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ENDP-06.30.2014-10Q
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549  
_______________________________
FORM 10-Q
_______________________________ 
(Mark One)
x
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
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM              TO
Commission file number: 001-36326  
_______________________________
ENDO INTERNATIONAL PLC
(Exact Name of Registrant as Specified in Its Charter)  
_______________________________
Ireland
Not Applicable
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
33 Fitzwilliam Square, Dublin 2 Ireland
Not Applicable
(Address of Principal Executive Offices)
(Zip Code)
011-353-1-669-6634
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share
The NASDAQ Global Market, The Toronto Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
_______________________________
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Sections 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 x    No   o
Indicate by check 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 x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES  o    NO   x
Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practical date.
Ordinary shares, $0.0001 par value
Number of ordinary shares outstanding as of
July 29, 2014
:
153,469,840


ENDO INTERNATIONAL PLC
INDEX

 
 
Page
 
 
PART I. FINANCIAL INFORMATION
 
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 


Table of Contents

FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations," which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as "believes," "expects," "anticipates," "intends," "estimates," "plan," "projected," "forecast," "will," "may" or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption "Risk Factors" in Item 1A. of this document and in Part I, Item 1A. under the caption "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, supplement, and as otherwise enumerated herein, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document.
We do not undertake any obligation to update our forward-looking statements after the date of this document for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities law. You are advised to consult any further disclosures we make on related subjects in our reports filed with the Securities and Exchange Commission (SEC) and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval (SEDAR). Also note that, in Item 1A. of this document and in Part I, Item 1A. under the caption "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.

i
Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.         Financial Statements
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
June 30,
2014
 
December 31,
2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,427,244

 
$
526,597

Restricted cash and cash equivalents
65,777

 
770,000

Marketable securities
46,279

 
—

Accounts receivable
875,932

 
725,827

Inventories, net
427,199

 
374,439

Prepaid expenses and other current assets
44,072

 
39,402

Income taxes receivable
67,305

 
—

Deferred income taxes
210,969

 
257,985

Assets held for sale (NOTE 3)
—

 
160,257

Total current assets
$
3,164,777

 
$
2,854,507

MARKETABLE SECURITIES
3,251

 
2,979

PROPERTY, PLANT AND EQUIPMENT, NET
386,856

 
372,077

GOODWILL
3,533,150

 
1,372,832

OTHER INTANGIBLES, NET
2,671,908

 
1,872,926

DEFERRED INCOME TAXES
1,436

 
—

OTHER ASSETS
200,528

 
96,535

TOTAL ASSETS
$
9,961,906

 
$
6,571,856

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
275,262

 
$
263,241

Accrued expenses
1,714,495

 
983,842

Current portion of long-term debt
185,631

 
414,929

Income taxes payable
—

 
3,089

Deferred income taxes
847

 
—

Liabilities related to assets held for sale (NOTE 3)
—

 
31,571

Total current liabilities
$
2,176,235

 
$
1,696,672

DEFERRED INCOME TAXES
229,240

 
310,764

LONG-TERM DEBT, LESS CURRENT PORTION, NET
4,229,895

 
3,323,844

OTHER LIABILITIES
481,916

 
655,360

COMMITMENTS AND CONTINGENCIES (NOTE 12)


 


SHAREHOLDERS’ EQUITY:
 
 
 
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized; 4,000,000 issued
54

 
—

Ordinary shares, $0.0001 and $0.01 par value; 1,000,000,000 and 350,000,000 shares authorized; 152,615,132 and 144,413,074 shares issued; 152,615,132 and 115,354,393 shares outstanding at June 30, 2014 and December 31, 2013, respectively
15

 
1,444

Additional paid-in capital
3,048,747

 
1,166,375

(Accumulated deficit) retained earnings
(289,518
)
 
126,234

Accumulated other comprehensive income (loss)
48,191

 
(4,915
)
Treasury stock, zero and 29,058,681 shares at June 30, 2014 and December 31, 2013, respectively
—

 
(763,120
)
Total Endo International plc shareholders’ equity
$
2,807,489

 
$
526,018

Noncontrolling interests (NOTE 3)
37,131

 
59,198

Total shareholders’ equity
$
2,844,620

 
$
585,216

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
9,961,906

 
$
6,571,856

See Notes to Condensed Consolidated Financial Statements.

1
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 REVENUES:
 
 
 
 
 
 
 
Net pharmaceutical product sales
$
577,892

 
$
584,303

 
$
1,008,852

 
$
1,120,047

Devices revenues
125,836

 
125,971

 
249,603

 
248,623

Other revenues
14,956

 
1,874

 
54,838

 
1,972

 TOTAL REVENUES
$
718,684

 
$
712,148

 
$
1,313,293

 
$
1,370,642

 COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of revenues
345,739

 
273,413

 
597,700

 
527,794

Selling, general and administrative
171,609

 
244,302

 
398,313

 
471,534

Research and development
41,174

 
33,393

 
82,854

 
72,162

Litigation-related and other contingencies, net
35,954

 
59,971

 
662,105

 
128,203

Asset impairment charges
—

 
2,849

 
—

 
3,949

Acquisition-related and integration items
19,618

 
1,825

 
64,887

 
2,383

 OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS
$
104,590

 
$
96,395

 
$
(492,566
)
 
$
164,617

 INTEREST EXPENSE, NET
52,181

 
42,334

 
105,579

 
86,610

 LOSS ON EXTINGUISHMENT OF DEBT
20,089

 
—

 
29,685

 
11,312

 OTHER INCOME, NET
(6,828
)
 
(16,700
)
 
(12,860
)
 
(34,969
)
 INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX
$
39,148

 
$
70,761

 
$
(614,970
)
 
$
101,664

 INCOME TAX
15,594

 
29,012

 
(199,827
)
 
38,262

 INCOME (LOSS) FROM CONTINUING OPERATIONS
23,554

 
41,749

 
(415,143
)
 
63,402

 DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
(3,168
)
 
6,362

 
2,251

 
11,312

 CONSOLIDATED NET INCOME (LOSS)
$
20,386

 
$
48,111

 
$
(412,892
)
 
$
74,714

 Less: Net (loss) income attributable to noncontrolling interests
(774
)
 
13,112

 
2,860

 
24,366

 NET INCOME (LOSS) ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
$
21,160

 
$
34,999

 
$
(415,752
)
 
$
50,348

 NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—BASIC:
 
 
 
 
 
 
 
Continuing operations
$
0.16

 
$
0.37

 
$
(2.96
)
 
$
0.57

Discontinued operations
$
(0.02
)
 
$
(0.06
)
 
$
—

 
$
(0.12
)
Basic
$
0.14

 
$
0.31

 
$
(2.96
)
 
$
0.45

 NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—DILUTED:
 
 
 
 
 
 
 
Continuing operations
$
0.15

 
$
0.36

 
$
(2.96
)
 
$
0.55

Discontinued operations
$
(0.02
)
 
$
(0.06
)
 
$
—

 
$
(0.11
)
Diluted
$
0.13

 
$
0.30

 
$
(2.96
)
 
$
0.44

 WEIGHTED AVERAGE SHARES:
 
 
 
 
 
 
 
Basic
152,368

 
112,531

 
140,252

 
111,873

Diluted
163,369

 
117,221

 
140,252

 
115,205

See Notes to Condensed Consolidated Financial Statements.

2
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 CONSOLIDATED NET INCOME (LOSS)
 
 
$
20,386

 
 
 
$
48,111

 
 
 
$
(412,892
)
 
 
 
$
74,714

 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Net unrealized gain (loss) on securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
$
2,034

 
 
 
$
(327
)
 
 
 
$
1,694

 
 
 
$
170

 
 
Less: reclassification adjustments for (gains) losses realized in net income (loss)
—

 
2,034

 
—

 
(327
)
 
—

 
1,694

 
—

 
170

Foreign currency translation gain (loss)
 
 
44,393

 
 
 
211

 
 
 
49,470

 
 
 
(2,969
)
Fair value adjustment on derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value adjustment on derivatives designated as cash flow hedges arising during the period
—

 
 
 
283

 
 
 
—

 
 
 
533

 
 
Less: reclassification adjustments for cash flow hedges settled and included in net income (loss)
—

 
—

 
126

 
409

 
—

 
—

 
195

 
728

 OTHER COMPREHENSIVE INCOME (LOSS)
 
 
$
46,427

 
 
 
$
293

 
 
 
$
51,164

 
 
 
$
(2,071
)
 CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
 
 
$
66,813

 
 
 
$
48,404

 
 
 
$
(361,728
)
 
 
 
$
72,643

Less: Net (loss) income attributable to noncontrolling interests
 
 
(774
)
 
 
 
13,112

 
 
 
2,860

 
 
 
24,366

Less: Other comprehensive (loss) income attributable to noncontrolling interests
 
 
(1,942
)
 
 
 
—

 
 
 
(1,942
)
 
 
 
—

 COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
 
 
$
69,529

 
 
 
$
35,292

 
 
 
$
(362,646
)
 
 
 
$
48,277

See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended June 30,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Consolidated net (loss) income
$
(412,892
)
 
$
74,714

Adjustments to reconcile consolidated net (loss) income to Net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
152,818

 
135,051

Share-based compensation
14,376

 
22,753

Amortization of debt issuance costs and premium / discount
17,993

 
18,567

Provision for bad debts
980

 
1,857

Deferred income taxes
(169,195
)
 
5,832

Net loss on disposal of property, plant and equipment
1,017

 
2,049

Loss on extinguishment of debt
29,685

 
11,312

Asset impairment charges
—

 
8,187

Gain on sale of business and other assets
(2,718
)
 
—

Changes in assets and liabilities which (used) provided cash:
 
 
 
Accounts receivable
(22,227
)
 
(22,946
)
Inventories
35,895

 
(73,185
)
Prepaid and other assets
11,019

 
9,121

Accounts payable
(83,991
)
 
(133,199
)
Accrued expenses
662,533

 
(94,975
)
Other liabilities
(194,067
)
 
130,537

Income taxes payable/receivable
(93,857
)
 
21,356

Net cash (used in) provided by operating activities
$
(52,631
)
 
$
117,031

INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(40,398
)
 
(37,469
)
Proceeds from sale of property, plant and equipment
19

 
440

Acquisitions, net of cash acquired
(203,088
)
 
(3,645
)
Proceeds from sale of marketable securities
47,850

 
—

Proceeds from notes receivable, net
23,066

 
—

Patent acquisition costs and license fees
(5,000
)
 
(10,000
)
Proceeds from sale of business, net
54,521

 
—

Settlement escrow
3,148

 
—

Decrease in restricted cash and cash equivalents
704,223

 
—

Other investing activities
4,000

 
(2,673
)
Net cash provided by (used in) investing activities
$
588,341

 
$
(53,347
)

4
Table of Contents

 
Six Months Ended June 30,
 
2014
 
2013
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of 2023 Notes
750,000

 
—

Proceeds from issuance of term loans
1,525,000

 
—

Principal payments on term loans
(1,407,394
)
 
(117,344
)
Principal payments on other indebtedness, net
(5,800
)
 
(2,015
)
Repurchase of convertible senior subordinated notes due 2015
(547,852
)
 
—

Payments to settle common stock warrants
(242,192
)
 
—

Proceeds from the settlement of the hedge on convertible senior subordinated notes due 2015
302,113

 
—

Deferred financing fees
(58,715
)
 
(9,573
)
Payment for contingent consideration
—

 
(5,000
)
Tax benefits of share awards
27,573

 
5,561

Payments of tax withholding for restricted shares
(22,803
)
 
(7,624
)
Exercise of options
31,616

 
52,483

Payments related to the issuance of ordinary shares
(4,800
)
 
—

Issuance of ordinary shares related to the employee stock purchase plan
2,288

 
2,803

Cash distributions to noncontrolling interests
(6,144
)
 
(24,349
)
Cash buy-out of noncontrolling interests, net of cash contributions
(82
)
 
(1,882
)
Net cash provided by (used in) financing activities
$
342,808

 
$
(106,940
)
Effect of foreign exchange rate
4,716

 
948

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
$
883,234

 
$
(42,308
)
LESS: NET DECREASE IN CASH AND CASH EQUIVALENTS OF DISCONTINUED OPERATIONS
(17,413
)
 
(5,968
)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OF CONTINUING OPERATIONS
$
900,647

 
$
(36,340
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
526,597

 
529,689

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
1,427,244

 
$
493,349

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment financed by capital leases
$
578

 
$
461

Acquisition financed by ordinary shares
$
2,844,279

 
$
—

Accrual for purchases of property, plant and equipment
$
4,423

 
$
5,036

See Notes to Condensed Consolidated Financial Statements.

5
Table of Contents

ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2014
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements of Endo International plc, which we refer to herein as the "Company", "Endo", "we", "our" or "us", have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of June 30, 2014 and the results of our operations and our cash flows for the periods presented. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The year end Condensed Consolidated Balance Sheet data as of December 31, 2013 was derived from the audited financial statements.
In prior periods, our consolidated financial statements present the accounts of Endo Health Solutions Inc. and all of its subsidiaries (EHSI). Endo International plc was incorporated in Ireland on October 31, 2013 as a private limited company and re-registered effective February 18, 2014 as a public limited company. It was established for the purpose of facilitating the business combination between EHSI and Paladin Labs Inc. (Paladin). On February 28, 2014, we became the successor registrant of EHSI and Paladin Labs Inc. in connection with the consummation of certain transactions further described elsewhere in our Condensed Consolidated Financial Statements. In addition, on February 28, 2014, the shares of Endo International plc began trading on the NASDAQ under the symbol "ENDP," the same symbol under which EHSI’s shares previously traded, and on the Toronto Stock Exchange under the symbol "ENL". References throughout to "ordinary shares" refer to EHSI’s common shares, 350,000,000 authorized, par value $0.01 per share, prior to the consummation of the transactions and to Endo International plc's ordinary shares, 1,000,000,000 authorized, par value $0.0001 per share, subsequent to the consummation of the transactions. In addition, on February 11, 2014 the Company issued 4,000,000 euro deferred shares of $0.01 each at par.
References throughout to "we," "our," "us," the "Company" or "Endo" refer to financial information and transactions of Endo Health Solutions Inc. prior to February 28, 2014 and Endo International plc thereafter.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of an Entity” (ASU 2014-08). ASU 2014-08 changes the requirements for reporting discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results. The disclosure requirements for discontinued operations under ASU 2014-08 will be expanded in order to provide users of financial statements with more information about the assets, liabilities, revenues and expenses of discontinued operations. ASU 2014-08 is effective on a prospective basis for (1) all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years, and (2) all businesses that are classified as held for sale on acquisition that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. The Company is currently evaluating the impact of this standard on the Company's consolidated results of operations and financial position.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. This ASU is effective for annual reporting periods beginning after December 15, 2016 and interim reporting periods within that reporting period. Early adoption is not permitted. Accordingly, the Company will adopt this ASU on January 1, 2017. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the impact of ASU 2014-09 on the Company's consolidated results of operations and financial position.

6
Table of Contents

NOTE 3. DISCONTINUED OPERATIONS
On December 28, 2013, the Board approved a plan to sell the HealthTronics business and the Company entered into a definitive agreement to sell the business on January 9, 2014 to Altaris Capital Partners LLC for an upfront cash payment of $85.0 million, subject to cash and other working capital adjustments. In addition, EHSI received rights to additional cash payments of up to $45.0 million based on the future operating performance of HealthTronics, of which no value has been recognized in the accompanying Condensed Consolidated financial statements, for total potential consideration of up to $130.0 million. Additional cash payments, if any, will be recorded when earned. The sale was completed on February 3, 2014.
As previously disclosed, prior to the sale, at September 30, 2013, the Company had determined that a sale of the HealthTronics business was more-likely-than-not to occur over the next twelve months. Accordingly, the Company initiated an interim goodwill impairment analysis of the HealthTronics reporting units' goodwill balances as of September 30, 2013. The fair value of the Urology Services and HITS reporting units were estimated using a number of factors including the fair value implied by the then ongoing sales process and previously prepared discounted cash flow analyses. As a result of this analysis, the Company determined that the net book value of both our Urology Services reporting unit and our HITS reporting unit exceeded their estimated fair value. The Company prepared a preliminary analysis to estimate the amount of an impairment charge as of September 30, 2013, and determined that an impairment was probable and reasonably estimable. The preliminary fair value assessments were performed by the Company taking into consideration a number of factors including the preliminary results of a hypothetical purchase price allocation. As a result of the preliminary analysis, the Company recorded a combined estimated goodwill impairment charge of $38.0 million in the Condensed Consolidated Statements of Operations during the three months ended September 30, 2013, representing the difference between the estimated implied fair value of the HealthTronics reporting units' goodwill and their respective net book values. The Company finalized the impairment analysis in the fourth quarter of 2013 when it recorded charges of $118.9 million to write down the book value of the reporting units' assets to fair value less costs to sell. Subsequently, during the six months ended June 30, 2014, the Company has recorded a net loss of approximately $1.1 million, representing the carrying amount of the assets sold less the amount of the net proceeds received.
Until it was sold on February 3, 2014, the assets of this business segment, previously known as the HealthTronics segment, and related liabilities were classified as held for sale in the Condensed Consolidated Balance Sheet. Depreciation and amortization expense were not recorded on assets held for sale. The operating results of this business segment are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. Financial results are only related to disposed of or to-be-disposed of businesses.

The following table provides the operating results of Discontinued operations, net of tax for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
$
—

 
$
54,361

 
$
14,442

 
$
104,386

(Loss) income from discontinued operations before income taxes
$
(2,677
)
 
$
3,384

 
$
1,721

 
$
9,026

Income taxes
491

 
(2,978
)
 
(530
)
 
(2,286
)
Discontinued operations, net of tax
$
(3,168
)
 
$
6,362

 
$
2,251

 
$
11,312

The following table provides the components of Assets held for sale and Liabilities related to assets held for sale as of December 31, 2013 (in thousands):
 
December 31, 2013
Current assets
$
69,131

Property, plant and equipment
23,461

Goodwill and other intangibles, net
58,761

Other assets
8,904

      Assets held for sale
$
160,257

Current liabilities
$
27,656

Long term debt, less current portion, net
3,354

Other liabilities
561

     Liabilities related to assets held for sale
$
31,571

The table above does not include noncontrolling interests related to HealthTronics of $59.2 million as of December 31, 2013.

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NOTE 4. RESTRUCTURING
June 2013 Restructuring Initiative
On June 4, 2013, the Board approved certain strategic, operational and organizational steps for EHSI to take to refocus its operations and enhance shareholder value. These actions were the result of a comprehensive assessment of the Company's strengths and challenges, its cost structure and execution capabilities, and its most promising opportunities to drive future cash flow and earnings growth. The cost reduction initiatives included a reduction in headcount of approximately 15% worldwide, streamlining of general and administrative expenses, optimizing commercial spend and refocusing research and development efforts.
As a result of the June 2013 restructuring initiative, the Company did not incur material expenses during the three and six months ended June 30, 2014. During the three months ended June 30, 2013, the Company incurred approximately $46.9 million of restructuring expenses primarily consisting of employee severance and other benefit-related costs. The Company anticipates there will be additional pre-tax restructuring expenses of $0.7 million, primarily attributable to employee severance and other benefit-related costs which will be incurred throughout 2014. The majority of these restructuring costs are included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations.
The liability related to the June 2013 restructuring initiative totaled $2.7 million and $12.3 million at June 30, 2014 and December 31, 2013, respectively. This liability is included in Accrued expenses in the Condensed Consolidated Balance Sheets. The change in the liability relates primarily to cash payments made during 2014.
Of the $0.7 million of additional pre-tax restructuring expenses the Company expects to incur, $0.6 million relates to the Devices segment and $0.1 million relates to Corporate. Segment operating results do not include restructuring expenses as segment performance is evaluated excluding such expenses. See further discussion in Note 6. Segment Results.
Other Restructuring Initiatives
During 2014 and 2013, EHSI and certain of its subsidiaries undertook certain other restructuring initiatives that were individually not material to the Company's Condensed Consolidated Financial Statements for any of the periods presented. On an aggregate basis, the Company recorded charges related to these initiatives totaling $5.7 million and $10.0 million during the three and six months ended June 30, 2014, respectively, which primarily consisted of employee severance and other benefit-related costs. The Company recorded charges related to these initiatives totaling $0.4 million and $5.6 million during the three and six months ended June 30, 2013, respectively, which primarily related to accelerated depreciation and asset impairment charges. Additionally, the Company recognized lease-exit costs of $7.8 million during the first quarter of 2013 upon the cease use dates of our Chadds Ford, Pennsylvania and Westbury, New York properties. The majority of these costs are included in Selling, general and administrative expense in the Condensed Consolidated Statements of Operations.
The liability related to these initiatives totaled $13.4 million and $16.1 million at June 30, 2014 and December 31, 2013, respectively. This liability is included in Accrued expenses in the Condensed Consolidated Balance Sheets. The change in the liability relates primarily to cash payments made during 2013, partially offset by the recognition of the expenses mentioned in the preceding paragraph.
NOTE 5. ACQUISITIONS
Paladin Labs Inc. Acquisition
On November 5, 2013, EHSI announced that it had reached a definitive agreement to acquire Paladin in a stock and cash transaction and, on February 28, 2014 (the Paladin Acquisition Date), the transaction closed and each of EHSI and Paladin was acquired by Endo International plc, a newly-formed Irish holding company.
Under the terms of the transaction, former Paladin shareholders received 1.6331 shares of Endo International stock, or approximately 35.5 million shares, and C$1.16 in cash, for total consideration of $2.9 billion as of February 28, 2014. On the Paladin Acquisition Date, each then current EHSI shareholder received one ordinary share of Endo International plc for each share of EHSI common stock owned upon closing. Immediately following the closing of the transaction, former EHSI shareholders owned approximately 79% of Endo International plc, and former Paladin shareholders owned approximately 21%.

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The acquisition consideration was as follows (in thousands of U.S. dollars, except for per share amounts):
Number of Paladin shares paid through the delivery of Endo International common stock
20,765

 
 
Exchange ratio
1.6331

 
 
Number of shares of Endo International common stock—as exchanged*
33,912

 
 
Endo common stock price on February 28, 2014
$
80.00

 
 
Fair value of common shares of Endo International issued to Paladin Shareholders*
 
 
$
2,712,956

Number of Paladin shares paid in cash
20,765

 
 
Per share cash consideration for Paladin shares (1)
$
1.09

 
 
Cash distribution to Paladin shareholders*
 
 
22,647

Fair value of the vested portion of Paladin stock options outstanding—1.3 million at February 28, 2014 (2)
 
 
131,323

Total acquisition consideration
 
 
$
2,866,926

__________
*
Amounts do not recalculate due to rounding.
(1)
Represents the cash consideration per the Arrangement Agreement of C$1.16 per Paladin share translated into U.S. dollars utilizing an exchange rate of $0.9402.
(2)
Represents the fair value of vested Paladin stock option awards attributed to pre-combination services that were outstanding on the Paladin Acquisition Date.
Paladin is a specialty pharmaceutical company headquartered in Montreal, Canada, focused on acquiring or in-licensing innovative pharmaceutical products for the Canadian and world markets. Paladin's key products serve growing drug markets including attention deficit hyperactivity disorder (ADHD), pain, urology and allergy. In addition to its Canadian operations, Paladin owns a controlling interest in Laboratorios Paladin de Mexico S.A. in Mexico and in publicly traded Litha Healthcare Group Limited in South Africa.
Paladin’s stable and growing cash flows and strong Canadian franchise complement Endo's existing portfolio and further diversify Endo's pharmaceutical product mix and geographic reach. The Company believes the transaction will generate operational and tax synergies and will create a financial platform to facilitate organic growth with broader options for future strategic activity.
While the Paladin acquisition was primarily equity based, Endo also made changes to its existing debt structure to complete the transaction. See Note 11. Debt.
The operating results of Paladin from and including February 28, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014. The Condensed Consolidated Balance Sheets as of June 30, 2014 reflect the acquisition of Paladin, effective February 28, 2014.

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The following table summarizes the fair values of the assets acquired and liabilities assumed at the Paladin Acquisition Date (in thousands):
 
February 28, 2014 (As initially reported)
 
Measurement period adjustments
 
February 28, 2014 (As adjusted)
Cash and cash equivalents
$
113,571

 
$
—

 
$
113,571

Marketable securities
89,420

 
—

 
89,420

Accounts receivable
93,832

 
3,260

 
97,092

Inventories
62,095

 
1,100

 
63,195

Prepaid expenses and other current assets
32,605

 
—

 
32,605

Deferred income tax assets, current
11,719

 
(210
)
 
11,509

Property, plant and equipment
7,299

 
—

 
7,299

Intangible assets
676,000

 
(30,000
)
 
646,000

Other assets
56,289

 
1,256

 
57,545

Total identifiable assets
$
1,142,830

 
$
(24,594
)
 
$
1,118,236

Accounts payable and accrued expenses
$
124,321

 
$
4,205

 
$
128,526

Income taxes payable
22,524

 
203

 
22,727

Deferred income taxes
160,620

 
(13,236
)
 
147,384

Debt
23,826

 
—

 
23,826

Other liabilities
9,578

 
—

 
9,578

Total liabilities assumed
$
340,869

 
$
(8,828
)
 
$
332,041

Net identifiable assets acquired
$
801,961

 
$
(15,766
)
 
$
786,195

Noncontrolling interests
$
(69,600
)
 
$
29,000

 
$
(40,600
)
Goodwill
2,134,565

 
(13,234
)
 
2,121,331

Net assets acquired
$
2,866,926

 
$
—

 
$
2,866,926

The estimated fair value of the Paladin assets acquired and liabilities assumed are provisional as of June 30, 2014 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements, particularly with respect to certain acquired equity and cost method investments, property, plant and equipment, intangible assets, contingent assets and liabilities, deferred income taxes and noncontrolling interests. Accordingly, the measurement of the Paladin assets acquired and liabilities assumed may change significantly upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date.
The Company expects multiple reporting units to benefit, directly or indirectly, from the synergies arising from the Paladin acquisition and related transactions. As a result, as of June 30, 2014, the Company has provisionally assigned the goodwill arising from the Paladin acquisition to multiple reporting units across each of its reportable segments. This assignment was based on the relative incremental benefit expected to be realized by each impacted reporting unit. The Company is continuing to assess the amount of goodwill assigned to each reporting unit and the underlying allocation methodology used to assign this goodwill. Refer to Note 9. Goodwill and Other Intangibles for the preliminary allocation of Paladin-related goodwill by reportable segment.

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The valuation of the intangible assets acquired and related amortization periods are as follows:
 
Valuation
(in millions) 
 
Amortization
Period
(in years)  
Developed Technology:
 
 
 
Canada Base Prescription
$
345.0

 
12
Canada OTC
40.0

 
11
Canada Other
65.0

 
11
Litha
60.0

 
12
Latin America
5.0

 
15
Licenses not renewed
4.5

 
3
Total
$
519.5

 

In Process Research & Development (IPR&D):
 
 
 
Serelaxin
$
115.0

 
n/a
Other
11.5

 
n/a
Total
$
126.5

 
n/a
Total other intangible assets
$
646.0

 
n/a
The preliminary fair values of the developed technology and IPR&D assets were estimated using a discounted present value income approach. Under this method, an intangible asset’s fair value is equal to the present value of the incremental after-tax cash flows (excess earnings) attributable solely to the intangible asset over its remaining useful life. To calculate fair value, the Company used cash flows discounted at rates ranging from 9.5% to 15.0%, which were considered appropriate given the inherent risks associated with each type of asset. The Company believes that the level and timing of cash flows appropriately reflect market participant assumptions. This analysis is preliminary and is subject to further adjustment as additional information becomes available.
The goodwill recognized is attributable primarily to strategic and synergistic opportunities related to existing pharmaceutical businesses, expected corporate synergies, the assembled workforce of Paladin and other factors. The amount of goodwill deductible for income tax purposes associated with the Paladin acquisition is not expected to be material. However, this expectation is preliminary and is subject to further adjustment as additional information becomes available and as additional analyses are performed.
Deferred tax assets and liabilities are related primarily to the difference between the book basis and tax basis of identifiable intangible assets.
The Company did not recognize acquisition-related transaction costs associated with the Paladin acquisition during the three months ended June 30, 2014. The Company recognized acquisition-related transaction costs associated with the Paladin acquisition during the six months ended June 30, 2014 totaling $33.4 million. These costs, which related primarily to bank fees, legal and accounting services, and fees for other professional services, are included in Acquisition-related and integration items in the accompanying Condensed Consolidated Statements of Operations.

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The amounts of Paladin Revenue and Net income attributable to Endo International plc included in the Company’s Condensed Consolidated Statements of Operations from and including February 28, 2014 to June 30, 2014 are as follows (in thousands, except per share data):
Revenue
$
96,910

Net income attributable to Endo International plc
$
671

Basic net income per share
$
—

Diluted net income per share
$
—

The following supplemental unaudited pro forma information presents the financial results as if the acquisition of Paladin had occurred on January 1, 2013 for the six months ended June 30, 2014 and for the three and six months ended June 30, 2013. This supplemental pro forma information has been prepared for comparative purposes and does not purport to be indicative of what would have occurred had the acquisition been made on January 1, 2013, nor are they indicative of any future results.
 
Six Months Ended June 30, 2014
 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
Unaudited pro forma consolidated results (in thousands, except per share data):
 
 
 
 
 
Revenue
$
1,356,293

 
$
832,189

 
$
1,607,708

Net (loss) income attributable to Endo International plc
$
(427,356
)
 
$
46,002

 
$
48,395

Basic net (loss) income per share
$
(3.05
)
 
$
0.41

 
$
0.43

Diluted net (loss) income per share
$
(3.05
)
 
$
0.39

 
$
0.42

These amounts have been calculated after applying the Company’s accounting policies and adjusting the results of Paladin to reflect factually supportable adjustments that give effect to events that are directly attributable to the Paladin Acquisition, including borrowings to finance the acquisition as well as the additional amortization that would have been charged assuming the fair value adjustments, primarily to intangible assets, had been applied on January 1, 2013, together with the consequential tax effects.
The Company has determined that U.S. shareholders of Endo will generally recognize gain (but not loss) on the
Endo shareholders’ exchange of EHSI common stock for Endo plc ordinary shares in the merger (Endo Share Exchange).  This determination is based on various factors described in the registration statement, including the upward movement of the Endo stock price following signing of the arrangement agreement and the aggregate estimated tax basis of the Endo shareholders in the Endo common stock at the time of the Endo Share Exchange.  Due to these factors the conditions necessary to prevent the application of Section 367(a) to the merger were not satisfied, and, as a result, the Endo Share Exchange will be a taxable transaction for U.S. federal income tax purposes effective February 28, 2014 whereby U.S. shareholders of Endo will generally recognize gain (but not loss) on the Endo Share Exchange. With respect to each U.S. shareholder, such gain will generally equal the excess of the fair market value of the Endo plc ordinary shares received over such holder’s adjusted tax basis in the shares of Endo common stock exchanged therefor. The Company has accrued approximately $55.3 million of expense related to the reimbursement of director's and certain employees' excise tax liabilities pursuant to Section 4985 of the Internal Revenue Code.
Boca Pharmacal LLC Acquisition
On August 28, 2013, the Company announced that it had entered into a definitive agreement to acquire Boca Pharmacal LLC (Boca), a specialty generics company that focuses on niche areas, commercializing and developing products in categories that include controlled substances, semisolids and solutions. On February 3, 2014, the Company announced that it had completed the acquisition of Boca for approximately $232.7 million in cash.
The preliminary fair values of the net identifiable assets acquired totaled approximately $221.8 million, resulting in goodwill of approximately $10.8 million, which was assigned to our U.S. Generic Pharmaceuticals segment. The amount of net identifiable assets acquired in connection with the Boca acquisition includes approximately $165.9 million of identifiable intangible assets, including $105.2 million of developed technology to be amortized over an average life of approximately 14 years and $60.7 million of IPR&D. The estimated fair values of the Boca net assets acquired are provisional as of June 30, 2014 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements. Accordingly, the measurement of the Boca assets acquired and liabilities assumed may change upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date.

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The operating results of Boca from and including February 3, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014. The Condensed Consolidated Balance Sheets as of June 30, 2014 reflect the acquisition of Boca, effective February 3, 2014.
Sumavel® DosePro® 
On April 24, 2014, the Company announced that it had acquired worldwide rights to Sumavel® DosePro® (Sumavel) for subcutaneous use, a needle-free delivery system for sumatriptan, from Zogenix, Inc. The Company closed the acquisition of Sumavel on May 19, 2014 and is accounting for this transaction as a business combination in accordance with the relevant accounting literature.
The Company acquired the product for consideration of $93.4 million, consisting of an upfront payment of $89.7 million and contingent cash consideration with an acquisition-date fair value of $3.7 million. Refer to Note 7. Fair Value Measurements for further discussion of this contingent consideration. In addition, the Company provided Zogenix, Inc. with a $7.0 million non-interest bearing loan due 2023 for working capital needs and it assumed an existing third-party royalty obligation on net sales. Sumavel® is a prescription medicine given with a needle-free delivery system to treat adults who have been diagnosed with acute migraine or cluster headaches.
The preliminary fair values of the net identifiable assets acquired totaled approximately $90.4 million, resulting in goodwill of approximately $3.0 million, which was assigned to our U.S. Branded Pharmaceuticals segment. The amount of net identifiable assets acquired in connection with the Sumavel® acquisition includes approximately $84.4 million of identifiable developed technology intangible assets to be amortized over an average life of approximately 13 years. The estimated fair values of the Sumavel net assets acquired are provisional as of June 30, 2014 and are based on information that is currently available to the Company. Additional information is being gathered to finalize these provisional measurements. Accordingly, the measurement of the Sumavel assets acquired and liabilities assumed may change upon finalization of the Company’s valuations and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date.
The operating results of Sumavel from and including May 19, 2014 are included in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014. The Condensed Consolidated Balance Sheets as of June 30, 2014 reflect the acquisition of Sumavel, effective May 19, 2014.
NOTE 6. SEGMENT RESULTS
Concurrent with the February 28, 2014 acquisition of Paladin, the Company changed the names of its reportable segments. This change to our segments had no impact on the Company’s unaudited Condensed Consolidated Financial Statements for all periods presented. In addition, the International Pharmaceuticals segment was added, which is comprised solely of the operations of the acquired Paladin business.
The four reportable business segments in which the Company now operates are: (1) U.S. Branded Pharmaceuticals (f/k/a Endo Pharmaceuticals), (2) U.S. Generic Pharmaceuticals (f/k/a Qualitest), (3) Devices (f/k/a AMS) and (4) International Pharmaceuticals. These segments reflect the level at which executive management regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s adjusted income (loss) from continuing operations before income tax, which we define as income (loss) from continuing operations before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, cost reduction and integration-related initiatives, asset impairment charges, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, litigation-related and other contingent matters and certain other items that the Company believes do not reflect its core operating performance.
Certain of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company's segments and are included in the results below as "Corporate unallocated". The Company's consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segment less these unallocated corporate costs.
U.S. Branded Pharmaceuticals
Our U.S. Branded Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm®, Opana® ER, Voltaren® Gel, Percocet®, Frova®, Fortesta® Gel, Supprelin® LA, Vantas®, Valstar® and AveedTM.

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Table of Contents

U.S. Generic Pharmaceuticals
Our U.S. Generic Pharmaceuticals segment has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. The product offerings of this segment include products in the pain management, urology, CNS disorders, immunosuppression, oncology, women’s health and hypertension markets, among others. Additionally, in May 2014, we launched an authorized generic lidocaine patch 5% (referred to as "Lidoderm® authorized generic").
Devices
Our Devices segment focuses on providing technology solutions to physicians treating men’s and women’s pelvic health conditions and operates in the following business lines: men’s health, women’s health, and benign prostatic hyperplasia (BPH or prostate health) therapy. AMS distributes devices through its direct sales force and independent sales representatives in the U.S., Canada, Australia and Western Europe. Additionally, We distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our customers or distributors accounted for 10% or more of our total revenues during the three and six months ended June 30, 2014 and 2013. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.
International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products for the Canadian and world markets, which we acquired from Paladin. Paladin's key products serve growing drug markets including ADHD, pain, urology and allergy. Foreign subsidiary sales are predominantly to customers in Canada and South Africa.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net revenues to external customers:
 
 
 
 
 
 
 
U.S. Branded Pharmaceuticals
$
248,547

 
$
415,647

 
$
482,712

 
$
773,236

U.S. Generic Pharmaceuticals
272,213

 
170,530

 
484,068

 
348,783

Devices (1)
125,836

 
125,971

 
249,603

 
248,623

International Pharmaceuticals (2)
72,088

 
—

 
96,910

 
—

Total net revenues to external customers
$
718,684

 
$
712,148

 
$
1,313,293

 
$
1,370,642

 
 
 
 
 
 
 
 
Adjusted income (loss) from continuing operations before income tax:
 
 
 
 
 
 
 
U.S. Branded Pharmaceuticals
$
130,416

 
$
236,014

 
$
264,833

 
$
410,421

U.S. Generic Pharmaceuticals
105,234

 
45,978

 
179,031

 
93,090

Devices
37,734

 
36,047

 
77,439

 
67,691

International Pharmaceuticals
22,602

 
—

 
31,897

 
—

Corporate unallocated
(70,246
)
 
(73,649
)
 
(149,437
)
 
(156,666
)
__________
(1)
The following table displays our Devices segment revenue by geography for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Devices:
 
 
 
 
 
 
 
United States
$
79,642

 
$
79,240

 
$
157,101

 
$
157,607

International
46,194

 
46,731

 
92,502

 
91,016

Total Devices revenues
$
125,836

 
$
125,971

 
$
249,603

 
$
248,623

(2)
Revenues generated by our International Pharmaceuticals segment are primarily attributable to Canada and South Africa.

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The table below provides reconciliations of our segment adjusted income from continuing operations before income tax to our consolidated income (loss) from continuing operations before income tax, which is determined in accordance with U.S. GAAP, for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Total segment adjusted income from continuing operations before income tax:
$
295,986

 
$
318,039

 
$
553,200

 
$
571,202

Corporate unallocated costs
(70,246
)
 
(73,649
)
 
(149,437
)
 
(156,666
)
Upfront and milestone payments to partners
(10,350
)
 
(5,398
)
 
(21,505
)
 
(7,972
)
Asset impairment charges
—

 
(2,849
)
 
—

 
(3,949
)
Acquisition-related and integration items (1)
(19,618
)
 
(1,825
)
 
(64,887
)
 
(2,383
)
Separation benefits and other cost reduction initiatives (2)
(11,463
)
 
(51,562
)
 
(11,740
)
 
(65,256
)
Excise tax (3)
4,700

 
—

 
(55,300
)
 
—

Amortization of intangible assets
(68,273
)
 
(51,089
)
 
(123,467
)
 
(98,339
)
Inventory step-up
(19,144
)
 
—

 
(22,725
)
 
—

Non-cash interest expense
(3,346
)
 
(5,662
)
 
(9,315
)
 
(11,112
)
Loss on extinguishment of debt
(20,089
)
 
—

 
(29,685
)
 
(11,312
)
Watson litigation settlement income, net
—

 
16,545

 
—

 
35,772

Certain litigation-related charges, net (4)
(32,859
)
 
(72,837
)
 
(673,959
)
 
(149,369
)
Charge related to the non-recoverability of certain non-trade receivables
(10,000
)
 
—

 
(10,000
)
 
—

Net gain on sale of certain early-stage drug discovery and development assets
3,850

 
—

 
3,850

 
—

Other income, net
—

 
1,048

 
—

 
1,048

Total consolidated income (loss) from continuing operations before income tax
$
39,148

 
$
70,761

 
$
(614,970
)
 
$
101,664

__________
(1)
Acquisition-related and integration-items include costs directly associated with the closing of certain acquisitions, changes in the fair value of contingent consideration and the costs of integration activities related to both current and prior period acquisitions.
(2)
Separation benefits and other cost reduction initiatives include employee separation costs of $4.1 million and $9.0 million during the three and six months ended June 30, 2014, respectively, compared to $39.7 million and $41.1 million for the three and six months ended June 30, 2013, respectively. Refer to Note 4. Restructuring for discussion of our material restructuring initiatives. These amounts are partially offset by changes in estimates related to certain cost reduction initiative accruals. Additionally, the amount of separation benefits and other cost reduction initiatives during the three and six months ended June 30, 2013 includes an expense recorded upon the cease use date of our Chadds Ford, Pennsylvania and Westbury, New York properties in the first quarter of 2013, representing the liability for our remaining obligations under the respective lease agreements of $7.2 million. These expenses were primarily recorded as Selling, general and administrative and Research and development expense in our Condensed Consolidated Statements of Operations.
(3)
This amount represents charges related to the expense for the reimbursement of director's and certain employee's excise tax liabilities pursuant to Section 4985 of the Internal Revenue Code, which we had previously estimated to be $60.0 million in the first quarter of 2014.
(4)
These amounts include charges for Litigation-related and other contingencies, net, consisting primarily of mesh-related product liability charges, as well as mesh litigation-related defense costs for the three and six months ended June 30, 2014 and 2013.

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Table of Contents

The following represents additional selected financial information for our reportable segments for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Depreciation expense:
 
 
 
 
 
 
 
U.S. Branded Pharmaceuticals
$
4,374

 
$
4,410

 
$
8,411

 
$
10,715

U.S. Generic Pharmaceuticals
4,339

 
3,269

 
11,908

 
6,439

Devices
2,442

 
2,853

 
4,528

 
5,655

International Pharmaceuticals
350

 
—

 
491

 
—

Corporate unallocated
2,119

 
1,729

 
4,013

 
4,194

Total depreciation expense
$
13,624

 
$
12,261

 
$
29,351

 
$
27,003

 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Amortization expense:
 
 
 
 
 
 
 
U.S. Branded Pharmaceuticals
$
17,739

 
$
24,847

 
$
38,462

 
$
46,127

U.S. Generic Pharmaceuticals
20,156

 
10,881

 
38,770

 
21,762

Devices
15,513

 
15,512

 
31,037

 
30,751

International Pharmaceuticals
11,198

 
—

 
15,198

 
—

Total amortization expense
$
64,606

 
$
51,240

 
$
123,467

 
$
98,640

Interest income and expense are considered corporate items and are not allocated to our segments. Asset information is not accounted for at the segment level and consequently is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 7. FAIR VALUE MEASUREMENTS
Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds are structured to maintain the fund’s net asset value at $1.00 per unit, which assists in providing adequate liquidity upon demand by the holder. Money market funds pay dividends that generally reflect short-term interest rates. Thus, only the dividend yield fluctuates. Also included in cash and cash equivalents are investments in guaranteed investment certificates (GICs) with original maturities of fewer than three months. GICs are interest-bearing Canadian deposit securities with defined maturities and are redeemable on demand. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds and GICs with original maturities of fewer than three months), accounts receivable, accounts payable and accrued expenses approximate their fair values.
At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. Fair value is determined based on a variety of approaches as described in more detail below. The Company reviews unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

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Table of Contents

The following table presents the carrying amounts and estimated fair values of our other financial instruments at June 30, 2014 and December 31, 2013 (in thousands):
 
June 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount 
 
Fair Value
Current assets:
 
 
 
 
 
 
 
Guaranteed investment certificates—original maturities of three months or more
$
21,351

 
$
21,351

 
$
—

 
$
—

Commercial paper
11,993

 
11,993

 
—

 
—

Bonds
10,118

 
10,118

 
—

 
—

Equity securities
2,817

 
2,817

 
—

 
—

Current portion of loans receivable
287

 
287

 
—

 
—

Long-term assets:
 
 
 
 
 
 
 
Equity securities
$
3,251

 
$
3,251

 
$
2,979

 
$
2,979

Loans receivable from joint venture
10,576

 
10,576

 
—

 
—

Other loans receivable, less current portion
14,838

 
14,838

 
—

 
—

Equity and cost method investments
46,783

 
N/A

 
15,654

 
N/A

Current liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$
7,608

 
$
7,608

 
$
3,878

 
$
3,878

Current portion of 1.75% Convertible Senior Subordinated Notes Due 2015, net
131,729

 
137,272

 
345,421

 
372,481

Current portion of New Term Loan A Facility Due 2019
44,687

 
44,687

 
—

 
—

Current portion of New Term Loan B Facility Due 2021
4,250

 
4,250

 
—

 
—

Current portion of Term Loan A Facility Due 2018
—

 
—

 
69,375

 
69,375

3.25% AMS Convertible Notes due 2036
22

 
22

 
22

 
22

4.00% AMS Convertible Notes due 2041
105

 
105

 
111

 
111

Current portion of Paladin debt
4,838

 
4,838

 
—

 
—

Minimum Voltaren® Gel royalties due to Novartis—short-term
22,075

 
22,075

 
28,935

 
28,935

Long-term liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—long-term
$
895

 
$
895

 
$
869

 
$
869

New Term Loan A Facility Due 2019, less current portion
1,045,000

 
1,045,526

 
—

 
—

New Term Loan B Facility Due 2021, less current portion
419,688

 
419,450

 
—

 
—

Term Loan A Facility Due 2018, less current portion
—

 
—

 
1,266,094

 
1,265,970

Term Loan B Facility Due 2018
—

 
—

 
60,550

 
60,686

7.00% Senior Notes Due 2019
499,875

 
535,804

 
500,000

 
536,563

7.00% Senior Notes Due 2020, net
397,538

 
430,250

 
397,200

 
430,500

7.25% Senior Notes Due 2022
400,000

 
434,250

 
400,000

 
431,750

5.75% Senior Notes Due 2022
700,000

 
717,938

 
700,000

 
703,500

5.375% Senior Notes Due 2023
750,000

 
749,531

 
—

 
—

Paladin debt, less current portion
17,794

 
17,852

 
—

 
—

Minimum Voltaren® Gel royalties due to Novartis—long-term
—

 
—

 
7,392

 
7,392

Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•
Level 1—Quoted prices in active markets for identical assets or liabilities.
•
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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Table of Contents

Our investments in GICs, commercial paper and bonds mature throughout 2014 and prior to June 30, 2015 and are held with highly rated financial institutions. Our investments in GICs with original maturities of three months or more are included within marketable securities in our Condensed Consolidated Balance Sheets. They are carried at the deposited value, which is a reasonable approximation of fair value, and are considered to be valued using Level 2 inputs within the fair value hierarchy. Our investments in commercial paper are based on broker quotes provided by our portfolio managers. We consider these investments to be valued using Level 2 inputs within the fair value hierarchy. Our investments in bonds consist of both corporate and Canadian government bonds and are valued using broker quotes, representing Level 2 measurements within the fair value hierarchy.
Our loans receivable at June 30, 2014 relate primarily to loans totaling $10.6 million to our joint venture owned through our Litha Healthcare Group Limited subsidiary. The joint venture investment is further described below. The majority of this amount is secured by certain of the assets of our joint venture. The fair values of these loans were based on anticipated cash flows, which approximate the carrying amount, and were classified in Level 2 measurements in the fair value hierarchy.
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the fair value hierarchy, as defined above. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in marketable securities in the Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013.
We have various investments which we account for using the equity or cost method of accounting, including a $24.1 million joint venture investment in the Biologicals and Vaccines Institute of Southern Africa (Pty) Limited, owned through our Litha Healthcare Group Limited subsidiary, which is accounted for as an equity method investment. The fair value of the equity method and cost method investments is not readily available nor have we estimated the fair value of these investments and disclosure is not required. The Company is not aware of any identified events or changes in circumstances that would have a significant adverse effect on the carrying value of any of our equity or cost method investments included in our Condensed Consolidated Balance Sheets at June 30, 2014 and December 31, 2013.
Acquisition-related contingent consideration is measured at fair value on a recurring basis using unobservable inputs, hence these instruments represent Level 3 measurements within the fair value hierarchy. See Recurring Fair Value Measurements below for additional information on the fair value methodology used for the acquisition-related contingent consideration.
The fair value of our 1.75% Convertible Senior Subordinated Notes (Convertible Notes) is based on an income approach, which incorporates certain inputs and assumptions, including scheduled coupon and principal payments, the conversion feature inherent in the Convertible Notes, the put feature inherent in the Convertible Notes, and share price volatility assumptions based on historic volatility of the Company’s ordinary shares and other factors. These fair value measurements are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy.
The fair values of the various term loan facilities and senior notes were based on market quotes and transactions proximate to the valuation date. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
The fair values of the Minimum Voltaren® Gel royalties due to Novartis were determined using an income approach (present value technique) taking into consideration the level and timing of expected cash flows and an assumed discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The liability is currently being accreted up to the expected minimum payments, less payments made to date. We believe the carrying amount of this minimum royalty guarantee at June 30, 2014 and December 31, 2013 represents a reasonable approximation of the price that would be paid to transfer the liability in an orderly transaction between market participants at the measurement date. Accordingly, the carrying value approximates fair value as of June 30, 2014 and December 31, 2013.

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Table of Contents

Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
June 30, 2014
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
 
Significant Other
Observable
Inputs (Level 2)  
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
40,000

 
$
—

 
$
—

 
$
40,000

Guaranteed investment certificates—original maturities of fewer than three months
—

 
22,430

 
—

 
22,430

Guaranteed investment certificates—original maturities of three months or more
—

 
21,351

 
—

 
21,351

Commercial paper
—

 
11,993

 
—

 
11,993

Bonds
—

 
10,118

 
—

 
10,118

Equity securities
6,068

 
—

 
—

 
6,068

Total
$
46,068

 
$
65,892

 
$
—

 
$
111,960

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$
—

 
$
—

 
$
7,608

 
$
7,608

Acquisition-related contingent consideration—long-term
—

 
—

 
895

 
895

Total
$
—

 
$
—

 
$
8,503

 
$
8,503

 
 
Fair Value Measurements at Reporting Date using:
December 31, 2013
Quoted Prices in
Active Markets
for Identical
Assets (Level 1) 
 
Significant Other
Observable
Inputs (Level 2)
 
Significant
Unobservable
Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
843,390

 
$
—

 
$
—

 
$
843,390

Equity securities
2,979

 
—

 
—

 
2,979

Total
$
846,369

 
$
—

 
$
—

 
$
846,369

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$
—

 
$
—

 
$
3,878

 
$
3,878

Acquisition-related contingent consideration—long-term
—

 
—

 
869

 
869

Total
$
—

 
$
—

 
$
4,747

 
$
4,747

Acquisition-Related Contingent Consideration
The fair value of the Teva Contingent Consideration assumed in connection with the November 30, 2010 acquisition of Generics International (US Parent), Inc. (doing business as Qualitest Pharmaceuticals) by our Endo Pharmaceuticals Inc. (EPI) subsidiary was estimated based on a probability-weighted discounted cash flow model (income approach). The increase in the balance primarily relates to the changes in the fair value of the liability, primarily reflecting changes to the present value assumptions associated with our valuation model. For further discussion, refer to our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 3, 2014.
During the second quarter of 2014, in connection with our acquisition of Sumavel®, we entered into an agreement to make contingent cash consideration payments to the former owner of Sumavel® of between zero and $20.0 million, based on certain factors relating primarily to the financial performance of Sumavel®. At the acquisition date, we estimated the fair value of this obligation to be $3.7 million based on a probability-weighted discounted cash flow model (income approach).

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Table of Contents

Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
June 30, 2014
 
June 30, 2013
 
June 30, 2014
 
June 30, 2013
Beginning of period
$
4,759

 
$
3,964

 
$
4,747

 
$
8,924

Amounts acquired or (settled)
3,700

 
—

 
3,700

 
(5,000
)
Transfers (in) and/or out of Level 3
—

 
—

 
—

 
—

Changes in fair value recorded in earnings
44

 
60

 
56

 
100

End of period
$
8,503

 
$
4,024

 
$
8,503

 
$
4,024

The following is a summary of available-for-sale securities held by the Company at June 30, 2014 and December 31, 2013 (in thousands):
 
Available-for-sale  
 
Amortized
Cost  
 
Gross
Unrealized
Gains
 
Gross
Unrealized
(Losses) 
 
Fair Value  
June 30, 2014
 
 
 
 
 
 
 
Money market funds
$
40,000

 
$
—

 
$
—

 
$
40,000

Guaranteed investment certificates—original maturities of fewer than three months
22,430

 
—

 
—

 
22,430

Total included in cash and cash equivalents
$
62,430

 
$
—

 
$
—

 
$
62,430

Guaranteed investment certificates—original maturities of three months or more
$
21,351

 
$
—

 
$
—

 
$
21,351

Commercial paper
11,974

 
19

 
—

 
11,993

Bonds
10,178

 
—

 
(60
)
 
10,118

Equity securities
3,843

 
—

 
(1,026
)
 
2,817

Total other short-term available-for-sale securities
$
47,346

 
$
19

 
$
(1,086
)
 
$
46,279

Equity securities
$
1,766

 
$
1,485

 
$
—

 
$
3,251

Long-term available-for-sale securities
$
1,766

 
$
1,485

 
$
—

 
$
3,251


 
Available-for-sale  
 
Amortized
Cost
 
Gross
Unrealized
Gains 
 
Gross
Unrealized
(Losses)  
 
Fair Value  
December 31, 2013
 
 
 
 
 
 
 
Money market funds
$
843,390

 
$
—

 
$
—

 
$
843,390

Total included in cash and cash equivalents
$
73,390

 
$
—

 
$
—

 
$
73,390

Total included in restricted cash and cash equivalents
$
770,000

 
$
—

 
$
—

 
$
770,000

Equity securities
$
1,766

 
$
1,213

 
$
—

 
$
2,979

Long-term available-for-sale securities
$
1,766

 
$
1,213

 
$
—