10-K 1 d441700d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

(Mark One)

 

[X]

  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2012

[   ]

  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 0-25317

 

 

Life Technologies Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   33-0373077

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

5791 Van Allen Way    
Carlsbad, California   92008
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

760-603-7200

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.01 par value   NASDAQ Global Select Market
Preferred Stock Purchase Rights, $0.01 par value   NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  [X] or No  [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  [   ] or No  [X]

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] or No  [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

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 Act). Yes  [   ] No    [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2012 was $7,888,305,183.

The number of outstanding shares of the registrant’s common stock as of February 25, 2013 was 170,386,980.

 

 

 


Table of Contents

2012 Annual Report to Stockholders

INCORPORATION BY REFERENCE

Portions of the registrant’s proxy statement to be filed with the SEC pursuant to Regulation 14A in connection with the registrant’s 2013 Annual Meeting of Stockholders, to be filed subsequent to the date hereof, are incorporated by reference into Part III of this annual report on Form 10-K. Such proxy statement will be filed with the SEC not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2012.


Table of Contents

LIFE TECHNOLOGIES CORPORATION

Annual Report on Form 10-K

for the Fiscal Year Ended December 31, 2012

TABLE OF CONTENTS

 

FORWARD LOOKING STATEMENTS   
PART I   
Item 1.   

Business

     2   
Item 1A.   

Risk Factors

     11   
Item 1B.   

Unresolved Staff Comments

     25   
Item 2.   

Properties

     25   
Item 3.   

Legal Proceedings

     26   
Item 4.   

Mine Safety Disclosures

     27   
PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      28   
Item 6.   

Selected Financial Data

     31   
Item 7.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   
Item 7A.   

Quantitative and Qualitative Disclosures About Market Risk

     54   
Item 8.   

Financial Statements and Supplementary Data

     55   
Item 9.   

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     103   
Item 9A.   

Controls and Procedures

     103   
Item 9B.   

Other Information

     106   
PART III   
Item 10.   

Directors, Executive Officers and Corporate Governance

     106   
Item 11.   

Executive Compensation

     106   
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      106   
Item 13.   

Certain Relationships and Related Transactions, and Director Independence

     106   
Item 14.   

Principal Accounting Fees and Services

     106   
PART IV   
Item 15.   

Exhibits and Financial Statement Schedules

     107   
SIGNATURES      109   


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FORWARD-LOOKING STATEMENTS

Any statements in this Annual Report on Form 10-K about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance that are not historical facts are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “should,” “intend,” “plan,” “will,” “expect(s),” “estimate(s),” “project(s),” “positioned,” “strategy,” “outlook” and similar expressions. Additionally, statements concerning future matters, such as the development of new products, enhancements of technologies, sales levels and operating results and other statements regarding matters that are not historical facts are forward-looking statements. Accordingly, all such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed in the statements. Any forward-looking statements are qualified in their entirety by reference to the risk, uncertainties and other factors discussed throughout this Annual Report on Form 10-K. Among the key factors that could cause our actual results to differ materially from those projected in our forward-looking statements, include our ability to:

 

   

continually develop and offer new products and services that are commercially successful;

 

   

successfully compete and maintain the pricing of products and services;

 

   

maintain our revenue and profitability during periods of adverse economic and business conditions;

 

   

successfully integrate and develop acquired businesses and technologies;

 

   

successfully acquire new products, services, and technologies through additional acquisitions;

 

   

successfully procure our products and supplies from our existing supply chain;

 

   

successfully secure and deploy capital;

 

   

satisfy our debt obligations; and

 

   

the additional risks and other factors described under the caption “Risk Factors” under Item 1A of this Annual Report on Form 10-K for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission.

Because the factors referred to above could cause our actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date of this Annual Report on Form 10-K, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after such date.

 

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In this Annual Report on Form 10-K, unless the context requires otherwise, “Life Technologies,” “Life Technologies Corporation,” “Company,” “we,” “our,” and “us” means Life Technologies Corporation and its subsidiaries.

PART I

ITEM 1. Business

General Development of Our Business

Life Technologies Corporation is a global life sciences company dedicated to improving the human condition. Our systems, consumables and services enable scientific researchers and commercial markets to accelerate scientific exploration, leading to discoveries and developments that improve the quality of life. Our products are also used in forensics, food and water safety, animal health testing and other industrial applications.

The Company delivers a broad range of products and services, including systems, instruments, reagents, software, and custom services. Our growing portfolio of products includes innovative technologies for capillary electrophoresis-based sequencing, next generation sequencing, PCR, sample preparation, cell culture, RNA interference analysis, functional genomics research, proteomics and cell biology applications, as well as clinical diagnostic applications, forensics and animal, food, pharmaceutical and water testing analysis. We also provide our customers convenient and value-added purchasing options through thousands of sales and service professionals, e-commerce capabilities and onsite supply center solutions.

The Company began operations as a California partnership in 1987 and incorporated in California in 1989. In 1997, the Company reincorporated as a Delaware corporation. On November 21, 2008, Invitrogen Corporation (also referred to as “Invitrogen”), a predecessor company to Life Technologies, completed the acquisition of Applied Biosystems, Inc. (also referred to as “AB” or “Applied Biosystems”) to form a new company called “Life Technologies Corporation”. Life Technologies has approximately 10,000 employees, has a presence in more than 180 countries, and possesses a rapidly growing intellectual property estate. Currently, the Company owns and/or licenses over 5,000 patents. The corporate headquarters are in Carlsbad, California.

The Company’s website is www.lifetechnologies.com. This Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and any amendments thereto are made available without charge on the Investor Relations section of our website (ir.lifetechnologies.com). These materials are available on the website as soon as reasonably practicable after filing these materials with, or furnishing them to, the Securities and Exchange Commission.

Financial Information About Our Segments and Geographic Areas

The Company determined, in accordance with The Financial Accounting Standards Board (FASB) Accounting Standards Codification, or ASC Topic 280, Segment Reporting, to operate as one operating segment. The Company’s Chief Operating Decision Maker (CODM) reviews revenue at the business group level and manufacturing, operating income and expenses, and net income at the Company wide level to allocate resources and assess the Company’s overall performance. The Company’s business groups share common, centralized support functions, including finance, human resources, legal, information technology, and corporate marketing, all of which report directly to the CODM. Accordingly, decisions regarding the Company’s overall operating performance and allocation of Company resources are assessed on a consolidated basis. The Company will disclose the revenues for each of its business groups in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3, “Geographic Information and Revenue by Business Groups” of the Consolidated Financial Statements, to allow the reader of the financial statements the ability to gain some transparency into the operations of the Company.

Financial information about our revenues from foreign countries and assets located in those countries is also included in the Note 3 of the Consolidated Financial Statements, “Geographic Information and Revenue by Business Groups”.

 

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Description of Our Business

Company Overview

We are a global life sciences company dedicated to helping our customers make scientific discoveries and applying those discoveries to ultimately improve the quality of life. Our systems and reagents enable, simplify and accelerate a broad spectrum of biological research of genes, proteins and cells within academic and life science research, clinical research and commercial applications. Our scientific expertise assists in making biodiscovery research techniques more effective and efficient for pharmaceutical, biotechnology, agricultural, clinical, government and academic scientific professionals with backgrounds in a wide range of scientific disciplines.

The Company offers many different products and services, and is continually developing and/or acquiring others. Some of our specific product categories include the following:

 

   

Capillary electrophoresis, SOLiD®, and Ion Torrent® DNA sequencing systems and reagents, which are used to discover sources of genetic and epigenetic variation, to catalog the DNA structure of organisms, to verify the composition of genetic research material, and to apply these genetic analysis discoveries in markets such as forensic human identification and diagnostics.

 

   

“High-throughput” gene cloning and expression technology, which allows customers to clone and expression-test genes on an industrial scale.

 

   

Pre-cast electrophoresis products, which improve the speed, reliability and convenience of separating nucleic acids and proteins.

 

   

Antibodies, which allow researchers to capture and label proteins, visualize their location through the use of dyes and discern their role in disease.

 

   

Magnetic beads, which are used in a variety of settings, such as attachment of molecular labels, nucleic acid purification, and organ and bone marrow tissue type testing.

 

   

Molecular Probes® fluorescence-based technologies, which facilitate the labeling of molecules for biological research and drug discovery.

 

   

Fluorescence microscopy instrumentation, which facilitates monitoring and measuring cell density and morphology as well as quick detection and verification of fluorescently labeled cells through imaging.

 

   

Transfection reagents, which are widely used to transfer genetic elements into living cells enabling the study of protein function and gene regulation.

 

   

PCR and Real Time PCR systems, reagents and assays, which enable researchers to amplify and detect targeted nucleic acids (DNA and RNA molecules) for a host of applications in molecular biology.

 

   

Cell culture media and reagents used in the scale-up and manufacture of biological drugs at cGMP facilities.

 

   

RNA Interference reagents, which enable scientists to selectively “turn off” genes in biology systems to gain insight into biological pathways.

 

   

Food safety and animal health products, which are used to for pathogen detection, molecular testing for production animals, crop testing and environmental testing products.

 

   

A lab developed test, which is used within our CLIA certified lab to help physicians stratify the risk of recurrence for their patients with early-stage, non-squamous, non small cell lung cancer.

In the first quarter of 2012, the Company modified its financial reporting from our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 into three new business groups to better reflect its internal organization and end markets. These business groups are Research Consumables, Genetic Analysis, and Applied Sciences. The Company’s internal organization was previously structured around its technology platforms of Molecular Biology Systems, Genetic Systems and Cell Systems. The Company has reclassified the historically presented business group revenue to conform to the current year presentation. The reclassification had no, nor has any, impact on previously reported consolidated results of operations or financial position.

 

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Scientific Background

The genome is the entirety of a living organism’s genetic information coded in the form of DNA. Within the genome are individual segments of DNA that form genes, which encode the instructions used by cells to create proteins. These instructions are relayed from the gene to the cell’s protein assembly machinery through the intermediary of a transcript composed of RNA. The total set of RNA transcripts expressed by the genome in a cell or organism is known as the transcriptome. The proteins, however, ultimately carry out most of the essential biological activities required for life. The total complement of proteins expressed by the genome in a cell or organism is known as the proteome. Proteins have many different functional properties, and are the key biological molecules involved in processes such as growth, development, reproduction, aging, and disease.

Researchers seeking to learn the causes of disease to develop treatments have historically used molecular biology techniques focused on the study of single or small numbers of genes and the proteins they code for, as opposed to the study of the genome or proteome as a whole. The study of the genome is known as genomics, while the study of the proteome is known as proteomics. Technological advances over the past two decades, including many developed and marketed by Life Technologies, have rapidly accelerated scientists’ ability to perform genomics and proteomics research. These advances include the development of automated instruments that can perform high-throughput analysis of samples and specialized reagents and consumables that enable scientific researchers to perform analysis accurately and efficiently. Genomics research has evolved from the sequencing of the first viral genome of just over 5,000 bases three decades ago to the complete sequencing of the more than 3 billion bases of the human genome in 2001. The recent advances in genomic and proteomic studies have also led to the rapid development of bioinformatics, which integrates biology and computing to analyze the massive amounts of data generated by such studies.

Following the sequencing of the complete human genome, functional genomics and the study of the transcriptome and proteome have come to prominence. Rather than replacing the study of single genes, these disciplines have complemented and enhanced such studies. For example, in the field of drug development, studies in genomics and proteomics combined with an understanding of drug action and efficacy can help to identify patient groups for which the drug may be particularly beneficial. Pharmaceutical-based research also includes the development of safe and effective methods of bioproduction for protein-based therapeutic agents.

In the field of disease treatment, research is often focused on the discovery of biomarkers. These are transcripts or proteins that are used as markers for the diagnosis of certain disease states and their prognosis for treatment. High-throughput production and screening of peptides (short chains of amino acids, the building blocks of proteins) can also assist in the design of vaccines against diseases for which current vaccines are ineffective or unavailable.

In medicine, basic research is focused on cell differentiation, cell proliferation, and cell death. These have wide applications in the study of regenerative medicine, which focuses on repairing organs damaged by trauma or disease. The study of aging is another important field in this category, and focuses on alleviating debilitating conditions associated with the aging process.

Customer Base

The Company divides its principal customer base into three primary categories:

 

   

Life Sciences. Our life sciences research customers consist of laboratories generally associated with universities, medical research centers, government institutions, and other research institutions as well as biotechnology, pharmaceutical and chemical companies. Researchers at these institutions use our products and services in a broad spectrum of scientific activities, such as searching for drugs or other techniques to combat a wide variety of diseases (namely cancer and viral and bacterial diseases); conducting clinical research disease identification or for improving the efficacy of drugs to targeted patient groups; and assisting in vaccine design. Our products and services provide the research tools needed for genomics studies, proteomics studies, gene splicing, cellular analysis, and other key research applications that are required by these life science researchers.

 

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Applied Sciences. Our applied sciences customers consist of businesses in a diverse range of industries. The current focus of our products within these industries is in the areas of: forensic analysis, which is used to identify individuals based on their DNA; quality and safety testing, such as testing required to measure food, beverage, or environmental quality and pharmaceutical manufacturing quality and safety; animal health testing, which enables the detection of pathogens in livestock; agricultural production, such as tools to support food processing and the commercial production of genetically-engineered products; synthetic biology, which enables our customers to explore ways to effectively harness the power of biology to replicate its systems and create biofuels; and biopharmaceutical manufacturing, such as the commercial production of rare or difficult to obtain substances, including proteins, interferons, interleukins, t-PA and monoclonal antibodies.

 

   

Medical Sciences. Our medical sciences customers consist of clinical labs and medical institutions that use our commercial technology for clinical and diagnostic purposes, and medical researchers that use our research technology to explore ways to advance medicine and deliver on the promise of personalized medicine. The current focus of our products is in the area of human diagnostics to better understand disease determination and targeted therapy selection, including use of our next generation sequencing technologies to better understand the nature of disease by unlocking the secrets of DNA; cell therapy; regenerative medicine; and tissue engineering.

Approximately 18% to 20% of the Company’s revenues are derived from federal, university and/or research institutions whose resources may be funded by the United States government either entirely, partially or have minimal to no funding at all. We estimate that, as of December 31, 2012, approximately 8 % of our total revenue was funded directly by the United States government, which takes into account those customers that are partially and/or minimally funded by the United States government. If there were to be a significant change in current research funding, there could be an adverse impact on the Company’s future revenues and results of operations, however the Company believes that such adverse impact shall be less than significant at each customer or customer group level or in aggregate.

Our Products

The Company aligns our products and services into three business groups: Research Consumables, Genetic Analysis and Applied Sciences.

The Research Consumables business group includes our molecular and cell biology reagents, endpoint PCR and other benchtop instruments and consumables. These products include RNAi, DNA synthesis, sample prep, transfection, cloning and protein expression profiling and protein analysis, cell culture media used in research, stem cells and related tools, cellular imaging products, antibodies and cell therapy related products.

The Genetic Analysis business group includes our capillary electrophoresis (also referred to as “CE”) instruments used for research applications and all CE consumables, real-time and digital qPCR instruments used in research applications and all qPCR consumables and genomic assays, as well as our next generation sequencing systems and reagents for the SOLiD® and Ion Torrent® systems.

The Applied Sciences business group includes our BioProduction, forensics and animal health and food safety reagent kits, CE and qPCR instruments that are used in applied markets applications and our medical sciences business, that includes our molecular diagnostics products and services, including laboratory-developed tests and transplant diagnostics.

The Company plans to continue to introduce new research products and services, as we believe continued new product development and rapid product introduction is a critical competitive factor in all of the industries that the Company serves. The Company expects to continue to increase expenditures in sales and marketing, manufacturing and research and development to support increased levels of sales and to augment our long-term competitive position.

 

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Service and Support

The Company generally provides limited warranties on all equipment at the time of sale for periods of time ranging up to two years from the date of sale depending on the product subject to warranty. However, warranties included with any sale can vary, and may be excluded altogether, depending on the particular circumstances of the sale. The sale of some equipment includes installation, basic user training, and/or application support. The Company also offers service contracts to our customers that are generally one to five years in duration after the original warranty period. The Company provides both repair services and routine maintenance services under these arrangements, and also offers repair and maintenance services on a time and material basis to customers that do not have service contracts. Service in the United States and major markets outside of the United States is provided by our service staff and, in some foreign countries, service is provided through third-party arrangements. In addition, we offer custom services such as cell line development, custom media modification, development of primers and custom assays. These services are typically offered with limited warranties.

Research and Development

The Company has a strong history of refining technology to create novel products for biosciences research through the combination of expertise in biology, chemistry, and engineering. The Company continues to generate innovative products across a broader continuum of discovery, development, and validation for the life sciences enterprise. In 2012, the Company launched nearly 145 products, representing approximately 740 new SKUs in fields ranging from genomic analysis to cell biology to human identification and diagnostics. The Company invested $341.9 million, $377.9 million and $375.5 million in research and development for the years ended December 31, 2012, 2011 and 2010, respectively.

As of December 31, 2012, the Company had approximately 1,200 employees engaged in research and development activities in the United States, Singapore, India, Germany, Norway, France, and the Netherlands. The Company also continues to maintain a comprehensive network of collaborators and scientific advisors across the globe. Our research and development activities are focused in segments where we are a leader, and in emerging growth areas where we can utilize our expertise in instrumentation, reagent and consumable solutions to develop new market opportunities.

Sales and Marketing

Our sales and marketing strategy supports our objective of building equity in Life Technologies as the brand that manufactures and delivers user-centered, innovative, premium products and services. Through our brands, including Gibco®, Ambion®, Molecular Probes®, Applied Biosystems®, Invitrogen®, Novex®, Ion Torrent®, and others, we provide premiere offerings to life science researchers and professionals applying biology in their work, such as forensics and molecular diagnostics. We have well established go-to-market channels including an expansive commercial organization of approximately 3,700 employees and a presence in more than 180 countries, with a highly educated and specialized sales force; over 1,000 supply centers worldwide based in our customers’ laboratories to provide convenient access to our products; and a world class e-commerce platform that delivers the easiest online experience to find, decide, and buy our products.

We are committed to being a partner of choice for our customers, which requires us to employ scientific personnel for our sales and service roles. The Company has various types of direct sales personnel, depending on the market and application area. Our organization includes: genetic analysis sales representatives focused on delivering customer solutions across our genetic analysis portfolio from discovery to diagnostics; clinical sales teams, focused on growth in clinical markets; regional commercial teams, focused on our core and mature markets; applied markets and specialty teams, focused on delivering customer solutions across our applied market areas such as food safety, animal health, and human identification; and inside sales teams. We also staff a team of technical sales specialists who have an extensive background in biology or other scientific fields of study and focus on specific product and workflow offerings. Having a thorough understanding of biological techniques and the research process allows our sales representatives to act as advisors to our customers. Our sales representatives also help us identify market needs and new technologies that we can license and develop into new products. If our customers have questions about their products, orders or other support areas, they have full

 

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access by phone or online, to our highly trained technical and customer service professionals. We offer a full range of eBusiness solutions, allowing our customers electronic access to their accounts and ordering modules whenever they need it.

Technology Licensing

Some of our existing products are manufactured or sold under the terms of license agreements that require us to pay royalties to the licensor based on the sales of products containing the licensed materials or technology. These licenses also typically impose obligations on us to market the licensed technology. Although the Company emphasizes our own research and development, we believe our ability to in-license new technology from third-parties is, and will continue to be, critical to our ability to offer competitive new products. Our ability to obtain these in-licenses depends in part on our ability to convince inventors that the Company will be successful in bringing new products incorporating their technology to market. Several significant licenses or exclusivity rights expire at various times during the next 17 years. There are certain risks associated with relying on third-party licensed technologies, including our ability to identify attractive technologies, license them on acceptable terms, meet our obligations under the licenses, renew those licenses should they expire before the Company retires the related product and the risk that the third-party may lose patent protection. These risks are more fully described under the heading “Risks Related to the Development and Manufacturing of our Products” and “Risks Related to Our Intellectual Property” below.

Patents and Proprietary Technologies

Our products are based on complex, rapidly-developing technologies. Some of these technologies are covered by patents the Company owns and others are owned by third-parties and are used by us under license. The Company has pursued a policy of seeking patent protection in the United States and other countries for developments, improvements, and inventions originating within our organization that are incorporated into our products or that fall within our fields of interest. The Company considers the protection of our proprietary technologies and products in our product divisions to be important to the success of our business and relies on a combination of patents and exclusive licenses to protect these technologies and products.

The Company currently owns and/or licenses over 5,000 patents, including over 2,000 in the United States. The Company also has numerous pending patent applications both domestically and internationally. Our success depends, to a significant degree, upon our ability to develop proprietary products and technologies and it is important to our success that we protect the intellectual property associated with these products and technologies. The Company intends to continue to file patent applications as we develop new products and technologies. Patents provide some degree of, but not complete, protection for our intellectual property.

The Company also relies in part on trade secret, copyright and trademark protection of our intellectual property. The Company protects our trade secrets by, among other things, entering into confidentiality agreements with third-parties, employees and consultants. It is our general policy to require employees and consultants to sign agreements to assign to us their interests in intellectual property arising from their work for us. There are risks related to our reliance on patents, trade secret, copyright and trademark protection laws, which are described in more detail under the heading “Risks Related to Our Intellectual Property” below.

The Company is currently, and could in the future, be subject to lawsuits, arbitrations, investigations, and other legal actions with private parties and governmental entities, particularly involving claims for infringement of patents and other intellectual property rights. From time to time, the Company has asserted that various competitors and others are infringing our patents, and, similarly, from time to time, others have asserted that we were or are infringing patents owned by them. These claims are sometimes settled by mutual agreement and result in the granting of licenses by or to us or the cessation of the alleged infringing activities. However, the Company cannot make any assurances as to the outcome of any pending or future claims. More information about the risk factors associated with our reliance on intellectual property is set forth under the heading “Risks Related to Our Intellectual Property” below.

 

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Competition

The markets for our products are competitive and are characterized by the application of advanced technologies. New technologies in life sciences could make our products and services obsolete unless the Company continues to develop new and improved products and services and pursue new opportunities. Given the breadth of our product and service offerings, our competition comes from a wide array of competitors with a high degree of technical proficiency, ranging from specialized companies that have strengths in narrow segments of the life science markets to larger manufacturers and distributors offering a broad array of biotechnology products and services that have significant financial, operational, research and development, and sales and marketing resources. These and other companies may have developed or could in the future develop new technologies that compete with our products or even render our products obsolete. Additionally, there are numerous scientists making materials themselves instead of using kits. The Company believes that a company’s competitive position in the markets we compete in is determined by product function, product quality, speed of delivery, technical support, price, breadth of product line, distribution capabilities, and timely product development. Our customers are diverse and may place varying degrees of importance on the competitive attributes listed above. While it is difficult to rank these attributes for all our customers in the aggregate, the Company believes we are well positioned to compete in each category.

Suppliers

Our manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other supplies. The Company buys materials for our products from many suppliers and the Company has Original Equipment Manufacturer (OEM) arrangements with many third-parties for the manufacturing of various products sold under our platform brand. While there are some raw materials that the Company obtains from a single supplier, we are not dependent on any one supplier or group of suppliers for our business as a whole. Raw materials are generally available from a number of suppliers. Even so, due to factors out of our control, some supplies may occasionally be difficult to obtain. Any interruption in the availability of our manufacturing supplies could force us to suspend manufacturing of an affected product and therefore harm our operations. See also the risk factor regarding “Adverse conditions in the global economy and disruption of financial markets” below for further analysis.

Government Regulation

Certain of our products and services, including some products that are intended for in vitro diagnostics, as well as the manufacturing process of these products, are subject to regulation under various portions of the United States Federal Food, Drug and Cosmetic Act (FDCA) and the laws of other countries. In addition, a number of our manufacturing facilities are subject to periodic inspection by the United States Food and Drug Administration (FDA), other product-oriented federal agencies and various state and local authorities in the United States as well as foreign governmental authorities. Additionally, some of our products must be manufactured in accordance with the requirements of the FDA’s Quality System Regulation, other federal, state and local regulations and other applicable quality standards such as ISO 9001 or ISO 13485. Portions of our business are subject to FDCA requirements including those relating to testing, safety, efficacy, premarket applications, marketing and labeling. Procedures are in place to comply with such requirements.

Materials used in development and testing activities at certain of our facilities are also subject to the Controlled Substances Act, administered by the Drug Enforcement Agency (or DEA). Procedures for control, use and inventory of these materials are in place at our Madison, Wisconsin facility.

The Company also follows Centers for Disease Control/National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules, Biosafety in Microbiological and Biomedical Laboratories and the hazard classification system recommendations for handling bacterial and viral agents, with capabilities through biosafety level three.

The Company is subject to federal, state, local and foreign laws and regulations, regulating the emission or discharge of materials into the environment, or otherwise relating to the protection of the environment, in those

 

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jurisdictions where we operate or maintain facilities. We do not believe that any liability arising under, or compliance with, these laws and regulations will have a material effect on our business and no material capital expenditures are expected for environmental control.

In addition to the foregoing, we are subject to other federal, state, local and foreign laws and regulations applicable to our business, including the Occupational Safety and Health Act, the Toxic Substances Control Act, Department of Transportation regulations, national restrictions on technology transfer, import, export and customs regulations, statutes and regulations relating to government contracting, and similar laws and regulations in foreign countries. In particular, the Company is subject to various foreign regulations sometimes restricting the importation or the exportation of animal-derived products such as fetal bovine serum.

Workforce

As of December 31, 2012, we had approximately 10,000 employees, approximately 4,900 of whom worked outside the United States. These numbers include part-time employees. Our success will depend in large part upon our ability to attract and retain employees. The Company faces competition in this regard from other companies, research and academic institutions, government entities and other organizations. None of our domestic employees are subject to collective bargaining agreements. The Company generally considers relations with our employees to be good.

Recent Developments

At least on an annual basis, our board of directors reviews and assesses strategic opportunities to increase shareholder value, and the board of directors initiated such a review last summer. On January 18, 2013, in response to a media report, we issued a press release confirming that the board of directors had initiated the review. We also announced that we had retained Deutsche Bank Securities Inc. and Moelis & Company LLC as financial advisors for the process. The strategic review is ongoing, and the board of directors has not decided on any specific course of action.

Executive Officers of the Registrant

The Board of Directors appoints executive officers of Life Technologies, and the Chief Executive Officer has authority to hire and terminate such officers. Each executive officer holds office until the earlier of his or her death, resignation, removal from office or the appointment of his or her successor. No family relationships exist among any of Life Technologies’ executive officers, directors or persons nominated to serve in those positions. We have listed the ages, positions held and the periods during which our current executive officers have served in those positions below:

Gregory T. Lucier (age 48) is the Chief Executive Officer and Chairman of the Board at Life Technologies, a global biotechnology company with a presence in more than 180 countries. Ranked 9th among the world’s 50 most innovative companies, Life Technologies is a market leader in products and services that accelerate advancements in basic research and drug development, molecular diagnostics, 21st century forensics, regenerative science and agricultural research. Mr. Lucier fosters a culture of excellence and applies his more than 25 years of strategic management at Life Technologies in his endeavor to shape an era of personalized medicine in which researchers can efficiently read, write and edit DNA for humanity’s benefit. Mr. Lucier previously served as a corporate officer at GE Healthcare and on the Board of the Sanford Burnham Institute, and currently serves on the Board of Directors at Synthetic Genomics, Inc., CareFusion Corporation, Rady Children’s Hospital and the California Healthcare Institute. He received his B.S. in Engineering from Pennsylvania State University and an M.B.A. from Harvard Business School.

Ronald A. Andrews (age 53) serves as President, Medical Sciences of Life Technologies. From 2010 – 2012, Mr. Andrews served as Chief Executive Officer for the Clarient Business Unit, and Segment Leader in Molecular Diagnostics, for GE Healthcare. From 2004 until GE’s acquisition of the company, he served as Chief Executive Officer and Vice Chairman of Clarient Healthcare. Prior to joining Clarient, Mr. Andrews served in a variety of leadership roles at Roche Molecular Diagnostics, Immucor and Abbott Diagnostics. He received his B.S. in Biology and Chemistry from Wofford College.

 

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John A. Cottingham (age 58) serves as Chief Legal Officer and Secretary of Life Technologies. From May 2004 to November 2008, Mr. Cottingham served as Senior Vice President, General Counsel and Secretary of Life Technologies’ predecessor entity, Invitrogen Corporation. Mr. Cottingham served as Vice President, General Counsel of Invitrogen Corporation from September 2000 to May 2004. Prior to the merger of the former Life Technologies, Inc., or “LTI”, with Invitrogen Corporation in September 2000, Mr. Cottingham was the General Counsel and Assistant Secretary of LTI from January 1996 to September 2000. From May 1988 to December 1995, Mr. Cottingham served as an international corporate attorney with the Washington, D.C. office of Fulbright and Jaworski L.L.P. Mr. Cottingham received his B.S. in Political Science from Furman University, his J.D. from the University of South Carolina, his L.L.M. in Securities Regulation from Georgetown University and his M.S.E.L. from the University of San Diego.

David F. Hoffmeister (age 58) serves as Chief Financial Officer of Life Technologies. From October 2004 to November 2008, Mr. Hoffmeister served as Chief Financial Officer and Senior Vice President of Life Technologies’ predecessor entity, Invitrogen Corporation. Prior to joining Invitrogen Corporation, Mr. Hoffmeister held various positions over the course of twenty (20) years with McKinsey & Company, most recently as a senior partner serving clients in the healthcare, private equity and chemicals industries. Prior to joining McKinsey & Company, Mr. Hoffmeister held financial positions at GTE and W.R.Grace. Mr. Hoffmeister is a member of the board of Celanese Corporation. Mr. Hoffmeister received his B.S. in Business from the University of Minnesota and an M.B.A. from the University of Chicago.

Peter M. Leddy, Ph.D. (age 49) serves as Senior Vice President of Global Human Resources and Internal Communications of Life Technologies. From July 2005 to November 2008, Dr. Leddy served as Senior Vice President of Global Human Resources of Life Technologies’ predecessor entity, Invitrogen Corporation. Prior to joining Invitrogen Corporation, Dr. Leddy held several senior management positions with Dell Incorporated from 2000 to 2005. Prior to joining Dell Incorporated, Dr. Leddy served as the Executive Vice President of Human Resources at Promus Hotel Corporation. Dr. Leddy also served in a variety of executive and human resource positions at PepsiCo. Dr. Leddy received his B.A. in Psychology from Creighton University and his M.S. and Ph.D. in Industrial/Organizational Psychology from the Illinois Institute of Technology. Dr. Leddy is director of NuVasive, Inc., and a member of the California State University Professional Science Master’s Executive Board of Directors and is a former board member of the Biotechnology Institute.

Kelli A. Richard (age 44) serves as Vice President of Finance and Chief Accounting Officer of Life Technologies. Ms. Richard served as Vice President of Finance and Chief Accounting Officer of Life Technologies’ predecessor entity, Invitrogen Corporation. Ms. Richard joined Invitrogen Corporation in August 2005 with more than fourteen (14) years of accounting and financial reporting experience, previously serving as Vice President of Accounting and Reporting. Prior to joining Invitrogen Corporation, Ms. Richard held the position of Principal Accounting Officer at Gateway, Inc. Ms. Richard is a certified public accountant with a Bachelor of Business Administration degree from the University of Iowa.

Mark P. Stevenson (age 50) serves as President and Chief Operating Officer of Life Technologies. From December 2007 to November 2008, Mr. Stevenson served as President and Chief Operating Officer of Life Technologies’ predecessor entity, Applied Biosystems. Mr. Stevenson joined Applied Biosystems in Europe in 1998, and held roles of increasing responsibility in Europe and Japan. Mr. Stevenson moved to the U.S. in 2004 to establish the Applied Markets Division of Applied Biosystems and, in 2006, was named President of the Molecular and Cellular Biology Division of Applied Biosystems. Mr. Stevenson has more than twenty (20) years of sales, marketing, and international executive management experience and received his B.S. in Chemistry from the University of Reading, UK, and an M.B.A. from Henley Management School, UK. Mr. Stevenson serves on the Board of Trustees of the Keck Graduate Institute and is an Executive Committee Board Member of BIOCOM, a life science association representing approximately 550 member companies is Southern California.

Available Information

We post our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on the Investor Relations section of our public website (ir.lifetechnologies.com) as

 

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soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Copies of any of these documents may be obtained free of charge either on our website, by contacting our Investor Relations Department at 5791 Van Allen Way, Carlsbad, California 92008, or by calling 1-760-603-7208.

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains our reports, proxy and information statements, and other information at www.sec.gov.

We have included the certifications of our Chief Executive Officer and Chief Financial Officer required by Section 302 and 906 of the Sarbanes-Oxley Act of 2002 and related rules, relating to the quality of our public disclosure, as exhibits to this Annual Report on Form 10-K.

ITEM 1A. Risk Factors

You should carefully consider the following risks, together with other matters described in this Annual Report on Form 10-K or incorporated herein by reference in evaluating our business and prospects. If any of the following risks occurs, our business, financial condition and/or operating results could be harmed. In such case, the trading price of our securities could decline, in some cases significantly. The risks described below are not the only ones we face. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business operations.

Risks Related to the Growth of Our Business

The Company must continually offer new products and services

We sell our products and services in industries that are characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements, and evolving industry standards. Our success depends in large part on continuous, timely and cost-effective development and introduction of new products and services as well as improvements to our existing products and services, which address these evolving market requirements and are attractive to customers. For example, if the Company does not appropriately innovate and invest in new technologies, then our technologies will become dated and our customers could move to new technologies offered by our competitors and we could lose our competitive position in the markets that we serve.

These facts require us to make appropriate investments in the development and identification of new technologies and products and services. As a result, we are continually looking to develop, license and acquire new technologies and products and services to further broaden and deepen our already broad product and service line. Once we have developed or obtained a new technology, to the extent that we fail to introduce new and innovative products and services that are accepted by our markets, we may not obtain an adequate return on our research and development, licensing and acquisition investments and could lose revenue opportunities to our competitors, which would be difficult to regain and could seriously damage our business. Some of the factors affecting customer acceptance of our products and services include:

 

   

availability, quality and price as compared to competitive products and services;

 

   

the functionality of new and existing products and services, and their conformity to industry standards and regulatory standards that may be applicable to our customers;

 

   

the timing of introduction of our products and services as compared to competitive products and services;

 

   

scientists’ and customers’ opinions of the product’s or services’ utility and our ability to incorporate their feedback into future products and services;

 

   

reimbursement for molecular diagnostic products and lab-developed tests;

 

   

the extent to which new products and services are within the scope of our proven expertise;

 

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citation of the products and services in published research; and

 

   

general trends in life sciences research and life science informatics software development.

The Company’s future growth depends in part on our ability to acquire new products, services, and technologies through additional acquisitions, which may absorb significant resources and may not be successful

As part of the Company’s strategy to develop and identify new products, services, and technologies, we have made, and continue to make, acquisitions and investments. Acquiring and integrating the operations of such businesses requires significant efforts, the initial outlay of capital and resources as well as the coordination of information technologies, research and development, sales and marketing, operations, manufacturing and finance. These efforts result in additional expenses and divert management’s time from other projects. Our failure to manage successfully the growth of the acquired company could also have an adverse impact on our business. In addition, there is no guarantee that some of the businesses we acquire will become profitable or remain so. If our acquisitions do not reach our initial expectations, we may record unexpected impairment charges. Our acquisitions involve a number of risks and financial, managerial and operational challenges, including the following, any of which could cause significant operating inefficiencies and adversely affect our growth and profitability:

 

   

any acquired business, technology, service or product could under-perform relative to our expectations and the price that the Company paid for it;

 

   

the Company could experience difficulty in integrating personnel, operations and financial and other systems;

 

   

the Company could have difficulty in retaining key managers and other employees of the acquired company;

 

   

acquisition-related earnings charges could adversely impact operating results;

 

   

acquisitions could place unanticipated demands on the Company’s management, operational resources and financial and internal control systems;

 

   

the Company may be unable to achieve cost savings anticipated in connection with the integration of an acquired business;

 

   

in an acquisition, the Company may assume contingent liabilities that prove greater than anticipated, or deficiencies in internal controls, and the realization of any of these liabilities or deficiencies may increase our expenses and adversely affect the Company’s financial position; and

 

   

the Company may have disagreements or disputes with the prior owners of an acquired business, technology, service or product that may result in litigation and/or resolution expenses and a distraction of our management’s attention.

In addition, we face additional risks related to international acquisitions, including risks related to cultural and language differences and particular economic, currency, political and regulatory risks associated with specific countries. If an acquired business fails to operate as anticipated or cannot be successfully integrated with our existing businesses, our results of operations and financial condition could be adversely affected.

The Company may not successfully manage its current and future divestitures, and, as a result, may not achieve some or all of the expected benefits of such divestitures

We continually evaluate the performance and strategic fit of our businesses and may decide to sell a business, product line or technology based on such an evaluation. Divestitures could involve additional risks, including the following:

 

   

difficulties in the separation of operations, services, products and personnel;

 

   

the diversion of management’s attention from other business concerns;

 

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the need to agree to retain or assume certain current or future liabilities in order to complete the divestiture;

 

   

the disruption of our business; and

 

   

the potential loss of key employees.

Any divestitures may result in significant write-offs, including those related to goodwill and other intangible assets, which could have an adverse effect on our results of operations and financial condition. In addition, we may encounter difficulty in finding buyers or alternative exit strategies at acceptable prices and terms and in a timely manner. We may not be successful in managing these or any other significant risks that we encounter in divesting a business or product line, and, as a result, may not achieve the expected benefits of the divestiture.

The Company faces significant competition

The markets for our products and services are very competitive and price sensitive. Our competitors, which could include some of our customers (such as large pharmaceutical companies) have significant financial, operational, sales and marketing resources, and experience in research and development. Our competitors could develop new technologies that compete with our products and services or even render our products and services obsolete. If a competitor develops superior technology or cost-effective alternatives to our products and services, our business could be seriously harmed.

The markets for some of our products are also subject to specific competitive risks. These markets are highly price competitive. Our competitors have competed in the past by lowering prices on certain products. If they do so again, we may be forced to respond by lowering our prices and thereby reducing our revenues and profits. Failure to anticipate and respond to price competition may hurt our competitive position.

The Company believes that customers in our markets display a significant amount of loyalty to their initial supplier of a particular product. Therefore, it may be difficult to generate sales to potential customers who have purchased products from competitors. Additionally, there are numerous scientists making materials themselves instead of using kits or reagents that we supply. To the extent we are unable to be the first to develop and supply new products, customers may buy from our competitors or make materials themselves, causing our competitive position to suffer.

Consolidation trends in both our market and that of our customers have increased competition

There has been a trend toward industry consolidation in our markets for the past several years. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result in stronger competitors that are better able to compete as sole-source vendors for customers. This could lead to more variability in operating results and could harm our business.

Additionally, there has been a trend toward consolidation among our customers, notably, in the pharmaceutical industry. Consolidation in our customer markets results in increased competition for important market segments and fewer available accounts. Larger consolidated customers may be able to exert increased pricing pressure on us.

Adverse conditions in the global economy and disruption of financial markets may significantly harm our revenue, profitability and results of operations

The global economy has experienced a period of significant economic downturn. Continued or worsening economic conditions in the businesses or geographic areas where we sell our products and/or services could reduce demand for our products and/or services and result in a decrease in sales volume that could have a negative impact on our results of operations. Global credit and capital markets have experienced unprecedented volatility and disruption. Business credit and liquidity have tightened in much of the world. Volatility and disruption of financial markets could limit our customers’ ability to obtain adequate financing or credit to purchase and pay for our products and/or services in a timely manner, or to maintain operations, which may

 

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result in a decrease in sales volume that could harm our results of operations. General concerns about the fundamental soundness of domestic and international economies may also cause our customers to reduce their purchases. Changes in governmental banking, monetary and fiscal policies to address liquidity and increase credit availability may not be effective. In addition, a significant reduction of government funding for research or significant government investment and allocation of resources to assist the economic recovery of sectors that do not include our customers may reduce the resources available for government grants and related funding for life sciences research and development. Economic conditions and market turbulence may also impact our suppliers’ ability to supply us with sufficient quantities of product components in a timely manner, which could impair our ability to manufacture our products. It is difficult to determine the extent of the economic and financial market problems and the many ways that they may affect our suppliers, customers and our business in general. Continuation or further deterioration of these financial and macroeconomic conditions could significantly harm our sales, profitability and results of operations.

A significant portion of our sales are dependent upon our customers’ capital spending policies and research and development budgets, and government funding of research and development programs at universities and other organizations, which are each subject to significant changes

Our customers include pharmaceutical and biotechnology companies, academic institutions, government laboratories, and private foundations. Fluctuations in the research and development budgets at these organizations could have a significant effect on the demand for our products and services. Research and development budgets fluctuate due to changes in available resources, mergers of pharmaceutical and biotechnology companies, spending priorities, general economic conditions, and institutional and governmental budgetary policies. In addition, a significant portion of our instrument product sales are capital purchases by our customers, and these policies fluctuate due to similar factors. Our business could be seriously damaged by any significant decrease in capital equipment purchases or life sciences research and development expenditures by pharmaceutical and biotechnology companies, academic institutions, government laboratories, or private foundations.

The timing and amount of revenues from customers that rely on government funding of research may vary significantly due to factors that can be difficult to forecast. Research funding for life science research has increased more slowly during the past several years compared to the previous years and has declined in some countries, including a slight decrease in 2012 in United States government funding for the NIH. Some grants have been frozen for extended periods of time or otherwise become unavailable to various institutions, sometimes without advance notice. Government funding of research and development is subject to the political process, which is inherently fluid and unpredictable. In the United States for example, the Budget Control Act of 2011 created a Joint Select Committee on Deficit Reduction, which was tasked with recommending proposals to reduce spending. Since that Joint Committee was unable to achieve a targeted deficit reduction of at least $1.2 trillion for the years 2013 through 2021, absent further action by the United States government, an automatic reduction in federal spending, or “sequestration” is to be triggered, which, combined with the expiration of certain tax cuts on December 31, 2012, has typically been known as the “Fiscal Cliff.” While the United States government did agree to a package of tax and federal spending proposals on January 1, 2013, these did not eliminate “sequestration” threat, but moved it back to March 1, 2013. In addition, other programs, such as homeland security or defense, or general efforts to stimulate the economy could be viewed by the United States government as a higher priority. These budgetary pressures may result in reduced allocations to government agencies that fund research and development activities. Past proposals to reduce budget deficits, for instance, have included reduced NIH and other research and development allocations. Any shift away from the funding of life sciences research and development or delays surrounding the approval of government budget proposals may cause our customers to delay or forego purchases of our products, which could seriously damage our business.

Our United States customers generally receive funds from approved grants at particular times of the year, as determined by the United States federal government. In the past, such grants have been frozen for extended periods or have otherwise become unavailable to various institutions without advance notice. The timing of the receipt of grant funds affects the timing of purchase decisions by our customers and, as a result, can cause fluctuations in our sales and operating results.

 

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We may need additional financing in the future to meet our capital needs or to make opportunistic acquisitions and such financing may not be available on favorable terms, if at all, and may be dilutive to existing stockholders

We intend to continue to invest in our business, including investing in research and development activities, expanding our sales and marketing activities, and continuing to make acquisitions. Our ability to take these and other actions may be limited by our available liquidity. As a consequence, in the future, we may need to seek additional financing. We may be unable to obtain any desired additional financing on terms favorable to us, if at all. If we are unable to obtain funds for such matters on acceptable terms, we may be unable to fund our expansion, successfully develop or enhance products or respond to competitive pressures, any of which could negatively affect our business. If we raise additional funds through the issuance of equity securities, our stockholders will experience dilution of their ownership interest. If we raise additional funds by issuing debt, we may be subject to limitations on our operations due to restrictive covenants.

Additionally, our ability to make scheduled payments or refinance our obligations will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and financial, business and other factors beyond our control. Recent disruptions in the financial markets, including the bankruptcy or restructuring of a number of financial institutions and reduced lending activity, may adversely affect the availability, terms and cost of credit in the future. We cannot be sure that recent government initiatives in response to the disruptions in the financial markets will stabilize the markets in general or increase liquidity and the availability of credit to us.

Some of our customers are requiring us to change our sales arrangements to lower their costs, which may limit our pricing flexibility and harm our business

Some of our customers have developed purchasing initiatives to reduce the number of vendors from which they purchase to lower their supply costs. In some cases, these accounts have established agreements with large distributors, including discounts and the distributors’ direct involvement with the purchasing process. These activities may force us to supply the large distributors with our products at a discount to reach those customers. For similar reasons, many larger customers, including the United States government, have requested and may in the future request, special pricing arrangements, including blanket purchase agreements.

These agreements may limit our pricing flexibility, which could harm our business, financial condition, and results of operations. For a limited number of customers, we have, at the customer’s request, made sales through third-party online intermediaries, to whom we are required to pay commissions. If such intermediary sales grow, it could have a negative impact on our gross margins.

Risks Related to the Development and Manufacturing of Our Products

Our business depends on our ability to license new technologies from and to third parties

We believe our ability to in-license new technologies from third-parties is, and will continue to be, critical to our ability to offer new products to our customers. A significant portion of our current revenue is from products manufactured or sold under licenses from third parties. Our ability to gain access to technologies that we need for new products and services depends — in part — on our ability to convince inventors and technology holders that we can successfully commercialize their inventions. We cannot guarantee that we will be able to continue to identify new external technologies of interest to our customers. Even if we are able to identify new technologies of interest, we may not be able to negotiate license agreements with external technology sources on acceptable terms, or at all.

In addition, several of our in-licenses, have finite terms and we may not be able to renew these existing in-licenses on favorable terms, or at all. If we lose the rights to a biological material or a patented technology, we may need to stop selling products and/or services containing those technologies and possibly other products and services, redesign our products, and/or lose a competitive advantage. While some of our in-licenses are exclusive to us in certain markets, potential competitors could also in-license technologies that we fail to in-license exclusively and potentially erode our competitive position for these and other products and services. Our in-

 

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licenses also typically subject us to various economic and commercialization obligations. If we fail to comply with these obligations, we could lose important rights under an in-license, such as exclusivity. In some cases, we could lose all rights under an in-license. In other instances, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent, or a third party could obtain a patent that curtails our freedom to operate under one or more licenses. Changes in patent law could affect the value of the licensed technology. We may also receive third-party claims of intellectual property infringement that we may not be indemnified by the licensor for. Loss of such rights could, in some cases, harm our business.

In the ordinary course of our business, we may determine to grant third parties the right to use certain of our patented technologies through out-licensing technology we have developed or acquired to a third-party licensee. We cannot assure you that we will be successful in identifying appropriate third-party licensees, or that we will be successful in negotiating acceptable commercial license terms. In addition, any third-party licensee may not be successful in developing and commercializing the licensed technology, or may default on the payment or other commercial terms of the license. As a result, we may not recognize the benefits of any out-licensed arrangements, which could harm our ability to expand our business.

The Company must be able to manufacture new and improved products to meet customer demand on a timely and cost-effective basis

The Company must be able to resolve in a timely manner manufacturing issues that may arise from time to time as it commences production of its complex products. Unanticipated difficulties or delays in manufacturing of new and improved products in sufficient quantities to meet customer demand could diminish future demand for such products and harm the Company’s business.

The Company relies on other companies to manufacture some of its products and supply certain components of the products it manufactures on its own which may hinder its ability to satisfy customer demand

Although the Company has contracts with most of its manufacturers and suppliers, their operations could be disrupted. These disruptions could be caused by conditions unrelated to our business or operations, including a global economic downturn. Although we have our own manufacturing facilities, it could take considerable time and resources for us replace the capacity of such vendors. Accordingly, if these other manufacturers or suppliers are unable or fail to fulfill their obligations to us, we might not be able to satisfy customer demand in a timely manner, and our business could be harmed.

Violation of government regulations or quality programs could harm demand for our products or services

Some of our products and tests are regulated by the Food & Drug Administration (FDA) and comparable agencies in other countries. As applicable, we must comply with medical device and other FDA-related and comparable agency laws and regulations. In addition, the Company now owns and operates a clinical laboratory and as such we are subject to the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) and required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Failure to comply with these laws and regulations can lead to sanctions by these agencies, including warning letters, product recalls, product seizures, consent decrees and civil and criminal sanctions. In addition, failure to comply with laws and regulations, could lead to disqualification of test data submitted in product applications. If the FDA were to take such actions, the FDA’s sanctions would be available to the public. Such publicity could harm our ability to sell these regulated products globally. In addition, we may not be able to obtain regulatory clearance or approval for our products in the United States and/or may incur significant costs in obtaining or maintaining such regulatory clearances or approvals in the United States. Additionally, any changes in FDA laws, regulations, and interpretations could adversely affect us and our customers, have an adverse impact on revenues, and result in government sanctions.

Medical device laws and regulations are also in effect in many countries, ranging from comprehensive device approval requirements to requests for product data or certifications. The number and scope of these requirements is increasing. We may not be able to obtain regulatory approvals in such countries and/or may incur significant costs in obtaining or maintaining our foreign regulatory approvals. In addition, our exports of certain

 

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of our products that have not yet been cleared or approved for United States commercial distribution may be subject to FDA, other export restrictions abroad, as well as import regulations in many countries.

Additionally, some of our customers use our products in the manufacturing or testing processes for their drug and medical device products, and such end-products or services may be regulated by the FDA under pharmaceutical Good Manufacturing Practice (GMP) for drugs and Quality System Regulations (QSR) for medical devices or by the Centers for Medicare and Medicaid Services (CMS) under the Clinical Laboratory Improvement Amendments (CLIA) regulations. The customer is ultimately responsible for QSR, CLIA and other compliance requirements for their products; however, we may agree to comply with certain requirements, and, if we fail to do so, we could lose sales and customers and be exposed to product liability claims.

Our facilities in Benecia, California; Brown Deer, Wisconsin; Frederick, Maryland; Grand Island, New York; Australia; Inchinnan, Scotland; New Zealand; Oslo, Norway; and Singapore manufacture certain products in compliance with FDA QSR 21 CFR Part 820 and are certified to ISO 13485 and ISO 9001, internationally-recognized standards. The ISO standards are voluntary quality management system standards that may be used in the design, development, production, and installation and servicing of medical devices similar to the QSR. Our facilities in Austin, Texas; Benicia and Pleasanton, California; Brown Deer, Wisconsin; Framingham, Massachusetts; Frederick, Maryland; Grand Island, New York; Inchinnan, Scotland; Oslo, Norway; Singapore; and Warrington, United Kingdom are each certified for compliance with ISO 13485. Our facilities in Carlsbad and Foster City, California; Eugene, Oregon; Grand Island; New York; Madison, Wisconsin; Newcastle, Australia; Beijing, China; Burlington, Canada; Lohne, Germany; Auckland, New Zealand; Israel; and Oslo, Norway are each certified for compliance with ISO 9001. Our facility in Austin, Texas has a USDA License. Failure to comply with ISO standards can lead to observations of non-compliance or even suspension of ISO certification or EC Declarations of Conformity Certificates by the registrar. If we were to lose ISO certification or EC Declarations of Conformity, some customers might purchase products from other suppliers as a result.

If the Company violates a government-mandated or voluntary quality program, we may incur additional expense to come back into compliance with the government mandated or voluntary standards. That expense may be material and we may not have anticipated that expense in our financial forecasts. Our financial results could suffer as a result of such increased expenses.

The regulatory clearance or approval process is expensive, time consuming and uncertain, and the failure to obtain and maintain required clearances or approvals may constrain the commercialization of submitted products

Our diagnostic products are subject to 510(k) clearance or pre-market approval by the FDA prior to their marketing for commercial use in the United States, and to any approvals required by foreign governmental entities prior to their marketing outside the United States. In addition, any changes or modifications to a device that has received regulatory clearance or approval that could significantly affect its safety or effectiveness, or would constitute a major change in its intended use, may require the submission of a new application for 510(k) clearance, pre-market approval or foreign regulatory approvals.

The 510(k) clearance and pre-market approval processes, as well as the process of obtaining foreign approvals, can be expensive, time consuming and uncertain. It generally takes from four to twelve months from submission to obtain 510(k) clearance, and from one to three years from submission to obtain pre-market approval; however, it may take longer, and 510(k) clearance or pre-market approval may never be obtained. Delays in receipt of, or failure to obtain, clearances or approvals for future products, including tests that are currently in design or development, would result in delayed or no realization of revenues from such products and in substantial additional costs that could decrease our profitability.

In addition, we are required to continue to comply with applicable FDA and other regulatory requirements once we have obtained clearance or approval for a product. There can be no assurance that we will obtain or maintain any required clearance or approval on a timely basis, or at all. Any failure to obtain or any material delay in obtaining FDA clearance or any failure to maintain compliance with FDA regulatory requirements could harm our business, financial condition and results of operations.

 

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Regulatory or legislative healthcare reforms may make it more difficult and costly for us to obtain regulatory clearance or approval of our products and to produce, market and distribute our products after clearance or approval is obtained

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory clearance or approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of our products. Delays in receipt of or failure to receive regulatory clearances or approvals for our new products would harm our business, financial condition and results of operations.

In addition, political, economic and regulatory influences are subjecting the life sciences industry to significant changes. We cannot predict with certainty which initiatives affecting the life sciences industry, if any, will be implemented at the state or federal level, or what affect any future legislation, regulation or governmental policy may have on the Company or our customers’ purchasing decisions regarding our products and services. However, the implementation of new legislation, regulation and policies may adversely affect our business.

New regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products

On August 22, 2012, the SEC adopted a new rule requiring disclosures of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured by public companies. The new rule, which is effective for calendar 2013 and requires a disclosure report to be filed by May 31, 2014, will require companies to diligence, disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The new rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. Since our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we implement, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.

Risks Related to Our Operations

Loss of key personnel may adversely affect our business

Our products and services are highly technical in nature. In general, only highly qualified and trained scientists have the necessary skills to develop and market our products and provide our services. In addition, some of our manufacturing positions are highly technical as well. We face intense competition for these professionals from our competitors, customers, marketing partners, and other companies throughout our industry. As is customary in the United States, we do not generally enter into employment agreements requiring these employees to continue in our employment for any period of time. Any failure on our part to hire, train, and retain a sufficient number of qualified employees could seriously damage our business. Additionally, integration of acquired companies and businesses can be disruptive and may lead to the departure of key employees. Further, we use or may use stock options, restricted stock units/awards, performance-based units, and performance-based cash to provide incentives to these individuals to remain with us and to build their long-term stockholder value to align their interests with those of the Company. If our stock price decreases, this reduces the value of certain of those awards that are equity-related and therefore a key employee’s incentive to stay. If we were to lose a sufficient number of our key employees and were unable to replace them, these losses could seriously damage our business.

 

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We have substantial indebtedness, which could adversely affect our cash flows, business and financial condition

As of December 31, 2012, the carrying value of our outstanding indebtedness was approximately $2,414.1 million, including $100.0 million drawn on our revolving credit facility. As of December 31, 2012, we had availability of $639.9 million (net of standby letters of credit of $10.1 million) under our revolving credit facility.

Our substantial level of debt could, among other things:

 

   

require us to dedicate a substantial portion of our cash flow from operations to the servicing and repayment of our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions and other purposes;

   

increase our vulnerability to, and limit our flexibility in planning for, adverse economic and industry conditions;

   

adversely affect our credit rating, with the result that the cost of new indebtedness might increase;

   

limit our ability to obtain additional financing to fund future working capital, capital expenditures, additional acquisitions and other general corporate requirements;

   

create competitive disadvantages compared to other companies with less indebtedness;

   

adversely affect our stock price;

   

limit our ability to apply proceeds from an offering, debt incurrence or asset sale to purposes other than the servicing and repayment of our debt; and

   

limit our ability to pay dividends and repurchase stock.

Our credit facility contains restrictions that limit our flexibility in operating our business

Our credit facility may contain various covenants that limit our ability to engage in specified types of transactions. These covenants may limit our and our subsidiaries’ ability to, among other things:

 

   

incur additional indebtedness (including guarantees or other contingent obligations);

   

pay dividends on, repurchase, or make distributions in respect to our common stock or make other restricted payments;

   

make specified investments (including loans and advances);

   

sell or transfer assets;

   

create liens;

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

   

enter into certain transactions with our affiliates.

In addition, under our credit facility, we are required to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot be assured that we will meet those ratios and tests. A breach of any of these covenants could result in a default under our credit facility. Upon the occurrence of an event of default under our credit facility, our lenders could elect to declare all amounts outstanding under our credit facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under our credit facility could proceed to collect against all United States subsidiaries, as guarantors of the facility.

The Company could incur more indebtedness, which may increase the risks associated with our substantial leverage, including our ability to service our indebtedness

The indentures governing our senior unsecured notes and our credit facility permit us, under some circumstances, to incur certain amounts of additional indebtedness. If we incur additional debt, the risks associated with our leverage, including our ability to service our debt, would increase. This, in turn, could negatively affect the market price of our common stock.

 

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Our federal, state and local income tax returns may, from time to time, be selected for audit by the taxing authorities or affected by a change in interpretation of legislation, either of which may result in tax assessments, penalties, or other results

The Company is subject to federal, state and local taxes in the United States and abroad. Significant judgment is required in determining the provision for taxes. Although the Company believes its tax expense is calculated correctly, if the IRS or other taxing authority disagrees with the positions taken by the Company on its tax returns, the Company could incur additional tax liabilities, plus related interest and penalties. If potential assessments differ significantly from previously recorded reserves, payment of such additional amounts upon final adjudication of any disputes could have a material impact on our results of operations and financial position.

In addition, United States’ federal, state and local, as well as international, tax laws and regulations are extremely complex and subject to varying interpretations, and a change in interpretation could have a material impact on our results of operations and financial position.

Tax legislation initiatives could adversely affect our results of operations and financial condition

We are a large multinational corporation subject to the tax laws and regulations of the United States federal, state and local governments, and of many international jurisdictions. From time to time, new tax legislation may be proposed, that could adversely affect our current or future tax filings and/or negatively impact our effective tax rate and increase future tax payments.

Cyber security risks and the failure to maintain the confidentiality, integrity, and availability of our computer hardware, software, and Internet applications and related tools and functions could result in damage to our reputation and/or subject us to costs, fines or lawsuits

The Company’s business requires manipulating and analyzing large amounts of data, and communicating the results of the analysis to our internal research personnel and to our customers via the Internet. In addition, we rely on a global enterprise software system to operate and manage our business. We also maintain personally identifiable information about our employees. Our business therefore depends on the continuous, effective, reliable, and secure operation of our computer hardware, software, networks, Internet servers, and related infrastructure. To the extent that our hardware or software malfunctions or access to our data by internal research personnel or customers through the Internet is interrupted, our business could suffer.

The integrity and protection of our customer, employee and Company data is critical to our business and our customers and employees have a high expectation that we will adequately protect their personal information. The regulatory environment, as well as the requirements imposed on us by the credit card industry, governing information, security and privacy laws is increasingly demanding and continues to evolve. Maintaining compliance with applicable security and privacy regulations may increase our operating costs and/or adversely impact our ability to market our products and services to our customers. Although our computer and communications hardware is protected through physical and software safeguards, it is still vulnerable to fire, storm, flood, power loss, earthquakes, telecommunications failures, physical or software break-ins, software viruses, and similar events. These events could lead to the unauthorized access, disclosure and use of non-public information, including credit card data. The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world. As a result, we may not be able to address these techniques proactively or implement adequate preventative measures. If our computer systems are compromised, we could be subject to fines, damages, litigation and enforcement actions, customers could curtail or cease using our applications, and we could lose trade secrets, the occurrence of which could harm our business.

In addition, our online products and services are complex and sophisticated, and as such, could contain data, design, or software errors that could be difficult to detect and correct. Software defects could be found in current or future products. If we fail to maintain and further develop the necessary computer capacity and data to support our computational needs and our customers’ access to information-based product and service offerings, we could experience a loss of or delay in revenues or market acceptance. In addition, any sustained disruption in internet access provided by other companies could harm our business.

 

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Business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses

The Company’s worldwide operations could be subject to earthquakes, power shortages, telecommunications failures, water shortages, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. Our corporate headquarters, and a portion of our principal research and development, manufacturing and administrative facilities, are located in California, and other critical business operations and some of our suppliers are located in California, Japan, Singapore and other parts of Asia, near major earthquake faults and fire zones. The ultimate impact of being located near major earthquake faults, fire zones and being consolidated in certain geographical areas on us, our significant suppliers and our general infrastructure is unknown, but our revenue, profitability and financial condition could suffer in the event of a major earthquake, fire or other natural disaster.

Risks Related to Our International Operations

We are subject to risks associated with doing business outside the United States

The Company’s products are currently marketed in approximately 180 countries throughout the world. Our international revenues, which include revenues from our foreign subsidiaries and export sales from the United States, represented 63% of our product revenues in 2012, 62% of our product revenues in 2011 and 60% of our product revenues in 2010. We intend to continue to pursue acquisition and growth opportunities in international markets, and we expect that international revenues will continue to account for a significant percentage of our revenues for the foreseeable future. There are a number of risks arising from our international business, including those related to:

 

   

foreign currency exchange rate fluctuations, potentially reducing the United States dollars we receive for sales denominated in foreign currency;

   

the possibility that unfriendly nations or groups could boycott our products;

   

general economic and political conditions in the markets we operate in;

   

potential increased costs associated with overlapping tax structures;

   

potential trade restrictions and exchange controls;

   

more limited protection for intellectual property rights in some countries;

   

difficulties and costs associated with staffing and managing foreign operations;

   

unexpected changes in regulatory requirements;

   

the difficulties of compliance with a wide variety of foreign laws and regulations;

   

longer accounts receivable cycles in certain foreign countries, whether due to cultural differences, exchange rate fluctuation or other factors;

   

import and export licensing requirements; and

   

changes to our distribution networks.

These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. For example, we are subject to compliance with the United States Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to foreign government officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot be sure that our internal policies and procedures will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.

We are subject to foreign exchange risk

A significant portion of the Company’s revenues are received in currencies other than the United States dollar, which is our reporting currency. Most of our costs, however, are incurred in United States dollars. While we have at times attempted to hedge our net cash flows in currencies other than the United States dollar, our hedging program relies in part on forecasts of these cash flows. As a result, we cannot guarantee this program will adequately protect

 

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our cash flows from the full risks and effects of exchange rate fluctuations. We also continually evaluate the costs and benefits of our hedging program and cannot guarantee that we will continue to conduct hedging activities. At the current time, we are not hedging net cash flow exposures on foreign currency revenue. As a result, fluctuations in exchange rates for the currencies in which we do business have caused, and will continue to cause, fluctuations in the United States dollar value of our financial results. We cannot definitively predict the effects of currency exchange rate fluctuations upon our future financial results because of the number of currencies involved, the variability of currency exposures and the volatility of currency exchange rates.

Risks Related to Our Intellectual Property

The Company may not be able to effectively and efficiently protect and enforce intellectual property covering our proprietary technology

The Company’s success depends to a significant degree upon our ability to develop proprietary products and technologies. When we develop such technologies, we routinely seek patent protection in the United States and abroad. However, the intellectual property rights of biotechnology companies, including us, involve complex factual, scientific, and legal questions. We cannot assure that patents will be granted on any of our patent applications or that the scope of any of our issued patents will be sufficiently broad to offer meaningful protection. Even if we receive a patent that we believe is valid for a particular technology, we may not be able to realize the expected value to us from that technology due to several factors, including, without limitation, the following:

 

   

Although we have licensing programs to provide industry access to some of our patent rights, some other companies have in the past refused to participate in these licensing programs and some companies may refuse to participate in them in the future. In addition, our licenses typically provide our customers with access for limited use of our technology, such as for certain fields of use or to provide certain kinds of products and services. The validity of the restrictions contained in these licenses could be contested, and we cannot provide assurances that we would either be aware of an unauthorized use or be able to enforce the restrictions in an effective manner;

   

Legal actions to enforce patent rights can be expensive and may involve the diversion of significant management time. Our enforcement actions may not be successful, and furthermore they could give risk to legal claims against us and could result in the invalidation of some of our intellectual property rights or legal determinations that they are not enforceable;

   

The Company only seeks to have patents issued in selected countries. Third-parties can make, use and sell products covered by our patents in any country in which we do not seek patent protection, unless such activity is covered by our other intellectual property;

   

The Company’s issued patents or patents we exclusively license from others could be successfully challenged through legal actions or other proceedings, such as by challenging the validity and scope of a patent with the United States Patent and Trademark Office, or USPTO, foreign patent offices, Federal Courts, or the International Trade Commission. These actions or proceedings could result in amendments to or rejection of certain patent claims; and

   

Judicial decisions in third-party litigation and legislative changes could harm the value of our patents, or could impact our exclusive licenses or the effectiveness of our label licenses associated with our products, which, in turn, could have an impact on our business and/or revenue.

The Company is currently, and could in the future be, subject to lawsuits, arbitrations, investigations, and other legal actions with private parties and governmental entities, particularly involving claims for infringement of patents and other intellectual property rights, and we may need to obtain licenses to intellectual property from others

Our products are based on complex, rapidly developing technologies. These products could be developed without knowledge of previously filed patent applications that mature into patents that cover some aspect of these technologies. In addition, we may seek to protect and commercialize a technology even though we are aware that patents have been applied for and, in some cases, issued to others claiming technologies that are closely related to ours. Because patent litigation is complex and the outcome inherently uncertain, our belief that our products do

 

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not infringe on valid and enforceable patents owned by others could be successfully challenged. We have from time to time been notified that we may be infringing on the patents and other intellectual property rights of others. In addition, in the course of our business, we may from time to time have access to confidential or proprietary information of others, and they could bring a claim against us asserting that we had misappropriated their technologies, that, though not patented, are protected as trade secrets, and had improperly incorporated those technologies into our products. The outcome of legal actions is inherently uncertain, and we cannot be sure that we will prevail in any of these actions. An adverse determination in some of our current legal actions could harm our business and financial condition.

Due to these factors, litigation regarding patents and other intellectual property rights is extensive in the biotechnology industry, and there remains a constant risk of intellectual property litigation and other legal actions affecting us, which could include antitrust claims. From time to time, we have been made a party to litigation and have been subject to other legal actions regarding intellectual property matters, which have included claims of violations of antitrust laws. Some of these actions, if determined adversely, could harm our business and financial condition. To avoid or settle legal claims, it may be necessary or desirable in the future to obtain licenses relating to one or more products or relating to current or future technologies. We may not be able to obtain these licenses or other rights on commercially reasonable terms, or at all, and there is a risk that we may need to discontinue an important product or product line or alter our products and processes. In some situations, settlement of claims may require an agreement to cease allegedly infringing activities.

The Company is involved in several legal actions that could affect our intellectual property rights and our products and services. The cost of litigation and the amount of management time associated with these cases has been, and is expected to continue to be, significant. These matters might not be resolved favorably. If they are not resolved favorably, we could be enjoined from selling the products or services in question or other, related products or services, and monetary or other damages could be assessed against us. The damages assessed against us could include damages for past infringement, which, in some cases, can be trebled by the court. Such possible outcomes could harm our business or financial condition.

Disclosure of trade secrets could cause harm to our business

The Company attempts to protect our trade secrets by, among other things, entering into confidentiality agreements with third-parties, our employees, and our consultants. However, these agreements can be breached and, if they are, there may not be an adequate remedy available to us. If our trade secrets become publicly known, we may lose our competitive position.

Some of the intellectual property that is important to our business is owned by other companies or institutions and licensed to us, and legal actions against them could harm our business

Even if we are not a party to these legal actions, an adverse outcome could harm our business because it might prevent these other companies or institutions from continuing to license intellectual property that we may need for our business. Furthermore, an adverse outcome could result in infringement or other legal actions being brought directly against us.

Risks Related to Environmental, Product Liability and Litigation Issues

Risks related to handling of hazardous materials and other regulations governing environmental and workplace safety

The Company’s research and development and manufacturing activities involve the use of potentially hazardous materials, including biological materials, chemicals, and various radioactive compounds. In addition, some of our products are hazardous materials or include hazardous materials. Our operations also involve the generation, transportation and storage of waste. These activities are subject to complex and stringent federal, state, local, and foreign environmental, health, safety and other governmental laws, regulations, and permits governing the use, storage, handling, transport, and disposal of hazardous materials and specified waste products, as well as the shipment and labeling of materials and products containing hazardous materials. Public officials and private individuals or organizations may seek to enforce these legal requirements against us. While we

 

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believe we are in material compliance with these laws, regulations, and permits, we could discover that we are not in material compliance. Under some laws and regulations, a party can be subject to “strict liability” for damages caused by some hazardous materials, which means that a party can be liable without regard to fault or negligence. Existing laws and regulations may also be revised or reinterpreted, or new laws and regulations may become applicable to us, whether retroactively or prospectively, that may have a negative effect on our business and results of operations. It is therefore impossible to eliminate completely the risk of contamination or injury from the hazardous and other materials that we use in our business and products. If we fail to comply with any of these laws, regulations, or permits, or if we are held strictly liable under any of these laws, regulations, or permits despite our compliance, we could be subject to substantial fines or penalties, payment of remediation costs, loss of permits, embargos, and/or other adverse governmental action, and we could be liable for substantial damages. Any of these events could harm our business and financial condition.

In acquiring Dexter Corporation in 2000, we assumed certain of Dexter Corporation’s environmental liabilities, including clean-up of formerly-owned locations as well as several hazardous waste sites under state and federal environmental laws. We also assumed certain Applied Biosystems environmental liabilities, including clean-up of formerly-owned locations as well as hazardous waste sites under state and federal environmental laws, in connection with our acquisition of Applied Biosystems in 2008. Unexpected results related to the investigation and clean-up of any of these sites could cause our financial exposure in these matters to exceed stated reserves and insurance, requiring us to allocate additional funds and other resources to address our environmental liabilities, which could cause a material adverse effect on our business.

Potential product liability and other litigation claims could cause harm to our business

We face a potential risk of liability claims based on our products or services. We carry product liability insurance coverage, that is limited in scope and amount. We cannot assure, however, that we will be able to maintain this insurance at a reasonable cost and on reasonable terms. We also cannot assure that this insurance will be adequate to protect us against a product liability claim, should one arise.

Some of our services include the manufacture of biologic products to be tested in human clinical trials. We could be held liable for errors and omissions in connection with these services, even though we are not the party performing the clinical trials. In addition, we formulate, test and manufacture products intended for use by the public. These activities could expose us to risk of liability for personal injury or death to persons using such products. We seek to reduce our potential liability through measures such as contractual indemnification provisions with clients (the scope of which may vary from client to client and the performances of which are not secured), insurance maintained by clients and conducting certain of these businesses through subsidiaries. Nonetheless, we could be materially harmed if we were required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements, if the indemnity, although applicable, is not performed in accordance with its terms or if our liability exceeds the amount of applicable insurance or indemnity. In addition, we could be held liable for errors and omissions in connection with the services we perform. We currently maintain product liability and errors and omissions insurance with respect to these risks. There can be no assurance, however, that our insurance coverage will be adequate or that insurance coverage will continue to be available on terms acceptable to us.

We are involved in a number of legal proceedings. Legal proceedings are inherently unpredictable, and the outcome can result in excessive verdicts and/or injunctive relief that may affect how we operate our business, or we may enter into settlements of claims for monetary damages that exceed our insurance coverage, if any. Future court decisions and legislative activity may increase our exposure to litigation and regulatory investigations. In some cases, substantial non-economic remedies or punitive damages may be sought.

Risks Related to the Market for Our Securities

Operating results and the market price of our stock and the senior unsecured notes could be volatile

Our operating results and the price of our stock and the senior unsecured notes have been in the past, and will continue to be, subject to fluctuations as a result of a number of factors, including those that we fail to foresee. Our stock price could also be affected by any of the following: inability to meet analysts’ expectations; general

 

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fluctuations in the stock market; actual or anticipated fluctuations in our operating results; fluctuations in the stock prices of companies in our industry or those of our customers; changes in earnings estimated by securities analysts or our ability to meet those estimates; domestic and foreign economic conditions; and publicity regarding the genomics, biotechnology, pharmaceutical, or life sciences industries generally, including, for example, comments by securities analysts or public officials regarding such matters. Such volatility has had a significant effect on the market prices of many companies’ securities for reasons unrelated to their operating performance and, in the past, has led to securities class action litigation. Securities litigation against us could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

Certain provisions in our restated certificate of incorporation and seventh amended and restated bylaws, and of Delaware law, may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock

Our restated certificate of incorporation and our seventh amended and restated bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:

 

   

the inability of our stockholders to call a special meeting;

   

rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings;

   

the right of our board to issue preferred stock without stockholder approval; and

   

the ability of our directors, and not stockholders, to fill vacancies on our board of directors.

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding common stock.

We believe these provisions may help protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make our company immune from takeovers. In addition, although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board, they would apply even if the offer may be considered beneficial by some stockholders. These provisions may also frustrate or prevent any attempts by our stockholders to replace or remove our current management team by making it more difficult for stockholders to replace members of our board, which is responsible for appointing the members of our management.

ITEM 1B. Unresolved Staff Comments

Not applicable.

ITEM 2. Properties

We own or lease approximately 4,725,000 square feet of property being used in current operations at the following principal locations within the United States, each of which contains office, manufacturing, storage and/or laboratory facilities:

 

   

Ann Arbor, Michigan (leased)

   

Austin, Texas (leased)

   

Bedford, Massachusetts (leased)

   

Benicia, California (leased)

   

Beverly, Massachusetts (leased)

   

Billerica, Massachusetts (leased)

   

Bothell, Washington (leased)

   

Bowling Green, Kentucky (leased)

   

Brown Deer, Wisconsin (leased)

   

Carlsbad, California (owned (land only) and leased)

 

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Durham, North Carolina (leased)

   

Eugene, Oregon (owned and leased)

   

Foster City, California (owned and leased)

   

Framingham, Massachusetts (leased)

   

Fresno, California (leased)

   

Frederick, Maryland (owned and leased)

   

Grand Island, New York (owned and leased)

   

Madison, Wisconsin (leased)

   

Pleasanton, California (owned)

   

South San Francisco, California (leased)

   

Washington, District of Columbia (leased)

   

West Sacramento, California (leased)

In addition, we own or lease approximately 1,500,000 square feet of property at locations outside the United States including these principal locations, each of which also contains office, manufacturing, storage and/or laboratory facilities:

 

   

Auckland, Christchurch and Nelson, New Zealand (owned)

   

Bangalore, India (leased)

   

Bleiswijk, Netherlands (leased)

   

Darmstadt and Regensburg, Germany (leased)

   

Lillestrom and Oslo, Norway (owned (land only) and leased)

   

Melbourne and Newcastle, Australia (owned and leased)

   

Paisley, Scotland (leased)

   

Shanghai, Beijing and Guangzhou, China (leased)

   

Singapore (leased)

   

Tokyo, Japan (leased)

   

Warrington, United Kingdom (owned and leased)

In addition to the principal properties listed above, we lease other properties in locations throughout the world, including: Argentina, Australia, Brazil, Canada, Chile, China, Croatia, Czech Republic, Denmark, France, Germany, Hong Kong, Hungary, India, Israel, Italy, Japan, Mexico, the Netherlands, Poland, Russia, Singapore, South Africa, South Korea, Spain, Sweden, Taiwan, and Thailand. Many of our plants have been constructed, renovated or expanded during the past ten years. We are currently using substantially all of our finished space, with some space available for expansion at some of our locations. We consider the facilities to be in a condition suitable for their current uses. Because of anticipated growth in the business and due to the increasing requirements of customers or regulatory agencies, we may need to acquire additional space or upgrade and enhance existing space during the next five years. We believe that adequate facilities will be available upon the conclusion of our leases.

We also have leases in San Carlos, California; Darmstadt, Germany; and Heathrow, United Kingdom that are subleased or are being offered for sublease. These properties are not used in current operations and therefore are not included in the discussion above.

Most of our products and services are manufactured or provided from our facilities in Austin, Texas; Bedford, Massachusetts; Carlsbad, Foster City and Pleasanton, California; Eugene, Oregon; Frederick, Maryland; Grand Island, New York; Madison, Wisconsin; Auckland, New Zealand; Oslo, Norway; Paisley, Scotland; and Warrington, United Kingdom. We also have manufacturing facilities in Israel, Japan and Singapore.

Additional information regarding our properties is contained in Notes 1, 3 and 6 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

ITEM 3. Legal Proceedings

We are subject to potential liabilities under government regulations and various claims and legal actions that are pending or may be asserted. These matters arise in the ordinary course and conduct of our business, and, at

 

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times, as a result of our acquisitions and dispositions. They include, for example, commercial, intellectual property, environmental, securities, and employment matters. Some are expected to be covered, at least partly, by insurance. We intend to continue to defend ourselves vigorously in such matters. We regularly assess contingencies to determine the degree of probability and range of possible loss for potential accrual in our financial statements. An estimated loss contingency is accrued in our financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on our assessment, we have accrued an amount in our financial statements for contingent liabilities associated with these legal actions and claims that the Company considers immaterial to its overall financial position. Litigation is inherently unpredictable, and unfavorable resolutions could occur. As a result, assessing contingencies is highly subjective and requires judgment about future events. The amount of ultimate loss may exceed our current accruals, and it is possible that our cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

ITEM 4. Mine Safety Disclosures

Not applicable.

 

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PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market and Stockholder Information

The Company’s common stock trades on The NASDAQ Global Select Market® under the symbol “LIFE.” Our common stock previously traded under the symbol “IVGN”. The trading symbol was changed in November 2008 in connection with the change of our corporate name from Invitrogen Corporation to Life Technologies Corporation. The table below provides the high and low sales prices of our common stock for the periods indicated, as reported by The NASDAQ Global Select Market.

 

     High      Low  

Year ended December 31, 2012

     

Fourth quarter

   $ 51.97       $ 45.67   

Third quarter

     50.27         40.50   

Second quarter

     49.07         39.73   

First quarter

     50.84         39.80   

Year ended December 31, 2011

     

Fourth quarter

   $ 43.31       $ 36.07   

Third quarter

     52.61         35.30   

Second quarter

     56.71         49.85   

First quarter

     57.25         49.18   

On February 25, 2013, the last reported sale price of our common stock was $56.90. As of February 25, 2013, there were approximately 3,845 stockholders of record of our common stock. The approximate number of holders is based upon the actual number of holders registered in our records at such date and excludes holders of shares in “street name” or persons, partnerships, associations, corporations, or other entities identified in security positions listings maintained by depository trust companies. The calculations of the market value of shares of Life Technologies stock held by non-affiliates as of June 30, 2012, shown on the cover of this report, was made on the assumption that there were no affiliates other than executive officers and directors as of the date of calculation.

 

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Price Performance Graph

Set forth below is a graph comparing the total return on an indexed basis of a $100 investment in the Company’s common stock, the NASDAQ Composite® (US) Index and the NASDAQ BioPharmaceutical Index. The measurement points utilized in the graph consist of the last trading day in each calendar year, which closely approximates the last day of the respective fiscal year of the Company.

 

LOGO

Dividends

We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business, debt repayment, stock repurchase programs, and general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, tax laws and other factors as the Board of Directors, in its discretion, deems relevant.

Securities Purchased Under Life Technologies Stock Repurchase Programs

In July 2012, the Board of Directors of the Company approved a program (the July 2012 program) authorizing management to repurchase up to $750.0 million of common stock. During the year ended December 31, 2012, the Company repurchased 4.9 million shares of its common stock under this program at a total cost of $238.0 million. As of December 31, 2012, there was $512.0 million of authorization remaining under this program.

In July 2011, the Board of Directors of the Company approved a program (the July 2011 program) authorizing management to repurchase up to $200.0 million of common stock. During the year ended December 31, 2012, the Company repurchased 4.6 million shares of its common stock under this program at a cost of $200.0 million, the maximum amount authorized, thereby completing the July 2011 program.

 

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In December 2010, the Board of Directors of the Company approved a program (the December 2010 program), authorizing management to repurchase up to $500.0 million of common stock. During the year ended December 31, 2011, the Company repurchased 6.4 million shares of its common stock under this program at a total cost of approximately $303.0 million. During the year ended December 31, 2012, the Company repurchased an additional 4.3 million shares of its common stock at a total cost of $197.0 million, thereby completing the December 2010 program by repurchasing an aggregate of 10.7 million shares at a total cost of $500.0 million, the maximum amount authorized.

In July 2010, the Board of Directors of the Company approved a program (the July 2010 program) authorizing management to repurchase up to $520.0 million of common stock over the next two years. As of December 31, 2010, the Company completed repurchasing 8.4 million shares at a total cost of $436.6 million. During the year ended December 31, 2011, the Company repurchased an additional 1.5 million shares of its common stock at a total cost of $83.4 million, thereby completing the July 2010 program by repurchasing an aggregate of 9.9 million shares at a total cost of $520.0 million, the maximum amount authorized.

The cost of repurchasing shares is included in treasury stock and reported as a reduction in total equity when a repurchase occurs.

The following table represents stock repurchases under the publicly announced programs during the fourth quarter of 2012:

 

Period

   (a)
Total Number
of Shares
(or Units)
purchased
     (b)
Average Price
Paid per
Share
     (c)
Total Dollar
of Shares
(or Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
     (d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs
 

October 1 — October 31

           $       $       $ 611,997,376   

November 1 — November 30

                             611,997,376   

December 1 — December 31

     2,000,395         49.99         99,999,109         511,998,267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,000,395       $ 49.99       $ 99,999,109       $ 511,998,267   

The Company did not make any share repurchases other than through publicly announced programs.

 

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ITEM 6.  Selected Financial Data

The following selected data should be read in conjunction with our financial statements located elsewhere in this Annual Report on Form 10-K and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

FIVE YEAR SELECTED FINANCIAL DATA

 

(in thousands, except per share data)    2012      2011      2010      2009      2008  

Revenues

   $ 3,798,510       $ 3,775,672       $ 3,588,094       $ 3,280,344       $ 1,620,323   

Gross profit

     2,134,477         2,109,977         2,106,141         1,824,725         940,752   

Net income from continuing operations

     430,449         377,834         377,858         144,594         4,356   

Net income from discontinued operations

                                     1,358   

Net income

     430,449         377,834         377,858         144,594         5,714   

Net loss attributable to noncontrolling interests

     406         658         437                   

Net income attributable to Life Technologies

     430,855         378,492         378,295         144,594         5,714   

Earnings from continuing operations per common share attributable to Life Technologies:

              

Basic

   $ 2.45       $ 2.11       $ 2.06       $ 0.82       $ 0.05   

Diluted

   $ 2.40       $ 2.05       $ 1.99       $ 0.80       $ 0.04   

Earnings from discontinued operations per common share attributable to Life Technologies:

              

Basic

   $       $       $       $       $ 0.01   

Diluted

   $       $       $       $       $ 0.01   

Net income per share attributable to Life Technologies:

              

Basic

   $ 2.45       $ 2.11       $ 2.06       $ 0.82       $ 0.06   

Diluted

   $ 2.40       $ 2.05       $ 1.99       $ 0.80       $ 0.05   

Current assets

   $ 1,625,239       $ 2,093,617       $ 2,046,525       $ 1,796,164       $ 1,612,171   

Noncurrent assets

     7,012,826         7,094,346         7,439,674         7,319,576         7,286,588   

Current liabilities (including convertible debt)

     1,192,351         1,496,306         1,146,385         1,385,723         1,007,242   

Noncurrent liabilities (including convertible debt)

     2,792,251         3,092,431         3,901,785         3,703,349         4,434,979   

Total equity

   $ 4,653,463       $ 4,599,226       $ 4,438,029       $ 4,026,668       $ 3,456,538   

The fiscal year 2008 financial data includes the results of operations of Applied Biosystems, Inc. from November 21, 2008, the date of acquisition, and the one-time purchase accounting charges associated with the merger such as in-process research and development, which affects the comparability of the Selected Financial Data. For more information on our business combinations accounting, refer to Note 2 of the Consolidated Financial Statements, “Business Combinations and Divestitures”.

 

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ITEM 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

We are a global life sciences company dedicated to helping our customers make scientific discoveries and ultimately improve the quality of life. Our systems, reagents, and services enable scientific researchers to accelerate scientific exploration, driving to discoveries and developments that make life better. Life Technologies customers do their work across the biological spectrum, working to advance genomic medicine, regenerative science, molecular diagnostics, agricultural and environmental research, and forensics. In 2012, the Company had sales of approximately $3.8 billion, had approximately 10,000 employees, had a presence in more than 180 countries, and possessed a rapidly-growing intellectual property estate of over 5,000 owned and/or licensed patents.

The Company’s systems and reagents enable, simplify and improve a broad spectrum of biological research of genes, proteins and cells within academic and life science research and commercial applications. Our scientific know-how is making biodiscovery research techniques more effective and efficient to pharmaceutical, biotechnology, agricultural, government and academic researchers with backgrounds in a wide range of scientific disciplines.

The Company offers many different products and services, and is continually developing and/or acquiring others. Some of our specific product categories include the following:

 

   

Capillary electrophoresis, SOLiD®, and Ion Torrent® DNA sequencing systems and reagents, which are used to discover sources of genetic and epigenetic variation, to catalog the DNA structure of organisms de novo, to verify the composition of genetic research material, and to apply these genetic analysis discoveries in markets such as forensic human identification.

   

“High-throughput” gene cloning and expression technology, which allows customers to clone and expression-test genes on an industrial scale.

   

Pre-cast electrophoresis products, which improve the speed, reliability and convenience of separating nucleic acids and proteins.

   

Antibodies, which allow researchers to capture and label proteins, visualize their location through use of Molecular Probes® dyes and discern their role in disease.

   

Magnetic beads, which are used in a variety of settings, such as attachment of molecular labels, nucleic acid purification, and organ and bone marrow tissue-type testing.

   

Molecular Probes® fluorescence-based technologies, which facilitate the labeling of molecules for biological research and drug discovery.

   

Fluorescence microscopy instrumentation, which facilitates monitoring and measuring cell density and morphology as well as quick detection and verification of fluorescently labeled cells through imaging.

   

Transfection reagents, which are widely used to transfer genetic elements into living cells enabling the study of protein function and gene regulation.

   

PCR and Real Time PCR systems and reagents, which enable researchers to amplify and detect targeted nucleic acids (DNA and RNA molecules) for a host of applications in molecular biology.

   

Cell culture media and reagents used in the scale-up and manufacture of biological drugs at cGMP facilities.

   

RNA Interference reagents, which enable scientists to selectively “turn off” genes in biology systems to gain insight into biological pathways.

   

Food safety and animal health products, which are used to for pathogen detection, molecular testing for production animals, crop testing and environmental testing products.

   

A lab developed test, which is used within our CLIA certified lab to help physicians stratify the risk of recurrence for their patients with early-stage, non-squamous, non-small cell lung cancer.

The Company aligns our products and services into three business groups: Research Consumables, Genetic Analysis and Applied Sciences.

The Research Consumables business group includes our molecular and cell biology reagents, endpoint PCR and other benchtop instruments and consumables. These products include RNAi, DNA synthesis, sample prep, transfection, cloning and protein expression profiling and protein analysis, cell culture media used in research, stem cells and related tools, cellular imaging products, antibodies and cell therapy related products.

 

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The Genetic Analysis business group includes our capillary electrophoresis (also referred to as “CE”) instruments used for research applications and all CE consumables, real-time and digital qPCR instruments used in research applications and all qPCR consumables and genomic assays, as well as our next generation sequencing systems and reagents for the SOLiD® and Ion Torrent® systems.

The Applied Sciences business group includes our BioProduction, forensics and animal health and food safety reagent kits, CE and qPCR instruments that are used in applied markets applications and our medical sciences business which includes our molecular diagnostics products and services and transplant diagnostics.

We divide our principal customer base into three primary categories:

Life Sciences. Our life sciences research customers consist of laboratories generally associated with universities, medical research centers, government institutions, and other research institutions as well as biotechnology, pharmaceutical, and chemical companies. Researchers at these institutions use our products and services in a broad spectrum of scientific activities, such as searching for drugs or other techniques to combat a wide variety of diseases (namely cancer and viral and bacterial diseases); conducting clinical research disease identification or for improving the efficacy of drugs to targeted patient groups; and assisting in vaccine design. Our products and services provide the research tools needed for genomics studies, proteomics studies, gene splicing, cellular analysis, and other key research applications that are required by these life science researchers.

Applied Sciences. Our applied sciences customers consist of businesses in a diverse range of industries. The current focus of our products within these industries is in the areas of: forensic analysis, used to identify individuals based on their DNA; quality and safety testing, such as testing required to measure food, beverage, or environmental quality, and pharmaceutical manufacturing quality and safety; animal health testing, which enables the detection of pathogens in livestock; agricultural production, such as tools to support food processing and the commercial production of genetically-engineered products; synthetic biology, which enables our customers to explore ways to effectively harness the power of biology to replicate its systems and create biofuels; and biopharmaceutical manufacturing, such as the commercial production of rare or difficult to obtain substances, including proteins, interferons, interleukins, t-PA and monoclonal antibodies.

Medical Sciences. Our medical sciences customers consist of clinical labs and medical institutions that use our commercial technology for clinical and diagnostic purposes, and medical researchers that use our research technology to explore ways to advance medicine and deliver on the promise of personalized medicine. The current focus of our products is in the area of human diagnostics to better understand disease determination and targeted therapy selection, including use of our next generation sequencing technologies to better understand the nature of disease by unlocking the secrets of DNA; cell therapy; regenerative medicine; and tissue engineering.

With acquisitions that were made in 2012, our Medical Sciences business now has a CLIA certified lab offering our first lab developed test, Pervenio™ RS lung, which is designed to assist physicians improve risk stratification of patients with early-stage, non-squamous non-small cell lung cancer, as well as bioinformatics capabilities used by the pharmaceutical industry to identify novel gene targets for drug discovery and development in cancer.

Our Strategy

Our objective is to provide essential life science technologies for basic research, drug discovery, and development of diagnostic and commercial applications.

Our strategies to achieve this objective include:

 

Ø

New Product Innovation and Development

 

  Ø

Developing innovative new products. We place a great emphasis on developing new technologies internally for life sciences research. Additionally, we are looking to utilize the broad range of our technologies to create unique customer application-based solutions. A significant portion of our growth and current revenue base has been created by the application of technology to accelerate our customer’s research process, and to various standardized testing environments such as human identification and animal health.

 

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  Ø

In-licensing technologies. We actively and selectively in-license new technologies that we utilize to develop kits, many of which address bottlenecks in research or drug discovery laboratories. We have a dedicated group of individuals that focus on in-licensing technologies from academic and government institutions, as well as biotechnology and pharmaceutical companies.

 

  Ø

Acquisitions. We actively and selectively seek to acquire and integrate companies with complementary products and technologies, trusted brand names, strong market positions and strong intellectual property positions. We have made numerous acquisitions over the course of the Company’s history. We take a disciplined approach in evaluating potential deals, including targeting attractive market segments and requiring specific return on capital metrics.

 

Ø

Utilize Existing Sales, Distribution and Manufacturing Infrastructure

 

  Ø

Multi-national sales footprint. We have developed a broad sales and distribution network with a sales presence in more than 180 countries. Our sales force is highly trained, with many of our sales people possessing degrees in molecular biology, biochemistry or related fields. We believe our sales force has successfully marketed our products across the globe and we expect to leverage this capacity to increase sales of our existing, newly developed and acquired products. In addition, to drive enhanced productivity for the Company and its customers, Life Technologies has a significant and growing e-commerce platform.

 

  Ø

High degree of customer satisfaction. Our sales, marketing, customer service and technical support and service teams provide our customers exceptional service and have been highly rated in customer satisfaction surveys. We use this strength to attract new customers and maintain existing customers.

 

  Ø

Rapid product delivery. We have the ability to ship typical consumable orders on a same-day or next-day basis. We use this ability to provide convenient service to our customers and to generate additional product revenues.

 

Ø

Invest in High Growth Industries

We will focus our investments and resources in segments that we believe will provide high growth opportunities, particularly in four areas:

 

  Ø

Next Generation DNA Sequencing. Our Ion Torrent® semiconductor technology represents innovation in next generation sequencing. We will continue to invest in innovative technologies, customer collaborations, and sales force expertise to remain a leader in this important area of research. We will also continue to invest in future sequencing technologies that will allow for more rapid and lower cost sequencing. Robust sequencing capabilities are critical to the advancement of genomic medicine, as the treatment of disease shifts to therapies that are specific to an individual’s unique genetic makeup.

 

  Ø

Emerging Geographies. We continue to focus and invest in high-growth geographic segments such as China, India and Brazil, with direct sales and marketing personnel, as well as manufacturing and distribution facilities. We will further optimize our presence in these areas by enhancing relationships with key government and academic institutions and local companies.

 

  Ø

Applied Markets. We will leverage the growing trend of applying biology to segments beyond basic life science research. We have a strong presence in many of the markets, such as forensics, quality and safety testing, animal health testing, agricultural production, synthetic biology and biopharmaceutical manufacturing. We will continue to invest to further add to our product portfolio and customer contacts in many applied markets.

 

  Ø

Molecular Diagnostics. We focus and invest in the high-growth molecular diagnostics segment. We acquired three companies in 2012 to build the foundation of our business, along with our existing transplant diagnostics and our diagnostic controls businesses. In a short time, we have already launched a lung cancer test service through our CLIA lab and intend to utilize our technology platforms to further grow our presence in this segment, as clinical research and testing begins to move towards next generation sequencing, as well as other opportunities for our other instrument platforms.

 

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RESULTS OF OPERATIONS

Comparison of Years Ended December 31, 2012 and 2011

 

(in millions)    2012     2011     $ Increase
(Decrease)
    % Increase  

Research Consumables

   $ 1,616.1      $ 1,596.5      $ 19.6        1

Genetic Analysis

     1,462.9        1,457.0        5.9        0

Applied Sciences

     718.5        673.5        45.0        7

Corporate and other

     1.0        48.7        (47.7     NM   
  

 

 

   

 

 

   

 

 

   

Total revenues

   $ 3,798.5      $ 3,775.7      $ 22.8        1
  

 

 

   

 

 

   

 

 

   

Total gross profit

   $ 2,134.5      $ 2,110.0      $ 24.5        1

Total gross profit %

     56     56    

Revenues

The Company’s revenues increased by $22.8 million or 1% for the year ended December 31, 2012 compared to the year ended December 31, 2011. The increase in revenue was primarily driven by a net increase of $93.2 million related to volume and pricing, and $13.8 million as a result of acquisitions, partially offset by a net decrease of $49.6 million from royalties and product discontinuation, including $38.8 million of revenue recognized upon a licensing settlement in 2011, $24.4 million in unfavorable foreign currency impacts, net of hedging, and an $11.8 million decrease from divestiture activities. Volume and pricing relates to the impact of revenue due to total unit sales for existing and new products as well as year over year change in unit pricing and its impact on gross revenue.

The Company operates our business under three business groups—Research Consumables, Genetic Analysis, and Applied Sciences. Revenue for the Research Consumables business group increased by $19.6 million or 1% in 2012 compared to 2011. This increase was driven primarily by $20.3 million in net increase from volume and pricing, and an increase of $5.2 million from royalties including licensing settlements, partially offset by $9.0 million in unfavorable currency impacts, net of hedging. Revenue for the Genetic Analysis business group increased $5.9 million in 2012 compared to 2011. This increase was driven primarily by a $35.1 million in net increase from volume and pricing, partially offset by a net decrease of $19.0 million from royalties including licensing settlements, and $10.2 million in unfavorable currency impacts, net of hedging. Revenue for the Applied Sciences business group increased by $45.0 million or 7% in 2012 compared to 2011. This increase was driven primarily by $37.9 million in net increase from volume and pricing, and $10.8 million associated with acquisitions, partially offset by $5.3 million in unfavorable currency impacts, net of hedging. The Company records revenues that do not correspond to any of the divisions in the Corporate and other revenues line. The $47.7 million decrease in Corporate and other revenues from 2011 to 2012 was driven primarily by revenue of $38.8 million recognized upon a licensing settlement in 2011.

Changes in exchange rates of foreign currencies, especially in the euro, British pound, and Japanese yen, can significantly increase or decrease our reported revenue on sales made in these currencies and could result in a material positive or negative impact on our reported results. In addition to currency exchange rates, we expect that future revenues will be affected by, among other things, new product introductions, competitive conditions, customer research budgets, government research funding, the rate of expansion of our customer base, price increases, product discontinuations, and acquisitions or dispositions of businesses or product lines.

Gross Profit

Gross profit increased by $24.5 million or 1% in 2012 compared to 2011. The increase in gross profit was primarily driven by a net increase of $74.7 million from price, volume, and product mix and a $17.0 million decrease in purchased intangible amortization, partially offset by a $38.8 million decrease of revenue recognized upon a licensing settlement mentioned in revenue drivers, and $11.9 million in unfavorable currency impacts, net

 

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of hedging. The Company received unfavorable legal judgments in both 2011 and 2012 resulting in the amounts of $52.0 million and $60.9 million, respectively. The net impact year over year is a reduction of gross margin of $8.9 million during 2012.

Operating Expenses

 

     For the Years Ended December 31,              
     2012     2011              
(in millions)    Operating
Expense
     As a
Percentage
of
Revenues
    Operating
Expense
     As a
Percentage
of
Revenues
    $ Increase
(Decrease)
    % Increase
(Decrease)
 

Operating Expenses

              

Selling, general and administrative

   $ 1,054.6         28   $ 1,009.0         27   $ 45.6        5

Research and development

     341.9         9     377.9         10     (36.0     (10 )% 

Business consolidation costs

     72.7         2     75.3         2     (2.6     (3 )% 

Selling, General and Administrative. For the year ended December 31, 2012, selling, general and administrative expenses increased by $45.6 million or 5% compared to the year ended December 31, 2011. This increase was driven primarily by a $33.1 million increase in compensation and benefits, a $14.2 million increase in purchased services, a $12.7 million increase of depreciation, amortization and license fees, an $11.4 million increase from a legal settlement, and a $10.4 million increase from travel and discretionary spending, partially offset by $16.8 million of favorable currency impacts, and a $10.3 million decrease in general overhead and infrastructure costs. As a percentage of revenue, the costs are relatively flat compared to the prior year when excluding the above mentioned legal settlement.

Research and Development. For the year ended December 31, 2012, research and development expenses decreased by $36.0 million or 10% compared to the year ended December 31, 2011. This decrease was driven primarily by a $13.7 million fair value adjustment to the contingent consideration liability that was recognized in 2011 and a $13.3 million decrease in compensation and benefits. The Company continues to invest in research and development programs and as a percentage of revenue, overall costs are comparable period over period.

Business Consolidation Costs. For the year ended December 31, 2012, business consolidation costs were $72.7 million, compared to $75.3 million for the year ended December 31, 2011, and represent costs to integrate recent and pending acquisitions and divestitures of the Company’s operations. The expenses for both periods related primarily to integration and restructuring efforts, including severance and site consolidation, related to various mergers, acquisitions and divestitures that took place in each of the periods, respectively. Included in the results for the year ended December 31, 2012 were settlements with former employees of an acquired entity in the amount of $24.4 million. Business consolidation costs were down year over year as less integration work was required.

Other Income (Expense)

Interest Income. Interest income was $2.4 million for the year ended December 31, 2012 compared to $3.9 million for the year ended December 31, 2011.

Interest income in the future will be affected by changes in short-term interest rates and changes in cash balances, which may materially increase or decrease as a result of acquisitions, debt repayment, and stock repurchase programs, and other financing activities.

Interest Expense. Interest expense was $123.9 million for the year ended December 31, 2012 compared to $162.1 million for the year ended December 31, 2011. The decrease in interest expense was primarily driven by lower debt balances driven by the payoff of the 2024 and 2025 Convertible Senior Notes in February 2012 and June 2011, respectively, partially offset by $3.7 million charged as a result of the extinguishment of a line of credit during 2012. The payoff of the 2024 and 2025 Notes resulted in $22.9 million lower non-cash interest expense for the year ended December 31, 2012 that was based on a bifurcation requirement, as prescribed by ASC Topic 470-20, Debt with Conversion and Other Options.

 

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Table of Contents

Other Expense, Net. Other expense, net, was $11.9 million for the year ended December 31, 2012 compared to $10.9 million for the same period of 2011. Included in 2012 were $5.3 million of charges associated with divesture related activities and foreign currency losses of $2.5 million driven by fluctuations in major currencies. Included in 2011 were foreign currency losses of $8.3 million driven by fluctuations in major currencies.

Provision for Income Taxes. The provision for income taxes as a percentage of pre-tax income from continuing operations was 19.1% for the year ended December 31, 2012 compared with 21.1% for the year ended December 31, 2011. The effective tax rate for 2012 is lower than 2011 primarily due to reduced state taxes and a one-time tax write-off of certain investments; offset by the temporary loss of the federal R&D tax credit.

Comparison of Years Ended December 31, 2011 and 2010

 

(in millions)    2011     2010     $ Increase      % Increase  

Research Consumables

   $ 1,596.5      $ 1,575.9      $ 20.6         1

Genetic Analysis

     1,457.0        1,374.5        82.5         6

Applied Sciences

     673.5        633.4        40.1         6

Corporate and other

     48.7        4.3        44.4         NM   
  

 

 

   

 

 

   

 

 

    

Total revenues

   $ 3,775.7      $ 3,588.1      $ 187.6         5
  

 

 

   

 

 

   

 

 

    

Total gross profit

   $ 2,110.0      $ 2,106.1      $ 3.9         0

Total gross profit %

     56     59     

Revenues

The Company’s revenues increased by $187.6 million or 5% for the year ended December 31, 2011 compared to the year ended December 31, 2010. The increase in revenue was primarily driven by increases of $59.4 million related to volume and pricing, $51.8 million as a result of acquisitions, $42.8 million in favorable foreign currency impacts, net of hedging, and an increase of $38.8 million of revenue recognized upon a licensing settlement in 2011. Volume and pricing relates to the impact of revenue due to total unit sales for existing and new products as well as year over year change in unit pricing and its impact on gross revenue.

The Company operates our business under three business groups—Research Consumables, Genetic Analysis, and Applied Sciences. Revenue for the Research Consumables business group increased by $20.6 million or 1% in 2011 compared to 2010. This increase was driven primarily by $20.0 million from favorable currency impacts, net of hedging, and $8.5 million as a result of acquisitions, partially offset by a decrease of $7.2 million related to volume and pricing. Revenue for the Genetic Analysis business group increased $82.5 million or 6% in 2011 compared to 2010. This increase was driven primarily by $42.7 million as a result of acquisitions, a $29.7 million increase from volume and pricing, and $18.5 million in favorable currency impacts, net of hedging. Revenue for the Applied Sciences business group increased by $40.1 million or 6% in 2011 compared to 2010. This increase was driven primarily by $33.6 million in net increase from volume and pricing, and $4.4 million in favorable currency impacts, net of hedging. The Company records revenues that do not correspond to any of the divisions in the Corporate and other revenues line. The $44.4 million increase in Corporate and other revenues from 2010 to 2011 was driven primarily by revenue of $38.8 million recognized upon a licensing settlement in 2011.

Changes in exchange rates of foreign currencies, especially in the euro, British pound, and Japanese yen, can significantly increase or decrease our reported revenue on sales made in these currencies and could result in a material positive or negative impact on our reported results. In addition to currency exchange rates, we expect that future revenues will be affected by, among other things, new product introductions, competitive conditions, customer research budgets, government research funding, the rate of expansion of our customer base, price increases, product discontinuations, and acquisitions or dispositions of businesses or product lines.

 

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Gross Profit

Gross profit increased by $3.9 million 2011 compared to 2010. The increase in gross profit was primarily driven by a net increase of $48.0 million from price, volume, royalties and product mix, including $38.8 million of revenue recognized upon a licensing settlement mentioned above, $23.3 million as a result of acquisitions, and $10.1 million in favorable currency impacts, net of hedging, partially offset by a judgment of $52.0 million on a case in litigation, an increase of $15.0 million in purchased intangible amortization and a decrease in contingent consideration fair value adjustments of $3.6 million.

Operating Expenses

 

     For the Years Ended December 31,              
     2011     2010              
(in millions)    Operating
Expense
     As a
Percentage
of
Revenues
    Operating
Expense
     As a
Percentage
of
Revenues
    $ Increase/
(Decrease)
    % Increase/
(Decrease)
 

Operating Expenses

              

Selling, general and administrative

   $ 1,009.0         27   $ 1,023.2         29   $ (14.2     (1 )% 

Research and development

     377.9         10     375.5         10     2.4        1

Business consolidation costs

     75.3         2     93.5         3     (18.2     (19 )% 

In-process research and development

             NM        1.7         NM        (1.7     NM   

Selling, General and Administrative. For the year ended December 31, 2011, selling, general and administrative expenses decreased by $14.2 million or 1% compared to the year ended December 31, 2010. This decrease was driven primarily by a $33.2 million decrease in compensation and benefits that included a decrease of $9.5 million of accelerated compensation expense as a result of an acquisition, a $5.9 million decrease in travel and discretionary spending, and a $5.8 million decrease in general overhead and infrastructure costs, partially offset by $21.9 million in unfavorable foreign currency impacts, and an increase of $12.7 million in purchased services. As a percentage of revenue, the costs are down from the prior year as a result of the restructuring activities that have contributed to the reduction of overall overhead related costs year over year.

Research and Development. For the year ended December 31, 2011, research and development expenses increased by $2.4 million or 1% compared to the year ended December 31, 2010. This increase was driven primarily by a $13.7 million fair value adjustment to the contingent consideration liability, partially offset by a $10.2 million decrease in compensation and benefits, including a decrease of $9.4 million of accelerated compensation expense as a result of an acquisition. The Company continues to invest in research and development programs and as a percentage of revenue, overall costs are comparable period over period.

Business Consolidation Costs. For the year ended December 31, 2011, business consolidation costs were $75.3 million, compared to $93.5 million for the year ended December 31, 2010, and represent costs to integrate recent and pending acquisitions and divestitures of the Company’s operations. The expenses for both periods related primarily to integration and restructuring efforts, including severance and site consolidation, related to various mergers, acquisitions and divestitures that took place in each of the periods, respectively.

Other Income (Expense)

Interest Income. Interest income was $3.9 million for the year ended December 31, 2011 compared to $4.3 million for the year ended December 31, 2010.

Interest Expense. Interest expense was $162.1 million for the year ended December 31, 2011 compared to $152.3 million for the year ended December 31, 2010. The increase in interest expenses was primarily driven by higher debt balances driven by the $1,500.0 million of fixed rate unsecured notes issued in February 2010 and the

 

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$800.0 million of fixed rate unsecured notes issued in December 2010, partially offset by the pay off of the term loans in February 2010 and the pay off of the 2025 and the 2023 Convertible Senior Notes in June 2011 and August 2010, respectively.

The Company adopted a bifurcation requirement on our convertible senior notes, as prescribed by ASC Topic 470-20, Debt with Conversion and Other Options and as a result incurred an additional $24.6 million and $38.0 million in interest expense for the years ended December 31, 2011 and 2010, respectively.

During February 2010, the Company fully repaid the remaining outstanding term loans, and recognized a loss of $54.2 million of deferred financing costs. The loss is separately identified in the Consolidated Statements of Operations as a “Loss on early extinguishment of debt”.

Other Expense, Net. Other expense, net, was $10.9 million for the year ended December 31, 2011 compared to $5.9 million for the same period of 2010. Included in 2011 were foreign currency losses of $8.3 million driven by fluctuations in major currencies. Included in 2010 was a loss on the discontinuance of cash flow hedges of $12.9 million and a $1.2 million expense related to the amortization of purchased intangibles and amortization of deferred revenue fair market value adjustments attributable to the joint venture, offset by a gain from the recovery on an impaired security of $7.1 million and a gain of $0.6 million on the discontinuance of a cash flow hedge.

During January 2010, the Company completed the sale of its 50% ownership stake in the Applied Biosystems/MDS Analytical Technologies Instruments joint venture and selected assets and liabilities directly attributable to the joint venture for $428.1 million in cash, excluding related tax obligations and transactions costs, and recorded a gain of $37.3 million. The gain is separately identified in the Consolidated Statements of Operations as a “Gain on divestiture of equity investments”.

Provision for Income Taxes. The provision for income taxes as a percentage of pre-tax income from continuing operations was 21.1% for the year ended December 31, 2011 compared with 14.4% for the year ended December 31, 2010. The effective tax rate for 2011 is higher than 2010 primarily due to large prior year tax benefits associated with one-time repatriation benefits from the Company’s global restructuring activities and acquisitions that significantly exceeded similar tax benefits recognized in 2011.

LIQUIDITY AND CAPITAL RESOURCES

Our future capital requirements and the adequacy of our available funds will depend on many factors, including future business acquisitions, debt repayment, share repurchases, scientific progress in our research and development programs and the magnitude of those programs, our ability to establish collaborative and licensing arrangements, the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and competing technological and market developments. We intend to continue our strategic investment activities in new product development, in-licensing technologies and acquisitions that support our platforms.

Our working capital factors, such as inventory turnover and days sales outstanding, are seasonal and, on an interim basis during the year, may require an influx of short-term working capital. We believe our current cash and cash equivalents, investments, cash provided by operations and cash available from bank loans and lines of credit will satisfy our working capital requirements, debt obligations and capital expenditures for the foreseeable future. In addition, we will continue to monitor the global economic environment, including that of the eurozone, to ensure that we continue to have adequate available funds to support domestic and international operations.

The Company has, and expects to be able to, continue to generate positive cash flow from operations. Future debt repayment, share repurchases, future acquisitions or additional payments for contingent consideration upon the achievement of milestones pertaining to previous acquisitions may be financed by a combination of cash on hand, our positive cash flow generation, a revolving credit facility, or an issuance of new debt or stock.

The Company will continuously assess the most appropriate method of financing the Company’s short and long term operations. While conditions of the credit market at any given time may impact our ability to obtain credit, the Company believes that it has the ability to raise funding, if needed, through public and private markets at reasonable rates based on the Company’s risk profile, along with its history of strong cash generation and timely debt repayments.

 

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It is the Company’s intention to indefinitely reinvest a majority of current foreign earnings in order to ensure sufficient foreign working capital and to expand its existing operations outside the United States. Additionally, the Company intends to use such unrepatriated cash held by its foreign subsidiaries to fund future foreign investments, including acquisitions. While the Company has repatriated significant earnings in the past, primarily due to certain debt obligations and covenants that no longer exist, similar repatriation of earnings is no longer expected or required. In addition to cash on hand in the United States, the Company has the ability to raise cash through bank loans, debt obligations or by settling loans with its foreign subsidiaries in order to cover its domestic needs. Accordingly, it is the intention of the Company’s management to indefinitely reinvest a majority of current earnings from foreign operations. For those limited foreign earnings that the Company, in the past, had determined will not be indefinitely reinvested, the Company has recorded the appropriate tax obligations in the statement of operations. In the event the Company is required to repatriate funds outside of the United States, such repatriation will be subject to local laws and taxes. The Company does not anticipate any period in which the Company would repatriate all funds held outside of the United States. Accordingly, the Company does not believe these tax obligations will materially alter the Company’s future cash flows. For more information on income taxes, refer to Note 7 of the Consolidated Financial Statements, “Income Taxes”.

Cash and cash equivalents were $255.5 million at December 31, 2012, a decrease of $583.2 million from December 31, 2011, primarily due to cash used in financing activities of $1,082.4 million, cash used in investing activities of $279.5 million, offset by cash provided by operating activities of $778.0 million, and the effect of exchange rate on cash of $0.7 million. Further discussion surrounding the makeup of each cash flow component movement for the year is discussed below.

Operating Activities. Operating activities provided net cash of $778.0 million during 2012 primarily from net income of $430.4 million plus net non-cash charges of $344.2 million. Changes in operating assets and liabilities provided a net increase of $3.4 million in cash during the period. Within the non-cash charges in operating activities, the primary drivers were amortization of intangible assets of $302.9 million, depreciation charges of $126.0 million, and share based compensation of $84.5 million, partially offset by a change in deferred income taxes that resulted in a use of cash of $184.1 million, which included the recapture of interest expense on the redemption of the 2024 Notes. The primary drivers of the $3.4 million increase in cash from changes in operating assets and liabilities were an increase in income tax liabilities of $33.7 million, $29.9 million related to currency impact on intercompany settlements, and a $22.2 million decrease in prepaids and other current assets, partially offset by a $61.6 million increase in trade accounts receivable, and a $21.9 million increase in inventories. The movement in cash as a result of changes in operating assets and liabilities is consistent with normal ongoing operations.

As of December 31, 2012, we had cash and cash equivalents of $255.5 million, restricted cash of $15.1 million, and short-term investments of $5.7 million. Our working capital was $432.9 million as of December 31, 2012, including restricted cash. Our funds for cash and cash equivalents are primarily invested in marketable securities, money market funds, and bank deposits with maturities of less than three months. Cash and cash equivalents held by our foreign subsidiaries at December 31, 2012 was approximately $223.1 million.

The Company’s pension plans and post retirement benefit plans are funded in accordance with local statutory requirements and supplemented by voluntary contributions. The funding requirement is based on the funded status, which is measured by using various actuarial assumptions, such as interest rate, rate of compensation increase and expected return on plan assets. The Company’s qualified pension plans are adequately funded at December 31, 2012. Based on the level of our contributions to the qualified pension plans and the qualified post retirement medical benefit plan during previous and current fiscal years, we do not expect to have to significantly fund these pension plans in fiscal year 2013 in order to meet minimum statutory funding requirements. However, we may contribute to the funds to maintain the desired funding level at the Company’s discretion. The Company’s funding policy is based upon the amount needed to meet the minimum funding standards according to the Employee Retirement Income Security Act (ERISA). The Company may also make additional contributions from time to time consistent with the Company’s cash flow and business conditions. As decreases in interest rates have occurred in recent periods, the related liability associated with pensions has increased over the prior year. However, based on the actuarial estimates at December 31, 2012, the Company expects to contribute $5.1 million to domestic non-qualified pension plans and post retirement benefit plans

 

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during 2013, a portion of which has already been funded in our rabbi trust. The Company has other postretirement plans that are unfunded, however, these are partially funded by insurance policies. During the year ended December 31, 2012, the Company contributed $2.3 million, $4.0 million, and $2.9 million to domestic pension plans, foreign pension plans, and postretirement plans, respectively. The aggregate current liabilities related to our domestic, foreign and postretirement plans were $2.3 million, $1.2 million, and $2.5 million, respectively at December 31, 2012.

The Company’s current funding requirements are based on the Company’s current asset balance in relation to the current obligation, taking into account past contributions and other actuarial measures. In the event the actual returns lag expected asset returns or the discount rates fall below current rates, the Company could be required to fund additional amounts in future periods. The amount of such funding would be based on the actual returns of plan assets, the correlation to the change in discount rates, the actuarial calculation of funding levels and the usage of prior service credits. There are also various legislation changes to pension funding requirements that could be enacted, and if so, may require accelerated funding. The Company is constantly monitoring the status of its pension plans and does not believe there would be a material impact on the Company’s cash flows should either of the above situations occur.

Our most significant pension plan is a qualified domestic pension plan, which constituted approximately 80% of our consolidated pension plan assets and approximately 74% of our projected benefit obligations as of December 31, 2012. The accrual of future service benefits for participants in the qualified domestic pension plan was frozen as of June 30, 2004. Effective on July 1, 2005, the expected rate of compensation increase was no longer factored into the determination of our net periodic pension expense as the accrual for future service benefits was frozen. A one hundred basis point increase or decrease in the discount rate for the qualified domestic pension plan for the period ended December 31, 2012 would result in a corresponding decrease or increase of our net periodic pension expense by approximately $0.3 million. Also, a one hundred basis point increase or decrease in the expected rate of return on the pension asset for the period ended December 31, 2012 would result in a corresponding decrease or increase our net periodic pension expense by approximately $0.3 million.

Investing Activities. Net cash used by investing activities during 2012 was $279.5 million. The primary drivers were cash used for business combinations of $149.0 million, $116.7 million for the purchases of property, plant, and equipment, and $19.4 million for asset purchases, partially offset by cash received from the sale of investments of $25.5 million.

For 2013, the Company expects capital expenditures to be in the range of $120.0 million to $140.0 million. The capital will include additional capital equipment, information technology, and integration related capital to support ongoing business.

The Company completed several acquisitions in the past that were not material individually or collectively to the overall consolidated financial statements and its results of operations. The results of operations for these acquisitions were included in the Company’s results from the date of acquisition. Pursuant to the purchase agreements for certain acquisitions, the Company could be required to make additional contingent payments in cash based on certain technological milestones, patent milestones and the achievement of future gross sales of the acquired companies. The Company has sufficient cash on hand, positive cash flow generation and a revolving credit facility to fund such contingent payments if they become due.

In October 2010, the Company completed the acquisition of Ion Torrent for a total purchase price of $683.3 million, of which $263.2 million was paid in cash, $159.3 million was paid in the Company’s common stock, and $260.8 million was accrued for as contingent consideration liabilities at the time of acquisition for the time and technological milestone due in January 2012. During the year ended December 31, 2011, the milestone was achieved, therefore, during January 2012, the Company paid the $300.0 million milestone with cash consideration of $192.4 million and approximately 2.7 million shares of the Company’s common stock or the equivalent of $107.6 million at the time of the settlement. Of the $192.4 million settled in cash, $161.4 million was classified as a financing activity and $31.0 million was classified as an operating activity commensurate with the nature of the payments.

 

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Due to the structure of certain acquisitions, the Company used aggregate cash of $167.2 million and $4.0 million in financing activities for the years ended December 31, 2012 and 2011, respectively, to increase our ownership interests in controlled subsidiaries and for acquisition related milestone payments.

For more information on business combination accounting and fair market value of the contingent consideration liabilities, refer to Note 2 and Note 6 of the Consolidated Financial Statements, “Business Combinations and Divestitures” and “Commitments and Contingencies”, respectively.

Financing Activities. Net cash used by financing activities totaled $1,082.4 million in 2012. The primary drivers were $813.0 million for principal payments on short-term obligations, $662.4 million for the purchases of treasury stock, $450.0 million for principal payments on long-term obligations and $167.2 million for business combination milestone payments, partially offset by $913.0 million for proceeds from short-term obligations, and proceeds from the exercise of employee stock options and purchase rights of $84.6 million.

During the year ended December 31, 2012, the Company settled the $300.0 million Ion Torrent milestone in a combination of $192.4 million in cash, and in 2.7 million shares of the Company’s common stock or the equivalent of $107.6 million at the time of settlement. Of the $192.4 million settled in cash, $161.4 million was classified as a financing activity and $31.0 million was classified as an operating activity commensurate with the nature of the payments.

Senior Notes

During 2010, the Company filed a prospectus that allows the Company to issue in one or more offerings, senior or subordinated debt securities covered by the prospectus by filing a prospectus supplement that contains specific information about the securities and specific terms being offered. Under the prospectus, the Company has issued a principal amount of $2,300.0 million of fixed unsecured and unsubordinated Senior Notes (the “Notes”), of which $1,500.0 million were offered in February 2010 and $800.0 million were offered in December 2010.

As a result, the Company recorded an aggregate $5.7 million of debt discounts for the notes. At December 31, 2012, the unamortized debt discount balance was $3.9 million. The debt discounts are amortized over the lives of the associated Notes using the effective interest method.

The aggregate net proceeds from the Notes offering in 2010 were $2,276.4 million after deducting the debt discount as well as an underwriting discount of $17.9 million. Total deferred financing costs associated with the issuances of the Notes were $21.8 million, including the $17.9 million underwriting discount and $3.9 million of legal and accounting fees. At December 31, 2012, the unamortized issuance costs for the Notes were $13.3 million that are expected to be recognized over a weighted average period of 5.9 years.

The Company, at its option, may redeem the Notes (prior to October 15, 2020 for the 2021 Notes) in whole or in part at any time at a redemption price equal to the greater of 100% of the principal amount of the notes to be redeemed or the sum of the present values of the remaining scheduled payments of the notes to be redeemed discounted on a semi-annual basis at a rate equal to the sum of the rate on a comparable United States Treasury note plus 25 basis points for the 2016 Notes, 30 basis points for the 2013 Notes, the 2015 Notes, and the 2021 Notes, and 35 basis points for the 2020 Notes, plus accrued and unpaid interest through the date of redemption, if any. Commencing on October 15, 2020, the Company may redeem the 2021 Notes, in whole or in part, at any time, at a redemption price equal to 100% of the principal amount of the notes being redeemed plus accrued and unpaid interest through the redemption date. Upon the occurrence of a change of control of the Company that results in a downgrade of the notes below an investment grade rating, the indenture requires under certain circumstances that the Company makes an offer to purchase then outstanding Senior Notes equal to 101% of the principal amount plus any accrued and unpaid interest to the date of repurchase.

The indentures governing the Senior Notes contain certain covenants that, among other things, limit the Company’s ability to create or incur certain liens and engage in sale and leaseback transactions. In addition, the indenture limits the Company’s ability to consolidate, merge, sell, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets. These covenants are subject to certain exceptions and qualifications.

The entire net proceeds from the 2013, 2015, and 2020 Notes offering in February 2010 were used to repay the outstanding balance of the term loans, together with the net of tax proceeds from the sale of our Applied

 

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Biosystems/MDS Analytical Technologies Instruments joint venture, and cash on hand. A portion of the net proceeds from the 2016 and 2021 Notes offering in December 2010 was used to retire the Company’s $350.0 million 3  1/4% Convertible Senior Notes (2025 Notes) in June 2011 and the Company’s $450.0 million 1 1/2% Convertible Senior Notes (2024 Notes) in January 2012.

The Company paid $109.4 million and $95.4 million in cash for the interest expense on the Senior Notes during the years ended December 31, 2012 and 2011, respectively.

The Credit Agreement

In February 2012, the Company entered into a new credit agreement (the Revolving Credit Facility) to replace the existing revolving credit facility of $500.0 million with a new credit facility of $750.0 million, under which $913.0 million was withdrawn and $813.0 million was repaid during the year ended December 31, 2012. As a result of the extinguishment of the previously existing credit facility, the Company recognized a $3.7 million loss, recorded in interest expense, on unamortized deferred financing costs. For details on the revolving credit facility as well as the Company’s other lines of credit refer to Note 4 of the Consolidated Financial Statements, “Lines of Credit”.

Convertible Senior Notes

In February 2012, the Company redeemed the outstanding balance of the 1 1/2% Convertible Senior Notes (2024 Notes), with no excess of the 2024 Notes’ conversion value over par, for $450.0 million of cash. The settlement was funded by cash on hand including proceeds from the Senior Notes offering made during the fiscal year 2010, and a portion from cash drawn on the $750.0 million revolving credit facility that the Company secured in February 2012. The redemption of the 2024 Notes triggered increased tax payments in 2012 by approximately $85.0 million, reflected in operating cash flow activities.

In June 2011, the Company repaid the outstanding balance of the 3  1/4% Convertible Senior Notes (the 2025 Notes). Total cash consideration of $350.0 million and 0.4 million shares of the Company’s common stock were issued to settle the par value and the excess of the Notes’ conversion value based on a conversion price of $49.13 per share. The Company funded the repayment of the 2025 Notes by using cash on hand, cash generated from operating activities and a portion of the net proceeds from the 2016 and 2021 Notes offering in December 2010.

In August 2010, the Company repaid the remaining outstanding balance of the 2% Convertible Senior Notes (2023 Notes). Total cash consideration of $347.8 million and 2.4 million shares of the Company’s common stock were issued to settle the par value and the excess of the Notes’ conversion value based on a conversion price of $34.12 per share. The Company funded the repayment of the 2023 Notes by using cash on hand and cash generated from operating activities.

The Company paid $3.4 million, $12.4 million, and $25.1 million in cash for the interest expense for convertible senior notes while the notes were outstanding for the years ended December 31, 2012, 2011, and 2010, respectively.

For more details of the Company’s long-term debt obligations, refer to Note 5 of the Consolidated Financial Statements, “Long-Term Debt”.

Stock Repurchase Programs

In July 2012, the Board of Directors of the Company approved a program (the July 2012 program) authorizing management to repurchase up to $750.0 million of common stock. During the year ended December 31, 2012, the Company repurchased 4.9 million shares of its common stock under this program at a total cost of $238.0 million. As of December 31, 2012, there was $512.0 million of authorization remaining under this program.

In July 2011, the Board of Directors of the Company approved a program (the July 2011 program) authorizing management to repurchase up to $200.0 million of common stock. During the year ended December 31, 2012, the Company repurchased 4.6 million shares of its common stock under this program at a total cost of $200.0 million, the maximum amount authorized, thereby completing the July 2011 program.

 

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In December 2010, the Board of Directors of the Company approved a program (the December 2010 program), authorizing management to repurchase up to $500.0 million of common stock. During the year ended December 31, 2011, the Company repurchased 6.4 million shares of its common stock under this program at a total cost of approximately $303.0 million. During the year ended December 31, 2012 the company repurchased an additional 4.3 million shares of its common stock at a total cost of $197.0 million, thereby completing the December 2010 program by repurchasing an aggregate of 10.7 million shares at a total cost of $500.0 million, the maximum amount authorized.

In July 2010, the Board of Directors of the Company approved a program (the July 2010 program) authorizing management to repurchase up to $520.0 million of common stock over the next two years. As of December 31, 2010, the Company completed repurchasing 8.4 million shares at a total cost of $436.6 million. During the year ended December 31, 2011, the Company repurchased an additional 1.5 million shares of its common stock at a total cost of $83.4 million, thereby completing the July 2010 program by repurchasing an aggregate of 9.9 million shares at a total cost of $520.0 million, the maximum amount authorized.

The cost of repurchasing shares is included in treasury stock and reported as a reduction in total equity when a repurchase occurs. The Company has been and anticipates using one or a combination of cash generated from operating activities and/or withdraws on our Revolving Credit Facility to fund current and future share repurchases under the authorized programs.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at December 31, 2012 and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

 

     Payments Due by Period(1)  
(in thousands)    Total      Less than
1 Year
     Years
1-3
     Years
3-5
     More than 5
Years
     All Other(3)  

Senior notes

   $ 2,873,583       $ 352,383       $ 683,486       $ 530,459       $ 1,307,255           

Revolving credit facility(2)

     100,000         100,000                                   

Capital lease obligations

     19,713         3,543         8,115         3,398         4,657           

Operating lease obligations

     212,260         39,917         62,681         35,474         74,188           

Licensing and purchase obligations

     65,593         40,152         15,045         5,465         4,931           

Uncertain tax liability and interest(3)

     107,052         633                                 106,419   

Other obligations

     22,947         16,265         5,612         684         386           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,401,148       $ 552,893       $ 774,939       $ 575,480       $ 1,391,417       $ 106,419   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Total contractual obligations exclude potential contingent consideration payments not earned pursuant to certain acquisitions the Company has completed. The contingent consideration for these previous acquisitions were due if specified future events occur or conditions are met such as the achievement of certain technological milestones, patent milestones or the achievement of targeted revenue milestones. For more information on our accounting for business combinations and contingent considerations, refer to Note 2 “Business Combinations and Divestitures” and Note 6 “Commitments and Contingencies” of the Notes to Consolidated Financial Statements.

(2)

The amount and timing of borrowings and repayments on the Revolving Credit Facility could fluctuate depending upon general working capital, capital expenditures, and/or other capital needs.

(3)

As of December 31, 2012, the Company’s expected cash payments on unrecognized tax benefits, including interest and penalties, were $107.1 million. We are unable to reasonably estimate the timing of uncertain tax liabilities and interest payments in individual periods beyond twelve months due to uncertainties in the timing of the effective settlement of tax positions.

 

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CRITICAL ACCOUNTING POLICIES

Revenue Recognition. We derive our revenue from the sale of our products, services and technology. We recognize revenue from product sales upon transfer of title of the product or performance of services. Transfer of title generally occurs upon shipment to the customer. We generally ship to our customers FOB shipping point. Concurrently, we record provisions for warranty, returns, and installation based on historical experience and anticipated product performance. Revenue is not recognized at the time of shipment of products in situations where risks and rewards of ownership are transferred to the customer at a point other than upon shipment to the customer due to the shipping terms, the existence of an acceptance clause, the achievement of milestones, or certain return or cancellation privileges. Revenue is recognized according to the shipping terms, at the time of customer acceptance, the lapse of acceptance provisions or cancellation privileges, or achievement of milestones. Service revenue is recognized over the period services are performed. If our shipping policies or sales terms were to change, materially different reported results could occur. In cases where customers order and pay for products and request that we store a portion of their order for them at our cost, we record any material up-front payments as deferred revenue in current or long-term liabilities, depending on the length of the customer prepayment, in the Consolidated Balance Sheets and recognize revenue upon shipment of the product to the customer. For instruments where installation is determined to be a separate earnings process, the portion of the sales price allocable to the fair value of the installation is deferred and recognized when installation is complete. We determine the fair value of the installation process based on technician labor billing rates, the expected number of hours to install the instrument based on historical experience, and amounts charged by third-parties. We continually monitor the level of effort required for the installation of our instruments to ensure that appropriate fair values have been determined. Deferred revenue, which includes customer prepayments and unearned service revenue, totaled $147.9 million at December 31, 2012.

We also enter into arrangements whereby revenues are derived from multiple deliverables. In these arrangements, the Company records revenue as separate elements if the delivered items have value to the customer on a standalone basis, and if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the seller’s control. Our revenue arrangements generally do not include a general right of return related to the delivered products. Arrangement consideration should be allocated at the inception of the arrangement to all deliverables using the relative selling price method based on a three-tier hierarchy. The relative selling price method requires that the allocation of arrangement consideration for each deliverable should be based on vendor-specific objective evidence (VSOE) of fair value, which represents the price charged for a deliverable when it is sold separately or for a deliverable not yet being sold separately, the price established by management having the relevant authority. When VSOE of fair value is not available, third-party evidence (TPE) of fair value is acceptable, or a best estimate of selling price if VSOE and TPE are not available. A best estimate of selling price should be consistent with the objective of determining the price at which we would transact if the deliverable were sold regularly on a standalone basis and also take into account market conditions and company specific factors. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s estimated selling price. Applicable revenue recognition criteria are also considered separately for separate units of accounting. Revenues from multiple-element arrangements involving license fees, up-front payments and milestone payments received and/or billable in connection with other rights and services that represent our continuing obligations, are deferred until all applicable revenue recognition criteria are met for each separable element. Contract interpretation is normally required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the multiple-elements, when to begin to recognize revenue for each element, and the period over which revenue should be recognized.

We recognize royalty revenue, including upfront licensing fees, when the amounts are earned and determinable during the applicable period based on historical activity, and make revisions for actual royalties received in the following quarter. Materially different reported results would be likely if any of the estimated royalty revenue were significantly different from actual royalties received, however, historically, these revisions have not been material to our consolidated financial statements. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue on the receipt of cash or royalty statements from our licensees.

 

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Since we are not able to forecast product sales by licensees, royalty payments that are based on product sales by the licensees are not determinable until the licensee has completed their computation of the royalties due and/or remitted their cash payment to us. In addition, we recognize up-front nonrefundable license fees when payments become due under contractual agreement, unless we have specific continuing performance obligations requiring deferral of all or a portion of these fees. If it cannot be concluded that a licensee fee is fixed or determinable at the outset of an arrangement, revenue is recognized as payments from third-parties become due. Should information on licensee product sales become available so as to enable us to recognize royalty revenue on an accrual basis, materially different revenues and results of operations could occur. Royalty revenue totaled $110.5 million, $121.8 million and $130.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Revenue recorded under proportional performance for projects in process is designed to approximate the amount of revenue earned based on the percentage of performance completed within the scope of the contractual arrangement. We undertake a review of these arrangements to determine the percentage of the work that has completed and the appropriate amount of revenue to recognize.

Shipping and handling costs are included in costs of sales. Shipping and handling costs charged to customers is recorded as revenue in the period the related product sales revenue is recognized.

Use of Estimates. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, or GAAP. In preparing these statements, we are required to use estimates and assumptions. While we believe we have considered all available information, actual results could affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Estimates represent management’s best estimate given current economic conditions, and as a result, changes in economic conditions can materially alter actual results from management’s best estimates. We believe that, of the significant accounting policies discussed in Note 1 to our Consolidated Financial Statements, the following accounting policies require our most difficult, subjective or complex judgments:

 

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Allowance for doubtful accounts. We provide a reserve against our accounts receivables for estimated losses that may result from our customers’ inability to pay. We determine the amount of the reserve by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ country or industry, historical losses and our customers’ credit-worthiness. Amounts later determined and specifically identified by management to be uncollectible are charged or written off against this reserve. To minimize the likelihood of uncollectability, customers’ credit-worthiness is reviewed periodically based on external credit reporting services and our experience with the account and adjusted accordingly. Should a customer’s account become past due, we generally place a hold on the account and discontinue further shipments to that customer, minimizing further risk of loss. Bad debt expense is recorded as necessary to maintain an appropriate level of allowance for doubtful accounts. Additionally, our policy is to fully reserve for all accounts with aged balances greater than one year, with certain exceptions determined necessary by management. The likelihood of a material loss on an uncollectible account would be mainly dependent on deterioration in the financial condition of that customer or in the overall economic conditions in a particular country or environment. Reserves are fully provided for all expected or probable losses of this nature. Gross trade accounts receivables totaled $711.6 million and the allowance for doubtful accounts was $14.3 million at December 31, 2012. Historically, the Company’s reserves have been adequate to cover losses.

 

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Inventory adjustments. Inventories are stated at lower of cost or market. We review the components of our inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales. The Company generally fully reserves for stock levels in excess of one year’s expected usage with certain exceptions deemed necessary by management. For those inventories less susceptible to obsolescence, the Company provides reserves for an estimation of spoilage of materials or specific to the inventory as determined by management. In the event a lower of cost or market issue arises, the Company will reserve for the value of the inventory in excess of current replacement cost. The likelihood of any material inventory write-down is dependent on customer demand, competitive conditions or new product introductions by us or our competitors that vary from our current expectations. Gross inventory totaled

 

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$492.5 million and the allowance for excess and obsolete and price impairment was $89.0 million at December 31, 2012. Historically, the Company’s reserve has been adequate to cover its losses.

 

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Valuation of goodwill. We are required to perform a review for impairment of goodwill in accordance with ASC Topic 350, Intangible — Goodwill and Other. The Company performs its goodwill impairment analysis at the reporting unit level, which aligns with the Company’s business group reporting structure. Goodwill is considered to be impaired if we determine that the carrying value of the reporting unit exceeds its fair value. In addition to the annual review, an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Examples of such events or circumstances include:

 

   

macroeconomic conditions such as a deterioration in general economic conditions;

 

   

industry and market considerations such as a deterioration in the environment in which an entity operates, an adverse change in the market for our products and services including an unanticipated competition, or adverse regulatory or political developments;

 

   

significant cost factors including increases in raw materials or other costs that have a negative effect on earnings and cash flows;

 

   

a significant decline in our projected revenue or earnings growth or cash flows;

 

   

a significant loss of key personnel, significant adverse changes in strategy, customers, or litigation;

 

   

an event affecting our reporting units including a change in the composition or carry amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group of a reporting unit, or goodwill impairment recognized at the subsidiary level of a reporting unit; and

 

   

a significant decline in our stock price or the stock price of comparable companies.

Assessing the impairment of goodwill requires us to make assumptions and judgments regarding the fair value of the net assets of our reporting units. Since our reporting units share the majority of our assets and liabilities, we must make assumptions and estimates in allocating the carrying value as well as the fair value of net assets to each reporting unit. Additionally, the reporting units share the Company’s support functions, including finance, human resources, legal, information technology, and corporate marketing, which requires assumptions, and estimates in allocating related expenses. Changes in the assumptions for the balance sheet and expenses are considered in the analysis, and the Company performs an internal sensitivity analysis to further support the Company’s assessment.

In accordance with our policy, we completed our most recent annual evaluation for impairment of goodwill as of October 1, 2012 and determined that no goodwill impairment existed. In this analysis, it was determined that no reporting unit of the Company was at risk of impairment when assessing the unit’s fair value compared to its carrying value. During the year ended December 31, 2012, the Company realigned its reporting units to match the Company’s business group reporting structure, which resulted in the realignment of goodwill prior to the current annual evaluation for impairment of goodwill. Realignment of goodwill among reporting units did not impact the results of the current or historical analysis, nor were there any indicators of impairment associated with the reporting unit realignment. Our evaluation included management estimates of cash flow projections based on internal future projections. Key assumptions from these projections included revenue growth and future gross and operating margin growth. The Company also makes key assumptions related to its weighted cost of capital and terminal growth rates. The revenue and margin growth was based on increased sales of new and existing products as we expect to maintain our investment in research and development, the effect and growth from business acquisitions already consummated and lower selling, general and administrative expenses as a percentage of revenue. Additional value creators assumed included increased efficiencies from capital spending. The resulting cash flows were discounted using a weighted average cost of capital. Operating mechanisms to ensure that these growth and efficiency assumptions will ultimately be realized were also considered in our evaluation. Our market capitalization at October 1, 2012 was also compared to the discounted cash flow analysis. No indicators of impairments were noted through December 31, 2012 and consequently, no impairment charge has been recorded during the year.

 

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We cannot guarantee our future annual or other periodic reviews for impairment of goodwill will not result in an impairment charge. Goodwill totaled $4,503.4 million at December 31, 2012.

 

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Valuation of intangible and other long-lived assets. We periodically assess the carrying value of intangible and other long-lived assets, including capitalized in-process research and development, which require us to make assumptions and judgments regarding the future cash flows of these assets. The assets are considered to be impaired if we determine that the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances:

 

   

the asset’s ability to continue to generate income from operations and positive cash flow in future periods;

 

   

loss of legal ownership or title to the asset;

 

   

significant changes in our strategic business objectives and utilization of the asset(s); and

 

   

the impact of significant negative industry or economic trends.

If the assets are considered to be impaired, the impairment charge we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. Intangible assets acquired in a business combination that are used for in-process research and development activities, or capitalized in-process research and development, are considered indefinite lived until the completion or abandonment of the associated research and development efforts. Until capitalized in-process research and development is no longer considered to be indefinite, these assets are reviewed annually, or an interim review is required if an event occurs or circumstances change that would more likely than not reduce the fair value of an intangible asset below its carrying amount in accordance with ASC Topic 350, Intangible–Goodwill and Other. Fair value is determined by a combination of third-party sources and discounted cash flows. In addition, we base the useful lives and related amortization or depreciation expense on our estimate of the period that the assets will generate revenues or otherwise be used by the Company. We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.

At December 31, 2012, the net book value of identifiable intangible assets that are subject to amortization totaled $1,456.0 million, the carrying value of identifiable intangible assets with indefinite lives totaled $69.9 million and the net book value of property, plant and equipment totaled $844.7 million.

 

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Valuation of financial instruments. We account for our financial instruments at fair value based on ASC Topic 820, Fair Value Measurements and Disclosures and ASC Topic 815, Derivatives and Hedging. In determining fair value, we consider both the credit risk of our counterparties and our own creditworthiness. ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements for financial instruments. The framework requires the valuation of investments using a three tiered approach in the valuation of investments. The Company reviews and evaluates the adequacy of the valuation techniques periodically. In the current year, there have not been any changes to the Company’s valuation methodologies. For details on the assets and liabilities subject to fair value measurements and the related valuation techniques used, refer to Note 11 of the Consolidated Financial Statements, “Fair Value of Financial Instruments”.

A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity securities, currencies, commodities or credit spreads. Derivatives include futures, forwards, swaps, or option contracts, or other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards).

The accounting for changes in fair value of a derivative instrument depends on the nature of the derivative and whether the derivative qualifies as a hedging instrument in accordance with ASC Topic 815, Derivatives and Hedging. During the periods outstanding, those hedging instruments that qualify for hedge accounting

 

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are included as an adjustment to revenue or interest expense, depending upon the underlying transactions the Company is hedging for. Those hedges that do not qualify for hedge accounting are included in non-operating income. Materially different reported results would be likely if volatility of the markets was different, or the Company’s forecasted transactions were significantly different from actual.

 

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Allocation of purchase price to acquired assets and liabilities in business combinations. The cost of an acquired business is assigned to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. We assess fair value, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, using a variety of methods including an income approach or a cost approach such as the estimation of current selling prices and replacement values. Fair value of the assets acquired and liabilities assumed, including intangible assets, in-process research and development (IPR&D), and contingent payments, are measured based on the assumptions and estimations with regards to the variable factors such as the amount and timing of future cash flows for the asset or liability being measured, appropriate risk-adjusted discount rates, nonperformance risk, or other factors that market participants would consider. Upon acquisition, we determine the estimated economic lives of the acquired intangible assets for amortization purposes, which are based on the underlying expected cash flows of such assets. Adjustments to inventory are based on the fair market value of inventory and amortized into income based on the period in which the underlying inventory is sold. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. Actual results may vary from projected results and assumptions used in the fair value assessments.

 

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Benefit and pension plans. We sponsor and manage several pension plans and postretirement health plans for employees and former employees, and nonqualified supplemental benefit plans for select domestic and foreign employees. A majority of the Company’s current employees do not participate in these plans. Accounting and reporting for the pension plans and postretirement health plans requires the use of assumptions for discount rates, expected returns on plan assets and rates of compensation increase that are used by our actuaries to determine our liabilities and annual expenses for these plans in addition to the value of the plan assets included in our Consolidated Balance Sheets. During the year ended December 31, 2012, the weighted average discount rates we used to determine the benefit obligation were 3.80%, 4.08%, and 2.85% for domestic pension plans, foreign pension plans, and postretirement health plans, respectively. The discount rates we used to determine the net periodic pension cost were 4.60%, 4.46%, and 4.15% for domestic pension plans, foreign pension plans, and postretirement health plans, respectively. The long-term rates of expected return on plan assets were 4.60% to 7.50%, 4.30%, and 7.50% for domestic pension plans, foreign pension plans, and postretirement health plans, respectively. Our actuaries also rely on assumptions, such as mortality rates, in preparing their estimates for us. The liabilities for the pension plans and postretirement plans are generally determined using the unit credit method, which is to expense each participant’s benefit under the plan as they accrue. The discount rate is derived by the yield curve and consists of spot interest rates at half year increments for each of the next 30 years based on pricing and yield information for high quality corporate bonds, private placement bonds that are traded in reliance with Rule 144A of the Securities Act of 1933 and are at least two years from the date of issuance, bonds with make-whole provisions, and bonds issued by foreign corporations that are denominated in United States dollars. The Company determines the best-fit regression curve to the bond data, and converts this coupon yield curve to a spot yield curve, using techniques that assume no arbitrage opportunities. The Company matches the pension cash flow to the spot rates to determine a single equivalent discount rate. The rate of expected return on plan assets is calculated with an expected weighted average rate of earnings on the funds that is a blended rate of historical returns and forward-looking capital market assumptions over the next 20 years adjusted by taking into account the benefits of diversification and rebalancing of the funds.

The likelihood of materially different valuations for assets, liabilities or expenses, would depend on interest rates, investment returns, actual non-investment experience or actuarial assumptions that are different from our current expectations. Actual weighted average allocation of our plan assets or valuation of our plan assets and benefit obligations may fluctuate significantly year over year. These fluctuations can be caused

 

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by conditions unrelated to our actuarial assumptions, including shifts in the global economic environment, market performance and plan funding status. Unexpected unrealized gains or losses in the plan assets or benefit obligation are reflected in other comprehensive income in our Consolidated Balance Sheets and amortized into income over the expected plan lives.

 

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Income taxes. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions for which the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of intercompany arrangements to share revenue and costs. There are uncertainties in such arrangements regarding the amount and manner of such sharing that could ultimately result in changes when the arrangements are reviewed by taxing authorities. Although we believe that our approach to determining the amount of such arrangements is reasonable, the final resolution of these matters could be materially different than reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provisions or benefits in the period in which such determination is made.

Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The likelihood of a material change in our expected realization of these assets depends on our ability to generate sufficient future taxable income of the proper character and in the necessary jurisdictions. Our ability to generate enough taxable income to utilize our deferred tax assets depends on many factors, among which are our ability to deduct tax operating loss and capital loss carryforwards against future taxable income, the effectiveness of our tax planning strategies, reversing deferred tax liabilities, and any significant changes in the tax treatment received on our business combinations. We believe that our deferred tax assets, net of our valuation allowance, should be realizable due to our estimate of future profitability in the United States and foreign jurisdictions, as applicable. Subsequent revisions to estimates of future taxable profits and losses and tax planning strategies could change the amount of the deferred tax asset we would be able to realize in the future, and therefore could increase or decrease the valuation allowance.

ASC Topic 740, Income Taxes defines the confidence level that a tax position must meet in order to be recognized in the financial statements. In accordance, we regularly assess uncertain tax positions in each of the tax jurisdictions that we have operations in and account for the related financial statement implications. Unrecognized tax benefits have been reported in accordance with ASC Topic 740, Income Taxes two-step approach under which the tax effect of a position is recognized only if it is “more-likely-than-not” to be sustained and the amount of the tax benefit recognized is equal to the largest tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement of the tax position. Determining the appropriate level of unrecognized tax benefits requires us to exercise judgment regarding the uncertain application of tax law. The amount of unrecognized tax benefits is adjusted when new information becomes available or when an event occurs indicating a change is appropriate. Future changes in required unrecognized tax benefits could have a material impact on our results of operations.

The Company continues to benefit from reduced tax rates in Singapore and Israel. Singapore’s taxing authority granted the Company pioneer company status that provides an incentive encouraging companies to undertake activities that have the effect of promoting economic or technological development in Singapore. This incentive equates to a tax exemption on earnings associated with most of the Company’s manufacturing activities and continues through December 31, 2021. The Company qualifies for an incentive tax benefit in Israel that provides for a reduced 3.5% tax rate on earnings from its subsidiary in Israel. This incentive has been granted for an indefinite period given minimum sales and investment levels are maintained. The impact of the tax holiday in Singapore decreased Singapore taxes by $14.6 million, $17.2 million and $21.2 million for years ended December 31, 2012, 2011 and 2010, respectively. The impact of the tax holiday in Israel decreased both taxes paid and income tax expense by $1.6 million, $1.7 million and $1.5 million for the years ended 2012, 2011 and 2010, respectively.

 

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Share-based compensation. We grant share-based awards to eligible employees and directors to purchase or receive shares of our common stock. In addition, we had qualified employee stock purchase plan in which eligible employees may elect to withhold up to 15% of their compensation to purchase shares of our common stock on a quarterly basis at a discounted price equal to 85% of the lower of the employee’s offering price or the closing price of the stock on the date of purchase. The benefits provided by these plans

 

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qualify as share-based compensation under the provisions of ASC Topic 718, Compensation—Stock Compensation, which requires us to recognize compensation expense based on their estimated fair values determined on the date of grant for all share-based awards granted, and the cumulative expense is adjusted by modified or cancelled shares subsequently. Effective October 31, 2012 the Company suspended the qualified employee stock purchase plan to all employees. No shares will be purchased under the Plan until it is reinstated.

For the year ended December 31, 2012, we recognized $22.2 million and $61.4 million of pre-tax compensation expense for employee stock options and purchase rights, and restricted stock units, respectively. At December 31, 2012, there was $19.5 million and $95.1 million remaining in unrecognized compensation cost related to employee stock options and restricted stock units, respectively, that are expected to be recognized over a weighted average period of 1.4 years and 2.6 years, respectively.

We estimate the fair value of share-based awards on the date of grant using the Black-Scholes option-pricing method (Black-Scholes method). The determination of fair value of share-based awards using an option-pricing model requires the use of certain estimates and assumptions that affect the reported amount of share-based compensation cost recognized in our Consolidated Statements of Operations. These include estimates of the expected term of share-based awards, expected volatility of our stock price, expected dividends and the risk-free interest rate. These estimates and assumptions are highly subjective and may result in materially different amounts should circumstances change and we employ different assumptions in our application of fair value assessment in future periods. The Company uses historical forfeiture rate trends as a basis for estimating pre-vesting forfeitures. Should there be a material shift in employee vesting trends, there could be a material change in actual forfeiture experience. During 2011, the Company made a cumulative adjustment of $4.2 million to restricted stock unit compensation expense as result of applying an adjusted forfeit estimate on such awards. Previously, the Company did not apply a forfeiture rate on restricted stock units as historical grants were granted primarily to executives and directors with minimal forfeiture activity, thus the Company’s history of restricted stock unit pre-vesting forfeitures was minimal. The Company has applied the estimated forfeiture rates during 2012.

For share-based awards issued during the year ended December 31, 2012, we estimated the expected term by considering various factors including the vesting period of options granted, employees’ historical exercise and post-employment termination behavior and aggregation by homogeneous employee groups. Our estimated volatility was derived using a combination of our historical stock price volatility and the implied volatility of market-traded options of our common stock with terms of up to approximately two years. Our decision to use a combination of historical and implied volatility was based upon the availability of actively traded options of our common stock and our assessment that such a combination was more representative of future expected stock price trends. We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends. We currently anticipate that we will retain all of our future earnings for use in the development and expansion of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, financial covenants, tax laws and other factors as the Board of Directors, in its discretion, deems relevant. The risk-free interest rate is based upon United States Treasury securities with remaining terms similar to the expected term of the share-based awards.

 

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Litigation reserves. Estimated amounts for claims that are probable and can be reasonably estimated are recorded as liabilities in the Consolidated Balance Sheets. The likelihood of a material change in these estimated reserves would be dependent on new claims as they may arise and the favorable or unfavorable outcome of the particular litigation. Both the amount and range of loss on pending litigation is uncertain until a verdict or settlement is reached. As such, we are unable to make a reasonable estimate of the liability that could result from unfavorable outcomes in litigation. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. Such revisions in our estimates of the potential liability could materially impact our results of operations and financial position.

Segment Information. The Company determined, in accordance with The Financial Accounting Standards Board (FASB) Accounting Standards Codification, or ASC Topic 280, Segment Reporting, to operate as one

 

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operating segment. The Company’s Chief Operating Decision Maker (CODM) reviews revenue at the business group level and manufacturing, operating income and expenses, and net income at the Company wide level to allocate resources and assess the Company’s overall performance. The Company’s business groups share common, centralized support functions, including finance, human resources, legal, information technology, and corporate marketing, all of which report directly to the CODM. Accordingly, decisions regarding the Company’s overall operating performance and allocation of Company resources are assessed on a consolidated basis. We believe it is appropriate to operate as one reporting segment. The Company has disclosed the revenues for each of its business groups to allow the reader of the financial statements the ability to gain some transparency into the operations of the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

For information on the recent accounting pronouncements impacting our business, refer to Note 1 of the Consolidated Financial Statements included in Item 8.

MARKET RISK

We are exposed to market risk related to changes in foreign currency exchange rates, commodity prices and interest rates, and we selectively use financial instruments to manage these risks. We do not enter into financial instruments for speculation or trading purposes. These financial exposures are monitored and managed by us as an integral part of our overall risk management program, which recognizes the unpredictability of financial markets and seeks to reduce potentially adverse effects on our results.

Foreign Currency

We translate the financial statements of each foreign subsidiary with a functional currency other than the United States dollar into the United States dollar for consolidation using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. Net gains or losses resulting from the translation of foreign financial statements and the effect of exchange rate changes on intercompany receivables and payables of a long-term investment nature are recorded as a separate component of stockholders’ equity. These adjustments will affect net income only upon sale or liquidation of the underlying investment in foreign subsidiaries. Net gains and losses resulting from the effect of exchange rate changes on intercompany receivables and payables of a short-term nature are recorded in the results of operations as other income (expense).

Changes in foreign currency exchange rates can affect our reported results of operations, which are reported in United States dollars. Based on the foreign currency rate in effect at the time of the translation of our foreign operations into United States dollars, reported results could be different from prior periods even if the same amount and mix of our products were sold at the same local prices during the two periods. This will affect our reported results of operations and also makes the comparison of our business performance in two periods more difficult. For example, our revenues for the year ended December 31, 2012 were approximately $3,798.5 million using applicable foreign currency exchange rates for that period. However, applying the foreign currency exchange rates in effect during the year ended December 31, 2011 to our revenues generated by foreign subsidiaries whose functional currencies differ from the United States dollars for the year ended December 31, 2012 would result in approximately $24.4 million more revenue for that period. These changes in currency exchange rates have affected and will continue to affect, our reported results, including our revenues, revenue growth rates, gross margins, income and losses as well as assets and liabilities.

Foreign Currency Transactions

We have operations through legal entities in Europe, Asia-Pacific and the Americas. As a result, our financial position, results of operations and cash flows can be affected by fluctuations in foreign currency exchange rates. As of December 31, 2012, the Company had $457.1 million of accounts receivable and $29.2 million of accounts payable, respectively, denominated in a foreign currency related to third party transactions. These accounts receivables and payables are denominated either in the functional currency of the

 

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legal entity or in a currency that differs from the functional currency of the legal entity owning the receivable or payable. The Company’s intercompany foreign currency receivables and payables are primarily concentrated in the euro, British pound, and Japanese yen.

For those third party and intercompany receivables and payables denominated in a currency that differs from the functional currency of the legal entity, the Company hedges such transactions to prevent financial statement risk. At December 31, 2012 the Company had a notional principal amount of $987.0 million in foreign currency forward contracts outstanding, predominantly to hedge currency risk on specific third party and intercompany receivables and payables denominated in a currency that differs from the legal entity’s functional currency. Such outstanding foreign currency forward contracts which settle in January 2013 through May 2013, effectively fix the exchange rate at which these specific receivables and payables will be settled, so that gains or losses on the forward contracts offset the losses or gains from changes in the value of the underlying receivables and payables. At December 31, 2012, the Company does not expect there will be a significant impact from unhedged foreign currency intercompany transactions. As a result, a movement in foreign currency rates would not be expected to have a material financial statement impact on the settlement of these outstanding third party and intercompany receivables and payables.

The notional principal amounts provide one measure of the transaction volume outstanding as of period end, but do not represent the amount of our exposure to market loss. In many cases, outstanding principal amounts offset assets and liabilities and the Company’s exposure is less than the notional amount. The estimates of fair value are based on applicable and commonly used pricing models using prevailing financial market information. The amounts ultimately realized upon settlement of these financial instruments, together with the gains and losses on the underlying exposures, will depend on actual market conditions during the remaining life of the instruments.

Both realized and unrealized gains and losses on the value of the third party and intercompany receivables and payables were included in other income (expense) in the Consolidated Statements of Operations. Net currency exchange gains (losses) recognized on business transactions, net of hedging transactions, were $(2.5) million, $(8.3) million and $0.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. These gains and losses arise from the timing of cash collections compared to the hedged transactions, which can vary based on timing of actual customer payments and intercompany settlements.

Refer to Note 11 of the Consolidated Financial Statements, “Fair Value of Financial Instruments” for more information on the Company’s hedging programs.

Cash Flow Hedges

The ultimate United States dollar value of future foreign currency sales generated by our reporting units is subject to fluctuations in foreign currency exchange rates. The Company used foreign currency forward contracts to mitigate foreign currency risk on forecasted foreign currency sales during the years ended December 31, 2011 and 2010 to limit the exposure from changes in currency exchange rates. No such contracts were used during the year ended December 31, 2012. The change in fair value prior to their maturity was accounted for as cash flow hedges, and recorded in other comprehensive income, net of tax, in the Consolidated Balance Sheets according to ASC Topic 815, Derivatives and Hedging. To the extent any portion of the forward contracts was determined to not be an effective hedge, the increase or decrease in value prior to the maturity was recorded in other income or expense in the Consolidated Statements of Operations. The fair value of foreign currency forward contracts was reported in other current assets or other current liabilities in the Consolidated Balance Sheet while outstanding and as appropriate. The Company reclassified deferred gains or losses reported in accumulated other comprehensive income into revenue when the underlying foreign currency sales occurred and were recognized in consolidated earnings. The Company used an inventory turnover ratio for each international operating unit to align the timing of a hedged item and a hedging instrument to impact the Consolidated Statements of Operations during the same reporting period.

During the year ended December 31, 2011, the Company did not recognize any material ineffective portion of its hedging instruments, and no hedging relationships were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. At December 31,

 

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2012 and December 31, 2011, the Company did not have any foreign currency forward contracts outstanding to hedge foreign currency revenue risk under ASC Topic 815, Derivatives and Hedging. The Company will continuously monitor the impact of foreign currency risk upon the financial results as part of the Company’s risk management program and at management’s discretion may enter into derivative transactions.

Commodity Prices

Our exposure to commodity price changes relates to certain manufacturing operations that utilize certain commodities as raw materials. We manage our exposure to changes in those prices primarily through our procurement and sales practices.

Interest Rates

Our investment portfolio is maintained in accordance with our investment policy that defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The fair value of our cash equivalents, marketable securities, short-term investments, and derivatives is subject to change as a result of changes in market interest rates and investment risk related to the issuers’ credit worthiness or our own credit risk. The Company uses credit default swap spread to derive risk-adjusted discount rate to measure the fair value of some of our financial instruments. At December 31, 2012, we had $276.4 million in cash, cash equivalents, restricted cash and short-term investments, all of which approximated the fair value. Changes in market interest rates would not be expected to have a material impact on the fair value of these assets at December 31, 2012, as the assets consisted of highly liquid securities with short-term maturities. The Company accounts for the $26.7 million of its long-term investments under the cost method and due to the nature of these investments, mainly non-public and early stage companies, the Company believes calculating a fair value thereon not to be practicable. Thus, changes in market interest rates would not be expected to have an impact on these investments. Refer to Note 11 of the Consolidated Financial Statements, “Fair Value of Financial Instruments”.

As of December 31, 2012, the Company had a carrying value of $2,296.1 million in debt with fixed interest rates, thus, the variability in market interest rates would not be expected to have a material impact on our scheduled interest payments. The Company will continuously assess the most appropriate method of financing the Company’s short and long term operations.

Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures requires certain financial and non-financial assets and liabilities to be measured at fair value using a three tiered approach. There were zero and $44.3 million of assets and liabilities, respectively, for which the Company used level 3, or significant unobservable inputs, to measure fair value at December 31, 2012. During 2012, the Company settled $287.3 million of contingent consideration liabilities, of which $282.2 million related to the Ion Torrent milestone payment in January 2012 and transferred $45.4 million of contingent consideration liabilities into level 3 fair value measurements. Using level 3 estimates, the Company also recorded an increase of $1.4 million to cost of revenues during 2012 based on a revised probability of achievement of milestones. For further discussion on the Company’s fair value measurements and valuation methodologies, refer to Note 11 of the Consolidated Financial Statements, “Fair Value of Financial Instruments”.

For information related to fair value measurements used in pension and postretirement plans, refer to Note 9 of the Consolidated Financial Statements, “Employee Benefit Plans”.

OFF BALANCE SHEET ARRANGEMENTS

The Company does not have any material off balance sheet arrangements. For further discussion on the Company’s commitments and contingencies, refer to Note 6 of the Consolidated Financial Statements, “Commitments and Contingencies”.

ITEM 7A.  Quantitative and Qualitative Disclosures About Market Risk

See discussion under Market Risk in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

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ITEM 8.  Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

To The Board of Directors and the Stockholders of Life Technologies Corporation:

We have audited the accompanying consolidated balance sheets of Life Technologies Corporation as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Life Technologies Corporation at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Life Technologies Corporation’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2013 expressed an unqualified opinion thereon.

/s/  Ernst & Young LLP

San Diego, California

February 27, 2013

 

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LIFE TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except par value and share data)

 

     December 31,  
     2012     2011  
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 255,547      $ 838,762   

Short-term investments

     5,726        26,559   

Restricted cash

     15,096        16,673   

Trade accounts receivable, net of allowance for doubtful accounts of $14,336 and $10,200, respectively

     697,228        636,998   

Inventories, net

     403,488        377,866   

Deferred income tax assets

     105,422        40,079   

Prepaid expenses and other current assets

     142,732        156,680   
  

 

 

   

 

 

 

Total current assets

     1,625,239        2,093,617   
  

 

 

   

 

 

 

Long-term investments

     26,677        24,996   

Property and equipment, net

     844,692        833,678   

Goodwill

     4,503,392        4,366,584   

Intangible assets, net

     1,525,823        1,746,701   

Deferred income tax assets

     23,008        28,805   

Other assets

     89,234        93,582   
  

 

 

   

 

 

 

Total assets

   $ 8,638,065      $ 9,187,963   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Current portion of long-term debt

   $ 253,214      $ 450,839   

Short-term borrowings

     100,000          

Accounts payable

     186,569        178,374   

Deferred compensation and related benefits

     194,489        201,689   

Deferred revenues and reserves

     114,558        113,048   

Contingent consideration

     16,738        283,098   

Accrued expenses and other current liabilities

     297,904        269,258   

Accrued income taxes

     28,879          
  

 

 

   

 

 

 

Total current liabilities

     1,192,351        1,496,306   
  

 

 

   

 

 

 

Long-term debt

     2,060,855        2,297,653   

Pension liabilities

     209,607        190,692   

Deferred income tax liabilities

     287,423        410,565   

Income taxes payable

     106,419        102,881   

Other long-term obligations

     127,947        90,640   
  

 

 

   

 

 

 

Total liabilities

     3,984,602        4,588,737   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Preferred stock; $0.01 par value, 6,405,884 shares authorized; no shares issued or outstanding

              

Common stock; $0.01 par value, 400,000,000 shares authorized; 218,741,855 and 211,652,864 shares issued, respectively

     2,187        2,117   

Additional paid-in-capital

     5,731,568        5,441,061   

Accumulated other comprehensive income

     59,070        64,656   

Retained earnings

     1,341,846        910,991   

Less cost of treasury stock; 47,503,208 shares and 33,100,712 shares, respectively

     (2,481,990     (1,819,599
  

 

 

   

 

 

 

Total Life Technologies stockholders’ equity

     4,652,681        4,599,226   

Noncontrolling interest

     782          

Total equity

     4,653,463        4,599,226   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 8,638,065      $ 9,187,963   
  

 

 

   

 

 

 

See accompanying notes for additional information.

 

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LIFE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     For the Years Ended December 31,  
     2012     2011     2010  

Revenues

   $ 3,798,510      $ 3,775,672      $ 3,588,094   

Cost of revenues

     1,372,277        1,356,967        1,188,199   

Purchased intangibles amortization

     291,756        308,728        293,754   
  

 

 

   

 

 

   

 

 

 

Gross profit

     2,134,477        2,109,977        2,106,141   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Selling, general and administrative

     1,054,616        1,008,973        1,023,179   

Research and development

     341,892        377,924        375,465   

Purchased in-process research and development

                   1,650   

Business consolidation costs

     72,732        75,324        93,450   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,469,240        1,462,221        1,493,744   
  

 

 

   

 

 

   

 

 

 

Operating income

     665,237        647,756        612,397   
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     2,401        3,932        4,266   

Interest expense

     (123,915     (162,073     (152,322

Loss on early extinguishment of debt

                   (54,185

Gain on divestiture of equity investments

                   37,260   

Other expense, net

     (11,898     (10,913     (5,864
  

 

 

   

 

 

   

 

 

 

Total other expense, net

     (133,412     (169,054     (170,845
  

 

 

   

 

 

   

 

 

 

Income before provision for income taxes

     531,825        478,702        441,552   

Income tax provision

     (101,376     (100,868     (63,694
  

 

 

   

 

 

   

 

 

 

Net income

     430,449        377,834        377,858   

Net loss attributable to noncontrolling interests

     406        658        437   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Life Technologies

   $ 430,855      $ 378,492      $ 378,295   
  

 

 

   

 

 

   

 

 

 

Earnings per common share attributable to Life Technologies stockholders:

      

Basic

   $ 2.45      $ 2.11      $ 2.06   

Diluted

   $ 2.40      $ 2.05      $ 1.99   

Weighted average shares used in per share calculations:

      

Basic

     175,831        179,390        183,398   

Diluted

     179,365        185,595        190,591   

See accompanying notes for additional information.

 

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LIFE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     For the Years Ended December 31,  
     2012     2011     2010  

Net Income

   $ 430,449      $ 377,834      $ 377,858   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

      

Pension plans

      

Actuarial loss

     (26,413     (47,704     (11,615

Prior service cost

     3,031               2,296   

Amortization or settlement recognition of net loss (credit)

     4,040        2,189        (1,552

Amortization of prior service credit

     (1,154     (1,128     (472
  

 

 

   

 

 

   

 

 

 

Total pension plans

     (20,496     (46,643     (11,343
  

 

 

   

 

 

   

 

 

 

Realized (gain) loss on cash flow hedges, reclassed into earnings

     (366     39,662        (9,880

Unrealized loss on cash flow hedges

            (13,856     (5,538

Translation adjustments

     15,280        (10,834     73,133   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (5,582     (31,671     46,372   
  

 

 

   

 

 

   

 

 

 

Comprehensive income, net of tax

     424,867        346,163        424,230   
  

 

 

   

 

 

   

 

 

 

Comprehensive (income) loss attributable to noncontrolling interest

      

Translation adjustments attributable to noncontrolling interest

     (4     (285     (1,728

Net loss attributable to noncontrolling interest

     406        658        437   
  

 

 

   

 

 

   

 

 

 

Less: comprehensive (income) loss attributable to noncontrolling interest

     402        373        (1,291
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Life Technologies stockholders

   $ 425,269      $ 346,536      $ 422,939   
  

 

 

   

 

 

   

 

 

 

 

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LIFE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

   

 

Common Stock

    Additional
Paid-in-
Capital
    Accumulated
Other
Comprehensive
Income
    Retained
Earnings
   

 

Treasury Stock

    Total Life Tech.
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Equity
 
    Shares     Amount           Shares     Amount        

Balance at December 31, 2009

    196,297      $ 1,963      $ 4,784,786      $ 51,968      $ 154,204        (16,214   $ (966,253   $ 4,026,668      $      $ 4,026,668   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

                                378,295                      378,295        (437     377,858   

Other comprehensive income

                         44,644                             44,644        1,728        46,372   

Common stock issuances for business combination

    3,374        34        159,320                                    159,354        35,177        194,531   

Purchase of subsidiaries shares

                  (5,393                                 (5,393     (32,515     (37,908

Common stock issuances under employee stock plans

    4,428        44        131,933                      (3     (109     131,868               131,868   

Tax benefit of employee stock plans

                  29,763                                    29,763               29,763   

Common stock issuances for convertible debt

    2,403        24        43,409                                    43,433               43,433   

Purchase of treasury shares

                                       (8,442     (436,629     (436,629            (436,629

Issuance of restricted shares, net of shares repurchased for minimum tax liability

    742        7        (8                   (333     (16,975     (16,976            (16,976

Amortization of stock-based compensation

                  79,049                                    79,049               79,049   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2010

    207,244      $ 2,072      $ 5,222,859      $ 96,612      $ 532,499        (24,992   $ (1,419,966   $ 4,434,076      $ 3,953      $ 4,438,029   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

                                378,492                      378,492        (658     377,834   

Other comprehensive income

                         (31,956                          (31,956     285        (31,671

Common stock issuances for business combination

                  (28                                 (28            (28

Purchase of subsidiaries shares

                  (1,128                                 (1,128     (3,580     (4,708

Common stock issuances under employee stock plans

    3,340        34        109,608                      (1     (28     109,614               109,614   

Tax benefit of employee stock plans

                  12,266                                    12,266               12,266   

Common stock issuances for convertible debt

    442        5        9,014                                    9,019               9,019   

Purchase of treasury shares

                                       (7,912     (386,377     (386,377            (386,377

Issuance of restricted shares, net of shares repurchased for minimum tax liability

    514        5        (5                   (195     (7,451     (7,451            (7,451

Issuance of deferred stock

    113        1        11,507                      (1     (5,777     5,731               5,731   

Amortization of stock-based compensation

                  76,968                                    76,968               76,968   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

    211,653      $ 2,117      $ 5,441,061      $ 64,656      $ 910,991        (33,101   $ (1,819,599   $ 4,599,226      $      $ 4,599,226   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss)

                                430,855                      430,855        (406     430,449   

Other comprehensive income

                         (5,586                          (5,586     4        (5,582

Common stock issuances for business combination

    2,746        27        107,526                                    107,553               107,553   

Contribution from noncontrolling interest

                                                            1,184        1,184   

Common stock issuances under employee stock plans

    2,791        27        82,492                             (11     82,508               82,508   

Tax benefit of employee stock plans

                  13,921                                    13,921               13,921   

Common stock issuances for convertible debt

                  (327                                 (327            (327

Purchase of treasury shares

                                       (13,837     (634,996     (634,996            (634,996

Issuance of restricted shares, net of shares repurchased for minimum tax liability

    1,551        16        (16                   (565     (27,378     (27,378            (27,378

Issuance of deferred stock

    1               2,438                             (6     2,432               2,432   

Amortization of stock-based compensation

                  84,473                                    84,473               84,473   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    218,742      $ 2,187      $ 5,731,568      $ 59,070      $ 1,341,846        (47,503   $ (2,481,990   $ 4,652,681      $ 782      $ 4,653,463   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes for additional information.

 

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LIFE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     For the Years Ended December 31,  
     2012      2011      2010  

CASH FLOWS FROM OPERATING ACTIVITIES:

        

Net income

   $ 430,449       $ 377,834       $ 377,858   

Adjustments to reconcile net income to net cash provided by operating activities, including effects of businesses acquired and divested:

        

Depreciation

     126,005         123,578         122,978   

Amortization of intangible assets

     302,888         313,948         299,616   

Amortization of deferred debt issuance costs

     7,948         6,860         62,972   

Amortization of inventory fair market value adjustments

     1,508         529         940   

Amortization of deferred revenue fair market value adjustment

     1,295         2,881         7,015   

Share-based compensation expense

     84,473         76,968         79,049   

Incremental tax benefits from stock options exercised

     (15,903      (12,971      (21,053

Deferred income taxes

     (184,079      (108,956      (107,067

Loss on disposal of assets

     8,280         3,827         4,351   

Gain on sale of equity investment

                     (37,260

Purchase of in-process research and development

                     1,650   

Debt discount amortization and other non-cash interest expense

     2,461         45,400         38,035   

Other non-cash adjustments

     9,301         6,196         11,442   

Changes in operating assets and liabilities:

        

Trade accounts receivable

     (61,609      (59,825      (57,334

Inventories

     (21,891      (58,527      (21,456

Prepaid expenses and other current assets

     22,199         3,119         (14,281

Other assets

     (612      26,015         (4,862

Accounts payable

     5,857         (2,584      (62,889

Accrued expenses and other liabilities

     (4,127      27,203         (2,680

Income taxes

     33,685         32,677         36,946   

Currency impact on intercompany settlements

     29,864         4,963         25,119   
  

 

 

    

 

 

    

 

 

 

Net cash provided by operating activities

     777,992         809,135         739,089   
  

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

        

Purchases of investments

     (10,226      (13,842      (26,733

Proceeds from sale of investments

     25,513         3,414         2,071   

Net cash paid for business combinations

     (148,997      (28      (343,387

Net cash paid for asset purchases

     (19,377      (2,771      (6,450

Net cash received (paid) for divestiture of equity investment

     (10,136      (39,364      379,512   

Purchases of property and equipment

     (116,736      (105,132      (124,817

Proceeds from sale of assets

     486         5,839           
  

 

 

    

 

 

    

 

 

 

Net cash used in investing activities

     (279,473      (151,884      (119,804
  

 

 

    

 

 

    

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

        

Principal payments on long-term obligations

     (450,000      (350,354      (2,320,299

Proceeds from long-term obligations

                     2,288,277   

Principal payments on short-term obligations

     (813,015              (127,000

Proceeds from short-term obligations

     913,015                 127,000   

Cash paid for business combination milestones and noncontrolling interest acquisitions

     (167,182      (4,001      (54,388

Cash contribution from noncontrolling interest shareholders

     1,184                   

Issuance cost payments on long-term obligations

     (2,491      (1,082      (17,938

Incremental tax benefits from stock options exercised

     15,903         12,971         21,053   

Proceeds from sale of common stock

     84,596         111,265         131,346   

Capital lease payments

     (2,033      (2,189      (2,146

Purchase of treasury stock

     (662,391      (393,878      (453,713
  

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

     (1,082,414      (627,268      (407,808

Effect of exchange rate changes on cash

     680         (4,790      5,505   
  

 

 

    

 

 

    

 

 

 

Net (decrease)/increase in cash and cash equivalents

     (583,215      25,193         216,982   

Cash and cash equivalents, beginning of period

     838,762         813,569         596,587   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

   $ 255,547       $ 838,762       $ 813,569   
  

 

 

    

 

 

    

 

 

 

See accompanying notes for additional information.

 

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LIFE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2012, 2011 AND 2010

 

1.

BUSINESS ACTIVITY, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND SIGNIFICANT ACCOUNTS

Business Activity

We are a global life sciences company dedicated to helping our customers make scientific discoveries and applying those discoveries to ultimately improve the quality of life. Our systems, reagents, and services enable scientific researchers to accelerate scientific exploration, driving life-enhancing discoveries and developments. Life Technologies’ customers do their work across the biological spectrum, advancing genomic medicine, regenerative science, molecular diagnostics, agricultural and environmental research and forensics.

Our systems and reagents enable, simplify and accelerate a broad spectrum of biological research of genes, proteins and cells within academic and life science research and commercial applications. Our scientific expertise assists in making biodiscovery research techniques more effective and efficient for pharmaceutical, biotechnology, agricultural, clinical, government and academic scientific professionals with backgrounds in a wide range of scientific disciplines.

Principles of Consolidation

The consolidated financial statements include the accounts of Life Technologies Corporation and its majority owned or controlled subsidiaries, collectively referred to as Life Technologies (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. When there is a portion of equity in an acquired subsidiary not attributable, directly or indirectly, to the parent, the Company records the fair value of the noncontrolling interests at the acquisition date and classifies the amounts attributable to noncontrolling interests separately in equity in the Company’s Consolidated Financial Statements. Any subsequent changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary are accounted for as equity transactions. For details on the noncontrolling interests, refer to the Consolidated Statements of Comprehensive Income and Stockholders’ Equity.

For purposes of these Notes to Consolidated Financial Statements, gross profit is defined as revenues less cost of revenues and purchased intangibles amortization and gross margin is defined as gross profit divided by revenues. Operating income is defined as gross profit less operating expenses and operating margin is defined as operating income divided by revenues.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassifications and Segment Information

In the first quarter of 2012, the Company modified its financial reporting into three business groups to better reflect its internal organization and end markets. These business groups are Research Consumables, Genetic Analysis, and Applied Sciences. The Company’s internal organization was previously structured around its technology platforms of Molecular Biology Systems, Genetic Systems and Cell Systems. The Company has reclassified the historically presented business group revenue to conform to the current year presentation. The reclassification had no impact on previously reported consolidated results of operations or financial position.

 

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The Company determined, in accordance with The Financial Accounting Standards Board (FASB) Accounting Standards Codification, or ASC Topic 280, Segment Reporting, to operate as one operating segment. The Company’s Chief Operating Decision Maker (CODM) reviews revenue at the business group level and manufacturing, operating income and expenses, and net income at the Company wide level to allocate resources and assess the Company’s overall performance. The Company’s business groups share common, centralized support functions, including finance, human resources, legal, information technology, and corporate marketing, all of which report directly to the CODM. Accordingly, decisions regarding the Company’s overall operating performance and allocation of Company resources are assessed on a consolidated basis. We believe it is appropriate to operate as one reporting segment. The Company has disclosed the revenues for each of its business groups to allow the reader of the financial statements the ability to gain some transparency into the operations of the Company.

Concentrations of Risks

Approximately $692.8 million, $696.3 million and $712.3 million, or 18%, 18% and 20% of the Company’s revenues during the years ended December 31, 2012, 2011 and 2010, respectively, are derived from federal, university and/or research institutions whose resources may be funded by the United States Government either entirely, partially or have minimal to no funding at all. If there were to be a significant change in current research funding, there could be an adverse impact on the Company’s future revenues and results of operations however the Company believes that such adverse impact shall be less than significant at each customer or customer group level or in aggregate.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment, updating ASC Topic 350, Intangibles- Goodwill and Other. Under the amended ASC Topic 350, an entity has the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount of the unit as a basis for determining if it is necessary to perform the two-step goodwill impairment test as required under ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. If the entity concludes otherwise, it must proceed with the first step of the two-step impairment test. The update provides examples of events and circumstances an entity should consider in evaluating whether it is more likely than not that the fair value of a reporting unit is less than the carrying value. These examples are not all-inclusive, and an entity may identify other relevant events or circumstances to consider in its assessment. Under this update, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of the guidance in fiscal year 2012 did not have an impact on the Company’s consolidated financial statements and is not expected to have an impact on the Company’s future operating results.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, updating ASC Topic 220, Comprehensive Income. Under the amended ASC Topic 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance eliminates the option to present other comprehensive income and its components in the Statement of Stockholders’ Equity. This guidance does not change the components that are recognized in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for the Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, updating ASC Topic 220, Comprehensive Income. This guidance defers changes in ASU 2011-05 that relate to the presentation of reclassification adjustments. The guidance in ASU 2011-05 and ASU 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15,

 

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2011, and is to be applied retrospectively. The adoption of the guidance in fiscal year 2012 did not have an impact on the Company’s consolidated financial statements and is not expected to have an impact on the Company’s future operating results.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, updating ASC Topic 820, Fair Value Measurement. This guidance clarifies existing fair value guidance and expands disclosure requirements on, among other things, fair value measurements using Level 3 unobservable inputs. Level 3 unobservable inputs refer to prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). This guidance requires disclosures of quantitative information about the inputs used in Level 3 valuations, the valuation process used, and the sensitivity of the fair value measurements to changes in unobservable inputs. Refer to Note 11 of the Consolidated Financial Statements, “Fair Value of Financial Instruments” for more description on fair value measurements using Level 3 unobservable inputs. This guidance is effective for interim and annual periods beginning after December 15, 2011, and is to be applied prospectively. The adoption of the guidance in fiscal year 2012 did not have an impact on the Company’s consolidated financial statements and is not expected to have an impact on the Company’s future operating results.

Revenue Recognition

We derive our revenue from the sale of our products, services and technology. We recognize revenue from product sales upon transfer of title of the product or performance of services. Transfer of title generally occurs upon shipment to the customer. We generally ship to our customers FOB shipping point. Concurrently, we record provisions for warranty, returns, and installation based on historical experience and anticipated product performance. Revenue is not recognized at the time of shipment of products in situations where risks and rewards of ownership are transferred to the customer at a point other than upon shipment to the customer due to the shipping terms, the existence of an acceptance clause, the achievement of milestones, or certain return or cancellation privileges. Revenue is recognized according to the shipping terms, at the time of customer acceptance, the lapse of acceptance provisions or cancellation privileges, or achievement of milestones. Service revenue is recognized over the period services are performed. If our shipping policies or sales terms were to change, materially different reported results could occur. In cases where customers order and pay for products and request that we store a portion of their order for them at our cost, we record any material up-front payments as deferred revenue in current or long-term liabilities, depending on the length of the customer prepayment, in the Consolidated Balance Sheets and recognize revenue upon shipment of the product to the customer. For instruments where installation is determined to be a separate earnings process, the portion of the sales price allocable to the fair value of the installation is deferred and recognized when installation is complete. We determine the fair value of the installation process based on technician labor billing rates, the expected number of hours to install the instrument based on historical experience, and amounts charged by third-parties. We continually monitor the level of effort required for the installation of our instruments to ensure that appropriate fair values have been determined. Deferred revenue, which includes customer prepayments and unearned service revenue, totaled $147.9 million at December 31, 2012.

We also enter into arrangements whereby revenues are derived from multiple deliverables. In these arrangements, the Company records revenue as separate elements if the delivered items have value to the customer on a standalone basis, and if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the seller’s control. Arrangement consideration should be allocated at the inception of the arrangement to all deliverables using the relative selling price method that is based on a three-tier hierarchy. The relative selling price method requires that the estimated selling price for each deliverable should be based on vendor-specific objective evidence (VSOE) of fair value, which represents the price charged for a deliverable when it is sold separately or for a deliverable not yet being sold separately, the price established by management having the relevant authority. When VSOE of fair value is not available, third-party evidence (TPE) of fair value is acceptable, or a best estimate of selling price if VSOE and TPE are not available. A best estimate of selling price should be consistent with the objective of determining the price at which we would transact if the deliverable were sold regularly on a standalone basis and also take into account market conditions and company specific factors. The

 

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relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s estimated selling price. Applicable revenue recognition criteria are also considered separately for separate units of accounting. Revenues from multiple-element arrangements involving license fees, up-front payments and milestone payments, which are received and/or billable in connection with other rights and services that represent our continuing obligations, are deferred until all applicable revenue recognition criteria are met for each separable element. Contract interpretation is normally required to determine the appropriate accounting, including whether the deliverables specified in a multiple element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, how the price should be allocated among the multiple-elements, when to begin to recognize revenue for each element, and the period over which revenue should be recognized.

We recognize royalty revenue, including upfront licensing fees, when the amounts are earned and determinable during the applicable period based on historical activity, and make revisions for actual royalties received in the following quarter. Materially different reported results would be likely if any of the estimated royalty revenue were significantly different from actual royalties received; however, historically, these revisions have not been material to our consolidated financial statements. For those arrangements where royalties cannot be reasonably estimated, we recognize revenue on the receipt of cash or royalty statements from our licensees. Since we are not able to forecast product sales by licensees, royalty payments that are based on product sales by the licensees are not determinable until the licensee has completed their computation of the royalties due and/or remitted their cash payment to us. In addition, we recognize up-front nonrefundable license fees when due under contractual agreement, unless we have specific continuing performance obligations requiring deferral of all or a portion of these fees. If it cannot be concluded that a licensee fee is fixed or determinable at the outset of an arrangement, revenue is recognized as payments from third-parties become due. Should information on licensee product sales become available so as to enable us to recognize royalty revenue on an accrual basis, materially different revenues and results of operations could occur. Royalty revenue totaled $110.5 million, $121.8 million and $130.4 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Revenue recorded under proportional performance for projects in process is designed to approximate the amount of revenue earned based on the percentage of performance completed within the scope of the contractual arrangement. We undertake a review of these arrangements to determine the percentage of the work that has completed and the appropriate amount of revenue to recognize.

Shipping and handling costs are included in costs of sales. Shipping and handling costs charged to customers are recorded as revenue in the period the related product sales revenue is recognized.

Restricted Cash and Related Liabilities

The Company had restricted cash of $15.1 million and $16.7 million at December 31, 2012 and 2011, respectively, which was held in Rabbi Trusts to supplement the payment of certain non-qualified pension plan liabilities. The funds are invested primarily in money market accounts. At December 31, 2012 and 2011, the Company had $20.6 million and $19.1 million, respectively, for certain non-qualified pension plan liabilities recognized in current liabilities and pension liabilities in our Consolidated Balance Sheets. Rabbi Trusts remain in place for the term of the non-qualified pension plan benefits payable or until the fund is depleted. The Rabbi Trust assets are subject to the claims of the Company’s creditors in the event of the Company’s insolvency. No further contributions are required to be made to the Rabbi Trusts as of December 31, 2012.

Accounts Receivable

The Company provides reserves against trade receivables for estimated losses that may result from a customers’ inability to pay. The amount is determined by analyzing known uncollectible accounts, aged receivables, economic conditions in the customers’ country or industry, historical losses and customer credit-worthiness. Bad debt expense is recorded as necessary to maintain an appropriate level of allowance for doubtful accounts in selling, general and administrative expense. Additionally, our policy is to fully reserve for all accounts with aged balances greater than one year, with certain exceptions determined necessary by management. Amounts determined to be uncollectible are charged or written off against the reserve. The allowances for doubtful accounts were $14.3 million and $10.2 million at December 31, 2012 and 2011, respectively.

 

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Inventories

Inventories are generally stated at lower of cost (first-in, first-out method) or market. Cost is determined principally on the standard cost method for manufactured goods that approximates cost on the first-in, first-out method. The Company reviews the components of its inventory on a regular basis for excess, obsolete and impaired inventory and makes appropriate dispositions as obsolete inventory is identified. Reserves for excess, obsolete and impaired inventory were $89.0 million and $88.7 million at December 31, 2012 and 2011, respectively. Inventories include material, labor and overhead costs in addition to purchase accounting adjustments to write-up acquired inventory to estimated selling prices less costs to complete, costs of disposal and a reasonable profit allowance.

Inventories consist of the following at December 31:

 

(in thousands)    2012      2011  

Raw materials and components

   $ 101,370       $ 105,628   

Work in process (materials, labor and overhead)

     96,725         93,738   

Finished goods (materials, labor and overhead)

     204,639         178,500   

Adjustments to write up acquired finished goods to fair value

     754           
  

 

 

    

 

 

 

Total inventories, net

   $ 403,488       $ 377,866   
  

 

 

    

 

 

 

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following at December 31:

 

(in thousands)    2012      2011  

Hedge assets

   $ 1,597       $ 21,340   

Prepaid expenses

     99,039         61,573   

Other current assets

     42,096         73,767   
  

 

 

    

 

 

 

Total prepaid expenses and other current assets

   $ 142,732       $ 156,680   
  

 

 

    

 

 

 

Fair Value of Financial Instruments

We account for our financial instruments at fair value based on ASC Topic 820, Fair Value Measurements and Disclosures and ASC Topic 815, Derivatives and Hedging. In determining fair value, we consider both the credit risk of our counterparties and our own creditworthiness. ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value and establishes a framework for measuring fair value. The framework requires the valuation of investments using a three tiered approach. The Company reviews and evaluates the adequacy of the valuation techniques periodically. In the current year, there have not been any changes to the Company’s valuation methodologies.

A derivative is an instrument whose value is derived from an underlying instrument or index, such as interest rates, equity securities, currencies, commodities or credit spreads. Derivatives include futures, forwards, swaps, or option contracts, or other financial instruments with similar characteristics. Derivative contracts often involve future commitments to exchange interest payment streams or currencies based on a notional or contractual amount (e.g., interest rate swaps or currency forwards).

The accounting for changes in fair value of a derivative instrument depends on the nature of the derivative and whether the derivative qualifies as a hedging instrument in accordance with ASC Topic 815, Derivatives and Hedging. Those hedging instruments that qualify for hedge accounting are included as an adjustment to revenue or interest expense, depending upon the nature of the underlying transactions the Company is hedging for. Those hedges that do not qualify for hedge accounting are included in other income (expense).

For details on the assets and liabilities subject to fair value measurements and the related valuation techniques used, and for details on derivative instruments, refer to Note 11 of the Consolidated Financial Statements, “Fair Value of Financial Instruments”.

 

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Valuation of Long-Lived Assets and Intangibles

The Company reviews long-lived assets and intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We periodically evaluate the original assumptions and rationale utilized in the establishment of the carrying value and estimated lives of our long-lived assets. The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate income from operations and positive cash flow in future periods as well as the strategic significance of any intangible asset in the Company’s business objectives. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets, which is determined by applicable market prices, when available. For intangible assets not subject to amortization, the Company assesses for impairment at least annually. There was no material impairment loss recognized for long-lived assets during the years ended December 31, 2012, 2011 and 2010.

Property and Equipment

We capitalize major renewals and improvements that significantly add to productive capacity or extend the life of an asset. We expense repairs, maintenance, and minor renewals and improvements as incurred. We remove the cost of assets and related depreciation from the related accounts on the balance sheet when assets are sold, or otherwise disposed of, and any related gains or losses are reflected in current earnings. Leased capital assets are included in property and equipment. Depreciation of property and equipment under capital leases is included in depreciation expense. We compute depreciation expense of owned property and equipment based on the expected useful lives of the assets primarily using the straight-line method. We amortize leasehold improvements over their estimated useful lives or the term of the applicable lease, whichever is less.

Capitalized internal-use software costs include only those direct costs associated with the actual development or acquisition of computer software for internal use, including costs associated with the design, coding, installation and testing of the system. Costs associated with preliminary development, such as the evaluation and selection of alternatives, as well as training, maintenance and support are expensed as incurred. At December 31, 2012 and 2011 the Company had $129.0 million and $137.8 million in unamortized capitalized software costs, respectively. For the years ended December 31, 2012, 2011 and 2010, the Company amortized into expense $30.6 million, $27.0 million and $25.2 million, respectively, related to capitalized computer software costs.

Property and equipment consist of the following at December 31:

 

(in thousands)    Estimated
Useful Life
(in years)
     2012     2011  

Land

           $ 139,889      $ 140,738   

Building and improvements

     1-50         479,194        449,124   

Machinery and equipment

     1-10         497,370        445,880   

Internal use software

     1-10         263,376        246,520   

Construction in process

             78,064        63,485   
     

 

 

   

 

 

 

Total gross property and equipment

        1,457,893        1,345,747   

Accumulated depreciation and amortization

        (613,201     (512,069
     

 

 

   

 

 

 

Total property and equipment, net

      $ 844,692      $ 833,678   
     

 

 

   

 

 

 

Intangible Assets

Intangible assets are amortized using the straight-line method over their estimated useful lives. Amortization expense related to intangible assets associated with product sales for the years ended December 31, 2012, 2011 and 2010 was $291.8 million, $308.7 million and $293.8 million, respectively. Acquired in-process research and development assets are accounted for as indefinite life intangible assets subject to annual impairment test, or earlier if an event or circumstance indicates that impairment may have occurred, until completion or

 

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abandonment of the acquired projects. Upon reaching the end of the relevant research and development project, the Company will amortize the acquired in-process research and development over its estimated useful life or expense the acquired in-process research and development should the research and development project be unsuccessful with no future alternative use. In connection with acquisitions, $1.7 million of the purchase price was allocated to in-process research and development and expensed in the Consolidated Statements of Operations for the year ended December 31, 2010 according to SFAS 141, Accounting for Business Combinations. In addition, the Company recorded $0.8 million of amortization expense in other income (expense) for the year ended December 31, 2010, in connection with the joint venture investment that was divested in January 2010.

Intangible assets consist of the following:

 

     December 31, 2012     December 31, 2011  
(in thousands)    Weighted
average
life
     Gross
carrying
amount
     Accumulated
amortization
    Weighted
average
life
     Gross
carrying
amount
     Accumulated
amortization
 

Amortized intangible assets:

                

Purchased technology

     7 years       $ 1,270,012       $ (1,003,531     7 years       $ 1,239,574       $ (909,246

Purchased tradenames and trademarks

     9 years         329,588         (184,272     9 years         322,906         (150,840

Purchased customer base

     11 years         1,464,042         (544,736     11 years         1,441,472         (424,039

Other intellectual properties

     6 years         375,164         (250,295     6 years         336,312         (179,289
     

 

 

    

 

 

      

 

 

    

 

 

 
      $ 3,438,806       $ (1,982,834      $ 3,340,264       $ (1,663,414
     

 

 

    

 

 

      

 

 

    

 

 

 

Intangible assets not subject to amortization:

                

Purchased tradenames

      $ 7,451            $ 7,451      

In-process research and development

        62,400              62,400      

Estimated amortization expense for amortizable intangible assets owned as of December 31, 2012 for each of the five succeeding fiscal years is as follows:

 

(in thousands)       

Years Ending December 31,

  

2013

   $ 295,755   

2014

     247,936   

2015

     227,763   

2016

     175,370   

2017

     160,268   

Goodwill

Goodwill represents the excess purchase price of net tangible and intangible assets acquired in business combinations over their estimated fair value. In accordance with ASC Topic 350, Intangibles—Goodwill and Other, goodwill is tested for impairment on an annual basis and earlier if there is an indicator of impairment. The Company performs its goodwill impairment tests annually during the fourth quarter of its fiscal year and earlier if an event or circumstance indicates that impairment has occurred. The Company utilized a discounted cash flow analysis to estimate the fair value of each reporting unit. The evaluation included management estimates of cash flow projections based on internal future projections. Key assumptions from these projections included revenue growth, future gross and operating margin growth, and the Company’s weighted cost of capital. The Company also used internal allocations of assets and liabilities and Company specific discount rates to determine the estimated value of each reporting unit. Based on this analysis, the Company determined that no impairment exists at October 1, 2012. No indicators of impairments were noted through December 31, 2012 and consequently, no impairment charge has been recorded during the year.

 

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Changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011 are as follows:

 

(in thousands)    Total  

Balance at December 31, 2010

   $ 4,372,073   

Foreign currency translation

     (6,751

Other adjustments

     1,262   
  

 

 

 

Balance at December 31, 2011

   $ 4,366,584   

Goodwill acquired during the year

     114,913   

Foreign currency translation

     22,779   

Other adjustments

     (884
  

 

 

 

Balance at December 31, 2012

   $ 4,503,392   
  

 

 

 

Refer to Note 2 of the Consolidated Financial Statements, “Business Combinations and Divestitures” for further details on business acquisitions.

Accrued Expenses and Other Current Liabilities

Accrued Expenses and Other Current Liabilities consist of royalty accruals, hedge liabilities, product warranties, interest accruals, legal accruals and other current liabilities.

In February 2012, the Company received an unfavorable verdict in its litigation with Promega Corporation that resulted in charges to cost of revenues and a legal accrual of $52.0 million, which was recorded in the December 31, 2011 financial statements and remains recorded as a liability as of December 31, 2012. Although a federal judge reversed the verdict in September 2012, Promega responded to the judge’s decision by filing various motions for a new trial. The Company intends to vigorously challenge all motions for a new trial.

In November 2012, the Company received an unfavorable verdict in its litigation with Enzo Biochem, resulting in charges to cost of revenues and legal accruals totaling $60.9 million during the year ended December 31, 2012. The Company strongly disagrees with the verdict and intends to vigorously challenge it in the trial court and on appeal.

None of the other liabilities in Accrued Expenses and Other Current Liabilities was material at December 31, 2012 or 2011.

Research and Development Costs

Costs incurred in research and development activities are expensed as incurred. Research and development costs incurred for collaborations that generate revenue where there are specific product deliverables, and research and development services incurred for defined performances or other design specifications are recorded in cost of sales. During the years ended December 31, 2012, 2011 and 2010 research and development expenses were $341.9 million, $377.9 million and $375.5 million, respectively.

Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

Accounting for Share-Based Compensation

The Company accounts for share-based compensation under the guidance prescribed by ASC Topic 718, Compensation—Stock Compensation. The Company uses the Black-Scholes option-pricing model (Black-Scholes model) to estimate the fair value of share-based compensation cost at the grant date, which is recognized as expense over the employee’s requisite service period for all share-based awards granted and adjusted by modification or cancellation as necessary. For details on the share-based compensation recognized and assumptions used, refer to Note 10 of the Consolidated Financial Statements, “Employee Stock Plans”.

 

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Computation of Earnings Per Share

Basic earnings per share was computed by dividing net income attributable to Life Technologies by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur from the following items:

 

   

Convertible senior notes where the effect of those securities is dilutive;

   

Dilutive contingently issuable shares from business combinations;

   

Dilutive stock options and restricted stock units;

   

Dilutive performance awards; and

   

Dilutive Employee Stock Purchase Plan (ESPP).

Computations for basic and diluted earnings per share for the years ending December 31, 2012, 2011 and 2010 are as follows:

 

(in thousands, except per share amounts)    Net Income
(Numerator)
    Shares
(Denominator)
    Amount  

2012

      

Basic earnings per share:

      

Net income attributable to Life Technologies

   $ 430,855        175,831      $ 2.45   
      

 

 

 

Diluted earnings per share:

      

Dilutive stock options and restricted stock units

            3,519     

Employee Stock Purchase Plan

            7     

1 1/2% Convertible Senior Notes due 2024

     12        8     
  

 

 

   

 

 

   

Net income attributable to Life Technologies plus assumed conversions

   $ 430,867        179,365      $ 2.40   
  

 

 

   

 

 

   

 

 

 

Potentially dilutive securities not included above since they are antidilutive:

      

Antidilutive stock options and restricted stock units

       3,644     

2011

      

Basic earnings per share:

      

Net income attributable to Life Technologies

   $ 378,492        179,390      $ 2.11   
      

 

 

 

Diluted earnings per share:

      

Dilutive stock options and restricted stock units

            4,229     

Employee Stock Purchase Plan

            13     

Business combination contingently issuable shares

     1,169        1,438     

1 1/2% Convertible Senior Notes due 2024

     131        250     

3 1/4% Convertible Senior Notes due 2025

            275     
  

 

 

   

 

 

   

Net income attributable to Life Technologies plus assumed conversions

   $ 379,792        185,595      $ 2.05   
  

 

 

   

 

 

   

 

 

 

Potentially dilutive securities not included above since they are antidilutive:

      

Antidilutive stock options and restricted stock units

       3,582     

2010

      

Basic earnings per share:

      

Net income attributable to Life Technologies

   $ 378,295        183,398      $ 2.06   
      

 

 

 

Diluted earnings per share:

      

Dilutive stock options and restricted stock units

            4,647     

Employee Stock Purchase Plan

            108     

Dilutive performance awards

            66     

2% Convertible Senior Notes due 2023

     44        2,109     

1 1/2% Convertible Senior Notes due 2024

     127        73     

3 1/4% Convertible Senior Notes due 2025

            190     
  

 

 

   

 

 

   

Net income attributable to Life Technologies plus assumed conversions

   $ 378,466        190,591      $ 1.99   
  

 

 

   

 

 

   

 

 

 

Potentially dilutive securities not included above since they are antidilutive:

      

Antidilutive stock options and restricted stock units

       3,396     

 

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Accumulated Other Comprehensive Income and Components of Other Comprehensive Income

Accumulated other comprehensive income includes unrealized gains and losses that are excluded from the Consolidated Statements of Operations. The unrealized gains and losses include foreign currency translation adjustments, cash flow hedge adjustments, and pension liability adjustments, net of tax.

Accumulated other comprehensive income, net of taxes, attributable to Life Technologies, consists of the following at December 31,

 

(in thousands)    2012     2011  

Foreign currency translation adjustments

   $