Discontinued Operations

9 Months Ended

Sep. 27, 2020

Discontinued Operations and Disposal Groups [Abstract]

We classify assets and liabilities as held for sale (disposal group) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. We also consider whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

During the fourth quarter of 2019, we committed to a plan to sell Grass Valley, and at such time, met all of the criteria to classify the assets and liabilities of this business as held for sale. Furthermore, we determined a divestiture of Grass Valley represented a strategic shift that is expected to have a major impact on our operations and financial results. As a result, the Grass Valley disposal group, which was included in our Enterprise Solutions segment, is reported within discontinued operations. The Grass Valley disposal group excludes certain Grass Valley pension liabilities that we retained. We also ceased depreciating and amortizing the assets of the disposal group once they met the held for sale criteria during the fourth quarter of 2019.

We wrote down the carrying value of Grass Valley and recognized asset impairments totaling $113.0 million and $342.1 million in the nine months ended September 27, 2020 and September 29, 2019, respectively. We determined the estimated fair values of the assets and of the reporting unit by calculating the present values of their estimated future cash flows.

We completed the sale of Grass Valley to Black Dragon Capital on July 2, 2020 and recognized a gain of $2.7 million, net of a $2.0 million income tax benefit. The terms of the sale included gross cash consideration of $120.0 million, or approximately $59.5 million net of cash delivered with the business and certain preliminary working capital adjustments. The sale also included deferred consideration consisting of a $175.0 million seller’s note that matures in 2025, up to $88 million in PIK (payment-in-kind) interest on the seller’s note, and $178.0 million in potential earnout payments. Based upon a third party valuation specialist using certain assumptions in a Monte Carlo analysis, the estimated fair value of the seller’s note is $34.9 million, which we recorded in Other Long-Lived Assets. We accounted for the earnout under a loss recovery approach and did not record an asset as of the disposal date. Any subsequent recognition of an earnout will be based on the gain contingency guidance.

As part of the transaction, we also invested $3.0 million for a 9% equity interest in Grass Valley with the right to put the equity back to Black Dragon Capital at any time on or before October 31, 2020. On October 23, 2020, we notified Black Dragon Capital that we are exercising our right to put the equity back to them. We expect to finalize the sale of our equity interest during the fourth quarter of 2020. We deconsolidated Grass Valley as of July 2, 2020 and are accounting for our equity interest under the cost method. Our equity interest is recorded in Other Long-Lived Assets.

The seller’s note accrues PIK interest at an annual rate of 8.5%. During the three months ended September 27, 2020, the seller’s note accrued interest of $3.6 million, which we reserved for based on our expected loss allowance methodology.

We are performing certain services for Grass Valley under a transition services agreement. During the three months ended September 27, 2020, the amount of transition services totaled $1.0 million, which we expect to collect in 2021.

The following table summarizes the operating results of the disposal group up to the July 2, 2020 disposal date for the three and nine months ended September 27, 2020 and September 29, 2019, respectively:


	Three Months Ended				Nine Months Ended
	September 27, 2020		September 29, 2019		September 27, 2020		September 29, 2019

	(In thousands)
Revenues	$	1,334	$	87,221	$	109,195	$	263,434
Cost of sales	(1,008)		(50,622)		(70,199)		(153,012)
Gross profit	326		36,599		38,996		110,422
Selling, general and administrative expenses	(574)		(21,924)		(37,435)		(66,785)
Research and development expenses	(610)		(7,360)		(15,083)		(28,526)
Amortization of intangibles	—		(3,218)		—		(11,695)
Asset impairment of discontinued operations	—		(342,146)		(113,007)		(342,146)
Interest expense, net	(12)		(198)		(432)		(611)
Non-operating pension benefit (cost)	27		(55)		(169)		(166)
Loss before taxes	$	(843)	$	(338,302)	$	(127,130)	$	(339,507)

The disposal group had capital expenditures of approximately $0.3 million and $16.7 million during the three and nine months ended September 27, 2020, respectively; and $8.3 million and $22.8 million during the three and nine months ended September 29, 2019, respectively.

The disposal group recognized credits to stock-based compensation of $0.0 million and $0.9 million during the three and nine months ended September 27, 2020, respectively. The disposal group incurred stock based compensation expense of $0.2 million and $0.8 million during the three and nine months ended September 29, 2019, respectively.

The disposal group did not have any significant non-cash charges for investing activities during the three and nine months ended September 27, 2020 or September 29, 2019.

The following table provides the major classes of assets and liabilities of the disposal group as of December 31, 2019:


	December 31, 2019

	(In thousands)
Assets:
Cash and cash equivalents	$	18,405
Receivables, net	117,386
Inventories, net	55,002
Other current assets	35,187
Plant, property, and equipment, less accumulated depreciation	61,233
Operating lease right-of-use assets	16,902
Goodwill	26,707
Intangible assets, less accumulated depreciation	143,459
Deferred income taxes	59,560
Other long-lived assets	21,652
Impairment of disposal group	(180,358)
Total Assets of discontinued operations	$	375,135
Liabilities:
Accounts payable	$	52,425
Accrued liabilities	83,349
Postretirement benefits	6,224
Deferred income taxes	2,740
Long-term operating lease liabilities	20,459
Other long-term liabilities	5,082
Total Liabilities of discontinued operations	$	170,279

The disposal group also had $42.3 million of accumulated other comprehensive losses as of December 31, 2019.