Note 3: Discontinued Operations
On February 1, 2013, the Company formally committed to pursue a sale of its obesity intervention business unit, including the assets related to the Lap-Band® gastric band system and the Orbera™ intra-gastric balloon system. On December 2, 2013, the Company completed the sale of its obesity intervention business to Apollo Endosurgery, Inc. (Apollo) for cash consideration of $75.0 million, subject to certain adjustments, and certain additional consideration, including a minority equity interest in Apollo with an estimated fair value of $15.0 million and contingent consideration of up to $20.0 million to be paid upon the achievement of certain regulatory and sales milestones.
At the closing date, the cash consideration was reduced by the amount of inventories held outside of the United States of $7.6 million and net trade accounts receivable and payable of $19.4 million, which the Company retained pursuant to the sale and transition services agreements with Apollo. The remaining balance of retained inventories at December 31, 2013 is included in continuing operations and will be sold to Apollo pursuant to the transition services agreements. The Company expects to realize the value of these retained assets in the normal course of business within one year from the closing date.
As a result of the sale of the obesity intervention business unit, the Company has reported the financial results from that business unit as discontinued operations in the consolidated statements of earnings for the year ended December 31, 2013 and the remaining assets related to that business unit as assets of discontinued operations in the consolidated balance sheet as of December 31, 2013. Additionally, the Company has retrospectively revised the consolidated statements of earnings for the years ended December 31, 2012 and 2011 and the consolidated balance sheet as of December 31, 2012 to reflect the financial results from the obesity intervention business unit and the related assets and liabilities as discontinued operations.
In 2013, the Company also reported a pre-tax loss of $408.2 million ($297.9 million after tax) on the disposal of the obesity intervention business unit net assets. The pre-tax loss includes transaction costs of approximately $2.6 million, consisting primarily of investment banking fees. The net assets of the obesity intervention unit included a portion of the Company's medical devices reporting unit's goodwill allocated to the obesity intervention business based on the relative fair value as of February 1, 2013 of that business unit to the portion of the medical devices reporting unit that the Company will retain. During 2013, the Company tested the remaining goodwill of the medical devices reporting unit for impairment and concluded that no impairment was indicated.
The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the obesity intervention business. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the obesity intervention business unit do not necessarily reflect what the results of operations would have been had the business operated as a stand-alone entity.
The following table summarizes the results of discontinued operations:
|
| | | | | | | | | | | |
| 2013 | | 2012 | | 2011 |
| (in millions) |
Product net sales | $ | 114.4 |
| | $ | 159.5 |
| | $ | 203.1 |
|
| | | | | |
Operating costs and expenses: | | | |
| | |
|
Cost of sales (excludes amortization of intangible assets) | 20.2 |
| | 24.3 |
| | 30.7 |
|
Selling, general and administrative | 57.9 |
| | 75.3 |
| | 88.3 |
|
Research and development | 5.0 |
| | 12.3 |
| | 31.3 |
|
Amortization of intangible assets | 10.3 |
| | 41.1 |
| | 41.5 |
|
Impairment of intangible assets | — |
| | — |
| | 16.1 |
|
Restructuring charges | — |
| | 4.2 |
| | 4.7 |
|
| | | | | |
Earnings (loss) from discontinued operations before income taxes | 21.0 |
| | 2.3 |
| | (9.5 | ) |
Provision for income taxes | (6.9 | ) | | (0.5 | ) | | (2.0 | ) |
Earnings (loss) from discontinued operations, net of income taxes | $ | 14.1 |
| | $ | 1.8 |
| | $ | (11.5 | ) |
| | | | | |
Loss on sale of discontinued operations before income taxes | $ | (408.2 | ) | | $ | — |
| | $ | — |
|
Income tax benefit on sale of discontinued operations | 110.3 |
| | — |
| | — |
|
Loss on sale of discontinued operations, net of income taxes | $ | (297.9 | ) | | $ | — |
| | $ | — |
|
| | | | | |
Discontinued operations | $ | (283.8 | ) | | $ | 1.8 |
| | $ | (11.5 | ) |
The following table summarizes the assets and liabilities of discontinued operations as of December 31, 2013 and 2012 related to the Company's obesity intervention business unit:
|
| | | | | | | |
| 2013 | | 2012 |
| (in millions) |
Assets: | |
| | |
|
Trade receivables, net | $ | 9.0 |
| | $ | 25.2 |
|
Inventories | — |
| | 10.6 |
|
Property, plant and equipment, net | — |
| | 1.4 |
|
Goodwill | — |
| | 105.7 |
|
Intangibles, net | — |
| | 369.0 |
|
Other assets | — |
| | 0.7 |
|
Total assets of discontinued operations | $ | 9.0 |
| | $ | 512.6 |
|
| | | |
Liabilities: | | | |
Accounts payable | $ | — |
| | $ | 0.9 |
|
Accrued expenses | — |
| | 4.1 |
|
Other liabilities | — |
| | 0.3 |
|
Total liabilities of discontinued operations | $ | — |
| | $ | 5.3 |
|
In connection with the sale of the obesity intervention business, the Company also entered into certain transitional service agreements designed to facilitate the orderly transfer of business operations to Apollo. These agreements primarily relate to administrative services in the United States and distribution services outside of the United States, all of which are generally to be provided for a period of up to 12 months. The Company will also manufacture and supply products to Apollo for a transitional period not to exceed 24 months in order to allow Apollo adequate time to obtain regulatory approval for licenses and manufacturing facilities. The continuing cash flows from these agreements are not significant. Net sales made pursuant to the manufacturing and distribution agreements are recorded as product net sales in the Company's consolidated statements of earnings and are reflected as other medical devices product net sales.
