acquisition candidates and may not successfully integrate acquired businesses into our business and operations.

We may selectively pursue complementary acquisitions. However, we may not be able to identify potential acquisition candidates that could complement our business or may not be able to negotiate acceptable terms for acquisition candidates we identify. As a result, we may not be able to realize this element of our growth strategy. In addition, even if we are successful in acquiring any companies, we may experience material negative consequences to our business, financial condition or results of operations if we cannot successfully integrate the operations of acquired businesses with ours. The integration of companies that have previously been operated separately involves a number of risks, including, but not limited to:

 

   

demands on management related to the significant increase in the size of the business for which they are responsible;

 

   

diversion of management’s attention from the management of daily operations to the integration of operations;

 

   

management of employee relations across facilities;

 

   

difficulties in the assimilation of different corporate cultures and practices, as well as in the assimilation and retention of broad and geographically dispersed personnel and operations;

 

   

difficulties and unanticipated expenses related to the integration of departments, systems (including accounting systems), technologies, books and records, procedures and controls (including internal accounting controls, procedures and policies), as well as in maintaining uniform standards, including environmental management systems;

 

   

expenses related to any undisclosed or potential liabilities; and

 

   

ability to maintain strong relationships with our and our acquired companies’ customers after the acquisitions.

Successful integration of acquired operations depends on our ability to effectively manage the combined operations, realize opportunities for revenue growth presented by broader product offerings and expanded geographic coverage and eliminate redundant and excess costs. If our integration efforts are not successful, we may not be able to maintain the levels of revenues, earnings or operating efficiency that we and the acquired companies achieved or might achieve separately.

Our Sponsors control our decisions and may have interests that conflict with ours.

Affiliates of Kohlberg Kravis Roberts & Co., L.P. (“KKR”) and Bain Capital, LLC (collectively, the “Sponsors”) approve significant business decisions and certain policies. Circumstances may occur in which the interests of the Sponsors could be in conflict with our interests. For example, the Sponsors and certain of their affiliates are in the business of making investments in companies and may from time to time in the future acquire interests in businesses that directly or indirectly compete with certain portions of our business or are suppliers or customers of ours. Further, if the Sponsors pursue such acquisitions or make further investments in our industry, those acquisition and investment opportunities may not be available to us. So long as the Sponsors continue to indirectly own a significant amount of our equity, even if such amount is less than 50%, they will continue to be able to influence our decisions.

Subsequent to December 31, 2011 our internal controls over financial reporting may not be effective and we may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business and reputation.

 

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Section 404 of the Sarbanes Oxley Act of 2002 and rules and regulations of the SEC thereunder require that companies who are required to file reports under section 13(a) or 15(d) of the Securities Exchange Act 1934 evaluate their internal controls over financial reporting in order to allow management to report on, and their independent registered public accounting firm to attest to, their internal controls over financial reporting. On July 21, 2010, the Dodd- Frank Wall Street Reform and Consumer Protection Act (“Dodd- Frank”) was signed into law. Dodd-Frank provides a permanent exemption from Section 404(b) of the Sarbanes- Oxley Act of 2002 (“Section 404(b)”) for those entities that are neither large accelerated filers nor accelerated filers. As a result, the requirement for us to have our independent registered public accounting firm attest to, and report on, our internal controls over financial reporting does not currently apply. Management has conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2011 based on the framework and criteria established in Internal Control—Integration Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2011. If we are not able to certify as to the effectiveness of our internal controls over financial reporting, we may be subject to sanctions or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative reaction in the financial markets due to a loss of confidence in the reliability of our financial statements. In addition, we may be required to incur costs to improve our internal control system and to hire additional personnel. Any such action could negatively affect our results of operations.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

We lease 17 facilities and own 6 facilities. Our principal executive office is located at 100 Fordham Road, Building C, Wilmington, Massachusetts 01887. We believe that our current facilities are adequate for our operations. Certain information about our facilities is set forth below:

 

Location

   Approximate
Square
Footage
     Own/Lease  

Arvada, Colorado

     45,000         Lease   

Brimfield, Massachusetts

     30,000         Own   

Brooklyn Park, Minnesota

     133,000         Lease   

Collegeville, Pennsylvania

     179,000         Own   

El Paso, Texas

     20,000         Lease   

Englewood, Colorado

     40,000         Lease   

Huntsville, Alabama

     44,000         Own   

Laconia, New Hampshire

     41,000         Lease   

Orchard Park, New York

     64,000         Lease   

Pittsburgh, Pennsylvania

     68,000         Own   

Salem, Virginia

     66,000         Lease   

Sturbridge, Massachusetts

     18,000         Lease   

Trenton, Georgia

     42,000         Lease   

Upland, California

     50,000         Lease   

Watertown, Connecticut

     46,000         Lease   

Wheeling, Illinois

     48,000         Own   

Wheeling, Illinois

     51,000         Lease   

Wilmington, Massachusetts

     55,000         Lease   

Aura, Germany

     17,000         Lease   

Galway, Ireland

     16,000         Lease   

Juarez, Mexico

     101,000         Lease   

Manchester, England (1)

     11,000         Lease   

Penang, Malaysia

     61,000         Own   
  

 

 

    

Total

     1,246,000      
  

 

 

    

 

(1) In December 2011 the Company’s Board of Directors approved a plan to close its Manchester facility. We expect the facility to be closed on or about the date of this filing.

 

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Item 3. Legal Proceedings

The Company is involved in various legal proceedings in the ordinary course of business including the environmental matters described above in “Government Regulation,” which are incorporated by reference herein. In the opinion of management, the outcome of such proceedings will not have a materially adverse effect on the Company’s financial position or results of operations or cash flows.

Item 4. Mine Safety Disclosures

Not applicable.

 

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no established public trading market for our common stock. As of the date hereof, there was one stockholder of record of our common stock. Accellent Acquisition Corp. owns 100% of our capital stock. Accellent Holdings Corp. owns 100% of the capital stock of Accellent Acquisition Corp.

We do not maintain any equity compensation plans under which our equity securities are authorized for issuance.

No dividends have been declared on our common stock during the last two fiscal years.

Item 6. Selected Financial Data

The following table presents our selected historical consolidated financial data for the years ended December 31, 2007, 2008, 2009, 2010 and 2011. The results of operations for any year are not necessarily indicative of the results to be expected for any future year.

The information presented below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K.

 

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     For the years ended December 31,  
     2007     2008     2009     2010     2011  

STATEMENT OF OPERATIONS DATA:

          

Net sales

   $ 471,681      $ 525,476      $ 478,793      $ 506,954      $ 531,782   

Cost of sales

     349,929        386,143        347,783        369,250        400,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     121,752        139,333        131,010        137,704        130,934   

Selling, general and administrative expenses

     52,454        58,814        47,725        52,002        54,288   

Research and development expenses

     2,565        2,924        2,064        2,393        2,522   

Restructuring charges

     729        2,499        5,727        (117     348   

Merger related costs

     (67     —          —          —          —     

Amortization of intangible assets

     15,506        14,939        14,939        14,939        14,939   

Loss (gain) on disposal of property and equipment

     345        1,074        966        15        (706

Impairment of goodwill and intangibles (1)

     251,253        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (201,033     59,083        59,589        68,472        59,543   

Other (expense) income, net

          

Interest expense, net

     (67,367     (65,257     (56,569     (73,939     (68,883

Loss on debt extinguishment

     —          —          —          (20,882     —     

Other (expense) income, net

     (1,090     (2,453     (514     6,211        30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense)

     (68,457     (67,710     (57,083     (88,610     (68,853

(Loss) income before income taxes

     (269,490     (8,627     2,506        (20,138     (9,310

Income tax expense

     5,391        4,689        3,576        4,365        5,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (274,881   $ (13,316   $ (1,070   $ (24,503   $ (14,939
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OTHER FINANCIAL DATA:

          

Cash flows provided by (used in):

          

Operating activities

   $ 8,218      $ 41,996      $ 55,479      $ 34,575      $ 29,015   

Investing activities

     (23,806     (15,734     (14,150     (25,878     (29,840

Financing activities

     18,280        (17,001     (22,171     (1,521     (771

Capital expenditures

     23,952        17,363        16,434        25,944        30,810   

Depreciation and amortization

     35,378        35,636        37,128        37,358        38,740   

EBITDA (2)

     (166,745     92,266        96,203        91,159        98,313   

Adjusted EBITDA (2)

     86,606        103,974        109,818        110,147        103,390   

Ratio of earnings to fixed charges (3)

     —          —          1.04        —          —     

Deficiency of earnings to fixed charges

   $ 269,490      $ 8,627      $ —        $ 20,138      $ 9,310   

BALANCE SHEET DATA (at period end):

          

Cash and cash equivalents

   $ 5,688      $ 14,525      $ 33,785      $ 40,787      $ 38,858   

Total assets

     1,122,365        1,102,731        1,078,975        1,098,076        1,087,422   

Total debt, net of unamortized discount

     721,201        706,536        684,657        712,684        712,989   

Total stockholder’s equity

     311,995        302,173        306,516        280,508        266,900   

 

(1) We recorded impairment charges for the impairment of goodwill and other intangible assets of $217.3 million and $34.0 million, respectively, during the year ended December 31, 2007.
(2) We define “EBITDA” as net loss before net interest expense, income tax expense, depreciation and amortization. Since EBITDA may not be calculated in the same manner by all companies, this measure may not be comparable to similarly titled measures by other companies. “Adjusted EBITDA” is defined as EBITDA, adjusted to give effect to unusual items, non-cash items and certain other adjustments, all of which are required in determining compliance with certain restrictive covenants of the indentures governing the 2017 Notes and the credit agreement governing our ABL Revolver.

We disclose EBITDA and Adjusted EBITDA to provide additional information to investors related to the indentures governing the 2017 Notes and our ABL Revolver. We also disclose it as a supplemental measure of our performance.

 

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EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. See Item 7 for a reconciliation of net loss to EBITDA and a reconciliation of EBITDA to Adjusted EBITDA under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Other Key Indicators of Financial Condition and Operating Performance”.

(3) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes plus fixed charges. Fixed charges include: interest expense, whether expensed or capitalized; amortization of debt issuance costs; and the portion of rental expense representative of the interest factor.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under “Item 1A. Risk Factors.” Our actual results may differ materially from those contained in any forward-looking statements.

Overview

We believe that we are a leading provider of outsourced precision manufacturing and engineering services in our target markets of the medical device industry. We offer our customers design and engineering, precision component manufacturing, device assembly and supply chain management services. We have extensive resources focused on providing our customers with reliable, high quality, cost-efficient, integrated outsourced solutions. Based on discussions with our customers, we believe we often become the sole supplier of manufacturing services for the products we provide to our customers.

We primarily focus on leading companies in large and growing markets within the medical device industry including cardiology, endoscopy and orthopaedics. Our customers include many of the leading medical device companies including Abbott Laboratories, Boston Scientific, Johnson & Johnson, Medtronic, Smith & Nephew, St. Jude Medical and Stryker. While revenues are aggregated by us to the ultimate parent of a customer, we typically generate diversified revenue streams within these large customers across their separate divisions and multiple products. During 2009, 2010 and 2011, our 10 largest customers accounted for approximately 60%, 64% and 65% of net sales with two customers each accounting for greater than 10% of net sales in 2009 and 2010 and three customers each accounting for greater than 10% of net sales in 2011.

We have aligned the Company to reflect the consolidation of our sales, finance, quality, engineering and customer services into a centrally managed organization designed to better serve our customers, many of whom service multiple medical device markets. We have one operating and reportable segment which is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and assess performance.

Net Sales are recorded when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price from the buyer is fixed or determinable, and collectibility is reasonably assured. Generally, we recognize revenue based on written arrangements or purchase orders with our customers and upon transfer of title of the product or rendering of the service. Amounts billed for shipping and handling fees are classified within net sales in our consolidated statements of operations. Costs incurred for shipping and handling fees are classified as cost of sales. We provide an allowance for estimated future returns in the period revenue is recorded. The estimate of future returns is based on such factors as known pending returns and historical return data. We primarily generate our sales domestically. For each of the years ended December 31, 2009 and 2010, approximately 83% of our net sales were to customers located in the United States. For the year ended December 31, 2011, approximately 81% of our net sales were to customers located in the United States. Since a substantial majority of the leading medical device companies are located in the United States, we expect our net sales to U.S.-based companies to remain a high percentage of our net sales in the future. Our operations are based on purchase orders that typically provide for 30 to 90 days delivery from the time the purchase order is received, but which can provide for delivery within 30 days or up to 180 days, depending on the product and customers’ ability to forecast their requirements.

Cost of sales includes raw materials, labor and other manufacturing costs associated with the products we sell. Some products incorporate precious metals, such as gold, silver and platinum. Changes in prices for those commodities are generally passed through to our customers.

Selling, general and administrative expenses include salaries, sales commissions, professional fees and other selling and administrative costs.

Research and development costs consist of salaries, materials and other R&D costs.

 

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Restructuring charges include severance expenses associated with employee rationalization and other expenses related to facility closures.

Amortization of intangible assets consists of charges to amortize the Company’s finite-lived intangible assets over their expected useful lives.

Impairment charges consist of charges to write down goodwill and other intangible assets to fair value.

Interest expense relates primarily to the debt initially incurred to finance the acquisition of us by our Sponsors, debt subsequently incurred to refinance such acquisition financing and the amortization of deferred financing costs.

Results of Operations

The following table sets forth our operating data as a percentage of net sales for the years ended December 31, 2009, 2010 and 2011:

 

     Year Ended
December  31,

2009
    Year Ended
December  31,

2010
    Year Ended
December  31,

2011
 

Net sales

     100.0     100.0     100.0

Cost of sales

     72.6        72.8        75.4   
  

 

 

   

 

 

   

 

 

 

Gross profit

     27.4        27.2        24.6   

Selling, general and administrative expenses

     10.0        10.3        10.2   

Research and development expenses

     0.4        0.5        0.5   

Restructuring charges

     1.2        —          —     

Loss (gain) on disposal of property and equipment

     0.2        —          (0.1

Amortization of intangible assets

     3.1        2.9        2.8   
  

 

 

   

 

 

   

 

 

 

Income from operations

     12.5     13.5     11.2
  

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Net sales

Net sales for 2011 were $531.8.0 million, an increase of $24.8 million, or 4.9%, compared to net sales of $507.0 million for 2010. The increase in net sales is attributable to higher sales volume of $19.2 million, net of price decreases of $5.3 million, and approximately $10.9 million of higher platinum sales resulting from passing through to our customers, increases in precious metal prices which do not benefit gross profit.

Three customers, Johnson & Johnson, Medtronic and Boston Scientific, each accounted for greater than 10% of our net sales in 2011. Two customers, Johnson & Johnson and Medtronic, each accounted for greater than 10% of our net sales in 2010.

Cost of Sales and Gross Profit

Cost of sales was $400.8 million for 2011 compared to $369.3 million for 2010, an increase of $31.5 million, or 8.5%. Cost of sales reflects our variable manufacturing costs and our fixed overhead costs necessary to produce products for our customers. The increase in cost of sales is primarily attributable to increased material costs resulting from the sales increase related to platinum of approximately $10.9 million, increases in material costs primarily related to the increase in net sales of approximately $2.3 million, excluding costs related to new product introductions, increases in material costs related to new product introduction sales that generally have a higher material content of approximately $5.1 million, increased variable labor costs resulting primarily from wage inflation of approximately $5.7 million, increased manufacturing overhead costs of approximately $9.7 million, offset by lower variable manufacturing costs of $2.2 million.

 

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Gross profit for 2011 was $130.9 million, or 24.6% of net sales, compared to $137.7 million, or 27.2% of net sales, for 2010. The decrease in our gross profit of $6.8 million for 2011 compared to 2010 was primarily attributable to higher fixed manufacturing costs, increases in the market price of certain non-precious metals which we use extensively in manufacturing, and higher labor costs during the December 31, 2011 compared to the year ended December 31, 2010. As a percent of sales, gross profit decreased 2.6% during 2011 compared to 2010, due to the increase in sales of platinum, which represented 0.5% of the gross profit decrease as a percent of sales and overall higher manufacturing costs.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses were $54.3 million for 2011 compared to $52.0 million for 2010. The net $2.3 million increase in SG&A expenses was primarily attributable to higher employee related costs of $2.4 million, offset by a net decrease in discretionary SG&A spending totaling $0.1 million The increases in employee related costs reflect increased sales commissions of $0.2 million, increased retirement benefits of $0.6 million related primarily to a supplemental retirement plan maintained for an executive of the Company, higher non-cash compensation totaling $0.3 million and higher labor compensation and benefits provided for salaried and hourly SG&A personnel totaling $1.3 million.

Research and development expenses

Research and development expenses for 2010 were $2.4 million compared to $2.5 million for 2011. The increase of $0.1 million in 2011 compared to 2010 is related to an increase in discretionary spending during the year ended December 31, 2011 compared to the year ended December 31, 2010. Research and development expenses for both 2011 and 2012 include grant funds received totaling $0.1 million from the government of Ireland related to eligible research and development spending in Ireland.

Restructuring charges

In December 2011, the Company’s Board of Directors approved a plan of closure with respect to the Company’s manufacturing facility in Manchester, England. The facility will be closed, and all employees will be terminated, on or about March 31, 2012. All affected employees were offered both stay-bonuses as well as severance benefits to be received upon termination of employment, should they remain with the Company through the closing date. The total one-time termination benefits total approximately $0.6 million and are being recorded over the remaining service period as employees are required to stay through their termination date to receive the benefits. During the year ended December 31, 2011, the Company recorded $0.3 million of costs related to these one-time termination benefits which is recorded within “Restructuring charges” in the accompanying consolidated statement of operations for the year ended December 31, 2011.

During 2010, the Company reduced its estimates that are used in determining the amount of its liability related to restructuring charges. As a result, restructuring charges reflects an expense reduction of $0.1 million in 2010.

Loss on disposal of property and equipment

During the year ended December 31, 2011, the Company recorded approximately $0.7 million of net gains related to the disposal of property and equipment compared to $15,000 during the year ended December 31, 2010. During the year ended 2011, the Company sold certain intellectual property which resulted in a gain of approximately $0.7 million.

Amortization

Amortization of finite-lived intangible assets was $14.9 million for 2010 and $14.9 million for 2011.

Interest expense, net

Interest expense, net, decreased $5.1 million to $68.9 million in 2011, compared to $74.0 million in 2010. The decrease was primarily the result of lower rates of interest on our outstanding fixed rate indebtedness resulting from the debt refinancing transactions we completed in 2010. Refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Other (expense) income, net

Other (Expense) Income, net includes foreign currency gains and losses and mark-to-market gains and losses on derivative instruments that we held through November 2010. During the year ended December 31, 2011, we recorded a currency exchange loss of $0.1 million compared to a gain of approximately $1.5 million during the year ended December 31, 2010. This difference of approximately $1.6 million is due primarily to a decline in the in the dollar foreign exchange rate compared to the foreign exchange rate of the Euro during the year ended December 31, 2011 compared to the year ended December 31, 2010.

 

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Through November 2010, we maintained an interest rate swap agreement which reduced our exposure to variable interest rates on our then outstanding term indebtedness. During the year ended December 31, 2010 we realized a $4.5 million gain related to this interest rate swap agreement resulting from the changes in the underlying fair value of the interest rate swap agreement. The fair value of the interest rate swap agreement was largely dependent on movements in short-term interest rates, among other factors.

Income tax expense

Income tax expense for 2011 was $5.6 million and consisted of $2.0 million of deferred income taxes, which included $2.9 million related to the difference between the book and tax treatment of goodwill and indefinite lived intangible assets and a deferred income tax benefit of $0.2 million related to foreign deferred income taxes. Income tax expense for 2010 was $4.4 million and consisted of $3.1 million of deferred income taxes, which included $3.3 million related to the difference between the book and tax treatment of goodwill and indefinite lived intangible assets and a deferred income tax benefit of $0.2 million related to foreign deferred income taxes. At December 31, 2011, we provided a valuation allowance for substantially all of our net deferred tax assets that are temporary as we have determined that it is more likely than not that any future benefit from these net deferred tax assets will not be realized.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Net sales

Net sales for 2010 were $507.0 million, an increase of $28.2 million, or 5.9%, compared to net sales of $478.8 million for 2009. The increase in net sales is attributable to higher sales volume of $28.0 million driven by increased demand for the Company’s products from many of our larger customers, and a $5.9 million increase in platinum sales resulting from passing through to our customers, increases in precious metal prices which do not impact gross profit, offset by net price decreases.

Two customers, Johnson & Johnson and Medtronic, each accounted for greater than 10% of our net sales in 2010 and 2009.

Cost of Sales and Gross Profit

Cost of sales was $369.3 million for 2010 compared to $347.8 million for 2009, an increase of $21.5 million, or 6.2%. Cost of sales reflects our variable manufacturing costs and our fixed overhead costs necessary to produce products for our customers. The increase in Cost of sales is primarily attributable to higher 2010 revenue and, to a lesser extent, higher variable manufacturing costs resulting from (i) an increase in labor costs reflecting increased use of temporary personnel, which carries a higher cost per hour and (ii) increased costs of certain metals including platinum. These increases were partially offset by a reduction in our environmental liability of $1.3 million during 2010.

Gross profit for 2010 was $137.7 million, or 27.2% of net sales, compared to $131.0 million, or 27.4% of net sales, for 2009. The increase in our gross profit of $6.7 million for 2010 compared to 2009 was primarily attributable to increased net sales during the year. As a percent of sales, gross profit decreased 0.2% during 2010 compared to 2009, primarily due to higher variable manufacturing costs which were partially offset by increased leverage of our fixed overhead infrastructure with increased net sales and a reduction in our environmental liability of $1.3 million during the year.

Selling, general and administrative expenses

Selling, general and administrative, or SG&A, expenses were $52.0 million for 2010 compared to $47.7 million for 2009. The net $4.3 million increase in SG&A expenses was primarily attributable to higher employee labor related costs of $3.2 million and increases in professional fees, contract services and other discretionary spending totaling $1.4 million, $1.1 million and $0.1 million, respectively, offset by lower costs related to bad debts and lower recruiting and relocation costs of $0.9 million and $0.6 million, respectively. The increase in labor costs reflects increased sales commissions of $1.3 million and increased compensation of $1.9 million.

Research and development expenses

Research and development expenses for 2010 were $2.4 million compared to $2.1 million for 2009. The increase of $0.3 million in 2010 compared to 2009 is related to a decline in the amount of research and development grant funds received of $0.4 million from the government of Ireland related to eligible research and development spending in Ireland and higher discretionary spending of $0.1 million, both of which are offset by lower personnel and labor related costs of $0.2 million.

 

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Restructuring charges

The Company undertook no restructuring actions in 2010. During 2010, the Company reduced its estimates that are used in determining the amount of its liability related to restructuring charges. As a result, restructuring charges reflects an expense reduction of $0.1 million in 2010 compared to an expense $5.7 million for 2009. Details about our 2009 restructuring actions are summarized below.

During the year ended December 31, 2009, the Company recorded $5.7 million of restructuring charges consisting of severance costs resulting from both the elimination of 344 positions in manufacturing and administrative functions as part of the ongoing company-wide efforts to reduce costs and the closure of the Company’s manufacturing facility in Huntsville, Alabama as described below. Total costs associated with the Huntsville plant closure approximated $1.9 million.

In May 2009, the Company’s Board of Directors approved a plan of closure with respect to the Company’s Huntsville manufacturing. Pursuant to the plan, the facility closed in November 2009 and a majority of the operations were transferred to other Accellent facilities. In connection with the plan, all employees were terminated in November, 2009. All affected employees were offered both retention bonuses as well as individually determined severance benefits to be received upon termination of employment, if they remained with the Company through that date. The total one-time termination benefits approximated $1.2 million and were recorded over the employees’ remaining service period as employees were required to stay through their termination date to receive the benefits. Costs to consolidate facilities totaled approximately $0.7 million and are also reported in restructuring charges.

In connection with the closure of the Company’s Huntsville facility, in addition to termination benefits of approximately $1.2 million, the equipment that was not transferred to other of our factories was sold or written down to its fair value, less costs to sell, during the year ended December 31, 2009. The Company recorded approximately $0.4 million of losses on these assets. At December 31, 2009, approximately $0.9 million related to the closure of the Huntsville facility remained unpaid, all of which was paid by December 31, 2010.

Loss on disposal of property and equipment

During the year ended December 31, 2010, the Company recorded approximately $15,000 of losses related to the disposal of property and equipment compared to $1.0 million during the year ended December 31, 2009. The decrease is primarily due to lower asset disposals during 2010 compared to 2009. In 2009, in connection with the closure of the Company’s Huntsville manufacturing facility, the Company wrote-down the carrying value of certain assets to their fair value of $0.7 million. The resulting charges of $0.4 million during 2009 are included in loss on disposal of property and equipment in the consolidated statements of operations included elsewhere in this Annual Report on Form 10-K.

Amortization

Amortization of finite-lived intangible assets was $14.9 million for both 2010 and 2009.

Interest expense, net

Interest expense, net, increased $17.4 million to $74.0 million in 2010, compared to $56.6 million in 2009. The increase was primarily the result of a higher rate of interest on our 2017 Notes compared to our term loan, which was refinanced in January 2010, and higher gross debt outstanding during 2010 compared to 2009 as a result of two refinancing transactions completed during 2010. Refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Loss on Debt Extinguishment

In January 2010, the Company repaid the entire balance then outstanding of its term loan totaling $381.6 million plus accrued interest thereon with proceeds received from the sale of $400 million principal amount of Senior Secured Notes (the “Term Loan Refinancing”). As a result of the Term Loan Refinancing, the Company terminated its then existing revolving credit facility and replaced it with the “ABL Revolver”. In connection with the Term Loan Refinancing, deferred financing fees in the amount of $14.4 million, net of accumulated amortization of $8.6 million, related to its term loan and revolving credit facility were recorded as a loss on debt extinguishment of approximately $5.8 million during 2010.

In June 2010, the Company purchased $10.0 million principal amount of its 10 1/2% Senior Subordinated Notes due 2013 (the “2013 Senior Subordinated Notes”) at a price of 99.8% plus accrued interest thereon, for a total of approximately $10.0 million dollars. Subsequent to the purchase, the notes were cancelled. In connection with the purchase and subsequent cancellation of the 2013 Subordinated Notes, the Company recorded a loss on debt extinguishment of approximately $0.2 million.

 

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In October 2010, the Company sold $315 million of the 2017 Senior Subordinated Notes (“the “2017 Subordinated Notes”). A portion of the net proceeds from the sale of the 2017 Senior Subordinated Notes was used to finance the Company’s tender offer (the “Tender Offer”) for any and all of its then outstanding Senior Subordinated Notes due 2013, and the remaining net proceeds of the offering, along with available cash, were used to finance the Company’s redemption of the outstanding 2013 Senior Subordinated Notes that were not tendered during the period that the Tender Offer remained open. In connection with the sale of the 2017 Senior Subordinated Notes and the redemption of its then outstanding 2013 Senior Subordinated Notes, the Company recorded a loss on debt extinguishment which amounted to $14.9 million which consisted of a redemption premium of $6.3 million, a consent premium associated with the Tender Offer of $2.3 million, a write off of deferred financing fees of approximately $12.4 million, net of accumulated amortization thereon of approximately $7.6 million, and the remaining unamortized discount of $1.5 million.

Other (Expense) Income, net

Other (expense) income, net includes gains and losses on our derivative instruments and foreign currency transaction gains and losses. Through November 2010, we maintained an interest rate swap agreement which reduced our exposure to variable interest rates on our term loan. During 2010, we recorded a $4.5 million gain on the interest rate swap agreement compared to a $0.4 million gain during 2009. The fair value of the interest rate swap agreement was largely dependent on movements in short-term interest rates, among other factors. The difference of $4.1 million in 2010 compared to 2009 reflects the underlying difference due to short term interest rate changes. In addition, we recorded net currency exchange transaction gains of $1.5 million during 2010 compared to losses of $0.9 million during 2009. The difference of $2.4 million is primarily due to an improvement in the dollar foreign exchange rate compared to the Euro and British pound foreign exchange rates during 2010 compared to 2009.

Income tax expense

Income tax expense for 2010 was $4.4 million and consisted of $3.1 million of deferred income taxes, which included $3.3 million related to the difference between the book and tax treatment of goodwill and indefinite lived intangible assets and a deferred income tax benefit of $0.2 million related to foreign deferred income taxes. Income tax expense for 2009 was $3.6 million and consisted of $2.6 million of deferred federal income taxes primarily related to the difference between the book and tax treatment of goodwill and indefinite lived intangible assets, $0.8 million of foreign income taxes and state income taxes of $0.2 million. At December 31, 2010, we provided a valuation allowance for substantially all of our net deferred tax assets that are temporary as we have determined that it is more likely than not that any future benefit from these net deferred tax assets will not be realized.

Liquidity and Capital Resources

Our principal source of liquidity is our cash flow from operations and borrowings available to us under our $75 million ABL Revolver. At December 31, 2011, we had $12.1 million of letters of credit outstanding and no outstanding loans under the ABL Revolver. As of December 31, 2011, our total indebtedness amounted to $715.0 million. Refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash provided by operations was $29.0 million during 2011, compared to 34.6 million in 2010. The decrease in cash provided by operating activities of $5.6 million is primarily attributable to lower operating profitability offset by lower demand for working capital investments and lower cash interest costs.

Cash used in investing activities was $29.8 million during 2011 compared to $25.9 million during 2010. The increase in cash used for investing activities of $3.9 million during 2011 is attributable to higher capital asset acquisitions of $4.8 million, offset by the proceeds from sale of intellectual property of $0.9 million. During 2011, cash used in financing activities was $0.7 million compared to $1.5 million during 2010. During 2010, the Company completed two transactions to refinance its then outstanding indebtedness which resulted in a net use of $2.1 million of cash which was offset by $0.6 million received from the sale of stock in the Company’s parent company. In 2011, cash used for financing activities primarily reflects remaining payments of debt issuance costs related to the refinancing completed in 2010. Refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Cash provided by operations was $34.6 million during 2010, compared to $55.5 million in 2009. The decrease in cash provided by operating activities of $20.9 million is primarily attributable to working capital investments in accounts receivable and inventory and increased cash paid for interest during 2010, partially offset by increases in cash generated from higher operating profits and increased accounts payable and accrued liabilities.

Cash used in investing activities was $25.9 million during 2010 compared to $14.2 million during 2009. The increase in cash used for investing activities of $11.7 million during 2010 is attributable to higher capital asset acquisitions of $9.5 million, lower cash generated from sale of equipment of $0.9 million and cash proceeds of $1.3 million from the repayment of a note receivable generated in 2009.

 

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During 2010, cash used in financing activities was $1.5 million compared to $22.2 million during 2009. The decrease in cash used in financing activities of $20.7 million was attributable primarily to net incremental cash received from the refinancing transactions, lower scheduled debt principal payments of $39.6 million during 2010 and an increase in cash from the sale of parent company stock of $0.4 million, all of which were offset by $19.3 million of fees paid to unrelated third parties in connection with the refinancing transactions completed during 2010. Refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Capital Expenditures. We expect our capital expenditures for 2012 to approximate 5% of revenues and to include investments related to new business opportunities, upgrades of our existing equipment infrastructure and information technology enhancements. We expect that these investments will be financed from operating cash flow.

As of December 31, 2011, we have a liability of $1.8 million, of which the Company expects to pay $0.1 million during 2012, for environmental clean up matters. The United States Environmental Protection Agency, or EPA, issued an Administrative Consent Order in July 1988 requiring UTI, our subsidiary, to study and, if necessary, remediate the groundwater and soil beneath and around its plant in Collegeville, Pennsylvania. Since that time, UTI has implemented and is operating successfully a TCE contamination well pumping treatment system approved by the EPA. We expect to pay approximately $0.1 million of ongoing annual operating costs during each of the next five years relating to this remediation effort. Our environmental accrual at December 31, 2011 includes $1.7 million related to our Collegeville location. The remaining environmental accrual, related to our other locations, was $0.1 million at December 31, 2011.

Our ability to make payments on our indebtedness and to fund planned capital expenditures, other expenditures and long-term liabilities, and necessary working capital will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. Based on our current level of operations, we believe our cash flow from operations and available borrowings under the ABL Revolver will be adequate to meet our liquidity requirements for the next 12 months. However, no assurance can be given that this will be the case.

Indebtedness. At December 31, 2011 our aggregate debt was approximately $715.0 million substantially all of which was due in 2017. Our debt at December 31, 2011 consisted of our Senior Secured Notes which bear interest at 8.375% and our Senior Subordinated Notes which bear interest at 10%. In addition, we have a $75 million asset based revolving credit facility. Our revolving credit facility afforded us borrowing capacity of $27.6 million at December 31, 2011. No amounts have been drawn under the facility since it was put in place in January 2010. Our Senior Secured Notes were issued in January 2010 and our Senior Subordinated Notes were issued in October 2010.

ABL Revolver

In January 2010 in connection with refinancing, the Company entered into its ABL Revolver pursuant to a credit agreement among the Company, a syndicate of financial institutions, and certain institutional lenders.

The ABL Revolver provides for revolving credit financing of up to $75.0 million, subject to borrowing base availability, with a maturity of five years. The borrowing base at any time is limited to certain percentages of eligible accounts receivable and inventories. All borrowings under the ABL Revolver are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings, and undrawn letters of credit under the ABL Revolver exceeds the lesser of (i) the commitment amount and (ii) the borrowing base, the Company will be required to repay outstanding loans and cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.

Borrowings under the ABL Revolver bear interest at a rate per annum equal to, at the Company’s option, either (a) a base rate determined by reference to the highest of (1) the prime rate of the administrative agent, (2) the federal funds effective rate plus 1/2 of 1% and (3) the LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for a three month interest period plus 1% or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, in each case plus an applicable margin set at 2.25% per annum with respect to base rate borrowings and 3.25% per annum with respect to LIBOR borrowings. In addition to paying interest on outstanding principal under the ABL Revolver, the Company is required to pay a commitment fee of 0.50% per annum in respect of unutilized commitments. The Company must also pay customary administrative agency fees and customary letter of credit fees equal to the applicable margin on LIBOR loans. All outstanding loans under the ABL Revolver are due and payable in full on the fifth anniversary of the closing date.

 

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&All obligations under the ABL Revolver are unconditionally guaranteed jointly and severally on a senior secured basis by all the Company’s domestic restricted subsidiaries (refer to Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for supplemental guarantor financial information). All obligations under the ABL Revolver, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the guarantors, including:

 

   

a first-priority security interest in personal property consisting of accounts receivable, inventory, certain cash, related general intangibles and instruments related to the foregoing and proceeds of the foregoing (such assets, the “ABL Priority Collateral”); and

 

   

a second-priority security interest in, and mortgages on, substantially all of the Company’s material real property and equipment and all other assets other than the ABL Priority Collateral, which secure the 2017 Senior Secured Notes on a first-priority basis (such assets, the “Notes Priority Collateral”).

The ABL Revolver requires that if excess availability is less than 15% of the lesser of (i) the commitment amount and (ii) the borrowing base for five consecutive business days, the Company must comply with a minimum fixed charge coverage ratio test of not less than 1.1 to 1.0 for a period ending on the first day thereafter on which excess availability has been greater than the amounts set forth above for 30 consecutive days. In addition, the ABL Revolver includes affirmative and negative covenants that, subject to significant exceptions, limit the Company’s ability and the ability of its subsidiaries to, among other things:

 

   

incur, assume or permit to exist additional indebtedness or guarantees;

 

   

incur liens;

 

   

make investments and loans;

 

   

pay dividends, make payments or redeem or repurchase capital stock;

 

   

engage in mergers, acquisitions and asset sales;

 

   

prepay, redeem or purchase certain indebtedness including the 2017 Notes;

 

   

amend or otherwise alter terms of certain indebtedness, including the 2017 Notes;

 

   

engage in certain transactions with affiliates; and

 

   

alter the business that the Company conducts.

At December 31, 2011 the Company is in compliance with all covenants.

The ABL Revolver contains certain customary representations and warranties, affirmative covenants and events of default, including among other things payment defaults, breach of representations and warranties, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, certain events under ERISA, material judgments, actual or asserted failure of any guaranty or security document supporting the ABL Revolver to be in full force and effect, and change of control. If such an event of default occurs, the lenders under the ABL Revolver would be entitled to take various actions, including the acceleration of amounts due under the ABL Revolver and all actions generally permitted to be taken by a secured creditor.

During 2010, the Company refinanced both its term loan and its 2013 Senior Subordinated Notes – each of which were outstanding at December 31, 2009. The term loan was refinanced in January 2010 with proceeds from the issuance of the 2017 Senior Secured Notes and the 2013 Senior Subordinated Notes were redeemed using proceeds from the issuance of the 2017 Senior Subordinated Notes. The 2013 Senior Subordinated Notes were re-purchased in part, through a tender offer in which holders of the then outstanding 2013 Senior Subordinated Notes were offered a 0.3% premium which included a 0.2% redemption premium and a 0.1% consent premium for holders who tendered during an early tender period. Approximately 78% of the 2013 Senior Subordinated Notes were tendered and redeemed in October and the remaining 2013 Senior Subordinated Notes were redeemed in December. A summary of each of the 2017 Senior Secured Notes and the 2017 Senior Subordinated Notes is provided below.

Senior Notes

8 3/8% Senior Secured Notes due 2017

In January 2010, the Company issued $400 million aggregate principal amount of its 2017 Senior Secured Notes to refinance the term loan outstanding under its then existing credit facility (refer to Note 4 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K).

The 2017 Senior Secured Notes bear interest at 8.375% per annum and mature on February 1, 2017. Interest is payable on a semi-annual basis on August 1 and February 1. Prior to February 1, 2013, the Company may redeem the 2017 Senior

 

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Secured Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any. Additionally, during any 12-month period commencing on the issue date, the Company may redeem up to 10% of the aggregate principal amount of the notes at a redemption price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. The Company may also redeem any of the 2017 Senior Secured Notes at any time on or after February 1, 2013, in whole or in part, at specified redemption prices plus accrued and unpaid interest, if any. In addition, prior to February 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 2017 Senior Secured Notes with the net proceeds of certain equity offerings, provided at least 65% of the aggregate principal amount of the 2017 Senior Secured Notes remains outstanding immediately after such redemption. Upon a change of control, the Company will be required to make an offer to purchase each holder’s 2017 Senior Secured Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any.

The Company’s obligations under the 2017 Senior Secured Notes are jointly and severally guaranteed on a senior secured basis by the Company and all of the Company’s domestic subsidiaries (refer to Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for supplemental guarantor financial information). All obligations under the 2017 Senior Secured Notes, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the guarantors, including:

 

   

a first-priority security interest in, and mortgages on, the Notes Priority Collateral; and

 

   

a second-priority security interest in the ABL Priority Collateral.

 

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10% Senior Subordinated Notes due 2017

In October 2010, the Company issued $315 million aggregate principal amount of its 2017 Senior Subordinated Notes. The 2017 Subordinated Notes bear interest at 10.0% per annum and mature on November 1, 2017. Interest is payable semi-annually on May 1 and November 1, commencing on May 1, 2011. Prior to November 1, 2013, the Company may redeem the 2017 Senior Subordinated Notes, in whole or in part, at a price equal to 100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest, if any. The Company may also redeem any of the 2017 Senior Subordinated Notes at any time on or after November 1, 2013, in whole or in part, at specified redemption prices plus accrued and unpaid interest, if any. In addition, prior to November 1, 2013, the Company may redeem up to 35% of the aggregate principal amount of the 2017 Senior Subordinated Notes with the net proceeds of certain equity offerings, provided at least 65% of the aggregate principal amount of the 2017 Senior Subordinated Notes remain outstanding immediately after such redemption. Upon a change of control, the Company will be required to offer to purchase the 2017 Senior Subordinated Notes at a price of 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase.

The Company’s obligations under the 2017 Senior Subordinated Notes are jointly and severally guaranteed on a senior subordinated basis by all of the Company’s domestic restricted subsidiaries (refer to Note 16 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for supplemental guarantor financial information).

Terms Applicable to the 2017 Notes

The indentures that govern the 2017 Notes contain restrictions on our ability, and the ability of our subsidiaries, to:

 

   

incur additional indebtedness or issue preferred stock;

 

   

repay subordinated indebtedness prior to its stated maturity;

 

   

pay dividends on, repurchase or make distributions in respect of our capital stock or make other restricted payments;

 

   

make certain investments;

 

   

sell certain assets;

 

   

create liens;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

agree to any restrictions on the ability of restricted subsidiaries to make payments to the issuer

 

   

enter into certain transactions with our affiliates.

The 2017 Notes include customary events of default, including among other things payment defaults, covenant defaults, cross-defaults to certain indebtedness, certain events of bankruptcy, material judgments and actual or asserted failure of certain guarantees or security interests to be in full force and effect. If such an event of default occurs, the trustee or holders of the 2017 Notes, as applicable, may be entitled to take various actions, which may include the acceleration of amounts due under the 2017 Notes and, in the case of the trustee or holders of the 2017 Senior Notes, to enforce their security interests in our assets.

Other Key Indicators of Financial Condition and Operating Performance

EBITDA and Adjusted EBITDA presented in this Annual Report on Form 10-K are supplemental measures of our performance that are not required by, or presented in accordance with GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net loss or any other performance measures derived in accordance with GAAP.

EBITDA represents net loss before net interest expense, income tax expense, depreciation and amortization. Adjusted EBITDA is defined as EBITDA further adjusted to give effect to certain non-cash items and other adjustments, all of which are defined in the indentures governing the 2017 Notes and our ABL Revolver. We believe that the inclusion of EBITDA and Adjusted EBITDA in this Annual Report on Form 10-K is appropriate to provide additional information to investors regarding certain restrictions in the indentures governing the 2017 Notes and our ABL Revolver. There are no material differences in the manner in which EBITDA and Adjusted EBITDA were previously determined under our credit agreement, as amended.

We also present EBITDA because we consider it an important supplemental measure of our performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. We believe EBITDA facilitates operating performance comparison from

 

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period to period and company to company by backing out potential differences caused by variations in capital structures, tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense).

In determining Adjusted EBITDA, as permitted by the terms of our indebtedness, we eliminate the impact of a number of items. For the reasons indicated herein, you are encouraged to evaluate each adjustment and whether you consider it appropriate. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

   

they do not reflect our cash expenditures for capital expenditure or contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, our working capital requirements;

 

   

they do not reflect interest expense, or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements;

 

   

Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters we consider not to be indicative of our ongoing operations, as discussed in our presentation of “Adjusted EBITDA” in this report; and

 

   

other companies, including other companies in our industry, may calculate these measures differently than we do, limiting their usefulness as a comparative measure.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business or reduce our indebtedness. For these purposes, we rely on our GAAP results. For more information, see our consolidated financial statements and the notes to those statements included elsewhere in this report.

The following table sets forth a reconciliation of net loss to EBITDA for the years indicated:

 

     Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
 

RECONCILIATION OF NET LOSS TO EBITDA:

      

Net loss

   $ (1,070   $ (24,503   $ (14,939

Interest expense, net

     56,569        73,939        68,883   

Provision for income taxes

     3,576        4,365        5,629   

Depreciation and amortization

     37,128        37,358        38,740   
  

 

 

   

 

 

   

 

 

 

EBITDA

   $ 96,203      $ 91,159      $ 98,313   
  

 

 

   

 

 

   

 

 

 

 

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The following table sets forth a reconciliation of EBITDA to Adjusted EBITDA for the years indicated:

 

     Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
 

EBITDA

   $ 96,203      $ 91,159      $ 98,313   

Adjustments:

      

Restructuring charges

     5,727        (117     348   

Stock-based compensation—employees (a )

     617        695        1,021   

Stock-based compensation—non-employees(a )

     93        90        90   

Severance and relocation (b )

     1,968        1,942        1,701   

Executive recruiting costs (b )

     310        —          307   

Loss (gain) on disposal of property and equipment(c )

     966        15        (706

Management fees to stockholder (d )

     1,216        1,231        1,292   

Currency (gain)/ loss (e )

     900        (1,467     97   

Loss (gain) on derivative instruments (f )

     (425     (4,511     —     

Plant closure costs and other (g )

     2,243        49        158   

Other taxes (h )

     —          179        769   

Loss on debt extinguishment (i )

     —          20,882        —     
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 109,818      $ 110,147      $ 103,390   
  

 

 

   

 

 

   

 

 

 

The differences between Adjusted EBITDA and cash flows provided by operating activities are summarized as follows:

 

     Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
 

Adjusted EBITDA

   $ 109,818      $ 110,147      $ 103,390   

Net changes in operating assets and liabilities

     9,645        (685     (1,776

Interest expense, net

     (56,569     (73,939     (68,883

Cash portion of restructuring charges

     (4,599     —          (8

Deferred tax provisions

     2,456        3,087        2,801   

Income tax expense

     (3,576     (4,365     (5,629

Amortization of debt discount and non-cash interest

     4,229        3,662        2,934   

Other items, net

     (5,925     (3,332     (3,814
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

   $ 55,479      $ 34,575      $ 29,015   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (14,150   $ (25,878   $ (29,840
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

   $ (22,171   $ (1,521   $ (771
  

 

 

   

 

 

   

 

 

 

 

(a) We provide for the adjustment to EBITDA for non-cash compensation.
(b) We provide for the adjustment to EBITDA for certain expenses, including employee severance and relocation expenses and recruitment costs for our Executive Management.
(c) We provide for the adjustment to EBITDA for all gains and losses from sales of our property, plant and equipment.
(d) We have a management services agreement with KKR that provides for a $1.0 million annual payment, with such amount to increase by 5% per year. See Item 13-Certain Relationships and Related Party Transactions.
(e) We provide for the adjustment to EBITDA to exclude the effects of any non operating currency gains and losses.
(f) We provide for the adjustment to EBITDA to exclude the effects of any (gains) or losses on derivative instruments used to hedge future cash flows. Refer to Note 5 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
(g) We provide for the adjustment to EBITDA to exclude the effects of any other costs related to the closure of a facility.
(h) We provide for the adjustment to EBITDA for franchise and certain non-income based taxes pursuant to the agreements governing the ABL Revolver and our 2017 Notes.
(i) We provide for the adjustment to EBITDA for the loss on debt extinguishments related to our refinancing transactions completed in 2010.

 

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Off-Balance Sheet Arrangements

We do not have any “off-balance sheet arrangements” (as such term is defined in Item 303 of Regulation S-K) that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources, except for stand-by letters of credit of $12.1 million outstanding at December 31, 2011.

Contractual Obligations and Commitments

The following table sets forth our long-term contractual obligations as of December 31, 2011 (in thousands).

 

     Payment due by Period  

Contractual Obligations

   Total      Less than 1
year
     1-3 years      3-5 years      More than 5 years  

2017 Senior Secured Notes (1)

   $ 584,250       $ 33,500       $ 67,000       $ 67,000       $ 416,750   

2017 Senior Subordinated Notes (1)

     504,000         31,500         63,000         63,000         346,500   

Capital leases

     22         7         14         1         —     

Operating leases

     23,245         6,150         9,571         5,398         2,126   

Purchase obligations (2)

     36,660         36,660         —           —           —     

Other obligations (3)

     38,779         388         1,048         663         36,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,186,956       $ 108,205       $ 140,633       $ 136,062       $ 802,056   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Includes annual interest payments and principal payments due in 2017.
(2) Purchase obligations consist of commitments for materials, supplies, machinery and equipment.
(3) Other obligations include share based payment obligations of $0.3 million payable to employees and $1.0 million payable to non-employees, environmental remediation obligations of $1.7 million, accrued compensation and pension benefits of $4.0 million, deferred income taxes of $31.0 million and other obligations of $0.8 million.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. We make estimates and assumptions in the preparation of our consolidated financial statements that affect the reported amounts of assets and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. Estimates and assumptions are reviewed on an ongoing basis and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ materially from those estimates under different assumptions or conditions.

We have identified the following critical accounting policies that require us to make significant judgments and estimates in preparing our consolidated financial statements.

Revenue Recognition. The amount of product revenue recognized in a given period is impacted by our judgments made in establishing our allowance for potential future product returns. We provide for our estimate of future returns against revenue in the period the revenue is recorded. Our estimate of future returns is based on such factors as historical return data, current economic conditions, and our customer base. The amount of revenue we recognize is directly impacted by the estimates made to establish the allowance for potential future product returns. Our allowance for sales returns was $1.4 million and $1.3 million at December 31, 2010 and 2011, respectively.

Allowance for Doubtful Accounts. We estimate the collectability of our accounts receivable in establishing our allowance for doubtful accounts. The allowance for doubtful accounts is determined based on an analysis of specific customer accounts, changes in payment patterns, historical experience, customer credit worthiness and current economic trends. Based on this analysis, we provide allowances for doubtful accounts at the time we estimate that collectability becomes uncertain. Our allowance for doubtful accounts was $0.6 million at December 31, 2010 and $0.7 million at December 31, 2011.

 

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Valuation of Goodwill and Trade Names and Trademarks. Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill and certain of our other intangible assets, specifically trade names and trademarks, have indefinite lives. Goodwill and other indefinite- lived intangible assets are subject to an annual impairment test, or more often, if impairment indicators arise. If based on the results of such assessment the carrying value of goodwill and intangible assets may not be recoverable, we measure impairment as an amount by which the carrying value of goodwill and intangible assets exceeds their fair value. When we evaluate potential impairments outside of the annual measurement date, judgment is required in determining whether an event has occurred that may impair the value of goodwill or intangible assets. Factors that could indicate that impairment may exist include significant underperformance relative to plan or long-term projections, significant changes in business strategy, significant negative industry or economic trends or a significant decline in the value of the reporting unit for a sustained period of time. We utilize a combined weighted average of a market based (utilizing fair value multiples of comparable publicly traded companies) and an income based approach (utilizing discounted projected after tax cash flows) to determine the fair value of the reporting unit. We evaluate our trade name and trademark using a relief-from-royalty methodology of the income approach, which measures the present value of the net after-tax savings excepted to be realized over the life of the intangible asset. We make assumptions about future cash flows, discount rates and other estimates in those models. Different assumptions and judgment determinations could yield different conclusions that would affect our operating results in the period that such change or determination is made. At October 31, 2011, the Company had one reporting unit and its fair value exceeded its carrying value by approximately 25%.

Valuation of Long-lived Assets. Long-lived assets are comprised of property, plant and equipment and intangible assets with finite lives. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable through projected undiscounted cash flows expected to be generated by the asset or the asset group.

When we determine that the carrying value of intangible assets or fixed assets may not be recoverable, we measure impairment by the amount by which the carrying value of the asset exceeds the related fair value. In these instances, fair value is estimated utilizing either a market approach considering quoted market prices for identical or similar assets, or an income approach determined using discounted projected cash flows. The determination of fair value requires that we make assumptions about future cash flows, discount rates and other estimates. Different assumptions could yield different conclusions that would affect our operating results in the period that such determination is made. There were no impairment losses on long-lived assets incurred during 2009, 2010 and 2011.

Self Insurance Reserves. We accrue for costs to provide self-insured benefits under our workers’ compensation and employee health benefits programs. We determine the accrual for workers’ compensation losses based on estimated costs to resolve each claim. We accrue for self-insured health benefits based on historical claims experience. We maintain insurance coverage to prevent financial losses from catastrophic workers’ compensation or employee health benefit claims. Our financial position or results of operations could be materially adversely impacted should we experience a material increase in claims costs, including claim settlements or the projected costs to resolve claims increase significantly from the previously estimated amounts. Our accrued liability for self-insured workers’ compensation and employee health benefits at December 31, 2010 and December 31, 2011 were $4.9 million and $4.5 million, respectively.

Environmental Reserves. We accrue for environmental remediation costs when it is probable that a liability has been incurred and a reasonable estimate of the liability can be made. Our remediation cost estimates are based on the facts known at the current time including consultation with a third-party environmental specialist and external legal counsel. Changes in environmental laws, improvements in remediation technology and discovery of additional information concerning known or new environmental matters could affect our operating results in the period that such change or determination is made.

Share Based Payments. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires considerable judgment, including estimating the underlying value of the common stock, the expected term of stock options, expected volatility of the underlying stock, and the number of stock-based awards expected to be forfeited due to future terminations. In addition, for stock-based awards where vesting is dependent upon achieving certain operating performance goals, we estimate the likelihood of achieving the performance goals. Differences between actual results and these estimates could have a material impact on our financial results in the period that such determination is made.

Income Taxes. We estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as goodwill amortization, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We then assess the likelihood that our deferred tax assets will be recovered from future taxable income and, to the extent we believe that recovery is not likely, we establish a

 

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valuation allowance. To the extent we adjust our valuation allowance during a period, we increase or decrease our income tax provision in our consolidated statements of operations. If any of our estimates of our prior period taxable income or loss require change, material differences could impact the amount and timing of income tax benefits or payments for any period.

The Company provides liabilities for uncertain tax positions which requires that we evaluate positions taken or expected to be taken in our income tax filings in all jurisdictions where we are required to file, and provide a liability for any positions that do not meet a “more likely than not” threshold of being sustained if examined by tax authorities. Potential interest and penalties associated with any uncertain tax positions are recorded as a component of income tax expense.

Recent Accounting Pronouncements

None.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are subject to market risk associated with change in interest rates and foreign currency exchange rates. We do not use derivative financial instruments for trading or speculative purposes.

Interest Rate Risk

At December 31, 2011 we were not subject to market risk as the interest rates on our long-term debt are fixed and we do not have a balance outstanding on our ABL revolver.

Foreign Currency Risk

Foreign currency risk is the risk that we will incur economic losses due to changes in foreign currency exchange rates. We operate facilities in foreign countries. Our principal currency exposures relate to the Euro, the British pound, the Mexican peso and Malaysian ringgit. We consider impacts to our operating results related to foreign currency exposures to be low. Our foreign operations are generally cash flow positive and all transactions, both revenue and expense, are predominantly denominated in the local currency. As a result, any adverse currency changes would impact both revenue and expenses, offsetting each other, with little change to net income or loss and the related cash flows.

Commodity Price Risk

We are exposed to fluctuations in commodity prices through the purchase of raw materials that are processed from commodities, such as platinum, gold, titanium, stainless steel, cobalt-chrome and aluminum. Given the historical volatility of certain commodity prices, this exposure can impact product costs. To manage these fluctuations, we utilize competitive pricing methods such as bulk purchases, blanket orders and long-term contracts with our major suppliers to reduce short term fluctuations, in addition to certain instances where we generally pass through the cost of the raw material, such as with platinum. Additionally, we often do not set prices for our products in advance of our commodity purchases; therefore, we can take into account the cost of the commodity in setting our prices for each order. In instances where we have supply agreements with customers, we partially adjust prices for the impact of raw material price increases. However, to the extent that we are unable to offset the increased commodity costs in our product prices, our results could be affected.

Item 8. Consolidated Financial Statements and Supplementary Data

Our consolidated financial statements and related notes and report of our Independent Registered Public Accounting Firm are included beginning on page 66 of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

The certifications of our principal executive officer and principal financial officer required in accordance with Rule 13a-14(a) under the Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Annual Report on Form 10-K. The disclosures set forth in this Item 9A contain information concerning the evaluation of our disclosure controls and procedures, and changes in internal control over financial reporting, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 9A for a more complete understanding of the matters covered by the certifications.

 

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(a) Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of December 31, 2011.

(b) Management’s Report on Internal Control over Financial Reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets, provide reasonable assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are being made in accordance with authorizations of our management and Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on our financial statements.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2011. Based on this evaluation, our management concluded that we maintained effective internal control over financial reporting as of December 31, 2011, based on criteria in Internal Control—Integrated Framework issued by the COSO.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to the Dodd- Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010 (“Dodd-Frank”). Dodd-Frank provides a permanent exemption from the requirements of Section 404(b) of the Sarbanes- Oxley Act of 2002 for those entities that are neither large accelerated filers nor accelerated filers. As a result, the requirement for us to have our independent registered public accounting firm attest to, and report on, internal controls over financial reporting does not currently apply.

(c) Changes in Internal Control over Financial Reporting.

In 2011, we completed the process of implementing the Oracle ERP system throughout the entire company. The implementation of Oracle during the year ended December 31, 2011 modified our existing controls at two manufacturing locations as they migrated to the Oracle ERP system.

There have been no changes in our internal controls over financial reporting during the quarter ended December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

Not applicable.

 

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PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our executive officers and the directors, and their respective ages as of the date of this report, are as follows:

 

Name

   Age     

Position

Donald J. Spence

     58       Chief Executive Officer, President and Director

Jeremy A. Friedman

     58       Chief Financial Officer, Executive Vice President, Treasurer and Secretary

Jeffrey M. Farina

     55       Executive Vice President of Technology and Chief Technology Officer

James M. McGorry

     55       Executive Vice President, Sales and Marketing

Dean D. Schauer

     45       Executive Vice President Operations, Supply Chain and Engineering

Kenneth W. Freeman

     61       Chairman of the Board and Director

James C. Momtazee

     40       Director

Chris Gordon

     39       Director

Director Qualifications

The Board of Directors (the “Board”) seeks to ensure that the Board is composed of members whose particular experience, qualifications, attributes and skills, when taken together, will allow the Board to satisfy its oversight responsibilities effectively. In identifying candidates for membership on the Board, our Board takes into account (1) minimum individual qualifications, such as high ethical standards, integrity, mature, careful judgment, industry knowledge or experience and an ability to work collegially with the other members of the Board and (2) all other factors it considers appropriate, including our contractual obligations with investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P. (“KKR”) and Bain Capital, LLC (collectively, the “Sponsor Group”).

Kenneth W. Freeman, James C. Momtazee and Chris Gordon were appointed to the Board as a consequence of their respective relationships with investment funds affiliated with the Sponsor Group. Donald J. Spence was appointed to the Board upon his appointment as President and Chief Executive Officer in May 2010. Mr. Spence’s appointment to the Board considered his experience, qualifications, attributes and skills, particularly within the medical device space.

When considering whether the Board’s directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board to satisfy its oversight responsibilities effectively in light of Company’s business and structure, the Board focused primarily on the information discussed in each of the Board members’ or nominees’ biographical information set forth below.

Each of the directors was elected to the Board pursuant to a Stockholders’ Agreement, dated as of November 16, 2005, among Accellent Holdings Corp., our parent company, an affiliate of Kohlberg Kravis Roberts & Co. L.P. and certain affiliates of Bain Capital. Pursuant to such agreement, Kenneth W. Freeman and James C. Momtazee were appointed to the Board as a consequence of their respective relationships with KKR, and Chris Gordon was appointed to the Board as a consequence of his relationship with Bain Capital.

As a group, the directors possess experience in owning and managing enterprises like the Company and are familiar with corporate finance, strategic business planning activities and issues involving stakeholders more generally.

Donald J. Spence has served as our President and Chief Executive Officer and a Director since May 2010. Prior to joining us Mr. Spence was Chief Executive Officer of Philips Home Healthcare Solutions. Mr. Spence was President of the Sleep and Home Respiratory Group for Respironics, Inc. from 2005 until the firm was acquired by Royal Philips Electronics in 2008. Mr. Spence began his career as a financial analyst at Ford Motor Company, and has served in various roles in the medical device and automotive industries, including strategic planning, operations, global marketing, sales and senior management for BOC Group plc and GKN plc. Mr. Spence received a bachelor’s degree in economics from Michigan State University and a master’s degree in economics from Central Michigan University.

Jeremy A. Friedman has served as our Chief Financial Officer, Executive Vice President, Treasurer and Secretary since September 4, 2007. Prior to joining us, Mr. Friedman held several executive positions at Flextronics International Ltd., including Senior Vice President—Business Development from December 2006 to August 2007, Senior Vice President of Finance and Global Supply Chain—Components from January 2006 to December 2006, Chief Operating Officer—Flextronics Network Services from January 2004 to January 2006 and Vice President—Global Internal Audit from September 2002 to January 2004. Mr. Friedman holds a Bachelor of Arts Degree in Religion from Haverford College and an M.B.A. from Harvard Business School.

 

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Jeffrey M. Farina has served as our Executive Vice President of Technology and Chief Technology Officer since June 2004, and from June 2000 to June 2004 our Vice President of Engineering. Mr. Farina has B.S. and M.S. degrees in mechanical engineering from Drexel University.

James M. McGorry has served as our Executive Vice President, Sales and Marketing, since August 2011. Prior to joining us, Mr. McGorry held various executive positions at Genzyme Corporation from 1998 to 2010, most recently serving as Senior Vice President, Oncology from 2003 to 2010. Mr. McGorry graduated from the United States Military Academy, West Point with a Bachelor of Science in Engineering and served in the United States Military from 1979 to 1985. He also holds an M.B.A from the Fuqua School of Business at Duke University.

Dean D. Schauer has served on the Executive Staff of Accellent since 2004. In his current role as our Executive Vice President, Engineering and Sales, Dean is responsible for all sales, customer service, technical services, manufacturing engineering, and design and development engineering. He has been affiliated with Accellent and its predecessor companies since 2000 in roles including Engineering Manager, Director of Program Management, Vice President of Engineering and Quality, Senior Vice President of Engineering and Customer Operations as well as direct Operations Leadership. Prior to working at Accellent, Dean worked for 10 years in various positions including Application Engineering, Technology Development, Technical Management, and Global Engineering and Sales Management. Dean has a Bachelor of Science degree in Metallurgical Engineering from South Dakota School of Mines and Technology and is certified in Six Sigma methodology.

Kenneth W. Freeman has served as Chairman of Accellent since May 2010, and previously served as Executive Chairman since January 2006. He joined the board of directors in November 2005. Mr. Freeman has been a senior advisor of Kohlberg Kravis Roberts & Co. since August 2010 and in August 2010 was appointed Dean of Boston University School of Management. From October 2009 to August 2010, Mr. Freeman was a member of KKR Management LLC, the general partner of KKR & Co. Before that, he was a member of the limited liability company which served as the general partner of Kohlberg Kravis Roberts & Co. L.P. since 2007 and joined the firm as Managing Director in May 2005. From May 2004 to December 2004, Mr. Freeman was Chairman of Quest Diagnostics Incorporated, and from January 1996 to May 2004, he served as Chairman and Chief Executive Officer of Quest Diagnostics Incorporated. From May 1995 to December 1996, Mr. Freeman was President and Chief Executive Officer of Corning Clinical Laboratories, the predecessor company to Quest Diagnostics. Prior to that, he served in various general management and financial roles with Corning Incorporated. Mr. Freeman currently serves as a director of HCA, Inc., and Masonite, Inc. and is chairman of the board of trustees of Bucknell University.

James C. Momtazee has been a member of KKR Management LLC, the general partner of KKR & Co. L.P. since October 1, 2009. Before that, he was a member of the limited liability company which served as the general partner of Kohlberg Kravis Roberts & Co. L.P. since 2009. From 1996 to 2009, he was an executive of Kohlberg Kravis Roberts & Co. L.P. From 1994 to 1996, Mr. Momtazee was with Donaldson, Lufkin & Jenrette in its investment banking department. Mr. Momtazee served as a director of Alliance Imaging from 2002 to 2007 and Accuride from March 2005 to December 2005 and currently serves as a director of Jazz Pharmaceuticals, Inc. and HCA, Inc.

Chris Gordon has been a Managing Director at Bain Capital since 2008 and has been with the firm since 1997. Prior to joining Bain Capital, Mr. Gordon was a consultant at Bain & Company. Mr. Gordon holds an MBA from Harvard Business School and an AB in Economics from Harvard College. Mr. Gordon also serves as a member of the Board of Directors of HCA, Inc., CRC Health Group, Inc., Air Medical Group Holdings, Inc., Physio-Control, Inc. and Quintiles Transnational, Inc.

Section 16(a) Beneficial Ownership Reporting Compliance

None of our directors, executive officers or any beneficial owner of more than 10% of our equity securities is required to file reports pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to their relationship with us because we do not have any equity securities registered pursuant to Section 12 of the Exchange Act.

Code of Business Conduct and Ethics

Our Board of Directors has adopted a code of business conduct and ethics applicable to directors, officers and employees to establish standards and procedures related to the compliance with laws, rules and regulations, treatment of confidential information, conflicts of interest, competition and fair dealing and reporting of violations of the code; and includes a requirement that we make prompt disclosure of any waiver of the code for executive officers or directors made by our Board of Directors. A copy of the code of business conduct and ethics is available in print without charge to any person who sends a request to the office of the Secretary of the Company at 100 Fordham Road, Wilmington, Massachusetts 01887.

Audit Committee Matters

Our Board of Directors has an Audit Committee that is responsible for, among other things, overseeing our accounting and financial reporting processes and audits of our financial statements. The Audit Committee is comprised of Messrs. Momtazee and Gordon.

 

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Our audit committee does not include a “financial expert” as that term is defined in applicable regulations. The members of our audit committee have substantial experience in assessing the performance of companies and in understanding financial statements, accounting issues, financial reporting and audit committee functions. However, no member has comprehensive professional experience with generally accepted accounting principles and financial statement preparation and analysis and, accordingly, the Board of Directors does not consider either of them to be a “financial expert” as that term is defined in applicable regulations. Nevertheless, the Board of Directors believes that the members of our audit committee have the necessary expertise and experience to perform the functions required of the audit committee and, given their respective backgrounds, it would not be in the best interests of the Company to replace any of them with another person to qualify a member of the audit committee as a “financial expert.”

Item 11. Executive Compensation

Director Compensation

The non-employee directors of Accellent Holdings Corp. are paid an annual retainer of $30,000 in cash or phantom stock, as described below, for their service as members of the board of directors. Mr. Spence, who serves as our Chief Executive Officer in addition to serving as a director, did not receive any separate compensation in respect of his service as a director. In addition, all directors are reimbursed for any out-of-pocket expenses incurred by them in connection with services provided in such capacity.

Accellent Holdings Corp. has established a Directors’ Deferred Compensation Plan (the “Plan”) for all non-employee directors of Accellent Holdings Corp. The Plan allows each non-employee director to elect to defer receipt of all or a portion of his or her annual directors’ fees to a future date or dates. Any amounts deferred under the Plan are credited to a phantom stock account. The number of shares of phantom stock of Accellent Holdings Corp. credited to the director’s phantom stock account will be determined based on the amount of compensation deferred during any given year, divided by the then “fair market value per share” (as such term is defined in the Plan) of Accellent Holdings Corp.’s common stock. If there has been no public offering of Accellent Holdings Corp.’s common stock, the “fair market value per share” of the common stock will be determined in the good faith discretion of the Accellent Holdings Corp. Board of Directors. Upon a separation from service with the Accellent Holdings Corp. Board of Directors or the occurrence of a “change in control” of Accellent Holdings Corp. (as such term is defined in the Plan), each non-employee director will receive (or commence receiving, depending upon whether the director has elected to receive distributions from his or her phantom stock account in a lump sum or in installments over time) a distribution of his or her phantom stock account, in either cash or common stock of Accellent Holdings Corp. (subject to the prior election of each such director). The Plan may be amended or terminated at any time by the Accellent Holdings Corp. Board of Directors and in form and operation is intended to be compliant with Section 409A of the Internal Revenue Code of 1986, as amended.

Director Compensation for 2011

 

Name

   Fees
Earned
or Paid
in Cash
($) (1) (2)
     Stock
Awards
($)
     Option
Awards
($)
     Non-Equity
Incentive Plan
Compensation
($)
     Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
     All Other
Compensation
($)
     Total
($)
 

James C. Momtazee

   $ 30,000       $ —         $ —         $ —         $ —         $ —         $ 30,000   

Chris Gordon

   $ 30,000       $ —         $ —         $ —         $ —         $ —         $ 30,000   

Kenneth W. Freeman

   $ 30,000       $ —         $ —         $ —         $ —         $ —         $ 30,000   

 

(1) Each Director elected to defer the entire amount of his fees for 2011 under the Plan to a phantom stock account.
(2) Compensation for Donald J. Spence, a Director, is included in the Summary Compensation Table included elsewhere in this Item 11 as he served as our Chief Executive Officer during all of 2011.

Compensation Discussion and Analysis

Executive Compensation Philosophy and Objectives

Our compensation philosophy and programs are designed to attract and retain talented executives that will drive shareholder value. We achieve this goal by offering a competitive comprehensive compensation strategy that links executive

 

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pay to the achievement of measurable corporate and individual performance objectives that we believe enhance and motivate our executives to excel. Examples of such objectives include growth in revenue and EBITDA and the accomplishment of personal objectives that typically focus on more tactical areas like market penetration, new business, increased productivity, decreased costs, reductions in cycle time, fill rate and customer lot acceptance. We manage this process through our performance management and incentive design strategies.

Broadly stated, our compensation programs intend to reward the creation of shareholder value, financial and operational performance and individual expertise and experience.

Accellent also provides special compensation in certain situations. When attracting talent to our organization, annual compensation packages for new executives are determined by the competitive market for the role, experience of the candidate and to some extent, geographical location. As part of our executive recruiting process, we occasionally offer signing bonuses to offset compensation forfeited by the candidate when terminating employment with his or her prior employer.

Compensation Process

The Board of Directors of Accellent Holdings Corp. establishes compensation and benefit practices for the executives of Accellent. The compensation levels for executive officers are based on internal assessments by our largest stockholder, KKR Millennium GP LLC, prior compensation levels of those executives, the pay levels of the person in the role previously at Accellent and input from our search firm. For executive officers who are not newly recruited, current compensation levels are a result of merit increases from prior levels.

Elements of Compensation for Named Executive Officers

We achieve the objectives of our compensation program through the use of several compensation elements. We use a combination of direct compensation, such as salary, bonus, equity awards, limited perquisites and indirect compensation in the form of retirement benefits. We also provide executives with change in control and severance protection. During 2011, our Named Executive Officers were Donald J. Spence, our President and Chief Executive Officer, Jeremy A. Friedman, our Chief Financial Officer, Executive Vice President, Treasurer and Secretary, Dean D. Schauer, our Executive Vice President of Operations, Supply Chain and Engineering, Jeffrey M. Farina, our Executive Vice President and Chief Technology Officer and James M. McGorry, our Executive Vice President, Sales and Marketing.

 

   

Salary

Our base salary payments are used to compensate executives for their role at Accellent and for their individual expertise and experience and to provide executives with a stable and predictable source of income. Annual merit increases are based on a combination of accomplishments versus objectives (50%), completion of the normal duties of the role as defined in the job description (20%) and abiding by Accellent’s values (30%). During 2011, each of Messrs. Friedman, Schauer and Farina received 4% salary increases as a result of the merit increase process. Mr. McGorry, who joined us in August 2011, did not receive any salary increase in 2011.

 

   

Bonus

Accellent’s short-term incentive program consists of our annual bonus plan. We use our annual bonus plan, in combination with salary, to provide the executive with a total compensation package that exceeds the market when all annual goals are met. Eligibility for the annual bonus plan is dependent on role within the organization as well as competitive market data. All of our executive officers participate in the annual bonus plan. Rewards are determined based upon the accomplishment of annual goals and objectives. An annual target bonus of a percentage of the base salary is established at date of hire, and reviewed annually, and also determined, near time of payment, utilizing a combination of financial target elements, such as growth of Adjusted EBITDA (as defined in Item 6 in the “Selected Financial Data” section above), and personal objectives. We believe that both the financial targets and personal objectives are achievable. Executives may also be eligible for bonuses in excess of the annual target bonus for substantially exceeding the financial targets or for extraordinary performance. In 2011, the Named Executive Officer bonus plan was based on achievement of a revenue target (40%), an Adjusted EBITDA target (40%) and achievement of a measure of employee engagement (20%). To achieve the full bonus potential at 100%, the Company must have achieved revenue of $535.4 million and Adjusted EBITDA of $115.0 million. The plan permits bonus achievement should a minimum level of achievement be reached. For 2011 these minimums were $110.1 million for Adjusted EBITDA and $515.0 million for revenue. Should any one of the three bonus criteria not be achieved the Company is not obligated to pay bonuses regardless of achievement of any of the other measures. In 2011, the Company’s Adjusted EBITDA was $103.4 million, revenue was $531.8 million and the employee engagement measure was achieved. Since the minimum Adjusted EBITDA was not achieved, bonuses to be paid for 2011 are discretionary. Notwithstanding that the minimum Adjusted EBITDA target was not achieved, the Board of Directors approved discretionary bonus payments representing 30% of each named executive officer’s target bonus.

 

   

Equity awards

Accellent’s long-term incentive award program utilizes equity instruments to offer our executives a vehicle for wealth accumulation and provides Accellent with a strong retention instrument. Equity-based awards are intended to align the

 

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financial interest of our executives with long-term shareholder value creation. Equity-based awards are typically provided to executives upon hire or with an increase in responsibility. Equity grants historically have not been provided on an annual basis.

We have adopted the 2005 Equity Plan for Key Employees of Accellent Holdings Corp. and its Subsidiaries and Affiliates (the “Equity Plan”), which provides for the grant of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), options that are not incentive stock options and various other stock-based grants, including the shares of common stock of Accellent Holdings Corp. (our Parent) and options granted to executive officers and other key employees. The options are generally granted as follows: 50% vest and become exercisable over the passage of time, which we refer to as “time options,” assuming the option holder continues to be employed by us, and 50% vest and become exercisable upon the achievement of certain performance targets, which we refer to as “performance options.”

Exercise Price. The exercise price of the options is the fair market value of the shares underlying the options on the date of the grant of the option.

Vesting of Time Options. Time options generally become exercisable by the holder of the option in installments equal to 20% on each of the first five anniversaries of the grant date.

Vesting of Performance Options. Performance options generally are eligible to become exercisable over the first five fiscal years occurring after the grant date upon the achievement of certain performance targets for fully diluted share value growth over the five year window, using a defined calculation and pre-determined performance targets. In the event that performance targets are not achieved in any given fiscal year but are achieved in a subsequent year, the performance option will become exercisable as to the previously unexercisable percentage of the performance options from the missed years, as well as with respect to the percentage of the performance options in respect of the fiscal year in which the performance targets are achieved.

Effect of Change in Control of Accellent Holdings Corp. In addition, immediately prior to a change in control of Accellent Holdings Corp., as defined in the Equity Plan, (1) the exercisability of the time options will automatically accelerate with respect to 100% of the shares of common stock of Accellent Holdings Corp. subject to the time options and (2) a percentage of the unvested performance options will automatically vest if, as a result of the change in control, a specified rate of return is achieved by Accellent Holding Corp.

Effect of Disposition of Shares of Common Stock of Accellent Holdings Corp. In addition, based upon Accellent Holdings LLC’s disposition of its shares of common stock of Accellent Holdings Corp., the exercisability of the time and performance options will automatically accelerate with respect to a percentage of the shares of common stock of Accellent Holdings Corp. that would otherwise be subject to time and performance vesting conditions.

Miscellaneous. The options will only be transferable by will or pursuant to applicable laws of descent and distribution upon the death of the option holder. The Equity Plan may be amended or terminated by Accellent Holdings Corp.’s Board of Directors at any time. During 2011, considering several factors, including retention, Mr. Farina was granted 40,000 options.

 

   

Limited Perquisites

Accellent has limited perquisite benefits. We provide our executives with access to a Company-paid comprehensive annual physical. In addition, we provide certain executives with a car allowance, the amount of which is dependent on their role within the organization.

 

   

Retirement Benefits

Accellent provides retirement benefits to executives through a Company-wide 401(k) plan. The plan has a five year vesting schedule and matches employee contributions at a rate of 50% of the first 6% of employee contributions. This retirement benefit is designed to allow the executive to use the tax-deferred feature of a 401(k) plan to build a retirement fund. Mr. Farina is also a participant in the Supplemental Executive Retirement Pension Program (SERP) because he was affiliated with us before we discontinued any new participation in the SERP.

 

   

Change-in-Control and Severance Arrangements

Accellent believes executive officers should be protected and motivated in the event of a change in control of Accellent. The major component of the change in control protections for executives is reflected in our equity agreements and is in the form of an accelerated vesting schedule. In addition, we also offer salary continuation protection commensurate with role in the organization and experience.

 

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Summary Compensation Table

The following table sets forth information for the fiscal years ended December 31, 2009, 2010 and 2011 concerning all compensation awarded to, earned by or paid to the individuals who served as our chief executive officer and chief financial officer during the fiscal year ended December 31, 2011 and our other three Executive Vice Presidents who served in their roles during our most recently completed fiscal year. We refer to these individuals as our named executive officers.

 

Name and Principal Position

  Year     Salary
($)
    Bonus
($)
    Stock
Awards
($) (2)
    Option
Awards
($)
    Non-Equity
Incentive Plan
Compensation
($)
    Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
($)
    All Other
Compensation
($)
    Total ($)  

Donald J. Spence

    2011        559,625        152,955        —          —          —          —          —          712,580   

President and Chief Executive Officer

    2010        334,521        150,545        —          2,903,845        —          —          —          3,388,911   

Jeremy A. Friedman

    2011        380,996        69,416        —          —          —          —          7,440 (3)      457,852   

Chief Financial Officer,

    2010        368,408        112,333        —          223,527        —          —          7,910 (3)      712,178   

Executive Vice President,

    Treasurer and Secretary

    2009        360,000        —          —          —          —          —          7,530 (3)      367,530   

Dean D. Schauer

    2011        307,000        56,160        —          —          —          —          14,658 (5)      377,818   

Executive Vice President,

    2010        281,423        71,508        —          223,527        —          —          14,610 (5)      591,068   

Operations, Supply Chain and Engineering

    2009        248,482        —          —          234,611        —          —          14,672 (5)      497,765   

Jeffrey M. Farina

    2011        245,135        37,296        —          173,752        —          229,325 (4)      15,087 (5)      700,595   

Executive Vice President of Technology

        and Chief Technology Officer

    2010        237,176        60,062        —          —          —          1,059,732 (4)      15,117 (5)      1,372,087   
    2009        232,101        —          —          —          —          217,295 (4)      15,046 (5)      464,442   

James M. McGorry

Executive Vice President,

Sales and Marketing (1)

    2011        111,301        20,036        —          282,706        —          —          2,348 (6)      416,391   

 

(1) Mr. McGorry joined the Company as Executive Vice President, Sales and Marketing in August 2011.
(2) Option awards reflect the aggregate grant date fair value of awards granted during the applicable fiscal year calculated pursuant to Financial Accounting Standards Board Accounting Standards Codification 718, Compensation – Stock Compensation. For assumptions used to determine grant date fair value, see the “Stock-Based Compensation” section in Note 8 to the Consolidated Financial Statements.
(3) This amount represents the change in the actuarial present value of accumulated pension benefits.
(4) This amount represents employer contributions to a 401(k) plan, life insurance premiums, relocation costs and an incentive for Mr. Friedman’s participation in a Company sponsored wellness incentive.
(5) This amount includes employer contributions to a 401(k) plan, life insurance premiums and auto allowances.
(6) This amount includes employer contributions to a 401(k) plan.

 

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Grants of Plan-Based Awards in 2011

The following table provides summary information for each of our named executive officers with respect to grants of plan-based awards in 2011.

 

Name

   Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards
     Grant
Date
     Estimated Future Payouts
Under Equity Incentive Plan
Awards
     All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)
     All Other
Option
Awards:
Number of
Securities
Underlying
Options (#)
     Exercise
or Base
Price of
Option
Awards
($/Sh)
     Grant
Date Fair
Value of
Stock and
Option
Awards
 
   Threshold
($)
     Target
($)
     Maximum
($)
        Threshold
(#)
     Target
(#)
     Maximum
(#)
             

Donald J. Spence

     —         $ 152,955         —           —           —           —           —           —           —           —           —     

Jeremy A. Friedman

     —         $ 69,416         —           —           —           —           —           —           —           —           —     

Dean D. Schauer

     —         $ 55,266         —           —           —           —           —           —           —           —           —     

Jeffrey M. Farina

     —         $ 37,296         —           4/20/11        —           20,000        —           —           20,000      $ 3.00      $ 40,728   

Jeffrey M. Farina

     —           —           —           2/24/11         —           65,000         —           —           65,000       $ 3.00       $ 133,024   

James M. McGorry

     —         $ 66,788         —           10/20/11         —           150,000         —           —           150,000       $ 3.00       $ 282,706   

The time-based options generally become exercisable by the holder of the option in installments of 20% on each of the first five anniversaries of the option’s grant date. Performance options generally become exercisable over the first five fiscal years occurring after the grant date upon the achievement of certain performance targets. In the event that performance targets are not achieved in any given fiscal year but are achieved in a subsequent year, the performance option will become exercisable as to the previously unexercisable percentage of the performance options from the missed years, as well as with respect to the percentage of the performance options in respect of the fiscal year in which the performance targets are achieved. For further details on performance options, see the “Compensation Discussion & Analysis” section.

Employment Agreements

We have entered into employment agreements with certain named executive officers, which provide for their employment as executive officers of us and our subsidiaries. The terms of these employment agreements are set forth below.

In April 2010, we entered into an employment agreement with Donald J. Spence to serve as our President and Chief Executive Officer. We and Mr. Spence amended the employment agreement as of October 2011. Under the agreement, Mr. Spence is entitled to an annual salary of $550,000, subject to subsequent annual adjustment. Mr. Spence is eligible for an annual target bonus of 90% of his base salary (the “Annual Target Bonus”), based upon his reaching individual and Company-related performance milestones. Mr. Spence was also eligible for bonuses in excess of the Annual Target Bonus of up to one and one-half times the Annual Target Bonus for substantially exceeding the specified milestones, as well as for other extraordinary performance. The agreement also incorporates non-competition provisions. Mr. Spence’s employment agreement has a two year initial term with one year extensions after the initial term and is subject to termination upon 90 days written notice.

In September 2007, we entered into an employment agreement with Jeremy Friedman to serve as our Executive Vice President and Chief Financial Officer. We and Mr. Friedman amended the employment agreement as of March 2008 and as of December 2008. Under the amended agreement, Mr. Friedman is entitled to an annual salary of $360,000, subject to subsequent annual adjustment. Mr. Friedman is eligible for an annual target bonus of 60% of his base salary (the “Annual Target Bonus”), based upon Mr. Friedman reaching individual and Company-related performance milestones. Mr. Friedman may also be eligible for bonuses in excess of the Annual Target Bonus of up to one and one-half times the Annual Target Bonus for substantially exceeding the specified milestones, as well as for other extraordinary performance. For 2008, Mr. Friedman’s bonuses were paid in the form of fully vested shares of common stock of Accellent Holdings Corp. to the extent that Mr. Friedman had not made an investment in Accellent Holdings Corp. of an amount equal to $150,000 at the time the bonuses were paid. The agreement also incorporates non-competition provisions. Mr. Friedman’s employment agreement is subject to termination upon 90 days written notice.

 

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As of February 24, 2011, we entered into an employment agreement with Jeffrey M. Farina to continue as our Executive Vice President of Technology and Chief Technology Officer. Under the agreement, Mr. Farina is entitled to an annual salary of $240,000, subject to subsequent annual adjustment. In addition, Mr. Farina is eligible for an annual target bonus of 50% of his base salary (the “Annual Target Bonus”), based upon Mr. Farina reaching individual and Company-related performance milestones. Mr. Farina may also be eligible for bonuses in excess of the Annual Target Bonus for substantially exceeding the specified milestones, as well as for other extraordinary performance. The agreement also incorporates non-competition provisions. The agreement also entitles Mr. Farina to a longevity bonus of $150,000 if he remains employed with Accellent through January 1, 2015.

In July 2009, we entered into an employment agreement with Dean D. Schauer to serve as our Executive Vice President of Operations, Supply Chain and Engineering. We and Mr. Schauer amended the employment agreement as of October 2011. Under the agreement, Mr. Schauer is entitled to an annual salary of $275,000, subject to subsequent annual adjustment. In addition, Mr. Schauer is eligible for an annual target bonus of 50% of his base salary (the “Annual Target Bonus”), based upon Mr. Schauer reaching individual and Company-related performance milestones. Mr. Schauer may also be eligible for bonuses in excess of the Annual Target Bonus for substantially exceeding the specified milestones, as well as for other extraordinary performance. The agreement also incorporates non-competition provisions. Mr. Schauer’s employment agreement has a two year initial term with one year extensions after the initial term and is subject to termination upon 90 days written notice.

In August 2011, we entered into an employment agreement with James M. McGorry to serve as our Executive Vice President, Sales and Marketing. Under the agreement, Mr. McGorry is entitled to an annual salary of $325,000, subject to subsequent annual adjustment. In addition, Mr. McGorry is eligible for an annual target bonus of 60% of his base salary (the “Annual Target Bonus”), based upon Mr. McGorry reaching individual and Company-related performance milestones. Mr. McGorry may also be eligible for bonuses in excess of the Annual Target Bonus for substantially exceeding the specified milestones, as well as for other extraordinary performance. The agreement also incorporates non-competition provisions. Mr. McGorry’s employment agreement has a two year initial term with one year extensions after the initial term and is subject to termination upon 60 days written notice.

Outstanding Equity Awards at December 31, 2011

The following table provides summary information for each of our named executive officers with respect to outstanding equity awards held as of December 31, 2011. All stock options in the table below were granted by Accellent Holdings Corp. Our named executive officers did not hold any other form of equity-based compensation as of December 31, 2011.

 

     Option Awards  

Name

   Number of
Securities
Underlying
Unexercised
Options (#)
(Exercisable)
     Number of
Securities
Underlying
Unexercised
Options (#)
(Unexercisable)
     Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
     Options
Exercise
Price
($)
     Option
Expiration
Date
 

Donald Spence

     250,000         1,000,000         1,250,000       $ 3.00         5/24/20   

Jeremy Friedman

     566,650         100,000         333,350       $ 3.00         9/4/17   
     20,000         80,000         100,000       $ 3.00         7/20/20   

Jeffrey M. Farina

     20,182         —           —         $ 1.25         7/19/14   
     82,401         —           82,401       $ 5.00         11/22/15   
     93,330         40,000         66,670       $ 3.00         4/29/18   
     —           20,000         20,000       $ 3.00         4/20/21   
     —           65,000         65,000       $ 3.00         2/24/21   

Dean D. Schauer

     40,363         —           —         $ 1.25         7/1/14   
     20,182         —           —         $ 1.25         7/19/14   
     20,812         —           20,812       $ 5.00         11/22/15   
     25,000         —           25,000       $ 5.00         12/19/16   
     34,999         15,000         25,001       $ 3.00         4/29/18   
     60,000         90,000         150,000       $ 3.00         7/14/19   
     20,000         80,000         100,000       $ 3.00         7/20/20   

James M. McGorry

     —           150,000         150,000       $ 3.00         10/20/21   

Certain options with the exercise price of $1.25 are roll-over options and were fully vested upon grant. For the remaining options, 50% are time options and 50% are performance options. The grant dates for time and performance options are 10 years prior to the expiration dates. For more details about the vesting schedule of our equity awards, see the “Compensation Discussion & Analysis” section.

 

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Option Exercises and Stock Vested in 2011

The following table provides summary information for each of our named executive officers with respect to option exercises and stock vested in 2011. All stock awards vested as noted in the table below were in the stock of Accellent Holdings Corp.

 

Name

   Option Exercises and Stock Vested in 2011  
   Option Awards      Stock Awards  
   Number of
Shares
Acquired on
Exercise (#)
     Value
Realized on
Exercise
($)
     Number of
Shares
Acquired on
Vesting (#)
     Value
Realized on
Vesting ($)
 

Donald J. Spence

     —           —           —           —     

Jeremy Friedman

     —           —           —           —     

Dean D. Schauer

     —           —           —           —     

Jeffrey M. Farina

     —           —           —           —     

James M. McGorry

     —           —           —           —     

Pension Benefits for 2011

We maintain a Supplemental Executive Retirement Pension Program (“SERP”) for one of our named executives. Mr. Farina is the only named executive officer who participates in the SERP because he is the only named executive officer who was affiliated with us before we discontinued new participation in the SERP. Benefits under the SERP are shown in the table below.

 

Name

   Plan Name      Number
of Years
Credited
Service
(#)
     Present
Value of
Accumulated
Benefit ($)
     Payments
During
Last
Fiscal
Year ($)
 

Jeffrey Farina

     SERP         20       $ 816,265       $ —     

The present value of the accumulated benefit was determined based on discounted cash flows at a rate of 5.5%. Annual salary increases were projected at the rate of 3%. Benefits are payable if the participant has at least 10 years of service and retires no earlier than age 55. Termination prior to age 55 will result in forfeiture of the SERP benefit.

Potential Payments Upon Termination or Change-In-Control

Severance Arrangements

We have entered into severance and change-in-control agreements with certain of our named executive officers. The terms of these agreements are set forth below.

If Mr. Spence is terminated without cause or decides to leave his employment for good reason, then we will pay Mr. Spence in equal installments over 24 months, an amount equal to two times the sum of his (i) then-effective base salary and (ii) annual bonuses earned in respect of the two fiscal years prior to the termination (provided that this amount will be paid in one lump sum if the termination occurs within 24 months of a change of control). We will also continue to provide health, dental and vision insurance for 24 months from the date of termination of employment. We estimate the total severance cost to be approximately $1.8 million based on Mr. Spence’s compensation level as of December 31, 2011 and bonuses for 2011 and 2010. If Mr. Spence is terminated due to death or disability, then the Company will pay to the estate of Mr. Spence or Mr. Spence, as the case may be, the compensation that would otherwise be payable to Mr. Spence through the date of his termination including pro-rata bonus. If Mr. Spence is terminated for cause or decides to leave his employment without good reason, his rights to base salary, benefits and bonuses shall immediately terminate.

If Mr. Friedman is terminated without cause or decides to leave his employment for good reason, then we will pay Mr. Friedman, in equal installments over 18 months, an amount equal to the present value (using an 8% discount rate) of one and one half times the sum of his (i) then-effective base salary and (ii) annual bonus earned in respect of the fiscal year prior to the termination provided that this amount will be paid in one lump sum if a change of control occurs and Mr. Friedman is terminated (whether in anticipation of the change of control or thereafter). We will also continue to provide health, dental and vision insurance for eighteen months from the date of termination of employment. We estimate the total severance cost to be approximately $565,000 based on Mr. Friedman’s compensation level as of December 31, 2011 and bonus for 2011. If Mr. Friedman is terminated due to death or disability, then the Company will pay to the estate of Mr. Friedman or Mr. Friedman, as the case may be, the compensation that would otherwise be payable to Mr. Friedman through the date of his termination including pro-rata bonus. If Mr. Friedman is terminated for cause or decides to leave his employment without good reason, his rights to base salary, benefits and bonuses shall immediately terminate.

 

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If Mr. Farina is terminated without cause, then we will continue to pay Mr. Farina his base salary for a period of 12 months from the date of termination. We will also continue to provide health, dental and vision insurance for twelve months from the date of termination of employment. We estimate the total severance cost to be approximately $260,000 based on Mr. Farina’s compensation level as of December 31, 2011. If Mr. Farina is terminated due to death or disability, then the Company will pay to the estate of Mr. Farina or Mr. Farina, as the case may be, the compensation that would otherwise be payable to Mr. Farina through the end of the month in which the termination occurs. If Mr. Farina is terminated for cause or decides to leave his employment, his rights to base salary, benefits and bonuses shall immediately terminate.

If Mr. Schauer is terminated without cause or decides to leave his employment for good reason, then we will continue to pay Mr. Schauer in equal installments over twelve months, an amount equal to the sum of his (i) then-effective base salary and (ii) annual bonus earned in respect of the fiscal year prior to the termination (provided that this amount will be paid in one lump sum if the termination occurs within 24 months of a change of control). We will also continue to provide health, dental and vision insurance for twelve months from the date of termination of employment. We estimate the total severance cost to be approximately $380,000 based on Mr. Schauer’s compensation level as of December 31, 2011 and bonus for 2011. If Mr. Schauer is terminated due to death or disability, then the Company will pay to the estate of Mr. Schauer or Mr. Schauer, as the case may be, the compensation that would otherwise be payable to Mr. Schauer through the date of his termination including pro-rata bonus. If Mr. Schauer is terminated for cause or decides to leave his employment without good reason, his rights to base salary, benefits and bonuses shall immediately terminate.

If Mr. McGorry is terminated without cause or decides to leave his employment for good reason, then we will continue to pay Mr. McGorry in equal installments over twelve months, an amount equal to the sum of his (i) then-effective base salary and (ii) annual bonus earned in respect of the fiscal year prior to the termination (provided that this amount will be paid in one lump sum if the termination occurs within 24 months of a change of control). We estimate the total severance cost to be $345,036 based on Mr. McGorry’s compensation level as of December 31, 2011 and bonus for 2011. If Mr. McGorry is terminated due to death or disability, then the Company will pay to the estate of Mr. McGorry or Mr. McGorry, as the case may be, the compensation that would otherwise be payable to Mr. McGorry through the date of his termination including pro-rata bonus. If Mr. McGorry is terminated for cause or decides to leave his employment without good reason, his rights to base salary, benefits and bonuses shall immediately terminate.

Change in Control Arrangements

In addition, immediately prior to a change in control of Accellent Holdings Corp., as defined in the Equity Plan, (1) the exercisability of the time options will automatically accelerate with respect to 100% of the shares of common stock of Accellent Holdings Corp. subject to the time options and (2) a percentage of the unvested performance options will automatically vest if, as a result of the change in control, a specified rate of return is achieved by Accellent Holdings Corp. All named executives have entered into this change in control arrangement. Assuming that as of December 31, 2011 a change in control has occurred and the options accelerated, no value would have been realized based on the fair market value of December 31, 2011.

Following the completion of the Acquisition, Accellent Holdings Corp. entered into agreements with certain members of management providing such individuals with excise tax protection from excise taxes imposed on such member of management under Section 4999 of the Internal Revenue Code of 1986, as amended, in the event of a change in control (as defined in the agreement) following a public offering (as defined in the agreement) and if certain conditions are met, prior to a public offering. In 2011, because there would have been no value to the acceleration of options no excise tax would have been incurred.

Employee Benefit Plans

Generally, our employees, including certain of our directors and named executive officers, participate in our various employee benefit plans, including a stock option and incentive plan which provides for grants of incentive stock options, nonqualified stock options, restricted stock and restricted stock units. We maintain pension plans which provide benefits at a fixed rate for each month of service and a 401(k) plan which are available to employees at several of our locations as described above under “Compensation Discussion and Analysis.” We have a Supplemental Executive Retirement Pension Program (SERP), a non-qualified, unfunded deferred compensation plan that covers one executive.

Compensation Committee Report

The Board of Accellent Holdings Corp. has reviewed and discussed the Compensation Discussion and Analysis with management. Based on the Board’s review and discussion with management, the Board of Accellent Holdings Corp. recommended that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

James C. Momtazee

Chris Gordon

Kenneth W. Freeman

 

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Accellent Acquisition Corp. owns 100% of the capital stock of Accellent Inc., and Accellent Holdings Corp. owns 100% of the capital stock of Accellent Acquisition Corp. Accellent Inc. does not maintain any equity compensation plans under which our equity securities are authorized for issuance.

The following table and accompanying footnotes show information regarding the beneficial ownership of Accellent Holdings Corp. common stock as of March 19, 2012 by (i) each person known by us to beneficially own more than 5% of the outstanding shares of Accellent Holdings Corp. common stock, (ii) each of our directors, (iii) each named executive officer and (iv) all directors and executive officers as a group. Unless otherwise indicated, the address of each person named in the table below is c/o Accellent Inc., 100 Fordham Road, Building C, Wilmington, Massachusetts 01887.

 

Name and Address of Beneficial Owner

   Beneficial
Ownership of
Accellent
Holdings
Corp.
Common
Stock (1)
     Percentage
of
Accellent
Holdings
Corp.
Common
Stock
 

KKR Millennium GP LLC (2)

     91,650,000         71.7

Bain Capital (3)

     30,550,000         23.9

Donald J. Spence

     200,000         *   

Jeremy A. Friedman (4)

     516,650         *   

Jeffrey M. Farina (5)

     274,009         *   

Dean D. Schauer (6)

     158,856         *   

James M. McGorry (8)

     50,000         *   

Kenneth W. Freeman (2)

     —           —     

James C. Momtazee (2)

     —           —     

Chris Gordon (3)

     30,550,000         23.9

Directors and named executive officers as a group (11 persons) (7)

     123,349,515         96.6

 

* Less than one percent
(1) The amounts and percentages of Accellent Holdings Corp. common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed to be a beneficial owner of such securities as to which such person has an economic interest.
(2) Reflects shares of common stock owned of record by Accellent Holdings LLC, which is the investment vehicle of KKR Millennium Fund L.P., KKR Partners III, L.P. and KKR KFN Co-Invest Holdings, L.P. As the sole general partner of KKR Millennium Fund L.P., KKR Associates Millennium L.P. may be deemed to be the beneficial owner of such securities held by KKR Millennium Fund L.P. As the sole general partner of KKR Associates Millennium L.P., KKR Millennium GP LLC also may be deemed to be the beneficial owner of such securities held by KKR Millennium Fund L.P. Each of KKR Fund Holdings L.P. (as the designated member of KKR Millennium GP LLC); KKR Fund Holdings GP Limited (as a general partner of KKR Fund Holdings L.P.); KKR Group Holdings L.P. (as a general partner of KKR Fund Holdings L.P. and the sole shareholder of KKR Fund Holdings GP Limited); KKR Group Limited (as the sole general partner of KKR Group Holdings L.P.); KKR & Co. L.P. (as the sole shareholder of KKR Group Limited) and KKR Management LLC (as the sole general partner of KKR & Co. L.P.) may also be deemed to be the beneficial owner of the securities held by KKR Millennium Fund L.P. As the designated members of KKR Management LLC, Henry R. Kravis and George R. Roberts may also be deemed to beneficially own the securities held by KKR Millennium Fund L.P. Messrs. Kravis and Roberts have also been designated as managers of KKR Millennium GP LLC by KKR Fund Holdings L.P. Each person, other than the record holder, disclaims beneficial ownership of the securities held by Accellent Holdings LLC. Each of Mr. Kenneth W. Freeman and Mr. James C. Momtazee is a director of Accellent Holdings Corp. and Accellent Inc. and each is an executive of KKR and/or its affiliates. They disclaim beneficial ownership of any Accellent Holdings Corp. shares beneficially owned by affiliates of KKR. The address of the above holders is c/o Kohlberg Kravis Roberts & Co. L.P., 9 West 57th Street, New York, New York 10019, except the address for George R. Roberts is c/o Kohlberg Kravis Roberts & Co. L.P., 2800 Sand Hill Road, Suite 200, Menlo Park, CA 94025.

 

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(3) Shares shown as beneficially owned by Bain Capital and Mr. Chris Gordon reflect the aggregate number of shares of common stock held, or beneficially held, by Bain Capital Integral Investors, LLC (“Bain”) and BCIP TCV, LLC (“BCIP”). Mr. Gordon is a Managing Director of Bain Capital Investors, LLC (“BCI”), which is the administrative member of each of Bain and BCIP. Accordingly, Mr. Gordon and BCI may each be deemed to beneficially own shares owned by Bain and BCIP. Mr. Gordon is a director of Accellent Holdings Corp. and Accellent Inc. Mr. Gordon and BCI disclaim beneficial ownership of any such shares in which they do not have a pecuniary interest. The address of Bain, BCIP, BCI and Mr. Gordon is c/o Bain Capital, LLC, 111 Huntington Avenue, Boston, Massachusetts 02199.
(4) Consists of 466,650 shares of common stock underlying outstanding stock options that are exercisable within 60 days and 50,000 shares of common stock owned by Mr. Friedman which are subject to re-sale limitations.
(5) Consists of 274,009 shares of common stock underlying outstanding stock options that are exercisable within 60 days.
(6) Consists of 158,856 shares of common stock underlying outstanding stock options that are exercisable within 60 days.
(7) Includes 801,419 shares of common stock underlying outstanding stock options that are exercisable with 60 days.
(8) Includes 50,000 shares of common stock owned by Mr. McGorry which are subject to resale limitations.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Related Person Transaction Policy

We have established a related person transaction policy which provides procedures for the review of transactions in excess of $120,000 in any year between us and any covered person having a direct or indirect material interest, with certain exceptions. Covered persons include any director, executive officer, director nominee, 5% stockholder or any immediate family members of the foregoing. Any such related person transactions will require advance approval by our Board of Directors with covered persons involved in the transaction not participating.

Management Services Agreement with KKR

In connection with the Acquisition, we entered into a management services agreement with KKR pursuant to which KKR will provide certain structuring, consulting and management advisory services to us. Pursuant to this agreement, KKR received an aggregate transaction fee of $13.0 million paid upon the closing of the Acquisition and will receive an advisory fee of $1.0 million payable annually, such amount to increase by 5% per year beginning October 1, 2006. We indemnify KKR and its affiliates, directors, officers and representatives (collectively, the “Indemnified Parties”) for losses relating to the services contemplated by the management services agreement and the engagement of KKR pursuant to, and the performance by KKR of the services contemplated by, the management services agreement. We also reimburse any Indemnified Party for all expenses (including counsel fees and disbursements) upon request as they are incurred in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising from any of the foregoing, whether or not such Indemnified Party is a party and whether or not such claim, action or proceeding is initiated or brought by us; provided, however, that we will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court to have resulted from an Indemnified Party’s willful misconduct or gross negligence. During the year ended December 31, 2011, the Company incurred KKR management fees and related expenses of $1.3 million. As of December 31, 2011, the Company owed KKR $0.3 million for unpaid management fees which are included in accounts payable on the consolidated balance sheet included elsewhere in this Annual Report on Form 10-K. In addition, Capstone Consulting LLC and certain of its affiliates (“KKR-Capstone”), provide integration consulting services to the Company. Although neither KKR nor any entity affiliated with KKR owns any equity interest in KKR-Capstone, KKR has provided financing to KKR-Capstone. At December 31, 2011 the Company owed KKR-Capstone $0.3 million, which is payable in common stock of AHC.

Entities affiliated with KKR Asset Management (“KKR-AM”), an affiliate of KKR, owned approximately $31.3 million principal amount of our 2017 Senior Secured Notes at December 31, 2011. KKR- AM owned approximately $27.9 million principal amount of our 2017 Senior Subordinated Notes at December 31, 2011.

The Company sells medical device equipment to Biomet, Inc., which in September 2007 became privately owned by a consortium of private equity sponsors, including KKR. Sales to Biomet, Inc. during the fiscal year ended December 31, 2011 totaled $0.2 million. At December 31, 2011, $0.1 million was due from Biomet, Inc.

In October 2009, the Company began utilizing the services of SunGard Data Systems, Inc (“SunGard”), a provider of software and information processing solutions. SunGard is privately owned by a consortium of private equity sponsors, including KKR and Bain Capital. The Company entered into an agreement with SunGard to provide information systems hosting services for the Company. The Company incurred approximately $0.6 million in fees in connection with this agreement for the year ended December 31, 2011.

 

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Registration Rights Agreement

In connection with the Acquisition, we entered into a registration rights agreement with entities affiliated with KKR and entities affiliated with Bain Capital (each a “Sponsor Entity” and together the “Sponsor Entities”) pursuant to which the Sponsor Entities are entitled to certain demand rights with respect to the registration and sale of their shares of Accellent Holdings Corp.

Management Stockholder’s Agreement

In connection with retaining the Rollover Options, the grant of options under the new option plan and, in certain cases, the purchase of shares of common stock of Accellent Holdings Corp., certain of our members of management entered into a management stockholder’s agreement with us. The management stockholder’s agreement generally restricts the ability of the management stockholders to transfer shares held by them for five years after the closing of the Acquisition.

If a management stockholder’s employment is terminated prior to the fifth anniversary of the closing of the Acquisition, we have the right to purchase the shares and options held by such person on terms specified in the management stockholder’s agreement. If, prior to a public offering of Accellent Holdings Corp’s common stock, a management stockholder’s employment is terminated as a result of death or disability, such stockholder or, in the event of such stockholder’s death, the estate of such stockholder has the right to force us to purchase his shares and options, on terms specified in the management stockholder’s agreement. In addition, if, prior to a public offering of Accellent Holdings Corp’s common stock, a management stockholder’s employment is terminated by us without cause (as defined in the management stockholder’s agreement) or by the management stockholder for good reason (as defined in the management stockholder’s agreement), such stockholder has the right to force us to exercise his or her Rollover Options and then purchase all or a portion of the shares underlying such Rollover Options, but only the number of shares equal to the remaining tax liability (above the minimum required withholding tax liability) incurred upon exercise of such options. If, prior to a public offering of Accellent Holdings Corp’s common stock, a management stockholder’s employment is terminated by the management stockholder without good reason, such stockholder has the right to force us to exercise his or her Rollover Options and then purchase all or a portion of the shares underlying such Rollover Options, but only if the amount of applicable withholding taxes which we are required to withhold in respect of income recognized as a consequence of the exercise of such options (the “Statutory Withholding”) is less than the actual tax liability that would have been incurred on the original value of the Rollover Options (the “Original Liability Amount”) and then we are only required to purchase that number of shares equal to the difference between the Original Liability Amount and the Statutory Withholding. If, prior to a public offering of Accellent Holdings Corp.’s common stock, a management stockholder receives a notice from the Internal Revenue Service that taxes are due and payable in connection with his or her Rollover Options (other than in connection with the exercise or lapse of restrictions thereof) (the “Rollover Tax Liability”), such stockholder has the right to force us to exercise his or her Rollover Options and then purchase all or a portion of the shares underlying such Rollover Options, but only the number of shares equal to the Rollover Tax Liability.

The management stockholder’s agreement also permits these members of management under certain circumstances to participate in registrations by us of our equity securities. Such registration rights would be subject to customary limitations.

Sale Participation Agreement

Each management stockholder entered into a sale participation agreement, which grants to the management stockholder the right to participate in any sale of shares of common stock by the Sponsor Entities occurring prior to the fifth anniversary of our initial public offering on the same terms as the Sponsor Entities. In order to participate in any such sale, the management stockholder may be required, among other things, to become a party to any agreement under which the common stock is to be sold, and to grant certain powers with respect to the proposed sale of common stock to custodians and attorneys-in-fact.

Director Independence

Accellent Inc. has no independent directors. The Company is a privately held corporation. Our directors are not independent because of their affiliations with funds which hold more than 5% equity interests in Accellent Holdings Corp.

 

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Item 14. Principal Accountant Fees and Services

Deloitte & Touche LLP (“Deloitte”) has served as our independent registered public accounting firm since 2006. For fiscal years 2011 and 2010 we paid fees for services from Deloitte as discussed below.

Audit Fees. The aggregate audit fees for professional services rendered by Deloitte for the fiscal years ended December 31, 2010 and 2011 were approximately $990,000 and $990,000, respectively, and were comprised entirely of services to audit our annual financial statements and the review of our quarterly financial statements.

Audit Related Fees: The aggregate fees for services rendered by Deloitte for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements were approximately $60,000 and $64,000 for the fiscal years ended December 31, 2010 and 2011, respectively. Fees for services rendered in the years ended December 31, 2011 and 2010 were for statutory audit services performed for our Mexican subsidiary.

Tax Fees: The aggregate fees billed for services rendered by Deloitte for tax compliance, tax advice and tax planning were approximately $510,000 and $447,000 for the fiscal years ended December 31, 2010 and 2011, respectively.

All Other Fees. Other fees paid to Deloitte in 2010 and 2011 totaled approximately $302,000 and $137,300 and related primarily to services provided in connection with the Company’s refinancing transactions in 2010.

The Audit Committee has considered whether the independent auditors’ provision of other non-audit services to the Company is compatible with the auditors’ independence and determined that it is compatible. Since the Acquisition all audit and permissible non-audit services were pre-approved pursuant to the Audit Committee’s Pre-Approval of Audit and Permissible Non-Audit Services policy.

Audit Committee Pre-Approval Policy

Our Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm on a case-by-case basis pursuant to its Pre-Approval of Audit and Permissable Non-Audit Service policy. These services may include audit services, audit-related services, tax services and other services. Our Chief Financial Officer is responsible for presenting the Audit Committee with an overview of all proposed audit, audit-related, tax or other non-audit services to be performed by the independent registered public accounting firm. The presentation must be in sufficient detail to define clearly the services to be performed. The Audit Committee does not delegate its responsibilities to pre-approve services performed by the independent registered public accounting firm to management or to an individual member of the Audit Committee.

 

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

 

  (a) Documents filed as part of this report:

 

  1. Consolidated Financial Statements (See Item 8)

 

Statement

 

  

Report of Independent Registered Public Accounting Firm

     64   

Consolidated Balance Sheets as of December 31, 2010 and 2011

     65   

Consolidated Statements of Operations for the Years Ended December 31, 2009, 2010 and 2011

     66   

Consolidated Statements of Stockholder’s Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2009, 2010 and 2011

     67   

Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2010 and 2011

     68   

Notes to Consolidated Financial Statements

     69   

 

  2. Consolidated Financial Statement Schedules

 

Schedule

 

  

Schedule II—Valuation and Qualifying Accounts

     103   

 

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3. Exhibits

 

EXHIBIT
NUMBER

  

EXHIBIT DESCRIPTION

  3.1      Third Articles of Amendment and Restatement, as amended, of Accellent Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to Accellent Inc.’s Registration Statement on Form S-4, filed on January 26, 2006 (file number 333-130470)).
  3.2      Amended and Restated Bylaws of Accellent Inc. (incorporated by reference to Exhibit 3.2 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
  4.1      Indenture, dated as of January 29, 2010, among Accellent Inc., the subsidiary guarantors party thereto and The Bank of New York Mellon, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 to Accellent Inc.’s Current Report on Form 8-K, filed on February 3, 2010 (file number 333-130470)).
  4.2      Exchange and Registration Rights Agreement, dated as of January 29, 2010, among Accellent Inc., the guarantors party thereto and Credit Suisse Securities (USA) LLC, as representative of the several initial purchasers (incorporated by reference to Exhibit 4.2 to Accellent Inc.’s Current Report on Form 8-K, filed on February 3, 2010 (file number 333-130470)).
  4.3      Pledge Agreement, dated as of January 29, 2010, among Accellent Inc., the subsidiaries named therein, and the Bank of New York Mellon, as notes collateral agent (incorporated by reference to Exhibit 4.5 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2010 (file number 333-130470)).
  4.4      Security Agreement, dated as of January 29, 2010, among Accellent Inc., the subsidiaries named therein, and the Bank of New York, as notes collateral agent (incorporated by reference to Exhibit 4.6 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2010 (file number 333-130470)).
  4.5      Indenture with respect to 10% Senior Subordinated Notes due 2017, dated as of October 28, 2010, among Accellent Inc., the guarantors party thereto and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to Accellent Inc.’s Current Report on Form 8-K, filed on November 2, 2010 (file number 333-130470)).
  4.6      Exchange and Registration Rights Agreement with respect to 10% Senior Subordinated Notes due 2017, dated as of October 28, 2010, among Accellent Inc., the guarantors party thereto and the representatives of the several initial purchasers party thereto (incorporated by reference to Exhibit 4.2 to Accellent Inc.’s Current Report on Form 8-K, filed on November 2, 2010 (file number 333-130470)).
10.1*    2005 Equity Plan for Key Employees of Accellent Holdings Corp. and Its Subsidiaries and Affiliates (incorporated by reference to Exhibit 10.5 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.2      Management Services Agreement, dated November 22, 2005, between Accellent Inc. and Kohlberg Kravis Roberts & Co. L.P. (incorporated by reference to Exhibit 10.6 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.3*    Form of Rollover Agreement, dated November 22, 2005, between Accellent Holdings Corp. and certain members of management (incorporated by reference to Exhibit 10.7 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.4*    Form of Management Stockholder’s Agreement, dated November 22, 2005, between Accellent Holdings Corp. and certain members of management (incorporated by reference to Exhibit 10.8 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.5*    Form of Sale Participation Agreement, dated November 22, 2005, between Accellent Holdings LLC and certain members of management (incorporated by reference to Exhibit 10.9 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.6      Registration Rights Agreement, dated November 22, 2005, between Accellent Holdings Corp. and Accellent Holdings LLC (incorporated by reference to Exhibit 10.10 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.7      Stock Subscription Agreement, dated November 16, 2005, between Bain Capital Integral Investors LLC and Accellent Holdings Corp. (incorporated by reference to Exhibit 10.11 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).

 

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EXHIBIT
NUMBER

  

EXHIBIT DESCRIPTION

10.8        Stockholders’ Agreement, dated as of November 16, 2005 by and among Accellent Holdings Corp., Bain Capital Integral Investors, LLC, BCIP TCV, LLC and Accellent Holdings LLC (incorporated by reference to Exhibit 10.12 to Accellent Inc.’s Registration Statement on Form S-4, filed on December 19, 2005 (file number 333-130470)).
10.9*      Accellent Inc. Supplemental Executive Retirement Pension Program (incorporated by reference to Exhibit 10.11 to Accellent Inc.’s Registration Statement on Form S-1, filed on February 14, 2001).
10.10      Form of Stock Option Agreement, dated November 22, 2005, between Accellent Holdings Corp. and certain members of management (incorporated by reference to Exhibit 10.25 to Amendment No. 1 to Accellent Inc.’s Registration Statement on Form S-4, filed on January 26, 2006 (file number 333-130470)).
10.11*    Accellent Holdings Corp. Directors’ Deferred Compensation Plan (incorporated by reference to Exhibit 10.26 to Amendment No. 1 to Accellent Inc.’s Registration Statement on Form S-4, filed on January 26, 2006 (file number 333-130470)).
10.12*    Employment Agreement, dated December 1, 2005, between Accellent Corp. and Jeffrey M. Farina (incorporated by reference to Exhibit 10.29 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 13, 2007 (file number 333-130470)).
10.13*    Employment Agreement, dated September 4, 2007, between Accellent Inc. and Jeremy Friedman (incorporated by reference to Exhibit 99.2 to Accellent Inc.’s Current Report on Form 8-K, filed on September 6, 2007 (file number 333-130470)).
10.14*    First Amendment to the Employment Agreement, dated March 31, 2008, between Accellent Inc. and Jeremy Friedman (incorporated by reference to Exhibit 10. 26 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2008 (file number 333-130470)).
10.15*    Employment Agreement, dated January 15, 2010, between Accellent Inc. and Dean D. Schauer (incorporated by reference to Exhibit 10.23 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2010 (file number 333-130470)).
10.16*    Amendment No. 1 to Employment Agreement, dated as of October 20, 2011, between Accellent Inc. and Dean D. Schauer.
10.17      Credit Agreement, dated as of January 29, 2010, among Accellent Inc., as Borrower, the Several Lenders from time to time parties thereto, Wells Fargo Capital Finance, LLC, as Administrative Agent and Collateral Agent and Wells Fargo Capital Finance, LLC, as Lead Arranger and Bookrunner (incorporated by reference to Exhibit 10.1 to Accellent Inc.’s Current Report on Form 8-K, filed on February 3, 2010 (file number 333-130470)).
10.18      Guarantee, dated as of January 29, 2010, among the subsidiaries named therein and Wells Fargo Capital Finance, LLC, as collateral agent (incorporated by reference to Exhibit 10.25 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2010 (file number 333-130470)).
10.19      Pledge Agreement, dated as of January 29, 2010, among Accellent Inc., the subsidiaries named therein, and Wells Fargo Capital Finance, LLC, as collateral agent (incorporated by reference to Exhibit 10.26 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2010 (file number 333-130470)).
10.20      Security Agreement, dated as of January 29, 2010, among Accellent Inc., the subsidiaries named therein, and Wells Fargo Capital Finance, LLC, as collateral agent (incorporated by reference to Exhibit 10.27 to Accellent Inc.’s Annual Report on Form 10-K, filed on March 31, 2010 (file number 333-130470)).
10.21*    Employment Agreement, dated January 15, 2010, between Accellent Inc. and Donald J. Spence (incorporated by reference to Exhibit 99.2 to Accellent Inc.’s Current Report on Form 8-K, filed on April 26, 2010 (file number
333-130470)).
10.22*    Amendment No. 1 to Employment Agreement, dated as of October 20, 2011, between Accellent Inc. and Donald J. Spence.
10.23*    Employment Agreement dated August 3, 2011 between Accellent Inc. and James M. McGorry.
12.1        Statement of Computation of Ratio of Earnings to Fixed Charges.
21.1        Subsidiaries of Accellent Inc.
31.1        Rule 13a-14(a) Certification of Chief Executive Officer.
31.2        Rule 13a-14(a) Certification of Chief Financial Officer.

 

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EXHIBIT
NUMBER

  

EXHIBIT DESCRIPTION

 32.1        Section 1350 Certification of Chief Executive Officer.
 32.2        Section 1350 Certification of Chief Financial Officer.
101.INS     XBRL Instance Document.
101.SCH    XBRL Schema Document
101.CAL    XBRL Calculation Linkbase Document.
101.DEF    XBRL Definition Linkbase Document.
101.LAB    XBRL Labels Linkbase Document.
101.PRE    XBRL Presentation Linkbase Document.

 

* Management contract or compensatory plan or arrangement required to be filed (and/or incorporated by reference) as an exhibit to this Annual Report on Form 10-K.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

        Accellent Inc.
March 29, 2012     By:  

/s/ Donald J. Spence

     

Donald J. Spence

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Donald J. Spence

Donald J. Spence

  

President and Chief Executive Officer, Director

(Principal Executive Officer)

  March 29, 2012

/s/ Jeremy A. Friedman

Jeremy A. Friedman

  

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

  March 29, 2012

/s/ Kenneth W. Freeman

Kenneth W. Freeman

   Chairman of the Board of Directors and Director   March 29, 2012

/s/ James C. Momtazee

James C. Momtazee

   Director   March 29, 2012

/s/ Chris Gordon

Chris Gordon

   Director   March 29, 2012

Supplemental Information to be Furnished with Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act

The registrant has not sent to its sole stockholder an annual report to security holders covering the registrant’s last fiscal year or any proxy statement, form of proxy or other proxy soliciting material with respect to any annual or other meeting of security holders.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of Accellent Inc.

Wilmington, Massachusetts

We have audited the accompanying consolidated balance sheets of Accellent Inc. and subsidiaries (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholder’s equity and comprehensive income (loss), and cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Accellent Inc. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

March 29, 2012

 

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ACCELLENT INC.

Consolidated Balance Sheets

December 31, 2010 and 2011

(In thousands)

 

Assets    2010     2011  

Current assets:

    

Cash

   $ 40,787      $ 38,858   

Accounts receivable, net of allowances of $2,002 and $1,983 at December 31, 2010 and 2011, respectively

     54,011        54,763   

Inventory

     66,028        65,962   

Prepaid expenses and other current assets

     2,650        4,481   
  

 

 

   

 

 

 

Total current assets

     163,476        164,064   

Property, plant and equipment, net

     121,037        126,992   

Goodwill

     629,854        629,854   

Other intangible assets, net

     164,626        149,687   

Deferred financing costs and other assets, net

     19,083        16,825   
  

 

 

   

 

 

 

Total assets

   $ 1,098,076      $ 1,087,422   
  

 

 

   

 

 

 

Liabilities and Stockholder’s equity

    

Current liabilities:

    

Current portion of long-term debt

   $ 9      $ 22   

Accounts payable

     24,025        22,580   

Accrued payroll and benefits

     9,102        8,221   

Accrued interest

     19,787        19,519   

Accrued expenses

     17,793        18,747   
  

 

 

   

 

 

 

Total current liabilities

     70,716        69,089   

Long-term debt

     712,675        712,967   

Other liabilities

     34,177        38,466   
  

 

 

   

 

 

 

Total liabilities

     817,568        820,522   
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Stockholder’s equity:

    

Common stock, par value $0.01 per share, 50,000,000 shares authorized; 1,000 shares issued and outstanding at December 31, 2010 and 2011

     —          —     

Additional paid-in capital

     637,290        638,445   

Accumulated other comprehensive income (loss)

     (1,442     (1,266

Accumulated deficit

     (355,340     (370,279
  

 

 

   

 

 

 

Total stockholder’s equity

     280,508        266,900   
  

 

 

   

 

 

 

Total liabilities and stockholder’s equity

   $ 1,098,076      $ 1,087,422   
  

 

 

   

 

 

 

 

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ACCELLENT INC.

Consolidated Statements of Operations

(In thousands)

 

     Year Ended December 31,  
     2009     2010     2011  

Net sales

   $ 478,793      $ 506,954      $ 531,782   

Cost of sales (exclusive of amortization)

     347,783        369,250        400,848   
  

 

 

   

 

 

   

 

 

 

Gross profit

     131,010        137,704        130,934   

Operating expenses:

      

Selling, general and administrative expenses

     47,725        52,002        54,288   

Research and development expenses

     2,064        2,393        2,522   

Restructuring charges

     5,727        (117     348   

Amortization of intangible assets

     14,939        14,939        14,939   

Loss (gain) on disposal of property and equipment

     966        15        (706
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     71,421        69,232        71,391   
  

 

 

   

 

 

   

 

 

 

Income from operations

     59,589        68,472        59,543   
  

 

 

   

 

 

   

 

 

 

Other (expense) income, net:

      

Interest expense, net

     (56,569     (73,939     (68,883

Loss on debt extinguishment

     —          (20,882     —     

Other (expense) income, net

     (514     6,211        30   
  

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

     (57,083     (88,610     (68,853
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     2,506        (20,138     (9,310

Provision for income taxes

     3,576        4,365        5,629   
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,070   $ (24,503   $ (14,939
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ACCELLENT INC.

Consolidated Statements of Stockholder’s Equity and Comprehensive Income (Loss)

Years ended December 31, 2009, 2010 and 2011

(In thousands, except share data)

 

     Common Stock                           
     Shares      Amount      Additional
paid-in
capital
    Accumulated
other
comprehensive
income (loss )
    Accumulated
deficit
    Total
Stockholder’s

Equity
 

Balance, January 1, 2009

     1,000         —         $ 633,914      $ (1,974   $ (329,767   $ 302,173   

Comprehensive income:

              

Net loss

     —           —           —          —          (1,070     (1,070

Cumulative translation adjustment

     —           —           —          965        —          965   

Reclassification to earnings out of accumulated other comprehensive income (loss) of accumulated losses on derivative instruments

     —           —           —          3,038        —          3,038   

Amortization of pension actuarial loss

     —           —           —          (44     —          (44
              

 

 

 

Total comprehensive income

                 2,889   

Stock issuance (Note 6)

     —           —           812        —          —          812   

Vesting of restricted stock

     —           —           164        —          —          164   

Stock-based compensation

     —           —           454        —          —          454   

Forfeiture of rollover options

     —           —           24        —          —          24   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2009

     1,000         —         $ 635,368      $ 1,985      $ (330,837   $ 306,516   

Comprehensive loss:

              

Net loss

     —           —           —          —          (24,503     (24,503

Cumulative translation adjustment

     —           —           —          (2,255     —          (2,255

Pension actuarial loss

     —           —           —          (1,183     —          (1,183

Amortization of pension actuarial loss

     —           —           —          11        —          11   
              

 

 

 

Total comprehensive loss

                 (27,930

Stock issuance (Note 6)

     —           —           600        —          —          600   

Vesting of restricted stock

     —           —           104        —          —          104   

Stock-based compensation

     —           —           595        —          —          595   

Exercise of employee stock options

     —           —           689        —          —          689   

Repurchase of parent company common stock

     —           —           (66     —          —          (66
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

     1,000       $ —         $ 637,290      $ (1,442   $ (355,340   $ 280,508   

Comprehensive loss:

              

Net loss

     —           —           —          —          (14,939     (14,939

Cumulative translation adjustment

     —           —           —          (1,659     —          (1,659

Unrealized gain on held for sale security

     —           —           —          1,155        —          1,155   

Pension actuarial gain

     —           —           —          438        —          438   

Amortization of pension actuarial loss

     —           —           —          242        —          242   
              

 

 

 

Total comprehensive loss

                 (14,763

Stock issuance (Note 6)

     —           —           50        —          —          50   

Vesting of restricted stock

     —           —           66        —          —          66   

Stock-based compensation

     —           —           963        —          —          963   

Forfeiture of rollover options

     —           —           62        —          —          62   

Exercise of employee stock options

     —           —           42        —          —          42   

Repurchase of parent company common stock

     —           —           (28     —          —          (28
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 1,000       $ —         $ 638,445      $ (1,266   $ (370,279   $ 266,900   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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ACCELLENT INC.

Consolidated Statements of Cash Flows

(In thousands)

 

     Year Ended December 31,  
     2009     2010     2011  

Cash flows from operating activities:

      

Net loss

   $ (1,070   $ (24,503   $ (14,939

Adjustments to reconcile net loss to net cash flows provided by operating activities:

      

Depreciation and amortization

     37,128        37,358        38,740   

Amortization of debt discounts and non-cash interest accrued

     4,229        3,662        2,934   

Change in allowance for bad debts

     712        (213     510   

Restructuring charges, net of adjustments and payments

     1,128        (117     340   

Change in fair value of derivative instruments

     (425     (4,511     —     

Loss (gain) on disposal of property and equipment

     966        15        (706

Deferred income tax expense

     2,456        3,087        2,801   

Non-cash compensation expense

     710        785        1,111   

Loss on debt extinguishments

     —          20,882        —     

Change in environmental liabilities

     —          (1,302     —     

Changes in operating assets and liabilities:

      

Accounts receivable

     5,300        (9,163     (1,361

Inventory

     8,744        (10,635     (62

Prepaid expenses and other current assets

     (299     1,382        (998

Accounts payable, accrued expenses and other liabilities

     (4,100     17,848        645   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     55,479        34,575        29,015   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Capital expenditures

     (16,434     (25,944     (30,810

Proceeds from the sale of property and equipment

     1,016        66        970   

Proceeds from note receivable

     1,268        —          —     
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (14,150     (25,878     (29,840
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from borrowings on long-term debt

     —          712,396        —     

Repayments of long-term debt and capital lease obligations

     (22,384     (695,220     (18

Proceeds from sale of parent company stock

     239        600        50   

Repurchase of parent company common stock

     (16     (66     (28

Proceeds from the exercise of options in parent company stock

     —          106        19   

Payment of debt issuance costs

     (10     (19,337     (794
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (22,171     (1,521     (771
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes

     102        (174     (333
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     19,260        7,002        (1,929

Cash and cash equivalents, beginning of year

     14,525        33,785        40,787   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 33,785      $ 40,787      $ 38,858   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash paid for interest

   $ 53,074      $ 54,732      $ 66,172   

Cash paid for income taxes

   $ 2,354      $ 1,086      $ 2,343   

Supplemental disclosure of non-cash investing and financing activities:

      

Non-cash exercise of options in parent company stock

   $ —        $ 360      $ —     

Property and equipment purchases unpaid and included in accounts payable

   $ 1,406      $ 471      $ 726   

Deferred financing fees unpaid and included in accounts payable and accrued liabilities

   $ —        $ 568      $ —     

The accompanying notes are an integral part of these consolidated financial statements.

 

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ACCELLENT INC.

Notes to Consolidated Financial Statements

 

1. Summary of significant accounting policies

Basis of presentation

The consolidated financial statements include the accounts of Accellent Inc. and its wholly owned subsidiaries (collectively, the “Company”). All intercompany transactions have been eliminated.

The Company was acquired on November 22, 2005 through a merger transaction with Accellent Merger Sub Inc., a corporation formed by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and Bain Capital (“Bain”). The acquisition was accomplished through the merger of Accellent Merger Sub Inc. into Accellent Inc. with Accellent Inc. being the surviving company (the “Merger”). The Merger and the consideration raised through debt and equity transactions are collectively referred to as the “Acquisition.” The Company is a wholly owned subsidiary of Accellent Acquisition Corp., which is owned by Accellent Holdings Corp. Both of these companies were formed to facilitate the Acquisition. The Company’s accounting for the Acquisition recognized the requirement that purchase accounting treatment of the Acquisition be “pushed down” to the Company, resulting in the adjustment of all net assets to their respective fair values as of the Acquisition date.

Nature of operations and organization

The Company is engaged in the provision of custom component manufacturing and finished device assembly services primarily for customers in the medical device industry. Sales are focused primarily in domestic and Western European markets.

The Company is aligned to streamline sales, quality, engineering and customer service activities into one centrally managed organization to better serve customers, many of whom service multiple medical device end markets. As a result, the Company has one operating and reportable segment which is evaluated regularly by the Company’s chief operating decision maker in deciding how to allocate resources and assess performance. The Company’s chief operating decision maker is its chief executive officer.

Major customers and concentration of credit

Financial instruments that potentially subject the Company to concentrations of credit risk are primarily accounts receivable and cash equivalents. A significant portion of the Company’s customer base is comprised of companies within the medical device industry. The Company does not require collateral from its customers.

For the years ended December 31, 2009, 2010 and 2011, the Company’s ten largest customers in the aggregate accounted for 60%, 64% and 65% of consolidated net sales, respectively. Three customers each accounted for greater than 10% of net sales for the year ended December 31, 2011. Two customers each accounted for greater than 10% of net sales for the years ended December 31, 2009 and 2010. Actual percentages of net sales from all greater than 10% customers are as follows:

 

      Year Ended December 31,  
      2009     2010     2011  

Customer A

     18     18     16

Customer B

     15     16     16

Customer C

     *     *     10

 

* Less than 10%

At December 31, 2011, Customers A and B each comprised approximately 12% of accounts receivable, net. At December 31, 2010, Customers A and B each comprised approximately 11.0%, of accounts receivable, net.

Foreign currency translation

The Company has manufacturing subsidiaries in Europe, Mexico and Malaysia. The functional currency of each of these subsidiaries is the respective local currency. Assets and liabilities of the Company’s foreign subsidiaries are translated

 

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into U.S. dollars using the current rate of exchange existing at period-end, while revenues and expenses are translated at average monthly exchange rates. Translation gains and losses are recorded as a component of accumulated other comprehensive income (loss) within stockholder’s equity. Transaction gains and losses are included in other (expense) income, net. Currency transaction gains (losses) included in other (expense) income, net in each of the years ended December 31, 2009, 2010 and 2011 were $(0.9) million, $1.5 million, and $0.1 million, respectively.

Cash and cash equivalents

Cash and cash equivalents consist of cash in bank deposit accounts and highly liquid investments with an original or remaining maturity of 90 days or less when acquired. Periodically the Company may invest in cash equivalents, principally bank deposits and overnight repurchase agreements. At December 31, 2010 and 2011, the Company had no cash equivalents.

Allowance for Doubtful Accounts

The Company provides credit to its customers in the normal course of business. The Company maintains an allowance for doubtful accounts for those receivables that it determines are no longer collectible. The Company estimates its losses from uncollectable accounts based upon recent historical experience, the length of time the receivable has been outstanding and other specific information as it becomes available. The allowance for doubtful accounts was $0.6 million and $0.7 million at December 31, 2010 and 2011, respectively.

Inventories

Inventories are stated at the lower of cost (on first-in, first-out basis) or market and include the cost of materials, labor and manufacturing overhead. Costs related to abnormal amounts of idle facility expense, freight, handling costs, and wasted material are recognized as current period expenses.

Property, plant and equipment

Property, plant and equipment consisted of the following (in thousands):

 

      December 31,  
      2010     2011  

Land

   $ 4,367      $ 4,448   

Buildings

     16,450        18,812   

Machinery and equipment

     140,756        155,612   

Leasehold improvements

     14,228        14,773   

Computer equipment and software

     26,579        30,820   

Acquired assets to be placed in service

     19,155        25,942   
  

 

 

   

 

 

 
     221,535        250,407   

Less—Accumulated depreciation

     (100,498     (123,415
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 121,037      $ 126,992   
  

 

 

   

 

 

 

Property, plant and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures which significantly increase the value of, or extend the useful lives of property, plant and equipment, are capitalized, while replaced assets are retired when removed from service. Acquired assets to be placed in service are those assets where either (i) we have yet to begin using the asset in operations or (ii) additional costs are necessary to complete the asset for the use in operation. Depreciation expense is recorded on assets when they are placed in service.

Depreciation is calculated using the straight-line method over the estimated useful lives of depreciable assets. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the lease’s term including renewal options expected to be exercised, or estimated useful lives of the leased asset. Useful lives of depreciable assets, by class, are as follows:

 

Buildings

     20 years   

Machinery and equipment

     3 to 10 years   

Leasehold improvements

     2 to 10 years   

Computer equipment and software

     3 years   

 

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The Company evaluates the useful lives and potential impairment of property, plant and equipment whenever events or changes in circumstances indicate that either the useful life or carrying value may be impaired. Events and circumstances which may indicate impairment include a change in the use or condition of the asset, regulatory changes impacting the future use of the asset, or projected operating or cash flow losses, or an expectation that an asset could be disposed of prior to the end of its useful life. If the carrying value of the asset is not recoverable based on an analysis of cash flow, a charge for impairment is recorded equal to the amount by which the carrying value of the asset exceeds its fair value, less costs to sell. In these instances, fair value is estimated utilizing either a market approach considering quoted market prices for identical or similar assets, or the income approach determined using discounted projected cash flows. Additionally, the Company analyzes the remaining useful lives of potential impaired assets and adjusts these lives when appropriate.

Cost and accumulated depreciation for property retired or disposed of are removed from the accounts, and any gain or loss on disposal is recorded in earnings. Capitalized interest in connection with constructing property and equipment was not significant. Depreciation expense was $22.2 million, $22.4 million and $23.8 million for each of the years ended December 31, 2009, 2010 and 2011, respectively.

Goodwill

Goodwill represents the amount of cost over the fair value of the net assets of acquired businesses. Goodwill is subject to an annual impairment test (or more often if impairment indicators arise), using a fair value-based approach. Fair value is determined using a combined weighte