ENDP-06.30.2013-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_______________________________
FORM 10-Q
_______________________________
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013.
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
Commission file number: 001-15989
_______________________________
ENDO HEALTH SOLUTIONS INC.
(Exact Name of Registrant as Specified in Its Charter)
_______________________________ |
| |
Delaware | 13-4022871 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
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1400 Atwater Drive, Malvern, Pennsylvania | 19355 |
(Address of Principal Executive Offices) | (Zip Code) |
(484) 216-0000
(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
_______________________________
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Sections 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 o
Indicate by check 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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | x | Accelerated filer | o |
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Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
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| | | | |
Common Stock, $0.01 par value | Shares outstanding as of | July 30, 2013 | : | 114,204,833 |
ENDO HEALTH SOLUTIONS INC.
INDEX
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PART I. FINANCIAL INFORMATION |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. OTHER INFORMATION |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plan,” “projected,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption “Risk Factors” in Item 1A of this document and in Item 1A under the caption “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012, supplement and as otherwise enumerated herein, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document.
We do not undertake any obligation to update our forward-looking statements after the date of this document for any reason, even if new information becomes available or other events occur in the future. You are advised to consult any further disclosures we make on related subjects in our reports filed with the Securities and Exchange Commission (SEC). Also note that, in Item 1A of this document and in Item 1A under the caption “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2012, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data) |
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 505,608 |
| | $ | 547,916 |
|
Accounts receivable, net | 709,404 |
| | 690,850 |
|
Inventories, net | 429,942 |
| | 357,638 |
|
Prepaid expenses and other current assets | 38,964 |
| | 27,750 |
|
Income taxes receivable | 10,684 |
| | 36,489 |
|
Deferred income taxes | 262,665 |
| | 308,591 |
|
Total current assets | $ | 1,957,267 |
| | $ | 1,969,234 |
|
MARKETABLE SECURITIES | 2,018 |
| | 1,746 |
|
PROPERTY, PLANT AND EQUIPMENT, NET | 375,079 |
| | 385,668 |
|
GOODWILL | 2,017,313 |
| | 2,014,351 |
|
OTHER INTANGIBLES, NET | 2,010,258 |
| | 2,098,973 |
|
OTHER ASSETS | 91,703 |
| | 98,587 |
|
TOTAL ASSETS | $ | 6,453,638 |
| | $ | 6,568,559 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable | $ | 276,458 |
| | $ | 416,882 |
|
Accrued expenses | 1,075,351 |
| | 1,170,945 |
|
Current portion of long-term debt | 72,184 |
| | 133,998 |
|
Acquisition-related contingent consideration | 1,212 |
| | 6,195 |
|
Total current liabilities | $ | 1,425,205 |
| | $ | 1,728,020 |
|
DEFERRED INCOME TAXES | 476,384 |
| | 516,565 |
|
ACQUISITION-RELATED CONTINGENT CONSIDERATION | 2,812 |
| | 2,729 |
|
LONG-TERM DEBT, LESS CURRENT PORTION, NET | 2,994,252 |
| | 3,037,947 |
|
OTHER LIABILITIES | 303,440 |
| | 150,092 |
|
COMMITMENTS AND CONTINGENCIES (NOTE 12) |
|
| |
|
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STOCKHOLDERS’ EQUITY: | | | |
Preferred stock, $0.01 par value; 40,000,000 shares authorized; none issued | — |
| | — |
|
Common stock, $0.01 par value; 350,000,000 shares authorized; 142,753,663 and 140,040,882 shares issued; 113,624,131 and 110,793,855 shares outstanding at June 30, 2013 and December 31, 2012, respectively | 1,428 |
| | 1,400 |
|
Additional paid-in capital | 1,104,091 |
| | 1,035,115 |
|
Retained earnings | 861,921 |
| | 811,573 |
|
Accumulated other comprehensive loss | (8,873 | ) | | (6,802 | ) |
Treasury stock, 29,129,532 and 29,247,027 shares at June 30, 2013 and December 31, 2012, respectively | (765,627 | ) | | (768,430 | ) |
Total Endo Health Solutions Inc. stockholders’ equity | $ | 1,192,940 |
| | $ | 1,072,856 |
|
Noncontrolling interests | 58,605 |
| | 60,350 |
|
Total stockholders’ equity | $ | 1,251,545 |
| | $ | 1,133,206 |
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 6,453,638 |
| | $ | 6,568,559 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
REVENUES: | | | | | | | |
Net pharmaceutical product sales | $ | 584,303 |
| | $ | 598,061 |
| | $ | 1,120,047 |
| | $ | 1,102,661 |
|
Devices revenues | 125,971 |
| | 128,131 |
| | 248,623 |
| | 258,297 |
|
Service and other revenues | 56,235 |
| | 58,996 |
| | 106,358 |
| | 114,863 |
|
TOTAL REVENUES | $ | 766,509 |
| | $ | 785,188 |
| | $ | 1,475,028 |
| | $ | 1,475,821 |
|
COSTS AND EXPENSES: | | | | | | | |
Cost of revenues | 309,167 |
| | 294,570 |
| | 595,093 |
| | 659,390 |
|
Selling, general and administrative | 253,335 |
| | 233,622 |
| | 489,717 |
| | 488,076 |
|
Research and development | 34,091 |
| | 45,427 |
| | 75,660 |
| | 134,115 |
|
Patent litigation settlement, net | — |
| | 131,361 |
| | — |
| | 131,361 |
|
Litigation-related and other contingencies | 59,971 |
| | — |
| | 128,203 |
| | — |
|
Asset impairment charges | 7,087 |
| | 3,000 |
| | 8,187 |
| | 43,000 |
|
Acquisition-related and integration items, net | 2,640 |
| | 7,055 |
| | 3,958 |
| | 10,804 |
|
OPERATING INCOME | $ | 100,218 |
| | $ | 70,153 |
| | $ | 174,210 |
| | $ | 9,075 |
|
INTEREST EXPENSE, NET | 42,486 |
| | 45,985 |
| | 86,789 |
| | 92,881 |
|
LOSS ON EXTINGUISHMENT OF DEBT | — |
| | — |
| | 11,312 |
| | 5,426 |
|
OTHER (INCOME) EXPENSE, NET | (16,413 | ) | | 297 |
| | (34,581 | ) | | 748 |
|
INCOME (LOSS) BEFORE INCOME TAX | $ | 74,145 |
| | $ | 23,871 |
| | $ | 110,690 |
| | $ | (89,980 | ) |
INCOME TAX | 26,034 |
| | 1,776 |
| | 35,976 |
| | (37,550 | ) |
CONSOLIDATED NET INCOME (LOSS) | $ | 48,111 |
| | $ | 22,095 |
| | $ | 74,714 |
| | $ | (52,430 | ) |
Less: Net income attributable to noncontrolling interests | 13,112 |
| | 12,630 |
| | 24,366 |
| | 25,450 |
|
NET INCOME (LOSS) ATTRIBUTABLE TO ENDO HEALTH SOLUTIONS INC. | $ | 34,999 |
| | $ | 9,465 |
| | $ | 50,348 |
| | $ | (77,880 | ) |
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO ENDO HEALTH SOLUTIONS INC. COMMON STOCKHOLDERS: | | | | | | | |
Basic | $ | 0.31 |
| | $ | 0.08 |
| | $ | 0.45 |
| | $ | (0.67 | ) |
Diluted | $ | 0.30 |
| | $ | 0.08 |
| | $ | 0.44 |
| | $ | (0.67 | ) |
WEIGHTED AVERAGE SHARES: | | | | | | | |
Basic | 112,531 |
| | 116,992 |
| | 111,873 |
| | 117,022 |
|
Diluted | 117,221 |
| | 121,080 |
| | 115,205 |
| | 117,022 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
CONSOLIDATED NET INCOME (LOSS) | | | $ | 48,111 |
| | | | $ | 22,095 |
| | | | $ | 74,714 |
| | | | $ | (52,430 | ) |
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: | | | | | | | | | | | | | | | |
Net unrealized (loss) gain on securities: | | | | | | | | | | | | | | | |
Unrealized (losses) gains arising during the period | $ | (327 | ) | | | | $ | 1,561 |
| | | | $ | 170 |
| | | | $ | 1,369 |
| | |
Less: reclassification adjustments for (gains) losses realized in net income (loss) | — |
| | (327 | ) | | — |
| | 1,561 |
| | — |
| | 170 |
| | — |
| | 1,369 |
|
Foreign currency translation gain (loss) | | | 211 |
| | | | (6,640 | ) | | | | (2,969 | ) | | | | (3,568 | ) |
Fair value adjustment on derivatives designated as cash flow hedges: | | | | | | | | | | | | | | | |
Fair value adjustment on derivatives designated as cash flow hedges arising during the period | 283 |
| | | | 993 |
| | | | 533 |
| | | | 195 |
| | |
Less: reclassification adjustments for cash flow hedges settled and included in net income (loss) | 126 |
| | 409 |
| | (184 | ) | | 809 |
| | 195 |
| | 728 |
| | (24 | ) | | 171 |
|
OTHER COMPREHENSIVE INCOME (LOSS) | | | $ | 293 |
| | | | $ | (4,270 | ) | | | | $ | (2,071 | ) | | | | $ | (2,028 | ) |
CONSOLIDATED COMPREHENSIVE INCOME (LOSS) | | | $ | 48,404 |
| | | | $ | 17,825 |
| | | | $ | 72,643 |
| | | | $ | (54,458 | ) |
Less: Comprehensive income attributable to noncontrolling interests | | | 13,112 |
| | | | 12,630 |
| | | | 24,366 |
| | | | 25,450 |
|
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENDO HEALTH SOLUTIONS INC. | | | $ | 35,292 |
| | | | $ | 5,195 |
| | | | $ | 48,277 |
| | | | $ | (79,908 | ) |
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
OPERATING ACTIVITIES: | | | |
Consolidated net income (loss) | $ | 74,714 |
| | $ | (52,430 | ) |
Adjustments to reconcile consolidated net income (loss) to Net cash provided by operating activities: | | | |
Depreciation and amortization | 135,051 |
| | 139,563 |
|
Stock-based compensation | 22,753 |
| | 33,346 |
|
Amortization of debt issuance costs and premium / discount | 18,567 |
| | 17,521 |
|
Provision for bad debts | 1,857 |
| | — |
|
Selling, general and administrative expenses paid in shares of common stock | 136 |
| | 239 |
|
Deferred income taxes | 5,832 |
| | (75,015 | ) |
Net loss (gain) on disposal of property, plant and equipment | 2,049 |
| | (173 | ) |
Change in fair value of acquisition-related contingent consideration | 100 |
| | (68 | ) |
Loss on extinguishment of debt | 11,312 |
| | 5,426 |
|
Asset impairment charges | 8,187 |
| | 43,000 |
|
Changes in assets and liabilities which provided (used) cash: | | | |
Accounts receivable | (22,946 | ) | | 11,433 |
|
Inventories | (73,185 | ) | | (65,756 | ) |
Prepaid and other assets | 8,885 |
| | (5,513 | ) |
Accounts payable | (133,199 | ) | | 23,297 |
|
Accrued expenses | (94,975 | ) | | 127,444 |
|
Other liabilities | 130,537 |
| | 46,730 |
|
Income taxes payable/receivable | 21,356 |
| | (72,705 | ) |
Net cash provided by operating activities | $ | 117,031 |
| | $ | 176,339 |
|
INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (37,469 | ) | | (47,321 | ) |
Proceeds from sale of property, plant and equipment | 440 |
| | 907 |
|
Acquisitions, net of cash acquired | (3,645 | ) | | 443 |
|
Proceeds from sale of investments | — |
| | 18,800 |
|
Patent acquisition costs and license fees | (10,000 | ) | | (5,000 | ) |
Other investing activities | (2,673 | ) | | — |
|
Net cash used in investing activities | $ | (53,347 | ) | | $ | (32,171 | ) |
|
| | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
FINANCING ACTIVITIES: | | | |
Capital lease obligations repayments | (197 | ) | | (661 | ) |
Direct financing arrangement repayments | (1,719 | ) | | — |
|
Principal payments on Term Loans | (117,344 | ) | | (233,125 | ) |
Payment on AMS Convertible Notes | — |
| | (17 | ) |
Principal payments on other indebtedness | (99 | ) | | (303 | ) |
Deferred financing fees | (9,573 | ) | | — |
|
Payment for contingent consideration | (5,000 | ) | | — |
|
Tax benefits of stock awards | 5,561 |
| | 3,894 |
|
Payments of tax withholding for restricted shares | (7,624 | ) | | — |
|
Exercise of Endo Health Solutions Inc. stock options | 52,483 |
| | 10,819 |
|
Purchase of common stock | — |
| | (56,000 | ) |
Issuance of common stock from treasury | 2,803 |
| | 2,899 |
|
Cash distributions to noncontrolling interests | (24,349 | ) | | (26,158 | ) |
Cash buy-out of noncontrolling interests, net of cash contributions | (1,882 | ) | | (1,481 | ) |
Net cash used in financing activities | $ | (106,940 | ) | | $ | (300,133 | ) |
Effect of foreign exchange rate | 948 |
| | 291 |
|
NET DECREASE IN CASH AND CASH EQUIVALENTS | $ | (42,308 | ) | | $ | (155,674 | ) |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 547,916 |
| | 547,620 |
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 505,608 |
| | $ | 391,946 |
|
SUPPLEMENTAL INFORMATION: | | | |
Cash paid for interest | $ | 65,707 |
| | $ | 81,638 |
|
Cash paid for income taxes | $ | 3,928 |
| | $ | 106,185 |
|
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | |
Purchases of property, plant and equipment financed by capital leases | $ | 461 |
| | $ | 1,266 |
|
Accrual for purchases of property, plant and equipment | $ | 5,036 |
| | $ | 4,304 |
|
See Notes to Condensed Consolidated Financial Statements.
ENDO HEALTH SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of Endo Health Solutions Inc., which we refer to herein as the Company, Endo, we, our or us, have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of June 30, 2013 and the results of our operations and our cash flows for the periods presented. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. The amendments in this update provide guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance. This guidance requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and any additional amount the reporting entity expects to pay on behalf of its co-obligors. This ASU also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. ASU 2013-04 is effective on a retrospective basis for fiscal years and interim periods within those fiscal years beginning after December 15, 2013 and early adoption is permitted. The Company is currently evaluating ASU 2013-04 but does not expect the impact of adoption to be material.
In July 2013, the FASB issued ASU 2013-11, Presentation of Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this update provide guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists, in order to eliminate the diversity in practice in the presentation of unrecognized tax benefits in such instances. This guidance generally requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance of the tax position at the reporting date. ASU 2013-11 is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. The Company is currently evaluating ASU 2013-11 and plans to comply with all applicable provisions of this ASU no later than the first quarter of 2014.
NOTE 3. FAIR VALUE MEASUREMENTS
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration, debt obligations, and derivative instruments. Included in cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1 per unit, which assists in providing adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Due to their short-term maturity, the carrying amounts of cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.
The following table presents the carrying amounts and estimated fair values of our other financial instruments at June 30, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| June 30, 2013 | | December 31, 2012 |
| Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Current assets: | | | | | | | |
Derivative instruments | $ | 504 |
| | $ | 504 |
| | $ | — |
| | $ | — |
|
| $ | 504 |
| | $ | 504 |
| | $ | — |
| | $ | — |
|
Long-term assets: | | | | | | | |
Equity securities | $ | 2,018 |
| | $ | 2,018 |
| | $ | 1,746 |
| | $ | 1,746 |
|
Equity and cost method investments | 15,192 |
| | N/A |
| | 15,195 |
| | N/A |
|
| $ | 17,210 |
| | | | $ | 16,941 |
| | |
Current liabilities: | | | | | | | |
Acquisition-related contingent consideration—short-term | $ | 1,212 |
| | $ | 1,212 |
| | $ | 6,195 |
| | $ | 6,195 |
|
Current portion of Term Loan A Facility Due 2018 | 69,375 |
| | 69,375 |
| | 131,250 |
| | 131,250 |
|
3.25% AMS Convertible Notes due 2036 | 795 |
| | 795 |
| | 795 |
| | 795 |
|
4.00% AMS Convertible Notes due 2041 | 111 |
| | 111 |
| | 111 |
| | 111 |
|
Current portion of other long-term debt | 1,903 |
| | 1,903 |
| | 1,842 |
| | 1,842 |
|
Derivative instruments | — |
| | — |
| | 602 |
| | 602 |
|
Minimum Voltaren® Gel royalties due to Novartis—short-term | 29,388 |
| | 29,388 |
| | 31,878 |
| | 31,878 |
|
Other | 5,000 |
| | 5,000 |
| | 1,000 |
| | 1,000 |
|
| $ | 107,784 |
| | $ | 107,784 |
| | $ | 173,673 |
| | $ | 173,673 |
|
Long-term liabilities: | | | | | | | |
Acquisition-related contingent consideration—long-term | $ | 2,812 |
| | $ | 2,812 |
| | $ | 2,729 |
| | $ | 2,729 |
|
1.75% Convertible Senior Subordinated Notes Due 2015, net | 333,119 |
| | 364,012 |
| | 321,332 |
| | 364,444 |
|
Term Loan A Facility Due 2018, less current portion | 1,300,781 |
| | 1,300,370 |
| | 1,256,250 |
| | 1,259,094 |
|
Term Loan B Facility Due 2018 | 60,550 |
| | 60,592 |
| | 160,550 |
| | 162,260 |
|
7.00% Senior Notes Due 2019 | 500,000 |
| | 504,063 |
| | 500,000 |
| | 536,563 |
|
7.00% Senior Notes Due 2020, net | 397,047 |
| | 400,750 |
| | 396,899 |
| | 429,000 |
|
7.25% Senior Notes Due 2022 | 400,000 |
| | 401,250 |
| | 400,000 |
| | 431,500 |
|
Other long-term debt, less current portion | 2,755 |
| | 2,755 |
| | 2,916 |
| | 2,916 |
|
Minimum Voltaren® Gel royalties due to Novartis—long-term | — |
| | — |
| | 13,846 |
| | 13,846 |
|
Other | 8,150 |
| | 8,150 |
| | 5,775 |
| | 5,775 |
|
| $ | 3,005,214 |
| | $ | 3,044,754 |
| | $ | 3,060,297 |
| | $ | 3,208,127 |
|
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on a quoted market prices and thus represent Level 1 measurements within the fair value hierarchy, as defined below. These securities are not held to support current operations and are therefore classified as non-current assets.
The acquisition-related contingent consideration, which is required to be measured at fair value on a recurring basis, consists primarily of contingent cash consideration related to the November 2010 acquisition of Generics International (US Parent), Inc. (doing business as Qualitest Pharmaceuticals). The fair value of our acquisition-related contingent consideration is determined using an income approach (present value technique), which is based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy.
The fair value of our 1.75% Convertible Senior Subordinated Notes (Convertible Notes) is based on an income approach known as the binomial lattice model which incorporated certain inputs and assumptions, including scheduled coupon and principal payments, the conversion feature inherent in the Convertible Notes, the put feature inherent in the Convertible Notes, and stock price volatility assumptions of 36% at June 30, 2013 and 32% at December 31, 2012 that were based on historic volatility of the Company’s common stock and other factors. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.
The fair values of the Term Loan Facilities and 2019, 2020, and 2022 Notes were based on market quotes and transactions proximate to the valuation date. The Company had previously used an income approach to value these debt instruments; however, the
valuation methodology was subsequently transitioned to a market-based approach given the volume of observable market transactions and quoted prices for these debt instruments. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
The total fair value of various foreign exchange forward contracts as of June 30, 2013 includes assets of $0.5 million, reported in Prepaid expenses and other current assets. We measure our derivative instruments at fair value on a recurring basis using significant observable inputs, hence these instruments represent Level 2 measurements within the fair value hierarchy.
At the inception of our License and Supply Agreement with Novartis AG in 2008, we recorded a liability representing the fair value of the minimum Voltaren® Gel royalty due to Novartis AG. In December 2012, pursuant to the provisions of this agreement, the term was automatically renewed for an additional one year period. At this time, an additional liability of $21.3 million was recorded, representing the fair value of the incremental minimum royalty we expect to pay to Novartis AG over the renewal term. The fair values of these liabilities were determined using an income approach (present value technique) taking into consideration the level and timing of expected cash flows and an assumed discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The liability is currently being accreted up to the expected minimum payments, less payments made to date. We believe the carrying amount of this minimum royalty guarantee at June 30, 2013 and December 31, 2012 represents a reasonable approximation of the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date. Accordingly, the carrying value approximates fair value as of June 30, 2013 and December 31, 2012.
The fair value of equity method and cost method investments is not readily available nor have we estimated the fair value of these investments and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have a significant adverse effect on the carrying value of any of our equity or cost method investments included in our Condensed Consolidated Balance Sheets at June 30, 2013 and December 31, 2012.
As of June 30, 2013, the Company held certain assets and liabilities that are required to be measured at fair value on a recurring basis. Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
| |
• | Level 1—Quoted prices in active markets for identical assets or liabilities. |
| |
• | Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| |
• | Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date using: |
June 30, 2013 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Money market funds | $ | 73,366 |
| | $ | — |
| | $ | — |
| | $ | 73,366 |
|
Equity securities | 2,018 |
| | — |
| | — |
| | 2,018 |
|
Derivative instruments | — |
| | 504 |
| | — |
| | 504 |
|
Total | $ | 75,384 |
| | $ | 504 |
| | $ | — |
| | $ | 75,888 |
|
Liabilities: | | | | | | | |
Acquisition-related contingent consideration—short-term | $ | — |
| | $ | — |
| | $ | 1,212 |
| | $ | 1,212 |
|
Acquisition-related contingent consideration—long-term | — |
| | — |
| | 2,812 |
| | 2,812 |
|
Total | $ | — |
| | $ | — |
| | $ | 4,024 |
| | $ | 4,024 |
|
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date using: |
December 31, 2012 | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Assets: | | | | | | | |
Money market funds | $ | 58,331 |
| | $ | — |
| | $ | — |
| | $ | 58,331 |
|
Equity securities | 1,746 |
| | — |
| | — |
| | 1,746 |
|
Total | $ | 60,077 |
| | $ | — |
| | $ | — |
| | $ | 60,077 |
|
Liabilities: | | | | | | | |
Derivative instruments | $ | — |
| | $ | 602 |
| | $ | — |
| | $ | 602 |
|
Acquisition-related contingent consideration—short-term | — |
| | — |
| | 6,195 |
| | 6,195 |
|
Acquisition-related contingent consideration—long-term | — |
| | — |
| | 2,729 |
| | 2,729 |
|
Total | $ | — |
| | $ | 602 |
| | $ | 8,924 |
| | $ | 9,526 |
|
The table above includes $58.3 million of money market funds, classified as Cash and cash equivalents in the Condensed Consolidated Balance Sheets, which were not previously reported in the table in Note 3. Fair Value Measurements in our 2012 Annual Report on Form 10-K.
Acquisition-Related Contingent Consideration
On November 30, 2010 (the Qualitest Pharmaceuticals Acquisition Date), the Company acquired Qualitest Pharmaceuticals, which was party to an asset purchase agreement with Teva Pharmaceutical Industries Ltd (Teva) (the Teva Agreement). Pursuant to this agreement, Qualitest Pharmaceuticals purchased certain pipeline generic products from Teva and could be obligated to pay consideration to Teva upon the achievement of certain future regulatory milestones (the Teva Contingent Consideration).
The current range of the undiscounted amounts the Company could be obligated to pay in future periods under the Teva Agreement is between zero and $7.5 million, after giving effect to the first quarter 2013 payment. The Company is accounting for the Teva Contingent Consideration in the same manner as if it had entered into that arrangement with respect to its acquisition of Qualitest Pharmaceuticals. Accordingly, the fair value was estimated based on a probability-weighted discounted cash flow model, or income approach. The resultant probability-weighted cash flows were then discounted using a discount rate of U.S. Prime plus 300 basis points. Using this valuation technique, the fair value of the contractual obligation to pay the Teva Contingent Consideration was determined to be approximately $4.0 million at June 30, 2013 and $8.9 million at December 31, 2012. The decrease in the balance primarily relates to a first quarter 2013 payment of $5.0 million related to the achievement of certain regulatory milestones. The remaining fluctuation resulted from changes in the fair value of the liability, primarily reflecting changes to the present value assumptions associated with our valuation model.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2013 (in thousands):
|
| | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
April 1, 2013 | $ | (3,964 | ) |
Amounts (acquired) sold or (issued) settled, net | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | (60 | ) |
June 30, 2013 | $ | (4,024 | ) |
The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended June 30, 2012 (in thousands):
|
| | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
April 1, 2012 | $ | (8,560 | ) |
Amounts (acquired) sold / (issued) settled, net | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | (59 | ) |
June 30, 2012 | $ | (8,619 | ) |
The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2013 (in thousands):
|
| | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
January 1, 2013 | $ | (8,924 | ) |
Amounts (acquired) sold / (issued) settled, net | 5,000 |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | (100 | ) |
June 30, 2013 | $ | (4,024 | ) |
The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six months ended June 30, 2012 (in thousands):
|
| | | |
| Acquisition-related Contingent Consideration |
Liabilities: | |
January 1, 2012 | $ | (8,687 | ) |
Amounts (acquired) sold / (issued) settled, net | — |
|
Transfers in and/or (out) of Level 3 | — |
|
Changes in fair value recorded in earnings | 68 |
|
June 30, 2012 | $ | (8,619 | ) |
The following is a summary of available-for-sale securities held by the Company at June 30, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Available-for-sale |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
June 30, 2013 | | | | | | | |
Money market funds | $ | 73,366 |
| | $ | — |
| | $ | — |
| | $ | 73,366 |
|
Total included in cash and cash equivalents | $ | 73,366 |
| | $ | — |
| | $ | — |
| | $ | 73,366 |
|
Equity securities | $ | 1,766 |
| | $ | 252 |
| | $ | — |
| | $ | 2,018 |
|
Long-term available-for-sale securities | $ | 1,766 |
| | $ | 252 |
| | $ | — |
| | $ | 2,018 |
|
Total available-for-sale securities | $ | 75,132 |
| | $ | 252 |
| | $ | — |
| | $ | 75,384 |
|
|
| | | | | | | | | | | | | | | |
| Available-for-sale |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
December 31, 2012 | | | | | | | |
Money market funds | $ | 58,331 |
| | $ | — |
| | $ | — |
| | $ | 58,331 |
|
Total included in cash and cash equivalents | $ | 58,331 |
| | $ | — |
| | $ | — |
| | $ | 58,331 |
|
Equity securities | $ | 1,766 |
| | $ | — |
| | $ | (20 | ) | | $ | 1,746 |
|
Long-term available-for-sale securities | $ | 1,766 |
| | $ | — |
| | $ | (20 | ) | | $ | 1,746 |
|
Total available-for-sale securities | $ | 60,097 |
| | $ | — |
| | $ | (20 | ) | | $ | 60,077 |
|
The table above includes $58.3 million of money market funds, classified as Cash and cash equivalents in the Condensed Consolidated Balance Sheets, which were not previously reported in the table in Note 3. Fair Value Measurements in our 2012 Annual Report on Form 10-K.
At June 30, 2013 and December 31, 2012, our equity securities consisted of investments in the stock of publicly traded companies. As of June 30, 2013, one investment had been in an unrealized loss position for more than twelve months. As of December 31, 2012, one investment had been in an unrealized loss position for less than twelve months and one had been in an unrealized loss position for more than twelve months. The Company does not believe the remaining unrealized losses are other-than-temporary at June 30, 2013 or December 31, 2012 primarily because the Company has both the ability and intent to hold these investments for a period of time we believe will be sufficient to recover such losses.
Nonrecurring Fair Value Measurements
As further discussed in Note 5. Segment Results and Note 16. Restructuring, on June 4, 2013, the Company's Board of Directors approved certain strategic, operational and organizational steps for the Company to take to refocus its operations and enhance shareholder value, including cost reduction initiatives and plans to explore strategic alternatives for its HealthTronics business. In June 2013, the Company began implementing these cost reduction initiatives and also began marketing its anatomical pathology services reporting unit, a component of its HealthTronics segment, for sale.
In connection with the June 2013 restructuring initiative and other cost reduction initiatives, we determined that the carrying amounts of certain miscellaneous fixed assets were no longer recoverable. Accordingly, during the six months ended June 30, 2013, we recorded asset impairment charges totaling $3.9 million, primarily to write off these assets, which were assigned to our Endo Pharmaceuticals segment.
Also during the six months ended June 30, 2013, in connection with the planned sale of our anatomical pathology services reporting unit, we recorded asset impairment charges totaling $4.2 million to write down the book value of this reporting unit's assets to fair value less estimated costs to sell. These charges were assigned to our HealthTronics segment. These nonrecurring fair value measurements were based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.
NOTE 4. INVENTORIES
The following is a summary of inventories held by the Company at June 30, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Raw materials | $ | 113,981 |
| | $ | 108,460 |
|
Work-in-process | 97,008 |
| | 59,763 |
|
Finished goods | 218,953 |
| | 189,415 |
|
Total | $ | 429,942 |
| | $ | 357,638 |
|
Inventory amounts in the table above are shown net of obsolescence. Our reserve for obsolescence is not material to the Condensed Consolidated Balance Sheets and therefore has not been separately disclosed.
NOTE 5. SEGMENT RESULTS
The Company has four reportable segments: (1) Endo Pharmaceuticals, (2) Qualitest, (3) AMS and (4) HealthTronics. These segments reflect the level at which executive management regularly reviews financial information to assess performance and to make
decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of their respective products or services and is discussed in more detail below.
We evaluate segment performance based on each segment’s adjusted income (loss) before income tax, which we define as income (loss) before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, net, cost reduction and integration-related initiatives, asset impairment charges, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, litigation-related and other contingent matters and certain other items that the Company believes do not reflect its core operating performance.
Certain corporate general and administrative expenses are not allocated and are therefore included within Corporate unallocated. We calculate consolidated adjusted income (loss) before income tax by adding the amounts for each of our reportable segments to Corporate unallocated adjusted income (loss) before income tax.
Endo Pharmaceuticals
The Endo Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm®, Opana® ER, Voltaren® Gel, Percocet®, Frova®, Fortesta® Gel, Supprelin® LA, Vantas® and Valstar®.
Qualitest
The Qualitest segment is composed of our legacy Endo non-branded generics portfolio and the portfolio from Qualitest Pharmaceuticals, which we acquired in 2010. The Qualitest segment has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. The product offerings of this segment include products in the pain management, urology, central nervous system (CNS) disorders, immunosuppression, oncology, women’s health and hypertension markets, among others.
AMS
The AMS segment currently focuses on providing technology solutions to physicians treating men’s and women’s pelvic health conditions and operates in the following business lines: men’s health, women’s health, and benign prostatic hyperplasia (BPH) therapy. We distribute devices through our direct sales force and independent sales representatives in the U.S., Canada, Australia and Western Europe. Additionally, we distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our AMS customers or distributors accounted for ten percent or more of our total revenues during the three or six months ended June 30, 2013 or 2012. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.
HealthTronics
The HealthTronics segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics across the U.S. These services are sold through the following business lines: lithotripsy services, prostate treatment services, anatomical pathology services, medical products manufacturing, sales and maintenance and electronic medical records services.
On June 4, 2013, the Company announced, as part of its broader restructuring initiatives, plans to explore strategic alternatives for its HealthTronics business.
In June 2013, the Company's Board of Directors approved a plan to sell its anatomical pathology services reporting unit, a component of the Company's HealthTronics segment. The anatomical pathology services business is being actively marketed and the Company expects it to be sold within one year of the Board's approval. The operating results of the anatomical pathology services business are not material to the Company's consolidated operating results in any period being presented and therefore, we have not presented the business as discontinued operations in the Condensed Consolidated Statements of Operations. In addition, the assets and liabilities of the business are not presented as held for sale in the Condensed Consolidated Balance Sheets.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Net revenues to external customers: | | | | | | | |
Endo Pharmaceuticals | $ | 415,647 |
| | $ | 442,786 |
| | $ | 773,236 |
| | $ | 806,360 |
|
Qualitest | 170,530 |
| | 159,895 |
| | 348,783 |
| | 305,240 |
|
AMS(1) | 125,971 |
| | 128,131 |
| | 248,623 |
| | 258,297 |
|
HealthTronics(2) | 54,361 |
| | 54,376 |
| | 104,386 |
| | 105,924 |
|
Total consolidated net revenues to external customers | $ | 766,509 |
| | $ | 785,188 |
| | $ | 1,475,028 |
| | $ | 1,475,821 |
|
Adjusted income (loss) before income tax: | | | | | | | |
Endo Pharmaceuticals | $ | 236,014 |
| | $ | 229,373 |
| | $ | 410,421 |
| | $ | 408,199 |
|
Qualitest | 45,978 |
| | 50,409 |
| | 93,090 |
| | 86,660 |
|
AMS | 36,047 |
| | 29,250 |
| | 67,691 |
| | 56,302 |
|
HealthTronics(3) | 12,689 |
| | 13,006 |
| | 22,978 |
| | 25,414 |
|
Corporate unallocated | (73,502 | ) | | (83,920 | ) | | (158,000 | ) | | (176,080 | ) |
Total consolidated adjusted income (loss) before income tax | $ | 257,226 |
| | $ | 238,118 |
| | $ | 436,180 |
| | $ | 400,495 |
|
__________
| |
(1) | The following table displays our AMS segment revenue by geography (in thousands). International revenues were not material to any of our other segments for any of the periods presented. |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
AMS: | | | | | | | |
United States | $ | 79,240 |
| | $ | 83,935 |
| | $ | 157,607 |
| | $ | 170,905 |
|
International | 46,731 |
| | 44,196 |
| | 91,016 |
| | 87,392 |
|
Total AMS revenues | $ | 125,971 |
| | $ | 128,131 |
| | $ | 248,623 |
| | $ | 258,297 |
|
| |
(2) | HealthTronics revenues include revenues related to our anatomical pathology services business, which is currently being marketed for sale. Anatomical pathology services revenues totaled $5.7 million and $11.0 million during the three and six months ended June 30, 2013, respectively, compared to $6.0 million and $10.0 million in the comparable 2012 periods. |
| |
(3) | HealthTronics adjusted income (loss) before income tax includes amounts related to our anatomical pathology services business, which is currently being marketed for sale. Anatomical pathology services adjusted income (loss) before income tax is not material to the Company's consolidated operating results for any of the periods presented. |
The table below provides reconciliations of our consolidated adjusted income (loss) before income tax to our income (loss) before income tax, which is determined in accordance with U.S. GAAP, for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Total consolidated adjusted income (loss) before income tax: | $ | 257,226 |
| | $ | 238,118 |
| | $ | 436,180 |
| | $ | 400,495 |
|
Upfront and milestone payments to partners | (5,398 | ) | | (5,726 | ) | | (7,972 | ) | | (51,567 | ) |
Asset impairment charges | (7,087 | ) | | (3,000 | ) | | (8,187 | ) | | (43,000 | ) |
Acquisition-related and integration items, net(1) | (2,640 | ) | | (7,055 | ) | | (3,958 | ) | | (10,804 | ) |
Separation benefits and other cost reduction initiatives(2) | (54,243 | ) | | (3,754 | ) | | (68,647 | ) | | (15,368 | ) |
Amortization of intangible assets | (52,807 | ) | | (58,564 | ) | | (101,753 | ) | | (111,924 | ) |
Inventory step-up | — |
| | 382 |
| | — |
| | (880 | ) |
Non-cash interest expense | (5,662 | ) | | (5,169 | ) | | (11,112 | ) | | (10,145 | ) |
Loss on extinguishment of debt | — |
| | — |
| | (11,312 | ) | | (5,426 | ) |
Watson litigation settlement income, net | 16,545 |
| | — |
| | 35,772 |
| | — |
|
Accrual for payment to Impax Laboratories Inc. related to sales of Opana® ER | — |
| | — |
| | — |
| | (110,000 | ) |
Patent litigation settlement items, net | — |
| | (131,361 | ) | | — |
| | (131,361 | ) |
Certain litigation-related charges(3) | (72,837 | ) | | — |
| | (149,369 | ) | | — |
|
Other income (expense), net | 1,048 |
| | — |
| | 1,048 |
| | — |
|
Total consolidated income (loss) before income tax | $ | 74,145 |
| | $ | 23,871 |
| | $ | 110,690 |
| | $ | (89,980 | ) |
__________
| |
(1) | Acquisition-related and integration-items, net, include costs directly associated with the closing of certain immaterial acquisitions, changes in the fair value of contingent consideration and the costs of integration activities related to both current and prior period acquisitions. |
| |
(2) | Separation benefits and other cost reduction initiatives include employee separation costs of $39.7 million and $41.1 million for the three and six months ended June 30, 2013, respectively, and $3.6 million and $14.8 million for the three and six months ended June 30, 2012, respectively. Refer to Note 16. Restructuring for discussion of our material restructuring initiatives. Additionally, Separation benefits and other cost reduction initiatives during the six months ended June 30, 2013 includes an expense recorded upon the cease use date of our Chadds Ford, Pennsylvania properties in the first quarter of 2013, representing a liability for our remaining obligations under the respective lease agreements of $7.2 million. These expenses were primarily recorded as Selling, general and administrative expense in our Condensed Consolidated Statements of Operations. |
| |
(3) | This amount includes charges for Litigation-related and other contingencies, consisting primarily of mesh-related product liability charges, as well as mesh litigation-related defense costs for the three and six months ended June 30, 2013. |
The following represents additional selected financial information for our reportable segments for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Depreciation expense: | | | | | | | |
Endo Pharmaceuticals | $ | 4,410 |
| | $ | 3,912 |
| | $ | 10,715 |
| | $ | 7,710 |
|
Qualitest | 3,269 |
| | 2,998 |
| | 6,439 |
| | 5,935 |
|
AMS | 2,853 |
| | 2,542 |
| | 5,655 |
| | 5,198 |
|
HealthTronics | 3,014 |
| | 3,333 |
| | 5,995 |
| | 6,325 |
|
Corporate unallocated | 1,729 |
| | 1,107 |
| | 4,194 |
| | 2,171 |
|
Total depreciation expense | $ | 15,275 |
| | $ | 13,892 |
| | $ | 32,998 |
| | $ | 27,339 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Amortization expense: | | | | | | | |
Endo Pharmaceuticals | $ | 24,847 |
| | $ | 27,143 |
| | $ | 46,127 |
| | $ | 49,077 |
|
Qualitest | 10,881 |
| | 10,381 |
| | 21,762 |
| | 20,762 |
|
AMS | 15,512 |
| | 19,400 |
| | 30,751 |
| | 38,806 |
|
HealthTronics | 1,717 |
| | 1,790 |
| | 3,413 |
| | 3,579 |
|
Total amortization expense | $ | 52,957 |
| | $ | 58,714 |
| | $ | 102,053 |
| | $ | 112,224 |
|
Interest income and expense are considered corporate items and are not allocated to our segments. Asset information is not accounted for at the segment level and consequently is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 6. INCOME TAXES
During the three and six months ended June 30, 2013, we recognized income taxes totaling $26.0 million of expense and $36.0 million of expense, respectively. This compares to $1.8 million of expense and $37.6 million of benefit, respectively, in the comparable 2012 periods. The effective income tax rate was 35.1% and 32.5% during the three and six months ended June 30, 2013, respectively, compared to 7.4% and 41.7%, respectively, in the comparable 2012 periods.
The increase in the effective tax rate during the three months ended June 30, 2013 was primarily attributable to the increase in income (loss) before income tax, resulting in a relatively lower impact of certain tax benefits which existed during both the three months ended June 30, 2013 and 2012. Additionally, during the three months ended June 30, 2012, we recorded benefits for the reversal of a valuation allowance and the favorable impact of certain excess golden parachute payments stemming from the 2011 acquisition of AMS, Inc., which did not reoccur during the three months ended June 30, 2013. Also contributing to the increase in the effective tax rate was an increase in the non-deductible branded prescription drug fee and a reduction to the domestic production activities deduction during the three months ended June 30, 2013 when compared to the three months ended June 30, 2012. These increases were partially offset by the benefit recorded during the three months ended June 30, 2013 for the research and development tax credit, which was reinstated effective January 2013.
The decrease in the effective tax rate during the six months ended June 30, 2013 was primarily attributable to the impact of certain tax benefits, which led to a lower effective tax rate during the six months ended June 30, 2013, a period with income before income tax, compared to a higher effective tax rate during the six months ended June 30, 2012, a period with a loss before income tax. Also contributing to the decrease was the January 2013 reinstatement of the research and development tax credit, which resulted in the recording of a current period benefit for the estimated 2013 credit as well as the credit for 2012. Partially offsetting this decrease was the impact of the second quarter 2012 reversal of a valuation allowance which, due to the loss before income tax recorded during the six months ended June 30, 2012, had the effect of increasing the effective tax rate during the six months ended June 30, 2012.
NOTE 7. LICENSE AND COLLABORATION AGREEMENTS
We have entered into certain license, collaboration and discovery agreements with third parties for the development of pain management and other products. These agreements require us to share in the development costs of such products and grant marketing rights to us for such products.
We have also licensed from universities, corporations and other similar institutions, rights to certain technologies or intellectual property, generally in the field of pain management. We are generally required to make upfront payments as well as other payments upon successful completion of regulatory or sales milestones. In addition, these agreements generally require us to pay royalties on sales of the products arising from these agreements. These agreements generally permit Endo to terminate the agreement with no significant continuing obligation.
For additional discussion of our material license and collaboration agreements at December 31, 2012, refer to our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 1, 2013.
Commercial Products
Novartis AG and Novartis Consumer Health, Inc.
On March 4, 2008, we entered into a License and Supply Agreement (the Voltaren® Gel Agreement) with and among Novartis AG and Novartis Consumer Health, Inc. (Novartis) to obtain the exclusive U.S. marketing rights for the prescription medicine Voltaren® Gel (Voltaren® Gel or the Licensed Product). Voltaren® Gel received regulatory approval in October 2007 from the U.S. Food and Drug Administration (FDA), becoming the first topical prescription treatment for use in treating pain associated with
osteoarthritis and the first new product approved in the U.S. for osteoarthritis since 2001. Voltaren® Gel was granted marketing exclusivity in the U.S. as a prescription medicine until October 2010.
Under the terms of the five-year Voltaren® Gel Agreement, Endo made an upfront cash payment of $85 million. Endo agreed to pay royalties to Novartis on annual Net Sales of the Licensed Product, subject to certain thresholds as defined in the Voltaren® Gel Agreement. In addition, Endo agreed to make certain guaranteed minimum annual royalty payments of $30 million per year payable in the 4th and 5th year of the Voltaren® Gel Agreement, which may be reduced under certain circumstances, including Novartis’s failure to supply the Licensed Product, subject to certain limitations including the launch of a generic to the Licensed Product in the U.S. These guaranteed minimum royalties will be creditable against royalty payments on an annual basis such that Endo’s obligation with respect to each year is to pay the greater of (i) royalties payable based on annual net sales of the Licensed Product or (ii) the guaranteed minimum royalty for such Voltaren® Gel Agreement year. Novartis is also eligible to receive a one-time milestone payment of $25 million if annual net sales of Voltaren® Gel exceed $300 million in the U.S. To date, annual net sales have not exceeded this threshold and, therefore, this milestone payment has not been paid.
The $85 million upfront payment and the present value of the guaranteed minimum royalties was initially capitalized as an intangible asset in the amount of $129 million, representing the fair value of the exclusive license to market Voltaren® Gel over the initial contract term. We are amortizing this intangible asset into Cost of revenues over an estimated five-year useful life. Due to Novartis’s failure to supply Voltaren® Gel during the first quarter of 2012 resulting from the shutdown of its Lincoln, Nebraska manufacturing facility, we were not obligated to make any first quarter royalty payment, including the $7.5 million minimum royalty. Accordingly, during the first quarter of 2012, we recorded a reduction to the associated liability and a decrease in the intangible asset. Subsequent to the first quarter of 2012, royalties in the amount $6.6 million were incurred during the six months ended June 30, 2012, representing either a percentage of actual net sales of Voltaren® Gel or minimum royalties pursuant to the Voltaren® Gel Agreement. Voltaren® Gel royalties incurred during the six months ended June 30, 2013 were $15.0 million, representing minimum royalties pursuant to the Voltaren® Gel Agreement.
Endo is solely responsible to commercialize the Licensed Product during the term of the Voltaren® Gel Agreement. With respect to each year during the term of the Voltaren® Gel Agreement, subject to certain limitations, Endo is required to incur a minimum amount of annual advertising and promotional expenses (A&P Expenditures) on the commercialization of the Licensed Product, which may be reduced under certain circumstances including Novartis’s failure to supply the Licensed Product. In addition, Endo is required to perform a minimum number of face-to-face one-on-one discussions with physicians and other healthcare practitioners (Details) for the purpose of promoting the Licensed Product within its approved indication during each year of the Voltaren® Gel Agreement which may be reduced under certain circumstances including Novartis’s failure to supply the Licensed Product. Further, during the term of the Voltaren® Gel Agreement, Endo will share in the costs of certain clinical studies and development activities initiated at the request of the FDA or as considered appropriate by Novartis and Endo. On December 31, 2012, Endo and Novartis entered into an amendment to the Voltaren® Gel Agreement (the Voltaren® Gel Amendment) which reduced the minimum number of Details required to be conducted by Endo and the minimum amount of annual advertising and promotional expenses required to be spent by Endo on the commercialization of Voltaren® Gel during each remaining year of the Voltaren® Gel Agreement.
During the fourth Voltaren® Gel Agreement Year beginning on July 1, 2011 and extending through June 30, 2012, we agreed to spend 13% of prior year sales or approximately $16 million on A&P Expenditures. During the fifth Voltaren® Gel Agreement Year beginning on July 1, 2012 and extending through June 30, 2013, we agreed to spend approximately $4.5 million on A&P Expenditures. During the first renewal term year beginning on July 1, 2013 and extending through June 30, 2014, we agreed to spend approximately $5.9 million on A&P Expenditures. In subsequent Agreement Years, the minimum A&P Expenditures set forth in the Voltaren® Gel Agreement are determined based on a percentage of net sales of Voltaren® Gel, which may be reduced under certain circumstances, including Novartis’s failure to supply Voltaren® Gel.
Amounts incurred by Endo for such A&P Expenditures were $3.8 million and $6.5 million for the six months ended June 30, 2013 and 2012, respectively.
During the term of the Voltaren® Gel Agreement, Endo has agreed to purchase all of its requirements for the Licensed Product from Novartis. The price was fixed for the first year and subject to annual changes based upon changes in the producer price index and raw materials. The Voltaren® Gel Amendment reduced the supply price of Voltaren® Gel otherwise payable under the Agreement.
Novartis has the exclusive right, at its sole discretion, to effect a switch of the Licensed Product from a prescription product to an over-the-counter (OTC) product in the U.S. (an OTC Switch) by filing an amendment or supplement to the Licensed Product New Drug Application or taking any other action necessary or advisable in connection therewith to effect the OTC Switch, and thereafter to commercialize such OTC product. Notwithstanding the foregoing, Novartis shall not launch an OTC equivalent product prior to a time specified in the Voltaren® Gel Agreement, and Novartis shall not take any action that results in the loss of the prescription product status for the Licensed Product prior to such time. Novartis is obligated to notify Endo if it submits a filing to the FDA in respect of an OTC equivalent product. In the event that Novartis gains approval of an OTC equivalent product that results in the Licensed Product
being declassified as a prescription product, then Novartis will make certain royalty payments to Endo on net sales of such OTC equivalent product in the U.S. by Novartis, its affiliates and their respective licensees or sublicensees as set forth in the Voltaren® Gel Agreement. As a condition to the payment of any and all such royalties, net sales of the Licensed Product in the U.S. must have exceeded a certain threshold prior to the launch of the OTC equivalent product by Novartis or its affiliates.
The initial term of the Voltaren® Gel Agreement expired on June 30, 2013. In December 2012, pursuant to the provisions of the Voltaren® Gel Agreement which had provided Endo with an option to extend the term of the agreement for two successive one year terms, the term was automatically renewed for an additional one year period. As a result, we capitalized, as an intangible asset, $21.3 million, representing the present value of the guaranteed minimum royalties we expect to pay to Novartis AG over the renewal term. The Voltaren® Gel Agreement will remain in place unless either (i) Endo provides written notice of non-renewal to the other party at least six months prior to the expiration of the first renewal term or any renewal term thereafter, (ii) Novartis provides written notice of non-renewal to the other party at least six months prior to the expiration of the second renewal term or any renewal term thereafter, or (iii) the Voltaren® Gel Agreement is otherwise terminated in accordance with its terms. Upon extension, Endo is again obligated to make certain guaranteed minimum annual royalty payments of $30 million per year during each successive one-year renewal term, subject to certain limitations including the launch of a generic to the Licensed Product in the U.S. These guaranteed minimum annual royalty payments may be reduced under certain circumstances, including Novartis’s failure to supply the Licensed Product. These guaranteed minimum royalties will be creditable against royalty payments on an annual basis such that Endo’s obligation with respect to each year is to pay the greater of (i) royalties payable based on annual net sales of the Licensed Product or (ii) the guaranteed minimum royalty for such Voltaren® Gel Agreement year.
Among other standard and customary termination rights granted under the Voltaren® Gel Agreement, the Voltaren® Gel Agreement can be terminated by either party upon reasonable written notice and if either party has committed a material breach that has not been remedied within 90 days from the giving of written notice. Endo may terminate the Voltaren® Gel Agreement by written notice upon the occurrence of several events, including the launch in the U.S. of a generic to the Licensed Product. Novartis may terminate the Voltaren® Gel Agreement upon reasonable written notice (1) if Endo fails to deliver a set percentage of the minimum Details in a certain six-month period under the Voltaren® Gel Agreement; or (2) on or after the launch in the U.S. of an OTC equivalent product by Novartis, its affiliates or any third party that does not result in the declassification of the Licensed Product as a prescription product, following which net sales in a six-month period under the Voltaren® Gel Agreement are less than a certain defined dollar amount.
Products in Development
BayerSchering
In July 2005, Indevus (now, Endo Pharmaceuticals Solutions Inc.) licensed exclusive U.S. rights from Schering AG, Germany, now BayerSchering Pharma AG (BayerSchering) to market a long-acting injectable testosterone preparation for the treatment of male hypogonadism that we refer to as AveedTM (the BayerSchering Agreement). The Company is responsible for the development and commercialization of AveedTM in the U.S. BayerSchering is responsible for manufacturing and supplying the Company with finished product. As part of the BayerSchering Agreement, Indevus agreed to pay to BayerSchering up to $30.0 million in up-front, regulatory milestone, and commercialization milestone payments, including a $5.0 million payment due upon approval by the FDA to market AveedTM. Indevus also agreed to pay to BayerSchering 25% of net sales of AveedTM to cover both the cost of finished product and royalties.
In October 2006, Indevus entered into a supply agreement with BayerSchering pursuant to which BayerSchering agreed to manufacture and supply Indevus with all of its requirements for AveedTM for a supply price based on net sales of AveedTM. The supply price is applied against the 25% of net sales owed to BayerSchering pursuant to the BayerSchering Agreement. The BayerSchering Agreement expires 10 years after the first commercial sale of AveedTM. Either party may also terminate the BayerSchering Agreement in the event of a material breach by the other party.
BioDelivery Sciences International, Inc.
In January 2012, the Company signed a worldwide license and development agreement (the BioDelivery Agreement) with BioDelivery Sciences International, Inc. (BioDelivery) for the exclusive rights to develop and commercialize BEMA® Buprenorphine. BEMA® Buprenorphine is a transmucosal form of buprenorphine, a partial mu-opiate receptor agonist, which incorporates a bioerodible mucoadhesive (BEMA®) technology. BEMA® Buprenorphine is currently in Phase III trials for the treatment of moderate to severe chronic pain. The Company made an upfront payment to BioDelivery for $30.0 million, which was expensed as Research and development in the first quarter of 2012. During the first quarter of 2012, $15.0 million of additional costs were incurred related to the achievement of certain regulatory milestones and were recorded as Research and development expense. We paid this amount in the second quarter of 2012. In the future, Endo could be obligated to pay royalties based on net sales of BEMA® Buprenorphine and commercial and regulatory milestone payments of up to approximately $135.0 million. Endo may terminate the BioDelivery Agreement at any time upon six months' written notice. Unless terminated earlier, the BioDelivery Agreement shall expire, on a
country-by-country basis, upon the later to occur of 10 years from the date of first commercial sale in a particular country or the date on which the last valid claim of the applicable BioDelivery patents in a particular country has expired or been invalidated or found unenforceable.
NOTE 8. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the six months ended June 30, 2013 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Amount |
| Endo Pharmaceuticals | | Qualitest | | AMS | | HealthTronics | | Total Consolidated |
Balance as of December 31, 2012: | | | | | | | | | |
Goodwill | $ | 290,793 |
| | $ | 275,201 |
| | $ | 1,795,100 |
| | $ | 210,677 |
| | $ | 2,571,771 |
|
Accumulated impairment losses | — |
| | — |
| | (507,528 | ) | | (49,892 | ) | | (557,420 | ) |
| $ | 290,793 |
| | $ | 275,201 |
| | $ | 1,287,572 |
| | $ | 160,785 |
| | $ | 2,014,351 |
|
Goodwill acquired during the period | — |
| | — |
| | — |
| | 4,592 |
| | 4,592 |
|
Measurement period adjustments | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
Effect of currency translation | — |
| | — |
| | (1,624 | ) | | — |
| | (1,624 | ) |
Goodwill impairment charges | — |
| | — |
| | — |
| | — |
| | — |
|
Balance as of June 30, 2013: | | | | | | | | | |
Goodwill | 290,793 |
| | 275,201 |
| | 1,793,476 |
| | 215,263 |
| | 2,574,733 |
|
Accumulated impairment losses | — |
| | — |
| | (507,528 | ) | | (49,892 | ) | | (557,420 | ) |
| $ | 290,793 |
| | $ | 275,201 |
| | $ | 1,285,948 |
| | $ | 165,371 |
| | $ | 2,017,313 |
|
The goodwill acquired during the period relates to immaterial acquisitions in 2013.
Other Intangible Assets
The following is a summary of other intangible held by the Company at June 30, 2013 and December 31, 2012 (in thousands):
|
| | | | | | | |
| June 30, 2013 | | December 31, 2012 |
Indefinite-lived intangibles: | | | |
In-process research and development | $ | 126,400 |
| | $ | 165,400 |
|
Total indefinite-lived intangibles | $ | 126,400 |
| | $ | 165,400 |
|
Definite-lived intangibles: | | | |
Licenses (weighted average life of 8 years) | $ | 605,850 |
| | $ | 605,850 |
|
Less accumulated amortization | (372,936 | ) | | (329,120 | ) |
Licenses, net | $ | 232,914 |
| | $ | 276,730 |
|
Customer relationships (weighted average life of 16 years) | 159,295 |
| | 160,210 |
|
Less accumulated amortization | (20,664 | ) | | (15,682 | ) |
Customer relationships, net | $ | 138,631 |
| | $ | 144,528 |
|
Tradenames (weighted average life of 22 years) | 91,600 |
| | 91,600 |
|
Less accumulated amortization | (11,041 | ) | | (8,742 | ) |
Tradenames, net | $ | 80,559 |
| | $ | 82,858 |
|
Developed technology (weighted average life of 16 years) | 1,744,810 |
| | 1,694,336 |
|
Less accumulated amortization | (316,986 | ) | | (266,350 | ) |
Developed technology, net | $ | 1,427,824 |
| | $ | 1,427,986 |
|
Other (weighted average life of 8 years) | 4,416 |
| | 1,742 |
|
Less accumulated amortization | (486 | ) | | (271 | ) |
Other, net | $ | 3,930 |
| | $ | 1,471 |
|
Total definite-lived intangibles, net (weighted average life of 15 years) | $ | 1,883,858 |
| | $ | 1,933,573 |
|
Other intangibles, net | $ | 2,010,258 |
| | $ | 2,098,973 |
|
As of June 30, 2013, the weighted average amortization period for our definite-lived intangible assets in total was approximately 15 years.
Amortization expense for the six month periods ended June 30, 2013 and 2012 totaled $102.1 million and $112.2 million, respectively. Estimated amortization of intangibles for the five years subsequent to December 31, 2012 is as follows (in thousands):
|
| | | |
2013 | $ | 192,371 |
|
2014 | $ | 159,855 |
|
2015 | $ | 154,574 |
|
2016 | $ | 153,096 |
|
2017 | $ | 141,040 |
|
Changes in the gross carrying amount of our other intangible assets for the six months ended June 30, 2013 were as follows:
|
| | | |
| Gross Carrying Amount |
December 31, 2012 | $ | 2,719,138 |
|
Patents acquired | 12,125 |
|
Asset impairment charges | (652 | ) |
Effect of currency translation | (914 | ) |
Other | 2,674 |
|
June 30, 2013 | $ | 2,732,371 |
|
Impairments
A summary of intangible asset impairment charges for the three and six months ended June 30, 2013 and 2012 is included below by reportable segment.
Endo Pharmaceuticals Segment
Pursuant to the Sanctura XR® Amended and Restated License, Commercialization and Supply Agreement with Allergan USA, Inc. (Allergan), the Company receives royalties based on net sales of Sanctura XR® made by Allergan. In March 2009, Watson Pharmaceuticals, Inc. (now doing business as Actavis, Inc. and referred to herein as Watson or Actavis) filed an Abbreviated New Drug Application (ANDA) seeking FDA approval to market generic versions of Sanctura XR® before the expiration of Allergan’s patents listed in the Orange Book. Subsequent to Watson’s ANDA filing, Sandoz Inc. and Paddock Laboratories, Inc. (acquired by Perrigo Company in August 2011) also filed ANDAs for a generic version of Sanctura XR®. In April 2012, the U.S. District Court for the District of Delaware ruled that five patents covering Allergan’s Sanctura XR® (trospium chloride) extended-release capsules were invalid. The Company and Allergan appealed this ruling, and subsequently in June 2012, this appeal was dismissed.
As part of our first quarter 2012 financial close and reporting process, the Company concluded that an impairment assessment was required to evaluate the recoverability of the indefinite-lived intangible asset. The Company assessed the recoverability of this asset and determined the fair value of the Sanctura XR® intangible asset to be $21.6 million at March 31, 2012. Accordingly, the Company recorded a pre-tax non-cash impairment charge of $40.0 million in March 2012, representing the difference between the carrying amount of the intangible asset and its estimated fair value at March 31, 2012.
AMS Segment
During the second quarter of 2012, as a result of market and potential regulatory changes affecting the commercial potential in the U.S. for one of the AMS, Inc. in-process research and development (IPR&D) assets, the Company determined that the asset's carrying amount was no longer fully recoverable. Accordingly, in the second quarter of 2012, we recorded a pre-tax non-cash impairment charge of $3.0 million, representing the difference between the fair value and the carrying amount.
HealthTronics Segment
As further discussed in Note 5. Segment Results and Note 16. Restructuring, on June 4, 2013, the Company's Board of Directors approved certain strategic, operational and organizational steps for the Company to take to refocus its operations and enhance shareholder value, including cost reduction initiatives and plans to explore strategic alternatives for its HealthTronics business. In June 2013, the Company began implementing these cost reduction initiatives and also began marketing its anatomical pathology services reporting unit, a component of its HealthTronics segment, for sale. In connection with the planned sale of our anatomical pathology services reporting unit, we recorded asset impairment charges to write down the book value of this reporting unit's assets to fair value less estimated costs to sell, which included a pre-tax non-cash impairment charge of $0.7 million to completely write off an anatomical pathology services developed technology intangible asset.
There were no other intangible asset impairment charges for any of our segments for the three and six months ended June 30, 2013 and 2012.
NOTE 9. OTHER COMPREHENSIVE (LOSS) INCOME
The following table presents the tax effects allocated to each component of Other comprehensive income (loss) for the three months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2013 | | 2012 |
| Before- Tax Amount | | Tax Benefit (Expense) | | Net-of-Tax Amount | | Before-Tax Amount | | Tax (Expense) Benefit | | Net-of- Tax Amount |
Net unrealized (loss) gain on securities: | | | | | | | | | | | |
Unrealized (losses) gains arising during the period | $ | (521 | ) | | $ | 194 |
| | $ | (327 | ) | | $ | 1,592 |
| | $ | (31 | ) | | $ | 1,561 |
|
Less: reclassification adjustments for (gains) losses realized in net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net unrealized (losses) gains | (521 | ) | | 194 |
| | (327 | ) | | 1,592 |
| | (31 | ) | | 1,561 |
|
Foreign currency translation gain (loss) | 191 |
| | 20 |
| | 211 |
| | (6,731 | ) | | 91 |
| | (6,640 | ) |
Fair value adjustment on derivatives designated as cash flow hedges: | | | | | | | | | | | |
Fair value adjustment on derivatives designated as cash flow hedges arising during the period | 441 |
| | (158 | ) | | 283 |
| | 1,550 |
| | (557 | ) | | 993 |
|
Less: reclassification adjustments for cash flow hedges settled and included in net income | 196 |
| | (70 | ) | | 126 |
| | (288 | ) | | 104 |
| | (184 | ) |
Net unrealized fair value adjustment on derivatives designated as cash flow hedges | 637 |
| | (228 | ) | | 409 |
| | 1,262 |
| | (453 | ) | | 809 |
|
Other comprehensive income (loss) | $ | 307 |
| | $ | (14 | ) | | $ | 293 |
| | $ | (3,877 | ) | | $ | (393 | ) | | $ | (4,270 | ) |
The following table presents the tax effects allocated to each component of Other comprehensive loss for the six months ended June 30, 2013 and 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2013 | | 2012 |
| Before- Tax Amount | | Tax (Expense) Benefit | | Net-of-Tax Amount | | Before-Tax Amount | | Tax (Expense) Benefit | | Net-of- Tax Amount |
Net unrealized gain on securities: | | | | | | | | | | | |
Unrealized gains arising during the period | $ | 272 |
| | $ | (102 | ) | | $ | 170 |
| | $ | 1,386 |
| | $ | (17 | ) | | $ | 1,369 |
|
Less: reclassification adjustments for (gains) losses realized in net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net unrealized gains | 272 |
| | (102 | ) | | 170 |
| | 1,386 |
| | (17 | ) | | 1,369 |
|
Foreign currency translation loss | (2,985 | ) | | 16 |
| | (2,969 | ) | | (3,640 | ) | | 72 |
| | (3,568 | ) |
Fair value adjustment on derivatives designated as cash flow hedges: | | | | | | | | | | | |
Fair value adjustment on derivatives designated as cash flow hedges arising during the period | 832 |
| | (299 | ) | | 533 |
| | 304 |
| | (109 | ) | | 195 |
|
Less: reclassification adjustments for cash flow hedges settled and included in net income (loss) | 304 |
| | (109 | ) | | 195 |
| | (38 | ) | | 14 |
| | (24 | ) |
Net unrealized fair value adjustment on derivatives designated as cash flow hedges | 1,136 |
| | (408 | ) | | 728 |
| | 266 |
| | (95 | ) | | 171 |
|
Other comprehensive loss | $ | (1,577 | ) | | $ | (494 | ) | | $ | (2,071 | ) | | $ | (1,988 | ) | | $ | (40 | ) | | $ | (2,028 | ) |