Discontinued Operations

6 Months Ended

Jan. 01, 2017

Discontinued Operations

Discontinued Operations

NOTE 3 – Discontinued Operations

On September 30, 2016, the Company sold its non-core subsidiary, Tekna Seal LLC (“Tekna Seal”), to Winchester Electronics Corporation (“Winchester”) pursuant to a Membership Interests Purchase Agreement for $10.5 million in cash.  The sale to Winchester covered all of the membership interests of Tekna Seal, including 95.7% owned by the Company and 4.3% held by the Tekna Seal minority stakeholders.  The proceeds of the sale, after giving effect to any working capital adjustments, will be allocated among the Company and the minority sellers proportionate to their respective ownership of pre-closing membership interests.  The Company used the net cash proceeds of the sale to repay principal outstanding under the Company’s revolving loan.  During the second quarter of 2017, the Company finalized the working capital adjustments with Winchester and paid the former minority stakeholders.   

Below is a summary of the gain on sale of discontinued operations (in thousands):

Gross proceeds	$	10,538
Less:
Property and equipment, net		218
Accounts receivable		918
Inventory		1,268
Other current assets		54
Accounts payable and accrued expenses		(936)
Working capital adjustment		(184)
Total net assets disposed		1,338
Goodwill		3,374
Transaction costs		393
Minority interests		(393)
Payments to minority stakeholders		438
Gain on sale of discontinued operations, before income taxes	$	5,388

In connection with the sale, the Company recorded a pre-tax gain of approximately $5.4 million, which includes a non-cash charge of $3.4 million related to goodwill associated with Tekna Seal, and transaction costs of approximately $0.4 million.  The income from operations of Tekna Seal attributable to the Company was approximately $0.3 million for the three months ended December 27, 2015, and approximately $0.1 million and $0.5 million for the six months ended January 1, 2017 and December 27, 2015, respectively. 

The condensed consolidated statements of operations for the six months ended January 1, 2017, include the results of operations of Tekna Seal through the sale date of September 30, 2016 and the gain on the sale of Tekna Seal.  Financial information for discontinued operations for the three and six months ended January 1, 2017 and December 27, 2015 is as follows (in thousands):

	For the three months ended				For the six months ended
	January 1, 2017		December 27, 2015		January 1, 2017		December 27, 2015
Sales	$	—	$	1,191	$	1,277	$	2,049
Cost of sales		—		(688)		(943)		(1,166)
Gross profit		—		503		334		883
Selling, general and administrative		—		(198)		(242)		(405)
Income from discontinued operations, before income taxes		—		305		92		478
Gain on sale of discontinued operations		(255)		—		5,388		—
Total income from discontinued operations, before income taxes		(255)		305		5,480		478
Income tax expense on discontinued operations		(235)		—		(1,783)		—
Income from discontinued operations, net of tax	$	(490)	$	305	$	3,697	$	478

The following table presents the carrying amount as of June 30, 2016, of the major classes of assets and liabilities held for sale in the condensed consolidated balance sheet (in thousands):

	June 30, 2016
Current assets:
Accounts receivable	$	727
Inventory		1,028
Other assets		63
Total current assets		1,818
Property and equipment, net		153
Goodwill		3,374
Total assets of discontinued operations	$	5,345
Current liabilities:
Accounts payable and accrued expenses	$	714
Capital lease obligations		9
Total current liabilities		723
Capital lease obligations		19
Total liabilities of discontinued operations	$	742

Cash flows from Tekna Seal for the six months ended January 1, 2017 and December 27, 2015 are combined with the cash flows from operations within each of the categories presented on the condensed consolidated statements of cash flows.  There were no significant operating or investing activities from discontinued operations during the six months ended January 1, 2017 and December 27, 2015.