Annual Reports

 
Quarterly Reports

  • 10-Q (Nov 7, 2014)
  • 10-Q (Aug 8, 2014)
  • 10-Q (May 5, 2014)
  • 10-Q (Nov 7, 2013)
  • 10-Q (Aug 8, 2013)
  • 10-Q (May 3, 2013)

 
8-K

 
Other

Volcano 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Graphic
  7. Graphic
VOLC 6.30.2014 10-Q


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 000-52045
Volcano Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
 
33-0928885
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification Number)
 
 
 
3721 Valley Centre Drive, Suite 500
San Diego, CA
 
92130
(Address of principal executive offices)
 
(Zip Code)
(800) 228-4728
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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  þ    No  ¨
Indicate by check mark 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   þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
  
Accelerated filer  ¨
  
Non-accelerated filer ¨
  
Smaller reporting company ¨
 
  
 
  
(Do not check if a smaller reporting company)
  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
Indicate the number of shares of each of the issuer’s classes of common stock, as of the latest practicable date:
Class
  
Outstanding at August 4, 2014
Common stock, $0.001 par value
  
51,460,461





VOLCANO CORPORATION
Quarterly Report on Form 10-Q for the quarter ended June 30, 2014
Index
 






PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements
VOLCANO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
 
 
June 30,
 
December 31,
 
 
2014
 
2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
56,182

 
$
107,159

Short-term available-for-sale investments
 
149,981

 
230,775

Accounts receivable, net
 
85,097

 
81,962

Inventories
 
72,170

 
60,970

Prepaid expenses and other current assets
 
24,960

 
28,525

Total current assets
 
388,390

 
509,391

Long-term available-for-sale investments
 
35,510

 
34,750

Property and equipment, net
 
122,471

 
118,094

Intangible assets, net
 
126,970

 
58,108

Goodwill
 
150,882

 
55,087

Other non-current assets
 
56,330

 
56,489

Total assets
 
$
880,553

 
$
831,919

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
13,207

 
$
19,137

Accrued compensation
 
28,277

 
26,918

Accrued expenses and other current liabilities
 
29,979

 
28,453

Deferred revenues
 
11,119

 
10,652

Contingent consideration
 
14,450

 
3,750

Total current liabilities
 
97,032

 
88,910

Convertible senior notes
 
410,868

 
401,012

Other long-term debt
 
1,208

 
1,268

Deferred revenues
 
4,802

 
5,079

Contingent consideration, non-current portion
 
52,984

 
29,888

Other non-current liabilities
 
6,523

 
5,960

Total liabilities
 
573,417

 
532,117

Commitments and contingencies (Note 4)
 


 


Stockholders’ equity:
 
 
 
 
Preferred stock, par value of $0.001; 10,000 shares authorized; no shares issued and outstanding at June 30, 2014 and December 31, 2013
 

 

Common stock, par value of $0.001; 250,000 shares authorized at June 30, 2014 and December 31, 2013; 51,321 and 51,530 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively
 
51

 
52

Additional paid-in capital
 
437,098

 
420,234

Accumulated other comprehensive loss
 
(2,995
)
 
(4,088
)
Accumulated deficit
 
(127,018
)
 
(116,396
)
Total stockholders’ equity
 
307,136

 
299,802

Total liabilities and stockholders’ equity
 
$
880,553

 
$
831,919

See notes to unaudited condensed consolidated financial statements.

1



VOLCANO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$
102,605

 
$
101,344

 
$
197,133

 
$
194,575

Cost of revenues, excluding amortization of
intangibles
37,711

 
36,039

 
72,794

 
69,166

Gross profit
64,894

 
65,305

 
124,339

 
125,409

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative
49,353

 
45,734

 
99,664

 
89,563

Research and development
13,700

 
17,954

 
27,657

 
33,605

Amortization of intangibles
1,818

 
820

 
3,601

 
1,654

Acquisition-related items
(6,441
)
 
911

 
(5,405
)
 
2,489

Restructuring (benefits) charges
(841
)
 

 
32

 

Total operating expenses
57,589

 
65,419

 
125,549

 
127,311

Operating income (loss)
7,305

 
(114
)
 
(1,210
)
 
(1,902
)
Interest income
281

 
305

 
596

 
643

Interest expense
(7,320
)
 
(6,607
)
 
(14,498
)
 
(13,152
)
Exchange rate (loss) gain
(13
)
 
(301
)
 
71

 
(1,079
)
Other, net
14

 
2,279

 
124

 
4,177

Income (loss) before income tax
267

 
(4,438
)
 
(14,917
)
 
(11,313
)
Income tax benefit
(15
)
 
(2,050
)
 
(4,295
)
 
(5,764
)
Net income (loss)
$
282

 
$
(2,388
)
 
$
(10,622
)
 
$
(5,549
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
(0.04
)
 
$
(0.21
)
 
$
(0.10
)
Diluted
$
0.01

 
$
(0.04
)
 
$
(0.21
)
 
$
(0.10
)
Shares used in calculating net income (loss) per share:
 
 
 
 
 
 
 
Basic
51,300

 
54,574

 
51,630

 
54,389

Diluted
51,674

 
54,574

 
51,630

 
54,389


See notes to unaudited condensed consolidated financial statements.


2



VOLCANO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
282

 
$
(2,388
)
 
$
(10,622
)
 
$
(5,549
)
Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation adjustments
206

 
363

 
1,753

 
5

Changes in unrealized loss on available-for-sale investments, net of tax
(44
)
 
(169
)
 
(40
)
 
(194
)
Changes in unrealized (losses) gain on foreign currency forward exchange contracts, net of tax
(357
)
 
8

 
(620
)
 
8

Other comprehensive (loss) income
(195
)
 
202

 
1,093

 
(181
)
Comprehensive income (loss)
$
87

 
$
(2,186
)
 
$
(9,529
)
 
$
(5,730
)

See notes to unaudited condensed consolidated financial statements.



3



VOLCANO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balance at December 31, 2013
 
51,530

 
$
52

 
$
420,234

 
$
(4,088
)
 
$
(116,396
)
 
$
299,802

Issuance of common stock under equity compensation plans
 
940

 

 
9,541

 

 

 
9,541

Employee stock-based compensation cost
 

 

 
7,616

 

 

 
7,616

Common stock repurchase/retirement
 
(1,149
)
 
(1
)
 
2

 

 

 
1

Tax expense related to stock-based compensation
 

 

 
(295
)
 

 

 
(295
)
Net loss
 

 

 

 

 
(10,622
)
 
(10,622
)
Other comprehensive income
 

 

 

 
1,093

 

 
1,093

Balance at June 30, 2014
 
51,321

 
$
51

 
$
437,098

 
$
(2,995
)
 
$
(127,018
)
 
$
307,136


See notes to unaudited condensed consolidated financial statements.


4



      
VOLCANO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Six Months Ended
June 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(10,622
)
 
$
(5,549
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization
15,212

 
12,223

Amortization (accretion) of investment premium (discount), net
1,866

 
1,378

Accretion of debt discount on convertible senior notes and other long-term debt
9,881

 
9,341

Change in contingent consideration
(6,204
)
 
1,656

Non-cash stock compensation expense
7,515

 
7,847

Asset impairment related to restructuring
818

 

Gain on sale of other long-term investment
(365
)
 
(1,925
)
Effect of exchange rate changes and others
(953
)
 
9,139

Deferred income taxes
1,014

 

Changes in operating assets and liabilities, net of acquisitions:

 

Accounts receivable
(2,312
)
 
(5,468
)
Inventories
(8,462
)
 
(6,807
)
Prepaid expenses and other assets
(5,585
)
 
(11,076
)
Accounts payable
(7,599
)
 
(6,156
)
Accrued compensation
1,313

 
846

Accrued expenses and other liabilities
2,333

 
(3,860
)
Deferred revenues
209

 
(62
)
Net cash (used in) provided by operating activities
(1,941
)
 
1,527

Investing activities
 
 
 
Purchase of short-term and long-term available-for-sale securities
(120,514
)
 
(154,887
)
Sale or maturity of short-term and long-term available-for-sale securities
198,621

 
139,494

Capital expenditures
(14,661
)
 
(18,490
)
Cash paid for intangible assets and other investments
(4,941
)
 
(1,692
)
Proceeds from sale of other long-term investments
365

 
3,426

Cash paid related to acquisitions, net of cash acquired


(114,791
)
 

Net cash used in investing activities
(55,921
)
 
(32,149
)
Financing activities
 
 
 
Repayment of capital lease liability
(19
)
 
(15
)
Cash paid to settle contingent liability related to acquisition
(2,900
)
 

Proceeds from sale of common stock under employee stock purchase plan
1,851

 
1,713

Proceeds from exercise of common stock options
7,691

 
1,185

Net cash provided by financing activities
6,623

 
2,883

Effect of exchange rate changes on cash and cash equivalents
262

 
(1,136
)
Net decrease in cash and cash equivalents
(50,977
)
 
(28,875
)
Cash and cash equivalents, beginning of period
107,159

 
330,635

Cash and cash equivalents, end of period
$
56,182

 
$
301,760

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
4,384

 
$
4,183

Cash paid for income taxes
$
1,246

 
$
1,860

See notes to unaudited condensed consolidated financial statements.

5



VOLCANO CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
1. Summary of Significant Accounting Policies
Basis of Presentation and Nature of Operations
The unaudited condensed consolidated financial statements of Volcano Corporation (“we,” “us,” “our,” “Volcano” or the “Company”) contained in this quarterly report on Form 10-Q include our financial statements and the financial statements of our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnote disclosures it normally includes in its annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the U.S., or GAAP. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2013.
The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Reclassification
Certain reclassifications have been made to the prior period condensed consolidated financial statements to conform to the current year presentation.
Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing consolidated net income (loss) by the weighted-average number of common shares outstanding and dilutive common stock equivalent shares outstanding during the period. Our potentially dilutive shares include outstanding common stock options, unvested restricted stock units, including those with performance or market conditions, and incremental shares issuable upon the conversion of the Senior Convertible Notes or upon exercise of the warrants relating to the Senior Convertible Notes. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share or increase net income per share as discussed in the following paragraph. For the three months ended June 30, 2014, 374,000 in the money option and award shares were dilutive for the period and potentially dilutive shares totaling 28.8 million have not been included in the computation of diluted net income per share, as the result would be anti-dilutive. For the six months ended June 30, 2014, potentially dilutive shares totaling 24.2 million have not been included in the computation of diluted net loss per share, as the result would be anti-dilutive.
Diluted net income (loss) per common share does not include any incremental shares related to the Senior Convertible Notes for the three and six months ended June 30, 2014 and 2013. Because the principal amount of the Senior Convertible Notes will be settled in cash upon conversion, only the conversion spread relating to the Senior Convertible Notes may be included in our calculation of diluted net loss per common share. As such, the Senior Convertible Notes have no impact on diluted net income (loss) per common share until the price of our common stock exceeds the conversion price (initially $29.64 for the 2.875% Convertible Senior Notes due 2015, or the 2015 Notes, and $32.83 for the 1.75% Convertible Senior Notes due 2017, or the 2017 Notes, or collectively, the Notes, subject to adjustments) of the Notes. In addition, the diluted net income (loss) per common share does not include any incremental shares related to the exercise of the warrants related to the Notes for the three and six months ended June 30, 2014 and 2013. The warrants will not have an impact on diluted net income (loss) per common share until the price of our common stock exceeds the strike price of the warrants (initially $34.875 for the warrants issued in connection with the 2015 Notes offering and $37.59 for the warrants issued in connection with the 2017 Notes offering, subject to adjustments). When the market price of our stock exceeds the strike price, as applicable, we will include, in the diluted net income (loss) per common share calculation, the effect of the additional shares that may be issued upon exercise of the warrants using the treasury stock method to the extent the effect is not anti-dilutive.

6



The call options to purchase our common stock, which we purchased to hedge against potential dilution upon conversion of the Notes, are not considered for purposes of calculating the total dilutive weighted average shares outstanding, as their effect would be anti-dilutive. Upon exercise, the call options will mitigate the dilutive effect of the Notes.
On December 2, 2013, our board of directors authorized a $200 million share repurchase program. Pursuant to this approval, we entered into a $100 million accelerated share repurchase, or ASR, program with a counterparty, and received a total of 4,705,683 shares of our common stock (see Note 5 "Stockholders' Equity"), of which 3,557,137 shares of our common stock were delivered in December 2013 and 1,148,546 shares of our common stock were delivered in March 2014. The weighted average number of the shares received was removed from the denominator of the basic and diluted net loss per share calculation at the share delivery date.
The basic and diluted net income (loss) per common share calculations for the three and six months ended June 30, 2014 and 2013 are as follows (in thousands, except per share data):
 
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2014
 
2013
2014
 
2013
Net income (loss)
$
282

 
$
(2,388
)
$
(10,622
)
 
$
(5,549
)
Weighted average common shares outstanding for basic
51,300

 
54,574

51,630

 
54,389

Weighted average common shares outstanding for diluted
51,674

 
54,574

51,630

 
54,389

Net income (loss) per share:
 
 
 
 
 
 
Basic
$
0.01

 
$
(0.04
)
$
(0.21
)
 
$
(0.10
)
Diluted
$
0.01

 
$
(0.04
)
$
(0.21
)
 
$
(0.10
)
Recent Accounting Pronouncements
In May 2014, the FASB amended the accounting standards to create Topic 606 Revenue from Contracts with Customers. The updated guidance is effective for us beginning in fiscal year 2017 and early application is not permitted. The Company is currently evaluating the new standard to determine the effect, if any, on our consolidated financial statements.

2. Acquisitions and Acquisition-Related Items

AtheroMed Acquisition

On June 17, 2014, we completed the acquisition of all outstanding equity interests in AtheroMed, Inc., or AtheroMed, a privately-held company engaged in the development of atherectomy technology used in the treatment of peripheral artery disease, or PAD. AtheroMed’s Phoenix® Atherectomy System, or Phoenix, received 510(k) clearance in January 2014, has a CE Mark, and has reimbursement in the U.S. and select countries in Europe. The primary reasons for the acquisition were to diversify our product offerings and to allow us the opportunity to better position ourselves in the peripheral vascular market. The transaction was accounted for as a business combination.
We paid approximately $116.5 million in cash at closing, which amount was partially offset by our acquisition at closing of approximately $1.7 million in cash. This closing cash payment is subject to a post-closing net working capital adjustment. In addition, we agreed to pay a cash milestone of $15.0 million if FDA clearance of a premarket 510(k) notification is received on or before November 15, 2014 for AtheroMed's second generation Phoenix Atherectomy System. The fair market value of this contingent consideration was preliminarily estimated to be $14.0 million at acquisition. Furthermore, we may be required to make payments upon reaching certain sales milestones. We estimate the contingent sales milestone payments to be approximately $39.4 million and the fair value of this contingent consideration was preliminarily estimated to be $29.0 million at acquisition.
The assets acquired, consisting primarily of developed technology valued at $61.9 million and IPR&D valued at $9.0 million, were recorded at their estimated fair values as of the acquisition date. The excess of purchase price over the fair value amounts of the assets acquired and liabilities assumed is $95.8 million, which represents the goodwill amount resulting from the acquisition, was allocated to our medical segment and is not deductible for income tax purposes.

7



As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price and the valuation of its contingent consideration. Changes to the current allocation and contingent consideration may occur as additional information becomes available including, but not limited to, potential working capital adjustments, the valuation of inventory, fixed assets, intangible assets and deferred taxes, with such changes recorded as an adjustment to goodwill.
The acquisition was not individually or collectively considered material to the overall unaudited condensed consolidated financial statements and results of operations of the Company. We have included the operating results associated with the AtheroMed acquisition in our unaudited condensed consolidated financial statements from the date of acquisition.
Pioneer Acquisition
On August 30, 2013, we completed the acquisition of the Pioneer Plus re-entry catheter product line, or Pioneer, from Medtronic, Inc. or Medtronic. The product line is an interventional medical device designed to enable the crossing of sub-total, total and chronic total occlusions within the peripheral vasculature, potentially eliminating the need for surgery. The primary reason for the acquisition was to increase our penetration of the peripheral vascular market with a therapeutic product offering and continue to diversify our product offerings beyond coronary applications.
This transaction was structured as an asset purchase and was accounted for as a business combination with an aggregate purchase price of $15.0 million. The assets acquired, primarily $12.7 million of intangible assets, were recorded at their
estimated fair values as of the acquisition date. The excess of purchase price over the fair value amounts of the assets acquired
and liabilities assumed was $1.5 million, which represented the goodwill amount resulting from the acquisition and was allocated
to our medical segment and is not deductible for income tax purposes. As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. Changes to the current allocation may occur as additional information becomes available related to the valuation of inventory, fixed assets and intangible assets and deferred taxes, with such changes recorded as an adjustment to goodwill.
The acquisition was not individually or collectively considered material to the overall unaudited condensed consolidated financial statements and the results of the Company’s operations. We have included the operating results associated with the Pioneer acquisition in our unaudited condensed consolidated financial statements from the date of acquisition.
Crux Acquisition
On December 12, 2012 we completed the acquisition of all outstanding equity interests in Crux Biomedical, Inc., or Crux, a privately-held company engaged in the development of filter technology for the vascular, cardiovascular and interventional radiology markets. The primary reason for the acquisition was to diversify our product offerings, allow us the opportunity to better position ourselves in the peripheral vascular market and to increase our IVUS product sales. The transaction was accounted for as a business combination. The operating results of Crux from the date of acquisition were included in our unaudited condensed consolidated financial statements.
Under the merger agreement and the amendment to the merger agreement, we agreed to pay a cash milestone payment of $3.0 million following the achievement of written clearance by the U.S. Food and Drug Administration, or FDA, of a 510(k) notification for the commercial sale in the United States of an inferior vena cava filter retrieval device developed by Crux, provided such 510(k) notification was submitted on or before November 30, 2013. The 510(k) notification was submitted on November 30, 2013 and was approved by FDA during the first quarter of 2014. The $3.0 million cash milestone was paid during the first quarter of 2014.
In addition, subject to the terms of the merger agreement, we may be required to make payments upon reaching various sales milestones. We determined the fair value of the contingent consideration relative to the milestone payments based on commercial sales of Crux products using various estimates, including revenue projections, discount rates and amount of time until the conditions of the milestone payments are met. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At June 30, 2014, for the fair value relative to the milestone payments based on the commercial sales of Crux products, the key assumptions in applying the income approach include a 10% discount rate and probability-weighted expected milestone payment ranges from $26.4 million to $50.2 million based on estimated commercial sales of Crux products ranging from $87.0 million to $154.0 million from 2014 to 2019. During the quarter ended June 30, 2014, we reduced the future revenue estimates based on our initial commercial experience. Offsetting the reduction in the liability related to the change in future revenue estimates was a reduction in the discount rate from 14% to 10% to reflect a reduction in the risk premium associated with commercialization now that the product is in full market release. Using different valuation assumptions could result in significant differences in the fair value of the contingent consideration and accretion expense in the current or future periods.

8



The following table sets forth the changes in the estimated fair value of the Company’s contingent liabilities (net of working capital receivable adjustment) measured on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2014
 
2013
 
2014
 
2013
Fair value measurement at beginning of period
$
31,504

 
$
31,167

 
$
33,638

 
$
30,231

Change in fair value measurement included in operating expenses
(7,214
)
 
720

 
(6,348
)
 
1,656

Contingent consideration settled and other

 
(200
)
 
(3,000
)
 
(200
)
Fair value measurement at end of period
24,290

 
31,687

 
24,290

 
31,687

Sync-Rx Acquisition
On November 26, 2012, we acquired all of the outstanding equity interests in Sync-Rx Ltd., or Sync-Rx, a privately-held company, which is engaged in the development of advanced software applications that optimize and facilitate transcatheter cardiovascular interventions using automated online image processing. The Sync-Rx technology will provide us with a platform on which to build a range of advanced software features that will aid clinical decision-making by providing angiography and intra-body image enhancement, measurement and non-invasive imaging and intravascular co-registration capabilities, and future opportunities in physiology and peripheral and minimally invasive structural heart therapy guidance. The transaction was accounted for as a business combination. The operating results of Sync-Rx from the date of acquisition were included in our unaudited condensed consolidated financial statements.
In connection with the acquisition, we recorded a contingent liability of $1.1 million related to a government grant received to develop the underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We expect to generate revenues sufficient to repay the liability in its entirety. The grant was recorded as other long term debt at its present value using various estimates, including revenue projections, discount rate and estimated years of re-payment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. At acquisition, for the fair value relative to this liability, the key assumptions in applying the income approach included an 8% discount rate and estimated commercial sales derived from the underlying technology ranging from $256.1 million to $298.3 million over the expected period of re-payment of 10 to 16 years. The long term liability will be accreted to the re-payment amount of $1.9 million plus interest, with such accretion recorded as interest expense over the expected period of re-payment. As of June 30, 2014, there were no significant changes in the range of outcomes for the contingent liability recognized as a result of the acquisition.
Acquisition-Related Items
During the three and six months ended June 30, 2014, we recorded income of $6.4 million and $5.4 million, respectively, from acquisition-related items. We recorded $7.0 million and $6.2 million, respectively, of income related to the change in fair value of the contingent consideration associated with the Crux and AtheroMed acquisitions, which is primarily due to revised revenue forecasts for Crux partially offset by the passage of time, a change in the discount factor for Crux and $629,000 and $800,000, respectively, in transaction costs primarily associated with the AtheroMed and Sync-Rx acquisitions.
During the three and six months ended June 30, 2013, we recorded charges of $911,000 and $2.5 million, respectively, in acquisition-related items, including charges of $720,000 and $1.7 million, respectively, related to the change in fair value of the contingent consideration associated with the Crux acquisition, which is primarily due to the passage of time, and $191,000 and $835,000, respectively, in transaction costs primarily associated with the Crux and Sync-Rx acquisitions.
3. Financial Statement Details
Cash and Cash Equivalents and Available-for-Sale Investments
We invest our excess funds in U.S. government securities, corporate fixed income securities, commercial paper, certificates of deposit and money market funds. As of June 30, 2014, all of these investments were classified as available-for-sale and mature within 15 months. These investments are recorded at their estimated fair value, with unrealized gains or losses reported as a separate component of accumulated other comprehensive income or loss.

9



At June 30, 2014 and December 31, 2013, available-for-sale investments are detailed as follows (in thousands):                 
                                                   At June 30, 2014
 
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated
Fair Value
Short-term:
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
131,919

 
$
54

 
$
15

 
$
131,958

U.S. Treasury and agency debt securities
 
18,005

 
18

 

 
18,023

Short-term available-for-sale investments
 
$
149,924

 
$
72

 
$
15

 
$
149,981

Long-term:
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
35,530

 
$

 
$
20

 
$
35,510

U.S. Treasury and agency debt securities
 

 

 

 

Long-term available for sale investments
 
$
35,530

 
$

 
$
20

 
$
35,510

         At December 31, 2013
 
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Estimated
Fair Value
Short-term:
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
164,570

 
$
72

 
$
4

 
$
164,638

U.S. Treasury and agency debt securities
 
66,153

 
2

 
18

 
66,137

Short-term available-for-sale investments
 
$
230,723

 
$
74

 
$
22

 
$
230,775

Long-term:
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
11,697

 
$
30

 
$

 
$
11,727

U.S. Treasury and agency debt securities
 
23,008

 
15

 

 
23,023

Long-term available for sale investments
 
$
34,705

 
$
45

 
$

 
$
34,750

Available-for-sale investments that are in an unrealized loss position at June 30, 2014 and December 31, 2013 are detailed as follows (in thousands):
 
 
At June 30, 2014
 
 
Estimated
Fair Value
 
Gross Unrealized
Losses
Corporate debt securities
 
$
77,621

 
$
36

U.S. Treasury and agency debt securities
 

 

 
 
$
77,621

 
$
36

 
 
At December 31, 2013
 
 
Estimated
Fair Value
 
Gross Unrealized
Losses
Corporate debt securities
 
$
21,226

 
$
4

U.S. Treasury and agency debt securities
 
40,982

 
18

 
 
$
62,208

 
$
22

Derivative Financial Instruments
Foreign Currency Forward Contracts
We are exposed to foreign currency risks through our global operations, primarily in Japan and Europe, and when we enter into transactions in non-functional currencies. Exchange rate fluctuations between the U.S. dollar and foreign currencies, primarily the Japanese yen, or yen, and the euro, could adversely affect our financial results. We use derivative financial instruments to mitigate our foreign currency exposures. We do not enter into derivative instruments for speculative purposes.
We enter into derivative financial instruments, principally forward contracts, to manage a portion of the foreign currency risk related to transactions in non-functional currencies. We record derivative financial instruments as either assets or liabilities in our unaudited condensed consolidated balance sheets and measure them at fair value. Certain of the derivative instruments

10



we use to mitigate this exposure are not designated for hedge accounting treatments, and as a result, changes in their fair values are recorded in exchange rate gain (loss) in the unaudited condensed consolidated statement of operations.
We hedge forecasted intercompany inventory transactions that are denominated in yen and euro. Forward contracts are used to hedge forecasted intercompany inventory transactions over specific time periods. These forward contracts are designated as cash flow hedges and have maturity dates of up to 15 months. Changes in the fair value of cash flow hedges, excluding time value of the hedges which is recorded as interest expense, are reported as a component of accumulated other comprehensive income (loss), or AOCI, within stockholders' equity. Once the underlying hedged transaction occurs, we de-designate the derivative, cease to apply hedge accounting treatment to the transaction, reclassify the gain or loss recorded to date from AOCI into cost of sales, and record any further gains or losses to exchange rate gain (loss). We evaluate hedge effectiveness at the inception of the hedge and on an ongoing basis. To the extent we experience ineffectiveness in our hedges, the gains or losses accumulated in other comprehensive income associated with the ineffective portion of the hedge are reclassified immediately into exchange rate gain (loss). We adjust the level and use of derivatives as soon as practicable after learning that an exposure has changed. We review all exposures on derivative positions on a regular basis.
At June 30, 2014 and December 31, 2013, the notional amount of our outstanding forward contracts was $121.6 million and $97.3 million, respectively, of which $64.0 million and $40.3 million, respectively, were designated as cash flow hedges. At June 30, 2014, our outstanding forward contracts mature through September 2015.
As of June 30, 2014, the deferred loss, net of tax, for those derivative contracts that qualified for hedge accounting treatment was $121,500, all of which will be reclassified from accumulated other comprehensive income (loss) into cost of sales at the then-current values over the next twelve months as the underlying hedged transactions are recognized.
The following tables summarize the location and fair values of derivative instruments on our unaudited condensed consolidated balance sheets (in thousands) at June 30, 2014 and December 31, 2013. The fair value amounts are presented on a gross basis and are segregated between derivatives that are designated and qualify as hedging instruments and those that are not.
 
At June 30, 2014
 
Asset Derivatives
 
Liability Derivatives
Balance sheet location
 
Fair Value
 
Balance sheet location
 
Fair Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
   Foreign exchange forward contracts
Other current assets
 
$
127

 
Other current liabilities
 
$
397

   Foreign exchange forward contracts
Other long-term assets
 
26

 
Other long-term liabilities
 
34

Total Derivatives Designated as Hedging Instruments
 
 
153

 
 
 
431

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
   Foreign exchange forward contracts
Other current assets
 
503

 
Other current liabilities
 
592

Total Derivatives Not Designated as Hedging Instruments
 
 
503

 
 
 
592

 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
656

 
 
 
$
1,023

 
As of December 31, 2013
 
Asset Derivatives
 
Liability Derivatives
Balance sheet location
 
Fair Value
 
Balance sheet location
 
Fair Value
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
   Foreign exchange forward contracts
Other current assets
 
$
954

 
Other current liabilities
 
$
251

   Foreign exchange forward contracts
Other long-term assets
 
81

 
Other long-term liabilities
 

Total Derivatives Designated as Hedging Instruments
 
 
1,035

 
 
 
251

 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
   Foreign exchange forward contracts
Other current assets
 
1,953

 
Other current liabilities
 
1,164

Total Derivatives Not Designated as Hedging Instruments
 
 
1,953

 
 
 
1,164

 
 
 
 
 
 
 
 
Total Derivatives
 
 
$
2,988

 
 
 
$
1,415


11



The Company has elected to present the fair value of derivative assets and liabilities within the unaudited condensed consolidated balance sheets on a gross basis even when derivative transactions are subject to master netting arrangements and may otherwise qualify for net presentation. The following table provides information (in thousands) as if the Company had elected to offset the asset and liability balances of derivative instruments, netted in accordance with various criteria as stipulated by the terms of the master netting arrangements with each of the counterparties. Derivatives not subject to master netting arrangements are not eligible for net presentation.
 
As of June 30, 2014
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
 
Gross Amount of Recognized Assets (Liabilities)
 
Financial Instruments
 
Cash Collateral (Received) or Pledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
   Foreign exchange forward contracts
$
656

 
$
(656
)
 

 
$

Derivative Liabilities
 
 

 
 
 

   Foreign exchange forward contracts
(1,023
)
 
656

 

 
(367
)
Total
$
(367
)
 

 

 
(367
)

 
As of December 31, 2013
 
 
 
Gross Amount Not Offset on the Balance Sheet
 
 
 
Gross Amount of Recognized Assets (Liabilities)
 
Financial Instruments
 
Cash Collateral (Received) or Pledged
 
Net Amount
Derivative Assets
 
 
 
 
 
 
 
   Foreign exchange forward contracts
$
2,988

 
$
(1,415
)
 

 
$
1,573

Derivative Liabilities
 
 
 
 
 
 
 
   Foreign exchange forward contracts
(1,415
)
 
1,415

 

 

Total
$
1,573

 

 

 
1,573

The following table summarizes the effect of our foreign exchange forward contracts on our unaudited Condensed Consolidated Statements of Operations (in thousands).
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2014
 
2013
 
2014
 
2013
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income on foreign currency forward contracts (effective portion)
 
$
(287
)
 
$
8

 
$
(658
)
 
$
8

Gain (loss) reclassified from accumulated other comprehensive income into cost of revenue (effective portion)
 
263

 

 
297

 

Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)
 
(47
)
 
(32
)
 
(40
)
 
(32
)
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
 
Gain (loss) recognized in exchange rate gain (loss), net
 
$
(417
)
 
$
1,966

 
$
(942
)
 
$
5,882

Options and Warrants Related to Our Convertible Notes
In connection with our convertible debt offering in December 2012, we purchased call options on our common stock. The call options give us the right to purchase up to approximately 14.0 million shares of our common stock at $32.83 per share subject to certain adjustments that generally correspond to the adjustments to the conversion rate for the underlying debt. Additionally, we sold warrants, which give the purchasers of the warrants the right to purchase up to approximately 14.0 million shares of our common stock at $37.59 per share, subject to certain adjustments.
In connection with our convertible debt offering in September 2010 and subsequent partial repurchase in December 2012, we purchased call options on our common stock and sold warrants. The remaining call options give us the right to purchase up

12



to approximately 850,000 shares of our common stock at $29.64 per share, subject to certain adjustments, and the remaining warrants give the counterparty the right to purchase up to approximately 850,000 shares of our common stock at $34.88 per share, subject to certain adjustments.
In accordance with the authoritative guidance, we concluded that these call options and warrants were indexed to our stock. Therefore, the call options and warrants were classified as equity instruments and are not being marked to market prospectively unless certain conditions as described in the 2017 and 2015 Notes occur.
Concentration of Credit Risk
Financial instruments which subject us to potential credit risk consist of our cash and cash equivalents, short-term and long-term available-for-sale investments, foreign currency derivative contracts, and trade accounts receivable.
We have established guidelines to limit our exposure to credit risk by placing investments with high credit quality financial institutions, diversifying our investment portfolio and holding investments with maturities that maintain safety and liquidity. We place our cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand. Therefore we believe the financial risks associated with these financial instruments are minimal.
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. We consider receivables past due based on the contractual payment terms. We perform ongoing credit evaluations of our customers, and generally we do not require collateral on our accounts receivable. We estimate the need for allowances for potential credit losses based on historical collection activity and the facts and circumstances relevant to specific customers and we record a provision for uncollectible accounts when collection is uncertain. To date, we have not experienced significant credit related losses.
We are exposed to credit losses in the event of nonperformance by the banks with which we transact foreign currency contracts. We currently hold foreign exchange forward contracts with two counterparties. Our overall risk of loss in the event of a counterparty default is limited to the amount of any unrealized gains on outstanding contracts (i.e., those contracts that have a positive fair value) at the date of default. We manage this credit risk by executing foreign currency contracts with counterparties that meet our minimum requirements, and monitoring the credit ratings of our counterparties on a periodic basis. As of June 30, 2014, we had no credit exposure as our contract liability exceeded assets with both counterparty banks.
In connection with the issuance of our 2015 Notes and our 2017 Notes, we purchased call options from counterparties. Non-performance by the counterparties under these call options would potentially expose us to dilution of our common stock to the extent our stock price exceeds the conversion price (in the case of the 2015 Notes and the 2017 Notes).
We purchase integrated circuits and other key components for use in our products. For certain components, which are currently single sourced, there are relatively few sources of supply. Although we believe that other suppliers could provide similar components on comparable terms, establishment of additional or replacement suppliers cannot be accomplished quickly. Any significant supply interruption could have a material adverse effect on our business, financial condition and results of operations. For further discussion, see “Risk Factors—Our manufacturing operations are dependent upon third party suppliers, some of which are sole-sourced, which makes us vulnerable to supply problems, price fluctuations and manufacturing delays.”
Fair Value Measurements
Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Authoritative guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
Level 1—Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of money market funds and U.S. Treasury and agency debt securities.
Level 2—Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of corporate debt securities including commercial paper, corporate bonds, certificates of deposit and foreign currency forward contracts.

13



Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. Our Level 3 liability includes the contingent consideration related to the Crux acquisition and the other long-term debt related to the Sync-Rx acquisition.
We utilize a third-party pricing service to assist us in obtaining fair value pricing for our investments. Pricing for certain securities is based on proprietary models. Inputs are documented in accordance with the fair value disclosure hierarchy. We also utilize third-party financial institutions to assist us in obtaining fair value pricing for our foreign currency forward contracts.
Contingent consideration arrangements obligate us to pay former shareholders of an acquired entity if specified future events occur or conditions are met such as the achievement of certain technological milestones or the achievement of targeted revenue milestones. We measure such liabilities using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. We used various key assumptions, such as the probability of achievement of the agreed milestones and the discount rate, in our determination of the fair value of contingent consideration. We monitor the fair value of the contingent consideration and the subsequent revisions are reflected in our unaudited consolidated statements of operations. For a further discussion on the key assumptions used in determining the fair value and the change in the estimated fair value of the contingent consideration during the three and six months ended June 30, 2014, refer to Note 2, "Acquisitions and Acquisition-Related Items".
In connection with the Sync-Rx acquisition, we recorded a contingent liability related to a government grant received to develop an underlying technology. The timing of repayment of the grant is contingent upon the generation of revenues derived from the technology for which grant proceeds were received. We measure such liability using Level 3 unobservable inputs, applying the income approach, such as the discounted cash flow technique, or the probability-weighted scenario method. The grant was recorded as other long-term debt at its present value using various estimates, including revenue projections, discount rate and estimated years of re-payment. This fair value measurement is based on significant inputs not observable in the market, representing a Level 3 measurement within the fair value hierarchy. We monitor the fair value of the contingent liability and the subsequent revisions are reflected in our Statements of Operations. For a further discussion on the key assumptions used in determining the fair value, refer to Note 2, "Acquisitions and Acquisition-Related Items - Sync-Rx Acquisition".
During the three and six months ended June 30, 2014 and 2013, no transfers were made into or out of the Level 1, 2, or 3 categories.
Financial assets and liabilities measured at fair value on a recurring basis are summarized below at June 30, 2014 and December 31, 2013 (in thousands):
 

14



 
 
Fair Value Measurements at June 30, 2014
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
Cash
 
$
26,897

 
$
26,897

 
$

 
$

Money market funds
 
29,285

 
29,285

 

 

Corporate debt securities
 
131,958

 

 
131,958

 

U.S. Treasury and agency debt securities
 
18,023

 
18,023

 

 

Foreign currency forward contracts
 
630

 

 
630

 

Non-current:
 
 
 
 
 
 
 
 
Corporate debt securities
 
35,510

 

 
35,510

 

U.S. Treasury and agency debt securities
 

 

 

 

Foreign currency forward contracts
 
26

 

 
26

 

Total assets measured at fair value
 
$
242,329

 
$
74,205

 
$
168,124

 
$

Liabilities:
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
      Foreign currency forward contracts
 
$
989

 
$

 
$
989

 
$

      Contingent consideration, current portion (1)
 
14,450

 

 

 
14,450

Non-current:
 
 
 
 
 
 
 
 
      Foreign currency forward contracts
 
34

 

 
34

 

      Other long-term debt
 
1,208

 

 

 
1,208

      Contingent consideration
 
52,984

 

 

 
52,984

Total liabilities measured at fair value
 
$
69,665

 
$

 
$
1,023

 
$
68,642

(1)
This amount is reflected net of the fair value of the working capital receivable in the amount of $1.3 million at June 30, 2014.
 
 
Fair Value Measurements at December 31, 2013
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
Cash
 
$
98,436

 
$
98,436

 
$

 
$

Money market funds
 
8,723

 
8,723

 

 

Corporate debt securities
 
164,638

 

 
164,638

 

U.S. Treasury and agency debt securities
 
66,137

 
66,137

 

 

Foreign currency forward contracts
 
2,907

 

 
2,907

 

Non-current:
 
 
 
 
 
 
 
 
Corporate debt securities
 
11,727

 

 
11,727

 

U.S. Treasury and agency debt securities
 
23,023

 
23,023

 

 

       Foreign currency forward contracts
 
81

 

 
81

 

Total assets measured at fair value
 
$
375,672

 
$
196,319

 
$
179,353

 
$

Liabilities:
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
      Foreign currency forward contracts
 
$
1,415

 
$

 
$
1,415

 
$

      Contingent consideration, current portion (1)
 
3,750

 

 

 
3,750

Non-current:
 
 
 
 
 
 
 
 
      Other long-term debt
 
1,268

 

 

 
1,268

      Contingent consideration
 
29,888

 

 

 
29,888

Total liabilities measured at fair value
 
$
36,321

 
$

 
$
1,415

 
$
34,906

(1)
This amount is reflected net of the fair value of the working capital receivable in the amount of $1.2 million at December 31, 2013.

15



Inventories
Inventories consist of the following (in thousands):
 
 
June 30, 2014
 
December 31, 2013
Finished goods (1)
 
$
32,956

 
$
27,237

Work-in-process
 
13,192

 
12,051

Raw materials
 
26,022

 
21,682

 
 
$
72,170

 
$
60,970

 
(1)
Finished goods inventory includes consigned inventory of $6.4 million and $5.6 million at June 30, 2014 and December 31, 2013, respectively.
Intangible Assets
Intangible assets consisted of the following (in thousands):
 
 
June 30, 2014
Intangible assets subject to amortization
 
Cost
 
Accumulated
Amortization
 
Net
 
Weighted-
Average Life
(in years) (1)
Developed technology
 
$
120,781

 
$
20,088

 
$
100,693

 
12.3
Licenses
 
7,479

 
7,127

 
352

 
8.8
Customer relationships
 
4,239

 
4,063

 
176

 
6.1
Patents and trademarks
 
13,855

 
3,108

 
10,747

 
13.8
Covenant not to compete
 
600

 
158

 
442

 
3.0
 
 
146,954

 
34,544

 
112,410

 
12.0
Intangible assets not yet subject to amortization
 
 
 
 
 
 
 
 
In-process research and development
 
14,560

 

 
14,560

 
n/a
 
 
$
161,514

 
$
34,544

 
$
126,970

 
 
 
 
 
December 31, 2013
Intangible assets subject to amortization
 
Cost
 
Accumulated
Amortization
 
Net
 
Weighted-
Average Life
(in years) (1)
Developed technology
 
$
57,507

 
$
16,393

 
$
41,114

 
8.6
Licenses
 
7,441

 
7,102

 
339

 
8.8
Customer relationships
 
4,441

 
4,312

 
129

 
6.1
Patents and trademarks
 
13,668

 
2,894

 
10,774

 
13.2
Covenant not to compete
 
300

 
108

 
192

 
3.0
 
 
83,357

 
30,809

 
52,548

 
9.2
Intangible assets not yet subject to amortization
 
 
 
 
 
 
 
 
In-process research and development
 
5,560

 

 
5,560

 
n/a
 
 
$
88,917

 
$
30,809

 
$
58,108

 
 
(1)
Weighted average life of intangible assets is presented excluding fully amortized assets.
At June 30, 2014, future amortization expense related to our intangible assets subject to amortization is expected to be as follows (in thousands):

16



 
 
 
2014
5,991

2015
11,164

2016
10,975

2017
10,412

2018
10,314

Thereafter
63,554

 
$
112,410

Restructuring Activity
Disposables Manufacturing Transition to Costa Rica Initiative
During the second quarter of 2013, our management approved plans to consolidate and transition our manufacturing resources related to the manufacture of disposables to Costa Rica. Activities under this restructuring plan were initiated in the second quarter of 2013 and are expected to be substantially completed by the end of 2014. We estimate that this restructuring plan will result in total pre-tax charges of approximately $2.8 million, all of which are one-time termination benefits, including severance payments and continuing medical benefits.
A summary of the activities related to this initiative is presented below (in thousands):
 
 
Employee Termination Cost
Balance at 01/01/2013
 
$

Restructuring charges during 2013
 
333

Payments during 2013
 
(333
)
Balance at 12/31/2013
 
$

Restructuring charges during the first half of 2014
 
189

Payments during the first half of 2014
 
(189
)
Balance at 06/30/2014
 
$

Strategic Reorganization Initiative
During the third quarter of 2013, our management evaluated various development projects, product lines and functional areas in an effort to reprioritize and reallocate our resources within our distribution, research and development, and clinical programs to focus on development and commercial efforts that we believe better advance our key strategies. The key elements under this restructuring plan include the discontinuation of development programs for our FL.IVUS, FL.ICE and OCT intravascular coronary imaging development programs, the termination of the commercial sale of the ReFLOW product line, and a modest reorganization of several functional areas and business units within the Company.
Activities under this restructuring plan were initiated in the third quarter of 2013 and were substantially completed during the second quarter of 2014. We estimate that this restructuring plan will result in total pre-tax charges of approximately $18.9 million, of which approximately $6.7 million resulted or will result in cash outlay. The following provides a summary of our expected total costs associated with the plan by major type of costs (in thousands):
Type of Cost
 
Total Estimated Amount
Employee termination benefits
 
$
2,659

Asset impairments
 
12,220

Other associated costs
 
4,005

Total
 
$
18,884


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A summary of the restructuring charges related to this initiative is presented below (in thousands):
 
 
Employee Termination Benefits
 
Asset Impairments
 
Other Associated Costs
 
Total
Balance at 01/01/2013
 
$

 
$

 
$

 
$

Restructuring charges during 2013
 
2,867

 
11,402

 
4,772

 
19,041

Payments/write-off during 2013
 
(797
)
 
(11,402
)
 

 
(12,199
)
Balance at 12/31/2013
 
$
2,070

 
$

 
$
4,772

 
$
6,842

Restructuring charges during the first half of 2014
 
$
(209
)
 
818

 
(766
)
 
(157
)
Payments/write-off during the first half of 2014
 
$
(1,329
)
 
(818
)
 
(4,006
)
 
(6,153
)
Balance at 06/30/2014
 
532

 

 

 
532

The employee termination benefits include severance payments and continuing medical and other benefits. The asset impairments are related to the discontinued programs and include impairment of property, plant and equipment assets, impairment of intangible assets and other tangible asset impairments. The other associated costs include the contract termination costs related to our purchase and lease commitments, and other costs directly related to the restructuring activities. The $766,000 reduction in other associated costs is primarily from negotiating a favorable settlement on a contract termination. Reductions in employee termination benefits are the result of final severance costs being less than previously estimated.
All charges were recorded in the restructuring charges line item within our unaudited condensed consolidated statement of operations.
Both restructuring initiatives are related to our medical segment.
Debt
In December 2012, we issued $460 million aggregate principal amount of 1.75% Convertible Senior Notes due 2017, or the 2017 Notes, in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on June 1 and December 1, commencing on June 1, 2013.
In September 2010, we issued $115 million aggregate principal amount of 2.875% Convertible Senior Notes due 2015, or the 2015 Notes, in an offering registered under the Securities Act of 1933, as amended. Interest is payable semiannually in arrears on March 1 and September 1, commencing on March 1, 2011. In December 2012, in connection with the issuance of the 2017 Notes, we repurchased $90 million of the $115 million in aggregate principal amount of the 2015 Notes.
The carrying values of the liability and equity components of both the 2017 Notes and the 2015 Notes are reflected in our unaudited condensed consolidated balance sheets as follows (in thousands):
 
 
 
June 30, 2014

December 31, 2013
Long-term debt:
 
 
 
 
    2.875% Convertible Senior Notes due 2015:
 
 
 
 
Principal amount
 
$
25,000

 
$
25,000

Unamortized discount of liability component
 
(1,282
)
 
(1,818
)
Unamortized debt issuance costs
 
(143
)
 
(204
)
    Carrying value of liability component
 
23,575

 
22,978

 
 
 
 
 
    1.75% Convertible Senior Notes due 2017:
 
 
 
 
Principal amount
 
460,000

 
460,000

Unamortized discount of liability component
 
(64,667
)
 
(72,902
)
Unamortized debt issuance costs
 
(8,040
)
 
(9,064
)
    Carrying value of liability component
 
387,293

 
378,034

Total long-term debt
 
$
410,868

 
$
401,012

 
 
 
 
 
Equity—net carrying value
 
 
 
 
    2.875% Convertible Senior Notes due 2015
 
$
452

 
$
452

    1.75% Convertible Senior Notes due 2017
 
89,415

 
89,415


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The fair values of the Notes, which are all Level 2 measurements, are summarized as follows (in thousands):
 
June 30, 2014
 
December 31, 2013
2.875% Convertible Senior Notes due 2015
$
24,382

 
$
25,950

1.75% Convertible Senior Notes due 2017
462,475

 
456,320

    Total
$
486,857

 
$
482,270


4. Commitments and Contingencies
St. Jude Medical and LightLab Litigation Settlement
On August 7, 2014, Volcano Corporation (“Volcano”) and its wholly-owned subsidiary, Axsun Technologies, Inc. (“Axsun” and together with Volcano, the “Volcano Parties”), entered into a Settlement, Release, License Agreement, and Covenants Not To Sue (the “Agreement”) with St. Jude Medical, Inc. (“St. Jude”) and its affiliates St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB, St. Jude Medical S.C., Inc., and LightLab Imaging, Inc. (“LightLab”) (collectively, the “St. Jude Parties”), to settle all currently ongoing litigation among the Volcano Parties and the St. Jude Parties. The settlement covers the following civil actions:
LightLab Imaging, Inc. v. Axsun Technologies, Inc. and Volcano Corporation, in the Massachusetts Superior Court and the Massachusetts Supreme Judicial Court (the “Massachusetts Proceeding”);
Axsun Technologies, Inc. and Volcano Corporation v. LightLab Imaging, Inc., in the Delaware Chancery Court;
LightLab Imaging, Inc. v. Axsun Technologies, Inc. and Volcano Corporation, in the Delaware Chancery Court;
St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB, and St. Jude Medical S.C., Inc. v. Volcano Corporation, in the United States District Court for the District of Delaware;
St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB, and St. Jude Medical S.C., Inc. v. Volcano Corporation, in the United States District Court for the District of Delaware;
Volcano Corporation v. St. Jude Medical, Cardiovascular and Ablation Technologies Division, Inc.; St. Jude Medical, Cardiology Division, Inc.; St. Jude Medical, U.S. Division; St. Jude Medical S.C., Inc.; and St. Jude Medical Systems AB, in the United States District Court for the District of Delaware and the United States Court of Appeals for the Federal Circuit; and
St. Jude Medical, Cardiology Division, Inc., v. Volcano Corporation, and Michelle K. Lee, Deputy Director, U.S. Patent and Trademark Office, in the United States Patent and Trademark Office and the United States Court of Appeals for the Federal Circuit.
No payments are being made in connection with the Agreement.
Pursuant to the Agreement, the parties agreed to cause each of the Litigations to be dismissed with prejudice and to not seek appellate review of a recent decision issued in the Massachusetts Proceeding.
The Agreement contains mutual releases covering all claims that the Volcano Parties or the St. Jude Parties, or their respective affiliates, have or may have against the other in connection with the Litigations.
The Agreement contains covenants not to sue by each party for (i) infringement of any of the patents that are the subject of any of the Litigations, (ii) infringement of any of the other party’s patents (subject to specified exceptions) by a party’s current products, products in the field of functional measurement for which regulatory approval is submitted before August 7, 2016, or features of those products, (iii) misappropriation of certain claimed trade secrets communicated each way between Axsun and LightLab and (iv) claims of any nature that relate to any of the Litigations. The covenants described in the preceding sentence do not extend to any: (a) patent infringement claims by St. Jude with respect to any (1) wireless communication of physiological pressure sensor data between a sensor and a receiver, or (2) products for intravascular optical coherence tomography (OCT); (b) patent infringement claims by Volcano with respect to any (1) iFR® patents or (2) products for intravascular ultrasound (i.e., IVUS products); or (c) products of an assignee existing prior to the assignment.
The agreement contains licenses by each party to the other party of the patents that are the subject of the Litigations.
Each party to the Agreement also agreed not to challenge the validity or enforceability of any of the patents that are the subject of any of the Litigations during the term of the Agreement, unless such party is accused of infringing the applicable patent. The Agreement terminates on August 7, 2036.
Litigation-LightLab
On January 7, 2009, LightLab Imaging, Inc., or LightLab, which was acquired by St. Jude Medical, Inc., or St. Jude, in 2010, filed a complaint against us and our wholly owned subsidiary, Axsun, in the Superior Court of Massachusetts, Suffolk

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County, seeking injunctive relief and unspecified damages, or the Massachusetts Action. The complaint included allegations that Volcano interfered with an agreement between Axsun and LightLab and with LightLab's advantageous business relationship with Axsun, breach of contract by Axsun, that Axsun and Volcano misappropriated LightLab's confidential information and trade secrets, and violated Chapter 93A, a Massachusetts statute that provides for recovery of up to three times damages plus attorney's fees (93A).
On April 7, 2011, the court entered an Amended Final Judgment, in the Massachusetts Action: a) in favor of Volcano and Axsun on LightLab's claims for trade secret misappropriation on items 1-30 on LightLab's list of alleged trade secrets, b) ordered Volcano and Axsun to collectively pay $600,000 in damages and $4.5 million in attorneys' fees, c) in favor of LightLab on its claims against Axsun for breach of contract, breach of implied covenant of good faith and fair dealing, for violation of 93A, and misappropriation of trade secrets for disclosing three particular items to Volcano in December 2008 - the specifications for the two lasers provided by Axsun to LightLab and one Axsun laser prototype made in 2008, d) in favor of LightLab on its claims against Volcano for intentional interference with a contract and advantageous business relationship, unjust enrichment, violation of 93A, and misappropriation of trade secrets for the same three trade secrets described above. In addition, the Court denied a majority of LightLab's requested injunctions, and entered limited injunctive relief, none of which management believes have a material effect upon Volcano.
LightLab appealed various decisions of the Court including, a) the Court's pre-trial rulings excluding certain lost profits damages evidence that LightLab sought to introduce at trial; b) the Court's decisions adverse to LightLab's claims for trade secret misappropriation in items 1-30 of LightLab's alleged list of trade secrets, including various rulings requiring evidence of use or intent to use as a prerequisite for injunctive relief; c) the Court's post-trial decisions denying permanent injunctive relief that LightLab requested as terms of the Final Judgment; and; d) the denial of LightLab's motion to alter or amend the Final Judgment, which motion sought to obtain additional declaratory relief barring Axsun from “supplying” tunable lasers to Volcano. Volcano and Axsun did not cross appeal the Amended Final Judgment in 2011, and Volcano and Axsun satisfied their payment obligations under the Amended Final Judgment by Volcano paying LightLab approximately $5.4 million. The Massachusetts Supreme Judicial Court issued a ruling in Volcano and Axsun's favor on July 28, 2014.
In February 2010, Volcano and Axsun commenced an action in the Delaware Chancery Court, or the Chancery Court Action, against LightLab seeking a declaration of Volcano and Axsun's rights with respect to certain OCT technology, the High Definition Swept Source. LightLab then filed a counter-claim that included a claim against Axsun and Volcano for violations of 93A. This case has been stayed until such time as Volcano has achieved certain development and regulatory milestones.
Additionally, on May 24, 2011, LightLab commenced a separate action in Delaware Chancery Court, or the Second Chancery Court Action, against Volcano and Axsun alleging that Axsun is inappropriately assisting Volcano in the development of a third-party laser. The complaint seeks injunctive relief and unspecified damages. After Volcano and Axsun moved to dismiss the Second Chancery Court Action, LightLab filed an amended complaint against Volcano and Axsun, adding additional allegations regarding misappropriation of trade secrets. This case has been stayed indefinitely.
In January 2014, Volcano requested the Chancery Court dismiss the Chancery Court Actions. The Chancery Court has not ruled on this motion.
As described above, these actions were settled on August 7, 2014.
Litigation - St. Jude Medical
On July 27, 2010, St. Jude Medical filed a lawsuit against Volcano in federal district court in Delaware (collectively, with the counterclaims described below, the Delaware Patent Action), alleging that our pressure guide wire products infringe five patents owned by St. Jude Medical. St. Jude Medical is seeking injunctive relief and monetary damages. This action does not involve OCT technology and is separate from the Massachusetts Action.
On September 20, 2010, Volcano filed its response, in which we denied the allegations that our PrimeWire® products infringe any valid claim of St. Jude Medical's asserted patents. In addition, Volcano filed a counterclaim in which we alleged that St. Jude Medical's PressureWire® products and its RadiAnalyzer® Xpress product infringe three Volcano patents. In our counterclaim, Volcano sought injunctive relief and monetary damages. Trials on the St. Jude Medical patents and Volcano's patents were held in October 2012.
On October 12, 2012, the court entered summary judgment for Volcano with respect to one of St. Jude Medical's asserted patents. On October 19, 2012, a jury found in favor of Volcano on the remaining four St. Jude Medical patents, finding that two of the patents were invalid and that Volcano did not infringe two of the patents. On October 22, 2012, Volcano voluntarily dismissed its claims against St. Jude Medical with respect to one of Volcano's patents. On October 25, 2012, a jury found in favor of St. Jude Medical with respect to Volcano's asserted patents. In conjunction with the trial, St. Jude Medical agreed that previous versions of its PressureWire® products infringed Volcano's 6,976,965 patent (a pressure sensing guide wire patent).

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Post-trial motions are pending or remain available to the parties in the case. Volcano and St. Jude have stipulated to a confidential damages amount.
On April 9, 2012, St. Jude Medical, Cardiology Division, Inc., St. Jude Medical Systems AB and St. Jude Medical S.C. filed a sealed complaint in the United States District Court for the District of Delaware alleging that Volcano Corporation infringes United States Patent No. 6,565,514. Trial will be in December 2014 in this case.
On April 16, 2013, Volcano filed suit in Federal District Court in Delaware against St. Jude Medical, Cardiovascular and Ablation Technologies Division, Inc., St. Jude Medical, Cardiology Division, Inc., St. Jude Medical, U.S. Division, St. Jude Medical S.C. Inc., and St. Jude Medical Systems AB, (collectively, “St. Jude”) for infringement of Volcano's recently issued United States Patent Nos. 8,419,647 and 8,419,648 both entitled “Ultra Miniature Pressure Sensor.” Volcano's complaint accuses St. Jude's PressureWire® Certus and PressureWire® Aeris cardiac pressure sensing guide wire products (the “Accused Guide Wires”) and St. Jude's RadiAnalyzer® Xpress Measurement System, Ilumien® PCI Optimization System and Quantien® Integrated FFR Platform, which are used with the Accused Guide Wires, of infringing the patented methods of United States Patent No. 8,419,647. Volcano's complaint also accuses the Accused Guide Wires of infringing the patented device claims of United States Patent No. 8,419,648. A claim construction hearing was held in November 2013, and a ruling adverse to Volcano was issued in January 2014. In February 2014, the parties submitted a joint stipulation to the Court agreeing that the Accused Guide Wires do not infringe Volcano’s patents under the Court’s claim construction ruling. The Court entered judgment in March 2014 and Volcano has appealed to the Federal Circuit Court of Appeals, which will likely hear the appeal prior to the end of 2014.
As described above, these actions were settled on August 7, 2014.
Litigation - CardioSpectra
On March 27, 2012, Christopher E. Banas, et al., filed a lawsuit against Volcano in federal district court in the Northern District of California, alleging claims for breach of contract, breach of fiduciary duty, and breach of the implied covenant of good faith and fair dealing based on Volcano's acquisition of CardioSpectra in 2007. Specifically, plaintiffs assert that Volcano has failed to comply with the terms and the alleged implied obligations of the Merger Agreement relating to potential milestone payments. CardioSpectra was in the business of developing OCT technology; however, this litigation is separate from the Massachusetts Action.
On May 14, 2012, Volcano moved to dismiss the complaint in its entirety. The motion sought to dismiss the breach of fiduciary duty and implied covenant claims without leave for amendment, and to dismiss the breach of contract claim with leave to amend. By order dated August 6, 2012, the Court granted Volcano's motion as to all issues with leave to amend. The plaintiffs filed a Second Amended Complaint on August 20, 2012, which included a single claim for breach of the Merger Agreement. In addition, the plaintiffs identified in the Second Amended Complaint are listed as Christopher E. Banas and Paul Castella in their respective capacities as Shareholder Representatives under the Merger Agreement. Volcano answered the Second Amended Complaint on September 4, 2012, and in the same document Volcano asserted several affirmative defenses. In March 2014, the Court granted Volcano's motion for summary judgment and entered judgment in favor of Volcano. The plaintiffs have filed a notice of appeal.
Litigation - Other
In November 2012, we became aware through newspaper reports in the Italian media that a former employee of ours was under criminal investigation for an alleged violation of Italian anti-bribery laws. We also learned that Volcano Europe B.V.B.A., our wholly-owned subsidiary,