Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 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 May 6, 2013 was 81,288,432.

 

 

 


Table of Contents

ALERE INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended March 31, 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 Months Ended March 31, 2013 and 2012

     3   

b) Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March  31, 2013 and 2012

     4   

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

     5   

d) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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

     30   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     38   

Item 4. Controls and Procedures

     38   

PART II. OTHER INFORMATION

     38   

Item 6. Exhibits

     38   

SIGNATURES

     40   

 

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 March 31,  
     2013     2012  

Net product sales

   $ 508,276      $ 475,787   

Services revenue

     226,909        192,434   
  

 

 

   

 

 

 

Net product sales and services revenue

     735,185        668,221   

License and royalty revenue

     4,064        2,908   
  

 

 

   

 

 

 

Net revenue

     739,249        671,129   
  

 

 

   

 

 

 

Cost of net product sales

     253,078        225,554   

Cost of services revenue

     120,158        90,860   
  

 

 

   

 

 

 

Cost of net product sales and services revenue

     373,236        316,414   

Cost of license and royalty revenue

     1,756        1,644   
  

 

 

   

 

 

 

Cost of net revenue

     374,992        318,058   
  

 

 

   

 

 

 

Gross profit

     364,257        353,071   
  

 

 

   

 

 

 

Operating expenses:

    

Research and development

     41,454        39,000   

Sales and marketing

     156,456        158,578   

General and administrative

     135,858        120,435   
  

 

 

   

 

 

 

Total operating expenses

     333,768        318,013   
  

 

 

   

 

 

 

Operating income

     30,489        35,058   

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

     (57,399     (50,727

Other income (expense), net

     (470     11,831   
  

 

 

   

 

 

 

Loss before benefit for income taxes

     (27,380     (3,838

Benefit for income taxes

     (36,871     (1,455
  

 

 

   

 

 

 

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

     9,491        (2,383

Equity earnings of unconsolidated entities, net of tax

     2,934        3,412   
  

 

 

   

 

 

 

Net income

     12,425        1,029   

Less: Net loss attributable to non-controlling interests

     (25     (185
  

 

 

   

 

 

 

Net income attributable to Alere Inc. and Subsidiaries

     12,450        1,214   

Preferred stock dividends

     (5,250     (5,309
  

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ 7,200      $ (4,095
  

 

 

   

 

 

 

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

   $ 0.09      $ (0.05
  

 

 

   

 

 

 

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

   $ 0.09      $ (0.05
  

 

 

   

 

 

 

Weighted-average shares-basic

     81,199        80,240   
  

 

 

   

 

 

 

Weighted-average shares-diluted

     81,300        80,240   
  

 

 

   

 

 

 

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 March 31,  
     2013     2012  

Net income

   $ 12,425      $ 1,029   
  

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

    

Changes in cumulative translation adjustment

     (75,355     35,939   

Unrealized gains on available for sale securities

     —          431   

Unrealized gains on hedging instruments

     11        1,107   

Minimum pension liability adjustment

     605        (165
  

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (74,739     37,312   

Income tax benefit related to items of other comprehensive income

     —          (41
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (74,739     37,353   
  

 

 

   

 

 

 

Comprehensive income (loss)

     (62,314     38,382   

Less: Comprehensive loss attributable to non-controlling interests

     (25     (185
  

 

 

   

 

 

 

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

   $ (62,289   $ 38,567   
  

 

 

   

 

 

 

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)

 

     March 31, 2013     December 31, 2012  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 327,233      $ 328,346   

Restricted cash

     11,649        3,076   

Marketable securities

     884        904   

Accounts receivable, net of allowances of $41,337 and $36,395 at March 31, 2013 and December 31, 2012, respectively

     540,093        524,332   

Inventories, net

     336,442        337,121   

Deferred tax assets

     83,530        67,722   

Prepaid expenses and other current assets

     167,346        145,236   
  

 

 

   

 

 

 

Total current assets

     1,467,177        1,406,737   

Property, plant and equipment, net

     529,164        534,469   

Goodwill

     3,116,857        3,048,405   

Other intangible assets with indefinite lives

     58,393        36,451   

Finite-lived intangible assets, net

     1,874,636        1,834,225   

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

     99,300        108,857   

Investments in unconsolidated entities

     94,295        90,491   

Deferred tax assets

     8,653        8,293   
  

 

 

   

 

 

 

Total assets

   $ 7,248,475      $ 7,067,928   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 52,210      $ 60,232   

Current portion of capital lease obligations

     6,146        6,684   

Accounts payable

     166,012        169,974   

Accrued expenses and other current liabilities

     470,919        411,919   
  

 

 

   

 

 

 

Total current liabilities

     695,287        648,809   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of current portion

     3,788,842        3,628,675   

Capital lease obligations, net of current portion

     11,615        12,917   

Deferred tax liabilities

     415,452        428,188   

Other long-term liabilities

     212,376        166,635   
  

 

 

   

 

 

 

Total long-term liabilities

     4,428,285        4,236,415   
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

Stockholders’ equity:

    

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

     606,468        606,468   

Common stock, $0.001 par value; Authorized: 200,000 shares; Issued: 88,959 shares at March 31, 2013 and 88,576 shares at December 31, 2012; Outstanding: 81,280 shares at March 31, 2013 and 80,897 shares at December 31, 2012

     89        89   

Additional paid-in capital

     3,304,448        3,299,935   

Accumulated deficit

     (1,552,523     (1,564,973

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

     (184,971     (184,971

Accumulated other comprehensive income (loss)

     (50,865     23,874   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,122,646        2,180,422   

Non-controlling interests

     2,257        2,282   
  

 

 

   

 

 

 

Total equity

     2,124,903        2,182,704   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,248,475      $ 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)

 

     Three Months Ended March 31,  
     2013     2012  

Cash Flows from Operating Activities:

    

Net income

   $ 12,425      $ 1,029   

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

    

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

     5,217        5,278   

Depreciation and amortization

     104,970        102,721   

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

     461        4,681   

Non-cash stock-based compensation expense

     4,123        3,874   

Impairment of inventory

     —          5   

Impairment of long-lived assets

     —          134   

Loss on sale of fixed assets

     172        566   

Equity earnings of unconsolidated entities, net of tax

     (2,934     (3,412

Deferred income taxes

     (50,907     (13,752

Other non-cash items

     1,941        —    

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     (20,167     (12,942

Inventories, net

     (17,171     9,351   

Prepaid expenses and other current assets

     (5,833     3,521   

Accounts payable

     (1,988     (17,806

Accrued expenses and other current liabilities

     39,957        3,985   

Other non-current liabilities

     795        14,697   
  

 

 

   

 

 

 

Net cash provided by operating activities

     71,061        101,930   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

(Increase) decrease in restricted cash

     (8,573     6,302   

Purchases of property, plant and equipment

     (36,105     (30,385

Proceeds from sale of property, plant and equipment

     1,143        527   

Cash paid for acquisitions, net of cash acquired

     (158,421     (38,008

Cash received from equity method investment

     10,771        6,066   

Cash paid for marketable securities

     —          (2

Increase in other assets

     (5,569     (8,554
  

 

 

   

 

 

 

Net cash used in investing activities

     (196,754     (64,054
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash paid for financing costs

     (1,427     (1,876

Cash paid for contingent purchase price consideration

     (19,098     (48

Proceeds from issuance of common stock, net of issuance costs

     6,135        7,674   

Proceeds from issuance of long-term debt

     10,053        199,141   

Payments on long-term debt

     (19,638     (16,911

Net proceeds under revolving credit facilities

     162,483        1,339   

Payments on short-term debt

     —          (6,240

Cash paid for dividends

     (5,323     (5,323

Excess tax benefits on exercised stock options

     104        148   

Principal payments on capital lease obligations

     (1,721     (1,720
  

 

 

   

 

 

 

Net cash provided by financing activities

     131,568        176,184   
  

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     (6,988     864   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,113     214,924   

Cash and cash equivalents, beginning of period

     328,346        299,173   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 327,233      $ 514,097   
  

 

 

   

 

 

 

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 March 31, 2013, our cash equivalents consisted of money market funds.

(3) Inventories

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

 

     March 31, 2013      December 31, 2012  

Raw materials

   $ 101,477       $ 99,498   

Work-in-process

     82,574         89,895   

Finished goods

     152,391         147,728   
  

 

 

    

 

 

 
   $ 336,442       $ 337,121   
  

 

 

    

 

 

 

(4) Note Receivable from FGST Investments, Inc.

In December 2012, we entered into an arrangement whereby we issued a $40.0 million short-term note to an unrelated party, FGST Investments, Inc., or FGST, for the primary purpose of providing funding in connection with FGST’s acquisition of the Polymedica Corporation (“Liberty”) line of business, a medical supply business, from a subsidiary of Express Scripts Holding Company. The note bears interest at a rate of 3.25% per annum and is collateralized by substantially all of the assets of FGST and its parent entity, ATLS Acquisition, LLC, or ATLS, and was guaranteed by various subsidiaries of FGST. The $40.0 million short-term note is classified within prepaid expenses and other current assets on our Consolidated Balance Sheet as of March 31, 2013. In connection with the note, we obtained a call option to purchase certain of the assets acquired by FGST for a purchase price of $40.0 million. Under the terms of the option, we could exercise the option and satisfy the purchase price by cancellation of the principal amount of the note. On February 4, 2013, we exercised the option. On February 15, 2013, the issuer of the note filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Subsequently, in April 2013, we entered into an amendment of the option agreement and settlement stipulation related to these matters. (See Note 21)

 

7


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

(5) Stock-based Compensation

We recorded stock-based compensation expense in our Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012, respectively, as follows (in thousands):

 

     Three Months Ended March 31,  
     2013     2012  

Cost of net revenue

   $ 232      $ 269   

Research and development

     747        771   

Sales and marketing

     716        917   

General and administrative

     2,428        1,917   
  

 

 

   

 

 

 
     4,123        3,874   

Benefit for income taxes

     (862     (541
  

 

 

   

 

 

 
   $ 3,261      $ 3,333   
  

 

 

   

 

 

 

(6) Net Income (Loss) per Common Share

The following table sets forth the computation of basic and diluted net income (loss) per common share for the three months ended March 31, 2013 and 2012 (in thousands, except per share data):

 

     Three Months Ended March 31,  
     2013     2012  

Numerator:

    

Net income

   $ 12,425      $ 1,029   

Preferred stock dividends

     (5,250     (5,309

Less: Net loss attributable to non-controlling interest

     (25     (185
  

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ 7,200      $ (4,095
  

 

 

   

 

 

 

Denominator:

    

Weighted-average common shares outstanding—basic

     81,199        80,240   

Effect of dilutive securities:

    

Stock options

     101        —     
  

 

 

   

 

 

 

Weighted-average common shares outstanding—diluted

     81,300        80,240   
  

 

 

   

 

 

 

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

   $ 0.09      $ (0.05
  

 

 

   

 

 

 

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

   $ 0.09      $ (0.05
  

 

 

   

 

 

 

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

 

     Three Months Ended March 31,  
     2013      2012  

Denominator:

     

Options to purchase shares of common stock

     9,987         9,776   

Warrants

     4         152   

Conversion shares related to 3% convertible senior subordinated notes

     3,411         3,411   

Conversion shares related to subordinated convertible promissory notes

     27         27   

Conversion shares related to Series B convertible preferred stock

     10,239         10,239   
  

 

 

    

 

 

 

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

     23,668         23,605   
  

 

 

    

 

 

 

 

8


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

(7) Stockholders’ Equity and Non-controlling Interests

(a) Preferred Stock

For both the three months ended March 31, 2013 and 2012, Series B preferred stock dividends amounted to $5.3 million which reduced earnings available to common stockholders for purposes of calculating net income (loss) per common share for each of the respective periods. As of April 15, 2013, payments have been made covering all dividend periods through March 31, 2013.

The Series B preferred stock dividends for the three months ended March 31, 2013 and 2012 were paid in cash.

(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 three months ended March 31, 2013 and 2012 is provided below (in thousands):

 

     Three Months Ended March 31,  
     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

     6,135        —         6,135        7,674        —         7,674   

Preferred stock dividends

     (5,323     —         (5,323     (5,323     —         (5,323

Stock-based compensation related to grants of common stock options

     4,123        —         4,123        3,874        —         3,874   

Excess tax benefits on exercised stock options

     (422     —         (422     104        —         104   

Net income (loss)

     12,450        (25     12,425        1,214        (137     1,077   

Total other comprehensive income (loss)

     (74,739     —         (74,739     37,353        —         37,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 2,122,646      $ 2,257      $ 2,124,903      $ 2,274,130      $ 2,203      $ 2,276,333   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(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 months ended March 31, 2013 and 2012, we expensed acquisition-related costs of $0.9 million and $1.5 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) Mega Medika

On January 7, 2013, we acquired 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. The preliminary aggregate purchase price was approximately $10.7 million, which consisted of $10.4 million in cash and a contingent consideration obligation with an aggregate acquisition date fair value of $0.3 million. Included in our Consolidated Statement of Operations for the three months ended March 31, 2013 is revenue totaling approximately $0.4 million related to Mega Medika. The operating results of Mega Medika are included in our professional diagnostics reporting unit and business segment. The amount allocated to goodwill from this acquisition is deductible for tax purposes.

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

 

     Epocal      Mega Medika      Total  

Current assets(1)

   $ 11,935       $ 1,142       $ 13,077   

Property, plant and equipment

     1,267         229         1,496   

Goodwill

     99,519         655         100,174   

Intangible assets

     164,400         9,460         173,860   

Other non-current assets

     17,610         —           17,610   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     294,731         11,486         306,217   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     2,543         549         3,092   

Non-current liabilities

     43,727         211         43,938   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     46,270         760         47,030   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

     248,461         10,726         259,187   

Less:

        

Contingent consideration

     75,000         295         75,295   
  

 

 

    

 

 

    

 

 

 

Cash paid

   $ 173,461       $ 10,431       $ 183,892   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Includes approximately $2.6 million of acquired cash.

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

 

     Epocal      Mega Medika      Total      Weighted-
average
Useful Life
 

Core technology and patents

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

Trademarks and trade names

     20,500         —           20,500         19.2 years   

Customer relationships

     —           9,460         9,460         21.0 years   

In-process research and development

     24,200         —           24,200         N/A   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 164,400       $ 9,460       $ 173,860      
  

 

 

    

 

 

    

 

 

    

(b) Acquisitions in 2012

During 2012, we acquired the following businesses for a preliminary aggregate purchase price of $494.8 million, which included cash payments totaling $419.2 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)

 

9


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

   

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., or 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)

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 months ended March 31, 2012 included revenue totaling approximately $1.4 million related to the businesses that were acquired during that period. Goodwill has been recognized in all of these acquisitions and amounted to approximately $259.2 million. Goodwill related to the acquisitions of AmMed, Diagnostik and the U.S.-based assets of NationsHealth, which totaled $8.8 million, is deductible for tax purposes. The goodwill related to the remaining 2012 acquisitions is not deductible for tax purposes.

 

10


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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)

   $ 46,041   

Property, plant and equipment

     9,029   

Goodwill

     259,231   

Intangible assets

     325,223   

Other non-current assets

     629   
  

 

 

 

Total assets acquired

     640,153   
  

 

 

 

Current liabilities

     28,802   

Non-current liabilities

     116,580   
  

 

 

 

Total liabilities assumed

     145,382   
  

 

 

 

Net assets acquired

     494,771   

Less:

  

Contingent consideration

     75,620   
  

 

 

 

Cash paid

   $ 419,151   
  

 

 

 

 

(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 months ended March 31, 2013 and 2012 (in thousands):

 

     Three Months Ended March 31,  

Statement of Operations Caption

   2013      2012  

Cost of net revenue

   $ 623       $ 964   

Research and development

     —          624   

Sales and marketing

     1,099         827   

General and administrative

     2,170         3,113   
  

 

 

    

 

 

 

Total operating expenses

     3,892         5,528   

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

     55         60   
  

 

 

    

 

 

 

Total charges

   $ 3,947       $ 5,588   
  

 

 

    

 

 

 

 

11


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

(a) 2013 Restructuring Plans

In 2013, management developed cost reduction efforts within our professional diagnostics and health information solutions business segments, including businesses in our Europe and Asia Pacific regions. The following table summarizes the restructuring activities related to our 2013 restructuring plans for the three months ended March 31, 2013 (in thousands):

 

     Professional
Diagnostics
     Health
Information Solutions
     Total  

Severance-related costs

   $ 833       $ 69       $ 902   

Facility and transition costs

     13         —          13   
  

 

 

    

 

 

    

 

 

 

Total charges

   $ 846       $ 69       $ 915   
  

 

 

    

 

 

    

 

 

 

We anticipate incurring approximately $1.4 million in additional costs under our 2013 restructuring plans related primarily to our professional diagnostics business segment in Europe and may develop additional plans over the remainder of 2013. As of March 31, 2013, $0.1 million in severance 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 business 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 assets and intangibles. The following table summarizes the restructuring activities related to our 2012 restructuring plans for the three months ended March 31, 2013 and 2012 and since inception (in thousands):

 

     Three Months Ended March 31,      Since  

Professional Diagnostics

   2013     2012      Inception  

Severance-related costs

   $ 62      $ 1,973       $ 4,794   

Facility and transition costs

     63        —          182   
  

 

 

   

 

 

    

 

 

 

Cash charges

     125        1,973         4,976   

Fixed asset and inventory impairments

     —          —          304   
  

 

 

   

 

 

    

 

 

 

Total charges

   $ 125      $ 1,973       $ 5,280   
  

 

 

   

 

 

    

 

 

 
     Three Months Ended March 31,      Since  

Health Information Solutions

   2013     2012      Inception  

Severance-related costs

   $ 1,819      $ 797       $ 4,864   

Facility and transition costs

     659        —          1,893   

Other exit costs

     20        —          35   
  

 

 

   

 

 

    

 

 

 

Cash charges

     2,498        797         6,792   

Fixed asset and inventory impairments

     —         —          2,689   

Intangible asset impairments

     —         5        2,988   

Other non-cash (recoveries)

     (45     —          (76
  

 

 

   

 

 

    

 

 

 

Total charges

   $ 2,453      $ 802       $ 12,393   
  

 

 

   

 

 

    

 

 

 

We anticipate incurring approximately $3.7 million in additional severance and facility costs under these plans related primarily to our health information solutions business segment through 2014. As of March 31, 2013, $3.8 million in severance and exit costs under these plans remain unpaid.

(b) 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.

 

12


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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 businesses 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 months ended March 31, 2013 and 2012 and since inception (in thousands):

 

     Three Months Ended March 31,     Since  

Professional Diagnostics

   2013      2012     Inception  

Severance-related costs

   $ 250       $ 1,965      $ 19,963   

Facility and transition costs

     169         723        7,396   

Other exit costs

     16         19        714   
  

 

 

    

 

 

   

 

 

 

Cash charges

     435         2,707        28,073   

Fixed asset and inventory impairments

     —           134        6,374   
  

 

 

    

 

 

   

 

 

 

Total charges

   $ 435       $ 2,841      $ 34,447   
  

 

 

    

 

 

   

 

 

 
     Three Months Ended March 31,     Since  

Health Information Solutions

   2013      2012     Inception  

Severance-related costs

   $ —        $ —       $ 6,901   

Facility and transition costs (recoveries)

     —          (86     8,010   

Other exit costs

     19         41        531   
  

 

 

    

 

 

   

 

 

 

Cash charges (recoveries)

     19         (45     15,442   

Fixed asset and inventory impairments

     —          —         1,114   

Intangible asset impairments

     —          —         2,935   

Other non-cash charges

     —          —         761   
  

 

 

    

 

 

   

 

 

 

Total charges (recoveries)

   $ 19       $ (45   $ 20,252   
  

 

 

    

 

 

   

 

 

 
     Three Months Ended March 31,     Since  

Corporate and Other

   2013      2012     Inception  

Severance-related costs

   $ —        $ 17     $ 1,190   
  

 

 

    

 

 

   

 

 

 

Cash charges

     —          17        1,190   

Fixed asset and inventory impairments

     —          —         3   
  

 

 

    

 

 

   

 

 

 

Total charges

   $ —        $ 17      $ 1,193   
  

 

 

    

 

 

   

 

 

 

We anticipate incurring approximately $1.6 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 may also incur impairment charges on assets as plans are finalized. We do not anticipate incurring significant additional costs under these plans related to our health information solutions business segment. As of March 31, 2013, $2.6 million in cash charges remain unpaid, primarily related to facility lease obligations.

 

13


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

(e) Restructuring Reserves

The following table summarizes our restructuring reserves related to the plans described above, of which $5.4 million is included in accrued expenses and other current liabilities and $1.0 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

     3,033        904        55        3,992   

Payments

     (2,923     (763     (72     (3,758

Currency adjustments

     (4     —          —         (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2013

   $ 3,273      $ 2,570      $ 605      $ 6,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

(10) Long-term Debt

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

 

     March 31, 2013     December 31, 2012  

A term loans(1)(2)

   $ 866,875      $ 878,438   

B term loans(1)

     911,125        913,438   

Incremental B-1 term loans(1)

     246,875        247,500   

Incremental B-2 term loans(1)

     196,314        196,739   

Revolving line of credit(1)

     192,500        22,500   

7.25% Senior notes

     450,000        450,000   

7.875% Senior notes

     —          1,809   

9% Senior subordinated notes

     393,383        392,933   

8.625% Senior subordinated notes

     400,000        400,000   

3% Convertible senior subordinated notes

     150,000        150,000   

Other lines of credit

     1,328        31,957   

Other

     32,652        3,593   
  

 

 

   

 

 

 
     3,841,052        3,688,907   

Less: Current portion

     (52,210     (60,232
  

 

 

   

 

 

 
   $ 3,788,842      $ 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.

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 months ended March 31, 2013 and 2012, respectively, as follows (in thousands):

 

     Three Months Ended March 31,  
     2013     2012  

Secured credit facility (1)

   $ 27,275      $ 22,851   

7.25% Senior notes

     8,356       —    

7.875% Senior notes

     (27     5,758   

9% Senior subordinated notes

     10,394        10,354   

8.625% Senior subordinated notes

     9,273        9,274   

3% Convertible senior subordinated notes

     1,246        1,246   
  

 

 

   

 

 

 
   $ 56,517      $ 49,483   
  

 

 

   

 

 

 

 

(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 months ended March 31, 2013 and 2012, the amounts include $1.0 million and $1.3 million, respectively, related to the amortization of fees paid for certain debt modifications.

 

14


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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. Furthermore, under the terms of the credit agreement as amended by the fourth amendment, we may make optional prepayments of the term loans under our secured credit facility from time to time without any premium or penalty, except that if, on or before September 22, 2013, we repay or prepay any “B” term loans, “Incremental B-1” term loans or “Incremental B-2” term loans with the proceeds of, or convert any “B” term loans, “Incremental B-1” term loans or “Incremental B-2” term loans into, any new term loans bearing interest with an effective yield (as defined in the credit agreement) less than the effective yield applicable to the “B” term loans, the “Incremental B-1” term loans or the “Incremental B-2” term loans, as applicable, we must pay a premium equal to 1.0% of the principal amount of the “B” term loans, “Incremental B-1” term loans or “Incremental B-2” term loans so repaid, prepaid or converted.

(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.

(a) 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.

The following table summarize 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
March 31, 2012
 

Foreign currency forward contracts

   Other comprehensive income (loss)    $ 1,107   
     

 

 

 

Total gain

   Other comprehensive income (loss)    $ 1,107   
     

 

 

 

(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.

 

15


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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 March 31, 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

   March 31, 
2013
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 884       $ 884       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 884       $ 884       $ —         $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 240,604       $ —        $ —        $ 240,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 240,604       $ —        $ —        $ 240,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Changes in the fair value of our Level 3 contingent consideration obligations during the three months ended March 31, 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

     75,295   

Foreign currency

     (557

Payments

     (21,323

Present value accretion

     3,474   

Adjustments, net (income) expense

     7,543   
  

 

 

 

Fair value of contingent consideration obligations, March 31, 2013

   $ 240,604   
  

 

 

 

 

16


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

At March 31, 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 March 31, 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 March 31,  
     2013     2012  

Service cost

   $ —       $ —    

Interest cost

     182        198   

Expected return on plan assets

     (156     (152

Amortization of prior service cost

     103        104   

Realized losses

     —         —    
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 129      $ 150   
  

 

 

   

 

 

 

(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 months ended March 31, 2013 and 2012 is as follows (in thousands):

 

     Professional
Diagnostics
     Health
Information
Solutions
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Three Months Ended March 31, 2013:

            

Net revenue

   $ 582,492       $ 134,207      $ 22,550       $ —        $ 739,249   

Operating income (loss)

   $ 59,840       $ (13,893   $ 2,280       $ (17,738   $ 30,489   

Depreciation and amortization

   $ 82,794       $ 20,737      $ 1,153       $ 286      $ 104,970   

Non-cash charge associated with acquired inventory

   $ 461       $ —        $ —         $ —        $ 461   

Restructuring charge

   $ 1,389       $ 2,503      $ —         $ —        $ 3,892   

Stock-based compensation

   $ —         $ —        $ —         $ 4,123      $ 4,123   

Three Months Ended March 31, 2012:

            

Net revenue

   $ 518,357       $ 130,784      $ 21,988       $ —        $ 671,129   

Operating income (loss)

   $ 70,179       $ (19,356   $ 365       $ (16,130   $ 35,058   

Depreciation and amortization

   $ 77,467       $ 23,774      $ 1,259       $ 221      $ 102,721   

Non-cash charge associated with acquired inventory

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

Restructuring charge

   $ 4,794       $ 717      $ —         $ 17      $ 5,528   

Stock-based compensation

   $ —        $ —        $ —         $ 3,874      $ 3,874   

Assets:

            

As of March 31, 2013

   $ 6,414,701       $ 608,161      $ 175,285       $ 50,328      $ 7,248,475   

As of December 31, 2012

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

 

 

17


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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 months ended March 31, 2013 and 2012 (in thousands):

 

     Three Months Ended March 31,  

Professional Diagnostics Segment

   2013      2012  

Cardiology

   $ 114,933       $ 138,826   

Infectious disease

     189,844         151,016   

Toxicology

     149,049         121,740   

Diabetes

     50,083         28,161   

Other

     74,719         75,706   
  

 

 

    

 

 

 

Net product sales and services revenue

     578,628         515,449   

License and royalty revenue

     3,864         2,908   
  

 

 

    

 

 

 

Professional diagnostics net revenue

   $ 582,492       $ 518,357   
  

 

 

    

 

 

 
     Three Months Ended March 31,  

Health Information Solutions Segment

   2013      2012  

Disease and case management

   $ 54,126       $ 53,380   

Wellness

     26,300         27,026   

Women’s & children’s health

     29,080         29,771   

Patient self-testing services

     24,701         20,607   
  

 

 

    

 

 

 

Health information solutions net revenue

   $ 134,207       $ 130,784   
  

 

 

    

 

 

 

(15) Related Party Transactions

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

We had a net receivable from the joint venture of $0.6 million and $2.3 million as of March 31, 2013 and December 31, 2012, respectively. Included in the $0.6 million receivable balance as of March 31, 2013 is approximately $1.5 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. We have also recorded a long-term receivable totaling approximately $13.7 million and $14.6 million as of March 31, 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 $8.9 million and $6.9 million as of March 31, 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 $17.1 million during each of the three-month periods ended March 31, 2013 and 2012. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $0.3 million during each of the three-month periods ended March 31, 2013 and 2012. 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.

 

18


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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 $8.7 million and $7.3 million of trade receivables which are included in accounts receivable on our accompanying Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, respectively, and $15.7 million and $21.3 million of trade accounts payable which are included in accounts payable on our accompanying Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, respectively. During the three months ended March 31, 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

   March 31, 2013      December 31, 2012  

Accounts receivable, net of allowances

   $ 8,667       $ 7,317   

Prepaid expenses and other current assets

   $ 9,425       $ 9,161   

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

   $ 13,665       $ 14,629   

Accounts payable

   $ 15,676       $ 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 March 31, 2013, we had borrowed no amounts under the Gates Loan Agreement. As of March 31, 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 months ended March 31, 2013, we recognized $0.5 million of qualified expenditures, which was recorded as an offset to our research and development expenses.

(17) Material Contingencies

(a) Acquisition-related Contingent Consideration Obligations

The following summarizes our principal contractual acquisition-related contingent consideration obligations as of March 31, 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 the first quarter of 2013 and the remaining payments will be made in quarterly installments of $1.5 million during the second and third quarter of 2013.

 

  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 $2.0 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.

 

  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, was made during the first quarter of 2013. The maximum remaining amount of the earn-out payments is £9.5 million (approximately $14.4 million at March 31, 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.

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

In May 2007, we completed the formation of SPD, our 50/50 joint venture with P&G for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiology, diabetes and oral care fields. Upon completion of the arrangement to form SPD, we ceased to consolidate the operating results of our consumer diagnostics business related to SPD. For the three months ended March 31, 2013 and 2012, we recorded earnings of $2.5 million and $2.8 million, 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 for the respective periods.

(b) TechLab

In May 2006, we acquired 49% of TechLab, Inc., or TechLab, a privately-held developer, manufacturer and distributor of rapid non-invasive intestinal diagnostics tests in the areas of intestinal inflammation, antibiotic-associated diarrhea and parasitology. For the three months ended March 31, 2013 and 2012, we recorded earnings of $0.2 million and $0.7 million, 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.

 

19


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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

 

     Three Months Ended March 31,  

Combined Condensed Results of Operations:

   2013      2012  

Net revenue

   $ 49,155       $ 52,525   
  

 

 

    

 

 

 

Gross profit

   $ 37,113       $ 35,179   
  

 

 

    

 

 

 

Net income after taxes

   $ 5,577       $ 6,993   
  

 

 

    

 

 

 

Combined Condensed Balance Sheet:

   March 31, 2013      December 31, 2012  

Current assets

   $ 65,835       $ 79,842   

Non-current assets

     37,603         38,991   
  

 

 

    

 

 

 

Total assets

   $ 103,438       $ 118,833   
  

 

 

    

 

 

 

Current liabilities

   $ 32,950       $ 45,084   

Non-current liabilities

     6,986         6,791   
  

 

 

    

 

 

 

Total liabilities

   $ 39,936       $ 51,875   
  

 

 

    

 

 

 

(20) Guarantor Financial Information

Our 7.25% senior notes due 2018, our 9% senior subordinated notes due 2016, and our 8.625% senior subordinated notes due 2018 are guaranteed by certain of our consolidated wholly owned subsidiaries, or the Guarantor Subsidiaries. The guarantees are full and unconditional and joint and several. The following supplemental financial information sets forth, on a consolidating basis, balance sheets as of March 31, 2013 and December 31, 2012, the related statements of operations, statements of comprehensive income (loss) and cash flows for each of the three months ended March 31, 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.

 

20


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2013

(in thousands)

 

      Issuer     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 233,493      $ 320,897      $ (46,114   $ 508,276   

Services revenue

     —          206,171        20,738        —          226,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          439,664        341,635        (46,114     735,185   

License and royalty revenue

     —          3,035        3,533        (2,504     4,064   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          442,699        345,168        (48,618     739,249   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     948        120,594        173,216        (41,680     253,078   

Cost of services revenue

     —          115,611        8,502        (3,955     120,158   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     948        236,205        181,718        (45,635     373,236   

Cost of license and royalty revenue

     —          17        4,243        (2,504     1,756   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     948        236,222        185,961        (48,139     374,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (948     206,477        159,207        (479     364,257   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     4,423        17,380        19,651        —          41,454   

Sales and marketing

     1,392        82,838        72,226        —          156,456   

General and administrative

     14,027        64,983        56,848        —          135,858   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     19,842        165,201        148,725        —          333,768   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (20,790     41,276        10,482        (479     30,489   

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

     (56,858     (7,021     (3,417     9,897        (57,399

Other income (expense), net

     4,770        6,259        (1,603     (9,896     (470
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (72,878     40,514        5,462        (478     (27,380

Provision (benefit) for income taxes

     (62,811     17,926        8,127        (113     (36,871
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (10,067     22,588        (2,665     (365     9,491   

Equity in earnings (losses) of subsidiaries, net of tax

     22,244        (614     —          (21,630     —     

Equity earnings of unconsolidated entities, net of tax

     248        —          2,688        (2     2,934   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     12,425        21,974        23        (21,997     12,425   

Less: Net loss attributable to non-controlling interests

     —          —          (25     —          (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Alere Inc. and Subsidiaries

     12,425        21,974        48        (21,997     12,450   

Preferred stock dividends

     (5,250     —          —          —          (5,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

   $ 7,175      $ 21,974      $ 48      $ (21,997   $ 7,200   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2012

(in thousands)

 

      Issuer     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 223,417      $ 285,599      $ (33,229   $ 475,787   

Services revenue

     —          176,715        15,719        —          192,434   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          400,132        301,318        (33,229     668,221   

License and royalty revenue

     —          4,304        2,546        (3,942     2,908   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          404,436        303,864        (37,171     671,129   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     850        106,202        151,598        (33,096     225,554   

Cost of services revenue

     —          83,643        7,217        —          90,860   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     850        189,845        158,815        (33,096     316,414   

Cost of license and royalty revenue

     —          5        5,581        (3,942     1,644   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     850        189,850        164,396        (37,038     318,058   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (850     214,586        139,468        (133     353,071   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     5,196        17,482        16,322        —          39,000   

Sales and marketing

     1,057        86,337        71,184        —          158,578   

General and administrative

     11,631        64,644        44,160        —          120,435   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     17,884        168,463        131,666        —          318,013   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (18,734     46,123        7,802        (133     35,058   

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

     (49,716     (11,067     (3,254     13,310        (50,727

Other income (expense), net

     (8,074     9,428        23,787        (13,310     11,831   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (76,524     44,484        28,335        (133     (3,838

Provision (benefit) for income taxes

     (26,998     16,782        8,690        71        (1,455
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (49,526     27,702        19,645        (204     (2,383

Equity in earnings (losses) of subsidiaries, net of tax

     49,895        (348     —          (49,547     —     

Equity earnings of unconsolidated entities, net of tax

     660        —          2,736        16        3,412   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,029        27,354        22,381        (49,735     1,029   

Less: Net loss attributable to non-controlling interests

     —          —          (185     —          (185
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Alere Inc. and Subsidiaries

     1,029        27,354        22,566        (49,735     1,214   

Preferred stock dividends

     (5,309     —          —          —          (5,309
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (4,280   $ 27,354      $ 22,566      $ (49,735   $ (4,095
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 12,425      $ 21,974       $ 23      $ (21,997   $ 12,425   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax:

           

Changes in cumulative translation adjustment

     (201     —           (75,154     —          (75,355

Unrealized gains on hedging instruments

     —          —           11        —          11   

Minimum pension liability adjustment

     —          —           605        —          605   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

     (201     —           (74,538     —          (74,739

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

     —         —          —          —          —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (201     —           (74,538     —          (74,739
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     12,224        21,974         (74,515     (21,997     (62,314

Less: Comprehensive loss attributable to non-controlling interests

     —         —          (25     —          (25
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ 12,224      $ 21,974       $ (74,490   $ (21,997   $ (62,289
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2012

(in thousands)

 

     Issuer      Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 1,029       $ 27,354      $ 22,381      $ (49,735   $ 1,029   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

           

Changes in cumulative translation adjustment

     329         (306     35,251        665        35,939   

Unrealized gains on available for sale securities

     429         2        —         —         431   

Unrealized gains on hedging instruments

     17         —         1,090        —         1,107   

Minimum pension liability adjustment

     —          —         (165     —         (165
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     775         (304     36,176        665        37,312   

Income tax benefit related to items of other comprehensive income

     —          —         (41     —         (41
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     775         (304     36,217        665        37,353   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,804         27,050        58,598        (49,070     38,382   

Less: Comprehensive loss attributable to non-controlling interests

     —          —         (185     —         (185
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Alere Inc. and Subsidiaries

   $ 1,804       $ 27,050      $ 58,783      $ (49,070   $ 38,567   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING BALANCE SHEET

March 31, 2013

(in thousands)

 

      Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 8,626      $ 52,407      $ 266,200      $ —        $ 327,233   

Restricted cash

     7,933        2,309        1,407        —          11,649   

Marketable securities

     —          771        113        —          884   

Accounts receivable, net of allowances

     —          242,772        297,321        —          540,093   

Inventories, net

     —          147,580        209,509        (20,647     336,442   

Deferred tax assets

     32,145        37,079        11,367        2,939        83,530   

Prepaid expenses and other current assets

     453,291        (315,140     29,231        (36     167,346   

Intercompany receivables

     312,349        603,711        64,077        (980,137     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     814,344        771,489        879,225        (997,881     1,467,177   

Property, plant and equipment, net

     2,387        290,253        236,980        (456     529,164   

Goodwill

     —          1,820,992        1,295,865        —          3,116,857   

Other intangible assets with indefinite lives

     —          13,900        44,493        —          58,393   

Finite-lived intangible assets, net

     10,927        1,092,551        771,158        —          1,874,636   

Deferred financing costs, net and other non-current assets

     69,133        10,357        19,881        (71     99,300   

Investments in subsidiaries

     4,345,418        353,666        (67,215     (4,631,869     —     

Investments in unconsolidated entities

     34,384        —          48,363        11,548        94,295   

Deferred tax assets

     —          —          8,653        —          8,653   

Intercompany notes receivable

     1,672,676        752,565        64,766        (2,490,007     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,949,269      $ 5,105,773      $ 3,302,169      $ (8,108,736   $ 7,248,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND EQUITY

          

Current liabilities:

          

Current portion of long-term debt

   $ 45,000      $ 985      $ 6,225      $ —        $ 52,210   

Current portion of capital lease obligations

     —          3,207        2,939        —          6,146   

Accounts payable

     7,390        67,623        90,999        —          166,012   

Accrued expenses and other current liabilities

     84,912        199,618        186,418        (29     470,919   

Intercompany payables

     584,562        133,102        262,472        (980,136     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     721,864        404,535        549,053        (980,165     695,287   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Long-term liabilities:

          

Long-term debt, net of current portion

     3,770,784        299        17,759        —          3,788,842   

Capital lease obligations, net of current portion

     —          4,845        6,770        —          11,615   

Deferred tax liabilities

     (15,907     319,914        111,497        (52     415,452   

Other long-term liabilities

     18,099        69,963        124,385        (71     212,376   

Intercompany notes payables

     331,783        1,602,374        555,850        (2,490,007     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total long-term liabilities

     4,104,759        1,997,395        816,261        (2,490,130     4,428,285   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity

     2,122,646        2,703,843        1,934,598        (4,638,441     2,122,646   

Non-controlling interests

     —          —          2,257        —          2,257   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     2,122,646        2,703,843        1,936,855        (4,638,441     2,124,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 6,949,269      $ 5,105,773      $ 3,302,169      $ (8,108,736   $ 7,248,475   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

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        358,088         (67,799     (4,404,767     —     

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      $ 6,199,695       $ 3,064,253      $ (8,469,021   $ 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        2,684,818         1,726,153        (4,410,971     2,180,422   

Non-controlling interests

     —          —           2,282        —          2,282   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total equity

     2,180,422        2,684,818         1,728,435        (4,410,971     2,182,704   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 6,273,001      $ 6,199,695       $ 3,064,253      $ (8,469,021   $ 7,067,928   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income

   $ 12,425      $ 21,974      $ 23      $ (21,997   $ 12,425   

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

          

Equity in earnings (losses) of subsidiaries, net of tax

     (22,244     614        —          21,630        —     

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

     5,153        55        9        —          5,217   

Depreciation and amortization

     1,287        61,956        41,756        (29     104,970   

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

     —          —          461        —          461   

Non-cash stock-based compensation expense

     1,660        1,096        1,367        —          4,123   

(Gain) loss on sale of fixed assets

     —          227        (55     —          172   

Equity earnings of unconsolidated entities, net of tax

     (248     —          (2,688     2        (2,934

Deferred income taxes

     (30,889     (10,300     (9,605     (113     (50,907

Other non-cash items

     (762     275        2,428        —          1,941   

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —          (1,722     (18,445     —          (20,167

Inventories, net

     —          (10,475     (7,271     575        (17,171

Prepaid expenses and other current assets

     (473,927     413,773        35,134        19,187        (5,833

Accounts payable

     (604     (7,960     6,576        —          (1,988

Accrued expenses and other current liabilities

     478,082        (387,332     (31,606     (19,187     39,957   

Other non-current liabilities

     (126     (2,946     3,867        —          795   

Intercompany payable (receivable)

     63,473        (80,252     16,779        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     33,280        (1,017     38,730        68        71,061   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

Increase in restricted cash

     (7,933     (630     (10     —          (8,573

Purchases of property, plant and equipment

     (37     (14,354     (26,736     5,022        (36,105

Proceeds from sale of property, plant and equipment

     —          2,106        4,085        (5,048     1,143   

Cash paid for acquisitions, net of cash acquired

     (151,372     —          (7,049     —          (158,421

Cash received from equity method investments

     —          —          10,771        —          10,771   

Increase in other assets

     (3,210     (928     (1,431     —          (5,569
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (162,552     (13,806     (20,370     (26     (196,754
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (1,427     —          —          —          (1,427

Cash paid for contingent purchase price consideration

     (19,098     —          —          —          (19,098

Proceeds from issuance of common stock, net of issuance costs

     6,135        —          —          —          6,135   

Proceeds from issuance of long-term debt

     —          1,007        9,046        —          10,053   

Payments on long-term debt

     (16,845     (445     (2,348     —          (19,638

Net proceeds (payments) under revolving credit facilities

     170,000        —          (7,517     —          162,483   

Cash paid for dividends

     (5,323     —          —          —          (5,323

Excess tax benefits on exercised stock options

     71        17        16        —          104   

Principal payments on capital lease obligations

     —          (814     (907     —          (1,721
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     133,513        (235     (1,710     —          131,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     762        16        (7,724     (42     (6,988
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     5,003        (15,042     8,926        —          (1,113

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,626      $ 52,407      $ 266,200      $ —        $ 327,233   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

27


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income

   $ 1,029      $ 27,354      $ 22,381        $(49,735)      $ 1,029   

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

          

Equity in earnings (losses) of subsidiaries, net of tax

     (49,895     348        —          49,547        —     

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

     5,219        59        —          —          5,278   

Depreciation and amortization

     2,074        63,363        37,345        (61     102,721   

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

     1,007        1,377        1,490        —          3,874   

Impairment of inventory

     —          5        —          —          5   

Impairment of long-lived assets

     —          134        —          —          134   

Loss on sale of fixed assets

     —          508        58        —          566   

Equity earnings of unconsolidated entities, net of tax

     (660     —          (2,736     (16     (3,412

Deferred income taxes

     (11,105     (614     (2,033     —          (13,752

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —          (4,605     (8,337     —          (12,942

Inventories, net

     —          13,349        (3,733     (265     9,351   

Prepaid expenses and other current assets

     10,526        (4,386     (2,619     —          3,521   

Accounts payable

     (863     (4,101     (12,842     —          (17,806

Accrued expenses and other current liabilities

     (14,901     34,232        (15,346     —          3,985   

Other non-current liabilities

     4,309        (10,015     20,332        71        14,697   

Intercompany payable (receivable)

     131,413        (128,235     (3,178     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     78,153        (9,827     34,063        (459     101,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

Decrease in restricted cash

     —          —          6,302        —          6,302   

Purchases of property, plant and equipment

     (4     (17,375     (13,465     459        (30,385

Proceeds from sale of property, plant and equipment

     —          201        326        —          527   

Cash paid for acquisitions, net of cash acquired

     (22,500     —          (15,508     —          (38,008

Cash received from equity method investments

     —          —          6,066        —          6,066   

Cash paid for marketable securities

     —          (2     —          —          (2

Increase in other assets

     (6,144     (397     (2,013     —          (8,554
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (28,648     (17,573     (18,292     459        (64,054
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (1,876     —          —          —          (1,876

Cash paid for contingent purchase price consideration

     (48     —          —          —          (48

Proceeds from issuance of common stock, net of issuance costs

     7,674        —          —          —          7,674   

Proceeds from issuance of long-term debt

     198,000        951        190        —          199,141   

Payments on long-term debt

     (10,750     (656     (5,505     —          (16,911

Net proceeds under revolving credit facilities

     —          (2     1,341        —          1,339   

Payments on short-term debt

     (6,240     —          —          —          (6,240

Cash paid for dividends

     (5,323     —          —          —          (5,323

Excess tax benefits on exercised stock options

     98        48        2        —          148   

Principal payments on capital lease obligations

     —          (502     (1,218     —          (1,720
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     181,535        (161     (5,190     —          176,184   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     (429     73        1,220        —          864   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     230,611        (27,488     11,801        —          214,924   

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 243,062      $ 67,724      $ 203,311      $ —        $ 514,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

(21) Subsequent Event

On April 26, 2013, we settled our $40.0 million note receivable with FGST (see Note 4). In exchange for our surrender of the note, we acquired certain of the assets of the Medicare fee-for-service diabetes business (the “Liberty Assets”) of FGST, and its affiliates, including Liberty Medical, for $17.5 million and received $22.5 million in cash, along with all accrued and unpaid interest.

 

29


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, including acquisitions of health information solutions businesses outside the United States, 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, 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 information technology 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 from the ground up. Our diabetes revenues have grown to over $144.0 million in 2012, and including the effect of acquisitions completed in early 2013, we now service more than 250,000 active diabetes customers. We believe that the strong foundation that we have built in diabetes, specifically in our mail-order diabetes testing supply business, provides us with a competitive advantage in dealing with the impact that CMS’ competitive bidding program, which will significantly reduce current reimbursement rates starting in July 2013, is expected to have on competition and pricing in the market for diabetes testing supplies.

Core to our strategy are health information technologies 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 technologies that will supplement our internally developed information technologies, including Apollo, and improve our ability to execute our business strategy. We now offer a variety of 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 also continue to build momentum behind our next generation of novel diagnostic platforms that we expect to drive our growth in future years. With our novel molecular diagnostic platforms launched, or in the late stages of development, 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 platforms.

Financial Highlights

 

   

Net revenue increased by $68.1 million, or 10%, to $739.2 million for the three months ended March 31, 2013, from $671.1 million for the three months ended March 31, 2012.

 

30


Table of Contents
   

Gross profit increased by $11.2 million, or 3%, to $364.3 million for the three months ended March 31, 2013, from $353.1 million for the three months ended March 31, 2012.

 

   

For the three months ended March 31, 2013, we generated net income available to common stockholders of $7.2 million, or $0.09 per diluted common share, compared to a net loss available to common stockholders of $4.1 million, or $(0.05) per diluted common share, for the three months ended March 31, 2012.

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 $67.0 million, or 10%, to $735.2 million for the three months ended March 31, 2013, from $668.2 million for the three months ended March 31, 2012. Excluding the impact of currency translation, net product sales and services revenue for the three months ended March 31, 2013 increased by $70.3 million, or 11%, compared to the three months ended March 31, 2012. Net product sales and services revenue by business segment for the three months ended March 31, 2013 and 2012 are as follows (in thousands):

 

     Three Months Ended March 31,      % Change  
     2013      2012     

Professional diagnostics

   $ 578,628       $ 515,449         12

Health information solutions

     134,207         130,784         3

Consumer diagnostics

     22,350         21,988         2
  

 

 

    

 

 

    

Net product sales and services revenue

   $ 735,185       $ 668,221         10
  

 

 

    

 

 

    

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 months ended March 31, 2013 and 2012 (in thousands):

 

     Three Months Ended March 31,      % Change  
     2013      2012     

Cardiology

   $ 114,933       $ 138,826         (17 )% 

Infectious disease

     189,844         151,016         26

Toxicology

     149,049         121,740         22

Diabetes

     50,083         28,161         78

Other

     74,719         75,706         (1 )% 
  

 

 

    

 

 

    

Professional diagnostics net product sales and services revenue

   $ 578,628       $ 515,449         12
  

 

 

    

 

 

    

Net product sales and services revenue from our professional diagnostics business segment increased by $63.2 million, or 12%, to $578.6 million for the three months ended March 31, 2013, from $515.4 million for the three months ended March 31, 2012. Excluding the impact of currency translation, net product sales and services revenue from our professional diagnostics business segment increased by $66.7 million, or 13%, comparing the three months ended March 31, 2013 to the three months ended March 31, 2012. Revenue increased primarily as a result of acquisitions, which contributed an aggregate of $62.0 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 three months ended March 31, 2013, as compared to the three months ended March 31, 2012. Net product sales from our North American flu-related sales increased approximately $27.7 million, from $6.6 million during the three months ended March 31 2012 to $34.3 million during the three months ended March 31, 2013. Net product sales and services revenue from our professional diagnostics business segment were negatively impacted by the FDA recall matters related to our Alere Triage® meter-based products. Net product sales of meter-based Triage products in the U.S. totaled $21.6 million during the three months ended March 31, 2013, as compared to $50.5 million during the three months ended March 31, 2012. Excluding the impact of acquisitions, 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 $5.8 million, or 1%, from the three months ended March 31, 2012 to the three months ended March 31, 2013.

 

31


Table of Contents

Within our professional diagnostics business segment, net product sales and services revenue for our cardiology business decreased by approximately $23.9 million, or 17%, to $114.9 million for the three months ended March 31, 2013, from $138.8 million for the three months ended March 31, 2012, driven principally by the impact of the FDA recall 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 $38.8 million, or 26%, to $189.8 million for the three months ended March 31, 2013, from $151.0 million for the three months ended March 31, 2012. The change was driven principally by an increase in flu-related sales during the comparable periods. Net product sales and services revenue for our toxicology business increased by approximately $27.3 million, or 22%, to $149.0 million for the three months ended March 31, 2013, from $121.7 million for the three months ended March 31, 2012, with our recent acquisitions of eScreen, Inc., or eScreen, Amedica Biotech, Inc., or Amedica, and Branan Medical Corporation, or Branan, contributing a combined net $41.7 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 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 $21.9 million, or 78%, to $50.1 million for the three months ended March 31, 2013, from $28.2 million for the three months ended March 31, 2012, with our recent acquisitions of AmMed and NationsHealth contributing a combined net $16.0 million of the non-currency adjusted increase.

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 months ended March 31, 2013 and 2012 (in thousands):

 

     Three Months Ended March 31,      % Change  
     2013      2012     

Disease and case management

   $ 54,126       $ 53,380         1

Wellness

     26,300         27,026         (3 )% 

Women’s and children’s health

     29,080         29,771         (2 )% 

Patient self-testing services

     24,701         20,607         20
  

 

 

    

 

 

    

Health information solutions net product sales and services revenue

   $ 134,207       $ 130,784         3
  

 

 

    

 

 

    

Our health information solutions net product sales and services revenue increased by $3.4 million, or 3%, to $134.2 million for the three months ended March 31, 2013, from $130.8 million for the three months ended March 31, 2012. Our patient self-testing services net product sales and services revenue increased approximately $4.1 million, or 20%, to $24.7 million for the three months ended March 31, 2013, from $20.6 for the three months ended March 31, 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.

Consumer Diagnostics

Net product sales and services revenue from our consumer diagnostics business segment revenue increased by $0.4 million, or 2%, to $22.4 million for the three months ended March 31, 2013, from $22.0 million for the three months ended March 31, 2012. Net product sales by our 50/50 joint venture with P&G, or SPD, were $43.1 million during the three months ended March 31, 2013, as compared to $46.2 million during the three months ended March 31, 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 increased by approximately $1.2 million, or 40%, to $4.1 million for the three months ended March 31, 2013, from $2.9 million for the three months ended March 31, 2012. The increase in royalty revenue for the three months ended March 31, 2013, compared to the three months ended March 31, 2012, is primarily a result of higher royalties earned under existing licensing agreements.

Gross Profit and Margin. Gross profit increased by $11.2 million, or 3%, to $364.3 million for the three months ended March 31, 2013, from $353.1 million for the three months ended March 31, 2012. The increase in gross profit during the three months ended March 31, 2013, compared to the three months ended March 31, 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 $19.2 million and $15.7 million for the three months ended March 31, 2013 and 2012, respectively and $0.5 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 three months ended March 31, 2013 and 2012, respectively.

 

32


Table of Contents

Overall gross margin was 49% and 53% for the three months ended March 31, 2013 and 2012, respectively.

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 $10.1 million, or 3%, to $361.9 million for the three months ended March 31, 2013, from $351.8 million for the three months ended March 31, 2012. Gross profit from net product sales and services revenue by business segment for the three months ended March 31, 2013 and 2012 is as follows (in thousands):

 

     Three Months Ended March 31,      % Change  
     2013      2012     

Professional diagnostics

   $ 300,175       $ 290,909         3

Health information solutions

     57,350         57,369         0

Consumer diagnostics

     4,424         3,529         25
  

 

 

    

 

 

    

Gross profit from net product sales and services revenue

   $ 361,949       $ 351,807         3
  

 

 

    

 

 

    

Professional Diagnostics

Gross profit from our professional diagnostics net product sales and services revenue increased by $9.3 million, or 3%, to $300.2 million for the three months ended March 31, 2013, compared to $290.9 million for the three months ended March 31, 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 recall relating to our meter-based Triage products also resulted in incremental costs during the three months ended March 31, 2013, principally due to unfavorable manufacturing variances and the lost margin on the reduced volume of tests sold during the three months ended March 31, 2013, as compared to the three months ended March 31, 2012. Cost of professional diagnostics net product sales and services revenue during the three months ended March 31, 2013 and 2012, included a non-cash charge of $0.5 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 three months ended March 31, 2013 and 2012 was $0.2 million and $0.6 million, respectively, in restructuring charges.

Cost of professional diagnostics net product sales and services revenue included amortization expense of $17.4 million and $13.8 million during the three months ended March 31, 2013 and 2012, respectively.

As a percentage of our professional diagnostics net product sales and services revenue, gross margin for the three months ended March 31, 2013 and 2012 was 52% and 56%, 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 three months ended March 31, 2013 from the three months ended March 31, 2012.

Health Information Solutions

Gross profit from our health information solutions net product sales and services revenue remained flat for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. Reducing gross profit during each of the three months ended March 31, 2013 and 2012 was $0.4 million in restructuring charges.

Cost of health information solutions net product sales and services revenue included amortization expense of $1.5 million and $1.6 million during the three months ended March 31, 2013 and 2012, respectively.

As a percentage of our health information solutions net product sales and services revenue, gross margin for the three months ended March 31, 2013 and 2012 was 43% and 44%, respectively.

Consumer Diagnostics

Gross profit from our consumer diagnostics net product sales and services revenue increased by $0.9 million, or 25%, to $4.4 million for the three months ended March 31, 2013, compared to $3.5 million for the three months ended March 31, 2012. The increase in gross profit was primarily the result of a one-time cost of goods sold adjustment totaling approximately $0.7 million related to our manufacturing agreement with SPD recorded during the three months ended March 31, 2012.

Cost of consumer diagnostics net product sales and services revenue included amortization expense of $0.3 million during each of the three months ended March 31, 2013 and 2012.

 

33


Table of Contents

As a percentage of net product sales and services revenue, gross margin for the three months ended March 31, 2013 and 2012 was 20% and 16%, respectively.

Research and Development Expense. Research and development expense increased by $2.5 million, or 6%, to $41.5 million for the three months ended March 31, 2013, from $39.0 million for the three months ended March 31, 2012. Research and development expense during the three months ended March 31, 2013 is reported net of grant funding of $0.5 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 March 31, 2012 were restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $0.6 million. Amortization expense of $1.3 million and $2.7 million was included in research and development expense for the three months ended March 31, 2013 and 2012, respectively.

Research and development expense as a percentage of net revenue was 6% for each of the three months ended March 31, 2013 and 2012.

Sales and Marketing Expense. Sales and marketing expense decreased by $2.1 million, or 1%, to $156.5 million for the three months ended March 31, 2013, from $158.6 million for the three months ended March 31, 2012. The decrease in sales and marketing expense was primarily driven by lower amortization expense during the three months ended March 31, 2013, compared to the three months ended March 31, 2012. Amortization expense of $53.5 million and $57.8 million was included in sales and marketing expense for the three months ended March 31, 2013 and 2012, respectively. Restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $1.1 million and $0.8 million were included in sales and marketing expense for the three months ended March 31, 2013 and 2012, respectively.

Sales and marketing expense as a percentage of net revenue was 21% and 24% for the three months ended March 31, 2013 and 2012, respectively.

General and Administrative Expense. General and administrative expense increased by approximately $15.4 million, or 13%, to $135.9 million for the three months ended March 31, 2013, from $120.4 million for the three months ended March 31, 2012. The increase in general and administrative expense relates primarily to additional spending related to newly-acquired businesses. During the three months ended March 31, 2013 and 2012, we recorded expenses of $11.0 million and $5.0 million, respectively, in connection with fair value adjustments to acquisition-related contingent consideration obligations. Acquisition-related costs of $0.9 million and $1.5 million were included in general and administrative expense for the three months ended March 31, 2013 and 2012, respectively. Restructuring charges associated with our various restructuring plans to integrate our newly-acquired businesses totaling approximately $2.2 million and $3.1 million were included in general and administrative expense for the three months ended March 31, 2013 and 2012, respectively. Amortization expense of $1.9 million and $2.0 million was included in general and administrative expense for the three months ended March 31, 2013 and 2012, respectively.

General and administrative expense as a percentage of net revenue was 18% for each of the three months ended March 31, 2013 and 2012.

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 increased by $6.7 million, or 13%, to $57.4 million for the three months ended March 31, 2013, from $50.7 million for the three months ended March 31, 2012. The increase is principally due to higher interest expense recorded in connection with higher outstanding debt balances during the first quarter of 2013 under our secured credit facility, compared to the outstanding debt balances during the first quarter of 2012.

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 March 31,     Change  
     2013     2012    

Interest income

   $ 1,023      $ 562      $ 461   

Foreign exchange gains (losses), net

     (467     (774     307   

Other

     (1,026     12,043        (13,069
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

   $ (470   $ 11,831      $ (12,301
  

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

Other income of $12.0 million for the three months ended March 31, 2012 includes a $13.5 million final royalty termination payment received from Quidel.

Benefit for Income Taxes. The benefit for income taxes increased by $35.4 million to a $36.9 million benefit for the three months ended March 31, 2013, from a $1.5 million benefit for the three months ended March 31, 2012. Our effective tax rate is calculated based on projected income across many different jurisdictions, and can change based on the location of income, losses and credits. The change in the effective tax rate, from the three months ended March 31, 2012 to the three months ended March 31, 2013, results primarily from our forecasted jurisdictional mix of income, as well as from U.S. federal research and development tax credits of approximately $1.6 million projected to be generated in 2013. In addition, we recognized a discrete tax benefit of $1.5 million for 2012 U.S. federal research and development tax credits during the three months ended March 31, 2013.

Equity Earnings in Unconsolidated Entities, Net of Tax. Equity earnings in 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 in unconsolidated entities, net of tax for the three months ended March 31, 2013 reflects the following: (i) our 50% interest in SPD in the amount of $2.5 million, (ii) our 40% interest in Vedalab S.A., or Vedalab, in the amount of $0.2 million and (iii) our 49% interest in TechLab, Inc., or TechLab, in the amount of $0.2 million. Equity earnings in unconsolidated entities, net of tax for the three months ended March 31, 2012 reflects the following: (i) our 50% interest in SPD in the amount of $2.8 million, (ii) our 40% interest in Vedalab in the amount of $(0.1) million and (iii) our 49% interest in TechLab in the amount of $0.7 million.

Net Income (Loss) Available to Common Stockholders. For the three months ended March 31, 2013, we generated net income available to common stockholders of $7.2 million, or $0.09 per diluted common share. For the three months ended March 31, 2012, we generated a net loss available to common stockholders of $4.1 million, or $0.05 per diluted common share. Net income (loss) available to common stockholders reflects $5.3 million of preferred stock dividends paid during each of the three months ended March 31, 2013 and 2012. See Note 6 of the accompanying Consolidated Financial Statements for the calculation of net income (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 and grow our business through new product and service offerings and by continuing to leverage our strong intellectual property position. As of March 31, 2013, we had $327.2 million of cash and cash equivalents, of which $74.8 million was held by domestic subsidiaries and $252.4 million was held by foreign entities. We do not plan to repatriate 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 March 31, 2013, we had outstanding borrowings totaling $192.5 million under the $250.0 million revolving line of credit under our secured credit facility, leaving $57.5 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 March 31, 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, $393.4 million of 9% senior subordinated notes due 2016 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 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

 

35


Table of Contents

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.

 

     Three Months Ended March 31,  

Cash Flow Summary (in thousands)

   2013     2012  

Net cash provided by operating activities

   $ 71,061      $ 101,930   

Net cash used in investing activities

     (196,754     (64,054

Net cash provided by financing activities

     131,568        176,184   

Foreign exchange effect on cash and cash equivalents

     (6,988     864   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (1,113     214,924   

Cash and cash equivalents, beginning of period

     328,346        299,173   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 327,233      $ 514,097   
  

 

 

   

 

 

 

Summary of Changes in Cash Position

As of March 31, 2013, we had cash and cash equivalents of $327.2 million, a $1.1 million decrease from December 31, 2012. Our primary sources of cash during the three months ended March 31, 2013 included $71.1 million generated by our operating activities, $162.5 million of net proceeds under various revolving credit facilities, which included $170.0 million borrowed against our secured credit facility revolving line-of-credit, $10.8 million return of capital from SPD, $10.1 million received from long-term debt borrowings and $6.1 million of cash received from common stock issuances under employee stock option and stock purchase plans. Our primary uses of cash during the three months ended March 31, 2013 were $158.4 million net cash paid for acquisitions, $36.1 million of capital expenditures, $19.6 million related to the repayment of long-term debt obligations, $19.1 million related to payments of acquisition-related contingent consideration obligations, $5.6 million related to an increase in other assets and $5.3 million for cash dividends paid on our Series B Preferred Stock. Fluctuations in foreign currencies negatively impacted our cash balance by $7.0 million during the three months ended March 31, 2013.

Cash Flows from Operating Activities

Net cash provided by operating activities during the three months ended March 31, 2013 was $71.1 million, which resulted from net income of $12.4 million, $63.0 million of non-cash items and $4.4 million of cash utilized by changes in net working capital requirements during the period. The $63.0 million of non-cash items included, among other items, $105.0 million related to depreciation and amortization, $5.2 million of interest expense related to the amortization of deferred financing costs and original issue discounts, $4.1 million related to non-cash stock-based compensation, $1.9 million related to other non-cash items and a $0.5 million non-cash charge related to the write up of inventory to fair value in connection with the acquisition of Epocal, Inc., or Epocal, partially offset by a $50.9 million decrease related to changes in our deferred tax assets and liabilities, which resulted in part from amortization of intangible assets, and $2.9 million in equity earnings in unconsolidated entities, net of tax.

Cash Flows from Investing Activities

Our investing activities during the three months ended March 31, 2013 utilized $196.8 million of cash, including $158.4 million net cash paid for acquisitions, $36.1 million of capital expenditures, an increase in our restricted cash balance of $8.6 million which was principally driven by $7.9 million of cash received from the Bill and Melinda Gates Foundation and $5.6 million related to an increase in other assets, partially offset by a $10.8 million return of capital from SPD and $1.1 million of proceeds received from the sale of property, plant and equipment.

Cash Flows from Financing Activities

Net cash provided by financing activities during the three months ended March 31, 2013 was $131.6 million. Financing activities during the three months ended March 31, 2013 primarily included approximately $162.5 million of net proceeds under various revolving credit facilities, which included $170.0 million borrowed against our secured credit facility revolving line-of-credit,

 

36


Table of Contents

$10.1 million received from long-term debt borrowings and $6.1 million of cash received from common stock issuances under employee stock option and stock purchase plans. We utilized approximately $19.6 million for the payment of certain long-term debt obligations, $19.1 million for payments of acquisition-related contingent consideration obligations, $5.3 million for dividend payments related to our Series B preferred stock, $1.7 million for payment of capital lease obligations and $1.4 million related to the payment of debt-related financing costs.

As of March 31, 2013, we had an aggregate of $17.4 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 March 31, 2013.

Contractual Obligations

The following summarizes our principal contractual obligations as of March 31, 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

   $ 3,849,355       $ 48,018       $ 99,247       $ 2,849,537       $ 852,553   

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. 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.

 

37


Table of Contents

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 in the three months ended March 31, 2013 to our market risks or management of such risks.

 

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.

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

  4.1    Fourteenth Supplemental Indenture to Indenture dated as of May 12, 2009 (to add the guarantees of Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc.) dated as of April 3, 2013 among Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.13 to Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc.’s Registration Statement on Form 8-A, filed on April 3, 2013)
*4.2    Fifteenth Supplemental Indenture to Indenture dated as of May 12, 2009 (to add the guarantees of Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc.) dated as of April 3, 2013 among Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc., as guarantors, the Company as issuer, the other guarantor subsidiaries named therein, as guarantors, and U.S. Bank National Association, as trustee

 

38


Table of Contents
      4.3    Sixteenth Supplemental Indenture (to add the guarantees of Alere Informatics, Inc., Alere Wellogic, LLC, ATS Laboratories, Inc., Avee Laboratories Inc., eScreen, Inc., Global Analytical Development LLC, Ionian Technologies Inc., Pembrooke Occupational Health, Inc., Screen Tox, Inc., and Standing Stone, Inc.), dated as of April 3, 2013, by and among the Company, the subsidiary guarantors named therein and Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-4 (File No. 333-187776))
*10.1    Fourth Amendment to Credit Agreement, dated as of March 22, 2013, among the Alere Inc., as Borrower, each of the Guarantors (as defined therein), the Lenders party thereto, and General Electric Capital Corporation, as Administrative Agent
*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 Months Ended March 31, 2013 and 2012, (b) our Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended March 31, 2013 and 2012, (c) our Consolidated Balance Sheets as of March 31, 2013 and December 31, 2012, (d) our Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 and (e) the Notes to such Consolidated Financial Statements.

 

* Filed herewith

 

39


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: May 9, 2013

     

/s/ David Teitel

      David Teitel
      Chief Financial Officer and an authorized officer

 

40