Business Combinations

9 Months Ended

Sep. 27, 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. In October 2013, we finalized the closing working capital adjustments with the seller for $1.9 million, resulting in an adjusted purchase price of $80.8 million. In addition, a total of $5.4 million held in escrow after the payments of closing working capital adjustments can be utilized as indemnification for certain representations and warranty claims against the seller until the expiration of the escrow arrangement in July 2014. 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 acquisition-related costs which are included in restructuring costs and other in the consolidated statements of operations, as follows (in thousands):

	Three Months Ended		Nine Months Ended		Cumulative Costs
	September 27, 2013		September 27, 2013		September 27, 2013
Acquisition-related charges	$	45	$	1,131	$	1,816

The acquisition of NDS has been accounted for as a business combination. The allocation of the purchase price is based upon a valuation of assets and liabilities acquired. 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 Company’s 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 income taxes, the fair value of certain liabilities and the amount of resulting goodwill.

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

	Purchase Price Allocation
Accounts receivable	$	10,327
Inventory		14,144
Property and equipment		2,426
Intangible assets		37,817
Other assets		1,782
Goodwill		26,509
Total assets acquired		93,005
Accounts payable		4,768
Accrued expenses		6,217
Deferred tax liabilities		315
Other liabilities assumed		932
Total liabilities assumed		12,232
Total net assets acquired	$	80,773

During the third quarter of 2013, the Company made adjustments to the preliminary purchase price allocation related to the finalization of closing working capital and adjustments to certain tangible and intangible assets, resulting in a decrease to goodwill of $2.4 million.

The preliminary fair value of intangible assets is comprised of the following (in thousands):

	Estimated Fair Value		Weighted Average Amortization Period
Customer relationships	$	22,294		20 years
Developed technology		6,689		10 years
Trademarks and tradenames		7,565		20 years
Backlog		1,269		1 year
Total	$	37,817

The preliminary purchase price allocation resulted in $26.5 million of goodwill and $37.8 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 certain 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.

The results of the NDS operations have been included in the consolidated statements of operations since the acquisition date. NDS contributed sales of $14.6 million and $49.7 million for the three and nine months ended September 27, 2013, respectively, and losses from continuing operations before income taxes of $1.5 million and $2.5 million for the three and nine months ended September 27, 2013, respectively. The losses from continuing operations before income taxes for both periods include amortization of the purchase price allocation adjustments.

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				Nine Months Ended
	September 27, 2013		September 28, 2012		September 27, 2013		September 28, 2012
Sales	$	85,484	$	88,838	$	254,997	$	267,373
Income from continuing operations, net of tax	$	2,881	$	2,194	$	5,826	$	8,513
Earnings per share - Basic	$	0.08	$	0.06	$	0.17	$	0.25
Earnings per share - Diluted	$	0.08	$	0.06	$	0.17	$	0.25

The pro forma information presented below includes the effects of acquisition accounting, including amortization charges from acquired intangible assets, interest expense on borrowings in connection with the acquisition, acquisition-related charges, 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.