FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

¨ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

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 October 31, 2013 was 81,881,428.

 

 

 


Table of Contents

ALERE INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2013

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, 2012 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 Nine Months Ended September 30, 2013 and 2012

     3   

b) Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September  30, 2013 and 2012

     4   

c) Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012

     5   

d) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012

     6   

e) Notes to Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     48   

Item 4. Controls and Procedures

     48   

PART II. OTHER INFORMATION

     49   

Item 6. Exhibits

     49   

SIGNATURE

     50   

 

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 September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Net product sales

   $ 509,038      $ 459,813      $ 1,538,876      $ 1,399,025   

Services revenue

     240,660        226,415        705,127        652,704   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     749,698        686,228        2,244,003        2,051,729   

License and royalty revenue

     4,184        5,188        13,113        11,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     753,882        691,416        2,257,116        2,063,062   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     258,234        223,612        764,501        671,664   

Cost of services revenue

     124,993        120,131        369,961        331,550   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     383,227        343,743        1,134,462        1,003,214   

Cost of license and royalty revenue

     2,009        1,898        5,264        5,394   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     385,236        345,641        1,139,726        1,008,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     368,646        345,775        1,117,390        1,054,454   

Operating expenses:

        

Research and development

     40,498        40,562        122,452        120,009   

Sales and marketing

     159,587        160,644        475,465        478,544   

General and administrative

     142,377        105,837        418,396        347,757   

Loss on disposition

     5,885        —          5,885        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     20,299        38,732        95,192        108,144   

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

     (53,420     (54,861     (203,272     (161,119

Other income (expense), net

     (8,869     (1,072     (8,276     14,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before benefit for income taxes

     (41,990     (17,201     (116,356     (38,405

Benefit for income taxes

     (17,148     (10,677     (36,152     (12,621
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before equity earnings of unconsolidated entities, net of tax

     (24,842     (6,524     (80,204     (25,784

Equity earnings of unconsolidated entities, net of tax

     5,753        3,007        13,238        10,417   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (19,089     (3,517     (66,966     (15,367

Less: Net income attributable to non-controlling interests

     359        286        601        137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Alere Inc. and Subsidiaries

     (19,448     (3,803     (67,567     (15,504

Preferred stock dividends

     (5,367     (5,352     (15,926     (15,940
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (24,815   $ (9,155   $ (83,493   $ (31,444
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share attributable to Alere Inc. and Subsidiaries:

   $ (0.30   $ (0.11   $ (1.03   $ (0.39
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average sharesbasic and diluted

     81,735        80,792        81,417        80,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Net loss

   $ (19,089   $ (3,517   $ (66,966   $ (15,367
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

        

Changes in cumulative translation adjustment

     67,268        39,695        (42,515     38,857   

Unrealized gains on available for sale securities

     —          141        —          931   

Unrealized gains on hedging instruments

     20        10        31        465   

Minimum pension liability adjustment

     (369     (98     335        (218
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     66,919        39,748        (42,149     40,035   

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

     —          360        —          360   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     66,919        39,388        (42,149     39,675   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     47,830        35,871        (109,115     24,308   

Less: Comprehensive income attributable to non-controlling interests

     359        286        601        137   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 47,471      $ 35,585      $ (109,716   $ 24,171   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     September 30, 2013     December 31, 2012  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 353,993      $ 328,346   

Restricted cash

     7,905        3,076   

Marketable securities

     820        904   

Accounts receivable, net of allowances of $70,978 and $36,396 at September 30, 2013 and December 31, 2012, respectively

     568,873        524,332   

Inventories, net

     370,448        337,121   

Deferred tax assets

     58,177        67,722   

Prepaid expenses and other current assets

     114,601        145,236   
  

 

 

   

 

 

 

Total current assets

     1,474,817        1,406,737   

Property, plant and equipment, net

     544,271        534,469   

Goodwill

     3,103,495        3,048,405   

Other intangible assets with indefinite lives

     58,953        36,451   

Finite-lived intangible assets, net

     1,747,538        1,834,225   

Restricted cash – non-current

     29,045        —     

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

     86,489        108,857   

Investments in unconsolidated entities

     101,822        90,491   

Deferred tax assets

     8,189        8,293   
  

 

 

   

 

 

 

Total assets

   $ 7,154,619      $ 7,067,928   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Short-term debt

   $ 25      $ —     

Current portion of long-term debt

     47,701        60,232   

Current portion of capital lease obligations

     6,533        6,684   

Accounts payable

     194,991        169,974   

Accrued expenses and other current liabilities

     447,228        411,919   
  

 

 

   

 

 

 

Total current liabilities

     696,478        648,809   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of current portion

     3,790,532        3,628,675   

Capital lease obligations, net of current portion

     14,926        12,917   

Deferred tax liabilities

     352,859        428,188   

Other long-term liabilities

     209,683        166,635   
  

 

 

   

 

 

 

Total long-term liabilities

     4,368,000        4,236,415   
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Stockholders’ equity:

    

Series B preferred stock, $0.001 par value (liquidation preference: $709,763 at September 30, 2013 and December 31, 2012); Authorized: 2,300 shares; Issued: 2,065 shares at September 30, 2013 and December 31, 2012; Outstanding: 1,774 shares at September 30, 2013 and December 31, 2012

     606,468        606,468   

Common stock, $0.001 par value; Authorized: 200,000 shares; Issued: 89,533 shares at September 30, 2013 and 88,576 shares at December 31, 2012; Outstanding: 81,854 shares at September 30, 2013 and 80,897 shares at December 31, 2012

     90        89   

Additional paid-in capital

     3,314,698        3,299,935   

Accumulated deficit

     (1,632,540     (1,564,973

Treasury stock, at cost, 7,679 shares at September 30, 2013 and December 31, 2012

     (184,971     (184,971

Accumulated other comprehensive income (loss)

     (18,275     23,874   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,085,470        2,180,422   

Non-controlling interests

     4,671        2,282   
  

 

 

   

 

 

 

Total equity

     2,090,141        2,182,704   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,154,619      $ 7,067,928   
  

 

 

   

 

 

 

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)

 

     Nine Months Ended September 30,  
     2013     2012  

Cash Flows from Operating Activities:

    

Net loss

   $ (66,966   $ (15,367

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

    

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

     14,088        16,087   

Depreciation and amortization

     326,689        322,371   

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

     1,880        4,681   

Non-cash stock-based compensation expense

     14,462        11,868   

Impairment of inventory

     243        295   

Impairment of long-lived assets

     4,101        274   

(Gain) loss on sale of fixed assets

     1,849        (4,194

Equity earnings of unconsolidated entities, net of tax

     (13,238     (10,417

Deferred income taxes

     (73,655     (43,619

Loss on extinguishment of debt

     35,603        —     

Loss on disposition

     5,885        —     

Bargain purchase gain

     (5,707     —     

Other non-cash items

     6,674        5,736   

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     (57,310     (8,261

Inventories, net

     (72,727     (15,596

Prepaid expenses and other current assets

     (9,132     4,171   

Accounts payable

     15,981        (16,743

Accrued expenses and other current liabilities

     37,242        24,116   

Other non-current liabilities

     (6,857     (21,639
  

 

 

   

 

 

 

Net cash provided by operating activities

     159,105        253,763   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

(Increase) decrease in restricted cash

     (33,881     5,771   

Purchases of property, plant and equipment

     (90,908     (97,309

Proceeds from sale of property, plant and equipment

     5,831        22,383   

Cash received from disposition

     32,000        —     

Cash paid for acquisitions, net of cash acquired

     (166,196     (384,780

Cash received from sales of marketable securities

     —          271   

Cash received from (paid for) equity method investments

     11,262        6,556   

(Increase) decrease in other assets

     19,244        (9,313
  

 

 

   

 

 

 

Net cash used in investing activities

     (222,648     (456,421
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash paid for financing costs

     (9,798     (2,313

Cash paid for contingent purchase price consideration

     (27,496     (16,248

Proceeds from issuance of common stock, net of issuance costs

     17,555        14,260   

Proceeds from issuance of long-term debt

     460,141        198,288   

Payments on long-term debt

     (455,157     (42,553

Net proceeds under revolving credit facilities

     138,768        91,162   

Borrowings from (payments on) short-term debt

     25        (6,240

Cash paid for dividends

     (15,970     (15,970

Excess tax benefits on exercised stock options

     434        277   

Principal payments on capital lease obligations

     (5,341     (4,925

Other

     (18,953     (2,811
  

 

 

   

 

 

 

Net cash provided by financing activities

     84,208        212,927   
  

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     4,982        (7,188
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     25,647        3,081   

Cash and cash equivalents, beginning of period

     328,346        299,173   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 353,993      $ 302,254   
  

 

 

   

 

 

 

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, 2012 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 March 1, 2013. 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, 2012.

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 September 30, 2013, our cash equivalents consisted of money market funds.

(3) Restricted Cash

As of September 30, 2013, we had a total of $36.9 million in restricted cash, of which $29.0 million was classified as non-current on our consolidated balance sheet. The $29.0 million secures a foreign bank loan arrangement that we entered into during the three months ended September 30, 2013 and will remain on deposit for a two-year period under the current terms of the loan arrangement.

(4) Inventories

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

 

     September 30, 2013      December 31, 2012  

Raw materials

   $ 115,441       $ 99,498   

Work-in-process

     83,571         89,895   

Finished goods

     171,436         147,728   
  

 

 

    

 

 

 
   $ 370,448       $ 337,121   
  

 

 

    

 

 

 

(5) Stock-based Compensation

We recorded stock-based compensation expense in our consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012, respectively, as follows (in thousands):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Cost of net revenue

   $ 287      $ 269      $ 797      $ 801   

Research and development

     1,111        752        2,641        2,379   

Sales and marketing

     975        751        2,597        2,581   

General and administrative

     3,289        1,854        8,427        6,107   
  

 

 

   

 

 

   

 

 

   

 

 

 
     5,662        3,626        14,462        11,868   

Benefit for income taxes

     (1,511     (536     (2,869     (1,951
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 4,151      $ 3,090      $ 11,593      $ 9,917   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7


Table of Contents

(6) Net Loss per Common Share

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

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Numerator:

        

Net loss

   $ (19,089   $ (3,517   $ (66,966   $ (15,367

Preferred stock dividends

     (5,367     (5,352     (15,926     (15,940

Less: Net income attributable to non-controlling interest

     359        286        601        137   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (24,815   $ (9,155   $ (83,493   $ (31,444
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted-average common shares outstanding—basic and diluted

     81,735        80,792        81,417        80,492   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net loss per common share attributable to Alere Inc. and Subsidiaries

   $ (0.30   $ (0.11   $ (1.03   $ (0.39
  

 

 

   

 

 

   

 

 

   

 

 

 

The following potential dilutive securities were not included in the calculation of diluted net loss per common share because the inclusion thereof would be antidilutive (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  

Denominator:

           

Options to purchase shares of common stock

     10,239         9,730         10,239         9,730   

Warrants

     4         4         4         4   

Conversion shares related to 3% convertible senior subordinated notes

     3,411         3,411         3,411         3,411   

Conversion shares related to subordinated convertible promissory notes

     27         27         27         27   

Conversion shares related to Series B convertible preferred stock

     10,239         10,239         10,239         10,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total number of antidilutive potentially issuable shares of common stock excluded from diluted common shares outstanding

     23,920         23,411         23,920         23,411   
  

 

 

    

 

 

    

 

 

    

 

 

 

(7) Stockholders’ Equity and Non-controlling Interests

(a) Preferred Stock

For the three and nine months ended September 30, 2013, Series B preferred stock dividends amounted to $5.3 million and $15.9 million, respectively, and for the three and nine months ended September 30, 2012, Series B preferred stock dividends amounted to $5.4 million and $15.9 million, respectively, which reduced earnings available to common stockholders for purposes of calculating net loss per common share for each of the respective periods. As of September 30, 2013, $5.3 million of Series B preferred stock dividends was accrued. As of October 15, 2013, payments have been made covering all dividend periods through September 30, 2013.

The Series B preferred stock dividends for the three and nine months ended September 30, 2013 and 2012 were paid in cash.

 

8


Table of Contents

(b) Changes in Stockholders’ Equity and Non-controlling Interests

A summary of the changes in stockholders’ equity and non-controlling interests comprising total equity for the nine months ended September 30, 2013 and 2012 is provided below (in thousands):

 

     Nine Months Ended September 30,  
     2013     2012  
     Total
Stockholders’
Equity
    Non-
controlling
Interests
     Total
Equity
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 

Equity, beginning of period

   $ 2,180,422      $ 2,282       $ 2,182,704      $ 2,229,234      $ 2,340      $ 2,231,574   

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

     17,555        —           17,555        14,261        —          14,261   

Issuance of common stock for settlement of an acquisition-related contingent consideration obligation

     —          —           —          1,243        —          1,243   

Preferred stock dividends

     (15,970     —           (15,970     (15,970     —          (15,970

Stock-based compensation related to grants of common stock options

     14,462        —           14,462        11,868        —          11,868   

Excess tax benefits on exercised stock options

     (1,283     —           (1,283     (437     —          (437

Non-controlling interest from acquisition

     —          1,788         1,788        —          —          —     

Purchase of subsidiary shares from non-controlling interests

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

Dividend relating to non-controlling interest

     —          —           —          —          (236     (236

Net income (loss)

     (67,567     601         (66,966     (15,504     200        (15,304

Total other comprehensive income (loss)

     (42,149     —           (42,149     39,675        —         39,675   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 2,085,470      $ 4,671       $ 2,090,141      $ 2,229,291      $ 2,304      $ 2,231,595   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(8) 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 dates of acquisition. During the three and nine months ended September 30, 2013, we expensed acquisition-related costs of $0.5 million and $1.8 million, respectively, in general and administrative expense. During the three and nine months ended September 30, 2012, we expensed acquisition-related costs of $0.8 million and $6.1 million, respectively, in general and administrative expense.

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

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. The estimated useful lives of the individual categories of intangible assets were 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 intangible 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 2013

(i) Epocal

On February 1, 2013, we acquired Epocal, Inc., or Epocal, located in Ottawa, Canada, a provider of technologies that support blood gas and electrolyte testing at the point of care. The preliminary aggregate purchase price was approximately $248.5 million, which consisted of $173.5 million in cash and a contingent consideration obligation with an aggregate acquisition date fair value of $75.0 million. The operating results of Epocal 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 2013

During the nine months ended September 30, 2013, we acquired the following businesses for a preliminary aggregate purchase price of $47.7 million, which included cash payments totaling $35.8 million, contingent consideration obligations with an aggregate acquisition date fair value of $1.3 million, deferred purchase price consideration with an acquisition date fair value of $0.6 million and an $8.0 million bargain purchase gain.

 

9


Table of Contents
    certain assets of PT Mega Medika Mandiri, or Mega Medika, located in South Jakarta, Indonesia, a distributor of infectious disease products to the Indonesian marketplace as well as materials for vaccines to a pharmaceutical customer (Acquired January 2013)

 

    Discount Diabetic, LLC, or Discount Diabetic, located in Phoenix, Arizona, a provider of blood glucose monitoring products, including diabetes testing systems and test strips and other products (Acquired April 2013)

 

    the Medicare fee-for-service assets of Liberty Medical, or the Liberty business, located in Port St. Lucie, Florida, a leading mail order provider of diabetes testing supplies serving the needs of both Type 1 and Type 2 diabetic patients (Acquired April 2013)

 

    51% share in Cardio Selfcare B.V., subsequently renamed Alere Health Services B.V., or Alere Health Services, located in Ede, the Netherlands, a developer of innovative software for the healthcare industry that develops and licenses software and sells medical devices to enable patients to perform medical self-care, including thrombosis self-care (Acquired May 2013)

 

    74.9% interest in Pantech Proprietary Limited, or Pantech, located in Durban, South Africa, a supplier of rapid diagnostic test kits, including HIV, malaria, syphilis, drugs of abuse, 10 parameter urine sticks, glucometers and glucose sticks (Acquired July 2013)

The operating results of Mega Medika, Discount Diabetic, the Liberty business, Alere Health Services, and Pantech are included in our professional diagnostics reporting unit and business segment.

Our consolidated statement of operations for the three and nine months ended September 30, 2013 included revenue totaling approximately $26.6 million and $59.5 million, respectively, related to these businesses. Goodwill has been recognized in the Mega Medika, Alere Health Services and Pantech acquisitions and amounted to approximately $1.6 million. The goodwill related to the Mega Medika acquisition is deductible for tax purposes.

With respect to our acquisition of the Liberty business, the purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a bargain purchase gain. The $8.0 million bargain purchase gain has been recorded in other income (expense), net in our consolidated statement of operations and is not recognized for tax purposes. The bargain purchase gain resulted from our operating cost structure which we believe will allow us to operate this business more cost effectively than the sellers.

A summary of the preliminary fair values of the net assets acquired for the acquisitions consummated in 2013 is as follows (in thousands):

 

     Epocal      Other      Total  

Current assets(1)

   $ 12,089       $ 12,968       $ 25,057   

Property, plant and equipment

     1,267         1,669         2,936   

Goodwill

     99,449         1,629         101,078   

Intangible assets

     164,400         42,920         207,320   

Other non-current assets

     17,610         29         17,639   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     294,815         59,215         354,030   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     2,627         5,398         8,025   

Non-current liabilities

     43,727         6,202         49,929   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     46,354         11,600         57,954   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

     248,461         47,615         296,076   

Less:

        

Contingent consideration

     75,000         1,264         76,264   

Non-controlling interest

     —           1,774         1,774   

Bargain purchase gain

     —           8,023         8,023   

Deferred purchase price consideration

     —           768         768   
  

 

 

    

 

 

    

 

 

 

Cash paid

   $ 173,461       $ 35,786       $ 209,247   
  

 

 

    

 

 

    

 

 

 

 

(1)  Includes approximately $3.3 million of acquired cash.

 

10


Table of Contents

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

 

     Epocal      Other      Total      Weighted-
average
Useful Life
 

Core technology and patents

   $ 119,700       $ —         $ 119,700         20.0 years   

Software

     —           804         804         10.0 years   

Trademarks and trade names

     20,500         10         20,510         19.2 years   

Customer relationships

     —           36,290         36,290         11.4 years   

Other

     —           5,816         5,816         3.0 years   

In-process research and development

     24,200         —           24,200         N/A   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 164,400       $ 42,920       $ 207,320      
  

 

 

    

 

 

    

 

 

    

(b) Acquisitions in 2012

During 2012, we acquired the following businesses for a preliminary aggregate purchase price of $494.5 million, which included cash payments totaling $418.9 million and contingent consideration obligations with aggregate acquisition date fair values of $75.6 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)

 

    eScreen, Inc., or eScreen, headquartered in Overland Park, Kansas, a technology-enabled provider of employment drug screening solutions for hiring and maintaining healthier and more efficient workforces (Acquired April 2012)

 

    MedApps Holding Company, Inc., or MedApps, headquartered in Scottsdale, Arizona, a developer of innovative remote health monitoring solutions that deliver efficient cost-effective connectivity between patient, care provider and electronic medical records (Acquired July 2012)

 

    Amedica Biotech, Inc., or Amedica, located in Hayward, California, a company focused on the development and manufacture of in vitro diagnostic tests (Acquired July 2012)

 

    DiagnosisOne, Inc., or DiagnosisOne, located in Lowell, Massachusetts, a software company that provides clinical analytics technology and data-driven content to hospitals, physician groups, insurers and governments (Acquired July 2012)

 

    Seelen Care Laege-og & Hospitalsartikler ApS, or Seelen, located in Holstebro, Denmark, a distributor of consumables, instruments and equipment to doctors, specialists and physiotherapists (Acquired August 2012)

 

    certain assets of Diagnostik Nord, or Diagnostik, located in Schwerin, Germany, a company focused on the sale of drug screening and in vitro diagnostic medical devices and a provider of diagnostic solutions (Acquired September 2012)

 

    Healthcare Connections Limited, or HCC, located in Buckinghamshire, United Kingdom, an occupational health provider specializing in employment medical programs, preventative health schemes and drug and alcohol sample collection services (Acquired November 2012)

 

    the diagnostic division of Medial spol. s.r.o., subsequently renamed Alere s.r.o., located in Prague, Czech Republic, a distributor of laboratory diagnostic devices, devices operating in the point-of-care testing regime, diagnostic kits and tests for biochemistry, hematology, and microbiology (Acquired November 2012)

 

    certain assets of Quantum Diagnostics, or Quantum Australia, located in Australia, an on-line medical supply company that provides a range of affordable drug and alcohol tests for personal, business and professional medical use (Acquired November 2012)

 

    certain assets of NationsHealth, Inc. (now named Convey Health Solutions, Inc.) and certain assets of its subsidiary United States Pharmaceutical Group, LLC (now d/b/a Convey Health Solutions), or, collectively, NationsHealth, headquartered in Sunrise, Florida, a privately-owned mail-order provider of diabetes home-testing products and supplies, and a share acquisition of NationsHealth’s subsidiary in the Philippines, or NationsHealth Philippines (Acquired December 2012)

 

    Branan Medical Corporation, or Branan, headquartered in Irvine, California, a manufacturer of drugs of abuse testing products (Acquired December 2012)

 

11


Table of Contents

The operating results of Alere Lda, AmMed, eScreen, MedApps, Amedica, Seelen, Diagnostik, HCC, Alere s.r.o., Quantum Australia, NationsHealth and Branan are included in our professional diagnostics reporting unit and business segment. The operating results of Wellogic UAE and DiagnosisOne are included in our health information solutions reporting unit and business segment. The operating results of Kullgren are included in our consumer diagnostics reporting unit and business segment.

Our consolidated statement of operations for the three and nine months ended September 30, 2012 included revenue totaling approximately $14.4 million and $26.3 million, respectively, related to the businesses that were acquired during that period. Goodwill has been recognized in all of these acquisitions and amounted to approximately $239.3 million. Goodwill related to the acquisitions of AmMed, Diagnostik and the U.S.-based assets of NationsHealth, which totaled $8.2 million, is deductible for tax purposes. The goodwill related to the remaining 2012 acquisitions is not deductible for tax purposes.

A summary of the preliminary fair values of the net assets acquired for the acquisitions consummated in 2012 is as follows (in thousands):

 

Current assets(1)

   $ 47,228   

Property, plant and equipment

     9,029   

Goodwill

     240,576   

Intangible assets

     325,223   

Other non-current assets

     17,261   
  

 

 

 

Total assets acquired

     639,317   
  

 

 

 

Current liabilities

     28,214   

Non-current liabilities

     116,580   
  

 

 

 

Total liabilities assumed

     144,794   
  

 

 

 

Net assets acquired

     494,523   

Less:

  

Contingent consideration

     75,620   
  

 

 

 

Cash paid

   $ 418,903   
  

 

 

 

 

(1)  Includes approximately $3.8 million of acquired cash.

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

   $ 148,103         18.7 years   

Trademarks and trade names

     19,390         18.3 years   

Customer relationships

     136,485         18.1 years   

Non-competition agreements

     1,118         5.1 years   

Other

     15,227         9.2 years   

In-process research and development

     4,900         N/A   
  

 

 

    

Total intangible assets

   $ 325,223      
  

 

 

    

(9) Restructuring Plans

The following table sets forth aggregate restructuring charges recorded in our consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

Statement of Operations Caption

   2013      2012      2013      2012  

Cost of net revenue

   $ 3,556       $ 1,080       $ 4,908       $ 2,069   

Research and development

     1,100         —           1,745         638   

Sales and marketing

     218         927         1,476         1,954   

General and administrative

     2,820         1,232         11,501         5,471   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     7,694         3,239         19,630         10,132   

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

     111         48         228         158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 7,805       $ 3,287       $ 19,858       $ 10,290   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12


Table of Contents

(a) 2013 Restructuring Plans

In 2013, management developed cost reduction efforts within our professional diagnostics business segment, including businesses in our United States, Europe and Asia Pacific regions. Additionally, management is continuing to improve efficiencies within our health information solutions business segment, including winding down a small portion of this business, which resulted in charges associated with the impairment of related fixed and intangible assets. The following table summarizes the restructuring activities related to our 2013 restructuring plans for the three and nine months ended September 30, 2013 (in thousands):

 

     Three Months Ended September 30, 2013  
     Professional
Diagnostics
     Health
Information
Solutions
    Total  

Severance-related costs

   $ 3,876       $ 1,340      $ 5,216   

Facility and transition costs

     1,107         327        1,434   

Other exit costs

     —           2        2   
  

 

 

    

 

 

   

 

 

 

Cash charges

     4,983         1,669        6,652   

Fixed asset and inventory impairments

     470         —          470   

Other non-cash charges

     —           (20     (20
  

 

 

    

 

 

   

 

 

 

Total charges

   $ 5,453       $ 1,649      $ 7,102   
  

 

 

    

 

 

   

 

 

 
     Nine Months Ended September 30, 2013  
     Professional
Diagnostics
     Health
Information
Solutions
    Total  

Severance-related costs

   $ 5,960       $ 1,398      $ 7,358   

Facility and transition costs

     1,457         568        2,025   

Other exit costs

     —           2        2   
  

 

 

    

 

 

   

 

 

 

Cash charges

     7,417         1,968        9,385   

Fixed asset and inventory impairments

     470         170        640   

Intangible asset impairments

     —           2,596        2,596   

Other non-cash charges

     —           (20     (20
  

 

 

    

 

 

   

 

 

 

Total charges

   $ 7,887       $ 4,714      $ 12,601   
  

 

 

    

 

 

   

 

 

 

We anticipate incurring approximately $1.1 million and $0.3 million in additional costs under our 2013 restructuring plans related to our professional diagnostics business and health information solutions business segments, respectively, in the United States and Europe and may develop additional plans over the remainder of 2013. As of September 30, 2013, $4.7 million in severance and facility exit costs arising under our 2013 restructuring plans remain unpaid.

(b) 2012 Restructuring Plans

In 2012, management developed cost reduction plans within our professional diagnostics business segment, including the integration of our businesses in Brazil, Europe and the United States. Additionally, management developed new plans to continue our efforts to reduce costs within our health information solutions business segment, including the termination of certain projects, which resulted in charges for the impairment of related fixed and intangible assets. The following table summarizes the restructuring activities related to our 2012 restructuring plans for the three and nine months ended September 30, 2013 and 2012 and since inception (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
     Since
Inception
 

Professional Diagnostics

   2013     2012      2013     2012     

Severance-related costs(1)

   $ (614   $ 691       $ (526   $ 3,009       $ 4,206   

Facility and transition costs

     —          —           82        —           201   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cash charges

     (614     691         (444     3,009         4,407   

Fixed asset impairments

     —          55        —          55        304   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total charges

   $ (614   $ 746       $ (444   $ 3,064       $ 4,711   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Severance-related costs for the three and nine months ended September 30, 2013 includes the reversal of an amount previously accrued which relates to a settlement resulting from a labor dispute.

 

13


Table of Contents
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
     Since
Inception
 

Health Information Solutions

   2013      2012      2013     2012     

Severance-related costs

   $ 14       $ 516       $ 2,362      $ 1,735       $ 5,407   

Facility and transition costs

     —           465         4,271        590         5,505   

Other exit costs

     82         5        134        5         149   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Cash charges

     96         986         6,767        2,330         11,061   

Fixed asset and inventory impairments

     —           —           75        —           2,764   

Intangible asset impairments

     —           —           —          —           2,988   

Other non-cash charges

     —           —           (953     —           (984
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total charges

   $ 96       $ 986       $ 5,889      $ 2,330       $ 15,829   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

We anticipate incurring approximately $0.5 million in additional transition and other facility costs under these plans related primarily to our health information solutions business segment through 2014. As of September 30, 2013, $3.8 million in severance and facility exit costs under these plans remain unpaid.

(c) 2011, 2010 and 2008 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 information solutions and professional diagnostics business segments. Management also developed plans within our professional diagnostics business segment to consolidate operating activities among certain of our U.S., European and Asia Pacific subsidiaries, including transferring the manufacturing of our Panbio products from Australia to our Standard Diagnostics facility in South Korea and eliminating redundant costs among our newly-acquired Axis-Shield subsidiaries. Additionally, within our health information solutions 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.

In 2010, management developed several plans to reduce costs and improve efficiencies within our health information solutions and professional diagnostics business segments. Additionally in 2008, management developed and initiated plans to transition the business of Cholestech to our San Diego, California facility.

The following table summarizes the restructuring activities related to our 2011, 2010 and 2008 restructuring plans for the three and nine months ended September 30, 2013 and 2012 and since inception (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
    Since
Inception
 

Professional Diagnostics

   2013      2012      2013      2012    

Severance-related costs

   $ 46       $ 639       $ 242       $ 2,914      $ 19,955   

Facility and transition costs

     112         464         442         1,348        7,669   

Other exit costs

     14         16         45         52        743   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cash charges

     172         1,119         729         4,314        28,367   

Fixed asset and inventory impairments

     350         290         350         424        6,724   

Intangible asset impairments

     686         —           686        —          686   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total charges

   $ 1,208       $ 1,409       $ 1,765       $ 4,738      $ 35,777   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
    Since
Inception
 

Health Information Solutions

   2013      2012      2013      2012    

Severance-related costs

   $ —         $  —         $ —         $  —        $ 6,901   

Facility and transition costs

     —           114         —           (59     8,010   

Other exit costs

     13         27         47         101        559   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cash charges

     13         141         47         42        15,470   

Fixed asset and inventory impairments

     —           —           —           85        1,114   

Intangible asset impairments

     —           —           —           —          2,935   

Other non-cash charges

     —           —           —           —          761   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total charges

   $ 13       $ 141       $ 47       $ 127      $ 20,280   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

14


Table of Contents
     Three Months Ended
September 30,
     Nine Months Ended
September 30,
     Since
Inception
 

Corporate and Other

   2013      2012      2013      2012     

Severance-related costs

   $  —         $ 5       $  —         $ 31       $ 1,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     —           5         —           31         1,219   

Fixed asset and inventory impairments

     —           —           —           —           3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $  —         $ 5      $  —         $ 31      $ 1,222   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We anticipate incurring approximately $0.5 million in additional costs under these plans related primarily to our professional diagnostics business segment. A majority of these additional costs relate to the transfer of the Panbio product manufacturing to Korea and are for severance and facility exit costs. We do not anticipate incurring significant additional costs under these plans related to our health information solutions business segment. As of September 30, 2013, $2.2 million in cash charges remain unpaid, primarily related to severance and facility lease obligations.

(d) Restructuring Reserves

The following table summarizes our restructuring reserves related to the plans described above, of which $8.7 million is included in accrued expenses and other current liabilities and $2.0 million is included in other long-term liabilities on our accompanying consolidated balance sheets (in thousands):

 

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

Balance, December 31, 2012

   $ 3,167      $ 2,429      $ 622      $ 6,218   

Cash charges

     9,436        6,820        228        16,484   

Payments

     (7,515     (4,149     (227     (11,891

Currency adjustments

     (72     5        —          (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2013

   $ 5,016      $ 5,105      $ 623      $ 10,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

(10) Long-term Debt

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

 

     September 30, 2013     December 31, 2012  

A term loans(1)(2)

   $ 843,750      $ 878,438   

B term loans(1)

     906,500        913,438   

Incremental B-1 term loans(1)

     245,625        247,500   

Incremental B-2 term loans(1)

     195,470        196,739   

Revolving line of credit(1)

     170,000        22,500   

7.25% Senior notes

     450,000        450,000   

7.875% Senior notes

     —          1,809   

9% Senior subordinated notes

     —          392,933   

8.625% Senior subordinated notes

     400,000        400,000   

6.5% Senior subordinated notes

     425,000        —     

3% Convertible senior subordinated notes

     150,000        150,000   

Other lines of credit

     150        31,957   

Other

     51,738        3,593   
  

 

 

   

 

 

 
     3,838,233        3,688,907   

Less: Current portion

     (47,701     (60,232
  

 

 

   

 

 

 
   $ 3,790,532      $ 3,628,675   
  

 

 

   

 

 

 

 

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

 

15


Table of Contents

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 accompanying consolidated statements of operations for the three and nine months ended September 30, 2013 and 2012, respectively, as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  

Secured credit facility (1)

   $ 25,809       $ 27,474       $ 78,741       $ 77,422   

7.25% Senior notes

     8,535         —           25,371         —     

7.875% Senior notes (2)

     —           5,763         137         17,276   

9% Senior subordinated notes (3)

     —           10,373         54,043         31,090   

8.625% Senior subordinated notes

     9,273         9,274         27,820         27,823   

6.5% Senior subordinated notes

     7,172         —           10,185         —     

3% Senior subordinated convertible notes

     1,246         1,246         3,738         3,738   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 52,035       $ 54,130       $ 200,035       $ 157,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 nine months ended September 30, 2013, the amounts include $0.4 million and $2.2 million, respectively, related to the amortization of fees paid for certain debt modifications. For the three and nine months ended September 30, 2012, the amount includes $1.3 million and $4.0 million, respectively, related to the amortization of fees paid for certain debt modifications.
(2)  For the nine months ended September 30, 2013, this amount includes an approximate $0.2 million loss recorded in connection with the repurchase of our 7.875% senior notes.
(3)  An approximate $35.6 million loss in connection with the repurchase of our 9% senior subordinated notes has been included in the nine-month period ended September 30, 2013. Included in the $35.6 million is $19.0 million related to tender offer consideration and call premium which has been classified within cash flow from financing activities in our consolidated statement of cash flows.

(a) Secured Credit Facility

The following summarizes the material terms of our secured credit facility that have changed significantly since December 31, 2012. All other terms of our secured credit facility as described in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2012, but omitted below, have not changed since that date.

On March 22, 2013, we and certain of our subsidiaries entered into a fourth amendment to the credit agreement that governs our secured credit facility, or the credit agreement. The fourth amendment provides for 50 basis point reductions in the interest rate margins applicable to the “B” term loans, the “Incremental B-1” term loans and the “Incremental B-2” term loans and certain other changes. Under the terms of the credit agreement as amended by the fourth amendment, the “B” term loans, the “Incremental B-1” term loans and the “Incremental B-2” term loans bear interest at a rate per annum of, at our option, either (i) the Base Rate, as defined in the credit agreement, plus an applicable margin, which varies between 2.00% and 2.75% depending on our consolidated secured leverage ratio, or (ii) the Eurodollar Rate, as defined in the credit agreement, plus an applicable margin, which varies between 3.00% and 3.75% depending on our consolidated secured leverage ratio. Interest on “B” term loans, “Incremental B-1” term loans and “Incremental B-2” term loans based on the Eurodollar Rate is subject to a 1.00% floor with respect to the base Eurodollar Rate.

(b) 6.5% Senior Subordinated Notes

On May 24, 2013, we sold a total of $425.0 million aggregate principal amount of 6.5% senior subordinated notes due 2020, or the 6.5% senior subordinated notes, in a private placement to initial purchasers, who agreed to resell the notes only to qualified institutional buyers and to persons outside the United States. We sold the 6.5% senior subordinated notes at an initial offering price of 100%. Net proceeds from this offering amounted to $417.7 million, which were net of the underwriters’ commissions and offering expenses totaling approximately $7.3 million.

The 6.5% senior subordinated notes were issued under a supplemental indenture dated May 24, 2013, or the 6.5% Indenture. The 6.5% senior subordinated notes accrue interest at the rate of 6.5% per annum. Interest on the 6.5% senior subordinated notes is payable semi-annually on June 15 and December 15, beginning on December 15, 2013. The 6.5% senior subordinated notes mature on June 15, 2020, unless earlier redeemed.

We may, at our option, redeem the 6.5% senior subordinated notes, in whole or part, at any time (which may be more than once) on or after June 15, 2016, by paying the principal amount of the notes being redeemed plus a declining premium, plus accrued and unpaid interest to (but excluding) the redemption date. The premium declines from 3.250% during the twelve months on and after June 15, 2016 to 1.625% during the twelve months on and after June 15, 2017 to zero on and after June 15, 2018. In addition, we may, at our option, at any time (which may be more than once) before May 24, 2015, redeem up to 10% of the aggregate principal amount of the 6.5% senior subordinated notes in each of the two twelve-month periods preceding May 24, 2015 at a redemption price of 103% of the principal amount thereof plus accrued and unpaid interest to (but excluding) the redemption date. In addition, at any time

 

16


Table of Contents

(which may be more than once) prior to June 15, 2016, we may, at our option, redeem up to 35% of the aggregate principal amount of the 6.5% senior subordinated notes with money that we raise in certain equity offerings, so long as (i) we pay 106.5% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to (but excluding) the redemption date; (ii) we redeem the 6.5% senior subordinated notes within 90 days of completing such equity offering; and (iii) at least 65% of the aggregate principal amount of the 6.5% senior subordinated notes remains outstanding afterwards. In addition, at any time (which may be more than once) prior to June 15, 2016, we may, at our option, redeem some or all of the 6.5% senior subordinated notes by paying the principal amount of the 6.5% senior subordinated notes being redeemed plus a make-whole premium, plus accrued and unpaid interest to (but excluding) the redemption date.

If a change of control occurs, subject to specified conditions, we must give holders of the 6.5% senior subordinated notes an opportunity to sell their notes to us at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to (but excluding) the date of the purchase.

If we or our subsidiaries engage in asset sales, we or they generally must either invest the net cash proceeds from such sales in our or their businesses within a specified period of time, repay senior indebtedness or make an offer to purchase a principal amount of the 6.5% senior subordinated notes equal to the excess net cash proceeds, subject to certain exceptions. The purchase price of the 6.5% senior subordinated notes would be 100% of their principal amount, plus accrued and unpaid interest.

The 6.5% Indenture provides that we and our subsidiaries must comply with various customary covenants. These covenants limit our ability, and the ability of our subsidiaries, to, among other things, incur additional debt; pay dividends on our or their capital stock or redeem, repurchase or retire our or their capital stock or subordinated debt; make certain investments; create liens on assets; transfer or sell assets; engage in transactions with our or their affiliates; create restrictions on the ability of our or their subsidiaries to pay dividends or make loans, asset transfers or other payments to us and our subsidiaries; issue capital stock of subsidiaries; engage in any business, other than our or their existing businesses and related businesses; enter into sale and leaseback transactions; incur layered indebtedness; and consolidate or merge with any person (other than certain affiliates) or transfer all or substantially all of our assets or the aggregate assets of us and our subsidiaries. These covenants are subject to certain important exceptions and qualifications, which are set forth in the 6.5% Indenture. At any time the 6.5% senior subordinated notes are rated investment grade, certain covenants will be suspended with respect to them.

The 6.5% Indenture contains customary events of default entitling the trustee or the holders of the 6.5% senior subordinated notes to declare all amounts owed pursuant to the 6.5% senior subordinated notes immediately payable if any such event of default occurs.

The 6.5% senior subordinated notes are our senior subordinated unsecured obligations, are subordinated in right of payment to all of our existing and future senior debt, including our borrowings under our secured credit facility and our 7.25% senior notes, and are equal in right of payment with our 8.625% senior subordinated notes and our 3% convertible senior subordinated notes. Our obligations under the 6.5% senior subordinated notes and the 6.5% Indenture are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated unsecured basis by certain of our domestic subsidiaries, and the obligations of such domestic subsidiaries under their guarantees are subordinated in right of payment to all of their existing and future senior debt. See Note 21 for guarantor financial information.

(c) 9% Senior Subordinated Notes

On May 24, 2013, we used $200.6 million of the net proceeds of our sale of the 6.5% senior subordinated notes to purchase $190.6 million outstanding principal amount of our 9% senior subordinated notes due 2016, or the 9% senior subordinated notes, pursuant to our tender offer for these notes. The purchased 9% senior subordinated notes represented approximately 47.7% of the total then-outstanding principal amount of the 9% senior subordinated notes.

On June 24, 2013, we redeemed the remaining $209.4 million outstanding principal amount of the 9% senior subordinated notes pursuant to our optional redemption right under the indenture under which the 9% senior subordinated notes were issued, and we subsequently terminated this indenture.

(11) Derivative Financial Instruments

We may 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.

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 was the undiscounted foreign currency spot rate risk on forecasted foreign currency revenue. As of December 31, 2012, all of the acquired foreign currency forward contracts were settled. We report the effective portion of the gain or loss on a cash flow hedge as a component of other comprehensive income, and it was subsequently reclassified into net earnings in the period in which the hedged transaction affected net earnings or the forecasted transaction was no longer probable of occurring.

 

17


Table of Contents

The following table summarizes the effect of derivative instruments in our accompanying consolidated statement of operations (in thousands):

 

Derivative Instruments

   Location of Gain
Recognized in Income
   Amount of Gain
Recognized
During the Three
Months Ended
September 30,
2012
     Amount of Gain
Recognized
During the Nine
Months Ended
September 30,
2012
 

Foreign currency forward contracts

   Other comprehensive income (loss)    $ 10       $ 465   
     

 

 

    

 

 

 

Total gain

   Other comprehensive income (loss)    $ 10       $ 465   
     

 

 

    

 

 

 

(12) 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.

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.

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 following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

Description

   September 30, 2013      Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 820       $ 820       $  —         $  —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 820       $ 820       $  —         $  —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 234,559       $  —         $  —         $ 234,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 234,559       $  —         $  —         $ 234,559   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Description

   December 31, 2012      Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 904       $ 904       $ —        $  —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 904       $ 904       $ —         $  —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 176,172       $  —         $ —        $ 176,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 176,172       $  —         $ —        $ 176,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  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 or decreases in any of these inputs could result in a significantly higher or 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.

 

18


Table of Contents

Changes in the fair value of our Level 3 contingent consideration obligations during the nine months ended September 30, 2013 were as follows (in thousands):

 

Fair value of contingent consideration obligations, January 1, 2013

   $  176,172   

Acquisition date fair value of contingent consideration obligations recorded

     76,269   

Net reclassifications

     (12

Foreign currency

     (150

Payments

     (36,703

Present value accretion

     7,359   

Adjustments, net (income) expense

     11,624   
  

 

 

 

Fair value of contingent consideration obligations, September 30, 2013

   $ 234,559   
  

 

 

 

At September 30, 2013 and December 31, 2012, 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 $3.8 billion and $3.9 billion, respectively, at September 30, 2013. The carrying amount and estimated fair value of our long-term debt were $3.7 billion at December 31, 2012. 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.

(13) 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 September 30,     Nine Months Ended September 30,  
     2013     2012     2013     2012  

Service cost

   $  —        $  —        $  —        $  —     

Interest cost

     182        199        543        596   

Expected return on plan assets

     (156     (152     (465     (457

Amortization of prior service costs

     103        104        308        312   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 129      $ 151      $ 386      $ 451   
  

 

 

   

 

 

   

 

 

   

 

 

 

(14) 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 information solutions, 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 nine months ended September 30, 2013 and 2012 is as follows (in thousands):

 

     Professional
Diagnostics
     Health
Information
Solutions
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Three Months Ended September 30, 2013:

            

Net revenue

   $ 590,801       $ 134,233      $ 28,848       $  —        $ 753,882   

Operating income (loss)

   $ 53,189       $ (7,203   $ 3,347       $ (29,034   $ 20,299   

Depreciation and amortization

   $ 88,835       $ 22,600      $ 1,063       $ 287      $ 112,785   

Non-cash charge associated with acquired inventory

   $ 708       $  —        $  —         $  —        $ 708   

Restructuring charge

   $ 6,033       $ 1,661      $  —         $  —        $ 7,694   

Stock-based compensation

   $ —         $  —        $  —         $ 5,662      $ 5,662   

Loss on disposition

   $ 5,885       $  —        $  —         $  —        $ 5,885   

Three Months Ended September 30, 2012:

            

Net revenue

   $ 531,442       $ 135,078      $ 24,896       $  —        $ 691,416   

 

 

19


Table of Contents
     Professional
Diagnostics
     Health
Information
Solutions
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Operating income (loss)

   $ 63,298       $ (14,357   $ 4,615       $ (14,824   $ 38,732   

Depreciation and amortization

   $ 85,030       $ 24,313      $ 1,167       $ 239      $ 110,749   

Restructuring charge

   $ 2,139       $ 1,095      $  —         $ 5      $ 3,239   

Stock-based compensation

   $  —         $  —        $  —         $ 3,626      $ 3,626   

Nine Months Ended September 30, 2013:

            

Net revenue

   $ 1,777,055       $ 403,215      $ 76,846       $  —        $ 2,257,116   

Operating income (loss)

   $ 185,925       $ (32,855   $ 9,031       $ (66,909   $ 95,192   

Depreciation and amortization

   $ 258,485       $ 64,062      $ 3,296       $ 846      $ 326,689   

Non-cash charge associated with acquired inventory

   $ 1,880       $  —        $  —         $  —        $ 1,880   

Restructuring charge

   $ 9,162       $ 10,468      $  —         $  —        $ 19,630   

Stock-based compensation

   $  —         $  —        $  —         $ 14,462      $ 14,462   

Loss on disposition

   $ 5,885       $  —        $  —         $  —        $ 5,885   

Nine Months Ended September 30, 2012:

            

Net revenue

   $ 1,589,909       $ 404,452      $ 68,701       $  —        $ 2,063,062   

Operating income (loss)

   $ 196,728       $ (46,379   $ 7,679       $ (49,884   $ 108,144   

Depreciation and amortization

   $ 245,911       $ 72,152      $ 3,604       $ 704      $ 322,371   

Non-cash charge associated with acquired inventory

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

Restructuring charge

   $ 7,750       $ 2,351      $  —         $ 31      $ 10,132   

Stock-based compensation

   $  —         $  —        $  —         $ 11,868      $ 11,868   

Assets:

            

As of September 30, 2013

   $ 6,243,064       $ 555,563      $ 213,764       $ 142,228      $ 7,154,619   

As of December 31, 2012

   $ 6,214,847       $ 593,172      $ 192,748       $ 67,161      $ 7,067,928   

The following tables summarize our net revenue from the professional diagnostics and health information solutions reporting segments by groups of similar products and services for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

Professional Diagnostics Segment:

   Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  

Cardiology

   $ 116,281       $ 122,372       $ 349,650       $ 386,795   

Infectious disease

     172,739         136,561         520,289         425,398   

Toxicology

     166,536         156,074         481,469         437,736   

Diabetes

     53,150         35,670         178,138         100,628   

Other

     78,607         78,077         235,992         230,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net product sales and services revenue

     587,313         528,754         1,765,538         1,581,076   

License and royalty revenue

     3,488         2,688         11,517         8,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Professional diagnostics net revenue

   $ 590,801       $ 531,442       $ 1,777,055       $ 1,589,909   
  

 

 

    

 

 

    

 

 

    

 

 

 

Health Information Solutions Segment:

   Three Months Ended September 30,      Nine Months Ended September 30,  
     2013      2012      2013      2012  

Disease and case management

   $ 56,554       $ 57,383       $ 163,258       $ 165,277   

Wellness

     22,223         24,290         75,753         80,881   

Women’s & children’s health

     28,431         29,136         86,767         90,220   

Patient self-testing services

     27,025         24,269         77,437         68,074   
  

 

 

    

 

 

    

 

 

    

 

 

 

Health information solutions net revenue

   $ 134,233       $ 135,078       $ 403,215       $ 404,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

(15) Related Party Transactions

In May 2007, we completed the formation of Swiss Precision Diagnostics GmbH, or 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 $3.2 million and $2.3 million as of September 30, 2013 and December 31, 2012, respectively. Included in the $3.2 million receivable balance as of September 30, 2013 is approximately $1.9 million of costs incurred in connection with our 2008 SPD-related restructuring plans. Included in the $2.3 million receivable balance as of December 31, 2012 is approximately $1.6 million of costs incurred in connection with our 2008 SPD-related restructuring plans.

 

20


Table of Contents

We have also recorded a long-term receivable totaling approximately $13.0 million and $14.6 million as of September 30, 2013 and December 31, 2012, 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 $10.0 million and $6.9 million as of September 30, 2013 and December 31, 2012, 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 $21.2 million and $56.5 million during the three and nine months ended September 30, 2013, respectively, and $15.9 million and $47.4 million during the three and nine months ended September 30, 2012, respectively. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $0.3 million and $0.9 million during the three and nine months ended September 30, 2013, respectively, and $0.3 million and $0.9 million during the three and nine months ended September 30, 2012, 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 $10.0 million and $7.3 million of trade receivables which are included in accounts receivable on our accompanying consolidated balance sheets as of September 30, 2013 and December 31, 2012, respectively, and $25.4 million and $21.3 million of trade accounts payable which are included in accounts payable on our accompanying consolidated balance sheets as of September 30, 2013 and December 31, 2012, respectively. During the nine months ended September 30, 2013 and 2012, we received $10.8 million and $6.1 million, respectively, in cash from SPD as a return of capital.

The following table summarizes our related party balances with SPD within our consolidated balance sheets (in thousands):

 

Balance Sheet Caption:

   September 30, 2013      December 31, 2012  

Accounts receivable, net of allowances

   $ 9,984       $ 7,317   

Prepaid expenses and other current assets

   $ 13,221       $ 9,161   

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

   $ 12,955       $ 14,629   

Accounts payable

   $ 25,437       $ 21,258   

(16) Other Arrangements

On February 19, 2013, we entered into an agreement with the Bill and Melinda Gates Foundation, or the Gates Foundation, whereby we were awarded a grant by the Gates Foundation in the amount of $21.6 million to support the development and commercialization of a validated, low-cost, nucleic-acid assay for clinical Tuberculosis, or TB, detection and drug-resistance test cartridges and adaptation of an analyzer platform capable of operation in rudimentary laboratories in low-resource settings. In connection with this agreement, we also entered into a loan agreement with the Gates Foundation, or the Gates Loan Agreement, which provides for the making of subordinated term loans by the Gates Foundation to us from time to time, subject to the achievement of certain milestones, in an aggregate principal amount of up to $20.6 million. Funding under the Gates Loan Agreement will be used in connection with the purchase of equipment for an automated high-throughput manufacturing line and other uses as necessary for the manufacture of the TB and HIV-related products. All loans under the Gates Loan Agreement are evidenced by promissory notes that we have executed and delivered to the Gates Foundation, bear interest at the rate of 3% per annum and, except to the extent earlier repaid by us, mature and are required to be repaid in full on December 31, 2019. As of September 30, 2013, we had borrowed no amounts under the Gates Loan Agreement. As of September 30, 2013, we had received approximately $7.9 million in grant-related funding from the Gates Foundation, which was recorded as restricted cash and deferred grant funding. The deferred grant funding is classified within accrued expenses and other current liabilities on our accompanying consolidated balance sheet. As qualified expenditures are incurred under the terms of the grant, we use the deferred funding to recognize a reduction of our related qualified research and development expenditures. For the three and nine months ended September 30, 2013, we incurred approximately $1.9 million and $4.3 million, respectively, of qualified expenditures, for which we reduced our deferred grant funding balance and recorded an offset to our research and development expenses.

(17) Material Contingencies

Acquisition-related Contingent Consideration Obligations

The following summarizes our principal contractual acquisition-related contingent consideration obligations as of September 30, 2013 that have changed significantly since December 31, 2012. 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, 2012, but which are omitted below, represent those that have not changed significantly since that date.

 

    Accordant

With respect to Accordant, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and cash collection targets starting after the second anniversary of the acquisition date and completed prior to the third anniversary of the acquisition date. An earn-out totaling $4.5 million was earned and accrued as of December 31, 2012. A payment of $1.5 million was made during each of the first, second and third quarters of 2013. No further payment obligations are outstanding as of September 30, 2013.

 

21


Table of Contents
    Alere Healthcare

With respect to Alere Healthcare, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and operating income targets during each of the calendar years 2010 through 2012. The 2012 portion of the earn-out totaling $0.3 million, which was previously accrued at December 31, 2012, was paid during the second quarter of 2013. No further contingent consideration obligations related to this acquisition exist as of September 30, 2013.

 

    Alere S.A.

With respect to Alere S.A., the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and EBITDA targets during each of the calendar years 2011 through 2016. The remaining earn-out was settled for BRL 6.9 million (approximately $3.1 million). A payment of BRL 2.9 million was paid during the third quarter of 2013 and the remaining BRL 4.0 million will be paid in 48 equal monthly installments beginning in August 2013. No further contingent consideration obligations related to this acquisition exist as of September 30, 2013.

 

    Amedica

With respect to Amedica, the terms of the acquisition agreement require us to make earn-out payments upon successfully meeting certain financial targets during each of the calendar years 2012 and 2013. The 2012 portion of the earn-out totaling $6.9 million, which was previously accrued at December 31, 2012, was paid during the second quarter of 2013. The maximum remaining amount of the earn-out payments is $8.1 million.

 

    Branan

With respect to Branan, the terms of the acquisition agreement require us to pay earn-outs upon successfully achieving various regulatory product approval milestones by the second anniversary of the acquisition date. Four milestones were achieved during 2012, resulting in an accrual totaling approximately $2.0 million as of December 31, 2012. During the first quarter of 2013, two additional milestones were achieved, resulting in an incremental accrual of $1.0 million. Payment of these earn-outs was made during the first quarter of 2013. The maximum remaining amount of the earn-out payments is $1.8 million.

 

    Epocal

With respect to Epocal, the terms of the acquisition agreement require us to pay earn-outs and management incentive payments upon successfully meeting certain product development and United States Food and Drug Administration regulatory approval milestones from the date of acquisition through December 31, 2018. The maximum amount of the earn-out payments is $90.5 million, of which $15.0 million was paid at the acquisition closing date. The maximum amount of the management incentive payments is $9.4 million.

 

    Immunalysis

With respect to Immunalysis, the terms of the acquisition agreement require us to pay earn-outs upon successfully meeting certain gross profit targets during each of the calendar years 2010 through 2012. During the second quarter of 2013, it was determined that the 2012 earn-out totaling $1.7 million had been achieved and payment was made during the same quarter. No further contingent consideration obligations related to this acquisition exist as of September 30, 2013.

Additionally, we had a contractual contingent obligation to pay up to $3.0 million in compensation to certain executives of Immunalysis in accordance with the acquisition agreement that, to the extent earned, was paid out in connection with the contingent consideration payable to the former shareholders of Immunalysis, for each of the calendar years 2010, 2011 and 2012. Payment of the 2012 compensation totaling $1.0 million, which was previously accrued at December 31, 2012, was made during the second quarter of 2013. No further such compensation obligations related to this acquisition exist as of September 30, 2013.

 

    MedApps

With respect to MedApps, the terms of the acquisition agreement require us to make earn-out payments upon achievement of certain technological and product development milestones through January 15, 2015. A portion of the earn-out, totaling $3.0 million, was earned and paid during the second quarter of 2013. The maximum remaining amount of the earn-out payments is $18.2 million.

 

    NationsHealth

With respect to NationsHealth, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain operational targets within one year of the acquisition date. During the second quarter of 2013, the earn-out was accrued for a settlement amount of $2.0 million, which was paid during the third quarter of 2013. No further contingent consideration obligations related to this acquisition exist as of September 30, 2013.

 

22


Table of Contents
    Pantech

With respect to Pantech, the terms of the acquisition agreement requires us to pay a maximum earn-out of approximately $0.6 million based upon successfully meeting certain EBITDA targets in each of the three years post-closing.

 

    ROAR

With respect to Forensics Limited, or ROAR, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain EBITDA targets during 2012 through 2014. Payment of the 2012 earn-out totaling approximately £1.0 million (approximately $1.5 million), which was previously accrued at December 31, 2012, was made during the first quarter of 2013. The maximum remaining amount of the earn-out payments is £9.5 million (approximately $15.2 million at September 30, 2013).

(18) 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.

Recent Accounting Pronouncement

In July 2013, the FASB issued Accounting Standards Update, or ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, or ASU 2013-11. ASU 2013-11 requires an entity to present unrecognized tax benefits as a reduction to deferred tax assets when a net operating loss carryforward, similar tax loss or a tax credit carryforward exists, with limited exceptions. ASU 2013-11 is effective for fiscal years beginning on or after December 15, 2013, and for interim periods within those fiscal years. We do not expect that the adoption of this ASU will have a material impact on our consolidated financial statements.

Recently Adopted Standards

Effective January 1, 2013, we adopted ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, or ASU 2012-02. ASU 2012-02 allows an entity the option to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The adoption of this standard is not expected to have an impact on our financial position, results of operations, comprehensive income or cash flows.

(19) 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

We have a 50/50 joint venture, called SPD, 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. We recorded earnings of $4.7 million and $11.4 million during the three and nine months ended September 30, 2013, respectively, and earnings of $2.1 million and $8.2 million during the three and nine months ended September 30, 2012, 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 or losses, as applicable, for the respective periods.

 

23


Table of Contents

(b) TechLab

We own 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 $1.3 million during the three and nine months ended September 30, 2013, respectively, and earnings of $0.6 million and $1.8 million during the three and nine months ended September 30, 2012, 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):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  

Combined Condensed Results of Operations:

   2013      2012      2013      2012  

Net revenue

   $ 49,272       $ 54,650       $ 153,096       $ 165,483   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 40,158       $ 34,411       $ 112,862       $ 105,175   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income after taxes

   $ 10,543       $ 5,399       $ 25,549       $ 20,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Combined Condensed Balance Sheet:

   September 30, 2013      December 31, 2012  

Current assets

   $ 95,764       $ 79,842   

Non-current assets

     37,909         38,991   
  

 

 

    

 

 

 

Total assets

   $ 133,673       $ 118,833   
  

 

 

    

 

 

 

Current liabilities

   $ 39,468       $ 45,084   

Non-current liabilities

     6,268         6,791   
  

 

 

    

 

 

 

Total liabilities

   $ 45,736       $ 51,875   
  

 

 

    

 

 

 

(20) Loss on Disposition

In July 2013, we sold our Spinreact operations located in Spain, which was part of our professional diagnostics reporting unit and business segment, for $32.0 million in cash proceeds and, as a result of this transaction, we recorded a loss on disposition of $5.9 million during the quarter ended September 30, 2013. The financial results for our Spinreact operations are immaterial to our consolidated financial results.

(21) Guarantor Financial Information

Our 7.25% senior notes due 2018, our 8.625% senior subordinated notes due 2018, and our 6.5% senior subordinated notes due 2020 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 September 30, 2013 and December 31, 2012, the related statements of operations and statements of comprehensive income (loss) for each of the three and nine months ended September 30, 2013 and 2012, respectively, and the statements of cash flows for the nine months ended September 30, 2013 and 2012, 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.

 

24


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 223,254      $ 330,389      $ (44,605   $ 509,038   

Services revenue

     —          220,439        20,221        —          240,660   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          443,693        350,610        (44,605     749,698   

License and royalty revenue

     —          5,103        4,057        (4,976     4,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          448,796        354,667        (49,581     753,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     887        129,408        165,396        (37,457     258,234   

Cost of services revenue

     —          120,032        10,292        (5,331     124,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     887        249,440        175,688        (42,788     383,227   

Cost of license and royalty revenue

     —          17        6,967        (4,975     2,009   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     887        249,457        182,655        (47,763     385,236   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (887     199,339        172,012        (1,818     368,646   

Operating expenses:

          

Research and development

     5,515        15,817        19,166        —          40,498   

Sales and marketing

     1,579        81,107        76,901        —          159,587   

General and administrative

     23,027        61,489        57,861        —          142,377   

Loss on disposition

     —          —          5,885        —          5,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (31,008     40,926        12,199        (1,818     20,299   

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

     (52,318     (6,326     (2,721     7,945        (53,420

Other income (expense), net

     (6,775     5,770        81        (7,945     (8,869
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (90,101     40,370        9,559        (1,818     (41,990

Provision (benefit) for income taxes

     (29,302     14,928        (2,214     (560     (17,148
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (60,799     25,442        11,773        (1,258     (24,842

Equity earnings (losses) of subsidiaries, net of tax

     41,246        (337     —          (40,909     —     

Equity earnings of unconsolidated entities, net of tax

     464        —          5,217        72        5,753   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (19,089     25,105        16,990        (42,095     (19,089

Less: Net income attributable to non-controlling interests

     —          —          359        —          359   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (19,089     25,105        16,631        (42,095     (19,448

Preferred stock dividends

     (5,367     —          —          —          (5,367
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (24,456   $ 25,105      $ 16,631      $ (42,095   $ (24,815
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 219,484      $ 282,369      $ (42,040   $ 459,813   

Services revenue

     —          210,761        15,654        —          226,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          430,245        298,023        (42,040     686,228   

License and royalty revenue

     —          (4,912     4,868        5,232        5,188   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          425,333        302,891        (36,808     691,416   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     928        107,410        152,607        (37,333     223,612   

Cost of services revenue

     —          115,212        7,161        (2,242     120,131   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     928        222,622        159,768        (39,575     343,743   

Cost of license and royalty revenue

     —          5        (3,339     5,232        1,898   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     928        222,627        156,429        (34,343     345,641   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (928     202,706        146,462        (2,465     345,775   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     6,292        18,007        16,263        —          40,562   

Sales and marketing

     1,220        85,866        73,558        —          160,644   

General and administrative

     11,392        48,704        45,741        —          105,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     18,904        152,577        135,562        —          307,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (19,832     50,129        10,900        (2,465     38,732   

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

     (54,324     (9,278     (2,783     11,524        (54,861

Other income (expense), net

     1,534        8,319        599        (11,524     (1,072
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (72,622     49,170        8,716        (2,465     (17,201

Provision (benefit) for income taxes

     (27,401     17,014        643        (933     (10,677
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (45,221     32,156        8,073        (1,532     (6,524

Equity earnings (losses) of subsidiaries, net of tax

     41,052        (230     —          (40,822     —     

Equity earnings of unconsolidated entities, net of tax

     652        —          2,405        (50     3,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (3,517     31,926        10,478        (42,404     (3,517

Less: Net income attributable to non-controlling interests

     —          —          286        —          286   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (3,517     31,926        10,192        (42,404     (3,803

Preferred stock dividends

     (5,352     —          —          —          (5,352
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (8,869   $ 31,926      $ 10,192      $ (42,404   $ (9,155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 665,672      $ 1,016,614      $ (143,410   $ 1,538,876   

Services revenue

     —          644,760        60,367        —          705,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          1,310,432        1,076,981        (143,410     2,244,003   

License and royalty revenue

     —          10,908        12,662        (10,457     13,113   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          1,321,340        1,089,643        (153,867     2,257,116   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     2,722        367,552        519,559        (125,332     764,501   

Cost of services revenue

     —          355,930        28,511        (14,480     369,961   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     2,722        723,482        548,070        (139,812     1,134,462   

Cost of license and royalty revenue

     —          52        15,668        (10,456     5,264   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     2,722        723,534        563,738        (150,268     1,139,726   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (2,722     597,806        525,905        (3,599     1,117,390   

Operating expenses:

          

Research and development

     16,167        49,354        56,931        —          122,452   

Sales and marketing

     4,384        245,148        225,933        —          475,465   

General and administrative

     51,531        200,646        166,219        —          418,396   

Loss on disposition

     —          —          5,885        —          5,885   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (74,804     102,658        70,937        (3,599     95,192   

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

     (200,836     (19,729     (9,209     26,502        (203,272

Other income (expense), net

     (7,612     17,665        8,173        (26,502     (8,276
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (283,252     100,594        69,901        (3,599     (116,356

Provision (benefit) for income taxes

     (102,473     44,896        22,663        (1,238     (36,152
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (180,779     55,698        47,238        (2,361     (80,204

Equity earnings (losses) of subsidiaries, net of tax

     112,535        (1,510     —          (111,025     —     

Equity earnings of unconsolidated entities, net of tax

     1,278        —          11,932        28        13,238   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (66,966     54,188        59,170        (113,358     (66,966

Less: Net income attributable to non-controlling interests

     —          —          601        —          601   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (66,966     54,188        58,569        (113,358     (67,567

Preferred stock dividends

     (15,926     —          —          —          (15,926
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (82,892   $ 54,188      $ 58,569      $ (113,358   $ (83,493
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 649,719      $ 854,113      $ (104,807   $ 1,399,025   

Services revenue

     —          605,193        47,511        —          652,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          1,254,912        901,624        (104,807     2,051,729   

License and royalty revenue

     —          8,982        10,016        (7,665     11,333   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          1,263,894        911,640        (112,472     2,063,062   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     2,635        311,722        456,760        (99,453     671,664   

Cost of services revenue

     —          311,718        22,074        (2,242     331,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     2,635        623,440        478,834        (101,695     1,003,214   

Cost of license and royalty revenue

     —          15        13,044        (7,665     5,394   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     2,635        623,455        491,878        (109,360     1,008,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (2,635     640,439        419,762        (3,112     1,054,454   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     17,361        53,528        49,120        —          120,009   

Sales and marketing

     3,096        260,283        215,165        —          478,544   

General and administrative

     37,590        174,639        135,528        —          347,757   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     58,047        488,450        399,813        —          946,310   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (60,682     151,989        19,949        (3,112     108,144   

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

     (158,009     (31,291     (9,853     38,034        (161,119

Other income (expense), net

     (2,552     33,550        21,606        (38,034     14,570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (221,243     154,248        31,702        (3,112     (38,405

Provision (benefit) for income taxes

     (74,149     59,013        3,494        (979     (12,621
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (147,094     95,235        28,208        (2,133     (25,784

Equity earnings (losses) of subsidiaries, net of tax

     129,929        (763     —          (129,166     —     

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

     1,798        —          8,643        (24     10,417   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (15,367     94,472        36,851        (131,323     (15,367

Less: Net income attributable to non-controlling interests

     —          —          137        —          137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (15,367     94,472        36,714        (131,323     (15,504

Preferred stock dividends

     (15,940     —          —          —          (15,940
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (31,307   $ 94,472      $ 36,714      $ (131,323   $ (31,444
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended September 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (19,089   $ 25,105       $ 16,990      $ (42,095   $ (19,089
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax:

           

Changes in cumulative translation adjustment

     524        —           66,742        2        67,268   

Unrealized gains on hedging instruments

     —          —           20        —          20   

Minimum pension liability adjustment

     —          —           (369     —          (369
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     524        —           66,393        2        66,919   

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

     —          —           —          —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     524        —           66,393        2        66,919   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (18,565     25,105         83,383        (42,093     47,830   

Less: Comprehensive income attributable to non-controlling interests

     —          —           359        —          359   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ (18,565   $ 25,105       $ 83,024      $ (42,093   $ 47,471   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended September 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (3,517   $ 31,926       $ 10,478      $ (42,404   $ (3,517
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax:

           

Changes in cumulative translation adjustment

     132        1         36,027        3,535        39,695   

Unrealized gains on available for sale securities

     141        —           —          —          141   

Unrealized gains on hedging instruments

     —          —           10        —          10   

Minimum pension liability adjustment

     —          —           (98     —          (98
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     273        1         35,939        3,535        39,748   

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

     360        —           —          —          360   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (87     1         35,939        3,535        39,388   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (3,604     31,927         46,417        (38,869     35,871   

Less: Comprehensive income attributable to non-controlling interests

     —          —           286        —          286   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ (3,604   $ 31,927       $ 46,131      $ (38,869   $ 35,585   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Nine Months Ended September 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (66,966   $ 54,188       $ 59,170      $ (113,358   $ (66,966
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax:

           

Changes in cumulative translation adjustment

     (329     —           (42,188     2        (42,515

Unrealized gains on hedging instruments

     —          —           31        —          31   

Minimum pension liability adjustment

     —          —           335        —          335   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

     (329     —           (41,822     2        (42,149

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

     —          —           —          —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (329     —           (41,822     2        (42,149
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (67,295     54,188         17,348        (113,356     (109,115

Less: Comprehensive income attributable to non-controlling interests

     —          —           601        —          601   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ (67,295   $ 54,188       $ 16,747      $ (113,356   $ (109,716
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Nine Months Ended September 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (15,367   $ 94,472      $ 36,851      $ (131,323   $ (15,367
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

          

Changes in cumulative translation adjustment

     (100     (302     37,136        2,123        38,857   

Unrealized gains on available for sale securities

     926        5        —          —          931   

Unrealized gains on hedging instruments

     17        —          448        —          465   

Minimum pension liability adjustment

     —          —          (218     —          (218
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     843        (297     37,366        2,123        40,035   

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

     360        —          —          —          360   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     483        (297     37,366        2,123        39,675   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (14,884     94,175        74,217        (129,200     24,308   

Less: Comprehensive income attributable to non-controlling interests

     —          —          137        —          137   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (14,884   $ 94,175      $ 74,080      $ (129,200   $ 24,171   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

CONSOLIDATING BALANCE SHEET

September 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 47,863      $ 76,234       $ 229,896       $ —        $ 353,993   

Restricted cash

     4,439        2,309         1,157         —          7,905   

Marketable securities

     —          815         5         —          820   

Accounts receivable, net of allowances

     —          256,578         312,295         —          568,873   

Inventories, net

     —          170,372         225,894         (25,818     370,448   

Deferred tax assets

     8,749        35,980         9,440         4,008        58,177   

Prepaid expenses and other current assets

     3,911        34,732         75,999         (41     114,601   

Intercompany receivables

     332,124        714,131         61,898         (1,108,153     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     397,086        1,291,151         916,584         (1,130,004     1,474,817   

Property, plant and equipment, net

     9,048        291,621         243,981         (379     544,271   

Goodwill

     —          1,810,036         1,293,459         —          3,103,495   

Other intangible assets with indefinite lives

     —          12,900         46,053         —          58,953   

Finite-lived intangible assets, net

     8,786        1,003,272         735,480         —          1,747,538   

Restricted cash—non-current

     —          —           29,045         —          29,045   

Deferred financing costs, net and other non-current assets

     58,996        9,299         18,247         (53     86,489   

Investments in subsidiaries

     4,473,400        274,450         127,711         (4,875,561     —     

Investments in unconsolidated entities

     30,221        —           58,049         13,552        101,822   

Deferred tax assets

     —          —           8,189         —          8,189   

Intercompany notes receivable

     1,541,655        665,623         97,887         (2,305,165     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 6,519,192      $ 5,358,352       $ 3,574,685       $ (8,297,610   $ 7,154,619   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Short-term debt

   $ —        $ —         $ 25       $ —        $ 25   

Current portion of long-term debt

     45,000        348         2,353         —          47,701   

Current portion of capital lease obligations

     —          3,808         2,725         —          6,533   

Accounts payable

     18,702        77,163         99,126         —          194,991   

Accrued expenses and other current liabilities

     (381,276     604,035         225,084         (615     447,228   

Intercompany payables

     677,842        149,645         280,668         (1,108,155     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     360,268        834,999         609,981         (1,108,770     696,478   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Long-term liabilities:

            

Long-term debt, net of current portion

     3,750,057        150         40,325         —          3,790,532   

Capital lease obligations, net of current portion

     —          6,133         8,793         —          14,926   

Deferred tax liabilities

     (27,768     282,942         97,211         474        352,859   

Other long-term liabilities

     20,198        57,762         131,776         (53     209,683   

Intercompany notes payables

     330,967        1,503,599         470,599         (2,305,165     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     4,073,454        1,850,586         748,704         (2,304,744     4,368,000   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Stockholders’ equity

     2,085,470        2,672,767         2,211,329         (4,884,096     2,085,470   

Non-controlling interests

     —          —           4,671         —          4,671   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,085,470        2,672,767         2,216,000         (4,884,096     2,090,141   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 6,519,192      $ 5,358,352       $ 3,574,685       $ (8,297,610   $ 7,154,619   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

33


Table of Contents

CONSOLIDATING BALANCE SHEET

December 31, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 3,623      $ 67,449       $ 257,274       $ —        $ 328,346   

Restricted cash

     —          1,680         1,396         —          3,076   

Marketable securities

     —          787         117         —          904   

Accounts receivable, net of allowances

     —          241,050         283,282         —          524,332   

Inventories, net

     —          142,413         203,230         (8,522     337,121   

Deferred tax assets

     12,193        39,601         13,138         2,790        67,722   

Prepaid expenses and other current assets

     (20,636     99,271         66,634         (33     145,236   

Intercompany receivables

     298,812        1,254,727         55,847         (1,609,386     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     293,992        1,846,978         880,918         (1,615,151     1,406,737   

Property, plant and equipment, net

     2,679        293,260         239,082         (552     534,469   

Goodwill

     —          1,820,438         1,227,967         —          3,048,405   

Other intangible assets with indefinite lives

     —          14,600         21,851         —          36,451   

Finite-lived intangible assets, net

     24,701        1,132,656         676,868         —          1,834,225   

Deferred financing costs, net and other non-current assets

     78,522        10,341         20,065         (71     108,857   

Investments in subsidiaries

     4,114,478        222,175         73,940         (4,410,593     —     

Investments in unconsolidated entities

     33,979        —           56,512         —          90,491   

Deferred tax assets

     —          782         7,511         —          8,293   

Intercompany notes receivable

     1,724,650        722,552         1,278         (2,448,480     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 6,273,001      $ 6,063,782       $ 3,205,992       $ (8,474,847   $ 7,067,928   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Current portion of long-term debt

   $ 45,000      $ 349       $ 14,883       $ —        $ 60,232   

Current portion of capital lease obligations

     —          3,209         3,475         —          6,684   

Accounts payable

     7,993        76,256         85,725         —          169,974   

Accrued expenses and other current liabilities

     (388,830     586,116         214,659         (26     411,919   

Intercompany payables

     557,578        806,507         245,300         (1,609,385     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     221,741        1,472,437         564,042         (1,609,411     648,809   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Long-term liabilities:

            

Long-term debt, net of current portion

     3,617,068        374         11,233         —          3,628,675   

Capital lease obligations, net of current portion

     —          5,412         7,505         —          12,917   

Deferred tax liabilities

     (5,329     333,388         100,216         (87     428,188   

Other long-term liabilities

     17,678        72,890         76,138         (71     166,635   

Intercompany notes payables

     241,421        1,630,376         576,684         (2,448,481     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     3,870,838        2,042,440         771,776         (2,448,639     4,236,415   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Stockholders’ equity

     2,180,422        2,548,905         1,867,892         (4,416,797     2,180,422   

Non-controlling interests

     —          —           2,282         —          2,282   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,180,422        2,548,905         1,870,174         (4,416,797     2,182,704   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 6,273,001      $ 6,063,782       $ 3,205,992       $ (8,474,847   $ 7,067,928   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

34


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income (loss)

   $ (66,966   $ 54,188      $ 59,170      $ (113,358   $ (66,966

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

          

Equity (earnings) losses of subsidiaries, net of tax

     (112,535     1,510        —          111,025        —     

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

     13,814        229        45        —          14,088   

Depreciation and amortization

     3,731        188,745        134,317        (104     326,689   

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

     —          —          1,880        —          1,880   

Non-cash stock-based compensation expense

     5,836        3,646        4,980        —          14,462   

Impairment of inventory

     —          27        216        —          243   

Impairment of long-lived assets

     —          2,954        1,147        —          4,101   

Loss on sale of fixed assets

     —          1,118        731        —          1,849   

Equity earnings of unconsolidated entities, net of tax

     (1,278     —          (11,932     (28     (13,238

Deferred income taxes

     (17,386     (27,285     (27,830     (1,154     (73,655

Loss on extinguishment of debt

     35,603        —          —          —          35,603   

Loss on disposition

     —          —          5,885        —          5,885   

Bargain purchase gain

     —          —          (5,707     —          (5,707

Other non-cash items

     5,201        (8     1,481        —          1,481   

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —          (15,528     (41,782     —          (57,310

Inventories, net

     —          (45,883     (30,615     3,771        (72,727

Prepaid expenses and other current assets

     (64,547     67,871        (4,941     (7,515     (9,132

Accounts payable

     5,918        (1,453     11,516        —          15,981   

Accrued expenses and other current liabilities

     10,396        17,570        2,342        6,934        37,242   

Other non-current liabilities

     (915     (15,197     8,739        516        (6,857

Intercompany payable (receivable)

     298,083        (182,214     (115,869     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     114,955        50,290        (6,227     87        159,105   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

Increase in restricted cash

     (4,439     (630     (28,812     —          (33,881

Purchases of property, plant and equipment

     (1,037     (42,950     (58,860     11,939        (90,908

Proceeds from sale of property, plant and equipment

     —          6,908        11,186        (12,263     5,831   

Cash received from disposition

     —          —          32,000        —          32,000   

Cash paid for acquisitions, net of cash acquired

     (157,373     —          (8,823     —          (166,196

Cash received from equity method investments

     490        —          10,772        —          11,262   

(Increase) decrease in other assets

     19,244        (2,047     2,065        (18     19,244   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (143,115     (38,719     (40,472     (342     (222,648
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (9,798     —          —          —          (9,798

Cash paid for contingent purchase price consideration

     (27,165     —          (331     —          (27,496

Proceeds from issuance of common stock, net of issuance costs

     17,555        —          —          —          17,555   

Proceeds from issuance of long-term debt

     425,000        989        34,152        —          460,141   

Payments on long-term debt

     (446,845     (1,213     (7,099     —          (455,157

Net proceeds (payments) under revolving credit facilities

     147,500        —          (8,732     —          138,768   

Borrowings from short-term debt

     —          —          25        —          25   

Cash paid for dividends

     (15,970     —          —          —          (15,970

Excess tax benefits on exercised stock options

     205        181        48        —          434   

Principal payments on capital lease obligations

     —          (2,715     (2,626     —          (5,341

Other

     (18,953     —          —          —          (18,953
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     71,529        (2,758     15,437        —          84,208   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     871        (28     3,884        255        4,982   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     44,240        8,785        (27,378     —          25,647   

Cash and cash equivalents, beginning of period

     3,623        67,449        257,274        —          328,346   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 47,863      $ 76,234      $ 229,896      $ —        $ 353,993   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income (loss)

   $ (15,367   $ 94,472      $ 36,851      $ (131,323   $ (15,367

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Equity (earnings) losses of subsidiaries, net of tax

     (129,929     763        —          129,166        —     

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

     15,929        158        —          —          16,087   

Depreciation and amortization

     4,314        198,576        119,462        19        322,371   

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

     —          1,400        3,281        —          4,681   

Non-cash stock-based compensation expense

     3,119        4,309        4,440        —          11,868   

Impairment of inventory

     —          5        290        —          295   

Impairment of long-lived assets

     —          219        55        —          274   

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

     3        (4,029     (168     —          (4,194

Equity earnings of unconsolidated entities, net of tax

     (1,798     —          (8,643     24        (10,417

Deferred income taxes

     20,901        (38,495     (25,122     (903     (43,619

Other non-cash items

     (1,156     685        6,207        —          5,736   

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —          (6,468     (1,793     —          (8,261

Inventories, net

     —          4,881        (23,303     2,826        (15,596

Prepaid expenses and other current assets

     (419,146     410,233        13,059        25        4,171   

Accounts payable

     3,961        (2,327     (18,377     —          (16,743

Accrued expenses and other current liabilities

     354,452        (323,909     (5,843     (584     24,116   

Other non-current liabilities

     (7,158     (1,634     (13,275     428        (21,639

Intercompany payable (receivable)

     297,741        (322,706     27,088        (2,123     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     125,866        16,133        114,209        (2,445     253,763   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

Decrease in restricted cash

     —          12        5,759        —          5,771   

Purchases of property, plant and equipment

     (1,149     (69,092     (94,311     67,243        (97,309

Proceeds from sale of property, plant and equipment

     —          22,230        66,281        (66,128     22,383   

Cash received from (paid for) acquisitions, net of cash acquired

     (364,731     1,469        (21,518     —          (384,780

Cash received from sales of marketable securities

     —          268        3        —          271   

Net cash received from equity method investments

     490        —          6,066        —          6,556   

(Increase) decrease in other assets

     (10,028     (615     1,275        55        (9,313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (375,418     (45,728     (36,445     1,170        (456,421
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (2,313     —          —          —          (2,313

Cash paid for contingent purchase price consideration

     (16,248     —          —          —          (16,248

Proceeds from issuance of common stock, net of issuance costs

     14,260        —          —          —          14,260   

Proceeds from issuance of long-term debt

     198,000        —          288        —          198,288   

Payments on long-term debt

     (33,250     (455     (8,848     —          (42,553

Net proceeds (payments) under revolving credit facilities

     97,500        (2     (6,336     —          91,162   

Payments on short-term debt

     (6,240     —          —          —          (6,240

Cash paid for dividends

     (15,970     —          —          —          (15,970

Excess tax benefits on exercised stock options

     183        74        20        —          277   

Principal payments on capital lease obligations

     —          (1,503     (3,422     —          (4,925

Other

     —          —          (2,811     —          (2,811
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     235,922        (1,886     (21,109     —          212,927   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     1,508        331        (10,302     1,275        (7,188
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (12,122     (31,150     46,353        —          3,081   

Cash and cash equivalents, beginning of period

     12,451        95,212        191,510        —          299,173   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 329      $ 64,062      $ 237,863      $ —        $ 302,254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

36


Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report 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. You can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other “forward-looking” information. Forward-looking statements include, without limitation, statements regarding anticipated expansion and growth in certain of our product and service offerings, the impact of our research and development activities, potential new product and technology achievements, the potential for selective acquisitions, our ability to improve our working capital and operating margins, our expectations with respect to Apollo, our integrated health information solutions technology platform, our ability to improve care and lower healthcare costs for both providers and patients, the effect of the Affordable Care Act and other initiatives to reduce healthcare expenses, the potential for divestitures of non-core assets and the effects of any such divestitures, and our funding plans for our future working capital needs and commitments. Actual results or developments could differ materially from those projected in such statements as a result of numerous factors, including, without limitation, those risks and uncertainties set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2012 and other risk factors identified herein or from time to time in our periodic filings with the SEC. We do not undertake any obligation to update any forward-looking statements. This report and, in particular, the following discussion and analysis of our financial condition and results of operations should be read in light of those risks and uncertainties and in conjunction with our accompanying consolidated financial statements and notes thereto.

Overview

We enable individuals to take greater control of their health at home, under the supervision of their healthcare providers, by combining near-patient diagnostics, health monitoring capabilities and health information solutions. A leading global provider of point-of-care diagnostics and services, we have developed a strong commercial presence in cardiology, infectious disease, toxicology, and diabetes. Our products and services help healthcare practitioners make earlier, more effective treatment decisions and improve outcomes for individuals living with chronic disease.

During 2012, we focused on completing the foundation for this business model by expanding our presence in toxicology and diabetes through acquisitions. Our toxicology group is now a full-service provider to a broad range of domestic and foreign employers in industries that require rigorous drug testing. We built a strong presence in diabetes through targeted acquisitions. Including the effect of acquisitions completed in early 2013, we now service more than 670,000 active diabetes customers. We believe that the strong foundation that we have built in diabetes, specifically in our mail-order diabetes testing supply business, has provided us with a competitive advantage in dealing with the impact of Centers for Medicare and Medicaid Services’, or CMS’, reduction in reimbursement rates for diabetes testing supplies by approximately 70% effective July 1, 2013.

Core to our strategy are health information solutions that enable diagnostic data to be fed directly into an information exchange that integrates the diagnostic data with other patient-related information in a single health record. In recent periods, we have focused on acquiring health information solutions that will supplement our internally developed information solutions, including Apollo, and improve our ability to execute our business strategy. We offer a variety of connectivity tools, software-based analytics, clinical decision support tools, and health improvement programs that enable healthcare providers to initiate earlier interventions, personalize treatment plans, lower costs by reducing hospital readmissions, and measure improvements in outcomes at both a patient and population level.

We remain focused on enhancing shareholder value through our three-point plan to accelerate organic growth, improve operational execution and deleverage our capital structure. We continue to build momentum behind our next generation of novel diagnostic platforms that we expect will drive our growth in future years. With our novel molecular diagnostic platforms in the late stages of development and nearing launch, we have now begun to refocus our research and development efforts away from long-term projects towards product enhancements and menu expansion for our existing and recently launched platforms. We are also focused on improving our operational efficiency, including reducing selling, general and administrative expense, in order to generate dependable, long-term cash flow. To achieve this we are implementing a variety of global shared service initiatives, particularly in the areas of distribution and information technology, as well as implementing and expanding services from our recently established global in-sourcing facility in the Philippines. Additionally, with the foundation of our business essentially complete, we are exploring divestures of non-core businesses, with the $32.0 million sale of our Spinreact operations in Spain in July 2013 representing the first such disposition. We expect to use our improved cash flow, as well as the proceeds from non-core divestitures, or portions thereof, to reduce our indebtedness without compromising our core businesses.

 

37


Table of Contents

Financial Highlights

 

    Net revenue increased by $62.5 million, or 9%, to $753.9 million for the three months ended September 30, 2013, from $691.4 million for the three months ended September 30, 2012. Net revenue increased by $194.1 million, or 9%, to $2.3 billion for the nine months ended September 30, 2013, from $2.1 billion for the nine months ended September 30, 2012.

 

    Gross profit increased by $22.9 million, or 7%, to $368.6 million for the three months ended September 30, 2013, from $345.8 million for the three months ended September 30, 2012. Gross profit increased by $62.9 million, or 6%, to $1,117.4 million for the nine months ended September 30, 2013, from $1,054.5 million for the nine months ended September 30, 2012.

 

    For the three months ended September 30, 2013, we generated a net loss available to common stockholders of $24.8 million, or $0.30 per basic and diluted common share, compared to a net loss available to common stockholders of $9.2 million, or $0.11 per basic and diluted common share, for the three months ended September 30, 2012. For the nine months ended September 30, 2013, we generated a net loss available to common stockholders of $83.5 million, or $1.03 per basic and diluted common share, compared to a net loss available to common stockholders of $31.4 million, or $0.39 per basic and diluted common share, for the nine months ended September 30, 2012.

 

    Net loss for the nine months ended September 30, 2013 includes a $35.6 million loss on extinguishment of debt in connection with the repurchase of our 9% senior subordinated notes in the second quarter this year.

Results of Operations

Where discussed, results excluding the impact of foreign currency translation are calculated on the basis of local currency results, using foreign currency exchange rates applicable to the earlier comparative period. We believe presenting information using the same foreign currency exchange rates helps investors isolate the impact of changes in those rates from other trends. Our results of operations were as follows:

Net Product Sales and Services Revenue, Total and by Business Segment. Total net product sales and services revenue increased by $63.5 million, or 9%, to $749.7 million for the three months ended September 30, 2013, from $686.2 million for the three months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue for the three months ended September 30, 2013 increased by $68.0 million, or 10%, compared to the three months ended September 30, 2012. Total net product sales and services revenue increased by $192.3 million, or 9%, to $2.2 billion for the nine months ended September 30, 2013, from $2.1 billion for the nine months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue for the nine months ended September 30, 2013 increased by $203.7 million, or 10%, compared to the nine months ended September 30, 2012. Net product sales and services revenue by business segment for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

 

     Three Months Ended September 30,      %     Nine Months Ended September 30,      %  
     2013      2012      Change     2013      2012      Change  

Professional diagnostics

   $ 587,313       $ 528,754         11   $ 1,765,538       $ 1,581,076         12

Health information solutions

     134,233         135,078         (1 )%      403,215         404,452         —  

Consumer diagnostics

     28,152         22,396         26     75,250         66,201         14
  

 

 

    

 

 

      

 

 

    

 

 

    

Net product sales and services revenue

   $ 749,698       $ 686,228         9   $ 2,244,003       $ 2,051,729         9
  

 

 

    

 

 

      

 

 

    

 

 

    

Professional Diagnostics

The following table summarizes our net product sales and services revenue from our professional diagnostics business segment by groups of similar products and services for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

     Three Months Ended September 30      %     Nine Months Ended September 30,      %  
     2013      2012      Change     2013      2012      Change  

Cardiology

   $ 116,281       $ 122,372         (5 )%    $ 349,650       $ 386,795         (10 )% 

Infectious disease

     172,739         136,561         26     520,289         425,398         22

Toxicology

     166,536         156,074         7     481,469         437,736         10

Diabetes

     53,150         35,670         49     178,138         100,628         77

Other

     78,607         78,077         1     235,992         230,519         2
  

 

 

    

 

 

      

 

 

    

 

 

    

Professional diagnostics net product sales and services revenue

   $ 587,313       $ 528,754         11   $ 1,765,538       $ 1,581,076         12
  

 

 

    

 

 

      

 

 

    

 

 

    

 

38


Table of Contents

Net product sales and services revenue from our professional diagnostics business segment increased by $58.6 million, or 11%, to $587.3 million for the three months ended September 30, 2013, from $528.8 million for the three months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $63.8 million, or 12%, comparing the three months ended September 30, 2013 to the three months ended September 30, 2012. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $30.6 million of the non-currency-adjusted increase. Partly driving the increase in net product sales and services revenue was an increase in our North American flu-related net product sales during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. Net product sales from our North American flu-related sales increased approximately $8.4 million, from $9.9 million during the three months ended September 30, 2012 to $18.3 million during the three months ended September 30, 2013. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $17.7 million during the three months ended September 30, 2013, as compared to $34.9 million during the three months ended September 30, 2012. Excluding the impact of acquisitions and the disposition of our Spinreact operations in Spain, the increase in flu-related sales during the comparable periods and the impact of the reduction in net product sales from meter-based Triage products in the U.S., the currency-adjusted organic growth for our professional diagnostics net product sales and services revenue was approximately $44.3 million, or 9%, from the three months ended September 30, 2012 to the three months ended September 30, 2013. This growth rate was adversely impacted by the change in CMS’ reimbursement rates which became effective on July 1, 2013 for our U.S. mail order diabetes business.

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $6.1 million, or 5%, to $116.3 million for the three months ended September 30, 2013, from $122.4 million for the three months ended September 30, 2012, driven principally by the impact of the FDA review of certain of our meter-based Triage products in the U.S. Net product sales and services revenue for our infectious disease business increased by approximately $36.2 million, or 26%, to $172.7 million for the three months ended September 30, 2013, from $136.6 million for the three months ended September 30, 2012. The change was driven principally by a growth in HIV, flu and malaria revenues during the comparable periods. Net product sales and services revenue for our toxicology business increased by approximately $10.5 million, or 7%, to $166.5 million for the three months ended September 30, 2013, from $156.1 million for the three months ended September 30, 2012, with our recent toxicology-related acquisitions contributing a combined net $3.0 million of the non-currency adjusted increase. Offsetting the increase in net product sales and services revenue for our toxicology business contributed by acquisitions was a $7.3 million decrease in net product sales related to our Triage toxicology products. Net product sales and services revenue from our diabetes business increased by approximately $17.5 million, or 49%, to $53.2 million for the three months ended September 30, 2013, from $35.7 million for the three months ended September 30, 2012. The increase was primarily the result of our recent acquisitions of NationsHealth, Discount Diabetic, LLC, or Discount Diabetic, and the Medicare fee-for-service assets of Liberty Medical, or the Liberty business, which contributed a combined net $26.5 million of the non-currency adjusted increase. Included in the $53.2 million of revenue from our diabetes business for the three months ended September 30, 2013 were $34.3 million of mail order diabetes sales, compared to $22.8 million for the three months ended September 30, 2012. The $34.3 million of mail order diabetes sales reflect the negative impact of the reduction in CMS’ reimbursement rates for diabetes testing supplies which became effective on July 1, 2013, offset by incremental sales related to our April 2013 acquisition of the Liberty business.

Net product sales and services revenue from our professional diagnostics business segment increased by $184.5 million, or 12%, to $1.8 billion for the nine months ended September 30, 2013, from $1.6 billion for the nine months ended September 30, 2012. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $197.2 million, or 12%, comparing the nine months ended September 30, 2013 to the nine months ended September 30, 2012. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $140.1 million of the non-currency-adjusted increase. Contributing to the increase in net product sales and services revenue was an increase in our North American flu-related net product sales during the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012. Net product sales from our North American flu-related sales increased approximately $34.0 million, from $20.6 million during the nine months ended September 30, 2012 to $54.6 million during the nine months ended September 30, 2013. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $58.6 million during the nine months ended September 30, 2013, as compared to $126.0 million during the nine months ended September 30, 2012. Excluding the impact of acquisitions and the disposition of our Spinreact operations in Spain, the increase in flu-related sales during the comparable periods and the impact of the reduction in net product sales from meter-based Triage products in the U.S., the currency-adjusted organic growth for our professional diagnostics net product sales and services revenue was approximately $92.8 million, or 6%, from the nine months ended September 30, 2012 to the nine months ended September 30, 2013. This growth rate was adversely impacted by the change in CMS’ reimbursement rates which became effective on July 1, 2013 for our U.S. mail order diabetes business.

 

39


Table of Contents

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $37.1 million, or 10%, to $349.7 million for the nine months ended September 30, 2013, from $386.8 million for the nine months ended September 30, 2012, driven principally by the impact of the FDA review of certain of our meter-based Triage products in the U.S. Net product sales and services revenue for our infectious disease business increased by approximately $94.9 million, or 22%, to $520.3 million for the nine months ended September 30, 2013, from $425.4 million for the nine months ended September 30, 2012. The change was driven principally by an increase in HIV, flu and malaria-related sales during the comparable periods. Net product sales and services revenue for our toxicology business increased by approximately $43.7 million, or 10%, to $481.5 million for the nine months ended September 30, 2013, from $437.7 million for the nine months ended September 30, 2012, with our recent toxicology-related acquisitions contributing a combined net $52.9 million of the non-currency adjusted increase. Partially offsetting the increase in net product sales and services revenue for our toxicology business contributed by acquisitions was a $22.6 million decrease in net product sales related to our Triage toxicology products and a reduction in commercial pricing for our pain and rehab businesses which was implemented in the second quarter of 2012. Our diabetes business increased by approximately $77.5 million, or 77%, to $178.1 million for the nine months ended September 30, 2013, from $100.6 million for the nine months ended September 30, 2012. The increase was primarily the result of our recent acquisitions of AmMed, NationsHealth, Discount Diabetic, and the Liberty business, which contributed a combined net $78.8 million of the non-currency adjusted increase. Included in the $178.1 million of revenue from our diabetes business for the nine months ended September 30, 2013 were $123.8 million of mail order diabetes sales, compared to $60.7 million for the nine months ended September 30, 2012. The $123.8 million of mail order diabetes sales from the nine months ended September 30, 2013 reflect the negative impact of the reduction in CMS’ reimbursement rates for diabetes testing supplies which became effective on July 1, 2013, offset by incremental sales related to our April 2013 acquisition of the Liberty business.

Health Information Solutions

The following table summarizes our net product sales and services revenue from our health information solutions business segment by groups of similar products and services for the three and nine months ended September 30, 2013 and 2012 (in thousands):

 

     Three Months Ended September 30,      %     Nine Months Ended September 30,      %  
     2013      2012      Change     2013      2012      Change  

Disease and case management

   $ 56,554       $ 57,383         (1 )%    $ 163,258       $ 165,277         (1 )% 

Wellness

     22,223         24,290         (9 )%      75,753         80,881         (6 )% 

Women’s & children’s health

     28,431         29,136         (2 )%      86,767         90,220         (4 )% 

Patient self-testing services

     27,025         24,269         11     77,437         68,074         14
  

 

 

    

 

 

      

 

 

    

 

 

    

Health information solutions net product sales and services revenue

   $ 134,233       $ 135,078         (1 )%    $ 403,215       $ 404,452         —  
  

 

 

    

 

 

      

 

 

    

 

 

    

Our health information solutions net product sales and services revenue decreased by $0.8 million, or 0.6%, to $134.2 million for the three months ended September 30, 2013, from $135.1 million for the three months ended September 30, 2012. Net product sales and services revenues from our disease and case management, wellness and women’s and children’s health businesses each decreased during the three months ended September 30, 2013, compared to the three months ended September 30, 2012, as we experienced customer terminations, lower state enrollments in wellness programs and lower revenue from homecare services in these businesses, respectively. Our patient self-testing services net product sales and services revenue increased approximately $2.8 million, or 11%, to $27.0 million for the three months ended September 30, 2013, from $24.3 million for the three months ended September 30, 2012, principally driven by an increase in our home coagulation monitoring programs resulting from a larger patient population and a simultaneous reduction in customer attrition rates.

Our health information solutions net product sales and services revenue was $403.2 million for the nine months ended September 30, 2013, and was relatively flat compared to $404.5 million for the nine months ended September 30, 2012. Net product sales and service revenue from our disease and case management, wellness and women’s and children’s health businesses each decreased during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, as we experienced customer terminations, lower state enrollments in wellness programs and lower revenue from homecare services in these businesses, respectively. Given the challenging contracting season, we expect weak sales in the fourth quarter of 2013 and in the first quarter of 2014, and then expect to resume sequential growth, adjusting for seasonality within this segment through 2014, from the first quarter of 2014 base. Our patient self-testing services net product sales and services revenue increased approximately $9.4 million, or 14%, to $77.4 million for the nine months ended September 30, 2013, from $68.1 million for the nine months ended September 30, 2012, principally driven by an increase in our home coagulation monitoring programs resulting from a larger patient population and a simultaneous reduction in customer attrition rates.

 

40


Table of Contents

Consumer Diagnostics

Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $5.8 million, or 26%, to $28.2 million for the three months ended September 30, 2013, from $22.4 million for the three months ended September 30, 2012. Net product sales by our 50/50 joint venture with P&G, Swiss Precision Diagnostics GmbH, or SPD, were $50.6 million during the three months ended September 30, 2013, as compared to $47.6 million during the three months ended September 30, 2012.

Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $9.0 million, or 14%, to $75.2 million for the nine months ended September 30, 2013, from $66.2 million for the nine months ended September 30, 2012. Net product sales by our 50/50 joint venture with P&G, or SPD, were $134.3 million during the nine months ended September 30, 2013, as compared to $145.0 million during the nine months ended September 30, 2012.

License and Royalty Revenue. License and royalty revenue represents license and royalty fees from intellectual property license agreements with third parties. License and royalty revenue decreased by approximately $1.0 million, or 19%, to $4.2 million for the three months ended September 30, 2013, from $5.2 million for the three months ended September 30, 2012. The decrease in royalty revenue for the three months ended September 30, 2013, compared to the three months ended September 30, 2012, is primarily a result of new licensing agreements and higher royalties earned under existing licensing agreements.

License and royalty revenue increased by approximately $1.8 million, or 16%, to $13.1 million for the nine months ended September 30, 2013, from $11.3 million for the nine months ended September 30, 2012. The increase in royalty revenue for the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, is primarily a result of new licensing agreements and higher royalties earned under existing licensing agreements.

Gross Profit and Margin. Gross profit increased by $22.9 million, or 7%, to $368.6 million for the three months ended September 30, 2013, from $345.8 million for the three months ended September 30, 2012. The increase in gross profit during the three months ended September 30, 2013, compared to the three months ended September 30, 2012, was largely attributed to the increase in net product sales and services revenue resulting from acquisitions.

Gross profit increased by $62.9 million, or 6%, to $1,117.4 million for the nine months ended September 30, 2013, from $1,054.5 million for the nine months ended September 30, 2012. The increase in gross profit during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, was largely attributed to the increase in net product sales and services revenue resulting from acquisitions.

Cost of net revenue included amortization expense of $18.2 million and $18.4 million for the three months ended September 30, 2013 and 2012, respectively. Included in the cost of net revenue for the three months ended September 30, 2013 was a $0.7 million non-cash charge relating to the write-up of inventory to fair value in connection with our acquisition of Epocal, Inc., or Epocal.

Cost of net revenue included amortization expense of $54.5 million and $51.6 million for the nine months ended September 30, 2013 and 2012, respectively, and $1.9 million and $4.7 million of non-cash charges relating to the write-up of inventory to fair value in connection with certain acquisitions during the nine months ended September 30, 2013 and 2012, respectively.

Overall gross margin for the three and nine months ended September 30, 2013 was 49% and 50%, compared to 50% and 51% for the three and nine months ended September 30, 2012, respectively. The decrease in gross margin principally reflects the impact of the diabetes reimbursement rates reduction that took effect in July 2013.

Gross Profit from Net Product Sales and Services Revenue, Total and by Business Segment. Gross profit from net product sales and services revenue increased by $24.0 million, or 7%, to $366.5 million for the three months ended September 30, 2013, from $342.5 million for the three months ended September 30, 2012. Gross profit from net product sales and services revenue increased by $61.0 million, or 6%, to $1.1 billion for the nine months ended September 30, 2013, from 1.0 billion for the nine months ended September 30, 2012. Gross profit from net product sales and services revenue by business segment for the three and nine months ended September 30, 2013 and 2012 is as follows (in thousands):

 

     Three Months Ended September 30,      %     Nine Months Ended September 30,      %  
     2013      2012      Change     2013      2012      Change  

Professional diagnostics

   $ 300,832       $ 276,906         9   $ 915,871       $ 853,676         7

Health information solutions

     60,237         60,358         —       178,368         180,460         (1 )% 

Consumer diagnostics

     5,402         5,221         3     15,302         14,379         6
  

 

 

    

 

 

      

 

 

    

 

 

    

Gross profit from net product sales and services revenue

   $ 366,471       $ 342,485         7   $ 1,109,541       $ 1,048,515         6
  

 

 

    

 

 

      

 

 

    

 

 

    

 

41


Table of Contents

Professional Diagnostics

Gross profit from our professional diagnostics net product sales and services revenue increased by $23.9 million, or 9%, to $300.8 million for the three months ended September 30, 2013, compared to $276.9 million for the three months ended September 30, 2012, principally as a result of gross profit earned on revenue from acquired businesses, as discussed above. Gross profit was negatively impacted by a decrease in our U.S. meter-based Triage product sales, as discussed above. The FDA matters relating to our meter-based Triage products also resulted in incremental costs during the three months ended September 30, 2013, principally due to unfavorable manufacturing variances and the lost margin on the reduced volume of tests sold during the three months ended September 30, 2013, as compared to the three months ended September 30, 2012. Cost of professional diagnostics net product sales and services revenue during the three months ended September 30, 2013 included a non-cash charge of $0.7 million relating to the write-up of inventory to fair value in connection with a recent acquisition. Reducing gross profit during the three months ended September 30, 2013 was $3.4 million in restructuring charges.

Gross profit from our professional diagnostics net product sales and services revenue increased by $62.2 million, or 7%, to $915.9 million for the nine months ended September 30, 2013, compared to $853.7 million for the nine months ended September 30, 2012, principally as a result of gross profit earned on revenue from acquired businesses, as discussed above. Gross profit was negatively impacted by a decrease in our U.S. meter-based Triage product sales and a reduction in commercial pricing for our pain and rehab businesses, as discussed above. The FDA matters relating to our meter-based Triage products also resulted in incremental costs during the nine months ended September 30, 2013, principally due to unfavorable manufacturing variances and the lost margin on the reduced volume of tests sold during the nine months ended September 30, 2013, as compared to the nine months ended September 30, 2012. Cost of professional diagnostics net product sales and services revenue during the nine months ended September 30, 2013 and 2012 included a non-cash charge of $1.9 million and $4.7 million, respectively, relating to the write-up of inventory to fair value in connection with certain acquisitions. Reducing gross profit during the nine months ended September 30, 2013 and 2012 was $3.8 million and $1.5 million, respectively, in restructuring charges.

Cost of professional diagnostics net product sales and services revenue included amortization expense of $15.2 million and $16.3 million during the three months ended September 30, 2013 and 2012, respectively. Cost of professional diagnostics net product sales and services revenue included amortization expense of $48.3 million and $45.7 million during the nine months ended September 30, 2013 and 2012, respectively.

As a percentage of our professional diagnostics net product sales and services revenue, gross margin for the three and nine months ended September 30, 2013 was 51% and 52%, respectively, compared to 52% and 54% for the three and nine months ended September 30, 2012, respectively. Increased revenue from our recently acquired toxicology businesses, which contribute lower-than-segment-average gross margin, and a decrease in our U.S. meter-based Triage product sales, which contribute higher-than-segment-average gross margin, contributed to the decrease in gross margin in the nine months ended September 30, 2013 from the nine months ended September 30, 2012.

Health Information Solutions

Gross profit from our health information solutions net product sales and services revenue decreased by $0.1 million, or 0.2%, to $60.2 million for the three months ended September 30, 2013, compared to $60.4 million for the three months ended September 30, 2012. Reducing gross profit during the three months ended September 30, 2013 and 2012 was $0.1 million in restructuring charges. Gross profit from our health information solutions net product sales and services revenue decreased by $2.1 million, or 1%, to $178.4 million for the nine months ended September 30, 2013, compared to $180.5 million for the nine months ended September 30, 2012. Reducing gross profit during the nine months ended September 30, 2013 and 2012 was $1.1 million and $0.6 million in restructuring charges, respectively.

Cost of health information solutions net product sales and services revenue included amortization expense of $2.8 million and $1.9 million during the three months ended September 30, 2013 and 2012, respectively. Cost of health information solutions net product sales and services revenue included amortization expense of $5.5 million and $5.1 million during the nine months ended September 30, 2013 and 2012, respectively.

As a percentage of our health information solutions net product sales and services revenue, gross margin for the three and nine months ended September 30, 2013 was 45% and 44%, respectively, compared to 45% for both the three and nine months ended September 30, 2012.

Consumer Diagnostics

        Gross profit from our consumer diagnostics net product sales and services revenue increased by $0.2 million, or 3%, to $5.4 million for the three months ended September 30, 2013, from $5.2 million for the three months ended September 30, 2012. Gross profit from our consumer diagnostics net product sales and services revenue increased by $0.9 million, or 6%, to $15.3 million for the nine months ended September 30, 2013, compared to $14.4 million for the nine months ended September 30, 2012. The increase in gross profit was primarily the result of a $0.7 million charge related to our manufacturing agreement with SPD recorded during the nine months ended September 30, 2012.

 

42


Table of Contents

Cost of consumer diagnostics net product sales and services revenue included amortization expense of $0.2 million and $0.3 million during the three months ended September 30, 2013 and 2012, respectively. Cost of consumer diagnostics net product sales and services revenue included amortization expense of $0.7 million and $0.9 million during the nine months ended September 30, 2013 and 2012, respectively.

As a percentage of our consumer diagnostics net product sales and services revenue, gross margin for the three and nine months ended September 30, 2013 was 19% and 20%, respectively, compared to 23% and 22% for the three and nine months ended September 30, 2012, respectively.

Research and Development Expense. Research and development expense was $40.5 million for the three months ended September 30, 2013, compared to $40.6 million for the three months ended September 30, 2012. Research and development expense during the three months ended September 30, 2013 is reported net of grant funding of $1.9 million arising from the research and development funding relationship with the Bill and Melinda Gates Foundation that we entered into in February 2013. Included in research and development expense for the three months ended September 30, 2013 were restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $1.1 million. Restructuring charges included in research and development expense during the three months ended September 30, 2012 totaled approximately $14,000. Amortization expense of $1.2 million and $1.3 million was included in research and development expense for the three months ended September 30, 2013 and 2012, respectively.

Research and development expense increased by $2.4 million, or 2%, to $122.5 million for the nine months ended September 30, 2013, from $120.0 million for the nine months ended September 30, 2012. Research and development expense during the nine months ended September 30, 2013 is reported net of grant funding of approximately $4.3 million arising from the research and development funding relationship with the Bill and Melinda Gates Foundation that we entered into in February 2013. Included in research and development expense for the nine months ended September 30, 2013 and 2012 were restructuring charges totaling approximately $1.7 million and $0.6 million, respectively, associated with our various restructuring plans to integrate our newly-acquired businesses. Amortization expense of $3.7 million and $1.3 million was included in research and development expense for the three months ended September 30, 2013 and 2012, respectively.

Research and development expense as a percentage of net revenue was 5% for both the three and nine months ended September 30, 2013, compared to 6% for both the three and nine months ended September 30, 2012.

Sales and Marketing Expense. Sales and marketing expense was $159.6 million for the three months ended September 30, 2013, compared to $160.6 million for the three months ended September 30, 2012. Amortization expense of $59.2 million and $61.1 million was included in sales and marketing expense for the three months ended September 30, 2013 and 2012, respectively. Restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $0.2 million were included in sales and marketing expense for each of the three months ended September 30, 2013 and 2012.

Sales and marketing expense decreased by $3.1 million, or 1%, to $475.5 million for the nine months ended September 30, 2013, from $478.5 million for the nine months ended September 30, 2012. The decrease in sales and marketing expense was primarily driven by lower amortization expense during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012. Amortization expense of $170.1 million and $179.2 million was included in sales and marketing expense for the nine months ended September 30, 2013 and 2012, respectively. Restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $1.5 million and $1.9 million were included in sales and marketing expense for the nine months ended September 30, 2013 and 2012, respectively.

Sales and marketing expense as a percentage of net revenue was 21% for each of the three and nine months ended September 30, 2013, compared to 23% for each of the three and nine months ended September 30, 2012, respectively.

General and Administrative Expense. General and administrative expense increased by approximately $36.5 million, or 35%, to $142.4 million for the three months ended September 30, 2013, from $105.8 million for the three months ended September 30, 2012. The increase in general and administrative expense relates primarily to additional spending related to newly-acquired businesses. During the three months ended September 30, 2013 and 2012, we recorded expense of $2.7 million and income of $15.1 million, respectively, in connection with fair value adjustments to acquisition-related contingent consideration obligations. Acquisition-related costs of $0.5 million and $0.8 million were included in general and administrative expense for the three months ended September 30, 2013 and 2012, respectively. Restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $2.8 million and $1.2 million were included in general and administrative expense for the three months ended September 30, 2013 and 2012, respectively. Amortization expense of $3.6 million and $2.0 million was included in general and administrative expense for the three months ended September 30, 2013 and 2012, respectively.

General and administrative expense increased by approximately $70.6 million, or 20%, to $418.4 million for the nine months ended September 30, 2013, from $347.8 million for the nine months ended September 30, 2012. The increase in general and administrative expense relates primarily to additional spending related to newly-acquired businesses. During the nine months ended September 30, 2013 and 2012, we recorded expense of $19.0 million and income of $16.8 million, respectively, in connection with

 

43


Table of Contents

fair value adjustments to acquisition-related contingent consideration obligations. Acquisition-related costs of $1.8 million and $6.1 million were included in general and administrative expense for the nine months ended September 30, 2013 and 2012, respectively. Restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $11.5 million and $5.5 million were included in general and administrative expense for the nine months ended September 30, 2013 and 2012, respectively. Amortization expense of $8.9 million and $6.1 million was included in general and administrative expense for the nine months ended September 30, 2013 and 2012, respectively.

General and administrative expense as a percentage of net revenue was 19% for each of the three and nine months ended September 30, 2013, compared to 15% and 17% for the three and nine months ended September 30, 2012, respectively.

Interest Expense. Interest expense includes interest charges and the amortization of deferred financing costs and original issue discounts associated with certain debt issuances. Interest expense decreased by $1.4 million, or 3%, to $53.4 million for the three months ended September 30, 2013, from $54.9 million for the three months ended September 30, 2012. The decrease is principally due to the lower interest rates associated with our 6.5% senior subordinated notes and our 7.25% senior notes, entered into in May 2013 and December 2012, respectively, compared to the higher interest rates associated with our 7.875% senior notes and our 9% senior subordinated notes, which we redeemed in February 2013 and June 2013, respectively.

Interest expense increased by $42.2 million, or 26%, to $203.3 million for the nine months ended September 30, 2013, from $161.1 million for the nine months ended September 30, 2012. The increase is principally due to a $35.6 million loss recorded in connection with the repurchase of our 9% senior subordinated notes during the nine months ended September 30, 2013.

Other Income (Expense), Net. Other income (expense), net includes interest income, realized and unrealized foreign exchange gains and losses, and other income and expense. The components and the respective amounts of other income (expense), net are summarized as follows (in thousands):

 

     Three Months Ended September 30,           Nine Months Ended September 30,        
     2013     2012     Change     2013     2012     Change  

Interest income

   $ 799      $ 344      $ 455      $ 2,602      $ 1,409      $ 1,193   

Foreign exchange gains (losses), net

     (3,722     671        (4,393     (3,263     (5,526     2,263   

Other

     (5,946     (2,087     (3,859     (7,615     18,687        (26,302
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (8,869   $ (1,072   $ (7,797   $ (8,276   $ 14,570      $ (22,846
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense of $5.9 million and $7.6 million for the three and nine months ended September 30, 2013, respectively, includes a provision of $5.0 million to reflect an estimate of the settlement or litigation costs which we may incur associated with an ongoing dispute with a customer in our U.S. toxicology business. Other income of $18.7 million for the nine months ended September 30, 2012 includes a $13.5 million final royalty termination payment received from Quidel, a $7.2 million gain recorded on the sale of property and $1.4 million of income associated with legal settlements related to intellectual property litigation.

Provision (Benefit) for Income Taxes. The benefit for income taxes increased by $6.5 million to $17.1 million for the three months ended September 30, 2013, from a $10.7 million benefit for the three months ended September 30, 2012. The effective tax rate for the three months ended September 30, 2013 and 2012 was 40.9% and 62.1%, respectively. The income tax benefits for the three months ended September 30, 2013 and 2012 relate to federal, foreign and state income tax provisions and benefits. The increase in tax benefit is largely related to losses for the three months ended September 30, 2013 versus September 30, 2012. The decrease in the effective income tax rate during the three months ended September 30, 2013, compared to the three months ended September 30, 2012, is primarily a result of a combination of the following: (i) adjustments related to filing 2012 tax returns in 2013, (ii) greater proportion of U.S. losses which are subject to a higher rate of tax, (iii) U.S. taxation of certain foreign income related to the sale of Spinreact, (iv) an enacted tax rate change in United Kingdom, (v) loss entity valuation allowance changes, and (vi) losses on contingent consideration fair value adjustments.

The benefit for income taxes increased by $23.6 million to $36.2 million for the nine months ended September 30, 2013, from a $12.6 million benefit for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2013 and 2012 was 31.1% and 32.9%, respectively. The income tax benefits for the nine months ended September 30, 2013 and 2012 relate to federal, foreign and state income tax provisions and benefits. The increase in tax benefit is largely related to losses for the nine months ended September 30, 2013 versus September 30, 2012. The decrease in the effective income tax rate during the nine months ended September 30, 2013, compared to the nine months ended September 30, 2012, is primarily a result of a combination of the following: (i) adjustments related to filing 2012 tax returns in 2013, (ii) greater proportion of U.S. losses which are subject to a higher rate of tax, (iii) U.S. taxation of certain foreign income related to the sale of Spinreact, (iv) losses on contingent consideration fair value adjustments, (v) adjustments for permanent differences between U.S. GAAP and tax rules, (vi) loss entity valuation allowance changes, and (vii) an enacted tax rate change in United Kingdom.

 

44


Table of Contents

Equity Earnings of Unconsolidated Entities, Net of Tax. Equity earnings of unconsolidated entities is reported net of tax and includes our share of earnings in entities that we account for under the equity method of accounting. Equity earnings of unconsolidated entities, net of tax for the three and nine months ended September 30, 2013 reflects the following: (i) our 50% interest in SPD in the amount of $4.7 million and $11.4 million, respectively, (ii) our 40% interest in Vedalab S.A., or Vedalab, in the amount of $0.5 million and $0.6 million, respectively, and (iii) our 49% interest in TechLab, Inc., or TechLab, in the amount of $0.5 million and $1.3 million, respectively. Equity earnings of unconsolidated entities, net of tax for the three and nine months ended September 30, 2012 reflects the following: (i) our 50% interest in SPD in the amount of $2.1 million and $8.2 million, respectively, (ii) our 40% interest Vedalab in the amount of $0.3 million and $0.4 million, respectively, and (iii) our 49% interest in TechLab in the amount of $0.6 million and $1.8 million, respectively.

Net Loss Available to Common Stockholders. For the three months ended September 30, 2013, we generated a net loss available to common stockholders of $24.8 million, or $0.30 per basic and diluted common share. For the three months ended September 30, 2012, we generated a net loss available to common stockholders of $9.2 million, or $0.11 per basic and diluted common share. Net loss available to common stockholders reflects $5.4 million of preferred stock dividends paid during each of the three months ended September 30, 2013 and 2012. For the nine months ended September 30, 2013, we generated a net loss available to common stockholders of $83.5 million, or $1.03 per basic and diluted common share. For the nine months ended September 30, 2012, we generated a net loss available to common stockholders of $31.4 million, or $0.39 per basic and diluted common share. Net loss available to common stockholders reflects $15.9 million of preferred stock dividends paid during each of the nine months ended September 30, 2013 and 2012. See Note 6 of the accompanying consolidated financial statements for the calculation of net loss per common share.

Liquidity and Capital Resources

Based upon our current working capital position, current operating plans and expected business conditions, we expect to fund our short- and long-term working capital needs primarily using existing cash and our operating cash flow, and we expect our working capital position to improve as we improve our future operating margins, grow our business through new product and service offerings and divest non-core businesses and assets. As of September 30, 2013, we had $354.0 million of cash and cash equivalents, of which $142.0 million was held by domestic subsidiaries and $212.0 million was held by foreign entities. As of September 30, 2012, we had $302.3 million of cash and cash equivalents, of which $77.0 million was held by domestic subsidiaries and $225.3 million was held by foreign entities. We do not plan to repatriate certain cash held by foreign entities due to adverse tax implications, including incremental U.S. tax liabilities and potential foreign withholding tax liabilities.

We may also utilize our secured credit facility or other new sources of financing to fund a portion of our capital needs and other commitments, including our contractual contingent consideration obligations and future acquisitions. As of September 30, 2013, we had outstanding borrowings totaling $170.0 million under the $250.0 million revolving line of credit under our secured credit facility, with $80.0 million available to us for additional borrowings. Our ability to access the capital markets may be impacted by the amount of our outstanding debt and equity and the extent to which our assets are encumbered by our outstanding secured debt. The terms and conditions of our outstanding debt instruments also contain covenants which expressly restrict our ability to incur additional indebtedness and conduct other financings. As of September 30, 2013, we had $3.8 billion in outstanding indebtedness comprised of $2.4 billion under our secured credit facility, including borrowings under our revolving line of credit, $450.0 million of 7.25% senior notes due 2018, $400.0 million of 8.625% senior subordinated notes due 2018, $425.0 million of 6.5% senior subordinated notes due 2020, and $150.0 million of 3% convertible senior subordinated notes due 2016.

If the capital and credit markets experience volatility or the availability of funds is limited, we may incur increased costs associated with issuing debt instruments. In addition, it is possible that our ability to access the capital and credit markets could be limited by these or other factors at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions.

Our funding plans for our working capital needs and other commitments may be adversely impacted by unexpected costs associated with potential divestitures, integrating the operations of newly-acquired companies, executing our cost-savings strategies and prosecuting and defending our existing lawsuits and/or unforeseen lawsuits against us. We also cannot be certain that our underlying assumed levels of revenues and expenses will be realized. In addition, we intend to continue to make investments in our research and development efforts related to the substantial intellectual property portfolio we own. We may also choose to further expand our research and development efforts and may pursue the acquisition of new products and technologies through licensing arrangements, business acquisitions, or otherwise. We may also choose to make significant investment to pursue legal remedies against potential infringers of our intellectual property rights. If we decide to engage in such activities, or if our operating results fail to meet our expectations, we could be required to seek additional funding through public or private financings or other arrangements. In such event, adequate funds may not be available when needed or may be available only on terms which could have a negative impact on our business and results of operations. In addition, if we raise additional funds by issuing equity or convertible securities, dilution to then-existing stockholders may result.

 

45


Table of Contents
     Nine Months Ended September 30,  

Cash Flow Summary (in thousands)

   2013     2012  

Net cash provided by operating activities

   $ 159,105      $ 253,763   

Net cash used in investing activities

     (222,648     (456,421

Net cash provided by financing activities

     84,208        212,927   

Foreign exchange effect on cash and cash equivalents

     4,982        (7,188
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     25,647        3,081   

Cash and cash equivalents, beginning of period

     328,346        299,173   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 353,993      $ 302,254   
  

 

 

   

 

 

 

Summary of Changes in Cash Position

Cash and cash equivalents increased $25.6 million during the nine months ended September 30, 2013, compared to an increase of $3.1 million during the nine months ended September 30, 2012. Our primary sources of cash during the nine months ended September 30, 2013 included $159.1 million generated by our operating activities, $460.1 million of net proceeds received in connection with long-term debt issuances, which included $425.0 million of gross proceeds received in connection with the issuance of our 6.5% senior subordinated notes, $138.8 million of net proceeds under various revolving credit facilities, which included $190.0 million borrowed against our secured credit facility revolving line-of-credit, $32.0 million received from the disposition of our Spinreact operations, a $19.2 million decrease related to other assets, $17.6 million of cash received from common stock issuances under employee stock option and stock purchase plans, $11.3 million return of capital related to an equity investment and $5.8 million in proceeds from the sale of property and equipment. Our primary uses of cash during the nine months ended September 30, 2013 were $455.2 million of cash payments on long-term debt, which included $400.0 million of cash payments related to the repurchase of our 9% senior subordinated notes, $166.2 million net cash paid for acquisitions, $90.9 million of capital expenditures, $33.9 million related to an increase in restricted cash, $27.5 million related to payments of acquisition-related contingent consideration obligations, $19.0 million related to tender offer consideration and call premium incurred in connection with the repurchase of our 9% senior subordinated notes, $16.0 million for cash dividends paid on our Series B preferred stock, $9.8 million related to the payment of debt-related financing costs and $5.3 million for payment of capital lease obligations. Fluctuations in foreign currencies improved our cash balance by $5.0 million during the nine months ended September 30, 2013.

Our primary sources of cash during the nine months ended September 30, 2012 included $253.8 million generated by our operating activities, approximately $198.3 million of proceeds received in connection with long-term debt issuances, $91.2 million of net proceeds under various revolving credit facilities, $22.4 million of proceeds received from the sale of property, plant and equipment, $14.3 million from common stock issuances under employee stock option and stock purchase plans and $6.6 million return of capital from equity method investments. Our primary uses of cash during the nine months ended September 30, 2012 included $384.8 million net cash paid for acquisitions, $97.3 million of capital expenditures, $42.6 million related to the repayment of long-term debt obligations, $16.2 million paid for contingent purchase price consideration, $16.0 million for cash dividends paid on our Series B preferred stock, $9.3 million related to an increase in other assets and $6.2 million related to the repayment of short-term debt obligations. Fluctuations in foreign currencies negatively impacted our cash balance by $7.2 million during the nine months ended September 30, 2012.

Cash Flows from Operating Activities

Net cash provided by operating activities during the nine months ended September 30, 2013 was $159.1 million, which resulted from a net loss of $67.0 million and $92.8 million of cash utilized by changes in net working capital requirements during the period, offset by $318.9 million of non-cash items. The $318.9 million of non-cash items included, among other items, $326.7 million related to depreciation and amortization, $14.5 million related to non-cash stock-based compensation, $14.1 million of interest expense related to the amortization of deferred financing costs and original issue discounts, $35.6 million related to a loss on extinguishment of debt, $6.7 million related to other non-cash items, $5.9 million loss on disposition from our sale of the Spinreact operations, $4.1 million related to the impairment of long-lived assets and a $1.9 million non-cash charge related to the write up of inventory to fair value in connection with the acquisition of Epocal, partially offset by a $73.7 million decrease related to changes in our deferred tax assets and liabilities, which resulted in part from amortization of intangible assets, $13.2 million in equity earnings of unconsolidated entities, net of tax, and $5.7 million relating to a bargain purchase gain in connection with our acquisition of the Liberty business.

Net cash provided by operating activities during the nine months ended September 30, 2012 was $253.8 million, which resulted from a net loss of $15.4 million, $303.1 million of non-cash items and $34.0 million of cash utilized by changes in net working capital requirements during the period. The $303.1 million of non-cash items included, among other items, $322.4 million related to depreciation and amortization, $16.1 million of interest expense related to the amortization of deferred financing costs and original issue discounts, $11.9 million related to stock-based compensation and a $4.7 million non-cash charge relating to the write-up of inventory to fair value in connection with the acquisition of Axis-Shield, partially offset by a $43.6 million decrease related to changes in our deferred tax assets and liabilities, which partially resulted from amortization of intangible assets, a $10.4 million decrease attributable to equity earnings of unconsolidated entities and a $4.2 million gain on the sale of property, plant and equipment.

 

46


Table of Contents

Cash Flows from Investing Activities

Our investing activities during the nine months ended September 30, 2013 utilized $222.6 million of cash, including $166.2 million net cash paid for acquisitions, $90.9 million of capital expenditures and an increase in our restricted cash balance of $33.9 million, which was principally driven by a $29.0 million deposit in connection with a foreign bank loan arrangement and $7.9 million of cash received from the Bill and Melinda Gates Foundation, of which $3.5 million was used to fund qualified expenditures, partially offset by $32.0 million in proceeds relating to the disposition of our Spinreact operations, a $19.2 million decrease related to other assets, an $11.3 million return of capital related to an equity investment and $5.8 million of proceeds received from the sale of property and equipment.

Our investing activities during the nine months ended September 30, 2012 utilized $456.4 million of cash, including $384.8 million net cash paid for acquisitions, $97.3 million of capital expenditures and $9.3 million related to an increase in other assets, offset by $22.4 million of proceeds received from the sale of property, plant and equipment, $6.6 million return of capital from equity method investments, which included a $6.1 million return of capital from SPD, and a $5.8 million decrease in our restricted cash balance.

Cash Flows from Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2013 was $84.2 million. Financing activities providing cash during the nine months ended September 30, 2013 primarily included $460.1 million of net proceeds received in connection with long-term debt issuances, which included $425.0 million of gross proceeds received in connection with the issuance of our 6.5% senior subordinated notes, $138.8 million of net proceeds under various revolving credit facilities, which included $190.0 million borrowed, net of $42.5 million paid, against our secured credit facility revolving line-of-credit, and $17.6 million of cash received from common stock issuances under employee stock option and stock purchase plans. We utilized $455.2 million of cash payments on long-term debt, which included $400.0 million of cash payments related to the repurchase of our 9% senior subordinated notes, $27.5 million for payments of acquisition-related contingent consideration obligations, $19.0 million related to tender offer consideration and call premium incurred in connection with the repurchase of our 9% senior subordinated notes, $16.0 million for dividend payments related to our Series B preferred stock, $9.8 million related to the payment of debt-related financing costs and $5.3 million for payment of capital lease obligations.

Net cash provided by financing activities during the nine months ended September 30, 2012 was $212.9 million. Financing activities during the nine months ended September 30, 2012 primarily included approximately $198.3 million of proceeds received in connection with long-term debt issuances, which included $198.0 million of net proceeds received in connection with the “Incremental B-2” term loans entered into as part of our secured credit facility, $91.2 million of net proceeds under various revolving credit facilities, which included $97.5 million borrowed against our secured credit facility revolving line-of-credit, and $14.3 million of cash received from common stock issuances under employee stock option and stock purchase plans. We utilized approximately $42.6 million in connection with the repayment of long-term debt obligations, $16.2 million paid for contingent purchase price consideration, $16.0 million for cash dividends paid on our Series B Preferred stock, $6.2 million for the repayment of short-term debt obligations and $4.9 million for payment of capital lease obligations.

As of September 30, 2013, we had an aggregate of $21.5 million in outstanding capital lease obligations which are payable through 2018.

Income Taxes

As of December 31, 2012, we had approximately $60.6 million of domestic NOL and domestic capital loss carryforwards, approximately $981.1 million of state NOL carryforwards and $211.6 million of foreign NOL and foreign capital loss carryforwards, which either expire on various dates through 2032 or can be carried forward indefinitely. As of December 31, 2012, we had approximately $57.7 million of domestic research and development, foreign tax and alternative minimum tax credits which either expire on various dates through 2031 or can be carried forward indefinitely. These loss carryforwards and tax credits may be available to reduce future federal, state and foreign taxable income, if any, and are subject to review and possible adjustment by the appropriate tax authorities.

Furthermore, all domestic losses and credits are subject to the limitations imposed by Sections 382 and 383 of the Internal Revenue Code, and may be limited in the event of certain cumulative changes in ownership interests of significant shareholders over a three-year period in excess of 50%. Sections 382 and 383 impose an annual limitation on the use of these losses or credits to an amount equal to the value of the company at the time of the ownership change multiplied by the long-term tax exempt rate. We have recorded a valuation allowance against a portion of the deferred tax assets related to our NOLs and credits and certain of our other deferred tax assets to reflect uncertainties that might affect the realization of such deferred tax assets, as these assets can only be realized via profitable operations.

Off-Balance Sheet Arrangements

We had no material off-balance sheet arrangements as of September 30, 2013.

 

47


Table of Contents

Contractual Obligations

The following summarizes our principal contractual obligations as of September 30, 2013 that have changed significantly since December 31, 2012 and the effects such obligations are expected to have on our liquidity and cash flow in future periods. Contractual obligations that were presented in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2012, but omitted below, represent those that have not changed significantly since that date.

 

     Payments Due by Period (in thousands)  
     Total      2013      2014-2015      2016-2017      Thereafter  

Long-term debt obligations

   $ 3,839,763       $ 21,377       $ 121,902       $ 2,419,326       $ 1,277,158   

With respect to our February 1, 2013 acquisition of Epocal, the terms of the acquisition agreement require us to pay earn-outs and management incentive payments upon successfully meeting certain product development and United States Food and Drug Administration regulatory approval milestones from the date of acquisition through December 31, 2018. The maximum amount of the earn-out payments is $90.5 million, of which $15.0 million was paid at the acquisition closing date and $10.0 million is expected to be paid during the fourth quarter of 2013. The maximum amount of the management incentive payments is $9.4 million.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in accordance with generally accepted accounting principles requires us to make estimates and judgments that may affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a quarterly basis, we evaluate our estimates, including those related to revenue recognition and related allowances, bad debt, inventory, valuation of long-lived assets, including intangible assets and goodwill, income taxes, including any valuation allowance for our net deferred tax assets, contingencies and litigation, and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

There have been no significant changes in our critical accounting policies or management estimates since December 31, 2012. A comprehensive discussion of our critical accounting policies and management estimates is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K, as amended for the year ended December 31, 2012.

Recent Accounting Pronouncements

See Note 18 in the notes to the consolidated financial statements included in this Quarterly Report on Form 10-Q, regarding the impact of certain recent accounting pronouncements on our consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks, and the ways we manage them, are summarized in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2012. There have been no material changes to our market risks or management of such risks since that date.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a -15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective at that time. We and our management understand nonetheless that controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. In reaching their conclusions stated above regarding the effectiveness of our disclosure controls and procedures, our CEO and CFO concluded that such disclosure controls and procedures were effective as of such date at the “reasonable assurance” level.

 

48


Table of Contents

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the most recent fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

 

ITEM 6. EXHIBITS

Exhibits:

 

Exhibit
No.

 

Description

    3.1  

Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current

Report on Form 8-K, event date October 9, 2013, filed with the SEC on October 16, 2013)

  10.1   Alere Inc. 2010 Stock Option and Incentive Plan, as amended (incorporated by reference to Appendix B to the Company’s Proxy Statement filed on Schedule 14A as filed with the SEC on June 26, 2013)
  10.2   Alere Inc. 2001 Employee Stock Purchase Plan, as amended (incorporated by reference to Appendix C to the Company’s Proxy Statement filed on Schedule 14A as filed with the SEC on June 26, 2013)
*31.1   Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*31.2   Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
*32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 *101   Interactive Data Files regarding (a) our Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012, (b) our Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012, (c) our Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012, (d) our Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 and (e) the Notes to such Consolidated Financial Statements.

 

* Filed herewith

 

49


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    ALERE INC.
Date: November 5, 2013       /s/ David Teitel
      David Teitel
      Chief Financial Officer and an authorized officer

 

50