GOODWILL AND OTHER INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2013

Goodwill and Intangible Assets Disclosure [Abstract]

The Company reviews goodwill for impairment annually during its third quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable. The Company performed its most recent annual assessment on July 31, 2013 which resulted in a non-cash goodwill impairment charge of $46.7 million for its U.S. Spine reporting unit, which is a part of the U.S. Spine and Other reportable segment.

As previously disclosed, the Company has monitored its U.S. Spine business and disclosed that it was at risk for impairment. In the third quarter, during the course of the annual strategic planning process, the Company determined that both the actual and expected income and cash flows for the U.S. Spine reporting unit are projected to be substantially lower than forecasts, and the U.S. spine market recovery may take longer than originally forecasted, including the current expectation of future significant negative pricing pressures. Factors that contributed to the impairment of the U.S. Spine reporting unit include broader market issues as well as company-specific issues. Company-specific issues have included turnover of some distributors, significant delays in new product introductions and other operational issues that negatively impacted and decreased projected revenues by a material amount. As a result, the Company lowered its expectations of recovery in the U.S. market and its related impact on the U.S. Spine reporting unit. This revised outlook resulted in a reduction of the U.S. Spine forecasts of the sales, operating income and cash flows expected in 2014 and beyond and consequently, resulted in an impairment charge.

To derive the fair value of the reporting units, as required in step one of the impairment test, the Company used the income approach, specifically the discounted cash flow ("DCF") method, which incorporates significant estimates and assumptions made by management which, by their nature, are characterized by uncertainty. Inputs used to fair value the Company's reporting units are considered Level 3 inputs of the fair value hierarchy. For Level 3 measurements, significant increases or decreases in long-term growth rates or discount rates in isolation or in combination could result in a significantly lower or higher fair value measurement. The key assumptions impacting the valuation included:


•	The Company's financial projections for its reporting units, which are based on management's assessment of regional and macroeconomic variables, industry trends and market opportunities, and the Company's strategic objectives and future growth plans.

•

The projected terminal value for each reporting unit, which represents the present value of projected cash flows beyond the last period in the discounted cash flow analysis. The terminal value reflects the Company's assumptions related to long-term growth rates and profitability, which are based on several factors, including local and macroeconomic variables, market opportunities, and future growth plans.

•

The discount rate used to measure the present value of the projected future cash flows is set using a weighted-average cost of capital method that considers market and industry data as well as the Company's specific risk factors that are likely to be considered by a market participant. The weighted-average cost of capital is the Company's estimate of the overall after-tax rate of return required by equity and debt holders of a business enterprise.

Based on the results of step one of the impairment test, the Company determined that the carrying value of the U.S. Spine reporting unit exceeded its respective fair value, and accordingly, the Company proceeded to step two of the impairment test.

In the second step, the Company assigned the reporting unit's fair value to all of its assets and liabilities, including any unrecognized intangible assets, in a hypothetical analysis that calculates the implied fair value of goodwill in the same manner as if the reporting unit were being acquired in a business combination. If the implied fair value of the reporting unit's goodwill is less than the carrying value, the difference is recorded as an impairment charge. This allocation process was performed only for the purposes of measuring the goodwill impairment and not to adjust the carrying values of the recognized tangible assets and liabilities. Step two of the impairment was initiated, but due to the time necessary to complete the analysis, has not been completed. The Company recorded its estimate of the goodwill impairment charge of $46.7 million, which represents the remaining goodwill balance in the U.S. Spine reporting unit. The Company expects to finalize the step two analysis in the fourth quarter of 2013. Any adjustment, which the Company does not expect to be material to the impairment charge, would be recorded in the Condensed Consolidated Statement of Operations and Comprehensive Income in that period. Only $5.5 million of the goodwill impairment charge was deductible for tax purposes.

Changes in the carrying amount of goodwill for the nine months ended September 30, 2013 were as follows:



	U.S. Neurosurgery		U.S. Instruments		U.S. Extremities		U.S. Spine and Other			International		Total
	(In thousands)
Goodwill, gross	$	94,312	$	57,514	$	60,353	$	56,219		$	25,669	$	294,067
Accumulated impairment losses
Goodwill at December 31, 2012	94,312		57,514		60,353		56,219			25,669		294,067
Tarsus Medical, Inc. acquisition					180							180
Goodwill impairment charge	—		—		—		(46,738		)	—		(46,738		)
Foreign currency translation	494		300		316		70			135		1,315
Balance at September 30, 2013	$	94,806	$	57,814	$	60,849	$	9,551		$	25,804	$	248,824

Prior to performing the annual goodwill impairment tests for the U.S. Spine reporting unit, the Company tested long-lived assets to be held and used by this reporting unit for impairment on an undiscounted cash flow basis. Based on the results of this testing, there was no impairment of the Company's long-lived assets to be held and used.

The components of the Company’s identifiable intangible assets were as follows:



	Weighted Average Life	September 30, 2013							Weighted Average Life	December 31, 2012
	Weighted Average Life	Cost		Accumulated Amortization			Net		Weighted Average Life	Cost		Accumulated Amortization			Net
	(Dollars in thousands)
Completed technology	12 years	$	80,835	$	(43,512	)	$	37,323	12 years	$	75,692	$	(38,402	)	$	37,290
Customer relationships	12 years	146,914		(77,361		)	69,553		12 years	147,690		(70,005		)	77,685
Trademarks/brand names	31 years	33,750		(15,516		)	18,234		31 years	33,807		(15,034		)	18,773
Trademarks/brand names	Indefinite	48,484		—			48,484		Indefinite	48,484		—			48,484
Supplier relationships	27 years	34,721		(8,933		)	25,788		27 years	34,721		(7,817		)	26,904
All other⁽¹⁾	4 years	4,830		(1,802		)	3,028		4 years	4,519		(1,388		)	3,131
		$	349,534	$	(147,124	)	$	202,410		$	344,913	$	(132,646	)	$	212,267


⁽¹⁾	At September 30, 2013 and December 31, 2012, all other included in-process research and development of $2.1 million and $1.7 million, respectively, which was indefinite-lived.

Based on quarter-end exchange rates, annual amortization expense is expected to approximate $19.4 million in 2013, $18.4 million in 2014, $16.6 million in 2015, $14.3 million in 2016 and $12.5 million in 2017. Identifiable intangible assets are initially recorded at fair market value at the time of acquisition using an income or cost approach.

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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