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BUSINESS ACQUISITIONS | 9 Months Ended
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Sep. 30, 2015
Business Combinations [Abstract] |
BUSINESS ACQUISITIONS | BUSINESS ACQUISITIONS TEI On July 17, 2015, the Company executed the two merger agreements (collectively, the "Agreements") under which the Company acquired TEI Biosciences, Inc., a Delaware corporation ("TEI Bio"), and TEI Medical Inc., a Delaware corporation ("TEI Med", collectively "TEI") for an aggregate purchase price of approximately $312.4 million ($210.4 million for TEI Bio and $102.0 million for TEI Med) subject in each case to purchase price adjustments for certain working capital changes. The purchase price consists of a cash payment to the former shareholders of TEI Bio and TEI Med of approximately $312.4 million upon the closing of the transaction, net of $1.2 million of acquired cash. TEI Bio is in the business of developing and commercializing biologic devices for soft tissue repair and regenerative applications, including dura and hernia repair and plastic and reconstructive surgery. TEI Med holds a license to TEI Bio’s regenerative technology in the fields of wound healing and orthopedics. The Company recorded revenue for TEI of approximately $13.2 million in the condensed consolidated statements of operations for the three- and nine-month period ended September 30, 2015. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it is in the process of being integrated into the Company's operations. The following summarizes the preliminary allocation of the purchase price as of September 30, 2015 based on the fair value of the assets acquired and liabilities assumed:
| Preliminary Purchase Price Allocation |
| (Dollars in thousands) |
Cash | $ | 1,241 |  |
Accounts receivable, net | 9,011 |  |
Inventory | 23,223 |  |
Income tax receivable | 5,135 |  |
Other current assets | 2,270 |  |
Property, plant, and equipment | 2,027 |  |
Intangible assets: |  |  | Wtd. Avg. Life:
Developed Technology | 167,400 |  | 14 -16
Contractual Relationships | 51,345 |  | 11 -14
Leasehold Interest | 69 |  |
Goodwill | 148,935 |  |
Total assets acquired | 410,656 |  |
Accrued expenses and other liabilities | 9,732 |  |
Deferred tax liabilities | 88,565 |  |
Net assets acquired | $ | 312,359 |  |
Metasurg On December 5, 2014, the Company acquired certain assets of Koby Ventures II, L.P. dba Metasurg ("Metasurg") for an aggregate purchase price of $27.6 million (including working capital and purchase price adjustments of $0.4 million). The purchase price consists of an initial cash payment to Metasurg of $26.5 million, a separate purchase price adjustment cash payment of $0.4 million, and contingent consideration with an acquisition date fair value of $0.7 million. The potential maximum undiscounted contingent consideration of $38.5 million is based on reaching certain sales levels for acquired products from April 1, 2015 through June 30, 2016. The fair value of this liability is based on future sales projections of the Metasurg product under various potential scenarios and weighting the probability of these outcomes for the twelve-month period ended December 31, 2015. At the date of the acquisition, the cash flow projection was discounted using an internal rate of return of 19.9%. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. Metasurg develops intuitive implant systems for the foot and ankle market and sells almost entirely in the U.S. market. The acquired foot and ankle products will enhance the Company's lower extremities market position. The Company recorded revenue for Metasurg of approximately $1.8 million and $5.1 million in the condensed consolidated statements of operations for the three- and nine-month period ended September 30, 2015. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it has been fully integrated into the Company's operations. The Company adjusted the preliminary purchase price allocation during the quarter ended June 30, 2015 to reflect the $0.4 million working capital and purchase price adjustment. The following summarizes the final allocation of the purchase price as of September 30, 2015 based on the fair value of the assets acquired and liabilities assumed:
| Final Purchase Price Allocation |
| (Dollars in thousands) |
Inventory | $ | 4,800 |  |
Property, plant, and equipment | 1,246 |  |
Intangible assets: |  |  | Wtd. Avg. Life:
Technology product rights | 20,590 |  | 8 - 14 Years
In-process research and development | 190 |  | Indefinite
Goodwill | 732 |  |
Net assets acquired | $ | 27,558 |  |
MicroFrance On October 27, 2014, the Company acquired all outstanding shares of Medtronic Xomed Instrumentation, SAS ("MicroFrance") from Medtronic, Inc. ("Medtronic") as well as certain assets of Medtronic for $60.1 million in cash (including working capital and purchase price adjustments of $1.5 million, of which $0.8 million was recorded against goodwill). MicroFrance specializes in manual ear, nose, and throat ("ENT") surgical instruments and designs, manufactures, and sells reusable handheld instruments to ENT and laparoscopy surgical specialists around the world. The acquired ENT instruments fill a portfolio gap for the Company with clear growth opportunities through market adjacencies and provides for increased scale and reach in the international market. The Company recorded revenue for MicroFrance of approximately $6.7 million and $18.8 million in the condensed consolidated statements of operations for the three- and nine-month period ended September 30, 2015. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it has been fully integrated into the Company's operations. The Company adjusted the preliminary purchase price allocation during the quarter ended March 31, 2015 to reflect the $1.5 million working capital and purchase price adjustments. The following summarizes the final allocation of the purchase price as of September 30, 2015 based on the fair value of the assets acquired and liabilities assumed:
| Final Purchase Price Allocation |
| (Dollars in thousands) |
Cash | $ | 2,195 |  |
Inventory | 3,155 |  |
Prepaid expenses | 620 |  |
Property, plant, and equipment | 3,675 |  |
Other current assets | 5,025 |  |
Intangible assets: |  |  | Wtd. Avg. Life:
Trade name | 11,990 |  | 20 Years
Technology | 4,580 |  | 15 - 16 Years
Customer relationships | 18,130 |  | 12 - 16 Years
Goodwill | 16,607 |  |
Total assets acquired | 65,977 |  |
Accounts payable and other liabilities | 5,910 |  |
Net assets acquired | $ | 60,067 |  |
Confluent Surgical, Inc. On January 15, 2014, the Company acquired all outstanding shares of Confluent Surgical, Inc., ("Confluent Surgical") - including its surgical sealant and adhesion barrier product lines - from Covidien Group S.a.r.l, ("Covidien") for an aggregate purchase price of $255.9 million. The purchase price consists of an initial cash payment to Covidien of $231.0 million upon the closing of the transaction, a separate prepayment of $4.0 million made under a transitional supply agreement with an affiliate of Covidien, and contingent consideration with an acquisition date fair value of $20.9 million. The potential maximum undiscounted contingent consideration of $30.0 million consists of $25.0 million upon obtaining certain U.S. governmental approvals and $5.0 million upon obtaining certain European governmental approvals, both related to the completion of the transition of the Confluent Surgical business to the Company. The transitional supply agreement secures the supply of the acquired products from an affiliate of Covidien until the earlier of (i) the time that the transition of the Confluent Surgical business as discussed above is complete, or (ii) the fifth anniversary of the effective date of the agreement (the agreement also contains an option to extend for another two years by providing written notice at least 180 days prior to the end of the initial five-year period). This agreement contains financial incentives to the affiliate of Covidien for the timely supply of products each fiscal quarter through the third anniversary of the agreement. The prices paid under the supply agreement are essentially flat through the third anniversary of the agreement, and then increase significantly each of the following three years. The Company also entered into a transition services agreement with an affiliate of Covidien at the closing for services such as customer service, accounting and information technology management, clinical and regulatory affairs, manufacturing transition services, and other functions. This acquisition complements the Company's global neurosurgery growth strategy aimed at providing a broader set of solutions for surgical procedures in the head. The Company recorded revenue for Confluent Surgical of approximately $20.6 million and $57.2 million in the condensed consolidated statements of operations for the three- and nine-month periods ended September 30, 2015 and $17.7 million and $50.1 million for the three- and nine-month periods ended September 30, 2014. The net income or loss attributable to this acquisition cannot be identified on a stand-alone basis because it has been fully integrated into the Company's operations. The Company adjusted the preliminary purchase price allocation during the quarter ended June 30, 2014 to reduce deferred tax liabilities by $12.4 million. This adjustment offset goodwill and was the result of the Company analyzing and revising its tax positions in certain jurisdictions. The following summarizes the final allocation of the purchase price as of September 30, 2015 based on the fair value of the assets acquired and liabilities assumed:
| Final Purchase Price Allocation |
| (Dollars in thousands) |
Inventory deposit | $ | 4,000 |  |
Fixed assets | 438 |  |
Intangible assets: |  |  | Wtd. Avg. Life
Technology product rights | 239,800 |  | 3 - 20 Years
Other | 400 |  | Less than 1 year
Deferred tax assets - long term | 12 |  |
Goodwill | 105,331 |  |
Total assets acquired | 349,981 |  |
Contingent supply liability | 5,891 |  |
Other | 731 |  |
Deferred tax liabilities - long term | 87,464 |  |
Net assets acquired | $ | 255,895 |  |
Subsequent to the acquisition date, a regulatory event occurred that resulted in the full-impairment of one of the acquired technology product rights of $0.6 million. This event was not known, or knowable, at the time of the acquisition and therefore the impairment has been included in the Company's cost of sales. The Company accounted for the contingent supply liability by recording its fair value as a liability on the date of the acquisition based on a discounted cash-flow model. This contingent supply liability relates to contractual quarterly incentive payments that will be made to an affiliate of Covidien if certain supply minimums under the transitional supply agreement are met. The Company accounted for the contingent consideration by recording its fair value as a liability on the date of the acquisition. The contingent consideration relates to the Company's obtaining certain U.S. and European regulatory approvals. At the date of the acquisition, both of these milestones were valued using a discount rate of 2.2%, which is equivalent to the cost of debt for the estimated time horizon, and an overall probability of occurring of 95%. Accordingly, on January 15, 2014 the Company recorded a $20.9 million liability representing the initial fair value estimate of the probability weighted contingent consideration that management believes will be paid between early 2017 and late 2018. Depending on the expected timing of the estimated payments, the acquisition date fair value of the probability adjusted payments could have been $0.3 million higher or $0.4 million lower. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. The contingent consideration is re-measured to fair value at each reporting date until the contingency is resolved, and those changes in fair value are recognized in earnings. The goodwill recorded in connection with these acquisitions is based on (i) expected cost savings, operating synergies and other benefits expected to result from the combined operations, (ii) the value of the going-concern element of the existing businesses (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately), and (iii) intangible assets that do not qualify for separate recognition such as an assembled workforce. The acquisitions generated a combination of deductible and non-deductible goodwill. Contingent Consideration The Company increased the fair value of contingent consideration during the nine-month period ended September 30, 2015 to reflect the change in the time value of money during the period. A reconciliation of the opening balances to the closing balances of these Level 3 measurements is as follows (in thousands):
|  | Location in Statement of Operations
Balance as of January 1, 2015 | $ | 22,008 |  |
Loss from increase in fair value of contingent consideration liabilities | 359 |  | Selling, general and administrative
Fair value at September 30, 2015 | $ | 22,367 |  |
The entire contingent consideration balance was included in Other liabilities at September 30, 2015 and December 31, 2014. Pro Forma Results The following unaudited pro forma financial information summarizes the results of operations for the three and nine months ended September 30, 2015 and 2014 as if the acquisitions completed by the Company during 2015 and 2014 had been completed as of the beginning of the prior year. The pro forma results are based upon certain assumptions and estimates, and they give effect to actual operating results prior to the acquisition and adjustments to reflect (i) the change in interest expense, depreciation expense, and intangible asset amortization, (ii) certain external expenses related to the acquisition as if they were incurred on January 1 of the year prior to the acquisition that will not be recurring in the post-acquisition periods, and (iii) income taxes on the aforementioned adjustments at the Company’s statutory rate. No effect has been given to other cost reductions or operating synergies. As a result, these pro forma results do not necessarily represent results that would have occurred if the acquisition had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2015 |  | 2014 |  | 2015 |  | 2014
| (In thousands, except per share amounts) |  | (In thousands, except per share amounts)
Total revenue | $ | 229,402 |  |  | $ | 223,837 |  |  | $ | 677,740 |  |  | $ | 656,584 |
Net (loss) income | $ | (31,697 | ) |  | $ | 10,160 |  |  | $ | (5,930 | ) |  | $ | 20,251 |
Net (loss) income per share: |  |  |  |  |  |  |
Basic | $ | (0.90 | ) |  | $ | 0.31 |  |  | $ | (0.18 | ) |  | $ | 0.63 |

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