10-Q 1 d30877d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2015

OR

 

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

For the transition period from                      to                     

COMMISSION FILE NUMBER 001-16789

 

 

 

LOGO

ALERE INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   04-3565120

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

51 SAWYER ROAD, SUITE 200

WALTHAM, MASSACHUSETTS 02453

(Address of principal executive offices)(Zip code)

(781) 647-3900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock, par value of $0.001 per share, as of November 4, 2015 was 86,254,320.

 

 

 


Table of Contents

ALERE INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2015

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. A number of important factors could cause actual results of Alere Inc. and its subsidiaries to differ materially from those indicated by such forward-looking statements. These factors include, but are not limited to, the risk factors detailed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2014 (as filed with the Securities and Exchange Commission on May 28, 2015) and other risk factors identified herein or from time to time in our periodic filings with the Securities and Exchange Commission. Readers should carefully review these risk factors, and should not place undue reliance on our forward-looking statements. These forward-looking statements are based on information, plans and estimates at the date of this report. We undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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

TABLE OF CONTENTS

 

 

         PAGE  

PART I. FINANCIAL INFORMATION

     3   

Item 1.

  Financial Statements (unaudited)      3   
 

a) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014

     3   
 

b) Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September  30, 2015 and 2014

     4   
 

c) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014

     5   
 

d) Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014

     6   
 

e) Notes to Consolidated Financial Statements

     7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      41   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      52   

Item 4.

  Controls and Procedures      52   

PART II. OTHER INFORMATION

     54   

Item 1.

 

Legal Proceedings

     54   

Item 1A.

 

Risk Factors

     54   

Item 6.

 

Exhibits

     55   

SIGNATURE

     56   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

 

    Three Months Ended September 30,     Nine Months Ended September 30,  
    2015     2014     2015     2014  

Net product sales

  $ 470,404      $ 507,625      $ 1,446,837      $ 1,499,302   

Services revenue

    128,341        137,403        378,825        406,547   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

    598,745        645,028        1,825,662        1,905,849   

License and royalty revenue

    3,299        4,182        13,691        15,998   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    602,044        649,210        1,839,353        1,921,847   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

    246,055        271,250        743,177        785,918   

Cost of services revenue

    79,803        75,102        232,137        221,356   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

    325,858        346,352        975,314        1,007,274   

Cost of license and royalty revenue

    1,137        1,236        4,431        3,900   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

    326,995        347,588        979,745        1,011,174   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    275,049        301,622        859,608        910,673   

Operating expenses:

       

Research and development

    36,011        38,726        91,225        114,855   

Sales and marketing

    106,493        122,760        322,756        391,605   

General and administrative

    101,306        104,794        254,810        338,986   

Impairment and (gain) loss on dispositions, net

    2,074       —         42,408        638   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    29,165        35,342        148,409        64,589   

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

    (52,333     (52,332     (158,258     (156,276

Other income (expense), net

    4,745        (8,087     7,735        2,164   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before provision (benefit) for income taxes

    (18,423     (25,077     (2,114     (89,523

Provision (benefit) for income taxes

    (18,924     65,489        (10,009     69,273   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    501        (90,566     7,895        (158,796

Equity earnings of unconsolidated entities, net of tax

    5,000        6,277        10,320        13,716   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    5,501        (84,289     18,215        (145,080

Income (loss) from discontinued operations, net of tax

    —          (14,401     216,777        (4,082
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    5,501        (98,690     234,992        (149,162

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

    (61     (306     386        (136
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    5,562        (98,384     234,606        (149,026

Preferred stock dividends

    (5,367     (5,367     (15,926     (15,926
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $ 195      $ (103,751   $ 218,680      $ (164,952
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per common share:

       

Income (loss) from continuing operations

  $ —        $ (1.08   $ 0.02      $ (1.94

Income (loss) from discontinued operations

    —          (0.17     2.55        (0.05
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

  $ —        $ (1.25   $ 2.57      $ (1.99
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per common share:

       

Income (loss) from continuing operations

  $ —        $ (1.08   $ 0.02      $ (1.94

Income (loss) from discontinuing operations

    —          (0.17     2.51        (0.05
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share

  $ —        $ (1.25   $ 2.53      $ (1.99
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares — basic

    85,895        83,115        85,141        82,719   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares — diluted

    87,169        83,115        86,279        82,719   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

 

3


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited)

(in thousands)

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
     2015     2014     2015     2014  

Net income (loss)

   $ 5,501      $ (98,690   $ 234,992      $ (149,162
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax:

        

Changes in cumulative translation adjustment

     (88,812     (96,425     (122,428     (69,950

Unrealized losses on available for sale securities

     —         —          —          (17

Unrealized gains on hedging instruments

     —          7        —          21   

Minimum pension liability adjustment

     419        481        (1,337     468   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

     (88,393     (95,937     (123,765     (69,478

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

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (88,393     (95,937     (123,765     (69,478
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (82,892     (194,627     111,227        (218,640

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

     (61     (306     386        (136
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (82,831   $ (194,321   $ 110,841      $ (218,504
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

4


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except par value)

 

     September 30, 2015     December 31, 2014  
ASSETS     

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 479,381      $ 378,461   

Restricted cash

     430,821        37,571   

Marketable securities

     157        259   

Accounts receivable, net of allowances of $89,915 and $76,163 at September 30, 2015 and December 31, 2014, respectively

     452,366        466,106   

Inventories, net

     362,226        365,165   

Deferred tax assets

     15,424        112,573   

Prepaid expenses and other current assets

     121,023        132,413   

Assets held for sale – current

     25,312        315,515   
  

 

 

   

 

 

 

Total current assets

     1,886,710        1,808,063   

Property, plant and equipment, net

     445,315        453,570   

Goodwill

     2,842,921        2,926,666   

Other intangible assets with indefinite lives

     28,744        43,651   

Finite-lived intangible assets, net

     1,052,949        1,276,444   

Restricted cash

     44,148       —     

Deferred financing costs, net and other non-current assets

     63,279        67,832   

Investments in unconsolidated entities

     73,882        91,693   

Deferred tax assets

     7,632        8,569   

Non-current income tax receivable

     2,537        2,468  

Assets held for sale – non-current

     126,048        —     
  

 

 

   

 

 

 

Total assets

   $ 6,574,165      $ 6,678,956   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

CURRENT LIABILITIES:

    

Short-term debt and current portion of long-term debt

   $ 604,092      $ 88,875   

Current portion of capital lease obligations

     3,505        4,241   

Accounts payable

     194,246        213,592   

Accrued expenses and other current liabilities

     315,336        375,494   

Liabilities related to assets held for sale – current

     8,836        78,843   
  

 

 

   

 

 

 

Total current liabilities

     1,126,015        761,045   
  

 

 

   

 

 

 

LONG-TERM LIABILITIES:

    

Long-term debt, net of current portion

     2,987,658        3,621,385   

Capital lease obligations, net of current portion

     6,270        10,560   

Deferred tax liabilities

     207,451        214,639   

Other long-term liabilities

     135,200        161,582   

Liabilities related to assets held for sale – non-current

     9,603        —     
  

 

 

   

 

 

 

Total long-term liabilities

     3,346,182        4,008,166   
  

 

 

   

 

 

 

Commitments and contingencies (Note 17)

    

STOCKHOLDERS’ EQUITY:

    

Series B preferred stock, $0.001 par value (liquidation preference: $709,763 at September 30, 2015 and December 31, 2014); Authorized: 2,300 shares; Issued: 2,065 shares at September 30, 2015 and December 31, 2014; Outstanding: 1,774 shares at September 30, 2015 and December 31, 2014

     606,468        606,468   

Common stock, $0.01 par value; authorized: 200,000 shares; Issued: 93,868 shares at September 30, 2015 and 91,532 shares at December 31, 2014; Outstanding: 86,189 shares at September 30, 2015 and 83,853 shares at December 31, 2014

     94        92   

Additional paid-in capital

     3,436,666        3,355,672   

Accumulated deficit

     (1,444,946     (1,679,552

Treasury stock, at cost, 7,679 shares at September 30, 2015 and December 31, 2014

     (184,971     (184,971

Accumulated other comprehensive loss

     (315,875     (192,110
  

 

 

   

 

 

 

Total stockholders’ equity

     2,097,436        1,905,599   

Non-controlling interests

     4,532        4,146   
  

 

 

   

 

 

 

Total equity

     2,101,968        1,909,745   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,574,165      $ 6,678,956   
  

 

 

   

 

 

 

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

 

5


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

     Nine Months Ended
September 30,
 
     2015     2014  

Cash Flows from Operating Activities:

    

Net income (loss)

   $ 234,992      $ (149,162

Income (loss) from discontinued operations, net of tax

     216,777        (4,082
  

 

 

   

 

 

 

Income (loss) from continuing operations

     18,215        (145,080

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

    

Tax benefit related to discontinued operations

     —          9,594   

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

     10,627        11,824   

Depreciation and amortization

     233,511        250,763   

Non-cash stock-based compensation expense

     19,596        7,751   

Impairment of inventory

     201        1,536   

Impairment of long-lived assets

     378        6,866   

Loss on sale of fixed assets

     3,273        4,679   

Equity earnings of unconsolidated entities, net of tax

     (10,320     (13,716

Deferred income taxes

     (46,740     9,557   

Loss related to impairment and net loss on dispositions

     42,323        638  

Loss on extinguishment of debt

     3,480       —     

Other non-cash items

     (4,785     3,683   

Non-cash change in fair value of contingent purchase price consideration

     (51,911     17,042  

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     (11,269     12,643   

Inventories, net

     (58,781     (30,446

Prepaid expenses and other current assets

     (14,953     (8,646

Accounts payable

     (16,000     38,687   

Accrued expenses and other current liabilities

     35,192        (8,501

Other non-current liabilities

     (8,790     33,221   

Cash paid for contingent purchase price consideration

     (6,315     (21,078
  

 

 

   

 

 

 

Net cash provided by continuing operations

     136,932        181,017   

Net cash provided by discontinued operations

     318        34,417   
  

 

 

   

 

 

 

Net cash provided by operating activities

     137,250        215,434   
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Increase in restricted cash

     (438,765     (3,227

Purchases of property, plant and equipment

     (67,947     (73,035

Proceeds from sale of property, plant and equipment

     1,486        1,144   

Cash received from dispositions, net of cash divested

     586,625        5,454   

Cash paid for business acquisitions, net of cash acquired

     (60,135     (75

Cash received from sales of marketable securities

     99        47   

Cash received from equity method investments

     14,297        198   

Proceeds from sale of equity investments

     —          9,526   

Decrease in other assets

     881        1,024   
  

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     36,541        (58,944

Net cash used in discontinued operations

     (209     (8,853
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     36,332        (67,797
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash paid for financing costs

     (16,053     (5

Cash paid for contingent purchase price consideration

     (14,079     (23,608

Cash paid for dividends

     (15,970     (15,970

Proceeds from issuance of common stock, net of issuance costs

     76,457        35,593   

Proceeds from issuance of short-term debt

     —          806   

Proceeds from issuance of long-term debt

     2,162,022        41   

Payments on short-term debt

     (25,584     —     

Payments on long-term debt

     (2,129,165     (47,302

Net proceeds (payments) under revolving credit facilities

     (126,603     498   

Excess tax benefits on exercised stock options

     6,102        415   

Principal payments on capital lease obligations

     (4,339     (4,639
  

 

 

   

 

 

 

Net cash used in continuing operations

     (87,212     (54,171

Net cash used in discontinued operations

     (76     (1,075
  

 

 

   

 

 

 

Net cash used in financing activities

     (87,288     (55,246
  

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     (8,674     (9,445
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     77,620        82,946   

Cash and cash equivalents, beginning of period—continuing operations

     378,461        355,431   

Cash and cash equivalents, beginning of period – discontinued operations

     23,300        6,477   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

     479,381        444,854   

Less: Cash and cash equivalents of discontinued operations, end of period

     —          13,503   
  

 

 

   

 

 

 

Cash and cash equivalents of continuing operations, end of period

   $ 479,381      $ 431,351   
  

 

 

   

 

 

 

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

 

6


Table of Contents

ALERE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis of Presentation of Financial Information

The accompanying consolidated financial statements of Alere Inc. are unaudited. In the opinion of management, the unaudited consolidated financial statements contain all adjustments considered normal and recurring and necessary for their fair statement. Interim results are not necessarily indicative of results to be expected for the year. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows. Our audited consolidated financial statements for the year ended December 31, 2014 included information and footnotes necessary for such presentation and were included in Amendment No. 2 to our Annual Report on Form 10-K/A filed with the Securities and Exchange Commission, or SEC, on May 28, 2015. These unaudited consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2014.

As a result of the sale of our health management business in January 2015, which was the largest component of our patient self-testing reporting segment, we no longer report our financial information in four operating segments. Our current reportable operating segments are professional diagnostics, consumer diagnostics and corporate and other. Financial information by segment for the three and nine months ended September 30, 2014 has been retroactively adjusted to reflect this change in reporting segments.

Certain reclassifications of prior period amounts have been made in order to retrospectively present discontinued operations. These reclassifications have no effect on net income or equity.

During the three and nine months ended September 30, 2015, we recorded $8.0 million of tax-related correcting adjustments related to prior periods which consisted of a $6.6 million net tax benefit related to U.S. taxes on foreign earnings and a $1.4 million tax benefit associated with a release of uncertain tax positions. We considered the correcting adjustments to be immaterial to both the prior periods and the current year financial statements.

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

(2) Discontinued Operations

On October 10, 2014, we completed the sale of our ACS subsidiary to ACS Acquisition, LLC (the “Purchaser”), pursuant to the terms of a Membership Interest Purchase Agreement with the Purchaser and Sumit Nagpal. In connection with the sale of ACS, we also agreed to sell our subsidiary Wellogic ME FZ – LLC (“Wellogic,” together with ACS, the “ACS Companies”) to the Purchaser, which we completed in June 2015. The ACS Companies were included in our patient self-testing segment prior to the sale. The purchase price for the ACS Companies consisted of cash proceeds of $2.00 at closing and contingent consideration of up to an aggregate of $7.0 million, consisting of (i) payments based on the gross revenues of the ACS Companies, (ii) payments to be made in connection with financing transactions by the Purchaser or the ACS Companies and (iii) payments to be made in connection with a sale by the Purchaser of the ACS Companies. In connection with the sale, we agreed to reimburse the Purchaser for up to $750,000 of the Purchaser’s and the ACS Companies’ transitional expenses. We accounted for our divestiture of the ACS Companies in accordance with ASC 205, Presentation of Financial Statements.

On January 9, 2015, we completed the sale of our health management business to OptumHealth Care Solutions for a purchase price of approximately $600.1 million, subject to a customary post-closing working capital adjustment. We used the net cash proceeds of the sale to repay $575.0 million in aggregate principal amount of outstanding indebtedness under our prior senior secured credit facility. In September 2015, we agreed to pay a post-closing working capital adjustment of $0.25 million, which was accrued on our consolidated balance sheet as of September 30, 2015.

We accounted for our divestiture of the health management business in accordance with Accounting Standards Update, or ASU, No. 2014-08. The following assets and liabilities associated with the health management business have been segregated and classified as assets held for sale and liabilities related to assets held for sale, as appropriate, in the consolidated balance sheet as of December 31, 2014 (in thousands):

 

     December 31, 2014  

Assets

  

Cash and cash equivalents

   $ 23,300   

Restricted cash

     361   

Accounts receivable, net of allowances of $5,882 at December 31, 2014

     50,902   

Inventories, net

     1,656   

Deferred tax assets – current

     6,939   

 

7


Table of Contents
     December 31, 2014  

Prepaid expenses and other current assets

     3,857   

Property, plant and equipment, net

     57,595   

Goodwill

     82,665   

Finite-lived intangible assets, net

     82,428   

Deferred tax assets – non-current

     3,347   

Other non-current assets

     2,465   
  

 

 

 

Total assets held for sale

   $ 315,515   
  

 

 

 

Liabilities

  

Current portion of capital lease obligations

   $ 799   

Accounts payable

     5,654   

Accrued expenses and other current liabilities

     32,822   

Capital lease obligations, net of current portion

     365   

Deferred tax liabilities – non-current

     27,453   

Other long-term liabilities

     11,750   
  

 

 

 

Total liabilities related to assets held for sale

   $ 78,843   
  

 

 

 

The following summarized financial information related to the businesses of the ACS Companies and the health management business has been segregated from continuing operations and has been reported as discontinued operations in our consolidated statements of operations. The results of the health management business are included in the nine months ended September 30, 2015, given our January 9, 2015 divestiture of this business. The results of the ACS Companies are included in the three and nine months ended September 30, 2014, given our October 31, 2014 divestiture of this business. The results are as follows (in thousands):

 

     Three Months
Ended September 30,
     Nine Months Ended September 30,  
     2014      2015      2014  

Net revenue

   $ 89,501       $ 7,373       $ 271,668   

Cost of net revenue

     (54,314      (4,413      (155,976

Sales and marketing

     (14,270      (996      (43,152

General and administrative

     (16,924      (5,001      (75,244

Interest expense

     (149      (9      (400

Other income (expense), net

     (117      160         (1,189

Gain on disposal

     —          366,191         —    
  

 

 

    

 

 

    

 

 

 

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

     3,727         363,305         (4,293

Provision (benefit) for income taxes

     18,128         146,528         (211
  

 

 

    

 

 

    

 

 

 

Income (loss) from discontinued operations, net of tax

   $ (14,401    $ 216,777       $ (4,082
  

 

 

    

 

 

    

 

 

 

(3) Cash and Cash Equivalents

We consider all highly-liquid cash investments with original maturities of three months or less at the date of acquisition to be cash equivalents. At September 30, 2015, our cash equivalents consisted of money market funds.

(4) Restricted Cash

We had restricted cash of $475.0 million and $37.6 million as of September 30, 2015 and December 31, 2014, respectively. Of the $475.0 million as of September 30, 2015, $425.9 million consisted of a deposit of funds with a trustee in connection with the satisfaction and discharge of our obligations associated with the October 1, 2015 redemption of our 8.625% senior subordinated notes due 2018, or the 8.625% notes. As of September 30, 2015, $44.1 million of our restricted cash was classified as non-concurrent on our consolidated balance sheet, as it secures a foreign bank loan arrangement that we entered into during the third quarter of 2015 and, under the terms of the loan agreement, is required to remain on deposit for two years unless the loan is terminated prior to maturity.

 

8


Table of Contents

(5) Inventories, Net

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

 

     September 30, 2015      December 31, 2014  

Raw materials

   $ 132,808       $ 122,886   

Work-in-process

     73,629         82,724   

Finished goods

     155,789         159,555   
  

 

 

    

 

 

 
   $ 362,226       $ 365,165   
  

 

 

    

 

 

 

(6) Stock-based Compensation

We recorded stock-based compensation expense in our consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014, as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015     2014  

Cost of net revenue

   $ 326       $ 291       $ 866      $ 863   

Research and development

     287         280         893        (340

Sales and marketing

     1,260         920         3,605        2,778   

General and administrative

     5,444         1,678         14,232        4,450   
  

 

 

    

 

 

    

 

 

   

 

 

 
     7,317         3,169         19,596        7,751   

Benefit for income taxes

     (472      (878      (5,374     (2,001
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 6,845       $ 2,291       $ 14,222      $ 5,750   
  

 

 

    

 

 

    

 

 

   

 

 

 

In connection with the departure of three of our senior executives, we recorded a reversal of stock-based compensation expense in the amount of $5.6 million during the second quarter of 2014 as a result of the termination of their stock option awards upon their departure. Of the $5.6 million reversal, $2.2 million was recorded through research and development expense and $3.4 million through general and administrative expense.

(7) Net Income (Loss) per Common Share

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015     2014  

Basic and diluted net income (loss) per common share:

          

Numerator:

          

Income (loss) from continuing operations

   $ 5,501       $ (84,289    $ 18,215      $ (145,080

Preferred stock dividends

     (5,367      (5,367      (15,926     (15,926
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations attributable to common shares

     134         (89,656      2,289        (161,006

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

     (61      (306      386        (136
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Alere Inc. and Subsidiaries

     195         (89,350      1,903        (160,870

Income (loss) from discontinued operations

     —          (14,401      216,777        (4,082
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ 195       $ (103,751    $ 218,680      $ (164,952
  

 

 

    

 

 

    

 

 

   

 

 

 

Denominator:

          

Weighted-average common shares outstanding — basic

     85,895         83,115         85,141        82,719   
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted-average common shares outstanding — diluted

     87,169         83,115         86,279        82,719   
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic net income (loss) per common share:

          

Income (loss) from continuing operations attributable to Alere Inc. and Subsidiaries

   $ 0.00       $ (1.08    $ 0.02      $ (1.94

Income (loss) from discontinued operations

     —          (0.17      2.55        (0.05
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic net income (loss) per common share

   $ 0.00       $ (1.25    $ 2.57      $ (1.99
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted net income (loss) per common share:

          

Income (loss) from continuing operations

   $ 0.00       $ (1.08    $ 0.02      $ (1.94

Income (loss) from discontinuing operations

     —           (0.17      2.51        (0.05
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted net income (loss) per common share

   $ 0.00       $ (1.25    $ 2.53      $ (1.99
  

 

 

    

 

 

    

 

 

   

 

 

 

 

9


Table of Contents

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Denominator:

           

Options to purchase shares of common stock

     7,062         7,687         7,062         7,687   

Warrants

     —           4         4         4   

Conversion shares related to 3% convertible senior subordinated notes

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

Conversion shares related to subordinated convertible promissory notes

     27         27         27         27   

Conversion shares related to Series B convertible preferred stock

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

 

 

    

 

 

    

 

 

    

 

 

 

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

     20,739         21,368         20,743         21,368   
  

 

 

    

 

 

    

 

 

    

 

 

 

(8) Stockholders’ Equity and Non-controlling Interests

(a) Preferred Stock

For each of the three and nine months ended September 30, 2015 and 2014, Series B preferred stock dividends amounted to $5.3 million and $15.9 million, respectively, which reduced earnings available to common stockholders for purposes of calculating net income (loss) per common share for each of the respective periods. As of September 30, 2015, $5.3 million of Series B preferred stock dividends was accrued. As of October 15, 2015, payments have been made covering all dividend periods through September 30, 2015.

The Series B preferred stock dividends for the three and nine months ended September 30, 2015 and 2014 were paid in cash.

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

A summary of the changes in stockholders’ equity and non-controlling interests comprising total equity for the nine months ended September 30, 2015 and 2014 is provided below (in thousands):

 

 

     Nine Months Ended September 30,  
     2015     2014  
     Total
Stockholders’
Equity
    Non-
controlling
Interests
     Total
Equity
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 

Equity, beginning of period

   $ 1,905,599      $ 4,146       $ 1,909,745      $ 2,073,256      $ 4,882      $ 2,078,138   

Issuance of common stock under employee compensation plans

     76,457        —          76,457        35,593        —         35,593   

Tax withholdings related to net

share settlement of restricted

stock units

     (2,240     —           (2,240     —          —          —     

Preferred stock dividends

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

Stock-based compensation expense

     19,596        —          19,596        7,751        —         7,751   

Excess tax benefits on exercised stock options

     3,153        —          3,153        (6,302     —         (6,302

Net income (loss)

     234,606        386         234,992        (149,026     (136     (149,162

Total other comprehensive loss

     (123,765     —          (123,765     (69,478     —         (69,478
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Equity, end of period

   $ 2,097,436      $ 4,532       $ 2,101,968      $ 1,875,824      $ 4,746      $ 1,880,570   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

(9) Business Combinations

We account for acquisitions using the acquisition method and include the financial results of the acquired company in our consolidated financial statements from the date of acquisition.

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

Net assets acquired are initially recorded at their fair value on a preliminary basis and are subject to adjustment upon finalization of the fair value analysis. The estimated useful lives of the individual categories of intangible assets were based on the nature of the applicable intangible asset and the expected future cash flows to be derived from the intangible asset. Amortization of intangible assets with finite lives is recognized over the shorter of the respective lives of the agreement or the period of time the intangible assets are expected to contribute to future cash flows. We amortize our finite-lived intangible assets based on patterns on which the respective economic benefits are expected to be realized.

During the three and nine months ended September 30, 2015, we expensed acquisition-related costs of $0.2 million and $0.3 million, respectively, in general and administrative expense. During the three and nine months ended September 30, 2014, we expensed acquisition-related costs of $0.3 million and $0.7 million, respectively, in general and administrative expense.

Acquisitions in 2015

US Diagnostics

On July 10, 2015, we acquired substantially all of the assets of US Diagnostics, Inc., or USD, located in Huntsville, Alabama, a provider of instant on-site drug testing products designed for quick and accurate drug test results. The aggregate purchase price was approximately $60.1 million and was paid in cash. The operating results of USD are included in our professional diagnostics reporting unit and business segment.

Our consolidated statements of operations for each of the three and nine months ended September 30, 2015 included revenue totaling approximately $5.0 million related to this business. Goodwill has been recognized in the acquisition and amounted to approximately $29.4 million, which is deductible for tax purposes.

A summary of the preliminary fair values of the net assets acquired from USD is as follows (in thousands):

 

 

     Total  

Current assets

   $ 4,652   

Property, plant and equipment

     182   

Goodwill

     29,422   

Intangible assets

     27,200   
  

 

 

 

Total assets acquired

   $ 61,456   
  

 

 

 

Current liabilities

   $ 1,321   
  

 

 

 

Total liabilities assumed

   $ 1,321   
  

 

 

 

Net assets acquired

   $ 60,135   
  

 

 

 

Cash paid

   $ 60,135   
  

 

 

 

 

11


Table of Contents

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

 

     Total      Weighted-
average
Useful Life
 

Trademarks

   $ 1,600         3.0 - 13.0 years   

Customer relationships

     24,900         13.0 years   

Non-compete agreements

     700         2.0 years   
  

 

 

    

Total intangible assets

   $ 27,200      
  

 

 

    

(10) Restructuring Plans

The following table sets forth aggregate restructuring charges recorded in our consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

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

Statement of Operations Caption

   2015      2014      2015      2014  

Cost of net revenue

   $ 522       $ 5,654       $ 2,921       $ 6,707   

Research and development

     18         5,457         667         8,488   

Sales and marketing

     619         1,019         2,572         7,420   

General and administrative

     1,105         5,167         5,227         14,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     2,264         17,297         11,387         37,075   

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

     6         9         19         32   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 2,270       $ 17,306       $ 11,406       $ 37,107   
  

 

 

    

 

 

    

 

 

    

 

 

 

(a) 2014 Restructuring Plans

In 2014, management developed world-wide cost reduction plans to reduce costs and improve operational efficiencies within our professional diagnostics and corporate and other business segments, primarily impacting our global sales and marketing, information technology and research and development groups, as well as closing certain business locations in Europe and Asia. The following table summarizes the restructuring activities related to our 2014 restructuring plans for the three and nine months ended September 30, 2015 and 2014 and since inception of these restructuring plans (in thousands):

 

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

Professional Diagnostics

   2015      2014      2015      2014         

Severance-related costs

   $ 1,322       $ 5,827       $ 5,385       $ 17,923       $ 33,192   

Facility and transition costs

     132         1,713         3,045         1,894         6,505   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     1,454         7,540         8,430         19,817         39,697   

Fixed asset and inventory impairments

     124         6,322         579         8,402         11,530   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 1,578       $ 13,862       $ 9,009       $ 28,219       $ 51,227   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Corporate and Other

   2015      2014      2015     2014         

Severance-related costs

   $ 686       $ 199       $ 1,297      $ 2,399       $ 4,198   

Facility and transition costs

     —           2,979         (13     4,929         11,322   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total cash charges

   $ 686       $ 3,178       $ 1,284      $ 7,328       $ 15,520   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

We anticipate incurring approximately $4.2 million in additional costs under our 2014 restructuring plans related to our professional diagnostics business segment, primarily related to the closure of our manufacturing facility in Israel. We may develop additional restructuring plans over the remainder of 2015. As of September 30, 2015, $4.1 million in severance and transition costs arising under our 2014 restructuring plans remain unpaid.

 

12


Table of Contents

(b) Restructuring Plans Prior to 2014

In 2013, management developed cost reduction plans within our professional diagnostics segment impacting businesses in our United States, Europe and Asia Pacific regions. In 2011, management developed plans to consolidate operating activities among certain of our United States, European and Asia Pacific subsidiaries, including transferring the manufacturing of our Panbio products from Australia to our Standard Diagnostics facility in South Korea and eliminating redundant costs among our Axis-Shield subsidiaries. Additionally, in 2008, management developed and initiated plans to transition the Cholestech business to our San Diego, California facility.

The following table summarizes the restructuring activities within our professional diagnostics business segment related to our active 2013, 2011 and 2008 restructuring plans for the three and nine months ended September 30, 2015 and 2014 and since inception of these plans (in thousands):

 

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

Professional Diagnostics

   2015      2014      2015      2014         

Severance-related costs

   $ —         $ 56       $ —         $ 990       $ 26,926   

Facility and transition costs

     —           201         1,094         537         11,574   

Other exit costs

     6         9         19         33         817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash charges

     6         266         1,113         1,560         39,317   

Fixed asset and inventory impairments

     —          —          —          —          6,776   

Intangible asset impairments

     —                 —          —          686   

Other non-cash charges

     —          —          —          —          64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total charges

   $ 6       $ 266       $ 1,113       $ 1,560       $ 46,843   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We do not anticipate incurring significant additional costs under these plans related to our professional diagnostics business segment. As of September 30, 2015, $1.1 million in cash charges remain unpaid under our restructuring plans prior to 2014, primarily related to facility lease obligations, which are anticipated to continue through 2020.

(c) Restructuring Reserves

The following table summarizes our restructuring reserves related to the restructuring plans described above, of which $4.6 million is included in accrued expenses and other current liabilities and $0.7 million is included in other long-term liabilities on our consolidated balance sheets (in thousands):

 

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

Balance, December 31, 2014

   $ 4,590       $ 9,868       $ 290       $ 14,748   

Cash charges

     6,288         4,387         19         10,694   

Payments

     (8,460      (11,166      (99      (19,725

Currency adjustments

     (156      (303              (459
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30, 2015

   $ 2,262       $ 2,786       $ 210       $ 5,258   
  

 

 

    

 

 

    

 

 

    

 

 

 

(11) Debt

We had the following long-term debt balances outstanding as of the dates indicated (in thousands):

 

     September 30, 2015      December 31, 2014  

A term loans(1)

   $ 638,823       $ —    

B term loans(1)

     1,044,842         —    

Prior credit facility—A term loans(2)

     —          785,938   

Prior credit facility—B term loans(3)

     —          1,330,810   

Prior credit facility—Revolving loans

     —          127,000   

7.25% Senior notes

     450,000         450,000   

6.5% Senior subordinated notes

     425,000         425,000   

6.375% Senior subordinated notes

     425,000         —    

 

13


Table of Contents
     September 30, 2015      December 31, 2014  

8.625% Senior subordinated notes(4)

     400,000         400,000   

3% Convertible senior subordinated notes(5)

     150,000         150,000   

Other lines of credit

     1,052         684   

Other

     57,033         40,828   
  

 

 

    

 

 

 
     3,591,750         3,710,260   

Less: Short-term debt and current portion of long-term debt

     (604,092      (88,875
  

 

 

    

 

 

 

Long-term debt

   $ 2,987,658       $ 3,621,385   
  

 

 

    

 

 

 

 

(1)  Incurred under our secured credit facility entered into on June 18, 2015.
(2)  Included “A” term loans and “Delayed Draw” term loans under our prior credit facility.
(3)  Included term loans previously referred to as “Incremental B-1” term loans and “Incremental B-2” term loans under our prior credit facility, which term loans had been converted into and consolidated with the “B” term loans under our prior credit facility.
(4)  On October 1, 2015, we redeemed the entire $400.0 million principal amount of the 8.625% senior subordinated notes pursuant to the notice of optional redemption that we issued to the holders thereof on June 24, 2015. The redemption price was equal to 102.156% of the principal amount of such notes plus accrued and unpaid interest from April 1, 2015 to (but excluding) October 1, 2015. The balance of such notes is included in the short-term debt and current portion of long-term debt on our consolidated balance sheet as of September 30, 2015, as the redemption notice created an obligation to pay the balance on October 1, 2015. The redemption was funded with $425.9 million of cash that had been held in an irrevocable trust with the trustee for such notes, which is classified as restricted cash on our consolidated balance sheet as of September 30, 2015. Upon settlement of the redemption on October 1, 2015, we satisfied and discharged all of our obligations with respect to such notes.
(5)  The balance of the 3% convertible senior subordinated notes is included in the short-term debt and current portion of long-term debt on our consolidated balance sheet as of September 30, 2015, as these notes mature on May 15, 2016.

In connection with our debt issuances, we recorded interest expense, including amortization and write-offs of deferred financing costs and original issue discounts, in our consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014, as follows (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Secured credit facility (1)

   $ 18,161       $ —        $ 20,763       $ —    

Prior credit facility (2) (3)

     —           24,985         49,437         74,606   

7.25% Senior notes

     8,524         8,525         25,573         25,574   

6.5% Senior subordinated notes

     7,274         7,180         21,741         21,534   

6.375% Senior subordinated notes

     7,002         —          7,544         —    

8.625% Senior subordinated notes

     9,273         9,271         27,820         27,819   

3% Senior subordinated convertible notes

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

Other

     853         1,125         1,642         3,005   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 52,333       $ 52,332       $ 158,258       $ 156,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Includes “A” term loans, “B” term loans and revolving line of credit loans.
(2)  Includes the following loans under our prior credit facility: “A” term loans, including the “Delayed-Draw” term loans; “B” term loans, including the term loans previously referred to as “Incremental B-1” term loans and “Incremental B-2” term loans and later converted into and consolidated into the “B” term loans; and revolving line of credit loans. For the three and nine months ended September 30, 2015, the amounts include $0.4 million and $1.1 million, respectively, related to the amortization of fees paid for certain debt modifications. For the three and nine months ended September 30, 2014, the amounts include $0.4 million and $1.1 million, respectively, related to the amortization of fees paid for certain debt modifications.
(3)  Includes a $3.5 million loss on extinguishment of debt associated with our prior credit facility during the nine months ended September 30, 2015.

 

14


Table of Contents

(a) Secured Credit Facility

On June 18, 2015, we entered into a Credit Agreement, or secured credit facility, with certain lenders, Goldman Sachs Bank USA, as B term loan administrative agent, General Electric Capital Corporation as pro rata administrative agent and collateral agent, and certain other agents and arrangers, and, along with certain of our subsidiaries, a related guaranty and security agreement. The secured credit facility provides for (i) term loans in the aggregate amount of $1.7 billion (consisting of “A” term loans in the aggregate principal amount of $650.0 million and “B” term loans in the aggregate principal amount of $1,050.0 million), all of which were drawn at closing, and (ii) subject to our continued compliance with the terms of the secured credit facility, a $250.0 million revolving line of credit (which revolving line of credit includes a $50.0 million sublimit for the issuance of letters of credit); no amount was drawn under the revolving credit facility at closing.

We used approximately $1.68 billion of the proceeds of the term loans drawn at closing to repay in full all indebtedness outstanding under our prior credit facility, whereupon such agreement was terminated (as described below), and to pay various fees and expenses associated with the transactions contemplated by the secured credit facility. Subject to certain limits and restrictions, we may use the remaining proceeds of the term loans, the proceeds of any revolving credit loans and the proceeds of any incremental term loans (described below) or incremental revolving credit commitments (described below) to finance permitted acquisitions, to finance capital expenditures, to provide working capital and for other general corporate purposes.

We must repay the “A” term loans in nineteen consecutive quarterly installments, beginning on September 30, 2015 and continuing through March 31, 2020, in the principal amount of $8,125,000 each, followed by a final installment on June 18, 2020, in the principal amount of $495,625,000. We must repay the “B” term loans in twenty-seven consecutive quarterly installments, beginning on September 30, 2015 and continuing through March 31, 2022, in the principal amount of $2,625,000 each, and a final installment on June 18, 2022, in the principal amount of $979,125,000. We may repay any future borrowings under the secured credit facility revolving line of credit at any time (without premium or penalty), but in no event later than June 18, 2020.

We are required to make mandatory prepayments of the term loans and mandatory prepayments of any revolving credit loans in various amounts if we have Excess Cash Flow (as defined in the Credit Agreement, and commencing in respect of our fiscal year ending December 31, 2016), if we issue certain types of debt, if we make certain sales of assets outside the ordinary course of business above certain thresholds or if we suffer certain property loss events above certain thresholds. We may make optional prepayments of the term loans from time to time without any premium or penalty, subject to a customary 101% “soft call” protection with respect to certain prepayments or a repricing event with respect to the “B” term loans occurring on or before December 18, 2015.

The “A” term loans and any borrowings under the revolving credit facility bear interest at a rate per annum of, at our option, either (i) the Base Rate, as defined in the Credit Agreement, plus an applicable margin of 2.00%, or (ii) the Eurodollar Rate, as defined in the Credit Agreement, plus an applicable margin of 3.00%. The “B” term loans bear interest at a rate per annum of, at our option, either (i) the Base Rate plus an applicable margin of 2.00% or 2.25% depending on our consolidated secured net leverage ratio, or (ii) the Eurodollar Rate plus an applicable margin of 3.00% or 3.25% depending on our consolidated secured net leverage ratio. The Eurodollar Rate is subject to a 1.00% floor with respect to “B” term loans based on the Eurodollar Rate. We are required to pay a fee on the unused portion of the revolving credit facility at a rate per annum equal to 0.50%. As of September 30, 2015, the “A” term loans and the “B” term loans bore interest at 3.20% and 4.25%, respectively. As of September 30, 2015, there were no borrowings under the revolving line of credit under the secured credit facility.

Subject to our pro forma compliance with certain financial tests and certain other terms and conditions set forth in the Credit Agreement, we may request at any time that the lenders under the Credit Agreement and/or other financial institutions that become lenders thereunder make incremental term loans or provide incremental revolving credit commitments under the Credit Agreement in addition to the committed credit facilities described above, subject to our obtaining the agreement of the relevant new or existing lenders, as the case may be. The Credit Agreement also includes (i) certain provisions that allow us to add one or more new term loan facilities or new revolving credit facilities in order to refinance all or a portion of the term loans or revolving credit commitments and (ii) certain “amend and extend” provisions that allow us to extend the maturity date of any term loans or revolving credit commitments (and make related changes to the terms of the relevant loans), subject in each case to our obtaining the agreement of the relevant new or existing lenders, as the case may be.

We must comply with various financial and non-financial covenants under the terms of the secured credit facility, which are set forth in the Credit Agreement. The primary financial covenant under the security credit facility consists of a maximum consolidated secured net leverage ratio applicable only to the “A” term loans and the revolving credit loans. The non-financial covenants are subject to certain important exceptions and qualifications.

 

15


Table of Contents

The lenders under the secured credit facility are entitled to accelerate repayment of the loans and terminate the revolving credit commitments thereunder upon the occurrence of any of various events of default as described in the Credit Agreement.

Borrowings under the secured credit facility are guaranteed by substantially all of our domestic subsidiaries (other than unrestricted subsidiaries and domestic subsidiaries of certain of our foreign subsidiaries) and are secured by the stock of substantially all of our domestic subsidiaries (other than unrestricted subsidiaries and domestic subsidiaries of certain of our foreign subsidiaries), portions of the stock of certain of our foreign subsidiaries, and substantially all of our and our guarantor subsidiaries’ other property and assets, in each case subject to various exceptions.

As of September 30, 2015, aggregate borrowings under the secured credit facility amounted to $1.7 billion, consisting of “A” term loans in the aggregate principal amount of $638.8 million (giving effect to the installment repayment due on such date) and “B” term loans in the aggregate principal amount of $1,044.8 million (giving effect to the installment repayment due on such date). As of September 30, 2015, we were in compliance with the maximum consolidated secured net leverage ratio under the secured credit facility.

(b) Prior Credit Facility

In connection with entering into the secured credit facility on June 18, 2015, we repaid in full all outstanding indebtedness under and terminated our prior Credit Agreement, or prior credit facility, dated as of June 30, 2011, as amended from time to time, with certain lenders, General Electric Capital Corporation as administrative agent and collateral agent, and certain other agents and arrangers, and certain related guaranty and security agreements. The aggregate outstanding principal amount of the loans repaid under our prior credit facility in connection with the termination thereof was approximately $1.65 billion. We assessed this repayment on a lender-by-lender basis in order to differentiate the portion constituting an extinguishment and the portion constituting a modification. Unamortized deferred financing fees relating to the extinguished portion of the prior credit facility debt were expensed, and the portion relating to modifications of the prior credit facility debt were carried forward to be amortized over the contractual life of the new secured credit facility.

(c) 6.375% Senior Subordinated Notes

On June 24, 2015, we sold a total of $425.0 million aggregate principal amount of 6.375% senior subordinated notes due 2023, or the 6.375% senior subordinated notes, in a private placement to initial purchasers, who agreed to resell the notes only to qualified institutional buyers and to persons outside the United States; we sold the 6.375% senior subordinated notes at an initial offering price of 100%. Net proceeds from this offering amounted to $417.3 million, which were net of the initial purchasers’ discount and offering expenses totaling approximately $7.7 million.

The 6.375% senior subordinated notes were issued under a supplemental indenture dated June 24, 2015, or the 6.375% Indenture. The 6.375% senior subordinated notes accrue interest at the rate of 6.375% per annum. Interest on the 6.375% senior subordinated notes is payable semi-annually on January 1 and July 1 of each year, beginning on January 1, 2016. The 6.375% senior subordinated notes mature on July 1, 2023, unless earlier redeemed.

We may, at our option, redeem the 6.375% senior subordinated notes, in whole or part, at any time (which may be more than once) on or after July 1, 2018 by paying the principal amount of the notes being redeemed plus a declining premium, plus accrued and unpaid interest to (but excluding) the redemption date. The premium declines from 4.781% during the twelve months on and after July 1, 2018, to 3.188% during the twelve months on and after July 1, 2019, to 1.594% during the twelve months on and after July 1, 2020, to zero on and after July 1, 2021. In addition, at any time (which may be more than once) prior to July 1, 2018, we may, at our option, redeem up to 35% of the aggregate principal amount of the 6.375% senior subordinated notes with money that we raise in certain qualifying equity offerings, so long as (i) we pay 106.375% of the principal amount of the notes being redeemed, plus accrued and unpaid interest to (but excluding) the redemption date; (ii) we redeem the 6.375% senior subordinated notes within 90 days of completing such equity offering; and (iii) at least 65% of the aggregate principal amount of the 6.375% senior subordinated notes remains outstanding afterwards. In addition, at any time (which may be more than once) prior to July 1, 2018, we may, at our option, redeem some or all of the 6.375% senior subordinated notes by paying the principal amount of the 6.375% senior subordinated notes being redeemed plus a make-whole premium, plus accrued and unpaid interest to (but excluding) the redemption date.

If a change of control occurs, subject to specified conditions, we must give holders of the 6.375% senior subordinated notes an opportunity to sell their notes to us at a purchase price of 101% of the principal amount of the notes, plus accrued and unpaid interest to (but excluding) the date of the purchase.

 

16


Table of Contents

If we or our restricted subsidiaries engage in asset sales, we or they generally must either invest the net cash proceeds from such sales in our or their businesses within a specified period of time, repay senior indebtedness or make an offer to purchase a principal amount of the 6.375% senior subordinated notes equal to the excess net cash proceeds, subject to certain exceptions. The purchase price of the 6.375% senior subordinated notes would be 100% of their principal amount, plus accrued and unpaid interest.

The 6.375% Indenture provides that we and our restricted subsidiaries must comply with various covenants, which are subject to certain important exceptions and qualifications, which are set forth in the 6.375% Indenture. At any time the 6.375% senior subordinated notes are rated investment grade, certain covenants will be suspended with respect to them.

The 6.375% Indenture contains events of default entitling the trustee or the holders of the 6.375% senior subordinated notes to declare all amounts owed pursuant to the 6.375% senior subordinated notes immediately payable if any such event of default occurs.

The 6.375% senior subordinated notes are our senior subordinated unsecured obligations, are subordinated in right of payment to all of our existing and future senior debt, including our borrowings under our secured credit facility and our 7.25% senior notes, and are equal in right of payment with all of our existing and future senior subordinated debt, including our 8.625% senior subordinated notes (our obligations in respect of which have been fully satisfied and discharged, as described below), our 6.5% senior subordinated notes and our 3% convertible senior subordinated notes. Our obligations under the 6.375% senior subordinated notes and the 6.375% Indenture are fully and unconditionally guaranteed, jointly and severally, on a senior subordinated unsecured basis by certain of our domestic subsidiaries, and the obligations of such domestic subsidiaries under their guarantees are subordinated in right of payment to all of their existing and future senior debt and equal in right of payment to all of their existing and future senior subordinated debt. See Note 23 for guarantor financial information.

(d) 8.625% Senior Subordinated Notes

On June 24, 2015, we issued a notice of optional redemption to the holders of 8.625% notes that, on October 1, 2015 (the redemption date), we would redeem the entire principal amount of the 8.625% notes then outstanding at a redemption price equal to 102.156% of the principal amount of the 8.625% notes to be redeemed plus accrued and unpaid interest from April 1, 2015 to (but excluding) the redemption date, upon the terms set forth in the notice of optional redemption. The balance of the 8.625% notes is included in the short-term debt and current portion of long-term debt on our consolidated balance sheet as of September 30, 2015 as the redemption notice created an obligation to pay the balance on October 1, 2015. We transferred an amount equal to the net proceeds received from the 6.375% notes of $417.3 million plus additional cash of $8.6 million, or a total of $425.9 million, into an irrevocable trust, which was used to fund the redemption of the 8.625% notes on October 1, 2015. The $425.9 million is classified on our consolidated balance sheet as of September 30, 2015 as restricted cash. We redeemed the entire $400.0 million aggregate principal amount of the 8.625% notes on October 1, 2015 and, upon settlement of the redemption on that date, we satisfied and discharged all of our obligations with respect to the 8.625% notes.

 

17


Table of Contents

(12) Fair Value Measurements

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

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

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

Level 2—Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following tables present information about our assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

Description

   September 30,
2015
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 157       $ 157       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 157       $ 157       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 63,591       $ —         $ —         $ 63,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 63,591       $ —         $ —         $ 63,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Description

   December 31,
2014
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 259       $ 259       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 259       $ 259       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 139,671       $ —         $ —         $ 139,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 139,671       $ —         $ —         $ 139,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  We determine the fair value of the contingent consideration obligations based on a probability-weighted approach derived from earn-out criteria estimates and a probability assessment with respect to the likelihood of achieving the various earn-out criteria. The measurement is based upon significant inputs not observable in the market. Significant increases or decreases in any of these inputs could result in a significantly higher or lower fair value measurement. Changes in the fair value of these contingent consideration obligations are recorded as income or expense within operating income in our consolidated statements of operations. See Note 17(a) for additional information on the valuation of our contingent consideration obligations.

 

18


Table of Contents

Changes in the fair value of our Level 3 contingent consideration obligations during the nine months ended September 30, 2015 were as follows (in thousands):

 

Fair value of contingent consideration obligations, December 31, 2014

   $ 139,671   

Payments

     (21,928

Present value accretion and adjustments

     (54,168

Foreign currency adjustments

     16   
  

 

 

 

Fair value of contingent consideration obligations, September 30, 2015

   $ 63,591   
  

 

 

 

At September 30, 2015 and December 31, 2014, the carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and other current liabilities approximated their estimated fair values.

The carrying amount and estimated fair value of our debt were both $3.6 billion at September 30, 2015. The carrying amount and estimated fair value of our debt were both $3.7 billion at December 31, 2014. The estimated fair value of our debt was determined using market sources that were derived from available market information (Level 2 in the fair value hierarchy) and may not be representative of actual values that could have been or will be realized in the future.

(13) Defined Benefit Pension Plan

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

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015     2014  

Service cost

   $ —        $ —        $ —       $ —    

Interest cost

     234         202         694        604   

Expected return on plan assets

     (240      (191      (712     (571

Amortization of prior service costs

     344         111         1,019        333   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net periodic benefit cost

   $ 338       $ 122       $ 1,001      $ 366   
  

 

 

    

 

 

    

 

 

   

 

 

 

(14) Financial Information by Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. As a result of the sale of our health management business in January 2015, which was the largest component of our patient self-testing reporting segment, we no longer report our financial information in four operating segments. Our current reportable operating segments are professional diagnostics, consumer diagnostics, and corporate and other. The information below for the three and nine months ended September 30, 2014 has been retroactively adjusted to reflect this change in reporting segments. Our operating results include license and royalty revenue which are allocated to professional diagnostics and consumer diagnostics on the basis of the original license or royalty agreement. We evaluate performance of our operating segments based on revenue and operating income (loss). Segment information for the three and nine months ended September 30, 2015 and 2014 and as of September 30, 2015 and December 31, 2014 is as follows (in thousands):

 

     Professional
Diagnostics
     Consumer
Diagnostics
     Corporate
and
Other
    Total  

Three Months Ended September 30, 2015:

          

Net revenue

   $ 583,297       $ 18,747       $ —       $ 602,044   

Operating income (loss)

   $ 54,452       $ 1,038       $ (26,325   $ 29,165   

Impairment and (gain) loss on dispositions, net

   $ 2,074       $ —        $ —       $ 2,074   

Depreciation and amortization

   $ 83,817       $ 717       $ 1,966      $ 86,500   

Restructuring charge

   $ 1,578       $ —        $ 686      $ 2,264   

Stock-based compensation

   $ —        $ —        $ 7,317      $ 7,317   

Three Months Ended September 30, 2014:

          

Net revenue

   $ 628,012       $ 21,198       $ —       $ 649,210   

Operating income (loss)

   $ 64,986       $ 3,742       $ (33,386   $ 35,342   

Depreciation and amortization

   $ 80,366       $ 841       $ 1,917      $ 83,124   

Restructuring charge

   $ 14,119       $ —        $ 3,178      $ 17,297   

Stock-based compensation

   $ —        $ —        $ 3,169      $ 3,169   

Nine Months Ended September 30, 2015:

          

Net revenue

   $ 1,773,993       $ 65,360       $ —       $ 1,839,353   

Operating income (loss)

   $ 219,544       $ 4,321       $ (75,456   $ 148,409   

 

19


Table of Contents
     Professional
Diagnostics
     Consumer
Diagnostics
     Corporate
and
Other
     Total  

Impairment and (gain) loss on dispositions, net

   $ 42,408       $ —        $ —        $ 42,408   

Depreciation and amortization

   $ 226,383       $ 2,153       $ 4,975       $ 233,511   

Restructuring charge

   $ 10,103       $ —        $ 1,284       $ 11,387   

Stock-based compensation

   $ —        $ —        $ 19,596       $ 19,596   

Nine Months Ended September 30, 2014:

           

Net revenue

   $ 1,856,629       $ 65,218       $ —        $ 1,921,847   

Operating income (loss)

   $ 129,446       $ 10,617       $ (75,474    $ 64,589   

Impairment and (gain) loss on dispositions, net

   $ 638       $ —        $ —        $ 638   

Depreciation and amortization

   $ 244,698       $ 2,604       $ 3,461       $ 250,763   

Restructuring charge

   $ 29,747       $ —        $ 7,328       $ 37,075   

Stock-based compensation

   $ —        $ —        $ 7,751       $ 7,751   

Assets:

           

As of September 30, 2015

   $ 5,749,115       $ 200,491       $ 624,559       $ 6,574,165   

As of December 31, 2014

   $ 6,323,944       $ 216,451       $ 138,561       $ 6,678,956   

The following table summarizes our net product sales and services revenue from the professional diagnostics reporting segment by groups of similar products and services, along with license and royalty revenue, for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30,  
     2015      2014      2015      2014  

Cardiometabolic

   $ 208,319       $ 208,248       $ 624,823       $ 631,452   

Infectious disease

     163,759         184,018         519,145         526,632   

Toxicology

     162,571         166,381         468,822         491,561   

Other

     45,349         65,183         147,512         190,986   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total professional diagnostics net product sales and services revenue

     579,998         623,830         1,760,302         1,840,631   

License and royalty revenue

     3,299         4,182         13,691         15,998   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total professional diagnostics net revenue

   $ 583,297       $ 628,012       $ 1,773,993       $ 1,856,629   
  

 

 

    

 

 

    

 

 

    

 

 

 

(15) Related Party Transactions

(a) SPD Joint Venture

In May 2007, we completed the formation of SPD Swiss Precision Diagnostics GmbH, or SPD, our 50/50 joint venture with Procter & Gamble, or P&G, for the development, manufacturing, marketing and sale of existing and to-be-developed consumer diagnostic products, outside the cardiometabolic, diabetes and oral care fields. We account for our 50% interest in the joint venture under the equity method of accounting.

We had a net receivable from SPD of $0.9 million as of September 30, 2015 and a net payable to SPD of $4.0 million as of December 31, 2014. Included in the $0.9 million receivable balance as of September 30, 2015 and the $4.0 million payable balance as of December 31, 2014 is approximately $1.5 million of costs incurred in connection with our 2008 SPD-related restructuring plans. We have also recorded a long-term receivable totaling approximately $9.1 million and $10.9 million as of September 30, 2015 and December 31, 2014, respectively, related to the 2008 SPD-related restructuring plans. Additionally, customer receivables associated with revenue earned after the formation of the joint venture have been classified as other receivables within prepaid and other current assets on our consolidated balance sheets in the amount of $7.4 million and $9.6 million as of September 30, 2015 and December 31, 2014, respectively. In connection with the joint venture arrangement, the joint venture bears the collection risk associated with these receivables. Sales to the joint venture under our manufacturing agreement totaled $17.3 million and $58.5 million during the three and nine months ended September 30, 2015, respectively, and $19.6 million and $60.8 million during the three and nine months ended September 30, 2014, respectively. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $0.2 million and $0.8 million during the three and nine months ended September 30, 2015, respectively, and $0.3 million and $1.0 million during the three and nine months ended September 30, 2014, respectively. Sales under our manufacturing agreement and long-term services agreement are included in net product sales and services revenue, respectively, in our consolidated statements of operations.

 

20


Table of Contents

Under the terms of our product supply agreement, SPD purchases products from our manufacturing facilities in China. SPD in turn sells a portion of those tests back to us for final assembly and packaging. Once packaged, a portion of the tests are sold to P&G for distribution to third-party customers in North America. As a result of these related transactions, we have recorded $10.0 million and $10.5 million of trade receivables which are included in accounts receivable on our consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively, and $37.6 million and $34.8 million of trade accounts payable which are included in accounts payable on our consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively.

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

 

Balance Sheet Caption

   September 30, 2015      December 31, 2014  

Accounts receivable, net of allowances

   $ 10,049       $ 10,465   

Prepaid expenses and other current assets

   $ 7,404       $ 9,635   

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

   $ 9,100       $ 10,875   

Accounts payable

   $ 37,608       $ 34,816   

As previously disclosed, SPD is currently involved in civil litigation brought by a competitor in the United States with respect to the advertising of one of SPD’s products in the United States. During the three months ended September 30, 2015, SPD appealed the district court’s injunction with respect to sales and advertising of such product, which was based on a finding that SPD violated certain laws with respect to the advertising of such product. The appellate court has issued a stay of the injunction, pending the outcome of the appeal. A ruling on the appeal is expected in the near future. Given the status of this matter, the ultimate resolution of this matter is not known at this time, nor is the potential impact it may have on SPD or us, including whether such resolution of the litigation or any damages imposed by the court would have a material adverse impact on SPD and, ultimately, by virtue of our 50% interest in SPD, on our financial position or results of operations. In addition, consumers who have used SPD products might make claims or initiate additional litigation against SPD or us on similar grounds as those at issue in the litigation described above in this paragraph.

(b) Entrustment Loan Arrangement with SPD Shanghai

Our subsidiary Alere (Shanghai) Diagnostics Co., Ltd., or Alere Shanghai, and SPD’s subsidiary SPD Trading (Shanghai) Co., Ltd., or SPD Shanghai, entered into an entrustment loan arrangement for a maximum of CNY 23 million (approximately $3.7 million at September 30, 2015), in order to finance the latter’s short-term working capital needs, with the Royal Bank of Scotland (China) Co., Ltd. Shanghai Branch, or RBS. The agreement governs the setting up of an Entrustment Loan Account with RBS, into which Alere Shanghai deposits certain monies. This restricted cash account provides a guarantee to RBS of amounts borrowed from RBS by SPD Shanghai. The Alere Shanghai RBS account is recorded as restricted cash on our balance sheet and amounted to $3.7 million at September 30, 2015.

(16) Other Arrangements

In September 2014, we entered into a contract with the U.S. Department of Health and Human Services’ Biomedical Advanced Research and Development Authority, or BARDA, to develop diagnostic countermeasures for pandemic influenza. Under the terms of the 3.5 year contract, BARDA will provide up to $12.9 million to us to support the development of a rapid, molecular, low-cost influenza diagnostic device with PCR-like performance at the point-of-care. The project is designed to help support future preparedness and medical response to an influenza pandemic. Funding from BARDA is subject to successful completion of various interim feasibility and development milestones as defined in the agreement. For the three and nine months ended September 30, 2015, we had incurred $0.8 million and $2.2 million, respectively, of qualified expenditures under the contract, for which we had received cash reimbursement from BARDA in the amount of $0.6 million and $1.6 million, respectively, and $0.6 million was recorded as a receivable as of that date. Reimbursements of qualified expenditures under this contract are recorded as a reduction of our related qualified research and development expenditures.

        In February 2013, we entered into an agreement with the Bill and Melinda Gates Foundation, or the Gates Foundation, whereby we were awarded a grant by the Gates Foundation in the amount of $21.6 million to support the development and commercialization of a validated, low-cost, nucleic-acid assay for clinical Tuberculosis, or TB, detection and drug-resistance test cartridges and adaptation of an analyzer platform capable of operation in rudimentary laboratories in low-resource settings. In connection with this agreement, we also entered into a loan agreement with the Gates Foundation, or the Gates Loan Agreement, which provides for the making of subordinated term loans by the Gates Foundation to us from time to time, subject to the achievement of certain milestones, in an aggregate principal amount of up to $20.6 million. Funding under the Gates Loan Agreement will be used in connection with the purchase of equipment for an automated high-throughput manufacturing line and other uses as necessary for the manufacture of the TB and HIV-related products. All loans under the Gates Loan Agreement are evidenced by promissory notes that we have executed and delivered to the Gates Foundation, bear interest at the rate of 3% per annum and, except to the extent earlier repaid by us, mature and are required to be repaid in full on December 31, 2019. As of September 30, 2015, we had borrowed no amounts under the Gates Loan Agreement. As of September 30, 2015, we had received approximately $19.7 million in grant-related funding from the Gates Foundation, which was recorded as restricted cash and deferred grant funding. As of September 30, 2015, we had deferred grant funding of $0.3 million relating to our agreement with the Gates Foundation, which is classified within accrued expenses and other current liabilities on our consolidated balance sheet. As qualified expenditures are incurred under the terms of the grant, we use the deferred funding to recognize a reduction of our related qualified research and development expenditures. For the three and nine months ended September 30, 2015, we incurred $0.3 million and $3.9 million, and for the three and nine months ended September 30, 2014, we incurred $2.5 million and $7.0 million, respectively, of qualified expenditures, for which we reduced our deferred grant funding balance and recorded an offset to our research and development expenses.

 

21


Table of Contents

(17) Commitments and Contingencies

(a) Acquisition-related Contingent Consideration Obligations

We have contractual contingent purchase price consideration obligations related to certain of our acquisitions. We determine the acquisition date fair value of the contingent consideration obligations based on a probability-weighted approach derived from the overall likelihood of achieving certain performance targets, including product development milestones or financial metrics. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement, as defined in fair value measurement accounting. The resultant probability-weighted earn-out payments are discounted using a discount rate based upon the weighted-average cost of capital. At each reporting date, we revalue the contingent consideration obligations to the reporting date fair values and record increases and decreases in the fair values as income or expense in our consolidated statements of operations.

Increases or decreases in the fair values of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of earn-out criteria and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.

During the nine months ended September 30, 2015, we revised the fair value estimates for the milestones related to the TwistDx, Inc. contingent consideration obligation to incorporate increased probabilities of success as a result of positive technological developments of related technology and regulatory approvals of certain related platforms. Accordingly, we recorded a charge associated with the resulting change in fair value of $16.2 million, which is included in general and administrative expense in our accompanying consolidated statement of operations.

During the nine months ended September 30, 2015, we revised the fair value estimates for certain of the milestones related to the Epocal contingent consideration obligation to reflect decreased probabilities of success and delayed cash inflows and clinical development timelines due to a strategic shift and re-allocation of research and development resources. As a result, we recorded a net reduction to expense during the nine months ended September 30, 2015 of $31.5 million, which is included in general and administrative expense in our accompanying consolidated statement of operations. Additionally, one milestone was achieved during the three months ended September 30, 2015, resulting in a cash payment of $10.0 million during the quarter.

Furthermore, during the nine months ended September 30, 2015, we recorded a reduction to expense of $24.5 million associated with a change in the fair value of our Ionian contingent consideration obligation to zero, which was included in the general and administrative expense in our accompanying consolidated statement of operations. The remaining product development milestones under the agreement were not achieved by the July 2015 deadline and, as such, the probability of making the related milestone payments was reduced to zero.

The following table summarizes our contractual contingent purchase price consideration obligations related to certain of our acquisitions, as follows (in thousands):

 

Acquisition

   Acquisition Date      Acquisition
Date Fair
Value
     Maximum
Remaining
Earn-out
Potential
as of
September 30,
2015
    Remaining
Earn-out
Period as
of
September 30,
2015
    Estimated
Fair Value as
of
September 30,
2015
     Estimated
Fair Value as
of
December 31,
2014
     Payments
made
during
2015
 

TwistDx, Inc.(1)

     March 11, 2010       $ 35,600       $ 103,247        2015 – 2025 (5)    $ 51,900       $ 41,100       $ 5,377   

Ionian Technologies, Inc. (2)

     July 12, 2010       $ 24,500       $ —          —          —          24,500         —    

DiagnosisOne, Inc. (3)

     July 31, 2012       $ 22,300       $ —         —         —          21,000         6,000   

Epocal(4)

     February 1, 2013       $ 75,000       $ 55,500        2015 – 2018        5,700         47,200         10,000   

Other

     Various       $ 30,373       $ —   (6)      2015 – 2016        5,991         5,871         551   
            

 

 

    

 

 

    

 

 

 
             $ 63,591       $ 139,671       $ 21,928   
            

 

 

    

 

 

    

 

 

 

 

(1)  The terms of the acquisition agreement require us to pay an earn-out upon successfully meeting certain revenue and product development targets through 2025.

 

22


Table of Contents
(2)  The earn-out period under the terms of the acquisition agreement expired July 12, 2015.
(3)  On March 25, 2015, the remaining earn-out was settled for $6.0 million, of which $4.5 million was paid on March 27, 2015 and $1.5 million was paid on April 3, 2015.
(4)  The terms of the acquisition agreement require us to pay earn-outs and management incentive payments upon successfully meeting certain product development and United States Food and Drug Administration regulatory approval milestones from the date of acquisition through December 31, 2018.
(5)  The maximum earn-out period ends on the fifteenth anniversary of the acquisition date.
(6)  The maximum remaining earn-out potential for the other acquisitions is not determinable due to the nature of one of the earn-outs, which is tied to an unlimited revenue metric.

(b) Legal Proceedings

U.S. Securities and Exchange Commission Subpoena

On August 28, 2015, we received a subpoena from the U.S. Securities and Exchange Commission, or SEC, which indicated that it is conducting a formal investigation of Alere. The SEC’s subpoena relates to, among other things, (i) our previously filed restatement and revision to our financial statements, including the accounting for deferred taxes for discontinued operations, as well as our tax strategies and policies and (ii) our sales practices and dealings with third-parties (including distributors and foreign government officials) in Africa relating to sales to government entities.

We are unable to predict when this matter will be resolved or what further action, if any, SEC may take in connection with it.

Matters Relating to our San Diego Facility

On October 9, 2012, we received a warning letter from the FDA referencing inspectional observations set forth in an FDA Form 483 received in June 2012. The observations were the result of an inspection of our San Diego facility conducted earlier during 2012 relating to our Alere Triage products, which resulted in two recalls of certain Alere Triage products and revised release specifications for our Alere Triage meter-based products. We submitted evidence of our completion of most of the actions we committed to in response to the FDA Form 483 and warning letter. In September 2014, as follow up to a further inspection of our San Diego facility, the FDA notified us that this most recent inspection was classified “voluntary action indicated,” meaning that the objectionable conditions or practices found in the inspection do not meet the threshold of significance requiring regulatory action, but that formal close-out of the October 2012 warning letter could not occur until after a future inspection.

In May 2012, we also received a subpoena from the Office of Inspector General of the Department of Health and Human Services, or the OIG, seeking documents relating primarily to the quality control testing and performance characteristics of Alere Triage products. We are cooperating with the OIG and have provided documents in response to the OIG under the subpoena.

We are unable to predict when these matters will be resolved or what further action, if any, the government will take in connection with them.

Matters Related to Theft of Laptop

In September 2012, a password-protected laptop containing personally identifiable information of approximately 116,000 patients was stolen from an employee of Alere Home Monitoring, or AHM. On January 24, 2013, a class action complaint was filed in the U.S. District Court for the Northern District of California against AHM, asserting claims for damages and other relief under California state law, including under California’s Confidentiality of Medical Information Act, or CMIA, arising out of this theft. On October 7, 2014, the class action was dismissed with leave to amend the complaint. On October 28, 2014, an amended complaint was filed, and on November 17, 2014 AHM responded by filing another motion to dismiss. On February 23, 2015, AHM’s motion to dismiss was granted in part, but denied as to the plaintiffs’ amended CMIA claims. The parties have settled this litigation and, in connection with such settlement, we have paid a nominal amount to the plaintiffs.

Claims in the Ordinary Course and Other Matters

We are not a party to any other pending legal proceedings that we currently believe could have a material adverse impact on our business. However, on December 10, 2014, we and our subsidiary, Avee Laboratories Inc., or Avee, received subpoenas from the United States Attorney for the District of New Jersey seeking marketing materials and other documents relating primarily to billing and marketing practices related to toxicology testing. We are cooperating with this investigation and are providing documents. Our subsidiary, Arriva Medical, LLC, or Arriva, is also in the process of responding to a Civil

 

23


Table of Contents

Investigative Demand, or CID, from the United States Attorney for the Middle District of Tennessee in connection with an investigation of possible improper claims submitted to Medicare and Medicaid. The CID requests patient and billing records. We are cooperating with the investigation of the United States Attorney for the Middle District of Tennessee and are providing documents responsive to the CID. We cannot predict what effect, if any, these investigations, or any resulting claims, could have on Alere or its subsidiaries. We have received, from time to time, additional subpoenas and requests for information from the Department of Justice, other federal government agencies and state attorney generals and we have, in each of these cases, cooperated with the applicable governmental entity in responding to the applicable subpoena or request for information.

Our diabetes, toxicology and patient self-testing business areas are subject to audit and claims for reimbursement brought in the ordinary course by private third-party payers, including health insurers, Zone Program Integrity Contractors, or ZPICs, and Medicare Administrative Contractors, or MACs, to monitor compliance with coverage and reimbursement rules and guidelines. These types of audits and claims can include, but are not limited to, claims relating to proper documentation and support or claims relating to the medical necessity of certain testing and can lead to assertions or determinations that certain claims should not have been, or will no longer be, paid by the private third-party payer or by Medicare or Medicaid. In such cases, the payer or program may seek to recoup or offset amounts they assert have been paid in error.

Our businesses may also be subject at any time to other commercial disputes, product liability claims, personal injury claims, including claims arising from or relating to product recalls, negligence claims or various other lawsuits arising in the ordinary course of business, including infringement, employment or investor matters, and we expect that this will continue to be the case in the future. Such lawsuits or claims generally seek damages or reimbursement, sometimes in substantial amounts. There are possible unfavorable outcomes related to litigation or governmental investigations that could materially impact our business, results of operations, financial condition, the consolidated statements of operations and cash flows.

(18) Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that we must adopt by the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position, results of operations, comprehensive income or cash flows upon adoption. Please also see Note 4, Summary of Significant Accounting Policies, to our consolidated financial statements included within Amendment No. 2 to our Annual Report on Form 10-K/A for the year ended December 31, 2014.

Recently Issued Standards

In August 2015, the FASB issued Accounting Standards Update, or ASU, No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30)—Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting), or ASU 2015-15. ASU 2015-15 adds the authoritative guidance on presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements to ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03 discussed below. We are currently evaluating the impact of ASU 2015-15 on our consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, or ASU 2015-14. ASU 2015-14 defers the effective date of ASU No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, discussed below, for all entities by one year.

In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965)—I. Fully Benefit-Responsive Investment Contracts, II. Plan Investment Disclosures, and III. Measurement Date Practical Expedient, or ASU 2015-12. Part I of ASU 2015-12 designates contract value as the only required measure for fully benefit-responsive investment contracts. Part II of ASU 2015-12 eliminates the requirement to disclose (a) individual investments that represent 5 percent or more of net assets available for benefits and (b) the net appreciation or depreciation for investments by general type requirements for both participant-directed investments and nonparticipant-directed investments. Part I and Part II of ASU 2015-12 are effective on a retrospective basis for fiscal years beginning after December 15, 2015. Early adoption is permitted. We are currently evaluating the impact of ASU 2015-12 on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, or ASU 2015-11. ASU 2015-11 requires an entity to measure in-scope inventory at the lower of cost and net realizable value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. A reporting entity should apply ASU 2015-11 prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of ASU 2015-11 on our consolidated financial statements.

        In April 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 is intended to simplify the presentation of debt issuance costs. It requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the impact of the adoption of ASU 2015-03 on our consolidated financial statements and, upon adoption, we will revise our current presentation of debt issuance costs on our consolidated balance sheet.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers as a new Topic, Accounting Standards Codification Topic 606. ASU 2014-09 sets forth a new revenue recognition standard that provides for a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB finalized a one-year delay in the effective date of this standard, which will now be effective for us on January 1, 2018; however, early adoption is permitted any time after the original effective date, which for us is January 1, 2017. We have not yet selected a transition method and are currently evaluating the impact of ASU 2014-09 on our consolidated financial statements.

 

24


Table of Contents

Recently Adopted Standards

None.

(19) Equity Investments

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

(a) SPD

We recorded earnings of $5.3 million and $9.5 million during the three and nine months ended September 30, 2015, respectively, and earnings of $5.9 million and $12.8 million during the three and nine months ended September 30, 2014, respectively, in equity earnings of unconsolidated entities, net of tax, in our consolidated statements of operations, which represented our 50% share of SPD’s net income for the respective periods. During the nine months ended September 30, 2015, we received $12.1 million in cash from SPD as a return of capital.

(b) TechLab

We own 49% of TechLab, Inc., or TechLab, a privately-held developer, manufacturer and distributor of rapid non-invasive intestinal diagnostics tests in the areas of intestinal inflammation, antibiotic-associated diarrhea and parasitology. We recorded losses of $0.3 million and earnings of $1.0 million during the three and nine months ended September 30, 2015, respectively, and earnings of $0.9 million and $1.6 million during the three and nine months ended September 30, 2014, respectively, in equity earnings of unconsolidated entities, net of tax, in our consolidated statements of operations, which represented our minority share of TechLab’s net income for the respective periods. During the nine months ended September 30, 2015, we received $2.2 million in cash from TechLab as a return of capital.

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

 

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

Combined Condensed Results of Operations:

   2015      2014      2015      2014  

Net revenue

   $ 56,303       $ 65,397       $ 157,319       $ 155,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

   $ 43,538       $ 40,268       $ 111,368       $ 120,680   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income after taxes

   $ 15,735       $ 12,834       $ 26,831       $ 27,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Combined Condensed Balance Sheet:

   September 30, 2015      December 31, 2014  

Current assets

   $ 83,646       $ 90,546   

Non-current assets

     31,413         33,697   
  

 

 

    

 

 

 

Total assets

   $ 115,059       $ 124,243   
  

 

 

    

 

 

 

Current liabilities

   $ 32,352       $ 35,954   

Non-current liabilities

     5,487         5,884   
  

 

 

    

 

 

 

Total liabilities

   $ 37,839       $ 41,838   
  

 

 

    

 

 

 

 

25


Table of Contents

As of September 30, 2015, we continued to meet the held for sale criteria with respect to our 49% investment in TechLab. We intend to use all or a portion of the proceeds from any sale of this investment to repay a portion of our outstanding indebtedness. Accordingly, we have classified our investment in TechLab in assets held for sale – non-current in our consolidated balance sheet as of September 30, 2015.

(20) Impairment and (Gain) Loss on Dispositions, Net

In July 2015, we sold certain assets of our Inverness Medical Innovations Australia Pty Ltd business, which was part of our professional diagnostics reporting unit and business segment, for AUD 0.2 million (approximately $0.1 million as of the date of disposition) in cash proceeds and, as a result of this transaction, we recorded a loss of $1.2 million during the three and nine months ended September 30, 2015. We recorded additional charges of approximately $0.9 million in connection with certain other business closures or divestitures during the three and nine months ended September 30, 2015.

In May 2015, we sold our Alere Analytics business, which was part of our professional diagnostics reporting unit and business segment. Under the terms of the sale we received nominal consideration and agreed to contribute working capital of $2.7 million to Alere Analytics, of which $2.4 million was contributed in cash immediately prior to the closing of the sale and the remaining $0.3 million of which was deposited in escrow pending the performance by the buyers under certain contracts. As a result of this transaction we recorded a loss of $4.7 million during the nine months ended September 30, 2015. During the three months ended March 31, 2015, before identifying a buyer for Alere Analytics, our management decided to close the business, and in connection with this decision we recorded an impairment charge of $26.7 million during the nine months ended September 30, 2015, including the write-off of $26.2 million of acquisition-related intangible assets and $0.5 million of fixed assets.

In March 2015, we sold certain assets of our AdnaGen GmbH business, which was part of our professional diagnostics reporting unit and business segment, for approximately $4.6 million in cash proceeds and, as a result of this transaction, we recorded a loss of $0.3 million during the nine months ended September 30, 2015.

In March 2015, we sold our Gesellschaft fur Patientenhilfe DGP GmbH subsidiary, which was part of our professional diagnostics reporting unit and business segment, for €7.6 million (approximately $8.2 million at March 31, 2015) and, as a result of this transaction, we recorded a loss on disposition of $7.5 million during the nine months ended September 30, 2015.

In December 2014, our management decided to close our Alere Connect, LLC subsidiary, which is part of our professional diagnostics reporting unit and business segment. During the nine months ended September 30, 2015, in connection with this decision, we recorded impairment charges of $1.1 million, consisting primarily of severance costs, inventory write-offs and other closure-related expenses.

In April 2014, we sold the Glucostabilizer business of Alere Informatics, Inc., which was part of our professional diagnostics reporting unit and business segment, to Medical Decision Network, LLC for $1.1 million in cash proceeds and a $1.5 million note receivable, which we fully reserved for based on our assessment of collectability. As a result of this transaction, we recorded a loss on disposition of $0.6 million during the nine months ended September 30, 2014.

The financial results for the above businesses are immaterial to our consolidated financial results.

(21) Direct-response Advertising

In connection with our mail order diabetes business, we incurred direct-response advertising and associated costs in connection with the placement of advertisements. Direct-response advertising and associated costs payable to third parties for the period presented are capitalized and amortized to selling, general and administrative expenses on an accelerated basis in the month following the broadcast month. Management assesses the realizability of the amounts of direct-response advertising costs reported as assets at each balance sheet date by comparing the net carrying value of capitalized advertising to the net present value of estimated future orders expected to result directly from such advertising. Advertising that does not meet the capitalization requirements is expensed in the current period.

Any change in existing accounting rules or a business change that impacts expected future orders or that shortens the period over which such net future benefits are estimated to be realized could result in accelerated charges against our earnings. In addition, new or different marketing initiatives that may not qualify for direct-response advertising could result in accelerated charges against our earnings. Whether there is an impairment loss or not is determined by comparing the net carrying value of direct-response advertising costs capitalized as assets at each balance sheet date to the probable remaining future orders expected to result directly from such advertising. If the net carrying value of the assets exceeds the probable remaining future orders expected to result directly from such assets, an impairment loss is recognized in an amount equal to that excess. Future benefits are determined by calculating the net present value of estimated future orders per cost pool. Net present value is calculated based upon the value of an order multiplied by the estimated future orders. Estimate of future orders is determined based on historical customer reorder rates. We perform the impairment test of our direct-response advertising asset in the quarter following the advertising broadcast quarter.

 

26


Table of Contents

(22) Provision (Benefit) for Income Taxes

The provision for income taxes decreased by $84.4 million to an $18.9 million benefit for the three months ended September 30, 2015 from a $65.5 million provision for the three months ended September 30, 2014. The effective tax rate for the three months ended September 30, 2015 and 2014 was 102.7% and (261.2)%, respectively. Our effective tax rate is based on our year-to-date results and projected income (loss) and is primarily impacted by changes in the geographical mix of consolidated pre-tax income (loss), as well as items that are accounted for discretely in the quarter. The change in the effective tax rate for the three months ended September 30, 2015, as compared to the three months ended September 30, 2014, is primarily a result of a discrete tax benefit, including correcting adjustments related to prior periods recorded during the three months ended September 30, 2015 with respect to a net tax benefit related to U.S. taxes on foreign earnings and a release of uncertain tax positions, as well as a discrete tax provision recorded during the three months ended September 30, 2014 related to the establishment of a valuation allowance against deferred tax assets associated with our U.S. foreign tax credit carryforwards.

The provision for income taxes decreased by $79.3 million to a $10.0 million benefit for the nine months ended September 30, 2015 from a $69.3 million provision for the nine months ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2015 and 2014 was 473.5% and (77.4)%, respectively. The change in the effective tax rate for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, is primarily a result of a discrete tax benefit, including correcting adjustments related to prior periods recorded during the nine months ended September 30, 2015 with respect to a net tax benefit related to U.S. taxes on foreign earnings and a release of uncertain tax positions, as well as a discrete tax provision recorded during the nine months ended September 30, 2014 related to the establishment of a valuation allowance against deferred tax assets associated with our U.S. foreign tax credit carryforwards.

(23) Guarantor Financial Information

Our 7.25% senior notes due 2018, our 6.5% senior subordinated notes due 2020 and our 6.375% senior subordinated notes due 2023 are guaranteed, and before their redemption on October 1, 2015, our 8.625% senior subordinated notes due 2018 were guaranteed, by certain of our consolidated 100% owned subsidiaries, or the Guarantor Subsidiaries. The guarantees are full and unconditional and joint and several. The following supplemental financial information sets forth, on a consolidating basis, balance sheets as of September 30, 2015 and December 31, 2014, the related statements of operations and comprehensive income (loss) for each of the three and nine months ended September 30, 2015 and 2014, respectively, and the statements of cash flows for the nine months ended September 30, 2015 and 2014, respectively, for Alere Inc., the Guarantor Subsidiaries and our other subsidiaries, or the Non-Guarantor Subsidiaries. The supplemental financial information reflects the investments of Alere Inc. and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.

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

For comparative purposes, certain amounts for prior periods have been reclassified to conform to the current period classification. Prior periods have been presented on a basis that is consistent with the current period, giving retrospective effect to the impact of discontinued operations.

 

27


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2015

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

  $ —        $ 227,939      $ 309,871      $ (67,406   $ 470,404   

Services revenue

    —          115,829        12,512        —          128,341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

    —          343,768        322,383        (67,406     598,745   

License and royalty revenue

    —          3,246        4,648        (4,595     3,299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    —          347,014        327,031        (72,001     602,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

    2,090        124,853        175,836        (56,724     246,055   

Cost of services revenue

    74        81,549        6,951        (8,771     79,803   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

    2,164        206,402        182,787        (65,495     325,858   

Cost of license and royalty revenue

    (19     401        5,350        (4,595     1,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

    2,145        206,803        188,137        (70,090     326,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (2,145     140,211        138,894        (1,911     275,049   

Operating expenses:

         

Research and development

    5,670        15,015        15,326        —          36,011   

Sales and marketing

    1,335        53,863        51,295        —          106,493   

General and administrative

    22,960        34,816        43,530        —          101,306   

Impairment and (gain) loss on dispositions, net

    150        85        1,839        —          2,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (32,260     36,432        26,904        (1,911     29,165   

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

    (51,705     (2,613     (4,999     6,984        (52,333

Other income (expense), net

    4,224        3,921        3,584        (6,984     4,745   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (79,741     37,740        25,489        (1,911     (18,423

Provision (benefit) for income taxes

    78,041        (33,431     (63,534     —          (18,924
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (157,782     71,171        89,023        (1,911     501   

Equity in earnings of subsidiaries, net of tax

    163,647        —          —          (163,647     —     

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

    (364     —          5,348        16        5,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    5,501        71,171        94,371        (165,542     5,501   

Less: Net loss attributable to non-controlling interests

    —          —          (61     —          (61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Alere Inc. and Subsidiaries

    5,501        71,171        94,432        (165,542     5,562   

Preferred stock dividends

    (5,367     —          —          —          (5,367
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $ 134      $ 71,171      $ 94,432      $ (165,542   $ 195   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended September 30, 2014

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

  $ —       $ 214,585      $ 353,817      $ (60,777   $ 507,625   

Services revenue

    —         122,045        15,358        —         137,403   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

    —         336,630        369,175        (60,777     645,028   

License and royalty revenue

    —         2,993        3,663        (2,474     4,182   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    —         339,623        372,838        (63,251     649,210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

    912        118,241        204,983        (52,886     271,250   

Cost of services revenue

    71        74,441        8,448        (7,858     75,102   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

    983        192,682        213,431        (60,744     346,352   

Cost of license and royalty revenue

    28        55        3,627        (2,474     1,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

    1,011        192,737        217,058        (63,218     347,588   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (1,011     146,886        155,780        (33     301,622   

Operating expenses:

         

Research and development

    7,256        15,318        16,152        —         38,726   

Sales and marketing

    1,265        54,422        67,073        —         122,760   

General and administrative

    33,549        30,323        40,922        —         104,794   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (43,081     46,823        31,633        (33     35,342   

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

    (51,589     (4,420     (4,512     8,189        (52,332

Other income (expense), net

    4,706        4,835        (9,438     (8,190     (8,087
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (89,964     47,238        17,683        (34     (25,077

Provision for income taxes

    42,727        13,657        9,140        (35     65,489   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (132,691     33,581        8,543        1        (90,566

Equity in earnings of subsidiaries, net of tax

    49,642        210        —         (49,852     —    

Equity earnings of unconsolidated entities, net of tax

    560        —         5,779        (62     6,277   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

    (82,489     33,791        14,322        (49,913     (84,289

Income (loss) from discontinued operations, net of tax

    (16,201     (20,615     22,415        —         (14,401
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (98,690     13,176        36,737        (49,913     (98,690

Less: Net loss attributable to non-controlling interests

    —         —         (306     —         (306
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (98,690     13,176        37,043        (49,913     (98,384

Preferred stock dividends

    (5,367     —         —         —         (5,367
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

  $ (104,057   $ 13,176      $ 37,043      $ (49,913   $ (103,751
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2015

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

  $ —        $ 657,751      $ 983,131      $ (194,045   $ 1,446,837   

Services revenue

    —          338,869        39,956        —          378,825   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

    —          996,620        1,023,087        (194,045     1,825,662   

License and royalty revenue

    —          9,676        14,721        (10,706     13,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

    —          1,006,296        1,037,808        (204,751     1,839,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

    2,923        358,983        550,081        (168,810     743,177   

Cost of services revenue

    204        233,470        22,823        (24,360     232,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

    3,127        592,453        572,904        (193,170     975,314   

Cost of license and royalty revenue

    (40     1,619        13,558        (10,706     4,431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

    3,087        594,072        586,462        (203,876     979,745   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

    (3,087     412,224        451,346        (875     859,608   

Operating expenses:

         

Research and development

    11,213        43,927        36,085        —          91,225   

Sales and marketing

    4,165        159,191        159,400        —          322,756   

General and administrative

    67,873        123,874        63,063        —          254,810   

Impairment and (gain) loss on dispositions, net

    81,051        (8,719     (29,924     —          42,408   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (167,389     93,951        222,722        (875     148,409   

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

    (156,889     (8,958     (13,744     21,333        (158,258

Other income (expense), net

    11,467        12,796        4,805        (21,333     7,735   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (312,811     97,789        213,783        (875     (2,114

Provision (benefit) for income taxes

    41,068        (20,334     (31,051     308        (10,009
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    (353,879     118,123        244,834        (1,183     7,895   

Equity in earnings of subsidiaries, net of tax

    369,200        —          —          (369,200     —     

Equity earnings of unconsolidated entities, net of tax

    982        —          9,340        (2     10,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

    16,303        118,123        254,174        (370,385     18,215   

Income (loss) from discontinued operations, net of tax

    218,689        (1,912     —          —          216,777   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    234,992        116,211        254,174        (370,385     234,992   

Less: Net income attributable to non-controlling interests

    —          —          386        —          386   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Alere Inc. and Subsidiaries

    234,992        116,211        253,788        (370,385     234,606   

Preferred stock dividends

    (15,926     —          —          —          (15,926
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to common stockholders

  $ 219,066      $ 116,211      $ 253,788      $ (370,385   $ 218,680   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

30


Table of Contents

CONSOLIDATING STATEMENT OF OPERATIONS

For the Nine Months Ended September 30, 2014

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —         $ 623,208      $ 1,048,212      $ (172,118   $ 1,499,302   

Services revenue

     —         355,132        51,415        —         406,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —         978,340        1,099,627        (172,118     1,905,849   

License and royalty revenue

     —         10,312        14,683        (8,997     15,998   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —         988,652        1,114,310        (181,115     1,921,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     2,291        348,701        591,778        (156,852     785,918   

Cost of services revenue

     214        216,142        25,123        (20,123     221,356   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     2,505        564,843        616,901        (176,975     1,007,274   

Cost of license and royalty revenue

     28        194        12,675        (8,997     3,900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     2,533        565,037        629,576        (185,972     1,011,174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (2,533     423,615        484,734        4,857        910,673   

Operating expenses:

          

Research and development

     20,034        45,753        49,068        —         114,855   

Sales and marketing

     6,329        175,536        209,740        —         391,605   

General and administrative

     78,257        112,850        147,879        —         338,986   

Loss on disposition

     —         638        —         —         638   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (107,153     88,838        78,047        4,857        64,589   

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

     (154,232     (14,933     (13,646     26,535        (156,276

Other income (expense), net

     11,823        15,867        1,068        (26,594     2,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (249,562     89,772        65,469        4,798        (89,523

Provision (benefit) for income taxes

     (2,566     42,896        27,319        1,624        69,273   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (246,996     46,876        38,150        3,174        (158,796

Equity in earnings of subsidiaries, net of tax

     97,307        442        —         (97,749     —    

Equity earnings of unconsolidated entities, net of tax

     1,387        —         12,516        (187     13,716   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (148,302     47,318        50,666        (94,762     (145,080

Income (loss) from discontinued operations, net of tax

     (860     (26,418     23,196        —         (4,082
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (149,162     20,900        73,862        (94,762     (149,162

Less: Net loss attributable to non-controlling interests

     —         —         (136     —         (136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (149,162     20,900        73,998        (94,762     (149,026

Preferred stock dividends

     (15,926     —         —         —         (15,926
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (165,088   $ 20,900      $ 73,998      $ (94,762   $ (164,952
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended September 30, 2015

(in thousands)

 

    Issuer     Guarantor
Subsidiaries
    Non -
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

  $ 5,501      $ 71,171      $ 94,371      $ (165,542   $ 5,501   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax:

         

Changes in cumulative translation adjustment

    (748     (570     (87,314     (180     (88,812

Minimum pension liability adjustment

    —          —          419        —          419   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

    (748     (570     (86,895     (180     (88,393

Income tax benefit related to items of other comprehensive income

    —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

    (748     (570     (86,895     (180     (88,393
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

    4,753        70,601        7,476        (165,722     (82,892

Less: Comprehensive loss attributable to non-controlling interests

    —          —          (61     —          (61
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 4,753      $ 70,601      $ 7,537      $ (165,722   $ (82,831
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended September 30, 2014

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (98,690   $ 13,176      $ 36,737      $ (49,913   $ (98,690
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax:

          

Changes in cumulative translation adjustment

     (383     (104     (95,936     (2     (96,425

Unrealized gains on hedging instruments

     —          —          7        —          7   

Minimum pension liability adjustment

     —          —          481        —          481   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     (383     (104     (95,448     (2     (95,937

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

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     (383     (104     (95,448     (2     (95,937
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (99,073     13,072        (58,711     (49,915     (194,627

Less: Comprehensive loss attributable to non-controlling interests

     —          —          (306     —          (306
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (99,073   $ 13,072      $ (58,405   $ (49,915   $ (194,321
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Nine Months Ended September 30, 2015

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non -
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 234,992      $ 116,211      $ 254,174      $ (370,385   $ 234,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax:

          

Changes in cumulative translation adjustment

     (1,208     (453     (120,587     (180     (122,428

Minimum pension liability adjustment

     —          —          (1,337     —          (1,337
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, before tax

     (1,208     (453     (121,924     (180     (123,765

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

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (1,208     (453     (121,924     (180     (123,765
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     233,784        115,758        132,250        (370,565     111,227   

Less: Comprehensive income attributable to non-controlling interests

     —          —          386        —          386   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Alere Inc. and Subsidiaries

   $ 233,784      $ 115,758      $ 131,864      $ (370,565   $ 110,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


Table of Contents

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Nine Months Ended September 30, 2014

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (149,162   $ 20,900      $ 73,862      $ (94,762   $ (149,162
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

          

Changes in cumulative translation adjustment

     (137     (178     (69,633     (2     (69,950

Unrealized losses on available for sale securities

     —          (17     —          —          (17

Unrealized gains on hedging instruments

     —          —          21        —          21   

Minimum pension liability adjustment

     —          —          468        —          468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     (137     (195     (69,144     (2     (69,478

Income tax benefit related to items of other comprehensive loss

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (137     (195     (69,144     (2     (69,478
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (149,299     20,705        4,718        (94,764     (218,640

Less: Comprehensive loss attributable to non-controlling interests

     —          —          (136     —          (136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (149,299   $ 20,705      $ 4,854      $ (94,764   $ (218,504
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

35


Table of Contents

CONSOLIDATING BALANCE SHEET

September 30, 2015

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 142,996      $ 7,649       $ 328,736       $ —        $ 479,381   

Restricted cash

     426,170        —           4,651         —          430,821   

Marketable securities

     —          157         —           —          157   

Accounts receivable, net of allowances

     —          205,533         246,833         —          452,366   

Inventories, net

     —          194,697         190,143         (22,614     362,226   

Deferred tax assets

     (39,530     31,285         25,788         (2,119     15,424   

Prepaid expenses and other current assets

     7,824        31,605         74,901         6,693        121,023   

Assets held for sale — current

     —          —           25,312         —          25,312   

Intercompany receivables

     642,439        762,656         81,594         (1,486,689     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,179,899        1,233,582         977,958         (1,504,729     1,886,710   

Property, plant and equipment, net

     31,011        229,347         185,403         (446     445,315   

Goodwill

     —          1,824,191         1,018,730         —          2,842,921   

Other intangible assets with indefinite lives

     —          7,662         21,141         (59     28,744   

Finite-lived intangible assets, net

     3,072        656,064         393,813         —          1,052,949   

Restricted cash

     —          —           44,148         —          44,148   

Deferred financing costs, net and other

            

non-current assets

     44,098        3,716         15,734         (269     63,279   

Investments in subsidiaries

     3,439,664        179,542         59,431         (3,678,637     —     

Investments in unconsolidated entities

     503        14,765         44,640         13,974        73,882   

Deferred tax assets

     —          —           7,632         —          7,632   

Non-current income tax receivable

     2,537        —           —           —          2,537   

Assets held for sale — non-current

     13,013        —           113,035         —          126,048   

Intercompany notes receivables

     2,030,141        676,485         4,967         (2,711,593     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 6,743,938      $ 4,825,354       $ 2,886,632       $ (7,881,759   $ 6,574,165   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Short-term debt and current portion of long-term debt

   $ 601,712      $ —         $ 2,380       $ —        $ 604,092   

Current portion of capital lease obligations

     —          1,404         2,101         —          3,505   

Accounts payable

     14,000        87,659         92,587         —          194,246   

Accrued expenses and other current liabilities

     (394,578     612,572         95,013         2,329        315,336   

Liabilities related to assets held for sale — current

     —          —           8,836         —          8,836   

Intercompany payables

     1,042,991        263,528         180,170         (1,486,689     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     1,264,125        965,163         381,087         (1,484,360     1,126,015   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Long-term liabilities:

            

Long-term debt, net of current portion

     2,940,664        —           46,994         —          2,987,658   

Capital lease obligations, net of current portion

     —          2,001         4,269         —          6,270   

Deferred tax liabilities

     (70,862     214,277         63,954         82        207,451   

Other long-term liabilities

     37,984        62,242         35,243         (269     135,200   

Liabilities related to assets held for sale — non-current

     —          —           9,603         —          9,603   

Intercompany notes payables

     474,591        1,189,716         1,047,286         (2,711,593     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     3,382,377        1,468,236         1,207,349         (2,711,780     3,346,182   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     2,097,436        2,391,955         1,293,664         (3,685,619     2,097,436   

Non-controlling interests

     —          —           4,532         —          4,532   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     2,097,436        2,391,955         1,298,196         (3,685,619     2,101,968   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 6,743,938      $ 4,825,354       $ 2,886,632       $ (7,881,759   $ 6,574,165   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

36


Table of Contents

CONSOLIDATING BALANCE SHEET

December 31, 2014

(in thousands)

 

 

     Issuer     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Current assets:

            

Cash and cash equivalents

   $ 2,149      $ 69,154       $ 307,158       $ —       $ 378,461   

Restricted cash

     5,012        —           32,559         —          37,571   

Marketable securities

     —          259         —           —          259   

Accounts receivable, net of allowances

     —          192,775         273,331         —          466,106   

Inventories, net

     —          191,323         195,606         (21,764     365,165   

Deferred tax assets

     36,347        44,961         31,265         —          112,573   

Prepaid expenses and other current assets

     9,800        31,410         88,695         2,508        132,413   

Assets held for sale – current

     1,361        284,369         29,785         —          315,515   

Intercompany receivables

     404,990        888,688         55,923         (1,349,601     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     459,659        1,702,939         1,014,322         (1,368,857     1,808,063   

Property, plant and equipment, net

     30,547        218,613         204,188         222        453,570   

Goodwill

     —          1,795,663         1,131,003         —          2,926,666   

Other intangible assets with indefinite lives

     —          9,287         34,422         (58     43,651   

Finite-lived intangible assets, net

     6,104        742,760         527,580         —          1,276,444   

Deferred financing costs, net and other non-current assets

     40,992        5,334         21,541         (35     67,832   

Investments in subsidiaries

     3,740,004        179,315         58,067         (3,977,386     —     

Investments in unconsolidated entities

     13,987        14,765         49,608         13,333        91,693   

Deferred tax assets

     —          —           8,569         —          8,569   

Non-current income tax receivable

     2,468        —           —           —          2,468   

Intercompany notes receivables

     2,028,701        649,444         46,676         (2,724,821     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 6,322,462      $ 5,318,120       $ 3,095,976       $ (8,057,602   $ 6,678,956   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

            

Current liabilities:

            

Short-term debt and current portion of long-term debt

   $ 61,700      $ 2       $ 27,173       $ —        $ 88,875   

Current portion of capital lease obligations

     —          1,045         3,196         —          4,241   

Accounts payable

     21,402        81,741         110,449         —          213,592   

Accrued expenses and other current liabilities

     (536,286     663,221         248,604         (45     375,494   

Liabilities related to assets held for sale – current

     1,094        77,749         —           —          78,843   

Intercompany payables

     902,576        198,788         248,237         (1,349,601     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     450,486        1,022,546         637,659         (1,349,646     761,045   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Long-term liabilities:

            

Long-term debt, net of current portion

     3,615,759        —           5,626         —          3,621,385   

Capital lease obligations, net of current portion

     —          4,097         6,463         —          10,560   

Deferred tax liabilities

     (107,844     252,944         69,457         82        214,639   

Other long-term liabilities

     42,762        46,865         71,988         (33     161,582   

Intercompany notes payables

     415,700        1,276,245         1,032,876         (2,724,821     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     3,966,377        1,580,151         1,186,410         (2,724,772     4,008,166   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     1,905,599        2,715,423         1,267,761         (3,983,184     1,905,599   

Non-controlling interests

     —          —           4,146         —          4,146   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,905,599        2,715,423         1,271,907         (3,983,184     1,909,745   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 6,322,462      $ 5,318,120       $ 3,095,976       $ (8,057,602   $ 6,678,956   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

37


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2015

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income

   $ 234,992      $ 116,211      $ 254,174      $ (370,385   $ 234,992   

Income (loss) from discontinued operations, net of tax

     218,689        (1,912     —          —          216,777   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     16,303        118,123        254,174        (370,385     18,215   

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

          

Equity in earnings of subsidiaries, net of tax

     (369,200     —          —          369,200        —     

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

     10,542        19        66        —          10,627   

Depreciation and amortization

     7,891        128,363        97,250        7        233,511   

Non-cash stock-based compensation expense

     10,600        4,251        4,745        —          19,596   

Impairment of inventory

     —          133        68        —          201   

Impairment of long-lived assets

     —          64        314        —          378   

Loss on sale of fixed assets

     —          2,768        505        —          3,273   

Equity earnings of unconsolidated entities, net of tax

     (982     —          (9,340     2        (10,320

Deferred income taxes

     (8,686     (30,699     (7,794     439        (46,740

Loss related to impairment and net (gain) loss on dispositions

     81,051        (8,804     (29,924     —          42,323   

Loss on extinguishment of debt

     3,480        —          —          —          3,480   

Other non-cash items

     (376     (1,054     (3,358     3        (4,785

Non-cash change in fair value of contingent purchase price consideration

     (33,667     16,616        (34,860     —          (51,911

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —          (11,370     101        —          (11,269

Inventories, net

     —          (31,079     (27,909     207        (58,781

Prepaid expenses and other current assets

     3,098        (28,016     4,917        5,048        (14,953

Accounts payable

     (7,435     777        (9,342     —          (16,000

Accrued expenses and other current liabilities

     111,628        33,995        (103,572     (6,859     35,192   

Other non-current liabilities

     (16,364     740        5,389        1,445        (8,790

Cash paid for contingent purchase price consideration

     (6,302     —          (13     —          (6,315

Intercompany payable (receivable)

     334,642        (246,828     (87,992     178        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     136,223        (52,001     53,425        (715     136,932   

Net cash provided by discontinued operations

     —          318        —          —          318   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     136,223        (51,683     53,425        (715     137,250   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

Increase in restricted cash

     (421,157     —          (17,608     —          (438,765

Purchases of property, plant and equipment

     (7,514     (25,915     (36,093     1,575        (67,947

Proceeds from sale of property, plant and equipment

     —          846        1,554        (914     1,486   

Cash received from (used in) disposition, net of cash divested

     593,066        (8,722     2,281        —          586,625   

Cash paid for business acquisitions, net of cash acquired

     (60,135     —          —          —          (60,135

Cash received from sales of (paid for purchase of) marketable securities

     —          103        (4     —          99   

Cash received from equity method investments

     2,205        —          12,092        —          14,297   

(Increase) decrease in other assets

     368        497        (219     235        881   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     106,833        (33,191     (37,997     896        36,541   

Net cash used in discontinued operations

     —          (209     —          —          (209
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     106,833        (33,400     (37,997     896        36,332   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (15,836     —          (217     —          (16,053

Cash paid for contingent purchase price consideration

     (13,640     —          (439     —          (14,079

Cash paid for dividends

     (15,970     —          —          —          (15,970

Proceeds from issuance of common stock, net of issuance costs

     76,457        —          —          —          76,457   

Proceeds from issuance of long-term debt

     2,119,125        —          42,897        —          2,162,022   

Payments on short-term debt

     —          —          (25,584     —          (25,584

Payments on long-term debt

     (2,128,625     —          (540     —          (2,129,165

Net proceeds (payments) under revolving credit facilities

     (127,000     —          397        —          (126,603

Excess tax benefits on exercised stock options

     3,264        2,531        307        —          6,102   

Principal payments on capital lease obligations

     —          (1,876     (2,463     —          (4,339
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) continuing operations

     (102,225     655        14,358        —          (87,212

Net cash used in discontinued operations

     —          (76     —          —          (76
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (102,225     579        14,358        —          (87,288
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     16        (301     (8,208     (181     (8,674
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     140,847        (84,805     21,578        —          77,620   

Cash and cash equivalents, beginning of period — continuing operations

     2,149        69,154        307,158        —          378,461   

Cash and cash equivalents, beginning of period — discontinued operations

     —          23,300        —          —          23,300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continuing operations, end of period

   $ 142,996      $ 7,649      $ 328,736      $ —        $ 479,381   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

38


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2014

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income (loss)

   $ (149,162   $ 20,900      $ 73,862      $ (94,762   $ (149,162

Income (loss) from discontinued operations, net of tax

     (860     (26,418     23,196        —          (4,082
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (148,302     47,318        50,666        (94,762     (145,080

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

          

Equity in earnings of subsidiaries, net of tax

     (97,307     (442     —          97,749        —     

Tax benefit related to discontinued operations..

     —          9,594        —          —          9,594   

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

     11,575        32        217        —          11,824   

Depreciation and amortization

     4,417        132,134        114,218        (6     250,763   

Non-cash stock-based compensation expense

     1,629        3,463        2,659        —          7,751   

Impairment of inventory

     —          —          1,536        —          1,536   

Impairment of long-lived assets

     1,573        (446     5,739        —          6,866   

Loss on sale of fixed assets

     —          4,078        601        —          4,679   

Equity earnings of unconsolidated entities, net of tax

     (1,387     —          (12,516     187        (13,716

Deferred income taxes

     28,030        (12,863     (7,320     1,710        9,557   

Net loss on dispositions

     —          638        —          —          638   

Other non-cash items

     (988     2,845        1,826        —          3,683   

Non-cash change in fair value of contingent purchase price consideration

     3,326        9,903        3,813        —          17,042   

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —          (10,136     22,779        —          12,643   

Inventories, net

     —          (22,521     (3,495     (4,430