FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 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 August 5, 2013 was 81,753,992.

 

 

 


Table of Contents

ALERE INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended June 30, 2013

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. A number of important factors could cause actual results of Alere Inc. and its subsidiaries to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, the risk factors detailed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2012 and other risk factors identified herein or from time to time in our periodic filings with the Securities and Exchange Commission. Readers should carefully review these risk factors, and should not place undue reliance on our forward-looking statements. These forward-looking statements are based on information, plans and estimates at the date of this report. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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

TABLE OF CONTENTS

 

     PAGE  

PART I. FINANCIAL INFORMATION

     3   

Item 1. Financial Statements

     3   

a) Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012

     3   

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

     4   

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

     5   

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

     6   

e) Notes to Consolidated Financial Statements

     7   

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

     38   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     49   

Item 4. Controls and Procedures

     49   

PART II. OTHER INFORMATION

     49   

Item 6. Exhibits

     49   

SIGNATURES

     51   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net product sales

   $ 521,562      $ 463,425      $ 1,029,838      $ 939,212   

Services revenue

     237,558        233,855        464,467        426,289   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     759,120        697,280        1,494,305        1,365,501   

License and royalty revenue

     4,865        3,237        8,929        6,145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     763,985        700,517        1,503,234        1,371,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     253,189        222,498        506,267        448,052   

Cost of services revenue

     124,810        120,559        244,968        211,419   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     377,999        343,057        751,235        659,471   

Cost of license and royalty revenue

     1,499        1,852        3,255        3,496   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     379,498        344,909        754,490        662,967   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     384,487        355,608        748,744        708,679   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Research and development

     40,500        40,447        81,954        79,447   

Sales and marketing

     159,422        159,322        315,878        317,900   

General and administrative

     140,161        121,485        276,019        241,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     340,083        321,254        673,851        639,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     44,404        34,354        74,893        69,412   

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

     (92,453     (55,531     (149,852     (106,258

Other income (expense), net

     1,063        3,811        593        15,642   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before provision (benefit) for income taxes

     (46,986     (17,366     (74,366     (21,204

Provision (benefit) for income taxes

     17,867        (489     (19,004     (1,944
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before equity earnings of unconsolidated entities, net of tax

     (64,853     (16,877     (55,362     (19,260

Equity earnings of unconsolidated entities, net of tax

     4,551        3,998        7,485        7,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (60,302     (12,879     (47,877     (11,850

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

     267        36        242        (149
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Alere Inc. and Subsidiaries

     (60,569     (12,915     (48,119     (11,701

Preferred stock dividends

     (5,309     (5,279     (10,559     (10,588
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (65,878   $ (18,194   $ (58,678   $ (22,289
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.81   $ (0.23   $ (0.72   $ (0.28
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares-basic and diluted

     81,311        80,375        81,255        80,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(unaudited)

(in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net loss

   $ (60,302   $ (12,879   $ (47,877   $ (11,850
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

        

Changes in cumulative translation adjustment

     (34,428     (36,777     (109,783     (838

Unrealized gains on available for sale securities

     —         359        —         790   

Unrealized gains (losses) on hedging instruments

     —         (652     11        455   

Minimum pension liability adjustment

     99        4        704        (120
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (34,329     (37,066     (109,068     287   

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

     —         —          —         —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (34,329     (37,066     (109,068     287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

     (94,631     (49,945     (156,945     (11,563

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

     267        36        242        (149
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to Alere Inc. and Subsidiaries

   $ (94,898   $ (49,981   $ (157,187   $ (11,414
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

 

     June 30, 2013     December 31, 2012  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 320,547      $ 328,346   

Restricted cash

     9,919        3,076   

Marketable securities

     889        904   

Accounts receivable, net of allowances of $57,939 and $36,395 at June 30, 2013 and December 31, 2012, respectively

     553,760        524,332   

Inventories, net

     356,753        337,121   

Deferred tax assets

     60,849        67,722   

Prepaid expenses and other current assets

     106,360        145,236   
  

 

 

   

 

 

 

Total current assets

     1,409,077        1,406,737   

Property, plant and equipment, net

     530,467        534,469   

Goodwill

     3,095,798        3,048,405   

Other intangible assets with indefinite lives

     57,346        36,451   

Finite-lived intangible assets, net

     1,811,951        1,834,225   

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

     89,383        108,857   

Investments in unconsolidated entities

     96,197        90,491   

Deferred tax assets

     9,786        8,293   
  

 

 

   

 

 

 

Total assets

   $ 7,100,005      $ 7,067,928   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

Current portion of long-term debt

   $ 50,539      $ 60,232   

Current portion of capital lease obligations

     5,958        6,684   

Accounts payable

     178,552        169,974   

Accrued expenses and other current liabilities

     425,379        411,919   
  

 

 

   

 

 

 

Total current liabilities

     660,428        648,809   
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of current portion

     3,808,302        3,628,675   

Capital lease obligations, net of current portion

     11,685        12,917   

Deferred tax liabilities

     390,012        428,188   

Other long-term liabilities

     197,781        166,635   
  

 

 

   

 

 

 

Total long-term liabilities

     4,407,780        4,236,415   
  

 

 

   

 

 

 

Commitments and contingencies (Note 16)

    

Stockholders’ equity:

    

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

     606,468        606,468   

Common stock, $0.001 par value; Authorized: 200,000 shares; Issued: 89,036 shares at June 30, 2013 and 88,576 shares at December 31, 2012; Outstanding: 81,357 shares at June 30, 2013 and 80,897 shares at December 31, 2012

     89        89   

Additional paid-in capital

     3,304,273        3,299,935   

Accumulated deficit

     (1,613,092     (1,564,973

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

     (184,971     (184,971

Accumulated other comprehensive income (loss)

     (85,195     23,874   
  

 

 

   

 

 

 

Total stockholders’ equity

     2,027,572        2,180,422   

Non-controlling interests

     4,225        2,282   
  

 

 

   

 

 

 

Total equity

     2,031,797        2,182,704   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 7,100,005      $ 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)

 

     Six Months Ended June 30,  
     2013     2012  

Cash Flows from Operating Activities:

    

Net loss

   $ (47,877   $ (11,850

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

    

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

     10,176        10,731   

Depreciation and amortization

     213,904        211,622   

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

     1,172        4,681   

Non-cash stock-based compensation expense

     8,800        8,242   

Impairment of inventory

     26        5   

Impairment of long-lived assets

     2,815        219   

(Gain) loss on sale of fixed assets

     1,301        (5,872

Equity earnings of unconsolidated entities, net of tax

     (7,485     (7,410

Deferred income taxes

     (44,052     (27,400

Loss on extinguishment of debt

     35,603        —     

Other non-cash items

     (727     (883

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     (38,326     (5,431

Inventories, net

     (52,104     (4,412

Prepaid expenses and other current assets

     (3,319     16,866   

Accounts payable

     11,850        (14,247

Accrued expenses and other current liabilities

     24,846        (366

Other non-current liabilities

     (17,844     (8,265
  

 

 

   

 

 

 

Net cash provided by operating activities

     98,759        166,230   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

(Increase) decrease in restricted cash

     (6,843     5,888   

Purchases of property, plant and equipment

     (64,617     (69,461

Proceeds from sale of property, plant and equipment

     4,640        21,677   

Cash paid for acquisitions, net of cash acquired

     (165,963     (310,240

Cash received from equity method investments

     10,574        6,556   

Cash paid for marketable securities

     —         226   

(Increase) decrease in other assets

     17,013        (7,714
  

 

 

   

 

 

 

Net cash used in investing activities

     (205,196     (353,068
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash paid for financing costs

     (9,018     (2,013

Cash paid for contingent purchase price consideration

     (26,638     (6,500

Proceeds from issuance of common stock, net of issuance costs

     7,772        8,697   

Proceeds from issuance of long-term debt

     435,467        199,234   

Payments on long-term debt

     (437,816     (29,884

Net proceeds under revolving credit facilities

     166,540        42,487   

Payments on short-term debt

     —         (6,240

Cash paid for dividends

     (10,646     (10,646

Excess tax benefits on exercised stock options

     166        210   

Principal payments on capital lease obligations

     (3,488     (3,319

Other

     (18,953     (2,577
  

 

 

   

 

 

 

Net cash provided by financing activities

     103,386        189,449   
  

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     (4,748     1,955   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (7,799     4,566   

Cash and cash equivalents, beginning of period

     328,346        299,173   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 320,547      $ 303,739   
  

 

 

   

 

 

 

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

 

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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 June 30, 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):

 

     June 30, 2013      December 31, 2012  

Raw materials

   $ 108,032       $ 99,498   

Work-in-process

     83,427         89,895   

Finished goods

     165,294         147,728   
  

 

 

    

 

 

 
   $ 356,753       $ 337,121   
  

 

 

    

 

 

 

(4) Stock-based Compensation

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Cost of net revenue

   $ 278      $ 263      $ 510      $ 532   

Research and development

     783        856        1,530        1,627   

Sales and marketing

     906        913        1,622        1,830   

General and administrative

     2,710        2,336        5,138        4,253   
  

 

 

   

 

 

   

 

 

   

 

 

 
     4,677        4,368        8,800        8,242   

Benefit for income taxes

     (496     (874     (1,358     (1,415
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 4,181      $ 3,494      $ 7,442      $ 6,827   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

7


Table of Contents

(5) Net Loss per Common Share

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Numerator:

        

Net loss

   $ (60,302   $ (12,879   $ (47,877   $ (11,850

Preferred stock dividends

     (5,309     (5,279     (10,559     (10,588

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

     267        36        242        (149
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to common stockholders

   $ (65,878   $ (18,194   $ (58,678   $ (22,289
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Weighted-average common shares outstanding — basic and diluted

     81,311        80,375        81,255        80,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (0.81   $ (0.23   $ (0.72   $ (0.28
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  

Denominator:

           

Options to purchase shares of common stock

     9,798         9,022         9,798         9,022   

Warrants

     4         110         4         110   

Conversion shares related to 3% convertible senior subordinated notes

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

Conversion shares related to subordinated convertible promissory notes

     27         27         27         27   

Conversion shares related to Series B convertible preferred stock

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

 

 

    

 

 

    

 

 

    

 

 

 

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

     24,097         23,355         24,097         23,355   
  

 

 

    

 

 

    

 

 

    

 

 

 

(6) Stockholders’ Equity and Non-controlling Interests

(a) Preferred Stock

For the three and six months ended June 30, 2013, Series B preferred stock dividends amounted to $5.3 million and $10.6 million, respectively, and for the three and six months ended June 30, 2012, Series B preferred stock dividends amounted to $5.3 million and $10.6 million, respectively, which reduced earnings available to common stockholders for purposes of calculating net loss per common share for each of the respective periods. As of July 15, 2013, payments have been made covering all dividend periods through June 30, 2013.

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

 

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Table of Contents

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

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

 

     Six Months Ended June 30,  
     2013     2012  
     Total
Stockholders’
Equity
    Non-
controlling
Interests
     Total
Equity
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 

Equity, beginning of period

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

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

     7,772        —          7,772        8,697        —         8,697   

Preferred stock dividends

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

Stock-based compensation related to grants of common stock options

     8,800        —          8,800        8,242        —         8,242   

Excess tax benefits on exercised stock options

     (1,589     —          (1,589     (261     —         (261

Non-controlling interest from acquisition

     —          1,701         1,701        —         —         —    

Purchase of subsidiary shares from non-controlling interests

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

Net income (loss)

     (48,119     242         (47,877     (11,701     (85     (11,786

Total other comprehensive income (loss)

     (109,068     —          (109,068     287        —         287   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 2,027,572      $ 4,225       $ 2,031,797      $ 2,188,773      $ 2,255      $ 2,191,028   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

(7) Business Combinations

Acquisitions are accounted for using the acquisition method and the acquired companies’ results have been included in the accompanying consolidated financial statements from their respective dates of acquisition. During the three and six months ended June 30, 2013, we expensed acquisition-related costs of $0.4 million and $1.3 million, respectively, in general and administrative expense. During the three and six months ended June 30, 2012, we expensed acquisition-related costs of $3.8 million and $5.3 million, respectively, in general and administrative expense.

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.

 

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Table of Contents

(ii) Other acquisitions in 2013

During the six months ended June 30, 2013, we acquired the following businesses for a preliminary aggregate purchase price of $46.5 million, which included cash payments totaling $35.4 million, contingent consideration obligations with an aggregate acquisition date fair value of $0.8 million, deferred purchase price consideration with an acquisition date fair value of $0.6 million and an $8.1 million bargain purchase gain.

 

   

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

 

   

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

 

   

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

 

   

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

The operating results of Mega Medika, Discount Diabetic, the Liberty business and Cardio Selfcare are included in our professional diagnostics reporting unit and business segment.

Our consolidated statement of operations for the three and six months ended June 30, 2013 included revenue totaling approximately $32.5 million and $32.9 million, respectively, related to these businesses. Goodwill has been recognized in the Mega Medika and Cardio Selfcare acquisitions and amounted to approximately $0.9 million. The goodwill related to the Mega Medika acquisition is deductible for tax purposes.

With respect to our acquisition of the Liberty business, the purchase price of the acquisition has been allocated to the net tangible and intangible assets acquired, with the excess of the fair value of assets acquired over the purchase price recorded as a bargain purchase gain. The $8.1 million bargain purchase gain has been recorded in other income (expense), net in our consolidated statement of operations and is not recognized for tax purposes. The bargain purchase gain resulted from our operating cost structure which we believe will allow us to operate this business more cost effectively than the sellers.

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

 

     Epocal      Other      Total  

Current assets(1)

   $ 12,111       $ 10,848       $ 22,959   

Property, plant and equipment

     1,267         1,669         2,936   

Goodwill

     99,443         939         100,382   

Intangible assets

     164,400         41,468         205,868   

Other non-current assets

     17,610         29         17,639   
  

 

 

    

 

 

    

 

 

 

Total assets acquired

     294,831         54,953         349,784   
  

 

 

    

 

 

    

 

 

 

Current liabilities

     2,643         2,603         5,246   

Non-current liabilities

     43,727         5,804         49,531   
  

 

 

    

 

 

    

 

 

 

Total liabilities assumed

     46,370         8,407         54,777   
  

 

 

    

 

 

    

 

 

 

Net assets acquired

     248,461         46,546         295,007   

Less:

        

Contingent consideration

     75,000         809         75,809   

Fair value of non-controlling interest

     —           1,683         1,683   

Bargain purchase gain

     —           8,062         8,062   

Deferred purchase price consideration

     —           618         618   
  

 

 

    

 

 

    

 

 

 

Cash paid

   $ 173,461       $ 35,374       $ 208,835   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Includes approximately $3.1 million of acquired cash.

 

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Table of Contents

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

 

     Epocal      Other      Total      Weighted-
average
Useful Life
 

Core technology and patents

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

Software

     —          515         515         10.0 years   

Trademarks and trade names

     20,500         10         20,510         19.2 years   

Customer relationships

     —          35,127         35,127         11.4 years   

Other

     —          5,816         5,816         3.0 years   

In-process research and development

     24,200         —          24,200         N/A   
  

 

 

    

 

 

    

 

 

    

Total intangible assets

   $ 164,400       $ 41,468       $ 205,868      
  

 

 

    

 

 

    

 

 

    

(b) Acquisitions in 2012

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

certain assets of NationsHealth, Inc., 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)

 

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Table of Contents

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

Our consolidated statement of operations for the three and six months ended June 30, 2012 included revenue totaling approximately $10.6 million and $11.9 million, respectively, related to the businesses that were acquired during that period. Goodwill has been recognized in all of these acquisitions and amounted to approximately $249.3 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.

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

 

Current assets(1)

   $ 47,201   

Property, plant and equipment

     9,029   

Goodwill

     249,294   

Intangible assets

     325,223   

Other non-current assets

     8,662   
  

 

 

 

Total assets acquired

     639,409   
  

 

 

 

Current liabilities

     28,307   

Non-current liabilities

     116,580   
  

 

 

 

Total liabilities assumed

     144,887   
  

 

 

 

Net assets acquired

     494,522   

Less:

  

Contingent consideration

     75,620   
  

 

 

 

Cash paid

   $ 418,902   
  

 

 

 

 

(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      
  

 

 

    

(8) Restructuring Plans

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

 

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

Statement of Operations Caption

   2013      2012      2013      2012  

Cost of net revenue

   $ 729       $ 25       $ 1,352       $ 989   

Research and development

     645         14         645         638   

Sales and marketing

     159         200         1,258         1,027   

General and administrative

     6,511         1,126         8,681         4,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     8,044         1,365         11,936         6,893   

 

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Table of Contents
     Three Months Ended June 30,      Six Months Ended June 30,  

Statement of Operations Caption

   2013      2012      2013      2012  

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

     62         50         117         110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 8,106       $ 1,415       $ 12,053       $ 7,003   
  

 

 

    

 

 

    

 

 

    

 

 

 

(a) 2013 Restructuring Plans

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

 

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

Severance-related costs

   $ 1,251       $ (11   $ 1,240   

Facility and transition costs

     337         241        578   
  

 

 

    

 

 

   

 

 

 

Cash charges

     1,588         230        1,818   

Fixed asset and inventory impairments

     —           170        170   

Intangible asset impairments

     —           2,596        2,596   
  

 

 

    

 

 

   

 

 

 

Total charges

   $ 1,588       $ 2,996      $ 4,584   
  

 

 

    

 

 

   

 

 

 

 

     Six Months Ended June 30, 2013  
     Professional
Diagnostics
     Health
Information
Solutions
     Total  

Severance-related costs

   $ 2,084       $ 58       $ 2,142   

Facility and transition costs

     350         241         591   
  

 

 

    

 

 

    

 

 

 

Cash charges

     2,434         299         2,733   

Fixed asset and inventory impairments

     —           170         170   

Intangible asset impairments

     —           2,596         2,596   
  

 

 

    

 

 

    

 

 

 

Total charges

   $ 2,434       $ 3,065       $ 5,499   
  

 

 

    

 

 

    

 

 

 

We anticipate incurring approximately $1.0 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 June 30, 2013, $0.4 million in severance and contract cancellation costs arising under our 2013 restructuring plans remain unpaid.

(b) 2012 Restructuring Plans

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

 

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

Professional Diagnostics

   2013      2012      2013      2012     

Severance-related costs

   $ 26       $ 345       $ 88       $ 2,318       $ 4,820   

Facility and transition costs

     19         —          82         —          201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents
                                                                                                        
     Three Months Ended
June  30,
    Six Months Ended
June  30,
     Since
Inception
 

Professional Diagnostics

   2013     2012     2013     2012     

Cash charges

     45        345        170        2,318         5,021   

Fixed asset impairments

     —         —         —         —          304   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total charges

   $      45      $ 345      $    170      $ 2,318       $   5,325   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

Health Information Solutions

   2013     2012     2013     2012     

Severance-related costs

   $ 529      $ 422      $ 2,348      $ 1,219       $ 5,393   

Facility and transition costs

     3,612        125        4,271        125         5,505   

Other exit costs

     32        —         52        —          67   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cash charges

     4,173        547        6,671        1,344         10,965   

Fixed asset and inventory impairments

     75        —         75        —          2,764   

Intangible asset impairments

     —         —         —         —          2,988   

Other non-cash charges

     (908     (5     (953     —          (984
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total charges

   $ 3,340      $ 542      $ 5,793      $ 1,344       $ 15,733   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

We anticipate incurring approximately $0.6 million in additional transition and other facility costs under these plans related primarily to our health information solutions business segment through 2014. As of June 30, 2013, $5.7 million in severance and exit costs under these plans remain unpaid.

(c) 2011, 2010 and 2008 Restructuring Plans

In 2011, management executed a company-wide cost reduction plan which impacted our corporate and other business segment, as well as the health information solutions and professional diagnostics business segments. Management also developed plans within our professional diagnostics business segment to consolidate operating activities among certain of our U.S., European and Asia Pacific subsidiaries, including transferring the manufacturing of our Panbio products from Australia to our Standard Diagnostics facility in South Korea and eliminating redundant costs among our newly-acquired Axis-Shield subsidiaries. Additionally, within our health information solutions business segment, management executed plans to further reduce costs and improve efficiencies, as well as cease operations at our GeneCare Medical Genetics Center, Inc., or GeneCare, facility in Chapel Hill, North Carolina and transfer the majority of our Quality Assured Services, Inc. operation in Orlando, Florida to our facility in Livermore, California.

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

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

 

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

Professional Diagnostics

   2013     2012      2013      2012     

Severance-related costs

   $ (54   $ 310       $ 196       $ 2,275       $ 19,909   

Facility and transition costs

     161        161         330         884         7,557   

Other exit costs

     15        17         31         36         729   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     122        488         557         3,195         28,195   

Fixed asset and inventory impairments

     —          —           —           134         6,374   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 122      $ 488       $ 557       $ 3,329       $ 34,569   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
                                                                                                        
     Three Months Ended
June  30,
    Six Months Ended
June  30,
    Since
Inception
 

Health Information Solutions

   2013      2012     2013      2012    

Severance-related costs

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

Facility and transition costs

     —          (87     —          (173     8,010   

Other exit costs

     15         33        34         74        546   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Cash charges

     15         (54     34         (99     15,457   

Fixed asset and inventory impairments

     —          85        —          85        1,114   

Intangible asset impairments

     —          —         —          —         2,935   

Other non-cash charges

     —          —         —          —         761   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total charges

   $ 15       $ 31      $ 34       $ (14   $ 20,267   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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

Corporate and Other

   2013      2012     2013      2012    

Severance-related costs

   $ —        $ 9      $ —        $ 26      $ 1,219   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Cash charges

     —          9        —          26        1,219   

Fixed asset and inventory impairments

     —          —         —          —         3   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total charges

   $ —        $ 9      $ —        $ 26      $   1,222   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

We anticipate incurring approximately $1.1 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 June 30, 2013, $2.5 million in cash charges remain unpaid, primarily related to facility lease obligations.

(d) Restructuring Reserves

The following table summarizes our restructuring reserves related to the plans described above, of which $6.3 million is included in accrued expenses and other current liabilities and $2.3 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

     4,774        5,274        117        10,165   

Payments

     (5,462     (2,042     (146     (7,650

Currency adjustments

     (166     (8     —         (174
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2013

   $ 2,313      $ 5,653      $ 593      $ 8,559   
  

 

 

   

 

 

   

 

 

   

 

 

 

(9) Long-term Debt

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

 

     June 30, 2013      December 31, 2012  

A term loans(1)(2)

   $ 855,313       $ 878,438   

B term loans(1)

     908,813         913,438   

Incremental B-1 term loans(1)

     246,250         247,500   

Incremental B-2 term loans(1)

     195,891         196,739   

Revolving line of credit(1)

     197,500         22,500   

7.25% Senior notes

     450,000         450,000   

7.875% Senior notes

     —          1,809   

9% Senior subordinated notes

     —          392,933   

8.625% Senior subordinated notes

     400,000         400,000   

 

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     June 30, 2013     December 31, 2012  

6.5% Senior subordinated notes

     425,000        —     

3% Convertible senior subordinated notes

     150,000        150,000   

Other lines of credit

     405        31,957   

Other

     29,669        3,593   
  

 

 

   

 

 

 
     3,858,841        3,688,907   

Less: Current portion

     (50,539     (60,232
  

 

 

   

 

 

 
   $ 3,808,302      $ 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 and six months ended June 30, 2013 and 2012, respectively, as follows (in thousands):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  

Secured credit facility (1)

   $ 25,657       $ 27,097       $ 52,932       $ 49,948   

7.25% Senior notes

     8,480         —          16,836         —    

7.875% Senior notes (2)

     1         5,755         137         11,513   

9% Senior subordinated notes (3)

     43,649         10,363         54,043         20,717   

8.625% Senior subordinated notes

     9,274         9,275         18,547         18,549   

6.5% Senior subordinated notes

     3,013         —          3,013         —    

3% Senior subordinated convertible notes

     1,246         1,246         2,492         2,492   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 91,320       $ 53,736       $ 148,000       $ 103,219   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes “A” term loans, including the “Delayed-Draw” term loans; “B” term loans; “Incremental B-1” term loans; “Incremental B-2” term loans; and revolving line of credit loans. For the three and six months ended June 30, 2013, the amounts include $0.8 million and $1.8 million, respectively, related to the amortization of fees paid for certain debt modifications. For the three and six months ended June 30, 2012, the amount includes $1.3 million and $2.6 million, respectively, related to the amortization of fees paid for certain debt modifications.

(2) 

For the six months ended June 30, 2013, this amount includes an approximate $0.2 million loss recorded in connection with the repurchase of our 7.875% senior notes.

(3) 

An approximate $35.6 million loss in connection with the repurchase of our 9% senior subordinated notes has been included in each of the three and six-month periods for 2013. Included in the $35.6 million is $19.0 million related to tender offer consideration and call premium which has been classified within cash flow from financing activities in our consolidated statement of cash flows.

(a) Secured Credit Facility

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

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

 

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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.

(b) 6.5% Senior Subordinated Notes

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

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

We may, at our option, redeem the 6.5% senior subordinated notes, in whole or part, at any time (which may be more than once) on or after June 15, 2016, by paying the principal amount of the notes being redeemed plus a declining premium, plus accrued and unpaid interest to (but excluding) the redemption date. The premium declines from 3.250% during the twelve months on and after June 15, 2016 to 1.625% during the twelve months on and after June 15, 2017 to zero on and after June 15, 2018. In addition, we may, at our option, at any time (which may be more than once) before May 24, 2015, redeem up to 10% of the aggregate principal amount of the 6.5% senior subordinated notes in each of the two twelve-month periods preceding May 24, 2015 at a redemption price of 103% of the principal amount thereof plus accrued and unpaid interest to (but excluding) the redemption date. In addition, at any time (which may be more than once) prior to June 15, 2016, we may, at our option, redeem up to 35% of the aggregate principal amount of the 6.5% senior subordinated notes with money that we raise in certain equity offerings, so long as (i) we pay 106.5% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to (but excluding) the redemption date; (ii) we redeem the 6.5% senior subordinated notes within 90 days of completing such equity offering; and (iii) at least 65% of the aggregate principal amount of the 6.5% senior subordinated notes remains outstanding afterwards. In addition, at any time (which may be more than once) prior to June 15, 2016, we may, at our option, redeem some or all of the 6.5% senior subordinated notes by paying the principal amount of the 6.5% senior subordinated notes being redeemed plus a make-whole premium, plus accrued and unpaid interest to (but excluding) the redemption date.

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

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

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

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

The 6.5% senior subordinated notes are our senior subordinated unsecured obligations, are subordinated in right of payment to all of our existing and future senior debt, including our borrowings under our secured credit facility and our 7.25% senior notes, and

 

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are equal in right of payment with our 8.625% senior subordinated notes and our 3% convertible senior subordinated notes. Our obligations under the 6.5% senior subordinated notes and the 6.5% Indenture are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated unsecured basis by certain of our domestic subsidiaries, and the obligations of such domestic subsidiaries under their guarantees are subordinated in right of payment to all of their existing and future senior debt. See Note 19 for guarantor financial information.

(c) 9% Senior Subordinated Notes

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

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

(10) Derivative Financial Instruments

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

Foreign Currency Risk

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

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

 

Derivative Instruments

  

Location of Gain (Loss)

Recognized in Income

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

Foreign currency forward contracts

   Other comprehensive income (loss)    $ (652   $ 455   
     

 

 

   

 

 

 

Total gain (loss)

   Other comprehensive income (loss)    $ (652   $ 455   
     

 

 

   

 

 

 

(11) Fair Value Measurements

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

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

Level 1—Quoted prices in active markets for identical assets or liabilities.

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.

 

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

 

Description

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

Assets:

           

Marketable securities

   $ 889       $ 889       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 889       $ 889       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 233,051       $ —        $ —        $ 233,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 233,051       $ —        $ —        $ 233,051   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 six months ended June 30, 2013 were as follows (in thousands):

 

Fair value of contingent consideration obligations, January 1, 2013

   $ 176,172   

Acquisition date fair value of contingent consideration obligations recorded

     75,815   

Net reclassifications

     (12

Foreign currency

     (460

Payments

     (34,739

Present value accretion

     3,402   

Adjustments, net (income) expense

     12,873   
  

 

 

 

Fair value of contingent consideration obligations, June 30, 2013

   $ 233,051   
  

 

 

 

At June 30, 2013 and December 31, 2012, the carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and other current liabilities approximated their estimated fair values.

The carrying amount and estimated fair value of our long-term debt were $3.9 billion and $3.9 billion, respectively, at June 30, 2013. The carrying amount and estimated fair value of our long-term debt were $3.7 billion at December 31, 2012. The estimated fair value of our long-term debt was determined using market sources that were derived from available market information (Level 2 in the fair value hierarchy) and may not be representative of actual values that could have been or will be realized in the future.

 

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(12) Defined Benefit Pension Plan

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

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Service cost

   $ —       $ —       $ —       $ —    

Interest cost

     180        199        361        397   

Expected return on plan assets

     (154     (153     (309     (305

Amortization of prior service costs

     102        104        205        208   

Realized losses

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 128      $ 150      $ 257      $ 300   
  

 

 

   

 

 

   

 

 

   

 

 

 

(13) Financial Information by Segment

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

We evaluate performance of our operating segments based on revenue and operating income (loss). Segment information for the three and six months ended June 30, 2013 and 2012 is as follows (in thousands):

 

     Professional
Diagnostics
     Health
Information
Solutions
    Consumer
Diagnostics
     Corporate
and
Other
    Total  

Three Months Ended June 30, 2013:

            

Net revenue

   $ 603,762       $ 134,775      $ 25,448       $ —       $ 763,985   

Operating income (loss)

   $ 72,896       $ (11,759   $ 3,404       $ (20,137   $ 44,404   

Depreciation and amortization

   $ 86,856       $ 20,725      $ 1,080       $ 273      $ 108,934   

Non-cash charge associated with acquired inventory

   $ 711       $ —       $ —        $ —       $ 711   

Restructuring charge

   $ 1,740       $ 6,304      $ —        $ —       $ 8,044   

Stock-based compensation

   $ —        $ —       $ —        $ 4,677      $ 4,677   

Three Months Ended June 30, 2012:

            

Net revenue

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

Operating income (loss)

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

Depreciation and amortization

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

Restructuring charge

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

Stock-based compensation

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

Six Months Ended June 30, 2013:

            

Net revenue

   $ 1,186,254       $ 268,982      $ 47,998       $ —       $ 1,503,234   

Operating income (loss)

   $ 132,736       $ (25,652   $ 5,684       $ (37,875   $ 74,893   

Depreciation and amortization

   $ 169,650       $ 41,462      $ 2,233       $ 559      $ 213,904   

Non-cash charge associated with acquired inventory

   $ 1,172       $ —       $ —        $ —       $ 1,172   

Restructuring charge

   $ 3,129       $ 8,807      $ —        $ —       $ 11,936   

Stock-based compensation

   $ —        $ —       $ —        $ 8,800      $ 8,800   

Six Months Ended June 30, 2012:

            

Net revenue

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

Operating income (loss)

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

Depreciation and amortization

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

Non-cash charge associated with acquired inventory

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

Restructuring charge

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

 

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

Stock-based compensation

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

Assets:

              

As of June 30, 2013

   $ 6,254,068       $ 561,786       $ 199,423       $ 84,728       $ 7,100,005   

As of December 31, 2012

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

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

 

Professional Diagnostics Segment:

   Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  

Cardiology

   $ 118,436       $ 125,597       $ 233,369       $ 264,423   

Infectious disease

     157,706         137,821         347,550         288,837   

Toxicology

     165,884         159,922         314,933         281,662   

Diabetes

     74,905         36,797         124,988         64,958   

Other

     82,666         76,736         157,385         152,442   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net product sales and services revenue

     599,597         536,873         1,178,225         1,052,322   

License and royalty revenue

     4,165         3,237         8,029         6,145   
  

 

 

    

 

 

    

 

 

    

 

 

 

Professional diagnostics net revenue

   $ 603,762       $ 540,110       $ 1,186,254       $ 1,058,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Health Information Solutions Segment:

   Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013      2012  

Disease and case management

   $ 52,578       $ 54,512       $ 106,704       $ 107,894   

Wellness

     27,230         29,567         53,530         56,591   

Women’s & children’s health

     29,256         31,313         58,336         61,084   

Patient self-testing services

     25,711         23,198         50,412         43,805   
  

 

 

    

 

 

    

 

 

    

 

 

 

Health management net revenue

   $ 134,775       $ 138,590       $    268,982       $    269,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

(14) Related Party Transactions

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

We had a net payable to the joint venture of $1.1 million as of June 30, 2013 and a net receivable from the joint venture of $2.3 million as of December 31, 2012. Included in the $1.1 million payable balance as of June 30, 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 $12.1 million and $14.6 million as of June 30, 2013 and December 31, 2012, respectively, related to the 2008 SPD-related restructuring plans. Additionally, customer receivables associated with revenue earned after the joint venture was completed have been classified as other receivables within prepaid and other current assets on our accompanying consolidated balance sheets in the amount of $9.2 million and $6.9 million as of June 30, 2013 and December 31, 2012, respectively. In connection with the joint venture arrangement, the joint venture bears the collection risk associated with these receivables. Sales to the joint venture under our manufacturing agreement totaled $18.2 million and $35.3 million during the three and six months ended June 30, 2013, respectively, and $14.5 million and $31.6 million during the three and six months ended June 30, 2012, respectively. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $0.3 million and $0.6 million during the three and six months ended June 30, 2013, respectively, and $0.3 million and $0.6 million during the three and six months ended June 30, 2012, respectively. Sales under our manufacturing agreement and long-term services agreement are included in net product sales and services revenue, respectively, in our accompanying consolidated statements of operations.

Under the terms of our product supply agreement, the joint venture purchases products from our manufacturing facilities in the U.K. and China. The joint venture in turn sells a portion of those tests back to us for final assembly and packaging. Once packaged,

 

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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 $9.6 million and $7.3 million of trade receivables which are included in accounts receivable on our accompanying consolidated balance sheets as of June 30, 2013 and December 31, 2012, respectively, and $23.1 million and $21.3 million of trade accounts payable which are included in accounts payable on our accompanying consolidated balance sheets as of June 30, 2013 and December 31, 2012, respectively. During the six months ended June 30, 2013 and 2012, we received $10.8 million and $6.1 million, respectively, in cash from SPD as a return of capital.

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

 

Balance Sheet Caption:

   June 30, 2013      December 31, 2012  

Accounts receivable, net of allowances

   $ 9,591       $ 7,317   

Prepaid expenses and other current assets

   $ 9,209       $ 9,161   

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

   $ 12,134       $ 14,629   

Accounts payable

   $ 23,131       $ 21,258   

Accrued expenses and other current liabilities

   $ 1,119       $ —     

(15) 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 June 30, 2013, we had borrowed no amounts under the Gates Loan Agreement. As of June 30, 2013, we had received approximately $7.9 million in grant-related funding from the Gates Foundation, which was recorded as restricted cash and deferred grant funding. The deferred grant funding is classified within accrued expenses and other current liabilities on our accompanying consolidated balance sheet. As qualified expenditures are incurred under the terms of the grant, we use the deferred funding to recognize a reduction of our related qualified research and development expenditures. For the three and six months ended June 30, 2013, we recognized approximately $1.8 million and $2.4 million, respectively, of qualified expenditures, which were recorded as an offset to our research and development expenses.

(16) Material Contingencies

Acquisition-related Contingent Consideration Obligations

The following summarizes our principal contractual acquisition-related contingent consideration obligations as of June 30, 2013 that have changed significantly since December 31, 2012. Other acquisition-related contingent consideration obligations that were presented in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2012, but which are omitted below, represent those that have not changed significantly since that date.

 

   

Accordant

With respect to Accordant, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and cash collection targets starting after the second anniversary of the acquisition date and completed prior to the third anniversary of the acquisition date. An earn-out totaling $4.5 million was earned and accrued as of December 31, 2012. A payment of $1.5 million was made during each of the first and second quarters of 2013 and the remaining payment will be made in a final installment of $1.5 million during the third quarter of 2013.

 

   

Alere Healthcare

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

 

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Alere S.A.

With respect to Alere S.A., the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and EBITDA targets during each of the calendar years 2011 through 2016. The remaining earn-out was settled for BRL 6.9 million (approximately $3.1 million at June 30, 2013). A payment of BRL 2.9 million will be paid during the third quarter of 2013 and the remaining BRL 4.0 million will be paid in 48 equal monthly installments beginning in August 2013. The present value of the settlement totaling BRL 6.1 million (approximately $2.8 million at June 30, 2013) was accrued at June 30, 2013. No further contingent consideration obligations related to this acquisition exist as of June 30, 2013.

 

   

Amedica

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

 

   

Branan

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

 

   

Immunalysis

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

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

 

   

MedApps

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

 

   

NationsHealth

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

 

   

ROAR

With respect to Forensics Limited, or ROAR, the terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain EBITDA targets during 2012 through 2014. Payment of the 2012 earn-out totaling approximately £1.0 million (approximately $1.5 million), which was previously accrued at December 31, 2012, was made during the first quarter of 2013. The maximum remaining amount of the earn-out payments is £9.5 million (approximately $14.4 million at June 30, 2013).

 

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(17) 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.

(18) Equity Investments

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

(a) SPD

We have a 50/50 joint venture, called SPD, with P&G for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiology, diabetes and oral care fields. We recorded earnings of $4.2 million and $6.7 million during the three and six months ended June 30, 2013, respectively, and losses of $3.3 million and $6.1 million during the three and six months ended June 30, 2012, respectively, in equity earnings of unconsolidated entities, net of tax, in our accompanying consolidated statements of operations, which represented our 50% share of SPD’s net income or losses, as applicable, for the respective periods.

(b) TechLab

We own 49% of TechLab, Inc., or TechLab, a privately-held developer, manufacturer and distributor of rapid non-invasive intestinal diagnostics tests in the areas of intestinal inflammation, antibiotic-associated diarrhea and parasitology. We recorded earnings of $0.5 million and $0.8 million during the three and six months ended June 30, 2013, respectively, and earnings of $0.5 million and $1.2 million during the three and six months ended June 30, 2012, respectively, in equity earnings of unconsolidated entities, net of tax, in our accompanying consolidated statements of operations, which represented our minority share of TechLab’s net income for the respective periods.

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

 

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

Combined Condensed Results of Operations:

   2013      2012      2013      2012  

Net revenue

   $ 54,669       $ 58,308       $ 103,824       $ 110,833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 35,591       $ 35,585       $ 72,704       $ 70,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income after taxes

   $ 9,429       $ 7,691       $ 15,006       $ 14,684   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Combined Condensed Balance Sheet:

   June 30, 2013      December 31, 2012  

Current assets

   $ 80,378       $ 79,842   

Non-current assets

     37,211         38,991   
  

 

 

    

 

 

 

Total assets

   $ 117,589       $ 118,833   
  

 

 

    

 

 

 

Current liabilities

   $ 36,842       $ 45,084   

Non-current liabilities

     6,261         6,791   
  

 

 

    

 

 

 

Total liabilities

   $ 43,103       $ 51,875   
  

 

 

    

 

 

 

 

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(19) Guarantor Financial Information

Our 7.25% senior notes due 2018, our 8.625% senior subordinated notes due 2018, and our 6.5% senior subordinated notes due 2020 are guaranteed by certain of our consolidated wholly owned subsidiaries, or the Guarantor Subsidiaries. The guarantees are full and unconditional and joint and several. The following supplemental financial information sets forth, on a consolidating basis, balance sheets as of June 30, 2013 and December 31, 2012, the related statements of operations and statements of comprehensive income (loss) for each of the three and six months ended June 30, 2013 and 2012, respectively, and the statements of cash flows for the six months ended June 30, 2013 and 2012, for Alere Inc., the Guarantor Subsidiaries and our other subsidiaries, or the Non-Guarantor Subsidiaries. The supplemental financial information reflects the investments of Alere Inc. and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.

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

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

 

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CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 208,925      $ 365,328      $ (52,691   $ 521,562   

Services revenue

     —          218,150        19,408        —          237,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          427,075        384,736        (52,691     759,120   

License and royalty revenue

     —          2,770        5,072        (2,977     4,865   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          429,845        389,808        (55,668     763,985   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     887        117,550        180,947        (46,195     253,189   

Cost of services revenue

     —          120,287        9,717        (5,194     124,810   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     887        237,837        190,664        (51,389     377,999   

Cost of license and royalty revenue

     —          18        4,458        (2,977     1,499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     887        237,855        195,122        (54,366     379,498   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (887     191,990        194,686        (1,302     384,487   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     6,229        16,157        18,114        —          40,500   

Sales and marketing

     1,413        81,203        76,806        —          159,422   

General and administrative

     14,477        74,174        51,510        —          140,161   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     22,119        171,534        146,430        —          340,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (23,006     20,456        48,256        (1,302     44,404   

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

     (91,660     (6,382     (3,071     8,660        (92,453

Other income (expense), net

     (5,607     5,636        9,695        (8,661     1,063   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (120,273     19,710        54,880        (1,303     (46,986

Provision (benefit) for income taxes

     (10,360     12,042        16,750        (565     17,867   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (109,913     7,668        38,130        (738     (64,853

Equity earnings (losses) of subsidiaries, net of tax

     49,045        (559     —          (48,486     —     

Equity earnings of unconsolidated entities, net of tax

     566        —          4,027        (42     4,551   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (60,302     7,109        42,157        (49,266     (60,302

Less: Net income attributable to non-controlling interests

     —          —          267        —          267   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (60,302     7,109        41,890        (49,266     (60,569

Preferred stock dividends

     (5,309     —          —          —          (5,309
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (65,611   $ 7,109      $ 41,890      $ (49,266   $ (65,878
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended June 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 206,818      $ 286,145      $ (29,538   $ 463,425   

Services revenue

     —          217,717        16,138        —          233,855   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          424,535        302,283        (29,538     697,280   

License and royalty revenue

     —          9,590        2,602        (8,955     3,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          434,125        304,885        (38,493     700,517   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     857        98,110        152,555        (29,024     222,498   

Cost of services revenue

     —          112,863        7,696        —          120,559   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     857        210,973        160,251        (29,024     343,057   

Cost of license and royalty revenue

     —          5        10,802        (8,955     1,852   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     857        210,978        171,053        (37,979     344,909   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (857     223,147        133,832        (514     355,608   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     5,873        18,039        16,535        —          40,447   

Sales and marketing

     819        88,080        70,423        —          159,322   

General and administrative

     14,567        61,291        45,627        —          121,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     21,259        167,410        132,585        —          321,254   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (22,116     55,737        1,247        (514     34,354   

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

     (53,969     (10,946     (3,816     13,200        (55,531

Other income (expense), net

     3,988        15,803        (2,780     (13,200     3,811   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (72,097     60,594        (5,349     (514     (17,366

Provision (benefit) for income taxes

     (19,750     25,217        (5,839     (117     (489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (52,347     35,377        490        (397     (16,877

Equity earnings (losses) of subsidiaries, net of tax

     38,982        (185     —          (38,797     —     

Equity earnings of unconsolidated entities, net of tax

     486        —          3,502        10        3,998   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (12,879     35,192        3,992        (39,184     (12,879

Less: Net income attributable to non-controlling interests

     —          —          36        —          36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (12,879     35,192        3,956        (39,184     (12,915

Preferred stock dividends

     (5,279     —          —          —          (5,279
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (18,158   $ 35,192      $ 3,956      $ (39,184   $ (18,194
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2013

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 442,418      $ 686,225      $ (98,805   $ 1,029,838   

Services revenue

     —          424,321        40,146        —          464,467   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          866,739        726,371        (98,805     1,494,305   

License and royalty revenue

     —          5,805        8,605        (5,481     8,929   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          872,544        734,976        (104,286     1,503,234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     1,835        238,144        354,163        (87,875     506,267   

Cost of services revenue

     —          235,898        18,219        (9,149     244,968   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     1,835        474,042        372,382        (97,024     751,235   

Cost of license and royalty revenue

     —          35        8,701        (5,481     3,255   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     1,835        474,077        381,083        (102,505     754,490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (1,835     398,467        353,893        (1,781     748,744   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     10,652        33,537        37,765        —          81,954   

Sales and marketing

     2,805        164,041        149,032        —          315,878   

General and administrative

     28,504        139,157        108,358        —          276,019   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     41,961        336,735        295,155        —          673,851   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (43,796     61,732        58,738        (1,781     74,893   

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

     (148,518     (13,403     (6,488     18,557        (149,852

Other income (expense), net

     (837     11,895        8,092        (18,557     593   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (193,151     60,224        60,342        (1,781     (74,366

Provision (benefit) for income taxes

     (73,171     29,968        24,877        (678     (19,004
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (119,980     30,256        35,465        (1,103     (55,362

Equity earnings (losses) of subsidiaries, net of tax

     71,289        (1,173     —          (70,116     —     

Equity earnings of unconsolidated entities, net of tax

     814        —          6,715        (44     7,485   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (47,877     29,083        42,180        (71,263     (47,877

Less: Net income attributable to non-controlling interests

     —          —          242        —          242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (47,877     29,083        41,938        (71,263     (48,119

Preferred stock dividends

     (10,559     —          —          —          (10,559
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (58,436   $ 29,083      $ 41,938      $ (71,263   $ (58,678
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2012

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —        $ 430,235      $ 571,744      $ (62,767   $ 939,212   

Services revenue

     —          394,432        31,857        —          426,289   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —          824,667        603,601        (62,767     1,365,501   

License and royalty revenue

     —          13,894        5,148        (12,897     6,145   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —          838,561        608,749        (75,664     1,371,646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     1,707        204,312        304,153        (62,120     448,052   

Cost of services revenue

     —          196,506        14,913        —          211,419   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     1,707        400,818        319,066        (62,120     659,471   

Cost of license and royalty revenue

     —          10        16,383