Business Combinations

3 Months Ended

Mar. 29, 2013

Business Combinations

3. Business Combinations

On January 15, 2013, the Company acquired 100% of the outstanding membership interests of NDS Surgical Imaging, LLC and 100% of the outstanding stock of NDS Surgical Imaging KK (collectively, “NDS”) from NDSSI Holdings, LLC and NDS Surgical Imaging, Inc. for $82.7 million in cash consideration, subject to customary closing working capital adjustments. The Company expects the addition of NDS will enable the Company to leverage its existing medical OEM sales channels and expertise in color measurement technology. The Company recognized $1.8 million in cumulative acquisition-related costs related to NDS, of which $1.1 million was recorded in the three month period ended March 29, 2013 and included in restructuring costs and other charges in the consolidated statement of operations. The results of the NDS operations have been included in our consolidated statement of operations since the acquisition date. NDS has contributed $18.4 million to sales and $0.2 million to income from continuing operations since the acquisition date.

The pro forma information for all periods presented below includes the effects of business combination accounting resulting from the acquisition, including amortization charges from acquired intangible assets, interest expense on borrowings in connection with the acquisition, and the related tax effects as though the acquisition had been consummated as of the beginning of 2012. These pro forma results exclude the impact of transaction costs included in the historical results and the related tax effects. The pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the results of operations that actually would have been achieved if the acquisition had taken place at the beginning of 2012.

The following unaudited pro forma information presents the combined financial results for the Company and NDS as if the acquisition of NDS had been completed as of January 1, 2012 (in thousands, except per share information):

	Three Months Ended
	March 29, 2013		March 30, 2012
Sales	$	84,206	$	86,716
Income from continuing operations	$	2,383	$	1,462
Earnings per share - Basic	$	0.07	$	0.04
Earnings per share - Diluted	$	0.07	$	0.04

The acquisition of NDS has been accounted for as a business combination. Assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The fair values of intangible assets were based on valuations using an income approach, with estimates and assumptions provided by management of NDS and the Company. The excess of the purchase price over the tangible assets, identifiable intangible assets and assumed liabilities was recorded as goodwill. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. Our estimates and assumptions in determining the estimated fair values of certain assets and liabilities are subject to change within the measurement period (up to one year from the acquisition date). The purchase price allocation is preliminary and the primary areas of the purchase price allocation that are not yet finalized relate to the settlement of final closing working capital, intangible assets, income taxes, the fair value of certain liabilities and the amount of resulting goodwill.

Based upon a preliminary valuation, the total purchase price allocation was as follows (in thousands):

	Estimated Purchase Price Allocation
Accounts receivable	$	10,327
Inventory		14,214
Property and equipment		2,812
Intangible assets		37,003
Other assets		2,018
Goodwill		28,693
Total assets acquired		95,067
Accounts payable		4,768
Accrued expenses		6,418
Deferred tax liabilities		315
Other liabilities assumed		913
Total liabilities assumed		12,414
Total net assets acquired	$	82,653

The preliminary fair value of intangible assets is comprised of the following (in thousands, except for amortization period):

	Estimated Fair Value		Amortization Period
Customer relationships	$	21,505		20 years
Developed technology		6,689		10 years
Trademarks and tradenames		7,565		20 years
Backlog		1,244		Less than 1 year
Total	$	37,003

The preliminary purchase price allocation resulted in $28.7 million of goodwill and $37.0 million of identifiable intangible assets, the majority of which are expected to be deductible for tax purposes. As a result, the Company recorded deferred tax liabilities of $0.3 million in purchase accounting, equal to the tax effect of the amount of the acquired intangible assets other than goodwill. Intangible assets are being amortized over their weighted average useful lives primarily based upon the pattern in which economic benefits related to such assets are expected to be realized. The resulting amount of goodwill reflects our expectations of the following synergistic benefits: (1) the potential growth due to additional financial resources to spend on research and development activities, increase of sales resources and the ability to enhance product offerings; (2) the potential to sell NDS products into our customer base and to sell the Company’s products into NDS’s customer base; and (3) our intention to leverage our expertise in light and color measurement.