Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2012

OR

 

¨ 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 001-16789

 

 

 

LOGO

ALERE INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   04-3565120

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

51 SAWYER ROAD, SUITE 200

WALTHAM, MASSACHUSETTS 02453

(Address of principal executive offices) (Zip code)

(781) 647-3900

(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  x    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  x    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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    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  x

The number of shares outstanding of the registrant’s common stock, par value of $0.001 per share, as of August 6, 2012 was 80,721,665.

 

 

 


Table of Contents

ALERE INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended June 30, 2012

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. A number of important factors could cause actual results of Alere Inc. and its subsidiaries to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, the risk factors detailed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2011 and other risk factors identified herein or from time to time in our periodic filings with the Securities and Exchange Commission. Readers should carefully review these risk factors, and should not place undue reliance on our forward-looking statements. These forward-looking statements are based on information, plans and estimates at the date of this report. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “we,” “us” and “our” refer to Alere Inc. and its subsidiaries.

TABLE OF CONTENTS

 

     PAGE  
PART I. FINANCIAL INFORMATION      3   
Item 1. Financial Statements      3   

a) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2012 and 2011

     3   

b) Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June  30, 2012 and 2011

     4   

c) Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011

     5   

d) Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011

     6   

e) Notes to Consolidated Financial Statements

     7   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      39   
Item 3. Quantitative and Qualitative Disclosures About Market Risk      49   
Item 4. Controls and Procedures      51   
PART II. OTHER INFORMATION      51   
Item 1. Legal Proceedings      51   
Item 1A. Risk Factors      51   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      52   
Item 6. Exhibits      52   
SIGNATURES      53   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

 

    Three Months Ended June 30,     Six Months Ended June 30,  
    2012     2011     2012     2011  

Net product sales

  $ 463,425      $ 398,805      $ 939,212      $ 806,048   

Services revenue

    233,855        163,575        426,289        331,127   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

    697,280        562,380        1,365,501        1,137,175   

License and royalty revenue

    3,237        4,805        6,145        12,474   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    700,517        567,185        1,371,646        1,149,649   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

    222,498        190,333        448,052        380,020   

Cost of services revenue

    120,559        82,495        211,419        167,211   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

    343,057        272,828        659,471        547,231   

Cost of license and royalty revenue

    1,852        1,629        3,496        3,483   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

    344,909        274,457        662,967        550,714   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    355,608        292,728        708,679        598,935   

Operating expenses:

       

Research and development

    40,447        41,348        79,447        77,890   

Sales and marketing

    159,322        140,388        317,900        273,597   

General and administrative

    121,485        94,838        241,920        200,389   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    321,254        276,574        639,267        551,876   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    34,354        16,154        69,412        47,059   

Interest expense, including amortization of original issue discounts and deferred financing costs

    (55,531     (68,562     (106,258     (106,867

Other income (expense), net

    3,811        437        15,642        2,773   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit for income taxes

    (17,366     (51,971     (21,204     (57,035

Benefit for income taxes

    (489     (42,736     (1,944     (47,066
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss before equity earnings (losses) of unconsolidated entities, net of tax

    (16,877     (9,235     (19,260     (9,969

Equity earnings (losses) of unconsolidated entities, net of tax

    3,998        (207     7,410        804   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

    (12,879     (9,442     (11,850     (9,165

Less: Net income (loss) attributable to non-controlling interests

    36        (40     (149     22   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Alere Inc. and Subsidiaries

    (12,915     (9,402     (11,701     (9,187

Preferred stock dividends

    (5,279     (5,515     (10,588     (11,324

Preferred stock repurchase

    —          10,248        —          23,936   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $ (18,194   $ (4,669   $ (22,289   $ 3,425   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share

  $ (0.23   $ (0.05   $ (0.28   $ 0.04   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per common share

  $ (0.23   $ (0.05   $ (0.28   $ 0.04   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares-basic

    80,375        85,703        80,307        85,536   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares-diluted

    80,375        85,703        80,307        87,032   
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Net loss

   $ (12,879   $ (9,442   $ (11,850   $ (9,165
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

        

Changes in cumulative translation adjustment

     (36,777     17,106        (838     38,621   

Unrealized gains (losses) on available for sale securities

     359        (104     790        (319

Unrealized gains (losses) on hedging instruments

     (652     10,371        455        11,988   

Minimum pension liability adjustment

     4        118        (120     80   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (37,066     27,491        287        50,370   

Income tax provision related to items of other comprehensive income (loss)

     —          3,993        —          4,612   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (37,066     23,498        287        45,758   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (49,945     14,056        (11,563     36,593   

Less: Comprehensive income (loss) attributable to non-controlling interests

     36        (40     (149     22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Alere Inc. and Subsidiaries

   $ (49,981   $ 14,096      $ (11,414   $ 36,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

 

     June 30, 2012     December 31, 2011  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 303,739      $ 299,173   

Restricted cash

     3,099        8,987   

Marketable securities

     863        1,086   

Accounts receivable, net of allowances of $31,625 and $24,577 at June 30, 2012 and December 31, 2011, respectively

     501,076        475,824   

Inventories, net

     316,897        320,269   

Deferred tax assets

     37,858        42,975   

Receivable from joint venture, net

     3,735        2,503   

Prepaid expenses and other current assets

     127,490        142,910   
  

 

 

   

 

 

 

Total current assets

     1,294,757        1,293,727   

Property, plant and equipment, net

     500,798        491,205   

Goodwill

     2,953,551        2,821,271   

Other intangible assets with indefinite lives

     53,169        69,546   

Finite-lived intangible assets, net

     1,904,722        1,785,925   

Deferred financing costs, net, and other non-current assets

     102,026        97,786   

Receivable from joint venture, net of current portion

     14,115        15,455   

Investments in unconsolidated entities

     90,071        85,138   

Marketable securities

     3,040        2,254   

Deferred tax assets

     11,206        10,394   
  

 

 

   

 

 

 

Total assets

   $ 6,927,455      $ 6,672,701   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 54,822      $ 61,092   

Current portion of capital lease obligations

     5,350        6,083   

Short-term debt

     —          6,240   

Accounts payable

     162,850        155,464   

Accrued expenses and other current liabilities

     396,470        395,573   
  

 

 

   

 

 

 

Total current liabilities

     619,492        624,452   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of current portion

     3,489,050        3,267,451   

Capital lease obligations, net of current portion

     10,229        12,629   

Deferred tax liabilities

     436,247        380,700   

Other long-term liabilities

     181,409        153,398   
  

 

 

   

 

 

 

Total long-term liabilities

     4,116,935        3,814,178   
  

 

 

   

 

 

 

Commitments and contingencies (Note 15)

    

Redeemable non-controlling interest

     —          2,497   
  

 

 

   

 

 

 

Stockholders’ equity:

    

Series B preferred stock, $0.001 par value (liquidation preference: $709,763 at June 30, 2012 and December 31, 2011); Authorized: 2,300 shares; Issued: 2,065 shares at June 30, 2012 and December 31, 2011; Outstanding: 1,774 shares at June 30, 2012 and December 31, 2011

     606,468        606,468   

Common stock, $0.001 par value; Authorized: 200,000 shares; Issued: 88,099 shares at June 30, 2012 and 87,647 shares at December 31, 2011; Outstanding: 80,420 shares at June 30, 2012 and 79,968 shares at December 31, 2011

     88        88   

Additional paid-in capital

     3,295,662        3,324,710   

Accumulated deficit

     (1,498,492     (1,486,791

Treasury stock, at cost, 7,679 shares at June 30, 2012 and December 31, 2011

     (184,971     (184,971

Accumulated other comprehensive loss

     (29,982     (30,270
  

 

 

   

 

 

 

Total stockholders’ equity

     2,188,773        2,229,234   

Non-controlling interests

     2,255        2,340   
  

 

 

   

 

 

 

Total equity

     2,191,028        2,231,574   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,927,455      $ 6,672,701   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

     Six Months Ended
June 30,
 
     2012     2011  

Cash Flows from Operating Activities:

    

Net loss

   $ (11,850   $ (9,165

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Non-cash interest expense, including amortization of original issue discounts and deferred financing costs

     10,731        27,590   

Depreciation and amortization

     211,622        196,116   

Non-cash charges for sale of inventories revalued at the date of acquisition

     4,681        —     

Non-cash stock-based compensation expense

     8,242        11,989   

Impairment of inventory

     5        466   

Impairment of long-lived assets

     219        957   

Impairment of intangible assets

     —          2,935   

(Gain) loss on sale of property, plant and equipment

     (5,872     1,270   

Gain on sales of marketable securities

     —          (331

Equity earnings of unconsolidated entities, net of tax

     (7,410     (804

Deferred income taxes

     (27,400     (63,343

Other non-cash items

     (883     (4,503

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     (5,431     (3,641

Inventories, net

     (4,412     (7,299

Prepaid expenses and other current assets

     16,866        (36,052

Accounts payable

     (14,247     13,524   

Accrued expenses and other current liabilities

     (366     17,721   

Other non-current liabilities

     (8,265     11,071   
  

 

 

   

 

 

 

Net cash provided by operating activities

     166,230        158,501   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Decrease in restricted cash

     5,888        34   

Purchases of property, plant and equipment

     (69,461     (67,630

Proceeds from sale of property, plant and equipment

     21,677        835   

Proceeds from disposition of business

     —          11,490   

Cash paid for acquisitions, net of cash acquired

     (310,240     (107,360

Cash received from sales of marketable securities

     226        7,919   

Cash received from equity method investments

     6,556        490   

Increase in other assets

     (7,714     (32,101
  

 

 

   

 

 

 

Net cash used in investing activities

     (353,068     (186,323
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash paid for financing costs

     (2,013     (64,699

Cash paid for contingent purchase price consideration

     (6,500     (24,707

Proceeds from issuance of common stock, net of issuance costs

     8,697        17,829   

Repurchase of preferred stock

     —          (99,068

Proceeds from issuance of long-term debt

     199,234        1,552,124   

Payments on long-term debt

     (29,884     (1,193,315

Net proceeds under revolving credit facilities

     42,487        3,335   

Payments on short-term debt

     (6,240     —     

Repurchase of common stock

     —          (926

Cash paid for dividends

     (10,646     (68

Excess tax benefits on exercised stock options

     210        1,704   

Principal payments on capital lease obligations

     (3,319     (1,294

Other

     (2,577     (10,349
  

 

 

   

 

 

 

Net cash provided by financing activities

     189,449        180,566   
  

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     1,955        2,612   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     4,566        155,356   

Cash and cash equivalents, beginning of period

     299,173        401,306   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 303,739      $ 556,662   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis of Presentation of Financial Information

The accompanying consolidated financial statements of Alere Inc. are unaudited. In the opinion of management, the unaudited consolidated financial statements contain all adjustments considered normal and recurring and necessary for their fair statement. Interim results are not necessarily indicative of results to be expected for the year. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows. Our audited consolidated financial statements for the year ended December 31, 2011 included information and footnotes necessary for such presentation and were included in our Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission, or SEC, on February 29, 2012. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2011.

Certain reclassifications of prior period amounts have been made to conform to current period presentation. These reclassifications had no effect on net income or equity.

Certain amounts presented may not recalculate directly, due to rounding.

(2) Cash and Cash Equivalents

We consider all highly-liquid cash investments with original maturities of three months or less at the date of acquisition to be cash equivalents. At June 30, 2012, our cash equivalents consisted of money market funds.

(3) Inventories

Inventories are stated at the lower of cost (first in, first out) or market and are comprised of the following (in thousands):

 

     June 30, 2012      December 31, 2011  

Raw materials

   $ 99,034       $ 92,844   

Work-in-process

     77,945         72,939   

Finished goods

     139,918         154,486   
  

 

 

    

 

 

 
   $ 316,897       $ 320,269   
  

 

 

    

 

 

 

(4) Stock-based Compensation

We recorded stock-based compensation expense in our consolidated statements of operations for the three and six months ended June 30, 2012 and 2011, respectively, as follows (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Cost of sales

   $ 263      $ 366      $ 532      $ 716   

Research and development

     856        1,191        1,627        2,136   

Sales and marketing

     913        1,209        1,830        2,168   

General and administrative

     2,336        3,415        4,253        6,969   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,368        6,181        8,242        11,989   

Benefit for income taxes

     (874     (1,304     (1,415     (2,590
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 3,494      $ 4,877      $ 6,827      $ 9,399   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7


Table of Contents

(5) Net Income (Loss) per Common Share

The following table sets forth the computation of basic and diluted net income (loss) per common share for the periods presented (in thousands, except per share data):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Numerator:

        

Net loss

   $ (12,879   $ (9,442   $ (11,850   $ (9,165

Preferred stock dividends

     (5,279     (5,515     (10,588     (11,324

Preferred stock repurchase

     —          10,248        —          23,936   

Less: Net income (loss) attributable to non-controlling interest

     36        (40     (149     22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (18,194   $ (4,669   $ (22,289   $ 3,425   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted-average common shares outstanding — basic

     80,375        85,703        80,307        85,536   

Effect of dilutive securities:

        

Stock options

     —          —          —          1,253   

Warrants

     —          —          —          131   

Potentially issuable shares of common stock associated with contingent consideration arrangements

     —          —          —          112   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding — diluted

     80,375        85,703        80,307        87,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share attributable to Alere Inc. and Subsidiaries

   $ (0.23   $ (0.05   $ (0.28   $ 0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per common share attributable to Alere Inc. and Subsidiaries

   $ (0.23   $ (0.05   $ (0.28   $ 0.04   
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three and six months ended June 30, 2012, anti-dilutive shares of 13.8 million and 13.9 million, respectively, were excluded from the computations of diluted net income (loss) per common share. For the three and six months ended June 30, 2011, anti-dilutive shares of 15.7 million and 14.5 million, respectively, were excluded from the computations of diluted net income (loss) per common share.

(6) Stockholders’ Equity and Non-controlling Interests

(a) Preferred Stock

For the three and six months ended June 30, 2012, Series B preferred stock dividends amounted to $5.3 million and $10.6 million, respectively, and for the three and six months ended June 30, 2011, Series B preferred stock dividends amounted to $5.5 million and $11.3 million, respectively, which reduced earnings available to common stockholders for purposes of calculating net income (loss) per common share for each of the respective periods. As of June 30, 2012, $5.3 million Series B preferred stock dividends were accrued. As of July 16, 2012, payments have been made covering all dividend periods through June 30, 2012.

The Series B preferred stock dividends for the three and six months ended June 30, 2012 were paid in cash. The Series B preferred stock dividends for the three and six months ended June 30, 2011 were paid in additional shares of Series B preferred stock.

(b) Share Repurchases

During the first quarter of 2011, we repurchased in the open market and privately-negotiated transactions 183,000 shares of our Series B preferred stock, which were convertible into approximately 1.1 million shares of our common stock, at a cost of approximately $49.4 million, which we paid in cash. The repurchase of the preferred stock at an average cost of $269.84 per preferred share, an amount less than the weighted average fair value of the preferred shares at issuance, resulted in the allocation of $13.7 million of income attributable to common stockholders. Also during the first quarter of 2011, under this same authorization, we completed this repurchase program by repurchasing 16,700 shares of our common stock at a cost of approximately $0.6 million, which we paid in cash.

During the second quarter of 2011, we repurchased in the open market and privately-negotiated transactions, 174,788 shares of our Series B preferred stock, which were convertible into approximately 1.0 million shares of our common stock, at a cost of approximately $49.7 million, which we paid in cash. Also during the second quarter of 2011 and pursuant to the same repurchase program, we repurchased 8,300 shares of our common stock at a cost of approximately $0.3 million, which we paid in cash. The repurchase of the preferred stock at an average cost of $284.28 per preferred share, an amount less than the weighted average fair value of the preferred shares at issuance, resulted in the allocation of $10.2 million of income attributable to common stockholders.

 

8


Table of Contents

(c) Changes in Stockholder’s Non-Controlling Interests

A summary of the changes in stockholders’ equity and non-controlling interests comprising total equity for the six months ended June 30, 2012 and 2011 is provided below (in thousands):

 

     Six Months Ended June 30,  
     2012     2011  
     Total
Stockholders’
Equity
    Non-
controlling
Interest
    Total Equity     Total
Stockholders’
Equity
    Non-
controlling
Interest
    Total Equity  

Equity, beginning of period

   $ 2,229,234      $ 2,340      $ 2,231,574      $ 2,575,038      $ 2,688      $ 2,577,726   

Issuance of common stock and warrants in connection with acquisitions

     —          —          —          1,000        —          1,000   

Exercise of common stock options, warrants and shares issued under employee stock purchase plan

     8,697        —          8,697        17,829        —          17,829   

Repurchase of common stock

     —          —          —          (926     —          (926

Repurchase of preferred stock

     —          —          —          (99,068     —          (99,068

Preferred stock dividends

     (10,646     —          (10,646     (68     —          (68

Stock-based compensation related to grants of common stock options

     8,242        —          8,242        11,989        —          11,989   

Excess tax benefits on exercised stock options

     (261     —          (261     1,704        —          1,704   

Purchase of subsidiary shares from non-controlling interests

     (35,079     —          (35,079     —          —          —     

Non-controlling interest from acquisitions

     —          —          —          —          2,500        2,500   

Dividend relating to non-controlling interest

     —          —          —          —          (270     (270

Net income (loss)

     (11,701     (85     (11,786     (9,187     22        (9,165

Total other comprehensive income

     287        —          287        45,758        —          45,758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 2,188,773      $ 2,255      $ 2,191,028      $ 2,544,069      $ 4,940      $ 2,549,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a summary of the changes in redeemable non-controlling interest recorded in the mezzanine section of the balance sheet for the six months ended June 30, 2012. There was no redeemable non-controlling interest during the six months ended June 30, 2011 (in thousands):

 

     Six Months Ended
June 30, 2012
 

Redeemable non-controlling interest, beginning of period

   $ 2,497   

Purchase of subsidiary shares from non-controlling interest

     (2,433

Net loss

     (64
  

 

 

 

Redeemable non-controlling interest, end of period

   $ —     
  

 

 

 

(7) Business Combinations

Acquisitions are accounted for using the acquisition method and the acquired companies’ results have been included in the accompanying consolidated financial statements from their respective date of acquisition. During the three and six months ended June 30, 2012, we expensed acquisition-related costs of $3.8 million and $5.3 million, respectively, in general and administrative expense. During the three and six months ended June 30, 2011, we expensed acquisition-related costs of $1.4 million and $3.3 million, respectively, in general and administrative expense.

Our business acquisitions have historically been made at prices above the fair value of the acquired net assets, resulting in goodwill, based on our expectations of synergies by combining the businesses. These synergies include elimination of redundant facilities, functions and staffing; use of our existing commercial infrastructure to expand sales of the acquired businesses’ products; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand product sales.

 

9


Table of Contents

Net assets acquired are recorded at their fair value and are subject to adjustment upon finalization of the fair value analysis. We are not aware of any information that indicates the final fair value analysis will differ materially from the preliminary estimates. Determination of the estimated useful lives of the individual categories of intangible assets was based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the shorter of the respective lives of the agreement or the period of time the assets are expected to contribute to future cash flows. We amortize our finite-lived intangible assets based on patterns on which the respective economic benefits are expected to be realized.

(a) Acquisitions in 2012

(i) eScreen

On April 2, 2012, we acquired eScreen, Inc., or eScreen, headquartered in Overland Park, Kansas, a technology-enabled provider of employment screening solutions for hiring and maintaining healthier and more efficient workforces. The preliminary aggregate purchase price was approximately $316.6 million, which consisted of $272.1 million in cash and a contingent consideration obligation with an aggregate acquisition date fair value of $44.5 million. Included in our consolidated statements of operations for the three and six months ended June 30, 2012 is revenue totaling approximately $40.7 million related to eScreen. The operating results of eScreen are included in our professional diagnostics reporting unit and business segment. The amount allocated to goodwill from this acquisition is not deductible for tax purposes.

(ii) Other acquisitions in 2012

During the six months ended June 30, 2012, we acquired the following businesses for a preliminary aggregate purchase price of $32.8 million, which included cash payments totaling $31.8 million and a contingent consideration obligation with an aggregate acquisition date fair value of $1.0 million.

 

   

Reatrol Comercializacao De Produtos De Saude, LDA, subsequently renamed Alere Lda, located in Vila Nova de Gaia, Portugal, a distributor of products for drugs of abuse testing (Acquired January 2012)

 

   

Kullgren Holding AB, or Kullgren, located in Gensta, Sweden, a company that manufactures and distributes high quality intimacy and pharmaceutical products (Acquired February 2012)

 

   

Wellogic ME FZ-LLC, or Wellogic UAE, located in Dubai, United Arab Emirates, a company that provides development services to Alere Wellogic, LLC, which acquired the assets of Method Factory, Inc. (d/b/a Wellogic), or Wellogic, in December 2011 (Acquired February 2012)

 

   

certain assets, primarily including customer and patient lists, of AmMed Direct LLC, or AmMed, located near Nashville, Tennessee, a privately-owned mail-order provider of home-diabetes testing products and supplies (Acquired March 2012)

The operating results of Alere Lda and AmMed are included in our professional diagnostics reporting unit and business segment. The operating results of Wellogic UAE are included in our health management reporting unit and business segment. The operating results of Kullgren are included in our consumer diagnostics reporting unit and business segment.

Our consolidated statements of operations for the three and six months ended June 30, 2012 included revenue totaling approximately $10.6 million and $11.9 million, respectively, related to these businesses. Goodwill has been recognized in all of the acquisitions and amounted to approximately $10.2 million. Goodwill related to the acquisition of AmMed, which totaled $7.5 million, is deductible for tax purposes. The goodwill related to the remaining 2012 acquisitions is not deductible for tax purposes.

 

10


Table of Contents

A summary of the preliminary fair values of the net assets acquired for the acquisitions consummated during the six months ended June 30, 2012 is as follows (in thousands):

 

     eScreen      Other      Total  

Current assets (1)

   $ 32,858       $ 2,177       $ 35,035   

Property, plant and equipment

     5,664         1,552         7,216   

Goodwill

     165,832         10,228         176,060   

Intangible assets

     221,000         26,875         247,875   

Other non-current assets

     480         —           480   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     425,834         40,832         466,666   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     22,658         1,721         24,379   

Non-current liabilities

     86,558         6,330         92,888   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     109,216         8,051         117,267   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

     316,618         32,781         349,399   

Less:

        

Contingent consideration

     44,500         1,000         45,500   
  

 

 

    

 

 

    

 

 

 

Cash paid

   $ 272,118       $ 31,781       $ 303,899   
  

 

 

    

 

 

    

 

 

 

  

 

(1) Includes cash acquired of approximately $2.0 million.

The following are the intangible assets acquired and their respective fair values and weighted-average useful lives (dollars in thousands):

 

     eScreen      Other      Total      Weighted-
average
Useful Life
 

Core technology and patents

   $ 93,200       $ 8,403       $ 101,603         22.3 years   

Trademarks and trade names

     17,300         530         17,830         19.5 years   

Customer relationships

     95,500         17,942         113,442         20.4 years   

Other

     15,000         —           15,000         10.0 years   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 221,000       $ 26,875       $ 247,875      
  

 

 

    

 

 

    

 

 

    

(b) Acquisitions in 2011

During 2011, we acquired the following businesses for a preliminary aggregate purchase price of $787.4 million, which included cash payments totaling $603.7 million, 831,915 shares of our common stock with an acquisition date fair value of $16.2 million, a previously-held investment with a fair value totaling $113.2 million, contingent consideration obligations with an aggregate acquisition date fair value of $48.7 million, deferred purchase price consideration with an acquisition date fair value of $4.2 million and a fair value of $1.5 million in debt forgiveness.

 

   

90% interest in BioNote, Inc., or BioNote, headquartered in South Korea, a manufacturer of diagnostic products for the veterinary industry (Acquired January 2011). We previously owned a 10% interest in BioNote.

 

   

assets, including domain name, of Pregnancy.org, LLC, or Pregnancy.org, a U.S.-based company providing a website for preconception, pregnancy and newborn care content, tools and sharing (Acquired January 2011)

 

   

Home Telehealth Limited, subsequently renamed Alere Connected Health Limited, or Alere Connected Health, located in Cardiff, Wales, a company that focuses on delivering integrated, comprehensive services and programs to health and social care providers and insurers (Acquired February 2011)

 

   

Bioeasy Diagnostica Ltda., or Bioeasy, located in Belo Horizonte, Brazil, a company that markets and sells rapid diagnostic tests and systems for laboratory diagnosis, prevention and monitoring of immunological diseases and fertility (Acquired March 2011)

 

   

80.92% interest in Standing Stone, Inc., or Standing Stone, located in Westport, Connecticut, a company that focuses on disease state management by enhancing the quality of care provided to patients who require long-term therapy for chronic disease management (Acquired May 2011). During May 2012, we acquired the remaining 19.08% interest in Standing Stone.

 

11


Table of Contents
   

certain assets, rights, liabilities and properties of Drug Detection Devices, Inc., or 3DL, located in Alpharetta, Georgia, a distributor that promotes, markets, distributes and sells drugs of abuse diagnostic products, including consumables, point-of-care diagnostic kits and related products and services (Acquired July 2011)

 

   

Colibri Medical AB, or Colibri, located in Helsingborg, Sweden, a distributor of point-of-care drugs of abuse diagnostic products primarily to the Scandinavian marketplace (Acquired July 2011)

 

   

Laboratory Data Systems, Inc., or LDS, located in Tampa, Florida, a provider of healthcare software products, services, consulting and solutions (Acquired August 2011)

 

   

certain assets, liabilities and properties of Abatek Medical LLC, or Abatek, located in Dover, New Hampshire, a distributor that promotes, markets, distributes and sells drugs of abuse diagnostic products, including consumables, point-of-care diagnostic kits and related products and services (Acquired September 2011)

 

   

Forensics Limited, or ROAR, located in Worcestershire, United Kingdom, a company that provides forensic quality toxicology services across the United Kingdom (Acquired September 2011)

 

   

Mahsan Diagnostika Vertriebsgesellschaft mbH, or Mahsan, located in Reinbek, Germany, a distributor of in vitro diagnostic drugs of abuse products primarily to the German marketplace (Acquired October 2011)

 

   

Avee Laboratories Inc. and related companies, which we refer to collectively as Avee, located in Tampa, Florida, a privately-owned provider of drug testing services in the field of pain management (Acquired October 2011)

 

   

Medical Automation Systems Inc., or MAS, located in Charlottesville, Virginia, a provider of network-based software solutions for point-of-care testing (Acquired October 2011)

 

   

Axis-Shield plc, or Axis-Shield, located in Dundee, Scotland, a U.K. publicly traded company focused on the development and manufacture of in vitro diagnostic tests for use in clinical laboratories and at the point of care (Acquired November 2011)

 

   

certain assets and properties of 1 Medical Distribution, Inc., or 1 Medical, located in Worthington, Ohio, a distributor that promotes, markets, distributes and sells drugs of abuse diagnostic products, including consumables, point-of-care diagnostic kits and related products and services (Acquired November 2011)

 

   

Arriva Medical LLC, or Arriva, located in Coral Springs, Florida, a privately-owned mail-order provider of home-diabetes testing products and supplies (Acquired November 2011)

 

   

Wellogic, headquartered in Waltham, Massachusetts, a provider of software solutions designed to connect the healthcare community (Acquired December 2011)

The operating results of BioNote, Bioeasy, 3DL, Colibri, LDS, Abatek, ROAR, Mahsan, Avee, MAS, Axis-Shield, 1 Medical and Arriva are included in our professional diagnostics reporting unit and business segment. The operating results of Pregnancy.org, Alere Connected Health, Standing Stone and Wellogic are included in our health management reporting unit and business segment.

Our consolidated statements of operations for the three and six months ended June 30, 2011 included revenue totaling approximately $6.7 million and $9.7 million, respectively, related to these businesses. Goodwill has been recognized in all of the acquisitions, with the exception of 1 Medical, and amounted to approximately $363.0 million. Goodwill related to the acquisitions of Pregnancy.org, 3DL, Abatek, LDS and Wellogic, which totaled $32.3 million, is expected to be deductible for tax purposes. The goodwill related to the remaining 2011 acquisitions is not expected to be deductible for tax purposes.

 

12


Table of Contents

A summary of the preliminary fair values of the net assets acquired for the acquisitions consummated in 2011 is as follows (in thousands):

 

Current assets (1)

   $ 134,120   

Property, plant and equipment

     68,474   

Goodwill

     363,039   

Intangible assets

     416,624   

Other non-current assets

     27,679   
  

 

 

 

Total assets acquired

     1,009,936   
  

 

 

 

Current liabilities

     90,209   

Non-current liabilities

     129,810   
  

 

 

 

Total liabilities assumed

     220,019   
  

 

 

 

Less:

  

Fair value of non-controlling interest

     2,500   
  

 

 

 

Net assets acquired

     787,417   

Less:

  

Fair value of previously-held equity investment

     113,168   

Contingent consideration

     48,685   

Fair value of common stock issued

     16,183   

Loan forgiveness

     1,489   

Deferred purchase price consideration

     4,170   
  

 

 

 

Cash paid

   $ 603,722   
  

 

 

 

  

 

(1) Includes cash acquired of approximately $23.2 million.

The following are the intangible assets acquired and their respective fair values and weighted-average useful lives (dollars in thousands):

 

     Amount      Weighted-
Average
Useful Life
 

Core technology and patents

   $ 76,659         10.1 years   

Database

     64         3.0 years   

Trademarks and trade names

     14,197         10.1 years   

Customer relationships

     243,725         12.3 years   

Non-compete agreements

     8,306         5.3 years   

Software

     7,400         10.9 years   

Other

     7,767         15.6 years   

In-process research and development

     58,506         N/A   
  

 

 

    

Total intangible assets

   $ 416,624      
  

 

 

    

 

13


Table of Contents

(c) Restructuring Plans of Acquisitions

In connection with several of our acquisitions consummated during 2008 and prior, we initiated integration plans to consolidate and restructure certain functions and operations, including the costs associated with the termination of certain personnel of these acquired entities and the closure of certain of the acquired entities’ leased facilities. These costs have been recognized as liabilities assumed in connection with the acquisition of these entities and are subject to potential adjustments as certain exit activities are refined. The following table summarizes the liabilities established for exit activities related to these acquisitions and the total exit costs incurred since inception of each plan (in thousands):

 

     Balance at
December 31,
2011
     Adjustments
to the
Reserve (1)
    Amounts
Paid
    Balance at
June 30,
2012
     Exit Costs
Since
Inception
 

Acquisition of Matria Healthcare, Inc.:

            

Severance-related costs

   $ 68       $ —        $ —        $ 68       $ 13,664   

Facility costs

     395         (111     (71     213         4,674   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total costs for Matria Healthcare, Inc.

     463         (111     (71     281         18,338   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Acquisition of Cholestech Corporation:

            

Severance-related costs

     —           —          —          —           5,845   

Facility costs

     1,304         —          (112     1,192         2,732   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total costs for Cholestech Corporation

     1,304         —          (112     1,192         8,577   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total costs for all plans

   $ 1,767       $ (111   $ (183   $ 1,473       $ 26,915   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

  

 

(1) These adjustments resulted in a change in the aggregate purchase price and related goodwill for each related acquisition.

Of the total $1.5 million liability outstanding as of June 30, 2012, $0.5 million is included in accrued expenses and other current liabilities and $1.0 million is included in other long-term liabilities.

Although we believe our plans and estimated exit costs for our acquisitions are reasonable, actual spending for exit activities may differ from current estimated exit costs.

(8) Restructuring Plans

The following table sets forth aggregate restructuring charges recorded in our consolidated statements of operations for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Statement of Operations Caption

   2012      2011      2012      2011  

Cost of net revenue

   $ 25       $ 880       $ 989       $ 2,230   

Research and development

     14         416         638         434   

Sales and marketing

     200         1,862         1,027         2,874   

General and administrative

     1,126         7,140         4,239         10,959   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     1,365         10,298         6,893         16,497   

Interest expense, including amortization of original issue discounts and deferred financing costs

     50         73         110         122   

Equity earnings of unconsolidated entities, net of tax

     —           142         —           335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 1,415       $ 10,513       $ 7,003       $ 16,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

(a) 2012 Restructuring Plans

In 2012, management developed cost reduction efforts within our professional diagnostics business segment, including the integration of our businesses in Brazil. Additionally, management developed new plans to continue our efforts to reduce costs within our health management business segment. The following table summarizes the restructuring activities related to our 2012 restructuring plans for the three and six months ended June 30, 2012 (in thousands):

 

                                      
     Three Months Ended June 30, 2012  
     Professional
Diagnostics
     Health
Management
    Total  

Severance-related costs

   $ 345       $ 422      $ 767   

Facility and transition costs

     —           125        125   
  

 

 

    

 

 

   

 

 

 

Cash charges

     345         547        892   

Other non-cash charges

     —           (5     (5
  

 

 

    

 

 

   

 

 

 

Total charges

   $  345       $ 542      $ 887   
  

 

 

    

 

 

   

 

 

 

 

                                      
     Six Months Ended June 30, 2012  
     Professional
Diagnostics
    Health
Management
    Total  

Severance-related costs

   $ 2,318       $ 1,219       $ 3,537   

Facility and transition costs

     —          125        125   
  

 

 

   

 

 

   

 

 

 

Cash charges

     2,318        1,344        3,662   

Other non-cash charges

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Total charges

   $ 2,318      $     1,344      $  3,662   
  

 

 

   

 

 

   

 

 

 

We anticipate incurring approximately $0.2 million in additional costs under our 2012 restructuring plan related to our professional diagnostics business segment in Brazil and may develop additional plans over the remainder of 2012. As of June 30, 2012, $1.5 million in severance and exit costs remain unpaid.

(b) 2011 Restructuring Plans

In 2011, management executed a company-wide cost reduction plan, which impacted our corporate and other business segment, as well as the health management and professional diagnostics business segments. Management also developed plans within our professional diagnostics business segment to consolidate operating activities among certain of our European and Asia Pacific subsidiaries, including transferring the manufacturing of our Panbio products from Australia to our Standard Diagnostics facility in South Korea. Additionally, within our health management business segment, management executed plans to further reduce costs and improve efficiencies, as well as cease operations at our GeneCare Medical Genetics Center, Inc., or GeneCare, facility in Chapel Hill, North Carolina, and transfer the majority of our Quality Assured Services, Inc. operation in Orlando, Florida to our facility in Livermore, California. The following table summarizes the restructuring activities related to our 2011 restructuring plans for the three and six months ended June 30, 2012 and 2011 and since inception (in thousands):

Professional Diagnostics

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
     Since  
     2012      2011      2012      2011      Inception  

Severance-related costs

   $ 310       $ 2,564       $ 2,275       $ 3,601       $ 14,322   

Facility and transition costs

     85         —           734         —           1,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     395         2,564         3,009         3,601         15,417   

Fixed asset and inventory impairments

     —           92         134         616         793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 395       $ 2,656       $ 3,143       $ 4,217       $ 16,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

Health Management

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
     Since  
     2012     2011      2012     2011      Inception  

Severance-related costs

   $ —        $ 945       $ —        $ 2,192       $ 2,254   

Facility and transition costs

     (3     3,807         (89     3,807         6,252   

Other exit costs

     19        —           44        —           138   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cash charges

     16        4,752         (45     5,999         8,644   

Fixed asset and inventory impairments

     85        804         85        804         949   

Intangible asset impairments

     —          —           —          2,935         2,935   

Other non-cash charges

     —          812         —          812         761   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total charges

   $ 101      $ 6,368       $ 40      $ 10,550       $ 13,289   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Corporate and Other

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
     Since  
     2012      2011      2012      2011      Inception  

Severance-related costs

   $ 9       $ 1,048      $ 26       $ 1,048      $ 1,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     9         1,048        26         1,048        1,219   

Fixed asset and inventory impairments

     —           2        —           2        3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 9       $ 1,050      $ 26       $ 1,050      $ 1,222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We anticipate incurring approximately $2.9 million in additional costs under these plans related to our professional diagnostics business segment, primarily related to severance and facility exit costs, and may also incur impairment charges on assets as plans are finalized. We anticipate incurring approximately $1.0 million in additional costs under these plans related to our health management business segment, primarily related to facility lease obligations through 2014. As of June 30, 2012, $3.0 million in cash charges remain unpaid.

(c) 2010 and 2008 Restructuring Plans

In 2010, management developed several plans to reduce costs and improve efficiencies within our health management and professional diagnostics business segments. In May 2008, management decided to close our facility located in Bedford, England and initiated steps to cease operations at this facility and transition the manufacturing operations principally to our manufacturing facilities in Shanghai and Hangzhou, China. Additionally in 2008, management developed and initiated plans to transition the businesses of Cholestech to our San Diego, California facility. The following table summarizes the restructuring activities related to these restructuring plans for the three and six months ended June 30, 2012 and 2011 and since inception (in thousands):

Professional Diagnostics

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
     Since  
     2012      2011      2012      2011      Inception  

Severance-related costs

   $ —         $ 43       $ —         $ 78       $ 8,897   

Facility and transition costs

     76         181         150         563         8,462   

Other exit costs

     17         37         36         46         4,454   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     93         261         186         687         21,813   

Fixed asset and inventory impairments

     —           —           —           —           10,309   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 93       $ 261       $ 186       $ 687       $ 32,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

Health Management

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
     Since  
     2012     2011      2012     2011      Inception  

Severance-related costs

   $ —        $ —         $ —        $ —         $ 4,647   

Facility and transition costs

     (84     —           (84     39         2,392   

Other exit costs

     14        36         30        76         318   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cash charges

     (70     36         (54     115         7,357   

Fixed asset and inventory impairments

     —          —           —          —           165   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total charges

   $ (70   $ 36       $ (54   $ 115       $ 7,522   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

We anticipate incurring an additional $1.6 million in facility lease obligation charges related to the Cholestech plan through 2017 and do not anticipate incurring significant additional charges under the other plans. As of June 30, 2012, $1.2 million in facility related costs remain unpaid.

In addition to the restructuring charges discussed above, certain charges associated with the Bedford facility closure were borne by SPD, our 50/50 joint venture with the Procter & Gamble Company, or P&G. Of the restructuring charges recorded by SPD, 50% has been included in equity earnings of unconsolidated entities, net of tax, in our consolidated statement of operations. The following table summarizes the 50% portion of the restructuring charges borne by SPD and included in equity earnings of unconsolidated entities, net of tax, for the three and six months ended June 30, 2011 and since inception (in thousands):

 

     Three Months Ended
June 30, 2011
     Six Months Ended
June 30, 2011
     Since
Inception
 

Severance-related costs

   $ 19       $ 30       $ 5,797   

Facility and transition costs

     123         233         5,396   

Other exit costs

     —           —           283   
  

 

 

    

 

 

    

 

 

 

Cash charges

     142         263         11,476   

Fixed asset and inventory impairments

     —           72         4,635   
  

 

 

    

 

 

    

 

 

 

Total charges included in equity earnings of unconsolidated entities, net of tax

   $ 142       $ 335       $ 16,111   
  

 

 

    

 

 

    

 

 

 

We do not anticipate incurring significant additional restructuring charges under this plan.

(e) Restructuring Reserves

The following table summarizes our restructuring reserves related to the plans described above, of which $4.3 million is included in accrued expenses and other current liabilities and $1.4 million is included in other long-term liabilities on our consolidated balance sheets (in thousands):

 

     Severance-
related
Costs
    Facility and
Transition
Costs
    Other Exit
Costs
    Total  

Balance, December 31, 2011

   $ 3,380      $ 5,215      $ 593      $ 9,188   

Cash charges

     5,838        836        110        6,784   

Payments

     (6,827     (3,030     (122     (9,979

Currency adjustments

     (248     (3     —          (251
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 2,143      $ 3,018      $ 581      $ 5,742   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

(9) Long-term Debt

We had the following long-term debt balances outstanding (in thousands):

 

     June 30, 2012     December 31, 2011  

A term loans (1)

   $ 901,563      $ 917,188   

B term loans

     918,063        922,688   

Incremental B-1 term loans

     248,750        250,000   

Incremental B-2 term loans

     197,587        —     

Secured credit facility revolving line-of-credit

     47,500        —     

3% Senior subordinated convertible notes

     150,000        150,000   

9% Senior subordinated notes

     392,063        391,233   

7.875% Senior notes

     246,081        245,621   

8.625% Senior subordinated notes

     400,000        400,000   

Other lines-of-credit

     12,416        19,603   

Other

     29,849        32,210   
  

 

 

   

 

 

 
     3,543,872        3,328,543   

Less: Current portion

     (54,822     (61,092
  

 

 

   

 

 

 
   $ 3,489,050      $ 3,267,451   
  

 

 

   

 

 

 

  

 

(1) Includes “A” term loans and “Delayed-Draw” term loans under our secured credit facility.

In connection with our significant long-term debt issuances, we recorded interest expense, including amortization and write-offs of deferred financing costs and original issue discounts, in our consolidated statements of operations for the three and six months ended June 30, 2012 and 2011, respectively, as follows (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012      2011  

Secured credit facility(1)

   $ 27,097       $ 220      $ 49,948       $ 220   

Former secured credit facility(2)

     —           42,203 (3)      —           54,257 (3) 

3% Senior subordinated convertible notes

     1,246         1,250        2,492         2,496   

9% Senior subordinated notes

     10,363         9,738        20,717         19,468   

7.875% Senior notes

     5,755         5,369        11,513         10,734   

8.625% Senior subordinated notes

     9,275         8,919        18,549         17,827   
  

 

 

    

 

 

   

 

 

    

 

 

 
   $ 53,736       $ 67,699      $ 103,219       $ 105,002   
  

 

 

    

 

 

   

 

 

    

 

 

 

  

 

(1) Includes “A” term loans, including the “Delayed-Draw” term loans; “B” term loans; “Incremental B-1” term loans; “Incremental B-2” term loans; and revolving line of credit loans. For the three and six months ended June 30, 2012, the amount includes $1.3 million and $2.6 million, respectively, related to the amortization of fees paid for certain debt modifications.
(2) Includes loans under First Lien Credit Agreement and Second Lien Credit Agreement.
(3) Amount includes approximately $29.9 million recorded in connection with the termination of our former secured credit facility and related interest rate swap agreement, coupled with the amortization of fees paid for certain debt modifications.

The following summarizes the material terms of our secured credit facility that have changed significantly since December 31, 2011. All other terms of our secured credit facility as described in our Annual Report on Form 10-K for the year ended December 31, 2011, but omitted below, have not changed since that date.

On March 28, 2012, we and certain of our subsidiaries entered into a third amendment to the credit agreement that governs our secured credit facility, or the credit agreement. The third amendment provides for an additional term loan facility consisting of “Incremental B-2” term loans in the aggregate principal amount of $200.0 million and thereby increases the total amount of the credit available to us under the secured credit facility to $2.55 billion in aggregate principal amount, consisting of term loans in the aggregate principal amount of $2.3 billion and, subject to our continued compliance with the credit agreement, a $250.0 million revolving line of credit; the revolving line of credit continues to include a sublimit for the issuance of letters of credit. On March 28, 2012, we borrowed the entire $200.0 million principal amount of the “Incremental B-2” term loans.

 

18


Table of Contents

Under the terms of the third amendment, we must repay the principal amount of the “Incremental B-2” term loans in twenty consecutive quarterly installments, beginning on June 30, 2012 (which installments we have paid in full) and continuing through March 31, 2017, in the amount of $0.5 million each, and a final installment on June 30, 2017 in the amount of $190.0 million; notwithstanding the foregoing, and subject to certain exceptions provided for in the credit agreement, in the event that any of our existing 3% senior subordinated convertible notes, 9% senior subordinated notes or 7.875% senior notes remain outstanding on the date that is six months prior to the relevant maturity date thereof, respectively, then the “Incremental B-2” term loans (as well as all other term loans and all revolving credit loans under the secured credit facility) shall instead mature in full on the relevant prior date. Otherwise, the terms and conditions, including the interest rates, that apply to the “Incremental B-2” term loans under the credit agreement are substantially the same as the terms and conditions, including the interest rates, that apply to the existing “B” term loans under the credit agreement.

(10) Derivative Financial Instruments

We manage our economic and transaction exposure to certain market-based risks through the use of derivative instruments. Our objective for holding derivative instruments has been to reduce volatility of net earnings and cash flows associated with changes in interest rates and foreign currency exchange rates. We do not hold or issue derivative financial instruments for speculative purposes.

(a) Interest Rate Risk

We used interest rate swap contracts in the management of our interest rate exposure related to our former secured credit facility. On June 30, 2011, we entered into a new secured credit facility and, in connection therewith, repaid in full all outstanding indebtedness under and terminated our former secured credit facility and related interest rate swaps.

(b) Foreign Currency Risk

In connection with our acquisition of Axis-Shield, we acquired a number of foreign currency forward contracts. The specific risk hedged in these contracts is the undiscounted foreign currency spot rate risk on forecasted foreign currency revenue. As of June 30, 2012 and December 31, 2011, the notional value of these contracts was approximately $1.9 million and CHF 1.2 million and $16.6 million and CHF 5.4 million, respectively. We report the effective portion of the gain or loss on a cash flow hedge as a component of other comprehensive income, and it is subsequently reclassified into net earnings in the period in which the hedged transaction affects net earnings or the forecasted transaction is no longer probable of occurring.

 

19


Table of Contents

The following tables summarize the fair value of our derivative instruments and the effect of derivative instruments on/in our accompanying consolidated balance sheets and consolidated statements of operations (in thousands):

 

                                            

Derivative Instruments

  

Balance Sheet Caption

   Fair Value at
June  30,
2012
       Fair Value at
December  31,
2011
 

Foreign currency forward contracts

  

Accrued expenses and other current liabilities

   $                 10         $             447   
     

 

 

      

 

 

 

 

Derivative Instruments

  

Location of Gain (Loss) Recognized in Income

   Amount of
Loss  Recognized
During the Three
Months Ended
June 30, 2012
       Amount of
Gain  Recognized
During the Three
Months Ended
June 30, 2011
 

Foreign exchange forward contract

   Other comprehensive income (loss)    $ (652      $ 8   

Interest rate swap contracts

   Other comprehensive income (loss)      —             224   
     

 

 

      

 

 

 

Total gain (loss)

   Other comprehensive income (loss)    $ (652      $   232   
     

 

 

      

 

 

 

 

Derivative Instruments

  

Location of Gain Recognized in Income

   Amount of
Gain  Recognized
  During the Six  
Months Ended
June 30, 2012
       Amount of
Gain  Recognized
  During the Six  
Months Ended
June 30, 2011
 

Foreign exchange forward contract

   Other comprehensive income (loss)    $ 455         $ 8   

Interest rate swap contracts

   Other comprehensive income (loss)      —             1,841   
     

 

 

      

 

 

 

Total gain

   Other comprehensive income (loss)    $   455         $  1,849   
     

 

 

      

 

 

 

(11) Fair Value Measurements

We apply fair value measurement accounting to value our financial assets and liabilities. Fair value measurement accounting provides a framework for measuring fair value under U.S. GAAP and requires expanded disclosures regarding fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

Described below are the three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities include investments in marketable securities.

Level 2 Observable inputs other than Level 1 prices, 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. Our Level 2 assets and liabilities include foreign exchange forward contracts.

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. The fair value of the contingent consideration obligations related to our acquisitions is valued using Level 3 inputs.

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

Description

   June 30, 
2012
     Quoted Prices in
Active  Markets
(Level 1)
     Significant Other
Observable  Inputs
(Level 2)
     Unobservable Inputs
(Level  3)
 

Assets:

           

Marketable securities

   $ 3,903       $ 3,903       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 3,903       $ 3,903       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign exchange forward contracts (1)

   $ 10       $ —         $ 10       $ —     

Contingent consideration obligations (2)

     173,527         —           —           173,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 173,537       $ —         $ 10       $ 173,527   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents
                                                                                                       

Description

  December 31,
2011
    Quoted Prices in
Active  Markets
(Level 1)
    Significant Other
Observable  Inputs
(Level 2)
    Unobservable Inputs
(Level  3)
 

Assets:

       

Marketable securities

  $ 3,340      $ 3,340      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 3,340      $ 3,340      $ —        $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

Foreign exchange forward contracts (1)

  $ 447      $ —        $ 447      $ —     

Contingent consideration obligations (2)

    140,047        —          —          140,047   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $ 140,494      $ —        $ 447      $ 140,047   
 

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) The fair value of the foreign exchange forward contracts was measured using readily observable market inputs, such as quotations on forward foreign exchange points and foreign interest rates.
(2) The fair value measurements for our contingent consideration obligations relate to acquisitions completed after January 1, 2009 and are valued using Level 3 inputs. We determine the fair value of the contingent consideration obligations based on a probability-weighted approach derived from earn-out criteria estimates and a probability assessment with respect to the likelihood of achieving the various earn-out criteria. The measurement is based upon significant inputs not observable in the market. Significant increases (decreases) in any of these inputs in isolation could result in significantly higher (lower) fair value measurement. Changes in the fair value of these contingent consideration obligations are recorded as income or expense within operating income in our consolidated statements of operations.

Changes in the fair value of our Level 3 contingent consideration obligations during the six months ended June 30, 2012 were as follows (in thousands):

 

Fair value of contingent consideration obligations, January 1, 2012

   $ 140,047   

Acquisition date fair value of contingent consideration obligations recorded

     45,500   

Foreign currency

     89   

Payments

     (10,472

Present value accretion

     9,052   

Adjustments, net (income) expense

     (10,689
  

 

 

 

Fair value of contingent consideration obligations, June 30, 2012

   $ 173,527   
  

 

 

 

At June 30, 2012 and December 31, 2011, the carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and other current liabilities approximated their estimated fair values.

The carrying amount and estimated fair value of our long-term debt were $3.5 billion at June 30, 2012. The carrying amount and estimated fair value of our long-term debt were $3.3 billion at December 31, 2011. The estimated fair value of our long-term debt was determined using market sources that were derived from available market information (Level 2 in the fair value hierarchy) and may not be representative of actual values that could have been or will be realized in the future.

(12) Defined Benefit Pension Plan

Our subsidiary in England, Unipath Ltd., has a defined benefit pension plan established for certain of its employees. The net periodic benefit costs are as follows (in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012     2011  

Service cost

   $ —        $ —        $ —        $ —     

Interest cost

     199        205        397        407   

Expected return on plan assets

     (153     (157     (305     (312

Amortization of prior service costs

     104        108        208        214   

Realized losses

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 150      $ 156      $ 300      $ 309   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

(13) Financial Information by Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our reportable operating segments are Professional Diagnostics, Health Management, Consumer Diagnostics and Corporate and Other. Our operating results include license and royalty revenue which are allocated to Professional Diagnostics and Consumer Diagnostics on the basis of the original license or royalty agreement.

We evaluate performance of our operating segments based on revenue and operating income (loss). Segment information for the three and six months ended June 30, 2012 and 2011 is as follows (in thousands):

 

                                                                                         
     Professional
Diagnostics
     Health
Management
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Three Months Ended June 30, 2012:

            

Net revenue

   $ 540,110       $ 138,590      $ 21,817       $ —        $ 700,517   

Operating income (loss)

   $ 63,251       $ (12,666   $ 2,699       $ (18,930   $ 34,354   

Depreciation and amortization

   $ 83,413       $ 24,065      $ 1,178       $ 244      $ 108,900   

Restructuring charge

   $ 817       $ 539      $ —         $ 9      $ 1,365   

Stock-based compensation

   $ —         $ —        $ —         $ 4,368      $ 4,368   

Three Months Ended June 30, 2011:

            

Net revenue

   $ 409,074       $ 135,572      $ 22,539       $ —        $ 567,185   

Operating income (loss)

   $ 49,304       $ (15,154   $ 1,902       $ (19,898   $ 16,154   

Depreciation and amortization

   $ 72,343       $ 27,329      $ 1,320       $ 149      $ 101,141   

Restructuring charge

   $ 2,880       $ 6,368      $ —         $ 1,050      $ 10,298   

Stock-based compensation

   $ —         $ —        $ —         $ 6,181      $ 6,181   

Six Months Ended June 30, 2012:

            

Net revenue

   $ 1,058,467       $ 269,374      $ 43,805       $ —        $ 1,371,646   

Operating income (loss)

   $ 133,430       $ (32,022   $ 3,064       $ (35,060   $ 69,412   

Depreciation and amortization

   $ 160,881       $ 47,839      $ 2,437       $ 465      $ 211,622   

Non-cash charge associated with acquired inventory

   $ 4,681       $ —        $ —         $ —        $ 4,681   

Restructuring charge

   $ 5,611       $ 1,256      $ —         $ 26     $ 6,893   

Stock-based compensation

   $ —         $ —        $ —         $ 8,242      $ 8,242   

Six Months Ended June 30, 2011:

            

Net revenue

   $ 824,886       $ 278,635      $ 46,128       $ —        $ 1,149,649   

Operating income (loss)

   $ 109,566       $ (27,087   $ 5,263       $ (40,683   $ 47,059   

Depreciation and amortization

   $ 137,592       $ 55,643      $ 2,579       $ 302      $ 196,116   

Restructuring charge

   $ 4,858       $ 10,589      $ —         $ 1,050      $ 16,497   

Stock-based compensation

   $ —         $ —        $ —         $ 11,989      $ 11,989   

Assets:

            

As of June 30, 2012

   $ 5,774,526       $ 545,559      $ 185,554       $ 421,816      $ 6,927,455   

As of December 31, 2011

   $ 5,826,756       $ 624,305      $ 199,422       $ 22,218      $ 6,672,701   

The following tables summarize our net revenue from the professional diagnostics and health management reporting segments by groups of similar products and services for the three and six months ended June 30, 2012 and 2011 (in thousands):

Professional Diagnostics Segment

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Cardiology

   $ 125,597       $ 132,854       $ 264,423       $ 262,709   

Infectious disease

     137,821         122,494         288,837         262,920   

Toxicology

     159,922         88,833         281,662         174,337   

Diabetes

     36,797         —           64,958         —     

Other

     76,736         60,034         152,442         114,034   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net product sales and services revenue

     536,873         404,215         1,052,322         814,000   

License and royalty revenue

     3,237         4,859         6,145         10,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

Professional diagnostics net revenue

   $ 540,110       $ 409,074       $ 1,058,467       $ 824,886   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

Health Management Segment

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Disease and case management

   $ 54,512       $ 61,222       $ 107,894       $ 122,677   

Wellness

     29,567         26,137         56,591         55,942   

Women’s & children’s health

     31,313         28,466         61,084         57,041   

Patient self-testing services

     23,198         19,747         43,805         42,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

Health management net revenue

   $ 138,590       $ 135,572       $ 269,374       $ 278,635   
  

 

 

    

 

 

    

 

 

    

 

 

 

(14) Related Party Transactions

In May 2007, we completed the formation of SPD, our 50/50 joint venture with P&G, for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiology, diabetes and oral care fields. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting.

We had a net receivable from the joint venture of $3.7 million and $2.5 million as of June 30, 2012 and December 31, 2011, respectively. Included in the $3.7 million receivable balance as of June 30, 2012 is approximately $1.6 million of costs incurred in connection with our 2008 SPD-related restructuring plans. Included in the $2.5 million receivable balance as of December 31, 2011 is approximately $1.5 million of costs incurred in connection with our 2008 SPD-related restructuring plans. We have also recorded a long-term receivable totaling approximately $14.1 million and $15.5 million as of June 30, 2012 and December 31, 2011, respectively, related to the 2008 SPD-related restructuring plans. Additionally, customer receivables associated with revenue earned after the joint venture was completed have been classified as other receivables within prepaid and other current assets on our accompanying consolidated balance sheets in the amount of $7.0 million and $7.3 million as of June 30, 2012 and December 31, 2011, respectively. In connection with the joint venture arrangement, the joint venture bears the collection risk associated with these receivables. Sales to the joint venture under our manufacturing agreement totaled $14.5 million and $31.6 million during the three and six months ended June 30, 2012, respectively, and $16.3 million and $32.6 million during the three and six months ended June 30, 2011, respectively. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $0.3 million and $0.6 million during the three and six months ended June 30, 2012, respectively, and $0.3 million and $0.6 million during the three and six months ended June 30, 2011, respectively. Sales under our manufacturing agreement and long-term services agreement are included in net product sales and services revenue, respectively, in our accompanying consolidated statements of operations.

Under the terms of our product supply agreement, the joint venture purchases products from our manufacturing facilities in the U.K. and China. The joint venture in turn sells a portion of those tests back to us for final assembly and packaging. Once packaged, the tests are sold to P&G for distribution to third-party customers in North America. As a result of these related transactions, we have recorded $6.4 million and $8.9 million of trade receivables which are included in accounts receivable on our accompanying consolidated balance sheets as of June 30, 2012 and December 31, 2011, respectively, and $17.6 million and $19.3 million of trade accounts payable which are included in accounts payable on our accompanying consolidated balance sheets as of June 30, 2012 and December 31, 2011, respectively. During the six months ended June 30, 2012, we received $6.1 million in cash from SPD as a return of capital.

(15) Material Contingencies and Legal Settlements

(a) Legal Proceedings

We are not a party to any pending legal proceedings that we currently believe could have a material adverse impact on our sales, operations or financial performance. However, because of the nature of our business, we may be subject at any particular time to lawsuits or other claims arising in the ordinary course of our business, and we expect that this will continue to be the case in the future.

 

23


Table of Contents

(b) Acquisition-related Contingent Consideration Obligations

The following summarizes our principal contractual acquisition-related contingent consideration obligations as of June 30, 2012 that have changed significantly since December 31, 2011. Other acquisition-related contingent consideration obligations that were presented in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2011, but which are omitted below, represent those that have not changed significantly since that date.

 

   

AmMed

With respect to AmMed, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain operational targets within six months of the acquisition date. The maximum amount of the earn-out payment is $2.0 million.

 

   

Capital Toxicology

The initial terms of the acquisition agreement for Capital Toxicology, LLC, provided for an earn-out calculated based on the amount, if any, by which EBITDA derived from the acquired business exceeded specified targets during each of the calendar years 2011 and 2012. A portion of the earn-out for the 2011 calendar year totaling approximately $2.1 million was earned and accrued as of December 31, 2011. During the first quarter of 2012, the acquisition agreement was modified to base the earn-out on the excess of actual cash collections for 2011 sales over 2011 expenses rather than EBITDA. This new criteria resulted in an incremental $2.9 million accrual related to the earn-out for the 2011 calendar year based on cash collections through March 31, 2011. $4.1 million was paid in respect of the earn-out for the 2011 calendar year during the second quarter of 2012. An additional payment may be made based on incremental cash collections for 2011 sales received prior to August 31, 2012. The maximum potential remaining amount of the earn-out payments for both the 2011 and 2012 calendar years is approximately $11.9 million.

 

   

eScreen

With respect to eScreen, the terms of the acquisition agreement require us to pay earn-outs upon successfully meeting certain financial targets during calendar years 2012 through 2014. The maximum amount of the earn-out payments is $70.0 million.

 

   

Standing Stone

With respect to Standing Stone, the terms of the acquisition agreement require us to pay earn-outs and employee bonuses upon successfully meeting certain operational, product development and revenue targets during the period from the date of acquisition through calendar year 2013. A cash earn-out payment totaling approximately $5.5 million and employee bonus payments totaling approximately $0.3 million for the achievement of the first two milestones were made during the second quarter of 2012. The maximum remaining amount of the earn-out payments is approximately $5.5 million. The maximum remaining amount of the employee bonuses is $0.3 million.

(c) Acquisition-related Obligations

 

   

Standing Stone

Under the terms of the acquisition agreement we acquired the remaining 19.08% of the issued and outstanding capital stock of Standing Stone, the holders of which were officers and employees of Standing Stone, in May 2012 for an aggregate purchase price of approximately $2.6 million.

(d) FDA Inspection and Office of Inspector General Subpoena

In March 2012, the Food & Drug Administration, or FDA, began an inspection of our San Diego facility related to our Alere Triage products. During the inspection, the FDA expressed concern about the alignment between certain aspects of our labeling for the Alere Triage products and the quality control release specifications that had been in effect prior to the inspection. As a result and as previously disclosed, we implemented two recalls of Alere Triage products during the second quarter of 2012. We also implemented interim quality control release specifications and agreed to implement final, tighter quality control release specifications by September 30, 2012. In June 2012, the FDA closed the inspection, and we received inspectional observations on FDA Form 483. We have provided the FDA with a written response to the 483 that describes proposed actions for resolving each of the inspectional observations. We have already completed a number of these actions and are working to implement the others. In addition, we are in the process of implementing product and process changes which we hope will ultimately improve manufacturing yield rates under both the interim release specifications, which we have been shipping against since early April 2012, and the final release specifications, which have not yet been determined. Because our average manufacturing yields under the interim release standards for certain Alere Triage meter-based products, most notably our cardiac panel and toxicology tests, have generally been lower than our average yields under previous standards, we have increased production substantially in order to increase the available supply of those products. These efforts have increased our manufacturing costs, and we expect that our costs will continue to increase as we prepare to meet the final release specifications due to be implemented by September 30, 2012. We expect to continue to experience supply constraints and increased manufacturing costs during the remainder of 2012 despite our increases in production.

 

24


Table of Contents

Also, in May 2012, we received a subpoena from the Office of Inspector General of the Department of Health and Human Services. The subpoena seeks documents relating primarily to the quality control testing and performance characteristics of Alere Triage products. We are cooperating with the government and are in the process of responding to the subpoena.

We are unable to predict when these matters will be resolved or what action, if any, the government will take in connection with these matters. Also, except for anticipated increases in manufacturing costs and decreased profitability for our Alere Triage products, we are unable to predict what impact, if any, these matters or ensuing proceedings, if any, will have on our financial condition, results of operations or cash flows.

(16) Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that we adopt as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position, results of operations, comprehensive income or cash flows upon adoption.

Recently Adopted Standards

Effective January 1, 2012, we adopted Accounting Standards Update, or ASU, No. 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing for Goodwill Impairment, or ASU 2011-08. ASU 2011-08 allows an entity the option to first assess qualitative factors to determine whether it is necessary to perform the current two-step impairment test. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative two-step impairment test is required; otherwise, no further testing is required. This update does not change the current guidance for testing other indefinite-lived intangible assets for impairment. The adoption of this standard did not have an impact on our financial position, results of operations, comprehensive income or cash flows.

Effective January 1, 2012, we adopted ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, or ASU 2011-05. ASU 2011-05 (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. This update does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented. Effective January 1, 2012, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, or ASU 2011-12. As these accounting standards only require enhanced disclosure, the adoption of these standards did not impact our financial position, results of operations, comprehensive income or cash flows.

Effective January 1, 2012, we adopted ASU No. 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, or ASU 2011-04. ASU 2011-04 provides common requirements for measuring fair value and disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards.

(17) Equity Investments

We account for the results from our equity investments under the equity method of accounting in accordance with ASC 323, Investments — Equity Method and Joint Ventures, based on the percentage of our ownership interest in the business. Our equity investments primarily include the following:

(a) SPD

In May 2007, we completed the formation of SPD, our 50/50 joint venture with P&G for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiology, diabetes and oral care fields. Upon completion of the arrangement to form SPD, we ceased to consolidate the operating results of our consumer diagnostics business related to SPD. We recorded earnings of $3.3 million and $6.1 million during the three and six months ended June 30, 2012, respectively, and we recorded losses of $0.9 million and $0.5 million during the three and six months ended June 30, 2011, respectively, in equity earnings of unconsolidated entities, net of tax, in our accompanying consolidated statements of operations, which represented our 50% share of SPD’s net income (losses) for the respective periods.

 

25


Table of Contents

(b) TechLab

In May 2006, we acquired 49% of TechLab, Inc., or TechLab, a privately-held developer, manufacturer and distributor of rapid non-invasive intestinal diagnostics tests in the areas of intestinal inflammation, antibiotic-associated diarrhea and parasitology. We recorded earnings of $0.5 million and $1.2 million during the three and six months ended June 30, 2012, respectively, and we recorded earnings of $0.6 million and $1.2 million during the three and six months ended June 30, 2011, respectively, in equity earnings of unconsolidated entities, net of tax, in our accompanying consolidated statements of operations, which represented our minority share of TechLab’s net income for the respective periods.

Summarized financial information for SPD and TechLab on a combined basis is as follows (in thousands):

Combined Condensed Results of Operations:

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012      2011     2012      2011  

Net revenue

   $ 58,308       $ 61,088      $ 110,833       $ 116,642   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross profit

   $ 35,585       $ 36,900      $ 70,764       $ 72,365   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income (loss) after taxes

   $ 7,691       $ (550   $ 14,684       $ 1,284   
  

 

 

    

 

 

   

 

 

    

 

 

 

Combined Condensed Balance Sheets:

 

                                                             
     June 30, 2012      December 31, 2011  

Current assets

   $ 81,312       $ 84,376   

Non-current assets

     39,651         37,659   
  

 

 

    

 

 

 

Total assets

   $ 120,963       $ 122,035   
  

 

 

    

 

 

 

Current liabilities

   $ 47,344       $ 49,453   

Non-current liabilities

     7,091         6,326   
  

 

 

    

 

 

 

Total liabilities

   $ 54,435       $ 55,779   
  

 

 

    

 

 

 

(18) Guarantor Financial Information

Our 9% senior subordinated notes due 2016, our 7.875% senior notes due 2016, and our 8.625% senior subordinated notes due 2018 are guaranteed by certain of our consolidated wholly owned subsidiaries, or the Guarantor Subsidiaries. The guarantees are full and unconditional and joint and several. The following supplemental financial information sets forth, on a consolidating basis, balance sheets as of June 30, 2012 and December 31, 2011, the related statements of operations and statements of comprehensive income for each of the three and six months ended June 30, 2012 and 2011, respectively, and the statements of cash flows for the six months ended June 30, 2012 and 2011, for Alere Inc., the Guarantor Subsidiaries and our other subsidiaries, or the Non-Guarantor Subsidiaries. The supplemental financial information reflects the investments of Alere Inc. and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.

We have extensive transactions and relationships between various members of the consolidated group. These transactions and relationships include intercompany pricing agreements, intellectual property royalty agreements and general and administrative and research and development cost-sharing agreements. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties.

For comparative purposes, certain amounts for prior periods have been reclassified to conform to the current period classification.

 

26


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 202,249      $ 290,714      $ (29,538   $ 463,425   

Services revenue

     —          152,856        80,999        —          233,855   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          355,105        371,713        (29,538     697,280   

License and royalty revenue

     —          9,536        2,656        (8,955     3,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          364,641        374,369        (38,493     700,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     857        94,152        156,513        (29,024     222,498   

Cost of services revenue

     —          79,691        40,868        —          120,559   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     857        173,843        197,381        (29,024     343,057   

Cost of license and royalty revenue

     —          —          10,807        (8,955     1,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     857        173,843        208,188        (37,979     344,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (857     190,798        166,181        (514     355,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     5,873        17,186        17,388        —          40,447   

Sales and marketing

     819        77,219        81,284        —          159,322   

General and administrative

     14,567        46,670        60,248        —          121,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,259        141,075        158,920        —          321,254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (22,116     49,723        7,261        (514     34,354   

Interest expense, including amortization of original issue discounts and deferred financing costs

     (53,969     (10,879     (3,883     13,200        (55,531

Other income (expense), net

     3,988        15,837        (2,814     (13,200     3,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision (benefit) for income taxes

     (72,097     54,681        564        (514     (17,366

Provision (benefit) for income taxes

     (19,750     23,233        (3,855     (117     (489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity earnings of unconsolidated entities, net of tax

     (52,347     31,448        4,419        (397     (16,877

Equity in earnings of subsidiaries, net of tax

     38,982        (185     —          (38,797     —     

Equity earnings of unconsolidated entities, net of tax

     486        —          3,502        10        3,998   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (12,879     31,263        7,921        (39,184     (12,879

Less: Net income attributable to non-controlling interests

     —          —          36        —          36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Alere Inc. and Subsidiaries

     (12,879     31,263        7,885        (39,184     (12,915

Preferred stock dividends

     (5,279     —          —          —          (5,279
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (18,158   $ 31,263      $ 7,885      $ (39,184   $ (18,194
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2011

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 216,256      $ 214,803      $ (32,254   $ 398,805   

Services revenue

     —          147,007        16,568        —          163,575   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          363,263        231,371        (32,254     562,380   

License and royalty revenue

     —          2,746        3,920        (1,861     4,805   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          366,009        235,291        (34,115     567,185   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     659        101,244        120,279        (31,849     190,333   

Cost of services revenue

     —          76,100        6,395        —          82,495   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     659        177,344        126,674        (31,849     272,828   

Cost of license and royalty revenue

     —          —          3,490        (1,861     1,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     659        177,344        130,164        (33,710     274,457   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (659     188,665        105,127        (405     292,728   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     5,237        15,889        20,222        —          41,348   

Sales and marketing

     298        83,954        56,136        —          140,388   

General and administrative

     13,737        59,626        21,475        —          94,838   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,272        159,469        97,833        —          276,574   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (19,931     29,196        7,294        (405     16,154   

Interest expense, including amortization of original issue discounts and deferred financing costs

     (35,845     (46,875     (3,863     18,021        (68,562

Other income (expense), net

     2,341        12,634        3,483        (18,021     437   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before provision (benefit) for income taxes

     (53,435     (5,045     6,914        (405     (51,971

Provision (benefit) for income taxes

     (44,788     (81     2,133        —          (42,736
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before equity earnings (losses) of unconsolidated entities, net of tax

     (8,647     (4,964     4,781        (405     (9,235

Equity in earnings of subsidiaries, net of tax

     (1,484     655        —          829        —     

Equity earnings (losses) of unconsolidated entities, net of tax

     689        —          (842     (54     (207
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (9,442     (4,309     3,939        370        (9,442

Less: Net loss attributable to non-controlling interests

     —          —          (40     —          (40
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Alere Inc. and Subsidiaries

     (9,442     (4,309     3,979        370        (9,402

Preferred stock dividends

     (5,515     —          —          —          (5,515

Preferred stock repurchase

     10,248        —          —          —          10,248   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (4,709   $ (4,309   $ 3,979      $ 370      $ (4,669
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 421,465      $ 580,514      $ (62,767   $ 939,212   

Services revenue

     —          298,989        127,300        —          426,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          720,454        707,814        (62,767     1,365,501   

License and royalty revenue

     —          13,765        5,277        (12,897     6,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          734,219        713,091        (75,664     1,371,646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     1,707        198,073        310,392        (62,120     448,052   

Cost of services revenue

     —          157,394        54,025        —          211,419   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     1,707        355,467        364,417        (62,120     659,471   

Cost of license and royalty revenue

     —          —          16,393        (12,897     3,496   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     1,707        355,467        380,810        (75,017     662,967   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (1,707     378,752        332,281        (647     708,679   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     11,069        33,762        34,616        —          79,447   

Sales and marketing

     1,876        154,778        161,246        —          317,900   

General and administrative

     26,198        104,971        110,751        —          241,920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     39,143        293,511        306,613        —          639,267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (40,850     85,241        25,668        (647     69,412   

Interest expense, including amortization of original issue discounts and deferred financing costs

     (103,685     (21,885     (7,198     26,510        (106,258

Other income (expense), net

     (4,086     25,265        20,973        (26,510     15,642   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision (benefit) for income taxes

     (148,621     88,621        39,443        (647     (21,204

Provision (benefit) for income taxes

     (46,748     35,538        9,312        (46     (1,944
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before equity earnings of unconsolidated entities, net of tax

     (101,873     53,083        30,131        (601     (19,260

Equity in earnings of subsidiaries, net of tax

     88,877        (533     —          (88,344     —     

Equity earnings of unconsolidated entities, net of tax

     1,146        —          6,238        26        7,410   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (11,850     52,550        36,369        (88,919     (11,850

Less: Net loss attributable to non-controlling interests